FORM
10-QSB
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
(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, 2006
OR
o
|
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 1-12830
BioTime,
Inc.
(Exact
name of small business issuer as specified in its charter)
|
|
California
|
94-3127919
|
(State
or other jurisdiction of incorporation
|
(IRS
Employer
|
or
organization)
|
Identification
No.)
|
6121
Hollis Street
Emeryville,
California 94608
(Address
of principal executive offices)
(510)
350-2940
(Issuer's
telephone number)
Indicate
by check mark whether the issuer (1) 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. Yes
X
No__
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes No X
APPLICABLE
ONLY TO CORPORATE ISSUERS:
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date. 22,574,374 common
shares, no par value, as of November
2,
2006.
Transitional
Small Business Disclosure Format (Check one) Yes No X
PART
1--FINANCIAL INFORMATION
Statements
made in this Report that are not historical facts may constitute forward-looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those discussed. Such risks and uncertainties
include but are not limited to those discussed in this report under Item
1 of
the Notes to Financial Statements, and in BioTime's Annual Report on Form
10-K
filed with the Securities and Exchange Commission. Words such as “expects,”
“may,” “will,” “anticipates,” “intends,” “plans,” “believes,” “seeks,”
“estimates,” and similar expressions identify forward-looking
statements.
Item
1. Financial Statements
BIOTIME,
INC.
CONDENSED
BALANCE SHEETS
ASSETS
|
|
September
30,
2006
(unaudited)
|
|
CURRENT
ASSETS
|
|
|
|
Cash
and cash equivalents
|
|
$
|
755,553
|
|
Accounts
receivable
|
|
|
7,916
|
|
Prepaid
expenses and other current assets
|
|
|
49,449
|
|
Total
current assets
|
|
|
812,918
|
|
|
|
|
|
|
EQUIPMENT,
net of accumulated depreciation of $580,314
|
|
|
6,738
|
|
DEPOSITS
AND OTHER ASSETS
|
|
|
22,986
|
|
TOTAL
ASSETS
|
|
$
|
842,642
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' DEFICIT
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
315,440
|
|
Current
portion of deferred license revenue
|
|
|
182,242
|
|
Total
Current Liabilities
|
|
|
497,682
|
|
|
|
|
|
|
DEFERRED
LICENSE REVENUE - long term
|
|
|
1,298,406
|
|
ROYALTY
OBLIGATION
|
|
|
594,360
|
|
OTHER
LONG TERM LIABILITIES
|
|
|
9,117
|
|
TOTAL
LIABILITIES
|
|
|
2,399,565
|
|
|
|
|
|
|
COMMITMENTS
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
DEFICIT:
|
|
|
|
|
Preferred
shares, no par value, undesignated as to Series, authorized 1,000,000
shares; none outstanding
|
|
|
—
|
|
Common
shares, no par value, authorized 40,000,000 shares; issued and
outstanding
22,574,374
|
|
|
40,376,822
|
|
Contributed
capital
|
|
|
93,973
|
|
Accumulated
deficit
|
|
|
(42,027,718
|
)
|
Total
shareholders' deficit
|
|
|
(1,556,923
|
)
|
TOTAL
LIABILITIES AND SHAREHOLDERS' DEFICIT
|
|
$
|
842,642
|
|
See
notes
to condensed financial statements.
BIOTIME,
INC.
CONDENSED
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30, 2006
|
|
September
30, 2005
|
|
September
30, 2006
|
|
September
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
License
fees
|
|
$
|
46,979
|
|
$
|
24,062
|
|
$
|
126,019
|
|
$
|
73,887
|
|
Royalties
from product sales
|
|
|
250,017
|
|
|
128,829
|
|
|
555,914
|
|
|
442,877
|
|
Grant
income
|
|
|
—
|
|
|
87,541
|
|
|
—
|
|
|
164,026
|
|
Total
revenue
|
|
|
296,996
|
|
|
240,432
|
|
|
681,933
|
|
|
680,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
(304,562
|
)
|
|
(401,144
|
)
|
|
(954,369
|
)
|
|
(1,205,271
|
)
|
General
and administrative
|
|
|
(301,924
|
)
|
|
(242,988
|
)
|
|
(1,139,305
|
)
|
|
(1,031,918
|
)
|
Total
expenses
|
|
|
(606,486
|
)
|
|
(644,132
|
)
|
|
(2,093,674
|
)
|
|
(2,237,189
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
INCOME (EXPENSE) AND OTHER:
|
|
|
(30,545
|
)
|
|
(11,358
|
)
|
|
(74,325
|
)
|
|
(27,982
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(340,035
|
)
|
$
|
(415,058
|
)
|
$
|
(1,486,066
|
)
|
$
|
(1,584,381
|
)
|
BASIC
AND DILUTED LOSS PER SHARE
|
|
$
|
(0.02
|
)
|
$
|
(0.02
|
)
|
$
|
(0.07
|
)
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMON
AND EQUIVALENT SHARES USED IN COMPUTING BASIC AND DILUTED PER SHARE
AMOUNTS
|
|
|
22,574,324
|
|
|
17,871,450
|
|
|
22,525,747
|
|
|
17,864,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes
to condensed financial statements.
BIOTIME,
INC.
CONDENSED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine
months Ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,486,066
|
)
|
$
|
(1,584,381
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
5,383
|
|
|
5,280
|
|
Interest
on royalty obligation
|
|
|
11,393
|
|
|
47,832
|
|
Amortization
of debt issuance costs
|
|
|
101,416
|
|
|
—
|
|
Stock-based
compensation
|
|
|
77,211
|
|
|
85,616
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(5,966
|
)
|
|
(234,901
|
)
|
Prepaid
expenses and other current assets
|
|
|
71,053
|
|
|
(8,029
|
)
|
Deposits
|
|
|
—
|
|
|
(4,926
|
)
|
Accounts
payable and accrued liabilities
|
|
|
(240,768
|
)
|
|
77
|
|
Deferred
revenue
|
|
|
389,362
|
|
|
(72,188
|
)
|
Other
long-term liabilities
|
|
|
4,578
|
|
|
2,594
|
|
Net
cash used in operating activities
|
|
|
(1,072,404
|
)
|
|
(1,763,026
|
)
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
Purchase
of equipment
|
|
|
(5,943
|
)
|
|
0
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
Increase
in royalty obligation
|
|
|
—
|
|
|
697,828
|
|
Payment
on royalty obligation
|
|
|
—
|
|
|
(130,000
|
)
|
Exercise
of options
|
|
|
126
|
|
|
—
|
|
Net
cash provided by financing activities
|
|
|
126
|
|
|
567,828
|
|
|
|
|
|
|
|
|
|
DECREASE
IN CASH AND CASH EQUIVALENTS
|
|
|
(1,078,221
|
)
|
|
(1,195,198
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
1,833,774
|
|
|
1,370,762
|
|
Cash
and cash equivalents at end of period
|
|
$
|
755,553
|
|
$
|
175,564
|
|
|
|
|
|
|
|
|
|
NONCASH
FINANCING AND INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Issuance
of shares to secure line of credit
|
|
$
|
38,000
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
Cash
for interest
|
|
$
|
—
|
|
$
|
—
|
|
See
notes to condensed financial statements.
|
(Concluded)
|
BIOTIME,
INC.
NOTES
TO FINANCIAL STATEMENTS
1.
Organization
General
-
BioTime, Inc. (“BioTime”) was organized November 30, 1990 as a California
corporation. BioTime is a biomedical organization which is engaged in the
research and development of synthetic plasma expanders, blood volume substitute
solutions, and organ preservation solutions, for use in surgery, trauma care,
organ transplant procedures, and other areas of medicine.
The
condensed balance sheet as of September 30, 2006, the condensed statements
of
operations for the three and nine months ended September 30, 2006 and 2005
and
the statements of cash flows for the nine months ended September 30, 2006
and
2005 have been prepared by BioTime without audit. In the opinion of management,
all adjustments (consisting primarily of normal recurring adjustments) necessary
to present fairly the financial position, results of operations, and cash
flows
at September 30, 2006 and for all periods presented have been made. The results
of operations for the three and nine months ended September 30, 2006 are
not
necessarily indicative of the operating results anticipated for the full
year.
Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been
condensed or omitted as permitted by regulations of the Securities and Exchange
Commission. Certain previously furnished amounts have been reclassified to
conform with presentations made during the current periods. It is suggested
that
these interim condensed financial statements be read in conjunction with
the
annual audited financial statements and notes thereto included in BioTime's
Form
10-K for the year ended December 31, 2005.
Significant
Risks and Uncertainties- BioTime’s
operations are subject to a number of factors that can affect its operating
results and financial condition. Such factors include but are not limited
to the
following: the results of clinical trials of BioTime’s products; BioTime’s
ability to obtain United States Food and Drug Administration and foreign
regulatory approval to market its products; competition from products
manufactured and sold or being developed by other companies; the price of
and
demand for BioTime products; BioTime’s ability to obtain additional financing
and the terms of any such financing that may be obtained; BioTime’s ability to
negotiate favorable licensing or other manufacturing and marketing agreements
for its products; the availability of ingredients used in BioTime’s products;
and the availability of reimbursement for the cost of BioTime’s products (and
related treatment) from government health administration authorities, private
health coverage insurers and other organizations.
Liquidity
- At
September 30, 2006, BioTime had $755,553 of cash on hand and available lines
of
credit totaling $543,600 (see Note 3), from which no money has yet been drawn.
However, BioTime needs additional capital and greater revenues to continue
its
current operations, to complete clinical trials of PentaLyteâ,
and to
conduct its planned product development and research programs. Sales of
additional equity securities could result in the dilution of the interests
of
present shareholders. BioTime is also continuing to seek new agreements with
pharmaceutical companies to provide product and technology licensing fees
and
royalties.
The availability and terms of equity financing and new license agreements
are
uncertain. The unavailability or inadequacy of additional financing or future
revenues to meet capital needs could force BioTime to modify, curtail, delay,
suspend, or possibly discontinue some or all aspects of its planned operations.
Management believes that its projected rate of spending, which includes possible
spending cuts, cash on hand, anticipated royalties from the sale of
Hextend®,
licensing fees, and available revolving lines of credit, will allow BioTime
to
operate through September 30, 2007.
2.
Significant
Accounting Policies
Financial
Statement Estimates
- The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue
recognition -
Royalty
and license fee revenues consist of product royalty payments and fees under
license agreements and are recognized when earned. Up-front fees where BioTime
has no continuing performance obligations are recognized as revenues when
collection is reasonably assured. In situations where continuing performance
obligations exist, up-front fees are deferred and amortized ratably over
the
performance period. If the performance period cannot be reasonably estimated,
BioTime amortizes fees over the life of the contract until such time that
the
performance period can be more reasonably estimated. Milestones, if any,
related
to scientific or technical achievements are recognized in income when the
milestone is accomplished if (a) substantive effort was required to achieve
the
milestone, (b) the amount of the milestone payment appears reasonably
commensurate with the effort expended and (c) collection of the payment is
reasonably assured.
BioTime
also defers costs, including finders’ fees, which are directly related to
license agreements for which revenue has been deferred. Deferred costs are
charged to expense proportionally and over the same period that related deferred
revenue is recognized as revenue. Deferred costs are net against deferred
revenues in BioTime’s balance sheet.
BioTime
recognizes royalty revenues in the quarter in which the sales report is
received, rather than the quarter in which the sales took place, as BioTime
does
not have sufficient sales history to accurately predict quarterly sales.
Grant
income is recognized as revenue when earned.
Stock-based
Compensation -
On
January 1, 2006, BioTime adopted Statement of Financial Accounting Standard
(“SFAS”) 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”) which
requires the measurement and recognition of compensation expense for all
share-based payment awards made to directors and employees including employee
stock options based on estimated fair values. SFAS 123(R) supersedes BioTime’s
previous accounting using the intrinsic value method under Accounting Principles
Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” for
periods beginning in fiscal 2006. In March 2005, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 107 (“SAB107”) relating to SFAS
123(R), which provides supplemental implementation guidance for SFAS 123(R).
BioTime has applied the provisions of SAB 107 in its adoption of SFAS 123(R).
Upon
adoption of SFAS 123 (R), BioTime has continued to utilize the Black-Scholes
Merton option pricing model which was previously used for BioTime’s proforma
disclosures under SFAS 123. BioTime’s determination of fair value of share-based
payment awards on the date of grant using an option-pricing model is affected
by
BioTime’s stock price as well as assumptions regarding a number of highly
complex and subjective variables. These variables include, but are not limited
to, BioTime’s expected stock price volatility over the term of the awards, and
the actual and the projected employee stock options exercise behaviors. The
expected term of options granted is derived from historical data on employee
exercises and post-vesting employment termination behavior. The risk-free
rate
is based on the U.S Treasury rates in effect during the corresponding period
of
grant. Because changes in the subjective assumptions can materially affect
the
estimated value, in management’s opinion, the existing valuation models may not
provide an accurate measure of the fair value of BioTime’s employee stock
options. Although the fair value of employee stock options is determined
in
accordance with SFAS 123(R) and SAB 107 using an option-pricing model, that
value may not be indicative of the fair value observed in a willing
buyer/willing seller market transaction.
3.
Lines of Credit
In
April 2006, BioTime entered into a Revolving Line of Credit Agreement (the
“Credit Agreement”) with Alfred D. Kingsley, Cyndel & Co., Inc., and George
Karfunkel, investors in BioTime, under which BioTime may borrow up to $500,000
for working capital purposes at an interest rate of 10% per annum. The maturity
date of the Credit Agreement is the earlier of (i) October 31, 2007 or
(ii) such date on which the borrower shall have received an aggregate of
$600,000 through (A) the sale of capital stock, (B) the collection of
licensing fees, signing fees, milestone fees, or similar fees in excess of
$1,000,000 under any present or future agreement pursuant to which the borrower
grants one or more licenses to use the borrower’s patents or technology,
(C) funds borrowed from other lenders, or (D) any combination of
sources under clauses (A) through (C). Under the Credit Agreement, BioTime
will prepay, and the credit line will be reduced by, any funds received prior
to
the maturity date from those sources discussed above. The line of credit
is
collateralized by a security interest in BioTime’s right to receive royalty and
other payments under the license agreement with Hospira. In consideration
for
making the line of credit available, BioTime issued to the investors a total
of
99,999 common shares. The market value of BioTime common shares was $0.38
per
common share on April 12, 2006, valuing the shares at $38,000. The debt
issuance costs are being amortized to interest expense through the maturity
date
of October 31, 2007. If any of the criteria (A) through (D) shall occur before
October 31, 2007, the remaining unamortized debt issuance costs will be charged
to interest expense at that time. No funds have yet been drawn on this line
of
credit.
BioTime
also has an available line of credit from American Express, which allows
for
borrowings up to $43,600; no funds have yet been drawn from this line of
credit.
Should any such money be drawn, interest will be payable on borrowings at
a
total rate equal to the prime rate plus 3.99%; however, regardless of the
prime
rate, the interest rate payable will at no time be less than 9.49%. The line
of
credit will not expire unless terminated by one of the parties.
4. Royalty Obligation
In
December 2004, BioTime entered into an agreement with Summit Pharmaceuticals
International Corporation (“Summit”) to co-develop Hextend and PentaLyte for the
Japanese market. Under the agreement, BioTime received $300,000 in December
2004, $450,000 in April 2005 and $150,000 in October 2005. The payments
represent a partial reimbursement of BioTime’s development cost of Hextend and
PentaLyte. In June 2005, following BioTime’s approval of Summit’s development
plan for Hextend, BioTime paid to Summit a one-time fee of $130,000 for their
services in preparing the plan. The agreement states that revenues from Hextend
and PentaLyte in Japan will be shared between BioTime and Summit as follows:
BioTime 40% and Summit 60%. Additionally, BioTime will pay Summit 8% of all
net
royalties received from the sale of PentaLyte in the United States.
