ANNUAL REPORT 2002
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) Market Information. The Company's Class A Common Stock is traded on The NASDAQ Stock
Market under the trading symbol "BPUR." There is no established public trading market for the Class B
Common Stock.
The following table sets forth the high and low sale prices for the Class A Common Stock for each of the
quarters in the two years ended October 31, 2002, as reported by The NASDAQ Stock Market.
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High |
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Low |
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| Year Ended October 31, 2001 |
| First Quarter |
$28.25 |
$17.25 |
| Second Quarter |
27.48 |
10.63 |
| Third Quarter |
32.70 |
19.46 |
| Fourth Quarter |
26.50 |
16.25 |
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| Year Ended October 31, 2002 |
| First Quarter |
20.30 |
8.75 |
| Second Quarter |
13.26 |
6.14 |
| Third Quarter |
8.95 |
4.95 |
| Fourth Quarter |
8.00 |
3.20 |
(b) Holders. As of December 31, 2002 there were 648 holders of record of the Class A Common
Stock.
(c) Dividends. The Company did not pay dividends on its Class A Common Stock during the two fiscal
years ended October 31, 2002 and does not plan to pay dividends on its Class A Common Stock in the
foreseeable future. The Class B Common Stock is not entitled to dividends.
Item 6. Selected Financial Data
Set forth below is selected financial data for the five years ended October 31, 2002.
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Fiscal Year Ended October 31, |
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2002 |
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2001 |
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2000 |
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1999 |
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1998 |
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(In thousands, except per share data) |
| Statements of Operations Data: |
| Total revenues |
$ 1,989 |
$ 3,489 |
$ 3,063 |
$ 2,866 |
$ 1,131 |
| Cost of revenues |
7,401 |
3,665 |
4,778 |
6,814 |
1,543 |
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| Gross profit (loss) |
(5,412) |
(176) |
(1,715) |
(3,948) |
(412) |
| Operating expenses: |
| Research and development |
25,982 |
34,609 |
26,378 |
24,166 |
22,950 |
| Sales and marketing |
3,028 |
2,807 |
2,463 |
2,922 |
2,444 |
| General and administrative |
12,235 |
15,365 |
9,878 |
5,266 |
4,660 |
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| Total operating expenses |
41,245 |
52,781 |
38,719 |
32,354 |
30,054 |
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| Loss from operations |
(46,657) |
(52,957) |
(40,434) |
(36,302) |
(30,466) |
| Total other income, net |
874 |
3,538 |
4,356 |
772 |
419 |
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| Net loss |
(45,783) |
(49,419) |
(36,078) |
(35,530) |
(30,047) |
| Stock dividends on preferred stock |
--- |
--- |
--- |
(17,915) |
--- |
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Net loss applicable to common
stockholders |
$(45,783) |
$(49,419) |
$(36,078) |
$(53,445) |
$(30,047) |
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| Basic net loss per common share |
$ (1.66) |
$ (1.97) |
$ (1.51) |
$ (3.61) |
$ (2.41) |
Weighted-average common shares
outstanding |
27,582 |
25,066 |
23,947 |
14,813 |
12,460 |
Pro forma basic net loss per
common share |
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$ (2.62) |
$ (1.65) |
Pro forma weighted-average common
shares outstanding |
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20,369 |
18,237 |
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At October 31, |
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2002 |
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2001 |
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2000 |
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1999 |
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1998 |
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(In thousands) |
| Balance Sheet Data: |
| Cash and cash equivalents |
$19,710 |
$36,089 |
$88,828 |
$30,778 |
$6,063 |
| Total current assets |
28,536 |
42,249 |
95,920 |
38,277 |
13,175 |
| Working capital |
22,347 |
35,952 |
84,928 |
27,872 |
1,986 |
| Net property and equipment |
38,769 |
30,162 |
25,061 |
27,447 |
29,606 |
| Total assets |
78,277 |
84,187 |
121,287 |
66,230 |
44,848 |
| Long-term debt (including current portion) |
9,847 |
5,205 |
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6,000 |
| Common stock to be repurchased |
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6,300 |
| Total stockholders' equity |
62,057 |
70,893 |
108,510 |
54,037 |
21,449 |
The following is a summary of quarterly (unaudited) financial results:
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4Q '02 |
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3Q '02 |
