<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
/X/ QUARTERLY REPORT SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 31, 1996
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
Commission File Number 0-21537
PACIFIC BIOMETRICS, INC.
- -------------------------------------------------------------------------------
(Exact name of small business issuer specified in its charter)
Delaware 93-1211114
- -------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1370 Reynolds Avenue, Suite 119, Irvine, CA 92614
- -------------------------------------------------------------------------------
(Address of principal executive offices)
714-263-9933
- -------------------------------------------------------------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months, and (2)
has been subject to such filing requirements for the past 90 days.
Yes ( X ) No ( )
As of January 31, 1997, shares of the issuer's common stock outstanding were
3,651,353.
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PACIFIC BIOMETRICS, INC.
INDEX TO FORM 10-QSB
PART I - FINANCIAL INFORMATION
Page
----
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Balance Sheets.............................................. 2
Consolidated Statements of Operations.................................... 3
Consolidated Statements of Cash Flows.................................... 4
Notes to Consolidated Financial Statements............................... 5
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................ 8
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS............................................... 12
ITEM 2 - CHANGES IN SECURITIES........................................... 12
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES................................. 12
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 12
ITEM 5 - OTHER INFORMATION............................................... 12
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K................................ 12
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PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
DECEMBER 31, 1996
ASSETS December 31
- ------ -----------
Current assets:
Cash and cash equivalents $ 5,074,858
Accounts receivable, net 496,876
Other receivables 200
Supplies and other 92,627
------------
Total current assets 5,664,561
------------
Property and equipment, net 183,639
------------
Other assets:
Technology license, net 132,812
Prepaid financing costs 0
Lease deposits and other 13,119
------------
145,931
------------
Total assets $ 5,994,131
------------
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Notes payable to related parties $ 213,667
Accounts payable and accrued liabilities 669,853
Advances from customers 320,296
------------
Total current liabilities 1,203,816
------------
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized, no shares issued and outstanding
Common stock, $0.01 par value, 30,000,000 shares authorized,
3,651,353 shares issued and outstanding 36,482
Additional paid-in capital 15,742,721
Deficit accumulated during the development stage (10,988,888)
------------
Total stockholders' equity 4,790,315
------------
Total liabilities and stockholders' equity $ 5,994,131
------------
------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
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PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED DECEMBER 31, 1996 AND 1995
AND FOR THE PERIOD FROM INCEPTION (DECEMBER 1992) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
For the Period
from Inception
Three months ended Three months ended Six months ended Six months ended (December 1992) to
December 31, 1996 December 31, 1995 December 31, 1996 December 31, 1995 December 31, 1996
------------------ ------------------ ----------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 648,437 $ 434,976 $ 1,225,223 $ 824,210 $ 3,449,335
---------- ---------- ------------ ---------- ------------
Operating expenses:
Laboratory 243,674 192,111 532,948 457,452 1,747,348
Clinic 0 0 0 0 0
Diagnostic research and
product development 243,714 186,603 474,002 387,117 1,566,345
General and administrative 426,932 227,350 729,170 432,022 3,410,812
Manufacturing agreement
termination 100,000 0 100,000 0 100,000
Services purchased through
issuance of common stock 0 0 220,8000 822,882
Purchased in-process research
and product development 0 0 0 0 6,373,884
Amortization of goodwill 0 0 0 0 428,368
---------- ---------- ------------ ---------- ------------
Total operating expenses 1,014,320 606,064 2,056,920 1,276,591 14,449,639
---------- ---------- ------------ ---------- ------------
Operating loss (365,883) (171,088) (831,697) (452,381) (11,000,304)
---------- ---------- ------------ ---------- ------------
Other income (expense):
Interest expense (26,472) (9,662) (131,408) (19,617) (197,423)
Grant and other income 85,920 2,220 131,599 4,887 208,839
---------- ---------- ------------ ---------- ------------