The
accounting treatment of the payments from Summit fall under the guidance
of
Emerging Issues Task Force (“EITF”) 88-18, “Sales of Future Revenues.” EITF
88-18 addresses the accounting treatment when an enterprise (BioTime) receives
cash from an investor (Summit) and agrees to pay to the investor a specified
percentage or amount of the revenue or a measure of income of a particular
product line, business segment, trademark, patent, or contractual right.
The
EITF reached a consensus on six independent factors that would require
reclassification of the proceeds as debt. BioTime meets one of the factors
whereby BioTime has significant continuing involvement in the generation
of the
cash flows due to the investor. As a result, BioTime initially recorded the
net
proceeds from Summit to date of $770,000 as long-term debt to
comply
with EITF 88-18, even though BioTime is not legally indebted to Summit for
that
amount.
In
July
2005, Summit sublicensed the rights to Hextend in Japan to Maruishi
Pharmaceutical Co., Ltd (“Maruishi”). In consideration for the license, Maruishi
agreed to pay Summit a series of milestone payments: Yen 70,000,000, (or
$593,390 based on foreign currency conversion rates at the time) upon executing
the agreement, Yen 100,000,000 upon regulatory filing in Japan, and Yen
100,000,000 upon regulatory approval of Hextend in Japan. Consistent with
the
terms of the BioTime and Summit agreement, Summit paid 40% of the initial
agreement execution amount, $237,356, to BioTime during October 2005. BioTime
does not expect the regulatory filing and approval milestones to be attained
for
several years.
The
initial accounting viewed the potential repayment of the $770,000 imputed
debt
to come only from the 8% share of US PentaLyte revenues generated by BioTime
and
paid to Summit. BioTime first became aware of the terms of the Maruishi
sublicense during the fourth quarter of 2005, at which time BioTime prepared
an
estimate of the future cash flows, and determined that Summit will earn a
majority of its return on investment from its agreement with Maruishi, and
not
the 8% of BioTime’s U.S. PentaLyte sales. Considering this, the imputed $770,000
obligation to Summit is viewed for accounting purposes as a royalty obligation
which will be reduced by Summit’s 8% share of BioTime’s U.S. PentaLyte sales
plus Summit’s 60% share of Japanese revenue. Accordingly, BioTime recorded the
entire $593,390 paid by Maruishi to Summit for the sublicense as deferred
revenue, to be amortized over the remaining life of the patent through 2019.
BioTime’s 40% share of this payment was collected in October 2005 and the
remaining 60% share was recorded as a reduction of the long-term royalty
obligation of BioTime to Summit. The balance of the license fees received
by
BioTime is still being treated as a long-term royalty obligation for financial
accounting purposes under EITF 88-18.
Interest
on the long-term royalty obligation is accrued monthly, using the effective
interest method beginning October 2005, at the rate of 25.2% per annum, which
BioTime has determined is the appropriate interest rate when the future cash
flows from the transaction are considered. Prior to October 2005, BioTime
was
accruing interest at a rate of 12% based upon its incremental borrowing rate
because the effective interest rate derived from future “deemed payments” could
not be reasonably estimated. The effective interest rate will be evaluated
annually, or when events occur that have significantly affected the estimate
of
future cash flows. BioTime has recorded $101,416 and $47,832 of interest
expense
on the long-term royalty obligation during
the nine months ended September 30, 2006 and September 30, 2005,
respectively.
5.
Shareholders’ Deficit
During
December 2005, BioTime completed a subscription rights offer (the “2005 Rights
Offer”) through which BioTime raised gross proceeds of $1,787,144 through the
sale of 4,467,862 common shares and 4,467,862 warrants. The common shares
and
warrants were sold as “units” consisting of one common share and one warrant for
$0.40 per unit. Each warrant entitles the holder to purchase one common share
for $2.00 per share and will expire on October 31, 2010. BioTime may redeem
the
warrants by paying $.05 per warrant if the closing price of the common shares
on
any national securities exchange or the Nasdaq Stock Market exceeds 200%
of the
exercise price of the warrants for any 20 consecutive trading days.
Certain
persons acted as guarantors of the 2005 Rights Offer under a Standby Purchase
Agreement pursuant to which they agreed to purchase up to 4,467,862 units
if the
subscription rights were not fully exercised. In consideration for their
agreement, BioTime paid the guarantors $132,000 in cash and issued to them
warrants to purchase 600,000 common shares, which were accounted for as costs
of
the equity financing. The $132,000 was included in accounts payable and accrued
expenses as of December 31, 2005. Total cash costs for the Rights Offer,
which
were recorded as a reduction of the proceeds received, were $379,984. The
warrants issued to the guarantors have the same terms as the warrants BioTime
sold in the 2005 Rights Offer. The market price of all warrants issued in
the
2005 Rights Offer was $0.05 per warrant on the closing date.
During
April 1998, BioTime entered into a financial advisory services agreement
with
Greenbelt Corp., a corporation controlled by Alfred D. Kingsley and Gary
K.
Duberstein, who are also shareholders of BioTime. The agreement has been
renewed
each subsequent year ending March 31. For the twelve months ending March
31,
2006, BioTime agreed to pay Greenbelt $45,000 in cash and issue 135,000 common
shares. During April 2006, BioTime paid the remaining $45,000 obligation
under
the agreement for the twelve months ended March 31, 2006 and issued 33,750
common shares. During
March 2006, the board of directors approved the renewal of the agreement
with
Greenbelt for the 12 months ending March 31, 2007. BioTime will pay Greenbelt
a
cash fee of $90,000 and will issue Greenbelt 200,000 common shares. The common
shares will be issued as follows: 150,000 shares on January 2, 2007 for services
rendered through December 31, 2006, and 50,000 shares on April 2, 2007 for
services rendered from January 1, 2007 through March 31, 2007. The cash fee
will
be payable as follows: $30,000 on January 2, 2007, $30,000 on April 2, 2007,
and
$30,000 on October 1, 2007; provided, that BioTime may defer either or both
of
the cash payments that would otherwise be
due
on
January 2, 2007 and April 2, 2007 until a date that BioTime may determine,
but
not later than October 1, 2007. If BioTime elects to defer either or both
cash
payments, BioTime will issue to Greenbelt 30,000 additional common shares
for
each deferred payment within ten business days after the date on which the
deferred cash payment was originally due.
Activity
related to the Greenbelt agreement is presented in the table
below:
|
|
Balance
included in Accounts Payable at January 1
|
|
Add:
Cash-based expense accrued
|
|
Add:
Stock-based expense accrued
|
|
Less:
Cash
payments
|
|
Less:
Value of stock-based payments
|
|
Balance
included in Accounts Payable at September 30
|
|
2006
|
|
$
|
65,138
|
|
$
|
56,250
|
|
$
|
33,487
|
|
$
|
(45,000
|
)
|
$
|
(43,875
|
)
|
$
|
66,000
|
|
2005
|
|
$
|
112,950
|
|
$
|
45,000
|
|
$
|
45,275
|
|
$
|
(67,500
|
)
|
$
|
(84,200
|
)
|
$
|
51,525
|
|
During
the nine months ended September 30, 2006 and 2005, BioTime issued to Greenbelt
135,000 and 60,000 common shares, respectively, valued at $43,875 and $84,200.
During
the nine months ended September 30, 2006, 63 warrants were exercised for
proceeds of $126.
6.
Licensing Agreement
On
March
24, 2006, BioTime entered into a license agreement with Summit to develop
Hextend and PentaLyte in the People’s Republic of China, and Taiwan. Summit paid
BioTime $500,000 in May, 2006 as the initial consideration for the China
and
Taiwan license. BioTime also will be entitled to receive 50% of the royalties
and any milestone payments received by Summit from any third-party sublicense,
excluding the first payment made by a sublicense upon execution of an agreement
with Summit. Summit has entered a sublicense agreement with Maruishi for
Hextend
and PentaLyte in China and Taiwan. Milestone payments of Yen 20,000,000 are
payable by Maruishi when the first new drug application for Hextend is filed
and
when the first clinical study of PentaLyte begins under the
sublicense.
BioTime
has recorded the $500,000 payment as deferred revenue, as development of
PentaLyte has not yet been completed. As the expected completion date is
uncertain, BioTime will amortize deferred revenue over the remaining lives
of
the underlying Hextend and PentaLyte patents, through 2019. Approximately
$16,000 has been amortized during the nine months ended September 30,
2006.
