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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
------------------------------
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ______________
Commission File Number 0-6533
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BOSTON LIFE SCIENCES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 87-0277826
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
20 Newbury Street, 5/th/ Floor, Boston, Massachusetts 02116
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(617) 425-0200
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(X) Yes ( ) No
As of November 12, 2002 there were 22,374,210 shares of Common Stock
outstanding.
BOSTON LIFE SCIENCES, INC.
INDEX TO FORM 10-Q
Page (s)
--------
Part I - Financial Information
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2002 1
and December 31, 2001
Consolidated Statements of Operations for the three and 2
nine months ended September 30, 2002 and 2001, and for the
period from inception (October 16, 1992) to September 30, 2002
Consolidated Statements of Cash Flows for the nine months 3
ended September 30, 2002 and 2001, and for the period from
inception (October 16, 1992) to September 30, 2002
Notes to Consolidated Financial Statements 4 - 7
Item 2 - Management's Discussion and Analysis of Financial 8 - 13
Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 13
Item 4 - Controls and Procedures 14
Part II - Other Information
Item 1 - Legal Proceedings 15
Item 2 - Changes in Securities 15
Item 3 - Defaults Upon Senior Securities 15
Item 4 - Submission of Matters to a Vote of Security Holders 15
Item 5 - Other Information 15
Item 6 - Exhibits and Reports on Form 8-K 15 - 16
Signatures 17
Certifications 18 - 19
Part I - Financial Information
Item 1 - Financial Statements
Boston Life Sciences, Inc.
(A Development Stage Enterprise)
Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
2002 2001
------------- ------------
Assets
Current assets:
Cash and cash equivalents $ 1,667,303 $ 287,302
Short-term investments 7,483,181 10,012,198
Other current assets 401,784 599,801
------------- ------------
Total current assets 9,552,268 10,899,301
Fixed assets, net 792,491 523,505
Other assets 356,191 3,613
------------- ------------
Total assets $ 10,700,950 $ 11,426,419
============= ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 1,967,564 $ 1,803,584
10% convertible senior secured promissory notes 3,699,872 -
Stockholders' equity:
Convertible preferred stock, $.01 par value; 1,000,000 shares authorized;
525,000 shares designated; no shares issued and
outstanding - -
Common stock, $.01 par value; 50,000,000 shares authorized;
22,374,210 and 20,774,642 shares issued and outstanding at
September 30, 2002 and December 31, 2001, respectively 223,742 207,746
Additional paid-in capital 87,812,377 84,319,102
Accumulated other comprehensive income 124,507 130,818
Deficit accumulated during development stage (83,127,112) (75,034,831)
------------- ------------
Total stockholders' equity 5,033,514 9,622,835
------------- ------------
Total liabilities and stockholders' equity $ 10,700,950 $ 11,426,419
============= ============
The accompanying notes are an integral part of the consolidated financial
statements.
1
Boston Life Sciences, Inc.
(A Development Stage Enterprise)
Consolidated Statements of Operations
(Unaudited)
From Inception
(October 16,
Three Months Ended Nine Months Ended 1992) to
September 30, September 30, September 30,
2002 2001 2002 2001 2002
------------- ------------- ------------ ------------ --------------
Revenues $ - $ - $ - $ - $ 900,000
Operating expenses:
Research and development 1,722,338 1,973,858 5,521,737 5,868,485 53,619,489
General and administrative 794,467 758,876 2,559,233 2,427,966 21,469,802
Purchased in-process research
and development - - - - 12,146,544
------------- ------------- ------------ ------------ --------------
Total operating expenses 2,516,805 2,732,734 8,080,970 8,296,451 87,235,835
------------- ------------- ------------ ------------ --------------
Loss from operations (2,516,805) (2,732,734) (8,080,970) (8,296,451) (86,335,835)
Other expenses - - (287,000) (396,880) (970,880)
Interest expense (100,950) - (100,950) - (2,353,407)
Interest income 141,502 242,609 376,639 847,122 6,533,010
------------- ------------- ------------ ------------ --------------
Net loss $ (2,476,253) $ (2,490,125) $ (8,092,281) $ (7,846,209) $ (83,127,112)
============= ============= ============ ============ ==============
Basic and diluted net loss
per share $ (0.11) $ (0.12) $ (0.37) $ (0.38)
============= ============= ============ ============
Weighted average shares outstanding 22,374,210 20,726,638 21,959,507 20,726,638
============= ============= ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
2
Boston Life Sciences, Inc.