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2Q '02 |
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1Q '02 |
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4Q '01 |
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3Q '01 |
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2Q '01 |
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1Q '01 |
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(In thousands, except per share data) |
| Statements of Operations Data: |
| Total revenues |
$ 73 |
$ 260 |
$ 928 |
$ 728 |
$ 970 |
$ 946 |
$ 838 |
$ 735 |
| Gross profit (loss) |
(3,023) |
(2,299) |
9 |
(99) |
(108) |
43 |
(76) |
(35) |
| Operating expenses: |
| Research and development |
3,794 |
7,063 |
8,153 |
6,972 |
7,123 |
10,297 |
9,002 |
8,187 |
| Sales and marketing |
1,075 |
875 |
615 |
463 |
737 |
784 |
664 |
622 |
| General and administration |
2,932 |
2,569 |
4,129 |
2,605 |
2,001 |
1,538 |
8,753 |
3,073 |
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| Total operating expenses |
7,801 |
10,507 |
12,897 |
10,040 |
9,861 |
12,619 |
18,419 |
11,882 |
| Loss from operations |
(10,824) |
(12,806) |
(12,888) |
(10,139) |
(9,969) |
(12,576) |
(18,495) |
(11,917) |
| Other income, net |
53 |
210 |
161 |
450 |
578 |
654 |
990 |
1,316 |
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| Net loss |
$(10,771) |
$(12,596) |
$(12,727) |
$ (9,689) |
$(9,391) |
$(11,922) |
$(17,505) |
$(10,601) |
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| Per share data: |
| Basic net loss per common share |
$ (0.36) |
$ (0.43) |
$ (0.49) |
$ (0.38) |
$ (0.37) |
$ (0.47) |
$ (0.70) |
$ (0.42) |
Weighted-average shares used in computing
basic net loss per common share |
29,742 |
29,141 |
25,993 |
25,401 |
25,208 |
25,134 |
24,958 |
24,960 |
In the third quarter of fiscal 2001, research and development expenses include a one-time expense of
$1,604,000, of which $1,511,000 is non-cash, for intellectual property and pre-clinical studies related to the
acquisition of Reperfusion Systems, Inc., an inactive company 26% owned by Biopure.
General and administrative expenses include non-cash compensation expense for stock options and
warrants granted to certain consultants and directors. This non-cash compensation must be accounted for at
fair value, per SFAS 123 and EITF 96-18, and be amortized over the vesting period and revalued each quarter
based on the closing stock price. The quarterly expenses/(credits) to operations for fiscal 2002 were $16,000,
$55,000, $13,000 and ($145,000) for the fourth, third, second and first quarters, respectively. The quarterly
expenses/(credits) to operations for fiscal 2001 were ($80,000), ($793,000), $6,370,000 and $1,347,000 for
the fourth, third, second and first quarters, respectively.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in
conjunction with the Condensed Consolidated Financial Statements and the related Notes included elsewhere
in this report. Except for strictly historical information contained herein, matters discussed in this report
constitute forward-looking statements. When used herein, the words "expects," "estimates," "intends,"
"plans," "should," "anticipates" and similar expressions are intended to identify such forward-looking
statements. Actual results could differ materially from those set forth in the forward-looking statements. There
can be no assurance that Biopure will be able to commercially develop its oxygen therapeutic products, that
necessary regulatory approvals will be obtained, that anticipated milestones will be met in the expected
timetable, that any clinical trials will be successful, or that any approved product will attain market acceptance
and be manufactured and sold in the quantities anticipated. Actual results may differ from those projected in
forward-looking statements due to risks and uncertainties that exist in the Company's operations and business
environment. These risks include, without limitation, the availability of sufficient financing to support
operations, the Company's stage of product development, history of operating losses, accumulating deficits,
and uncertainties and possible delays related to clinical trials and regulatory approvals, possible healthcare
reform, manufacturing capability, market acceptance and competition. In light of the substantial risks and
uncertainties inherent in all future projections, the inclusion of forward-looking statements in this report
should not be regarded as representations by the Company that the objectives or plans of the Company will be
achieved. The Company undertakes no obligation to release publicly the results of revisions to these forward looking
statements to reflect events or circumstances after the date hereof. Reference is made in particular to
the risk factors set forth in Exhibit 99.1 to this report and the discussions set forth below in this report under
"Management's Discussion and Analysis of Financial Condition and Results of Operations."