7.
Net Income (Loss) Per Share
Basic
earnings (loss) per share excludes dilution and is computed by dividing net
income (loss) by the weighted average number of common shares outstanding
during
the period. Diluted earnings (loss) per share reflects the potential dilution
from securities and other contracts which are exercisable or convertible
into
common shares. For the three and nine months ended
September
30, 2006 and 2005, options to purchase 1,419,644 and 1,352,164 common shares,
respectively, and warrants to purchase 7,847,867 and 3,153,191 common shares,
respectively, were excluded from the computation of earnings (loss) per share
as
their inclusion would be antidilutive. As a result, there is no difference
between basic and diluted calculations of loss per share for all periods
presented.
8.
Valuation and Expense Information under SFAS 123(R)
During
1992, BioTime adopted the 1992 Stock Option Plan (the “1992 Plan”). Options
granted under the 1992 Plan expire five to ten years from the date of grant
and
may be fully exercisable immediately, or may be exercisable according to
a
schedule or conditions specified by the Board of Directors or the Option
Committee. As of September 30, 2006, options to purchase 184,500 shares had
been granted and were outstanding at exercise prices ranging from $3.00 to
$11.75 under the 1992 Plan. At September 30, 2006, no options were
available for future grants under the 1992 Plan.
During
2002 BioTime adopted a new stock option plan (the “2002 Plan”). The 2002 Plan
was amended during December 2004 to increase the number of shares available
for the issuance of options. Under the 2002 Plan, BioTime has reserved 2,000,000
common shares for issuance under options granted to eligible persons. No
options
may be granted under the 2002 Plan more than ten years after the date the
2002
Plan was adopted by the Board of Directors, and no options granted under
the
2002 Plan may be exercised after the expiration of ten years from the date
of
grant. Under the 2002 Plan, options to purchase common shares may be granted
to
employees, directors and certain consultants at prices not less than the
fair
market value at date of grant for incentive stock options and not less than
85%
of fair market value for other stock options. These options expire five to
ten
years from the date of grant and may be fully exercisable immediately, or
may be
exercisable according to a schedule or conditions specified by the Board
of
Directors or the Compensation Committee. The 2002 Plan also permits BioTime
to
sell common shares to employees subject to vesting provisions under restricted
stock agreements that entitle BioTime to repurchase unvested shares at the
employee’s cost upon the occurrence of specified events, such as termination of
employment. BioTime may permit employees or consultants, but not executive
officers or directors, who purchase stock under restricted stock purchase
agreements to pay for their shares by delivering a promissory note that is
secured by a pledge of their shares. Under the 2002 Plan, as of September
30,
2006, BioTime had granted to certain employees, consultants, and directors,
options to purchase a total of 1,135,164 common shares at exercise prices
ranging from $0.34 to $4.00 per share; and had 864,836 options available
for
future grants.
On
January 1, 2006 BioTime adopted SFAS 123(R), which requires the measurement
and
recognition for all share-based payment awards made to BioTime’s employees and
directors including employee stock options. The following table summarizes
stock-based compensation expense related to employee and director stock options
awards for the three and nine months ended September 30, 2006, which was
allocated as follows:
|
|
Three
Months Ended September 30, 2006 (under SFAS
123(R))
|
|
Nine
Months Ended September 30, 2006 (under SFAS
123(R))
|
|
Stock-based
compensation expense:
|
|
|
|
|
|
|
|
Research
and Development
|
|
$
|
—
|
|
$
|
—
|
|
General
and Administrative
|
|
|
7,913
|
|
|
43,724
|
|
Stock-based
compensation expense included in operating expense
|
|
|
7,913
|
|
|
43,724
|
|
Total
stock-based compensation expense
|
|
$
|
7,913
|
|
$
|
43,724
|
|
The
following table compares the net loss and basic and diluted loss per share
for
the three and nine months ended September 30, 2006 and September 30, 2005
as if
the fair value recognition provision of SFAS 123(R) had been applied for
both
periods as follows:
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
income (loss) - as reported for the prior period (1)
|
|
|
N/A
|
|
$
|
(415,058
|
)
|
|
N/A
|
|
$
|
(1,584,381
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense related to employee stock options (2)
|
|
|
(7,913
|
)
|
|
(44,729
|
)
|
|
(43,725
|
)
|
|
(135,379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss), including the effect of stock-
based compensation expense (3)
|
|
$
|
(340,035
|
)
|
$
|
(459,787
|
)
|
$
|
(1,486,066
|
)
|
$
|
(1,719,760
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share - as reported for
the prior period
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
|
|
$
|
(0.02
|
)
|
|
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share, including the effect of stock-based compensation
expense (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.02
|
)
|
$
|
(0.03
|
)
|
$
|
(0.07
|
)
|
$
|
(0.10
|
)
|
(1)
|
Net
loss and net loss per share prior to fiscal 2006 did not include
stock-based compensation expense for employee stock options under
SFAS 123
because BioTime did not adopt the recognition provisions of SFAS
123.
|
(2)
|
Stock-based
compensation expense prior to fiscal 2006 is calculated based on
the pro
forma application of SFAS 123.
|
(3)
|
Net
income and net income per share prior to fiscal 2006 represents
pro forma
information based on SFAS 123.
|
BioTime
adopted SFAS 123(R) using the modified prospective transition method, which
requires the application of the accounting standard as of January 1, 2006,
the
first day of BioTime’s fiscal year 2006. BioTime’s condensed consolidated
financial statements as of and for the three months and nine months ended
September 30, 2006, reflect the impact of SFAS 123(R). In accordance with
the
modified prospective transition method, the condensed consolidated financial
statements for prior periods have not been restated to reflect, and do not
include, the impact of SFAS 123(R). As of September 30, 2006, total unrecognized
compensation costs related to unvested stock options was $19,986, which is
expected to be recognized as expense over a weighted average period of
approximately 0.60 years.
For
all
applicable periods, the value of each employee and director stock option
was
estimated on the date of grant using the Black-Scholes Merton model for the
purpose of the pro forma financial disclosures in accordance with SFAS
123.
The
weighted-average estimated fair value of stock options granted during the
nine
months ended September 30, 2006 and 2005 was $0.25 and $0.67 per share,
respectively, using the Black-Scholes Merton model with the following
weighted-average assumptions:
|
|
Nine
Months Ended September 30, 2006
|
|
|
Nine
Months Ended September 30, 2005
|
|
Expected
lives in years
|
|
|
5
|
|
|
|
5
|
|
Risk
free interest rates
|
|
|
4.79
|
%
|
|
|
4.51
|
%
|
Volatility
|
|
|
93
|
%
|
|
|
81.0
|
%
|
Dividend
yield
|
|
|
0
|
%
|
|
|
0
|
%
|
For
options granted prior to 2006 and valued in accordance with SFAS 123, the
expected life and the expected volatility of the stock options were based
upon
historical data. Forfeitures of employee stock options were accounted for
on an
as-incurred basis.
General
Option Information
A
summary
of all option activity for the nine months ended September 30, 2006 is as
follows:
|
|
Options
available
for
grant
|
|
Number
of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding,
December 31, 2005
|
|
|
887,336
|
|
|
1,477,164
|
|
$
|
3.31
|
|
Granted
|
|
|
(52,500
|
)
|
|
52,500
|
|
|
0.34
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Forfeited/expired
|
|
|
30,000
|
|
|
(110,000
|
)
|
|
5.14
|
|
Outstanding,
September 30, 2006
|
|
|
864,836
|
|
|
1,419,664
|
|
$
|
3.06
|
|
The
following table summarizes significant ranges of outstanding and exercisable
options as of September 30, 2006:
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
|
|
Number
Outstanding
|
|
Weighted
Avg.
