<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended: MARCH 31, 1998
Commission File Number: 333-37441
MEDICAL SCIENCE SYSTEMS, INC.
(Name of Small Business Issuer in its Charter)
TEXAS 94-3123681
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4400 MACARTHUR BOULEVARD, SUITE 980
NEWPORT BEACH, CALIFORNIA 92660
(Address of principal executive offices)(Zip Code)
Issuer's Telephone Number: (714) 440-9730
Securities registered under Section 12(b) of the Exchange Act:
(Title of each class) (Name of each exchange on which registered)
COMMON STOCK, NO PAR VALUE BOSTON STOCK EXCHANGE
Securities registered under Section 12(g) of the Exchange Act:
(Title of each class)
COMMON STOCK, NO PAR VALUE
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 (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 ( )
Title of Each Class Outstanding at April 1, 1998
- ------------------- ----------------------------
Common stock, no par value 5,540,895
Transitional Small Business Disclosure Format (check one):
Yes No X
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MEDICAL SCIENCE SYSTEMS, INC.
Form 10-QSB
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets (Unaudited) at
March 31,1998.....................................................2
Condensed Consolidated Statements of Operations (Unaudited) as of
March 31, 1998 and March 31, 1997.................................3
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
three months ending March 31, 1998 and March 31, 1997.............4
Notes to Condensed Consolidated (Unaudited)
Financial Statements..............................................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................10
Item 2. Changes in Securities...............................................10
Item 3. Default Upon Senior Securities......................................10
Item 4. Submission of Matters to a Vote of Security Holders.................10
Item 5. Other Information...................................................10
Item 6. Exhibits and Reports on Form 8-K....................................11
</TABLE>
i
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PART I
FINANCIAL INFORMATION
1
<PAGE> 4
MEDICAL SCIENCE SYSTEMS, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1998
--------------
<S> <C>
ASSETS
Cash and cash equivalents $ 5,747,249
Investments 4,059,698
Accounts receivable, net 33,443
Inventories 49,372
Prepaid Expenses 43,236
------------
Total current assets 9,932,998
Furniture and equipment, net 279,614
Patents, net of amortization 524,116
TOTAL ASSETS $ 10,736,728
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 575,861
Accrued expenses 98,840
Deferred income 191,294
Line of Credit 0
Current portion of long-term debt 149,852
Current portion of capitalized lease obligations 59,341
------------
Total current liabilities 1,075,188
Long-term debt, net 445,664
Capitalized lease obligations, net 82,111
------------
Total liabilities 1,602,963
------------
Preferred stock, no par value
5,000,000 shares authorized
none issued and outstanding 0
Common stock, no par value
10,000,000 shares authorized
5,540,895 shares issued and outstanding 16,652,199
Retained earnings (Accumulated deficit) (7,518,434)
Total shareholders' equity 9,133,765
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,736,728
============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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MEDICAL SCIENCE SYSTEMS, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C>
Sales $ 58,894 $ 28,283
Cost of sales 30,087 10,550
----------- -----------
Gross profit 28,807 17,733
Research and development 516,922 510,164
Selling, general, and administrative expense 1,785,518 289,626
----------- -----------
Total expenses 2,302,440 799,790
----------- -----------
Loss from operations (2,273,633) (782,057)
Other income (expense):
Interest income 145,649 0
Interest expense (24,290) (14,653)
----------- -----------
Total other income (expense) 121,359 (14,653)
----------- -----------
Loss before provision for income taxes (2,152,274) (796,710)
Provision for taxes 850 850
----------- -----------
NET LOSS $(2,153,124) $ (797,560)
=========== ===========
Basic loss per share (0.39) (0.23)
Diluted loss per share (0.39) (0.23)
Weighted average common shares outstanding 5,540,895 3,419,412
</TABLE>
3
<PAGE> 6
MEDICAL SCIENCE SYSTEMS, INC.