Overview
Biopure is a leading developer, manufacturer and supplier of pharmaceuticals called oxygen therapeutics.
Using our patented and proprietary technology, we have developed and manufacture two products. Hemopure
is a first-in-class product for human use that is approved in South Africa for the treatment of acutely anemic
surgical patients as an alternative to red blood cell transfusion. On July 31, 2002, we submitted a biologic
license application (BLA) to the FDA seeking regulatory approval to market Hemopure in the United States
for a similar indication in patients undergoing orthopedic surgery. The FDA has accepted and is reviewing this
application. We are also developing Hemopure for potential use in trauma and other medical applications. Our
veterinary product, Oxyglobin, is the only product of its kind approved in the United States and the Europe
Union, where it is indicated for the treatment of anemia in dogs.
During 2002 we completed the expansion of our existing manufacturing facilities, and in December 2002
we signed a lease for a proposed manufacturing facility that, when constructed, will further expand the
Company's production capacity.
Since inception, we have devoted substantially all of our resources to our research and development
programs and manufacturing. We have been dependent upon funding from debt and equity financings,
strategic alliances and interest income. We have not been profitable since inception and had an accumulated
deficit of $381.6 million as of October 31, 2002. We expect to incur additional operating losses over the next
several years in connection with clinical trials, preparation of a marketing application for Hemopure in Europe
and other markets and pre-marketing expenditures for Hemopure. We began generating revenue from the sale
of Oxyglobin in fiscal 1998.
We believe our cash and cash equivalents, as of January 27, 2003, are sufficient to fund our fiscal 2003
operating plan through more than half of the second quarter of fiscal 2003. Under this plan, our operations for
the balance of fiscal 2003 will be to fund the ramp up of production of Hemopure and Oxyglobin at our
manufacturing facility in Cambridge, Massachusetts, market development for Hemopure, sales and marketing
expenses for Oxyglobin in the United States and Europe and continuation of clinical development for
additional Hemopure indications. Additional expenditures not included in our fiscal 2003 operating plan,
including the costs of increasing personnel and clinical development of additional indications for Hemopure,
will be deferred until sufficient funds, in addition to those on hand, are available. Because the Company's
funds on hand at January 27, 2003 and forecast sales are not sufficient to fund our plan into fiscal 2004, the
audit report of Ernst & Young LLP, the Company's independent auditor, on our fiscal 2002 financial
statements includes a going concern modification. In order for us to remain a going concern we will require
significant funding. We are exploring opportunities to raise capital through equity offerings, the issuance of
debt securities, strategic alliances and other financing vehicles.
Critical Accounting Policies
The Company's significant accounting policies are described in the Notes to the Consolidated Financial
Statements. The application of our critical accounting policies is particularly important to the portrayal of the
Company's financial position and results of operations. These critical accounting policies require the Company
to make subjective judgements in determining estimates about the effect of matters that are inherently
uncertain. The following critical accounting policies meet these characteristics and are considered most
significant:
Inventories
Inventories are stated at the lower of cost (determined using the first-in, first-out method) or market.
Inventories consist of raw material, work-in-process and Hemopure and Oxyglobin finished goods and are
reviewed periodically for slow-moving or obsolete status based on sales activity, both projected and historical.
Inventories are also reviewed periodically to determine items that are under quality compliance investigations.
Reserves are established for inventory that falls into these categories.
Long-Lived Assets
SFAS 121 (and SFAS 144, applicable in fiscal 2003) require that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Our investments in property and equipment, including construction in progress and the
new facility construction; real property license rights related to the source, supply and initial processing of our
major raw material; and the asset related to the planned South Carolina manufacturing facility costs are the
principal long-lived assets that could be subject to such a review. The events or changes in circumstances,
among others, that may result in an impairment of these assets are a significant delay in U.S. regulatory
approval for our human product, a change in the source of supply of the major raw material, the inability to
obtain financing for the South Carolina facility, or lack of adequate demand for our products. In the event of
an impairment, the Company would write down the asset to the fair market value, thereby incurring a charge
to the statement of operations. Management believes that no such indicators or impairment of its long-lived
assets existed at October 31, 2002.