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
(Unaudited)
From Inception
(October 16,
Nine Months Ended 1992) to
September 30, September 30,
2002 2001 2002
----------- ----------- --------------
Cash flows from operating activities:
Net loss $(8,092,281) $(7,846,209) $ (83,127,112)
Adjustments to reconcile net loss to net
cash used for operating activities:
Purchased in-process research and development - - 12,146,544
Write-off of acquired technology - - 3,500,000
Modification of warrants 287,000 396,880 970,880
Non-cash interest expense 19,872 - 599,557
Compensation charge related to options and
warrants 51,328 25,000 2,162,054
Amortization and depreciation 123,903 31,673 1,699,885
Changes in current assets and liabilities:
Decrease in other current assets 198,017 437,983 457,179
Increase in accounts payable and accrued
expenses 163,980 603,082 1,194,899
----------- ----------- --------------
Net cash used for operating activities (7,248,181) (6,351,591) (60,396,114)
Cash flows from investing activities:
Cash acquired through Merger - - 1,758,037
Purchases of fixed assets (386,332) (222,913) (1,240,344)
(Increase) decrease in other assets (253,545) 1,117 (610,793)
Purchases of short term investments (6,959,705) (6,180,347) (91,803,357)
Sales and maturities of short term investments 9,482,411 14,735,128 84,444,683
----------- ----------- --------------
Net cash provided by (used for) investing activities 1,882,829 8,332,985 (7,451,774)
Cash flows from financing activities:
Proceeds from issuance of common stock 3,439,071 - 34,688,253
Proceeds from issuance of preferred stock - - 27,022,170
Preferred stock conversion inducement - - (600,564)
Proceeds from issuance of notes payable 4,000,000 - 6,585,000
Proceeds from issuance of convertible
debentures - - 9,000,000
Principal payments of notes payable - - (2,796,467)
Payments of financing costs (693,718) - (4,383,201)
----------- ----------- --------------
Net cash provided by financing activities 6,745,353 - 69,515,191
----------- ----------- --------------
Net increase in cash and cash equivalents 1,380,001 1,981,394 1,667,303
Cash and cash equivalents, beginning of period 287,302 407,327 -
----------- ----------- --------------
Cash and cash equivalents, end of period $ 1,667,303 $ 2,388,721 $ 1,667,303
=========== =========== ==============
Supplemental cash flow disclosures:
Non cash transactions (see note 5)
The accompanying notes are an integral part of the consolidated financial
statements.
3
Boston Life Sciences, Inc.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2002
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared by Boston Life Sciences, Inc. (the "Company") in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, these financial statements do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements.
The interim unaudited consolidated financial statements contained
herein include, in management's opinion, all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the financial
position, results of operations, and cash flows for the periods presented. The
results of operations for the interim period shown on this report are not
necessarily indicative of results for a full year. These financial statements
should be read in conjunction with the Company's consolidated financial
statements and notes for the year ended December 31, 2001 included in the
Company's Annual Report on Form 10-K.
At September 30, 2002, the Company had available cash, cash equivalents
and short-term investments of approximately $9.2 million and working capital of
approximately $7.6 million. The Company has incurred substantial losses and
negative cash flows from operations in each fiscal year since inception. For the
nine months ended September 30, 2002, the Company incurred a net loss of $8.1
million and negative cash flows from operations of $7.2 million. Additionally,
as of September 30, 2002, the Company had an accumulated deficit of $83.1
million.
Based on its current financial resources, the Company presently
anticipates a substantial reduction in operating cash outflows over the next
twelve months primarily due to an expected significant decrease in research and
development expenses. This potential reduction can be attributed to the absence
of certain costs incurred in 2002 associated with completing the remaining
studies for the filing of the New Drug Application, or NDA, for ALTROPANE(TM) as
a diagnostic for Parkinsonian Syndrome, which we call PS, (including Parkinson's
Disease, which we call PD), lower clinical trial costs for the ongoing Phase II
trial of ALTROPANE(TM) as a diagnostic for Attention Deficit Hyperactivity
Disorder, which we call ADHD, lower research and development expenditures on the
Company's early stage programs, and decreased research and development related
payroll costs associated with a lower expected headcount in 2003. These
reductions are not expected to materially affect the filing of an NDA for
ALTROPANE(TM) for PS, the completion of the pre-clinical studies required for
the filing of an Investigational New Drug, or IND, application for Inosine, and
manufacturing development efforts on Troponin. Management believes that other
actions, including reductions in the use of outside consultants are also
available to reduce future operating cash outflows.
Based on the Company's forecasted cash outflows and its cash, cash
equivalents and short-term investments on hand as of September 30, 2002, the
Company expects to have sufficient cash to finance its operations through at
least September 30, 2003. The Company's future beyond the next twelve months may
be dependent upon its ability to raise additional financing. The Company may
raise additional capital in the future through collaborative agreements with
other pharmaceutical or biotechnology companies, debt financings and equity
offerings. There can be no assurance, however, that the Company will be
successful or that additional funds will be available on acceptable terms, if at
all.
2. Net Loss Per Share
Basic and diluted net loss per share available to common stockholders
has been calculated by dividing net loss by the weighted average number of
common shares outstanding during the period. All potential common shares have
been excluded from the calculation of weighted average common shares outstanding
since their inclusion would be anti-dilutive.