AND SUBSIDIARY
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $(2,153,124) $ (797,560)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 34,297 13,867
Accretion of investments (103,985) 0
(Increase) decrease in
Accounts receivable 3,672 10,470
Inventories 840 (12,000)
Due from shareholder 0 6,565
Prepaid expenses (724) (1,916)
Increase (decrease) in
Accounts payable 25,674 213,617
Accrued expenses (28,842) (184,437)
Deferred income 118,293 0
----------- -----------
Net cash used in operating activities (2,103,899) (751,694)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of furniture and equipment (89,103) 0
Increases in patents (68,159) 0
Maturity of investments 2,052,000 0
----------- -----------
Net cash provided by investing activities 1,894,738 0
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock 0 774,996
Proceeds from capitalized lease obligations 0 49,748
Increase in deferred offering costs 0 (24,430)
Borrowings on line of credit, net 0 149,297
Principal payments of long-term debt (36,784) (10,763)
Principal payments of capitalized lease obligations (11,865) (8,924)
----------- -----------
Net cash provided by (used in) financing activities (48,649) (929,924)
----------- -----------
Net increase (decrease) in cash and equivalents (257,810) 178,230
Cash and equivalents, beginning of period 6,005,059 55,968
----------- -----------
CASH AND EQUIVALENTS, END OF PERIOD $ 5,747,249 $ 234,198
=========== ===========
Interest paid $ 24,290 $ 13,670
Income taxes paid $ 1,600 $ 0
</TABLE>
4
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MEDICAL SCIENCE SYSTEMS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1 - PRESENTATION OF INTERIM INFORMATION
As contemplated by the Securities and Exchange Commission under Item
310(b) of Regulation S-B, the accompanying consolidated financial
statements and footnotes have been condensed and therefore do not
contain all disclosures required by generally accepted accounting
principles. The interim financial data are unaudited; however, in the
opinion of the management of Medical Science Systems, Inc. and
subsidiary (the "Company"), the accompanying unaudited consolidated
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary to make the interim financial
information not misleading. Results for interim periods are not
necessarily indicative of those to be expected for the full year.
NOTE 2 - CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid investments purchased with
original maturities of three months or less to be cash equivalents. The
Company maintains cash deposits at one bank. Deposits at this bank are
insured by the Federal Deposit Insurance Corporation up to $100,000.
The Company has not experienced any losses in such accounts and
believes it is not exposed to any significant credit risk on cash and
cash equivalents.
NOTE 3 - INVESTMENTS
The Company's investments, which consist of United States treasury debt
securities, are classified as held-to-maturity and are reported at
amortized cost. These securities have original maturities ranging from
six months to one year. The amortized cost is approximately equal to
the fair market value at March 31, 1998.
NOTE 4 - EARNINGS PER SHARE
The Company computes earnings (loss) per share in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share." SFAS No. 128 replaced the previously reported primary and
fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. Basic earnings
per share is computed using the weighted-average number of common
shares outstanding during the period. Common equivalent shares are
excluded from the computation if their effect is anti-dilutive. Net
loss per share amounts for all periods have been restated to conform to
SFAS No. 128 requirements. Prior to SFAS No. 128, the Securities and
Exchange Commission ("SEC") required that, even where anti-dilutive,
common and common equivalent shares issued during the twelve-month
period prior
5
<PAGE> 8
to the filing of an IPO be included in the calculation of earnings per
share as if they were outstanding for all periods presented (using the
treasury stock method and the IPO price). Because of new requirements
issued in 1998 by the SEC for companies that recently completed an IPO
and interpretation by FASB of the initial application of SFAS No. 128,
the number of shares used in the calculation of basic net loss per
share has changed to exclude common equivalent shares, even when
anti-dilutive. Net loss per share for all periods presented has been
restated to conform with SFAS No. 128 and Staff Accounting Bulletin No.
98.
NOTE 5 - STOCK OPTIONS
During the period January 1998 through April 1998, the Company issued
205,400 incentive stock options to certain employees. The options
entitle the holder to purchase shares of the Company's common stock at
prices from $3.88 to $4.75 per share and expire ten years from the date
of issuance. Beginning in 1998, incentive stock options generally are
granted with a four-year vesting schedule.
In February 1998, the Company issued 11,500 non-qualified stock options
to certain non-employees. The options entitle the holder to purchase
shares of the Company's common stock at a price of $4.38 per share and
expire ten years from the date of issuance.
NOTE 6 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The FASB issued SFAS No. 130, "Reporting Comprehensive Income." This
statement requires companies to classify items of other comprehensive
income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section
of a statement of financial position. SFAS No. 130 is effective for
financial statements issued for fiscal years beginning after December
15, 1997. Management believes that SFAS No. 130 will not have a material
effect on the Company's financial statements.
The FASB also issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information." This statement establishes
additional standards for segment reporting in the financial statements
and is effective for fiscal years beginning after December 15, 1997.
Management believes that SFAS No. 131 will not have an effect on the
Company's financial statements.