Revenue Recognition
The Company recognizes revenue from sales of Oxyglobin upon shipment provided that there is evidence
of an agreement, there are no uncertainties surrounding acceptance, collectibility is probable, the price is fixed
and only perfunctory company obligations, if any, included in the arrangement remain to be completed. The
Company sells Oxyglobin to veterinarians in the United States through veterinary product distributors, who
purchase product for immediate and direct resale to veterinary practices. The Company sells Oxyglobin to a
distributor in the United Kingdom, which sells product in selected European countries through local
veterinary distributors in Germany, France and the UK. Collectibility is reasonably assured once pricing
arrangements are established, as these agreements establish the distributor's intent to pay. Sales of Hemopure
to South Africa are expected to begin in fiscal 2003 and also will be through an importer/distributor. The
Company's customers do not have a right to return product. The Company and its distributors have an ongoing
business relationship, and the Company monitors creditworthiness on a regular basis. The Company believes
collectibility of product revenues is reasonably assured at the time of sale.
Results of Operations
Fiscal Years Ended October 31, 2002 and 2001
Total revenues, almost entirely from Oxyglobin sales, were $2.0 million compared to $3.5 million in fiscal
2001. The decrease in Oxyglobin sales is due to our having an insufficient supply of inventory resulting from
the expansion and revalidation of Biopure's manufacturing facilities. We have been allocating Oxyglobin
produced before the expansion to our largest customers, and as of October 31, 2002, had backorders of more
than 9,000 units, or approximately $1.0 million in anticipated revenue. We expect to fill backorders in fiscal
2003 following regulatory clearance to ship product manufactured at the revalidated facilities.
Cost of revenues totaled $7.4 million compared to $3.7 million in fiscal 2001. The increase is due to costs
associated with the shut-down of our Cambridge manufacturing facility in November 2001 for capacity
expansion. During the six-month shutdown, we had negative gross margins for Oxyglobin sales resulting from
an allocation of unabsorbed manufacturing costs. The remainder of these fixed costs were allocated to research
and development. The above allocations were based on current and expected production levels and annual
production capacities and required management judgment. When production resumed in May 2002, because
we began producing Hemopure for sale to South Africa, the allocation of unabsorbed fixed manufacturing
costs to research and development stopped and all costs were charged to cost of revenues or inventory. Cost of
revenues for the last half of fiscal 2002 reflects manufacturing inefficiencies during ramp-up of the expanded
facilities. Unit production costs that exceeded the net realizable value were charged to cost of revenues.
Inventory reserves were increased by $1.2 million at October 31, 2002 above our usual allowances for
slow moving and obsolete inventory to cover:
- production lots that are not rejected but are undergoing additional review;
- product in inventory at October 31, 2002 that was subsequently rejected per the Company's pre-release
quality control procedures; and
- the possibility that delays in shipping could affect the saleability of product in inventory.
Research and development expenses include product and process development and engineering, preclinical
studies, clinical trials, clinical trial materials and, through May 2002, an allocation of unabsorbed fixed
costs of manufacturing. Our research and development efforts have focused on developing and gaining
regulatory approval of Hemopure, our product for use in humans. In fiscal 2002, we completed data analysis
and filed our biologic license application for Hemopure with the FDA. The development and approval of
Oxyglobin, our veterinary product, was a result of the development of Hemopure. Hemopure is approved for
use in South Africa. Failure to gain one or more additional regulatory approvals during the next several years
would make it difficult for the Company to continue its development efforts.
Research and development expenses decreased 24.9% to $26.0 million in fiscal 2002 from fiscal 2001.
This decrease was due to a $6.7 million reduction in expenses for activities associated with data organization
and analyses for the Phase III orthopedic surgery trial of Hemopure, a $1.6 million reduction in expenses for
preclinical studies, and a $2.2 million reduction in the allocation of unabsorbed fixed manufacturing costs, as
described above. Expenses in 2001 also included a one-time expense of $1.6 million, of which $1.5 million was
non-cash, for research and preclinical studies related to the acquisition in May 2001 of the balance of an
inactive company previously 26% owned by Biopure. The decrease in expenses was partially offset by an
increase of approximately $3.4 million for preparing the BLA for Hemopure that was submitted to the FDA
on July 31, 2002.