Stock options and warrants to purchase approximately 10.3 million and
8.0 million shares of common stock were outstanding at September 30, 2002 and
2001, respectively, but were not included in the computation of diluted net loss
per common share because they were anti-dilutive. The exercise of those stock
options and warrants outstanding at September 30, 2002, which could generate
proceeds to the Company of up to $26 million, could potentially dilute earnings
per share in the future.
3. Comprehensive Loss
The Company had total comprehensive loss of $2,448,949 and $2,353,135
for the three months ended September 30, 2002 and 2001, respectively. For the
nine months ended September 30, 2002 and 2001, total comprehensive loss was
$8,098,592 and $7,641,784, respectively.
4
Boston Life Sciences, Inc.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements (Unaudited)
4. Stockholders' Equity
In March 2002, the Company completed a private placement of 1,599,568
shares of common stock which raised approximately $3.4 million in gross
proceeds. In connection with the financing, the Company issued warrants to the
investors to purchase 399,892 shares of common stock at an exercise price equal
to $2.75 per share. In connection with this financing, the Company paid $271,772
in cash and issued a warrant to purchase 157,557 shares of common stock at an
exercise price equal to $2.75 per share to the placement agent.
5. 10% Convertible Promissory Notes
In July 2002, the Company entered into agreements pursuant to which the
Company issued $4.0 million in principal amount of 10% Convertible Senior
Secured Promissory Notes, or Notes, to a single institutional investor in a
private placement. Warrants to purchase a total of 500,000 shares of common
stock at $2.16 per share were also issued to the investor.
The Notes mature in July 2005 and bear interest at 10% per annum,
payable semi-annually on June 1 and December 1. The Company may elect to pay
interest on the Notes in either cash or, subject to certain limitations,
additional notes on the same terms. The Notes may be converted into the
Company's common stock at the option of the holder at a conversion price of
$2.16 per share, subject to anti-dilution adjustments. Among other adjustments,
unless the investor consents otherwise, if the Company issues equity securities
in the future for consideration per share of common stock less than the then
applicable conversion price of the Notes, the conversion price of the Notes will
be reduced to equal that lower price. The Notes are secured by a first priority
security interest and continuing lien on all current and after acquired property
of the Company. The Company generally may obtain a release of the security
interest by providing alternative collateral in the form of either cash or a
bank letter of credit. Until the time, if any, that the Company provides
alternative collateral or less than $500,000 principal amount of Notes remains
outstanding, the agreements also prohibit the Company, among other things, from
entering into any merger, consolidation or sale of all or substantially all of
its assets, incurring additional indebtedness, encumbering its assets with any
liens and redeeming or paying dividends on any of its capital stock. The Company
is permitted to grant licenses or sublicenses of its intellectual property to
third parties in the ordinary course of its business free from the security
interest, but the holders of the Notes will receive a first priority security
interest and continuing lien on all amounts owing to the Company in respect of
any such license or sublicense. The agreements also contain customary events of
default, including any change of control of the Company and breach by the
Company of its representations and warranties and covenants contained in the
agreements. If any event of default were to occur, the Company's obligations
under the notes could be accelerated and become immediately due and payable in
full.
The net proceeds of $3.9 million have been allocated between the
warrants (approximately $0.3 million) and the Notes (approximately $3.6 million)
based on their relative fair values. The initial carrying value of the Notes is
being accreted ratably, over the term of the Notes, to the $4 million amount due
at maturity. Interest expense totaled $100,950 for the three months ended
September 30, 2002, and included $74,521 in interest accrued on the 10% coupon
and $19,872 in discount accretion. Debt issuance costs totaling $105,590 have
been capitalized and will be amortized over the life of the Notes.
5
Boston Life Sciences, Inc.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements (Unaudited)
6. Modification of Warrants
In June 2001, the Company entered into an agreement with Pictet Global
Sector Fund-Biotech, or Pictet, whereby Pictet agreed to defer the effective
date of the reset provision contained in its 500,000 warrants (300,000
exercisable at $8.00 per share and 200,000 exercisable at $10.00 per share)
until June 30, 2002, at which time the exercise price was reset to $3.00 per
share. In return, the Company issued 160,000 additional new warrants
exercisable at $3.40 per share to Pictet. The Company was not required to
record an initial charge in connection with the transaction because the fair
value (as determined under the Black-Scholes pricing model) of the 160,000 new
warrants being issued was equivalent to the net decrease in the fair value of
the existing warrants resulting from the one year deferral in the reset
provision. Under the June 2001 agreement, the Company is also obligated to
issue additional warrants to Pictet in an amount equal to 9.9% of the increase
in common stock outstanding from June 25, 2001 through June 30, 2004, provided
that the total number of such additional warrants to Pictet cannot exceed
240,000. In accordance with this agreement, in June 2002, the Company issued
an additional 163,110 warrants, exercisable at $1.27 per share, based on the
increase in common stock outstanding from June 25, 2001 through June 30, 2002.