Remaining
Contractual Life
(yrs)
|
|
Weighted
Avg. Exercise Price
|
|
Aggregate
Intrinsic Value
|
|
Number
Exercisable
|
|
Weighted
Avg. Exercise Price
|
|
Aggregate
Intrinsic Value
|
|
$0.34-1.55
|
|
|
214,164
|
|
|
2.68
|
|
$
|
1.18
|
|
$
|
—
|
|
|
206,664
|
|
$
|
1.21
|
|
$
|
—
|
|
2.00-2.17
|
|
|
601,000
|
|
|
3.22
|
|
|
2.02
|
|
|
—
|
|
|
532,250
|
|
|
2.02
|
|
|
—
|
|
3.00-4.95
|
|
|
545,000
|
|
|
0.80
|
|
|
4.00
|
|
|
—
|
|
|
545,000
|
|
|
4.00
|
|
|
—
|
|
11.75
|
|
|
59,500
|
|
|
2.54
|
|
|
11.75
|
|
|
—
|
|
|
59,500
|
|
|
11.75
|
|
|
—
|
|
$0.34-$11.75
|
|
|
1,419,664
|
|
|
2.18
|
|
$
|
3.06
|
|
$
|
—
|
|
|
1,343,414
|
|
$
|
3.13
|
|
$
|
—
|
|
Item
2. Management's Discussion and Analysis or Plan of
Operation.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Since
its
inception in November 1990, BioTime has been engaged primarily in research
and
development activities, which have culminated in the commercial launch of
Hextend®,
our
lead product, and a clinical trial of PentaLyte®.
Our
operating revenues have been generated primarily from licensing fees and
from
royalties on the sale of Hextend. Our ability to generate substantial operating
revenue depends upon our success in developing and marketing or licensing
our
plasma volume expanders and organ preservation solutions and technology for
medical use.
Most
of
our research and development efforts have been devoted to our first three
blood
volume replacement products: Hextend, PentaLyte, and HetaCool®.
By
testing and bringing all three products to the market, we can increase our
market share by providing the medical community with solutions to match
patients’ needs. By developing technology for the use of HetaCool in low
temperature surgery, trauma care, and organ transplant surgery, we may also
create new market segments for our product line.
Our
first
product, Hextend, is a physiologically balanced blood plasma volume expander,
for the treatment of hypovolemia. Hextend is being distributed in the United
States and Canada by Hospira, Inc. and in South Korea by CJ Corp. (“CJ”) under
exclusive licenses from us. Hospira also has the right to obtain regulatory
approval and market Hextend in Latin America and Australia. Summit
Pharmaceuticals International Corporation (“Summit”) has a license to develop
Hextend and PentaLyte in Japan, the People’s Republic of China, and Taiwan.
Summit has entered into sublicenses with Maruishi Pharmaceutical Co., Ltd.
(“Maruishi”) to obtain regulatory approval, manufacture, and market Hextend in
Japan and Hextend and PentaLyte in China and Taiwan.
Under
our
license agreements, Hospira and CJ will report sales of Hextend and pay us
the
royalties and license fees due on account of such sales after the end of
each
calendar quarter. We recognize such revenues in the quarter in which the
sales
report is received, rather than the quarter in which the sales took place.
Royalty
revenues for the three months ended September 30, 2006 consist primarily
of
royalties on sales made by Hospira during the period beginning April 1,
2006 and ending June 30, 2006. Royalty revenues recognized for that three-month
period were $250,017, a 94% increase from the $128,829 of royalty revenue
during
the same period last year. The increase in royalties primarily reflects a
growth
in sales to the United States Armed Forces, although hospital sales also
increased.
We
expect
to receive royalties of $377,564 from Hospira during November 2006, based
on
Hextend sales during the three months ended September 30, 2006. Royalties
increased 109% from royalty revenues of $180,983 received during the same
period
last year. As in the prior quarter, the increase in royalties primarily reflects
a growth in sales to the United States Armed Forces, while hospital sales
also
increased.
Purchases by the Armed Forces generally take the form of intermittent, large
volume orders, and cannot be predicted with certainty. This revenue will
be reflected in our financial statements for the fourth quarter of 2006.
Hextend
has become the standard plasma volume expander at a number of prominent teaching
hospitals and leading medical centers and is part of the Tactical Combat
Casualty Care protocol. We believe that as Hextend use proliferates within
the
leading US hospitals, other smaller hospitals will follow their lead
contributing to sales growth.
We
have
recently completed the patient enrollment and treatment portion of a Phase
II
clinical trial of PentaLyte in which PentaLyte was used to treat hypovolemia
in
cardiac surgery, and we have begun processing and compiling the trial data.
Our
ability to commence and complete additional clinical studies of PentaLyte
depends on our cash resources and the costs involved, which are not presently
determinable. Clinical trials of PentaLyte in the United States may take
longer
and may be more costly than the Hextend clinical trials, which cost
approximately $3,000,000. The FDA permitted us to proceed directly into a
Phase
III clinical trial of Hextend involving only 120 patients because the active
ingredients in Hextend had already been approved for use in plasma expanders
by
the FDA in other products. Because PentaLyte contains a starch (pentastarch)
that has not been approved by the FDA for use in a plasma volume expander,
we
had to complete a Phase I clinical trial of PentaLyte, and we are now completing
a Phase II clinical trial. We expect our Phase II trial will cost approximately
an additional $153,000. A subsequent Phase III trial may involve more patients
than the Hextend trials, and we do not know yet the actual scope or cost
of the
clinical trials that the FDA will require for PentaLyte.
If
Hospira obtains a license to manufacture and market PentaLyte under our License
Agreement with them, they would reimburse us for all our direct costs incurred
in developing PentaLyte. Hospira’s decision whether to license PentaLyte would
follow their analysis of the data from our Phase II trial.
Plasma
volume expanders containing pentastarch have been approved for use in certain
foreign countries including Canada, certain European Union countries, and
Japan.
The regulatory agencies in those countries may be more willing to accept
applications for regulatory approval of PentaLyte based upon clinical trials
smaller in scope than those that may be required by the FDA. This would permit
us to bring PentaLyte to market overseas more quickly than in the United
States,
provided that suitable licensing arrangements can be made with multinational
or
foreign pharmaceutical companies to obtain financing for clinical trials
and
manufacturing and marketing arrangements.
We
are
also continuing to develop solutions for low temperature surgery. Once a
sufficient amount of data from successful low temperature surgery has been
compiled, we plan to seek permission to use Hextend as a complete replacement
for blood under near-freezing conditions. We currently plan to market Hextend
for complete blood volume replacement at very low temperatures under the
registered trademark “HetaCool®”
after
FDA approval is obtained, although the time frame for such approval is presently
uncertain.
We
have
been awarded a $299,990 research grant by the National Heart, Lung, and Blood
Institute division of the National Institutes of Health (“NIH”) for use in the
development of HetaCool. We are using the grant to fund a project entitled
“Resuscitating Blood-Substituted Hypothermic Dogs” at the Texas Heart Institute
in Houston under the guidance of Dr. George V. Letsou. Dr. Letsou is Associate
Professor of Surgery and Director of the Heart Failure Center at the University
of Texas Medical School in Houston, Texas. We were granted $149,994 for the
project during 2004 and $149,996 during 2005. Through September 30, 2006,
$184,186 of the grant funds had been paid to us. The time period for drawing
down the remainder of the grant funds was extended for another year, running
through March 31, 2007.
BioTime
scientists believe the HetaCool program has the potential to produce a product
that could be used in very high fluid volumes (50 liters or more per procedure
if HetaCool were used as a multi-organ donor preservation solution or to
temporarily replace substantially all of the patient’s circulating blood volume)
in cardiovascular surgery, trauma treatment, and organ transplantation. However,
the cost and time to complete the development of HetaCool, including clinical
trials, cannot presently be determined.
Until
such time as we are able to complete the development of PentaLyte and HetaCool
and enter into commercial license agreements for those products and foreign
commercial license agreements for Hextend, we will depend upon royalties
from
the sale of Hextend by Hospira and CJ as our principal source of
revenues.
The
amount and pace of research and development work that we can do or sponsor,
and
our ability to commence and complete clinical trials required to obtain FDA
and
foreign regulatory approval of products, depends upon the amount of money
we
have. Future research and clinical study costs are not presently determinable
due to many factors, including the inherent uncertainty of these costs and
the
uncertainty as to timing, source, and amount of capital that will become
available for these projects. We have already curtailed the pace of our product
development efforts due to the limited amount of funds available, and we
may
have to postpone further laboratory and clinical studies, unless our cash
resources increase through growth in revenues, the completion of licensing
agreements, additional equity investment, borrowing or third party sponsorship.