Sales and marketing expenses increased 7.9% to $3.0 million in fiscal 2002. Initial market development
expenses for Hemopure were classified as general and administrative expenses for the first half of fiscal 2002.
Hemopure marketing expenses of $1.0 million are included in sales and marketing expenses for the second
half of fiscal 2002, because Hemopure is approved for sale in South Africa. Oxyglobin sales and marketing
expenses decreased $781,000 to $2.0 million for fiscal 2002, in line with the decrease in sales volume. This
decrease is primarily due to reductions in veterinary educational programs in fiscal 2002.
General and administrative expenses decreased 20.4% to $12.2 million in fiscal 2002. This decrease is due
largely to fiscal 2001 non-cash charges of $6.8 million for stock options and warrants issued to non-employees
that vested fully in fiscal 2001. This non-cash compensation was accounted for at fair value, per SFAS 123 and
EITF 96-18. Excluding the effects of the non-cash compensation charges, expenses for fiscal 2002 increased
by $3.8 million primarily due to an expense of $1.3 million for product shipped to South Africa for use in a
pre-launch medical education program and increased information technology and consulting expenses
compared to fiscal 2001.
Total other income, net, consists of interest income and other non-product related income partially offset
by interest expense. Included in other income, net, for fiscal 2002 is $238,000 received as a contingent
payment for a 1998 intellectual property transfer not related to Hemopure or Oxyglobin. Total other income,
net, was $874,000 in fiscal 2002 compared to $3.5 million in fiscal 2001. This decrease was attributable to the
Company's decreased cash balance and lower interest rates. We anticipate a decrease in other income in fiscal
2003.
Basic and diluted net loss per common share for fiscal 2002 decreased to $1.66 from $1.97 per share in
2001. For fiscal 2002, non-cash compensation expense for stock options and warrants previously issued to non-employees
was a credit of $61,000 compared to an expense of $6.8 million, or $0.27 per share for fiscal 2001.
Shares used to calculate these losses were the actual weighted-average number of common shares outstanding
during 2002 of 27,582,301 and 25,066,132 for 2001. Diluted net losses per share equals basic earnings per
share because the Company had losses from all periods.
iFiscal Years Ended October 31, 2001 and 2000
Total revenues, almost entirely from Oxyglobin sales, increased 13.9% to $3.5 million in fiscal 2001.
Revenues in fiscal 2001 included the launch of Oxyglobin in Europe resulting in $173,000 in sales to our
European distributors. Domestic sales increased 8.2% resulting from a 1.5% increase in unit sales and an
increase in the average selling price per unit of 6.6%.
Cost of revenues totaled $3.7 million in fiscal 2001, a decrease of 23.3% from fiscal 2000. The decrease is
due to increased manufacturing activity associated with the development of Hemopure and the resulting
decrease in manufacturing expenses allocated to Oxyglobin. Cost of revenues in fiscal 2001 and 2000 reflects
the direct costs associated with the production of Oxyglobin plus an allocation of a portion of the unabsorbed
fixed costs of manufacturing. An allocation of these unabsorbed costs was also made to Hemopure units in
finished goods inventory. The remainder of these fixed costs and the direct costs of production of clinical trial
materials were allocated to research and development. The above allocations are based on current and
expected production levels and annual production capacities and require management judgment. Our
Cambridge manufacturing facility was shut down in November 2001 for a capacity upgrade.
Research and development expenses include product and process development and engineering, preclinical
studies, clinical trials, clinical trial materials and an allocation of unabsorbed fixed costs of
manufacturing. Our research and development efforts have been focused on developing and gaining regulatory
approval of Hemopure, our product for use in humans. The development and approval of Oxyglobin, our
veterinary product, was a result of the development of Hemopure. Hemopure is approved for use in South
Africa. Failure to gain one or more additional regulatory approvals during the next several years would make it
difficult for the Company to continue its development efforts.