The remaining obligation of up to 76,890 warrants may become issuable based on
the increase in common stock outstanding from July 1, 2002 through June 30,
2004. The Company recorded a charge of $287,000 related to this obligation
which is included ratably during the first and second quarters of 2002 in
Other Expenses in the Consolidated Statement of Operations.
In the second quarter of 2001, the Company entered into an agreement
with Brown Simpson Partners I, Ltd., or Brown Simpson, whereby the exercise
price of certain warrants held by Brown Simpson was reduced. The exercise
price of 720,000 warrants previously exercisable at $8.25 per share was
reduced to $4.625 and the exercise price of 970,000 warrants previously
exercisable at $5.75 per share was also reduced to $4.625. In return, Brown
Simpson agreed to the following restrictions (based on daily trading volume)
on the number of shares of common stock that it could sell through May 2002.
Percent of Daily
Total shares of Volume
Common allowed to be sold by
Stock traded Daily Brown Simpson
---------------------- -----------------------------------
less than 100,001 10%
100,001 - 150,000 15%
150,001 - 300,000 20%
300,001 - 700,000 25%
greater than 700,000 30%
6
Boston Life Sciences, Inc.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements (Unaudited)
In connection with the transaction, the Company recorded a charge of
$396,880 which is included in Other Expenses in the Consolidated Statement of
Operations for the nine month period ended September 30, 2001. The amount
of the charge is based upon the difference between the fair value (as determined
under the Black-Scholes pricing model) of the 1,690,000 warrants currently
exercisable at $4.625 per share compared to the fair value of the 720,000
warrants previously exercisable at $8.25 per share and the 970,000 warrants
previously exercisable at $5.75 per share. In March 2002, the number of warrants
and the exercise price thereof was adjusted. The exercise price of the 1,690,000
warrants was reduced to $2.15. In addition, Brown Simpson received an additional
130,123 warrants exercisable at $2.15 per share. In May 2002, the Company
entered into an agreement with Brown Simpson under which Brown Simpson agreed to
certain trading restrictions (based on daily trading volume) on the number of
shares of common stock that it could sell through December 31, 2003.
7. Accounting Pronouncements
In January 2002, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142
requires that ratable amortization of goodwill be replaced with periodic tests
of the goodwill's impairment and that intangible assets other than goodwill be
amortized over their useful lives. The Company's adoption of SFAS No. 142 did
not have a material effect on its financial statements.
In January 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses the financial
accounting and reporting for the disposal of long-lived assets. The Company's
adoption of SFAS No. 144 did not have a material effect on its financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). This statement
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (the "EITF") Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)" ("EITF 94-3"). SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. EITF 94-3 allowed for an exit cost liability to be recognized at the
date of an entity's commitment to an exit plan. SFAS No. 146 also requires that
liabilities recorded in connection with exit plans be initially measured at fair
value. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002, with early adoption
encouraged. The Company does not expect the adoption of SFAS No. 146 will have a
material impact on its financial position or results of operations.
7
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements.
Specifically, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," and
similar expressions are intended to identify forward-looking statements. There
are a number of meaningful factors that could cause the Company's actual results
to differ materially from those indicated by any such forward-looking
statements. These factors include, without limitation, the duration and results
of pre-clinical testing and clinical trials and their effect on the Food & Drug
Administration, or FDA, regulatory process, uncertainties regarding receipt of
approvals for any possible products and any commercial acceptance of such
products, possible difficulties with obtaining necessary patent protection, and
uncertainties regarding the Company's reliance on outside providers for the
conduct of its research and development, pre-clinical and clinical activities.
Other factors include those set forth under the caption "Forward-Looking
Statements" in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001 and the documents referred to under such caption.
General
Description of Company
The Company is a biotechnology company engaged in the research and
development of biopharmaceutical products for the diagnosis and treatment of
central nervous system, or CNS, diseases and for the treatment of some cancers
and autoimmune diseases. At September 30, 2002, the Company is considered a
"development stage enterprise" as defined in Statement of Financial Accounting
Standards No.7.
Product Development
ALTROPANE(TM) is an imaging agent for the diagnosis of Parkinsonian
Syndrome, which we call PS, (including Parkinson's Disease, which we call PD,
and Attention Deficit Hyperactivity Disorder, which we call ADHD. We have
completed a Phase III clinical trial for the diagnosis of PS, and during the
past year, have had extensive discussions with the FDA regarding what
information needs to be included in the New Drug Application, or NDA, filing.
The FDA has requested certain additional studies which we are in the process of
completing. We do not believe that any of the requested information represents a
substantial impediment to the filing of the NDA. Based on the estimated time
that it will take to complete these studies and compile this information, and
assuming no additional data is requested by the FDA, we expect to request a
pre-filing meeting with the FDA during the first quarter of 2003 and file our
NDA in the first half of 2003. We are currently conducting our second Phase II
trial of Altropane for the diagnosis of ADHD in adults using a simplified
scanning procedure and algorithm adjustments.