59,448 (7,442) 191 (14,730) 11,416
---------- ---------- ------------ ---------- ------------
Net loss $ (306,435) $ (178,530) $ (831,506) $ (467,111) $(10,988,888)
---------- ---------- ------------ ---------- ------------
---------- ---------- ------------ ---------- ------------
Net loss per share $ (0.10) $ (0.13) $ (0.30) $ (0.33) $ (7.49)
---------- ---------- ------------ ---------- ------------
---------- ---------- ------------ ---------- ------------
Weighted average common shares
and common equivalents 3,131,706 1,414,224 2,818,001 1,414,224 1,466,634
---------- ---------- ------------ ---------- ------------
---------- ---------- ------------ ---------- ------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
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PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED DECEMBER 31, 1996 AND 1995
AND FOR THE PERIOD FROM INCEPTION (DECEMBER 1992) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
For the Period
from Inception
Three months ended Three months ended Six months ended Six months ended (December 1992) to
December 31, 1996 December 31, 1995 December 31, 1996 December 31, 1995 December 31, 1996
------------------ ------------------ ----------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Increase in cash and cash
equivalents:
Cash used by operations $ (639,098) $ (163,556) $ (935,072) $ (341,109) $ (3,090,695)
Cash used by investing
activities (49,451) (26,632) (66,035) (139,132) (160,534)
Cash provided by financing
activities 5,565,558 194,554 5,883,066 396,759 8,326,087
----------- ----------- ----------- ----------- ------------
Increase in cash and cash
equivalents 4,877,009 4,366 4,881,959 (83,482) 5,074,858
Cash and cash equivalents:
Beginning of period 197,849 8,154 192,899 96,002 0
----------- ----------- ----------- ----------- ------------
End of period $ 5,074,858 $ 12,520 $ 5,074,858 $ 12,520 $ 5,074,858
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
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PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Pacific Biometrics, Inc. ("PBI-Delaware" or the "Company") was
incorporated in Delaware in May 1996. PBI-Delaware was formed in connection
with the acquisition of BioQuant, Inc. ("BioQuant"), a Michigan corporation,
and Pacific Biometrics, Inc. ("PBI"), a Washington corporation. On June 28,
1996, the Company completed the mergers whereby BioQuant and PBI became
wholly-owned subsidiaries of the Company in separate stock-for-stock exchange
transactions. The merger of PBI-Delaware, BioQuant and PBI was completed in
June 1996, whereby the majority of the outstanding stock of PBI-Delaware is
owned by the former stockholders of PBI and has been accounted for as a
reverse acquisition. All outstanding shares of stock, options and warrants of
PBI and BioQuant were exchanged for similar securities of PBI-Delaware. The
mergers have been accounted for as a purchase transaction with PBI as the
accounting acquirer of BioQuant. Prior to the mergers, the operations of
PBI-Delaware consisted of its initial formation and the issuance of one share
of common stock for cash consideration of $4.00.
Accordingly, the financial statements present the consolidated activity of
PBI-Delaware and it's wholly owned subsidiaries PBI and BioQuant from June
28, 1996 forward. Prior to June 28, 1996 the financial statements show the
consolidated activity of PBI-Delaware and PBI only because BioQuant was
accounted for as a purchase.
The following presents the results of operations of the Company for the
six month period ending December 31, 1996 and on a proforma basis for
December 31, 1995 as if the acquisition of BioQuant and PBI had occurred on
June 30, 1995:
1996 1995
---- ----
Revenues $ 1,225,223 $ 825,130
Net loss $ (831,506) $(766,752)
Net loss per share $ (0.31) $ (.54)
The unaudited financial statements of the Company presented herein, have
been prepared pursuant to the rules of the Securities and Exchange Commission
for quarterly reports on Form 10-QSB and do not include all of the
information and footnote disclosures required by generally accepted
accounting principles. These statements should be read in conjunction with
the financial statements and notes
5
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thereto for the year ended June 30, 1996 included in the Company's prospectus
contained in the registration statement on Form SB-2 filed with the
Securities and Exchange Commission on October 29, 1996.
In the opinion of management, the financial statements include all
adjustments (consisting solely of normal, recurring adjustments) necessary
for a fair presentation of results for these interim periods.
The Company is at an early stage of development. Except for the revenues
from the laboratory and from the sale of the Company's cholesterol diagnostic
product, all of the Company's potential products are currently in research
and development, and no material revenues have been generated to date.