6
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
OVERVIEW
Medical Science Systems, Inc. is dedicated to the development and
commercialization of genetic susceptibility tests for common diseases that are
treatable and preventable. The Company has initially concentrated on four
disease areas: periodontal disease (gum disease), osteoporosis (bone disease),
coronary artery disease (heart disease), and diabetic retinopathy (blindness
associated with diabetes). Recently the Company announced a new program in
asthma (lung disease). Additional discovery and development work is focused on
identifying markers and therapeutic targets for other chronic inflammatory
diseases in which genetics plays an important role
The Company has followed a strategy of working with partners at the
fundamental discovery stage. This strategy has given the Company access to
discoveries while reducing up-front research expenses. Since 1994, the Company
has had a strategic alliance with the Section of Molecular Medicine at Sheffield
University in the United Kingdom, now known as the Department of Molecular and
Genetic Medicine ("MGM"). Under this alliance, MGM has provided to the Company
the fundamental discovery and genetic analysis from MGM's research laboratories
and the Company has focused on product development, including clinical trials,
and the commercialization of these discoveries. The Company has entered into
multiple joint development and commercialization project agreements with MGM,
and anticipates entering into additional collaborative arrangements with MGM and
other parties during the year.
In October 1997, the Company commercially launched its first genetic
susceptibility test in the US. The test is for periodontal disease, and is known
as PST(R). PST(R) is the first in a series of genetic susceptibility tests that
the Company plans to bring to market during the next several years.
Although management recognizes the ongoing need to create demand for
this new class of product, interest in the test and acceptance of its value by
doctors and their patients continues to build. Although the number of PST(R)
tests performed in the first quarter of 1998 (355) decreased from the number
performed in the fourth quarter of 1997 (441), management is pleased to report
indications of growing acceptance for PST(R) tests during the quarter. Such
indications include purchases of PST(R) tests by new dentists and increased
interest from managed healthcare organizations. The improvement is reflected in
the $58,840 in revenues from 355 tests processed during the first quarter
compared to revenue of $43,452 during the previous quarter, a 35% increase. In
addition, during the first quarter of 1998 the Company reported "pre-paid"
revenue of $191,294 from 1,558 tests or a 162% increase over the $73,001 from
763 tests pre-paid for the previous quarter ending December 31, 1997. Pre-paid
revenue represents orders placed in preparation for the doctors to commence
testing patients. Such pre-paid revenue is reported as a liability until tests
are actually performed, at which time revenue is recognized by the Company.
In December the Company entered into an agreement with Medicadent, a
French corporation ("Medicadent"), to market and sell PST(R). Medicadent will
act as exclusive independent sales representative for sales of PST(R) in the
territory of France. The Company anticipates that the commercial introduction of
PST(R) through Medicadent will commence in France during the second quarter of
1998. The Company anticipates additional international agreements later in the
year.
The Company has been awarded three patents, and has eleven patents
pending. The U.S. Patent & Trademark Office awarded patents to the Company for
its osteoporosis and periodontal disease susceptibility tests. The Company has
also received a patent award for its biologic modeling technology called
BioFusion(R), which is used by the Company in the discovery, development and
commercialization process.
In November 1997, the Company completed its initial public offering of
Common Stock raising gross proceeds of $16.2 million. The Company is using the
proceeds of the offering predominantly to sales, marketing and commercial
operations for its genetic susceptibility testing business and continued
development of new genetic susceptibility tests.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 VERSUS THREE MONTHS ENDED MARCH 31, 1997
Gross revenue for the three months ended March 31, 1998 was $58,894 as
compared to $28,283 for the same period ended March 31, 1997, representing an
increase of $30,611 or 108%. The increases in revenue are primarily attributable
to the introduction of the Company's first genetic test. Cost of sales was
$30,087 for the three months ended March 31, 1998 as compared to $10,550 for
1997, representing an increase of 185%. The increase in costs of sales is
attributable primarily to the increased level of sales of the Company's PST(R)
genetic susceptibility test.
Research and development expenses remained relatively stable. For the
three months ended March 31, 1998, the Company had R&D expenses of $516,922 as
compared to $510,164 for the first quarter of 1997.
7
<PAGE> 10
Selling, general and administrative expenses increased significantly in
the first quarter of 1998 to $1,785,518 from $289,626, an increase of $1,495,892
or 516%. Such increase was anticipated by the Company and is primarily
attributable to building the infrastructure to support commercial operating and
the increased marketing and sales efforts required to support the Company's
genetic susceptibility testing business. Additionally, general and
administrative expenses increased to support the research and development
efforts of the Company, as well as to provide the reports and other activities
required of a reporting company. The Company has increased its number of full
time (or equivalent) employees from 31 as of December 31, 1997 to 46 at March
31, 1998.