Inosine is a nerve growth factor which specifically promotes axon
outgrowth in CNS cells. We recently had a pre-Investigational New Drug, or
IND, meeting with the FDA regarding Inosine during which the FDA detailed the
pre-clinical information that must be included in the IND filing. We expect to
commence the remaining pre-clinical studies, and compile the necessary
information, during the remainder of 2002 and into 2003. We hope to file an IND
application and commence a Phase I clinical trial for Inosine in Acute Ischemic
Stroke victims in late 2003 or early 2004.
Troponin I, which we refer to as Troponin, is our anti-angiogenic
agent. As has been the experience of many companies in the biotech community,
the establishment of an effective, scaled-up manufacturing process for complex
proteins like Troponin has been very challenging. The Company believes it has
developed such a process at its internal pilot manufacturing facility in
Baltimore, Maryland which we are now converting into a GMP compliant production
site. The current process produces pure, active material at a scale that is
still pre-commercial. In order to produce the material at the level required for
all of the clinical trials (phase I, II, and III) at a commercially feasible
cost, the Company needs to further "scale-up" the manufacturing process. Once
this expanded production level has been attained, the Company will complete the
remaining pre-clinical studies identified by the FDA as required for the filing
of an IND.
8
Earlier stage product candidates include FLOURATEC(TM), a
"second-generation" imaging agent for the diagnosis of PD and ADHD; C-MAF for
the treatment of autoimmune disease and allergies; and compounds for the
treatment of PD and other central nervous system disorders.
To date, we have not marketed, distributed or sold any products and,
with the exception of the ALTROPANE(TM) imaging agent, all of our technologies
and early-stage product candidates are in pre-clinical development. Our product
candidates must undergo a rigorous regulatory approval process which includes
extensive pre-clinical and clinical testing to demonstrate safety and efficacy
before any resulting product can be marketed. The FDA has stringent laboratory
and manufacturing standards which must be complied with before we can test our
product candidates in people or make them commercially available. Pre-clinical
testing and clinical trials are lengthy and expensive and the historical rate of
failure for product candidates is high. Clinical trials require sufficient
patient enrollment which is a function of many factors, and delays and
difficulties in completing patient enrollment can result in increased costs and
longer development times. The foregoing uncertainties and risks limit our
ability to estimate the timing and amount of future costs that will be required
to complete the clinical development of each program. In addition, we are unable
to estimate when material net cash inflows are expected to commence as a result
of the successful completion of one or more of our programs. However, we do not
currently expect to generate revenues from product sales for at least the next
twelve months.
The biotechnology and pharmaceutical industries are highly competitive
and are dominated by larger, more experienced and better capitalized companies.
Any delays we encounter in completing our clinical trial programs may adversely
impact our competitive position in the markets in which we compete. Such delays
may also adversely affect our financial position and liquidity.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements which have been
prepared by us in accordance with accounting principles generally accepted in
the United States of America. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. Our estimates include those related to investments and
research contracts. We base our estimates on historical experience and on
various other assumptions that we believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions. For a complete description of our accounting
policies, see Note 2 to our consolidated financial statements in our Annual
Report on Form 10-K.
Investments
Our investments consist exclusively of investments in United States
agency bonds and corporate debt obligations. These marketable securities are
adjusted to fair value on the consolidated balance sheet through other
comprehensive income. We disclose the value of restricted investments, if any,
in the notes to our consolidated financial statements.
Research contracts
We regularly enter into contracts with third parties to perform
research and development activities in connection with our scientific
technologies. Costs incurred under these contracts are
9
recognized ratably over the term of the contract which we believe corresponds to
the manner in which the work is performed.
Results of Operations
Three Months Ended September 30, 2002 and 2001
The Company's net loss was $2,476,253 during the three months ended
September 30, 2002 as compared with $2,490,125 during the three months ended
September 30, 2001. Net loss per common share equaled $0.11 per share for the
2002 period as compared to $0.12 per share for the 2001 period. The lower net
loss in the 2002 period was primarily due to decreased research and development
costs. The decrease in these expenses was mostly offset by lower interest income
and higher interest expense. The lower net loss per common share in the 2002
period was primarily due to an increase in weighted average shares outstanding
of approximately 1.6 million shares.
Research and development expenses were $1,722,338 during the three
months ended September 30, 2002 as compared with $1,973,858 during the three
months ended September 30, 2001. The decrease was primarily attributable to
lower manufacturing development costs for Troponin and ALTROPANE(TM) of
approximately $296,000 and $358,000, respectively. The decrease in these
expenses was partially offset by higher pre-clinical costs for Inosine of
approximately $244,000 and higher research and development wages resulting from
increased headcount of approximately $142,000.