Consequently, the Company is a development stage enterprise.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NET LOSS PER SHARE
Net loss per share is computed using the weighted-average of common stock
and common stock equivalent shares outstanding during the periods. Common
equivalent shares from stock options and warrants are excluded from the
computation if their effect is antidilutive, except that pursuant to the
requirements of the Securities and Exchange Commission Staff Accounting
Bulletin No. 83, common equivalent shares relating to stock, options and
warrants (using the treasury stock method and the anticipated offering price)
issued subsequent to September 30, 1995, have been included in the
computation for periods prior to the Company's initial public offering.
3. FINANCING
INITIAL PUBLIC OFFERING
On November 4, 1996, the Company received net proceeds of approximately $7
million through an initial public offering of its common stock. A portion of
the net proceeds were used to repay certain debt, in addition, the Company
intends to use the remaining proceeds to purchase laboratory equipment,
support Osteopatch-TM- product development activities and support the
financial requirements associated with implementing its business plan.
BRIDGE LOAN
In August 1996, the Company completed a bridge loan financing (the "Bridge
Loan") consisting of notes in the aggregate principal amount of $1,000,000 at
an
6
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annual interest rate of 14%, which notes plus interest were repaid from the
proceeds of the Company's initial public offering.
BANK FINANCING
Bank loans aggregating $131,960 were repaid out of proceeds from the Company's
initial public offering.
4. TERMINATION OF MANUFACTURING AGREEMENT
In January 1997, the Company received formal notification of termination,
effective April 6, 1997, of its manufacturing agreement dated March 1, 1994
related to the manufacture of the Company's SPINPRO-Registered Trademark-
product and accordingly must reimburse such manufacturer for the unamortized
cost of molds and production equipment. The unamortized cost is estimated at
$300,000.
The Company will have to locate another manufacturer, pay the current supplier
for molds and equipment by April 6, 1997 and potentially incur a loss relative
to the value of the molds and equipment and relocation of manufacturing. The
Company has established a $100,000 reserve for the costs that it expects to
incur in relation to the relocation of manufacturing, equipment, personnel and
facilities. The Company received verbal notification in December of 1996 of
the manufacturer's intention to terminate and began the process of assessing
its alternatives in connection with this situation. The Company does not
believe that the likely outcome will have a material adverse impact on the
business or financial condition of the Company taken as a whole.
7
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the preceding consolidated financial statements and notes in this Form 10-QSB.
OVERVIEW
The Company develops diagnostic and laboratory products and provides
laboratory services primarily in the fields of cardiovascular disease and
osteoporosis laboratory testing. The Company's strategy is to focus on the
development of cost-effective, non invasive diagnostic tests and improved
laboratory techniques in order to achieve early diagnosis, prevention, and
therapeutic monitoring. The Company plans to (i) finalize development and
commercialize a patented skin patch product that measures bone loss markers
in human perspiration (the "Osteopatch-TM-"); (ii) expand its specialty
reference laboratory business; (iii) evaluate the feasibility of non invasive
glucose testing using SalivaSac-Registered Trademark-, its patented saliva
collection device; and (iv) explore new applications and market opportunities
for the SPINPRO-Registered Trademark-product, its sample preparation device
used to perform certain laboratory tests.
To date, the Company's revenues have consisted primarily of fees charged
by the laboratory for services provided to customers, a nominal amount of
sales from the SPINPRO-Registered Trademark- cholesterol testing device, and
U.S. Government grants awarded to the Company under the National Institute of
Health Small Business Innovative Research programs to support research
activities. Expenses consist, and are expected to continue to consist,
primarily of operating expenses necessary to conduct the commercial
laboratory operation, research and development costs for products under
development, administration expenses and payment of license and royalty fees
to acquire and maintain the Company's intellectual property rights.
Through December 31, 1996, the Company had an accumulated deficit of $10,988,888
which included a one-time charge of $6,374,884 for purchased research and
development expenses relating to the Company's merger with BioQuant and a one-
time charge of $428,368 relating to a prior merger involving PBI.