Research and development expenses increased 31.2% to $34.6 million in fiscal 2001. The increase was
due to activities associated with data organization and analyses for the pivotal Phase III clinical trial of
Hemopure, preparation for the filing of an electronic U.S. marketing application, ongoing research and
development and an increase in the allocation of fixed costs of unused production capacity. Expenses in 2001
also included a one-time non-cash expense of $1.5 million for research and pre-clinical studies related to the
acquisition in May of Reperfusion Systems, Inc., an inactive company previously 26% owned by Biopure, for
approximately 67,000 shares of Biopure common stock and $55,000 in cash.
Sales and marketing expenses, consisting of Oxyglobin expenses, increased to $2.8 million, or 14.0% in
fiscal 2001. This increase was primarily due to selling, marketing and distribution expenses associated with the
launch of Oxyglobin in Europe during 2001.
General and administrative expenses increased 55.6% to $15.4 million in fiscal 2001. This increase is
primarily due to a $3.1 million increase in non-cash compensation expense for stock options and warrants
granted to our South African distributor, consultants and two directors. This non-cash compensation was
accounted for at fair value, per SFAS 123 and EITF 96-18. Prelaunch expenses for Hemopure, increased
premiums for insurance and increased spending on corporate communications also contributed to the increase
in 2001.
Total other income consists primarily of interest income and other non-product related income partially
offset by interest expense. Total other income was $3.5 million in fiscal 2001 compared to $4.4 million in fiscal
2000. This decrease was attributable to the Company's decreased cash balance and lower interest rates.
Basic and diluted net loss per common share for fiscal 2001 increased to $1.97 from $1.51 per share in
2000. Shares used to calculate these losses were the actual weighted-average number of common shares
outstanding during 2001 of 25,066,132 and 23,947,251 for 2000. Diluted net losses per share are not presented
because the Company had losses from all periods.
Liquidity and Capital Resources
At October 31, 2002, we had $19.7 million in cash and cash equivalents and from November 1, 2002
through January 27, 2003, we have raised $1.9 million through the sale of equity as discussed below. Based on
our fiscal 2003 operating plan, we require approximately $55 million to attain production of Hemopure and
Oxyglobin at full-capacity at our expanded Cambridge manufacturing facility, market development for
Hemopure, sales and marketing expenses for Oxyglobin in the United States and Europe and continuation of
clinical development for additional Hemopure indications. We believe our cash and cash equivalents at
January 27, 2003, are only sufficient to fund operations according to our fiscal 2003 operating plan through
more than half of the second quarter of fiscal 2003. External cash requirements are expected to be lower
during the last half of fiscal 2003 because of anticipated Hemopure product sales. Additional expenditures not
included in our fiscal 2003 operating plan, including the costs of personnel and clinical development of
additional indications for Hemopure, will be deferred until sufficient funds, in addition to those on hand, are
available. Because the Company's funds on hand at January 27, 2003 and forecast sales are not sufficient to
fund its plan into fiscal 2004, the audit report of Ernst & Young LLP, the Company's independent auditor, on
our fiscal 2002 financial statements includes a going concern modification. In order for us to remain a going
concern we will require significant funding. We are exploring opportunities to raise capital through equity
offerings, the issuance of debt securities, strategic alliances and other financing vehicles. However, additional
financing or strategic alliances may not be available when needed, or, if available, may not be on favorable
terms.
We raised $35.5 million through sales of Class A Common Stock in fiscal 2002. In the first quarter of
fiscal 2002, we drew net proceeds of $6.6 million under an equity line stock purchase agreement with Societe
Generale as further described below. On April 23, 2002, the Company raised net proceeds of $19.7 million
from a sale of registered shares. We realized an additional $4.9 million in net proceeds from another sale of
registered shares on May 9, 2002. On September 19, 2002, we raised net proceeds of $4.3 million from a sale
of registered shares. On December 31, 2002, we raised $1.9 million in a private placement.
We used $44.1 million of cash in operating activities in fiscal 2002. The principal uses of cash in fiscal
2002 were to fund our net loss of $45.8 million and the increase of Oxyglobin and Hemopure inventory of
$3.4 million, partially offset by $4.6 million of depreciation and amortization.
We used $7.6 million of cash in investing activities in fiscal 2002. The principal uses for this purpose were
to purchase property, plant and equipment, $2.8 million to complete the Cambridge manufacturing expansion
and $2.9 million for detailed engineering work for the planned manufacturing facility in South Carolina.