General and administrative expenses were $794,467 during the three
months ended September 30, 2002 as compared with $758,876 during the three
months ended September 30, 2001. There was no specific category or type of
expense to which the increase can be primarily attributed.
Interest expense totaled $100,950 during the three months ended
September 30, 2002 as compared to zero during the three months ended September
30, 2001. In July 2002, the Company issued $4 million of 10% convertible notes,
and incurred $74,521 in interest on the 10% coupon and $19,872 in non-cash
interest associated with the accretion of the discounted carrying value of the
notes.
Interest income was $141,502 during the three months ended September
30, 2002 as compared with $242,609 during the three months ended September 30,
2001. The decrease was primarily due to lower average cash, cash equivalents,
and short-term investment balances during the 2002 period as compared to the
2001 period.
Nine Months Ended September 30, 2002 and 2001
The Company's net loss was $8,092,281 during the nine months ended
September 30, 2002 as compared with $7,846,209 during the nine months ended
September 30, 2001. Net loss per common share equaled $0.37 per share for the
2002 period as compared to $0.38 per share for the 2001 period. The higher net
loss in the 2002 period was primarily related to a decrease in interest income
partially offset by lower research and development expenses. The lower net loss
per common share in the 2002 period was due to an increase in weighted average
shares outstanding of approximately 1.2 million shares.
Research and development expenses were $5,521,737 during the nine
months ended September 30, 2002 as compared with $5,868,485 during the nine
months ended September 30, 2001. The decrease was primarily attributable to
lower manufacturing development costs for Troponin and ALTROPANE(TM) of
approximately $914,000 and $552,000, respectively. The decrease in these
expenses was partially offset by higher pre-clinical costs for Inosine of
approximately $583,000 and higher research and development wages resulting from
increased headcount of approximately $189,000. In addition, higher clinical
trial expenses were incurred in the 2002 period related to our Phase II trial
for ALTROPANE(TM) for the diagonsis of ADHD of approximately $162,000.
General and administrative expenses were $2,559,233 during the nine
months ended September 30, 2002 as compared with $2,427,966 during the nine
months ended September 30, 2001. The increase was primarily related to higher
legal fees in connection with patent and intellectual property matters of
approximately $336,000. The increase in these expenses was partially offset by
the absence of personnel recruitment costs of approximately $150,000 that were
incurred in the 2001 period when the Company hired a number of senior
executives.
10
Other expenses were $287,000 during the nine months ended September 30,
2002 as compared with $396,880 during the nine months ended September 30, 2001.
The decrease in 2002 was due to lower non-cash charges related to agreements the
Company entered into with securityholders to modify outstanding warrants. One
agreement, which resulted in a charge of $396,880 in the 2001 period, lowered
the exercise price of certain warrants held by Brown Simpson in return for daily
trading restrictions on the number of shares of common stock that Brown Simpson
could sell through May 2002. The other agreement, which resulted in a charge of
$287,000 in the 2002 period, deferred the date on which the exercise price of
warrants held by Pictet would be reset. In return, the Company issued additional
warrants to Pictet. The non-cash charge was based upon a fair value calculation
of the additional warrants issued to the securityholder as determined under the
Black-Scholes pricing model.
Interest expense totaled $100,950 during the nine months ended
September 30, 2002 as compared to zero during the nine months ended September
30, 2001. In July 2002, the Company issued $4 million of 10% convertible notes,
and incurred $74,521 in interest on the 10% coupon and $19,872 in non-cash
interest associated with the accretion of the discounted carrying value of the
notes.
Interest income was $376,639 during the nine months ended September 30,
2002 as compared with $847,122 during the nine months ended September 30, 2001.
The decrease was primarily due to lower average cash, cash equivalents, and
short-term investment balances during the 2002 period as compared to the 2001
period.
Liquidity and Capital Resources
Since its inception, the Company has primarily satisfied its working
capital requirements from the sale of the Company's securities through private
placements. These private placements have included the sale of preferred stock
and common stock, as well as notes payable and convertible debentures. Each
private placement has included the issuance of warrants to purchase common
stock. A summary of financings completed during the three years ended September
30, 2002 is as follows:
Date Net Proceeds Raised Securities Issued
- ---- ------------------- -----------------
July 2002 $4.0 million Convertible secured promissory notes
March 2002 $2.9 million Common stock
June 2000 $9.9 million Common stock
In the future, the Company's working capital and capital requirements
will depend on numerous factors, including the progress of the Company's
research and development activities, the level of resources that the Company
devotes to the developmental, clinical, and regulatory aspects of its
technologies, and the extent to which the Company enters into collaborative
relationships with pharmaceutical and biotechnology companies.