Because
our research and development expenses, clinical trial expenses, and production
and marketing expenses will be charged against earnings for financial reporting
purposes, management expects that there will be losses from operations in
the
near term.
Hextend®,
PentaLyte®, and HetaCool® are registered trademarks of BioTime.
Stock-based
Compensation Expense
On
January 1, 2006, we adopted Statement of Financial Accounting Standard 123
(revised 2004), “Share-Based Payment” (“SFAS 123(R)”) which requires the
measurement and recognition of compensation expense for all share-based payment
awards made to our directors and employees including employee stock options
based on estimated fair values. Stock based compensation expense recognized
under SFAS 123(R) for the nine months ended September 30, 2006 was $43,724
which
consisted of stock-based compensation expense related to employee and director
stock option grants.
BioTime
adopted SFAS 123(R) using the modified prospective transition method, which
requires the application of the accounting standard as of January 1, 2006,
the
first day of BioTime’s fiscal year 2006. BioTime’s condensed consolidated
financial statements as of and for the three months ended September 30, 2006,
reflect the impact of SFAS 123(R). In accordance with the modified prospective
transition method, the condensed consolidated financial statements for prior
periods have not been restated to reflect, and do not include, the impact
of
SFAS 123(R). As of September 30, 2006, total unrecognized compensation costs
related to unvested stock options was $19,986, which is expected to be
recognized as expense over a weighted average period of approximately 0.60
years.
Upon
adoption of SFAS 123(R), we began estimating the value of employee stock
options
on the date of grant using the Black-Scholes Merton model. Prior to the adoption
of SFAS 123(R), the value of each employee stock options was estimated on
the
date of grant using the Black-Scholes Merton model for the purpose of the
pro
forma financial information in accordance with SFAS 123. The determination
of
the fair value of share-based payment awards on the date grant using an option
pricing model is affected by our stock price as well assumptions regarding
a
number of highly complex and subjective variables. These variables include,
but
are not limited to, the expected stock price volatility over the term of
the
awards, and actual and projected employee stock option exercise behaviors.
The
use of a Black-Scholes Merton model requires the use of extensive actual
employee exercise behavior data and the use of a number of complex assumptions
including expected volatility, risk-free interest rate and expected dividend
yields. The weighted-average estimated value of employee stock options granted
during the nine months ended September 30, 2006 was $0.25 per share using the
Black-Scholes Merton model with the following weighted average assumptions:
|
|
Nine
Months Ended September 30, 2006
|
|
|
|
|
|
Expected
lives in years
|
|
|
5
|
|
Risk
free interest rates
|
|
|
4.79
|
%
|
Volatility
|
|
|
93.00
|
%
|
Dividend
yield
|
|
|
0
|
%
|
The
fair
value of each option award is estimated on the date of grant using the
Black-Scholes Merton option valuation model with the weighted average assumption
for volatility, expected term and risk-free rate. The expected term of options
grants is derived from historical data on employee exercises and post-vesting
employment termination behavior. The risk-free
rate
is
based on the U.S. treasury rates in effect during the corresponding period
of
grant. The expected volatility is a blended rate based on both the historical
volatility of our stock price and the volatility of certain peer company
stock
prices.
As
stock-based compensation expense recognized in the condensed consolidated
statement of operations for the nine months ended September 30, 2006 is based
on
awards ultimately expected to vest, estimated forfeitures have been accounted
for. SFAS 123 (R) requires forfeitures to be estimated at the time of grant
and
revised, if necessary, in subsequent periods if actual forfeitures differ
from
those estimates. Forfeitures were estimated based on historical
experience.
If
factors change and we employ different assumptions in the application of
SFAS
123(R) in future periods, the compensation expense that we record under SFAS
123(R) may differ significantly from what we have recorded in the current
period.
Results
of Operations
Revenues
During
the three months ended September 30, 2006, we recognized $46,979 of license
fee
revenues related
to our license agreements with CJ and Summit. The CJ license fee of $800,000,
net of the finder’s fees, has been deferred and is being recognized as revenue
over the life of the contract, which has been estimated to be approximately
eight years based on the current expected life of the governing patent covering
BioTime’s products in Korea. See Notes 2 and 4 to the condensed financial
statements.
For
the
three months ended September 30, 2006, we recognized $250,017 in royalty
revenue, whereas we recognized $128,829 for the three months ended September
30,
2005. This increase of 94% in royalties is attributable to an increase in
product sales by Hospira, and primarily reflects a growth in sales to the
United States Armed Forces, although hospital sales also increased. Purchases
by
the Armed Forces generally take the form of intermittent, large volume orders,
and cannot be predicted with certainty.
Operating
Expenses
Research
and development expenses were $304,562 for the three months ended September
30,
2006, compared
to $401,144 for the three months ended September 30, 2005. This
decrease is chiefly attributable to a $61,468 decrease in outside research
expenses associated with our PentaLyte clinical trial, and a decrease of
$29,078
in scientific consulting costs. For the nine months ended September 30, 2006,
research and development expenses totaled $954,369, compared to $1,205,262
for
the nine months ended September 30, 2005. This
decrease is due primarily to a decrease of $263,061 in outside research expenses
associated with our PentaLyte clinical trial. Research
and development expenses include clinical trial expenses, laboratory study
expenses, salaries, ongoing prosecution of regulatory applications in the
United
States, and consultants’ fees.
General
and administrative expenses increased to $301,924 for the three months ended
September 30, 2006 from $242,988 for the three months ended September 30,
2005. The
major
component of this increase was an increase of $82,851 in salaries allocated
to
general and administrative expense following cessation of the pay-cuts that
had
been in effect during the third quarter of 2005. For the nine months ended
September 30, 2006, general and administrative expenses totaled $1,139,305,
compared to $1,031,918 for the nine months ended September 30, 2005. This
increase is due primarily to an increase of $118,300 in salaries allocated
to
general and administrative expenses, an increase of $22,289 in printing costs,
an increase of $37,033 in patent costs, an increase of $13,686 in costs for
outside services, and an increase of $18,831 in rent expense. These increases
were somewhat offset by a decrease of $55,284 in general and administrative
consulting fees, a decrease of $26,840 in office expenses, and a decrease
of
$23,819 in travel and entertainment expenditures.
Interest
and Other Income
For
the
three months ended September 30, 2006, we incurred net interest and other
expense of $30,545, compared to expense of $11,358 for
the
three months ended September 30, 2005. This increase in expense is due to
higher
interest expense associated with our imputed royalty obligation under our
license agreement with Summit, offset by higher interest income, due to larger
cash balances following the 2005 Rights Offer. For the nine months ended
September 30, 2006, we incurred net interest and other expense of $74,325,
compared to expense of $27,982 for the nine months ended September 30, 2005.
This increase in expense is due to an increase in the interest rate used
in
computing the royalty obligation to Summit, which was raised from 12% to
25%.
This increase was somewhat offset by an increase in interest income of
$18,348.
Income
Taxes
During
the three months ended September 30, 2006, we incurred no foreign withholding
taxes and no income taxes. With respect to Federal and state income taxes,
our
effective income tax rate differs from the statutory rate due to the 100%
valuation allowance established for our deferred tax assets, which relate
primarily to net operating loss carryforwards, as realization of such benefits
is not deemed to be likely.
Liquidity
and Capital Resources
During
December 2005, we completed the 2005 Rights Offer through which we raised
gross
proceeds of $1,787,144 through the sale of 4,467,862 common shares and warrants.
See Note 5 to the financial statements.
We
have
entered into agreements with Summit to develop Hextend and PentaLyte in Japan,
the People’s Republic of China, and Taiwan. Summit has sublicensed to Maruishi
the right to manufacture and market Hextend in Japan, and the right to
manufacture and market Hextend and PentaLyte in China and Taiwan. Summit
paid us
$500,000 in May 2006 as the initial consideration for the China and Taiwan
license.