The following discussion reflects the consolidated activity of
PBI-Delaware and its wholly owned subsidiaries, PBI and BioQuant, from June
28, 1996 forward. Prior to June 28, 1996 the financial statements show the
consolidated activity of PBI-Delaware and PBI only because BioQuant was
accounted for as a purchase.
8
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RESULTS OF OPERATIONS:
Comparison of periods ending December 31, 1996 and December 31, 1995
<TABLE>
<CAPTION>
- -----------------------------------------
Rounded to Three Six
Thousands $ Months Months
- -----------------------------------------
<S> <C> <C> <C>
Revenues:
Ending 12/31/96 $ 648 $ 1,225 The increase in laboratory revenues, which account for
Ending 12/31/95 $ 435 $ 824 90% of revenue, resulted from an increase in the
Dollar variance $ 213 $ 401 number and size of clinical trials on new
Percent variance 49% 49% pharmaceutical products and diagnostic devices conducted for third parties.
Laboratory expenses:
Ending 12/31/96 $ 244 $ 533 The increase in laboratory expense is related
Ending 12/31/95 $ 192 $ 457 directly to the increase in revenue. The Company has added
Dollar variance $ 52 $ 76 several key personnel to the laboratory staff to
Percent variance 27% 17% perform and manage the increased level of activity.
Diagnostic research and product development:
Ending 12/31/96 $ 244 $ 474 The increase is primarily due to inclusion of the costs
Ending 12/31/95 $ 187 $ 387 related to Osteopatch-TM- and SalivaSac-Registered Trademark- development.
Dollar variance $ 57 $ 87 Since both of these products originated with BioQuant,
Percent variance 31% 22% research costs are not included in the prior year.
General and administration expenses:
Ending 12/31/96 $ 427 $ 729 The increase is primarily attributed to the inclusion of
Ending 12/31/95 $ 227 $ 432 BioQuant expense in the current periods which are not
Dollar variance $ 200 $ 297 contained in the prior year's periods.
Percent variance 88% 69%
Total operating expenses:
Ending 12/31/96 $1,014 $ 2,057 In addition to the cost increase described above,
Ending 12/31/95 $ 606 $ 1,277 $100,000 has been reserved in the quarter ended
Dollar variance $ 408 $ 780 12/31/96 to cover costs related to relocation of
Percent variance 67% 61% manufacturing for the Company's SPINPRO-RegisteredTrademark- product.
Total other income (expense):
Ending 12/31/96 $ 59 $ 0 The quarter ended 12/31/96 includes interest income
Ending 12/31/95 $ (7) $ (15) earned from investing net IPO proceeds. The quarter
Dollar variance $ 67 $ 15 ended 9/30/96 included a one-time interest expense
Percent variance (899%) (101%) charge of $64,000 related to the Company's Bridge Loan.
</TABLE>
9
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<TABLE>
<CAPTION>
- -----------------------------------------
Rounded to Three Six
Thousands $ Months Months
- -----------------------------------------
<S> <C> <C> <C>
Net loss:
Ending 12/31/96 $ (306) $ (832) Net losses have increased over the prior year for the
Ending 12/31/95 $ (179) $ (467) reasons described above. The Company expects
Dollar variance $ (128) $ (364) normal operating losses to increase further as the
Percent variance 72% 78% Company increases research and development activities
associated with the Osteopatch-TM-.
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Registration Statement pertaining to the initial public offering of
Pacific Biometrics, Inc. was declared effective by the Securities and
Exchange Commission on October 29, 1996. Gross proceeds from the public
offering were $8,075,000. The Company will use the majority of the net
proceeds from the offering (approximately $7 million) for the product
development activities relating to the Osteopatch-TM- and for funding the
growth of its central reference laboratory operations.
In August 1996, the Company completed a bridge loan financing (the "Bridge
Loan") consisting of notes in the aggregate principal amount of $1,000,000 at
an annual interest rate of 14%, which notes plus interest were repaid from
the proceeds of the Company's initial public offering.
Bank loans aggregating $131,960 have been repaid out of proceeds from the
Company's initial public offering.
In January 1997, the Company received formal notification of termination,
effective April 6, 1997, of its manufacturing agreement dated March 1, 1994
related to the manufacture of the Company's SPINPRO-Registered
Trademark-product and accordingly must reimburse such manufacturer for the
unamortized cost of molds and production equipment. The unamortized cost is
estimated at $300,000.