At September 30, 2002, the Company had available cash, cash equivalents
and short-term investments of approximately $9.2 million and working capital of
approximately $7.6 million. The Company has incurred substantial losses and
negative cash flows from operations in each fiscal year since inception. For the
nine months ended September 30, 2002, the Company incurred a net loss of $8.1
million and negative cash flows from operations of $7.2 million. Additionally,
as of September 30, 2002, the Company had an accumulated deficit of $83.1
million.
Based on its current financial resources, the Company presently
anticipates a substantial reduction in operating cash outflows over the next
twelve months primarily due to an expected significant decrease in research and
development expenses. This potential reduction can be attributed to the absence
of certain costs incurred in 2002 associated with completing the remaining
studies for the filing of the NDA for ALTROPANE(TM) as a diagnostic for PS
(including PD), lower clinical trial costs for the ongoing Phase II trial of
ALTROPANE(TM) as a diagnostic for ADHD, lower research and development
expenditures on the Company's early stage programs, and decreased research and
development related payroll costs associated with a lower expected headcount in
2003. These reductions are not expected to materially affect the filing of an
NDA for ALTROPANE(TM) for PS, the completion of the pre-clinical studies
required for the filing of an IND application for Inosine, and manufacturing
development efforts on Troponin. Management believes that other actions,
including reductions in the use of outside consultants are also available to
reduce future operating cash outflows.
Based on the Company's forecasted cash outflows and its cash, cash
equivalents and short-term investments on hand as of September 30, 2002, the
Company expects to have sufficient cash to finance its operations through at
least September 30, 2003. The Company's future beyond the next twelve months may
be dependent upon its ability to raise additional financing. The Company may
raise additional capital in the future through collaborative agreements with
other pharmaceutical or biotechnology companies, debt financings and equity
offerings. There can be no assurance, however, that the Company will be
successful or that additional funds will be available on acceptable terms, if at
all.
11
Following is information on the direct research and development costs
incurred (all amounts in thousands) on the Company's principal scientific
technology programs currently under development. These amounts do not include
research and development employee and related overhead costs which total
approximately $7.7 million on a cumulative basis.
Program Period (1) Year to date Cumulative
- -------------------------------------- ------------------------------------------------------------------------
Diagnostic imaging $ 384 $ 977 $14,728
Anti-angiogenesis 423 1,669 12,588
CNS regeneration 338 1,203 3,984
Auto-immune diseases 13 39 2,604
Other $ 47 $184 $ 747
_________
(1) three months ended September 30, 2002
Estimating costs and time to complete development of a specific program
or technology is difficult due to the uncertainties of the development process
and the requirements of the FDA which could require additional clinical trials
or other development and testing. Results of any testing could lead to a
decision to change or terminate development of a technology, in which case
estimated future costs could change substantially. In the event the Company were
to enter into a licensing or other collaborative agreement with a corporate
partner involving sharing or funding by such corporate partner of development
costs, the estimated development costs incurred by the Company could be
substantially less than estimated. Additionally, research and development costs
are extremely difficult to estimate for early-stage technologies due to the fact
that there is generally less comprehensive data available for such technologies
to determine the development activities that would be required prior to the
filing of an NDA. As a result, the Company cannot reasonably estimate the cost
and the date of completion for any technology that is not at least in Phase III
clinical development due to the uncertainty of the number of required trials and
size of such trials and the duration of development. The Company presently
estimates that it will incur approximately $750,000 in additional direct
research and development costs to complete the preparation and filing of the NDA
for ALTROPANE(TM) for the diagnosis of PD. This estimate does not include
research and development employee and related overhead costs. Actual costs and
time to complete may differ significantly from the estimates.
In July 2002, the Company entered into agreements pursuant to which the
Company has issued $4.0 million in principal amount of 10% convertible senior
secured promissory notes to a single institutional investor in a private
placement. The Notes were issued pursuant to exemptions afforded by Section 4(2)
of the Securities Act and Rule 506 of Regulation D thereunder. The notes mature
in July 2005 and bear interest at 10% per annum, payable semi-annually on June 1
and December 1. The Company may elect to pay interest on the notes in either
cash or, subject to certain limitations, additional notes on the same terms. The
notes may be converted into the Company's common stock at the option of the
holder at a conversion price of $2.16 per share, subject to anti-dilution
adjustments. Among other adjustments, unless the investor consents otherwise, if
the Company issues equity securities in the future for consideration per share
of common stock less than the then applicable conversion price of the notes, the
conversion price of the notes will be reduced to equal that lower price. The
notes are secured by a first priority security interest and continuing lien on
all current and after acquired property of the Company. The Company generally
may obtain a release of the security interest by providing alternative
collateral in
12
the form of either cash or a bank letter of credit. Until the time, if any, that
the Company provides alternative collateral or less than $500,000 principal
amount of notes remains outstanding, the agreements also prohibit the Company,
among other things, from entering into any merger, consolidation or sale of all
or substantially all of its assets, incurring additional indebtedness,
encumbering its assets with any liens and redeeming or paying dividends on any
of its capital stock. The Company is permitted to grant licenses or sublicenses
of its intellectual property to third parties in the ordinary course of its
business free from the security interest, but the holders of the notes will
receive a first priority security interest and continuing lien on all amounts
owing to the Company in respect of any such license or sublicense. The
agreements also contain customary events of default, including any change of
control of the Company and breach by the Company of its representations and
warranties and covenants contained in the agreements. If an event of default
were to occur, the Company's obligations under the notes could be accelerated
and become immediately due and payable in full.