In December 2001, the Company signed an amended letter of intent with Sumter Realty Group, LLC for
the construction and financing of a 500,000-unit Hemopure plant in South Carolina expected to cost
$120 million. Sumter Realty Group, LLC has accepted a letter of commitment from a potential investor for
the full $120 million required to finance construction of the new manufacturing facility in South Carolina. In
December 2002, Biopure signed a lease agreement with Sumter Realty Group, LLC (the Lease). In addition,
the Company also expects to issue a warrant to purchase up to 2.5 million shares of Class A Common Stock at
$0.01 per share, exercisable five years from the start of construction and is committed to pay a finder's fee, of
approximately 2 percent of the net amount financed, to a consultant when financing for the facility is
completed. Under the terms of the Lease, minimum lease payments will start at substantial completion of the
facility, which the Company expects to be in the beginning of fiscal 2005. The annual lease payments will be
$13.8 million per year for the first two years and $17.2 million per year for the balance of the 25-year term. At
the conclusion of the 25-year term, the Company will own the facility. The terms of the Lease are subject to
financial closing and construction beginning within 75 days of the date of the lease. The Company can cancel
the lease if the definitive financing documentation is not acceptable or based on the outcome of continuing site
assessment. The lease will be void if the financing is not completed. Subject to diligence and definitive
documentation, closing and start of construction could occur in early calendar year 2003.
As of October 31, 2002, $12.8 million has been included in property, plant and equipment and
$9.8 million in long-term debt reflecting expenses to date for the engineering and design costs of the planned
manufacturing facility in Sumter, S.C. Through December 2002, the Company incurred an additional
$500,000 of costs for detailed engineering work, including shop drawings for major equipment and steel
fabrication, to maintain the timeline for a validated, FDA-approved plant in fiscal 2005. The total
$13.3 million of expenditures by the Company will be returned as described below.
During fiscal 2001, we paid $10 million, Biopure's initial contribution to the cost of the facility, into an
escrow account to fund certain initial expenditures related to the construction of the new facility. Under the
proposed agreement for the construction and financing of the new plant, the $10 million in project cost funded
by Biopure is expected to be refunded upon receipt of FDA approval for Hemopure and if a final lease
agreement has been executed. The $10 million has been accounted for as a deposit in long-term assets as of
October 31, 2002. If FDA approval is not received, the $10 million deposit will not be returned to the
Company and will be treated as a capital expenditure, and as a capital expenditure will be subject to
immediate impairment review pursuant to SFAS No. 121 (and SFAS No. 144, applicable in fiscal 2003).
Under the terms of the Lease, Sumter Realty Group, LLC will refund the $3.3 million of additional spending
by the Company in fiscal 2003 once financing is completed.
Biopure is a party to a $75 million equity line stock purchase agreement with Societe Generale. Under
this agreement, Biopure would have the option of drawing up to a remaining balance of $67.8 until June 2003,
if conditions under the agreement were met, in exchange for the issuance of Biopure common stock. As of
January 27, 2003, the Company had drawn net proceeds of $6.6 million, all in the first quarter of fiscal 2002,
under this agreement. The Company is currently unable to raise funds through this agreement because its
recent stock prices have been below the minimum price of $13 per share specified in the agreement.
We expect to continue financing our operations, until we are profitable, through sales of securities and
joint venture, leasing or licensing arrangements. We will also explore licensing and partnering arrangements
where appropriate. We have not been profitable since inception and had an accumulated deficit of
$381.6 million as of October 31, 2002. We will continue to generate losses for the next several years.
We plan to spend approximately $5.0 million in the period fiscal 2003 to fiscal 2004 on capital projects for
our existing facilities. The fiscal 2003 planned expenditures are included in the cash requirements identified
above.
The following table summarizes the Company's significant contractual obligations at October 31, 2002:
As of October 31, 2002, we had net operating loss carryforwards of approximately $225.6 million to offset
future federal and state taxable income through 2022. Due to the degree of uncertainty related to the ultimate
realization of such prior losses, no benefit has been recognized in our financial statements as of October 31,
2002. Utilization of such losses in future years may be limited under the change of stock ownership rules of the
Internal Revenue Service.