The Company will have to locate another manufacturer, pay the current
supplier for molds and equipment by April 6, 1997 and potentially incur a
loss relative to the value of the molds and equipment and relocation of
manufacturing. The Company has established a $100,000 reserve for the costs
that it expects to incur in relation to the relocation of manufacturing,
equipment, personnel and facilities. The Company received verbal notification
in December of 1996 of the manufacturer's intention to terminate and began
the process of assessing its alternatives in connection with this situation.
The Company does not believe that
10
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the likely outcome will have a material adverse impact on the business or
financial condition of the Company taken as a whole.
The Company anticipates, based on currently proposed plans and assumptions
relating to its operations, that the net proceeds of the IPO, together with
projected revenues from operations, will be sufficient to satisfy its
contemplated cash requirements for approximately eighteen months from
November 1996, the effective date of the IPO. The Company expects to
continue to incur significant operating losses for at least two years due to
anticipated increases in research and development activities associated with
the Osteopatch-TM- product, establishment of a marketing program for the
reference laboratory and general and administrative expenses.
The relocation of SPINPRO-Registered Trademark- manufacturing may disrupt
production while new manufacturing arrangements are finalized, however, such
temporary disruption is not anticipated to have a material effect on the
Company's operations or financial condition.
Successful future operations depend primarily upon the Company's ability
to complete development of the Osteopatch-TM- product, obtain FDA clearance,
and achieve successful product commercialization. The Company's operations
also depend on its ability to successfully grow a profitable reference
laboratory operation. There can be no assurance that the Company will be
able to achieve these objectives.
This report contains various forward-looking statements and information
that are based on management's beliefs as well as assumptions made by and
information currently available to management. These statements involve
risks and uncertainties that could cause actual results to differ materially,
including primarily the ability to obtain regulatory approval of any product
which is dependent upon a number of factors, including the results of trials,
the discretion of regulatory officials, and potential changes in regulations,
all of which may be beyond the control of the Company. In addition,
successful marketing of any product will be dependent upon market acceptance,
competition and technological change, and dependence on collaborators for
research, development and commercialization.
Finally, the adequacy of the Company's available cash equivalents,
together with the revenue from operations to sustain current operations is
subject to a number of variables related to maintaining existing laboratory
revenues and the level and timing of research and development costs necessary
to realize value from products under development. If adequate funds are not
available, the Company may be required to delay, scale back or eliminate one
or more of its research and development programs, including but not limited
to the development of the Osteopatch-TM-, or to obtain funds through entering
into arrangements with collaborative partners or others that may require the
Company to relinquish rights to certain of its technologies or potential
products that the Company would not otherwise relinquish.
11
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PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS - Not Applicable.
ITEM 2 - CHANGES IN SECURITIES - Not Applicable.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - Not Applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - Not
Applicable.
ITEM 5 - OTHER INFORMATION - Not Applicable.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27.1) Financial Data Schedule.
(b) No reports on Form 8-K were filed during the quarter ended December 31,
1996.
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.
DATED: February 13, 1997
/s/PAUL G. KANAN President, Chief Executive
- --------------------- Officer and Director
Paul G. Kanan
/s/PETER B. LUDLUM Principal Financial and
- -------------------- Accounting Officer
Peter B. Ludlum
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 5,074,858
<SECURITIES> 0
<RECEIVABLES> 508,506
<ALLOWANCES> (11,630)
<INVENTORY> 19,837
<CURRENT-ASSETS> 5,664,561
<PP&E> 272,500
<DEPRECIATION> (88,861)
<TOTAL-ASSETS> 5,994,131
<CURRENT-LIABILITIES> 1,203,816
<BONDS> 0
0
0
<COMMON> 36,482
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,994,131
<SALES> 1,225,223
<TOTAL-REVENUES> 1,225,223
<CGS> 0
<TOTAL-COSTS> 2,056,920
<OTHER-EXPENSES> (131,599)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 131,408
<INCOME-PRETAX> (831,506)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (831,506)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> 0
</TABLE>