There have been no material changes in the commitments and
contingencies reported in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001.
Accounting Pronouncements
In January 2002, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142
requires that ratable amortization of goodwill be replaced with periodic tests
of the goodwill's impairment and that intangible assets other than goodwill be
amortized over their useful lives. The Company's adoption of SFAS No. 142 did
not have a material effect on its financial statements.
In January 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses the financial
accounting and reporting for the disposal of long-lived assets. The Company's
adoption of SFAS No. 144 did not have a material effect on its financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). This statement
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (the "EITF") Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)" ("EITF 94-3"). SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. EITF 94-3 allowed for an exit cost liability to be recognized at the
date of an entity's commitment to an exit plan. SFAS No. 146 also requires that
liabilities recorded in connection with exit plans be initially measured at fair
value. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002, with early adoption
encouraged. The Company does not expect the adoption of SFAS No. 146 will have a
material impact on its financial position or results of operations.
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the market risks reported in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
13
Item 4 - Controls and Procedures
Evaluation of disclosure controls and procedures
The Company's principal executive and financial officers reviewed and
evaluated the Company's disclosure controls and procedures (as defined in
Exchange Act Rule 13a-14) as of a date within 90 days before the filing date of
this Form 10-Q. Based on that evaluation, the Company's principal executive and
financial officer concluded that the Company's disclosure controls and
procedures are effective in enabling the Company to identify, process and report
information required to be disclosed in the reports the Company files under the
Exchange Act.
Changes in internal controls
There were no significant changes in the Company's internal controls or
other factors that could significantly affect those controls subsequent to the
date of the Company's evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
14
PART II -- OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS.
None.
ITEM 2: CHANGES IN SECURITIES.
In July 2002, the Company entered into agreements pursuant to
which the Company issued $4.0 million in principal amount of 10%
Convertible Senior Secured Promissory Notes to a single
institutional investor in a private placement. Warrants to
purchase a total of 500,000 shares of common stock at $2.16 per
share were also issued to the investor.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5: OTHER INFORMATION.
On September 27, 2002, Mr. Scott Weisman resigned as a director of
the Company.
(a) Exhibits.
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
99.1 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 1350, Chapter
63 of Title 18, United States Code, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (1)
99.2 Agreement dated May 16, 2002 between Brown Simpson
Partners I, Ltd and the Company (1)
99.3 Employment Agreement dated July 9, 2002 between
Robert Rosenthal and the Company (2)
99.4 Securities Purchase Agreement, dated as of July 25,
2002, by and among the Company and the Investor named
therein (3)
99.5 10% Convertible Senior Secured Promissory Note, dated
as of July 25, 2002 (3)
99.6 Registration Rights Agreement, dated as of July 25,
2002, by and among the Company and the Investor named
therein (3)
99.7 Warrant to Purchase Common Stock, dated as of July
25, 2002 (3)
(1) Filed herewith.
(2) Incorporated by reference to the Company's report
on Form 8-K dated July 10, 2002.
(3) Incorporated by reference to the Company's report
on Form 8-K dated July 25, 2002.
15
(b) Reports on Form 8-K: The Registrant filed the following
reports on Form 8-K during the quarter ended September 30,
2002:
Date of Report Item Reported
-------------- -------------
July 10, 2002 5,7
July 25, 2002 5,7
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BOSTON LIFE SCIENCES, INC.
--------------------------
(Registrant)
DATE: November 14, 2002 /s/ S. David Hillson
-------------------------------
S. David Hillson
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ Joseph Hernon
-------------------------------
Joseph Hernon
Chief Financial Officer
(Principal Financial and Accounting
Officer)
17
CERTIFICATIONS
I, David Hillson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Boston Life
Sciences, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements and other
financial information included in this quarterly report, fairly present, in all
material respects, the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely affect
the registrant's ability to record, process, summarize and
report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
DATE: November 12, 2002 /s/ S. David Hillson
-------------------------------------
S. David Hillson
Chairman and Chief Executive Officer
18
I, Joseph Hernon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Boston Life
Sciences, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements and other
financial information included in this quarterly report, fairly present, in all
material respects, the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely affect
the registrant's ability to record, process, summarize and
report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
DATE: November 12, 2002 /s/ Joseph Hernon
-------------------------------------
Joseph Hernon
Executive Vice President, Chief
Financial Officer and Secretary
19