Recently Issued Accounting Standards
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." This statement supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and certain accounting and reporting
provisions of Accounting Principles Board (APB) Opinion No. 30, "Reporting the Results of Operations Ì
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." Statement 144 requires that one accounting model be used for long-lived
assets to be disposed of by sale, whether previously held and used or newly acquired, and it broadens the
presentation of discontinued operations to include more disposal transactions. The provisions of this statement
are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim
periods within those fiscal years, with early adoption permitted. We do not believe the adoption of this
statement will have a material impact on our results of operations or financial position.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", issued in July 2002,
addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies
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)." The principal difference between
Statement 146 and Issue 94-3 relates to Statement 146's requirements for recognition of a liability for a cost
associated with an exit or disposal activity. Statement 146 requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit
costs as generally defined in Issue 94-3 was recognized at the date of an entity's commitment to an exit plan.
Therefore, this Statement eliminates the definition and requirements for recognition of exit costs in Issue 94-3.
This Statement also established that fair value is the objective for initial measurement of the liability. The
provisions of this Statement are effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. We do not believe the adoption of this statement will have a material
impact on our results of operations or financial position.
FASB Interpretation No. 45, "Guarantor Accounting," will significantly change current practice in the
accounting for, and disclosure of, guarantees. Most guarantees are to be recognized and initially measured at
fair value, which is a change from current practice. In addition, guarantors will be required to make significant
new disclosures, even when the likelihood of the guarantor making payments under the guarantee is remote. In
general, the Interpretation applies to contracts or indemnification agreements that contingently require the
guarantor to make payments to the guaranteed party based on changes in an underlying that is related to an
asset, liability, or an equity security of the guaranteed party. The Interpretation's disclosure requirements are
effective for financial statements of interim or annual periods ending after December 15, 2002, while the initial
recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. We do not believe the adoption of this statement will have a material
impact on our results of operations or financial position.
At the November 21, 2002 meeting, the Energy Issues Task Force reached a consensus on Issue 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables," which addresses how to account for
arrangements that may involve the delivery or performance of multiple products, services, and/or rights to use
assets. The final consensus will be applicable to agreements entered into in fiscal periods beginning after
June 15, 2003 with early adoption permitted. Additionally, companies will be permitted to apply the consensus
guidance to all existing arrangements as the cumulative effect of a change in accounting principle in
accordance with APB Opinion No. 20, Accounting Changes. Following is a brief summary of the final model
approved by the Task Force.
Revenue arrangements with multiple deliverables should be divided into separate units of accounting if
the deliverables in the arrangement meet the following criteria:
- The delivered item(s) has value to the customer on a standalone basis. That item(s) has value on a
standalone basis if it is sold separately by any vendor or the customer could resell the deliverable on a
standalone basis. In the context of a customer's ability to resell the deliverable, the Task Force
observed that this criterion does not require the existence of an observable market.
- There is objective and reliable evidence of the fair value of the undelivered item(s).
- If the arrangement includes a general right of return, delivery or performance of the undelivered
item(s) is considered probable and substantially in the control of the vendor.
- Arrangement consideration should be allocated among the separate units of accounting based on their
relative fair values. The amount allocated to the delivered item(s) is limited to the amount that is not
contingent on the delivery of additional items or meeting other specified performance conditions.
- Applicable revenue recognition criteria should be considered separately for separate units of
accounting.
The Company does not believe the adoption of EITF 00-21 will have a material impact on its results of
operations or financial position.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Company currently does not have any foreign currency exchange risks, with the exception of
negligible exchange fluctuations associated with expenses for clinical trial and regulatory activities outside of
the United States. Biopure sells Oxyglobin to its European distributors and plans to sell Hemopure to its
South African distributor in U.S. dollars. The customers bear the risk of foreign currency exchange
fluctuation. Dramatic fluctuations in exchange rates could result in either increases or decreases in unit sales
as the effective unit price to the customer varies. The Company invests its cash and cash equivalents in high-grade
commercial paper and money market funds. These investments are subject to interest rate risk.
However, due to the nature of the Company's short-term investments, it believes that the financial market risk
exposure is not material.
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted as a separate section of this report commencing on Page F-1.
Schedules for which provision is made in the applicable accounting regulation of the Securities and
Exchange Commission are not required under the related instructions or are inapplicable, and therefore have
been omitted.
Item 9. Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
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