In
April
2006, we entered into a Revolving Line of Credit Agreement (the “Credit
Agreement”) with Alfred D. Kingsley, Cyndel & Co., Inc., and George
Karfunkel, investors in BioTime, under which we may borrow up to $500,000
for
working capital purposes at an interest rate of 10% per annum. We also have
a
$43,600 line of credit from American Express. See Note 3 to the financial
statements.
The
major
components of our net cash used in operations of approximately $1,072,000
in the
first nine months of 2006 can be summarized as follows: total outflows consist
of our net loss of approximately $1,486,000, offset by cash inflows of $500,000
from our product development and licensing agreements with Summit and royalty
revenues from the sale of Hextend.
At
our
projected rate of spending, which includes possible spending cuts, we expect
that our cash on hand, anticipated royalties from the sale of Hextend, licensing
fees, and our available revolving line of credit will allow us to operate
through September 30, 2007.
We
will
need to obtain additional equity capital from time to time in the future,
as
long as the fees we receive from licensing our products to pharmaceutical
companies, profits from sales of our products, and royalty revenues are not
sufficient to fund our operations. Sales of additional equity securities
could
result in the dilution of the interests of present shareholders. The amount
of
license fees and royalties that may be earned through the licensing and sale
of
our products and technology, the timing of the receipt of license fee payments,
and the future availability and terms of equity financing, are uncertain.
The
unavailability or inadequacy of financing or revenues to meet future capital
needs could force us to modify, curtail, delay or suspend some or all aspects
of
our planned operations.
We
have
no contractual obligations as of September 30, 2006, with the exception of
a
fixed, non-cancelable operating lease on our office and laboratory facilities
in
Emeryville, California. Under this lease, we are committed to make payments
of
$10,488 per month, increasing 3% annually, plus our pro rata share of operating
costs for the building and office complex, through May 31, 2010.
Item
3. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
Our
management, including our principal executive officers and our principal
financial officer, have reviewed and evaluated our disclosure controls and
procedures as of the end of the period covered by this quarterly report on
Form
10-QSB. Following this review and evaluation,
management
has collectively determined that our disclosure controls and procedures were
effective as of the end of the period covered by this quarterly report on
Form
10-QSB.
Changes
in Internal Controls
There
were no changes in our internal controls over financial reporting during
the
quarter ended September 30, 2006 that materially affected or that could
reasonably likely materially affect our internal controls over financial
reporting.
PART
II - OTHER INFORMATION
Item
6. Exhibits
Exhibit
|
|
Numbers
|
Description
|
|
|
3.1
|
Articles
of Incorporation, as Amended †
|
|
|
3.2
|
Amendment
of Articles of Incorporation ****
|
|
|
3.3
|
By-Laws,
As Amended.#
|
|
|
4.1
|
Specimen
of Common Share Certificate.+
|
|
|
4.2
|
Form
of Warrant Agreement between BioTime, Inc. and American Stock
Transfer
& Trust Company++
|
|
|
4.3
|
Form
of Amendment to Warrant Agreement between BioTime, Inc. and American
Stock
Transfer & Trust Company. +++
|
|
|
4.4
|
Form
of Warrant+++
|
|
|
10.1
|
Intellectual
Property Agreement between BioTime, Inc. and Hal
Sternberg.+
|
|
|
10.2
|
Intellectual
Property Agreement between BioTime, Inc. and Harold
Waitz.+
|
|
|
10.3
|
Intellectual
Property Agreement between BioTime, Inc. and Judith
Segall.+
|
|
|
10.4
|
Intellectual
Property Agreement between BioTime, Inc. and Steven
Seinberg.*
|
|
|
10.5
|
Agreement
between CMSI and BioTime Officers Releasing Employment Agreements,
Selling
Shares, and Transferring Non-Exclusive License.+
|
|
|
10.6
|
Agreement
for Trans Time, Inc. to Exchange CMSI Common Stock for BioTime,
Inc.
Common Shares.+
|
|
|
10.7
|
2002
Stock Option Plan, as amended.##
|
|
|
10.8
|
Exclusive
License Agreement between Abbott Laboratories and BioTime, Inc.
(Portions
of this exhibit have been omitted pursuant to a request for confidential
treatment).###
|
|
|
10.9
|
Modification
of Exclusive License Agreement between Abbott Laboratories and
BioTime,
Inc. (Portions of this exhibit have been omitted pursuant to
a request for
confidential treatment).^
|
|
|
10.10
|
Warrant
Agreement, dated March 27, 2002, between BioTime, Inc. and Alfred
D.
Kingsley*
|
|
|
10.11
|
Warrant
for the Purchase of Common Shares, dated August 12, 2002, issued
to
Ladenburg Thalmann & Co. Inc.**
|
|
|
10.12
|
Exclusive
License Agreement between BioTime, Inc. and CJ Corp.***
|
|
|
10.13
|
Hextend
and PentaLyte Collaboration Agreement between BioTime, Inc. and
Summit
Pharmaceuticals International Corporation‡
|
|
|
10.14
|
Lease
dated as of May 4, 2005 between BioTime, Inc. and Hollis R& D
Associates ‡‡
|
|
|
10.15
|
Addendum
to Hextend and PentaLyte Collaboration Agreement between BioTime,
Inc. and
Summit Pharmaceuticals International Corporation‡‡‡
|
|
|
10.16
|
Amendment
to Exclusive License Agreement Between BioTime, Inc. and Hospira,
Inc.††
|
|
|
10.17
|
Hextend
and PentaLyte China License Agreement between BioTime, Inc. and
Summit
Pharmaceuticals International Corporation†††
|
|
|
10.18
|
Revolving
Credit Line Agreement between BioTime, Inc, Alfred D. Kingsley,
Cyndel
& Co., Inc., and George Karfunkel, dated April 12, 2006. (Incorporated
by reference to BioTime’s Form 10-K for the year ended December 31,
2005)††††
|
|
|
10.19
|
Security
Agreement executed by BioTime, Inc., dated April 12, 2006. (Incorporated
by reference to BioTime’s Form 10-K for the year ended December 31, 2005)
††††
|
|
|
10.20
|
Form
of Revolving Credit Note of BioTime, Inc. in the principal amount
of
$166,666.67
dated April 12, 2006. ††††
|
|
|
31
|
Rule
13a-14(a)/15d-14(a) Certification ++++
|
|
|
32
|
Section
1350 Certification ++++
|
†
Incorporated by reference to BioTime’s Form 10-K for the fiscal year ended June
30, 1998.
+
Incorporated by reference to Registration Statement on Form S-1, File Number
33-44549 filed with the Securities and Exchange Commission on December 18,
1991,
and Amendment No. 1 and Amendment No. 2 thereto filed with the Securities
and
Exchange Commission on February 6, 1992 and March 7, 1992,
respectively.
#
Incorporated by reference to Registration Statement on Form S-1, File Number
33-48717 and Post-Effective Amendment No. 1 thereto filed with the Securities
and Exchange Commission on June 22, 1992, and August 27, 1992,
respectively.
++
Incorporated by reference to Registration Statement on Form S-2, File Number
333-109442, filed with the Securities and Exchange Commission on October
3,
2003, and Amendment No.1 thereto filed with the Securities and Exchange
Commission on November 13, 2003.
+++
Incorporated by reference to Registration Statement on Form S-2, File Number
333-128083 filed with the Securities and Exchange Commission on September
2,
2005.
##
Incorporated by reference to Registration Statement on Form S-8, File Number
333-101651 filed with the Securities and Exchange Commission on December
4, 2002
and
Registration Statement on Form S-8, File Number 333-122844 filed with the
Securities and Exchange Commission
on February 23, 2005.
###
Incorporated by reference to BioTime’s Form 8-K, filed April 24,
1997.
^
Incorporated by reference to BioTime’s Form 10-Q for the quarter ended June 30,
1999.
*
Incorporated by reference to BioTime’s Form 10-K for the year ended December 31,
2001.
**
Incorporated by reference to BioTime’s Form 10-Q for the quarter ended June 30,
2002.
***Incorporated
by reference to BioTime’s Form 10-K/A-1 for the year ended December 31,
2002.
‡
Incorporated by reference to BioTime’s Form 8-K filed December 30,
2004.
‡‡Incorporated
by reference to Post-Effective Amendment No. 3 to Registration Statement
on Form
S-2 File Number 333-109442, filed with the Securities and Exchange Commission
on
May 24, 2005
‡‡‡
Incorporated by reference to BioTime’s Form 8-K filed December 20,
2005.
††Incorporated
by reference to BioTime’s Form 8-K filed January 13, 2006
†††Incorporated
by reference to BioTime’s Form 8-K filed March 30, 2006
††††
Incorporated by reference to BioTime’s Form 10-K for the year ended December 31,
2005.
****
Incorporated by reference to BioTime’s Form 10-QSB for the quarter ended June
30, 2006.
++++Filed
herewith
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.
BIOTIME,
INC.
|
|
|
Date: November
14, 2006
|
By:
|
/s/ Judith
Segall
|
|
Judith
Segall
|
|
Vice-President
- Operations
|
|
Member,
Office of the President*
|
|
|
|
Date: November
14, 2006
|
By:
|
/s/ Hal
Sternberg
|
|
Hal
Sternberg
|
|
Vice-President
- Research
|
|
Member,
Office of the President*
|
|
|
|
Date: November
14, 2006
|
By:
|
/s/ Harold
Waitz
|
|
Harold
Waitz
|
|
Vice-President
- Regulatory Affairs
|
|
Member,
Office of the President*
|
|
|
|
Date: November
14, 2006
|
By:
|
/s/ Steven
A. Seinberg
|
|
Steven
A. Seinberg
|
|
Chief
Financial Officer
|
|
|
*
The
Office of the President is comprised of the three above-referenced executive
officers of BioTime who collectively exercise the powers of the Chief Executive
Officer
Exhibit
|
|
Numbers
|
Description
|
|
|
3.1
|
Articles
of Incorporation, as Amended †
|
|
|
3.2
|
Amendment
of Articles of Incorporation ****
|
|
|
3.3
|
By-Laws,
As Amended.#
|
|
|
4.1
|
Specimen
of Common Share Certificate.+
|
|
|
4.2
|
Form
of Warrant Agreement between BioTime, Inc. and American Stock Transfer
& Trust Company++
|
|
|
4.3
|
Form
of Amendment to Warrant Agreement between BioTime, Inc. and American
Stock
Transfer & Trust Company. +++
|
|
|
4.4
|
Form
of Warrant+++
|
|
|
10.1
|
Intellectual
Property Agreement between BioTime, Inc. and Hal
Sternberg.+
|
|
|
10.2
|
Intellectual
Property Agreement between BioTime, Inc. and Harold
Waitz.+
|
|
|
10.3
|
Intellectual
Property Agreement between BioTime, Inc. and Judith
Segall.+
|
|
|
10.4
|
Intellectual
Property Agreement between BioTime, Inc. and Steven
Seinberg.*
|
|
|
10.5
|
Agreement
between CMSI and BioTime Officers Releasing Employment Agreements,
Selling
Shares, and Transferring Non-Exclusive License.+
|
|
|
10.6
|
Agreement
for Trans Time, Inc. to Exchange CMSI Common Stock for BioTime,
Inc.
Common Shares.+
|
|
|
10.7
|
2002
Stock Option Plan, as amended.##
|
|
|
10.8
|
Exclusive
License Agreement between Abbott Laboratories and BioTime, Inc.
(Portions
of this exhibit have been omitted pursuant to a request for confidential
treatment).###
|
|
|
10.9
|
Modification
of Exclusive License Agreement between Abbott Laboratories and
BioTime,
Inc. (Portions of this exhibit have been omitted pursuant to a
request for
confidential treatment).^
|
|
|
10.10
|
Warrant
Agreement, dated March 27, 2002, between BioTime, Inc. and Alfred
D.
Kingsley*
|
|
|
10.11
|
Warrant
for the Purchase of Common Shares, dated August 12, 2002, issued
to
Ladenburg Thalmann & Co. Inc.**
|
|
|
10.12
|
Exclusive
License Agreement between BioTime, Inc. and CJ Corp.***
|
|
|
10.13
|
Hextend
and PentaLyte Collaboration Agreement between BioTime, Inc. and
Summit
Pharmaceuticals International Corporation‡
|
|
|
10.14
|
Lease
dated as of May 4, 2005 between BioTime, Inc. and Hollis R& D
Associates ‡‡
|
|
|
10.15
|
Addendum
to Hextend and PentaLyte Collaboration Agreement between BioTime,
Inc. and
Summit Pharmaceuticals International Corporation‡‡‡
|
|
|
10.16
|
Amendment
to Exclusive License Agreement Between BioTime, Inc. and Hospira,
Inc.††
|
|
|
10.17
|
Hextend
and PentaLyte China License Agreement between BioTime, Inc. and
Summit
Pharmaceuticals International Corporation†††
|
|
|
10.18
|
Revolving
Credit Line Agreement between BioTime, Inc, Alfred D. Kingsley,
Cyndel
& Co., Inc., and George Karfunkel, dated April 12, 2006. (Incorporated
by reference to BioTime’s Form 10-K for the year ended December 31,
2005)††††
|
|
|
10.19
|
Security
Agreement executed by BioTime, Inc., dated April 12, 2006. (Incorporated
by reference to BioTime’s Form 10-K for the year ended December 31, 2005)
††††
|
|
|
10.20
|
Form
of Revolving Credit Note of BioTime, Inc. in the principal amount
of
$166,666.67
dated April 12, 2006. ††††
|
|
|
31
|
Rule
13a-14(a)/15d-14(a) Certification ++++
|
|
|
32
|
Section
1350 Certification ++++
|
†
Incorporated by reference to BioTime’s Form 10-K for the fiscal year ended June
30, 1998.
+
Incorporated by reference to Registration Statement on Form S-1, File Number
33-44549 filed with the Securities and Exchange Commission on December
18, 1991,
and Amendment No. 1 and Amendment No. 2 thereto filed with the Securities
and
Exchange Commission on February 6, 1992 and March 7, 1992,
respectively.
#
Incorporated by reference to Registration Statement on Form S-1, File Number
33-48717 and Post-Effective Amendment No. 1 thereto filed with the Securities
and Exchange Commission on June 22, 1992, and August 27, 1992,
respectively.
++
Incorporated by reference to Registration Statement on Form S-2, File Number
333-109442, filed with the Securities and Exchange Commission on October
3,
2003, and Amendment No.1 thereto filed with the Securities and Exchange
Commission on November 13, 2003.
+++
Incorporated by reference to Registration Statement on Form S-2, File Number
333-128083 filed with the Securities and Exchange Commission on September
2,
2005.
##
Incorporated by reference to Registration Statement on Form S-8, File Number
333-101651 filed with the Securities and Exchange Commission on December
4, 2002
and
Registration Statement on Form S-8, File Number 333-122844 filed with the
Securities and Exchange Commission
on February 23, 2005.
###
Incorporated by reference to BioTime’s Form 8-K, filed April 24,
1997.
^
Incorporated by reference to BioTime’s Form 10-Q for the quarter ended June 30,
1999.
*
Incorporated by reference to BioTime’s Form 10-K for the year ended December 31,
2001.
**
Incorporated by reference to BioTime’s Form 10-Q for the quarter ended June 30,
2002.
***Incorporated
by reference to BioTime’s Form 10-K/A-1 for the year ended December 31,
2002.
‡
Incorporated by reference to BioTime’s Form 8-K filed December 30,
2004.
‡‡Incorporated
by reference to Post-Effective Amendment No. 3 to Registration Statement
on Form
S-2 File Number 333-109442, filed with the Securities and Exchange Commission
on
May 24, 2005
‡‡‡
Incorporated by reference to BioTime’s Form 8-K filed December 20,
2005.
††Incorporated
by reference to BioTime’s Form 8-K filed January 13, 2006
†††Incorporated
by reference to BioTime’s Form 8-K filed March 30, 2006
††††
Incorporated by reference to BioTime’s Form 10-K for the year ended December 31,
2005.
****
Incorporated by reference to BioTime’s Form 10-QSB for the quarter ended June
30, 2006.
++++Filed
herewith