Interest income from the first quarter of 1998 increased to $145,649
from $0 in the first quarter of 1997. Such increase is attributable entirely to
the interest income generated by the unused net proceeds of the initial public
offering. Interest expense of $24,290 was incurred during the period ended March
31, 1998, an increase of 65% ($9,637) over the same period in 1997. Such
increase is attributable to the added interest expense incurred on new equipment
leases for computer and office equipment.
Total losses increased to $2,153,124 for the first quarter of 1998, as
compared to $797,710 for the first quarter of 1997, an increase of $1,355,414 or
170%. Such increased loss is a result of the increased expenses of building the
infrastructure to support commercial operations and of marketing and selling the
periodontal disease genetic test. The Company anticipates that it will continue
to experience losses resulting from such expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that its cash and cash equivalents and investments
are the most significant indicators of the Company's liquidity position. As of
March 31, 1998, the Company had cash and cash equivalents of $5,747,249 and
investments of $4,059,698, for a total of $9,806,947. The Company's investments
consisted predominantly of short-term U.S. Treasury Notes and other securities
the Company believes to be highly liquid and relatively low-risk. Such
investments generated interest income of $145,649 in the first quarter of 1998.
The Company does not have any commitments for material long-term capital
expenditures, but anticipates that it will continue to enter into new capital
and operating leases for computer and office equipment. Such leases and one term
loan from Bank of America NT&SA in the principal amount of $595,516 constitute
the Company's only long-term obligations. The term loan is fully amortizing and
matures in June 2002. The Company believes that all long-term obligations will
be paid and payable from the cash and cash equivalents and investments available
to the Company.
The Company anticipates that the existing cash and investments, together
with interest income anticipated thereon and anticipated revenue, will be
sufficient to conduct its operations as planned through 1998. However, the
Company's future capital requirements are anticipated to be substantial, and the
Company does not have commitments for additional capital at this time. Such
capital requirements are expected to arise from the commercial launch of
additional genetic tests, continued marketing and sales efforts for PST(R),
continued research and development efforts, the protection of the Company's
intellectual property rights (including preparing and filing of patent
applications), the negotiation of distribution and other collaborative
arrangements for sales of the Company's products and operational, administrative
and legal expenses. The Company believes that, because its future capital needs
are significant, it will attempt to raise capital through equity and debt
issuance when, and if, such capital is available to it.
8
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IMPACT OF THE YEAR 2000 ISSUE
The Company has completed a review of its existing and planned computer
software and hardware and has determined that the costs and/or consequences
associated with the Year 2000 issue are not expected to have a material effect
on the Company's business, operations or future financial results or future
financial condition.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
The Company believes that this report on Form 10-QSB contains certain
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Such statements are based on management's current
expectations and are subject to a number of factors and uncertainties which
could cause actual results to differ materially from these described in the
forward-looking statements. The Company cautions investors that there can be no
assurance that actual results or business conditions will not differ materially
from those projected or suggested in such forward-looking statements as a result
of various factors, including, but not limited to, the following: difficulties
inherent in developing genetic tests once genes have been discovered; the
Company's limited marketing and sales experience and the risk that tests which
the Company has or may develop may not be able to be marketed at acceptable
prices or receive commercial acceptance in the markets that the Company is
targeting or expects to target; uncertainty as to whether there will exist
adequate reimbursement for the Company's services from government, private
health care insurers and third-party payors; and uncertainties as to the extent
of future government regulation of the Company's business. As a result, the
Company's future development efforts involve a high degree of risk. For further
information, refer to the more specific risks and uncertainties disclosed in the
Company's Annual Report on form 10-KSB.
9
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to, nor is its property the subject of, any
pending legal proceeding.
ITEM 2. CHANGES IN SECURITIES
The following table sets forth the Company's use of proceeds from its
initial public offering, from the closing of the offering until March 31, 1998:
<TABLE>
<S> <C>
Direct or indirect payments to anyone other than
directors, officers, persons owning ten percent or
more of any class of equity securities of the
Company, and affiliates of the Company (of which
there were no such payments).
- --------------------------------------------------------------------------------
Cash and investments $11,819,050
- --------------------------------------------------------------------------------
Research and development expenses $ 555,720
- --------------------------------------------------------------------------------
Marketing and sales expenses $ 1,099,221
- --------------------------------------------------------------------------------
General and administrative expenses $ 1,430,009
- --------------------------------------------------------------------------------
Total net proceeds: $14,904,000
- --------------------------------------------------------------------------------
</TABLE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders in the three months ended
March 31, 1997.
ITEM 5. OTHER INFORMATION
None.
10
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K
Not applicable
11
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MEDICAL SCIENCE SYSTEMS, INC.
Date: May 15, 1998 By: /s/ U. Spencer Allen
-----------------------------------------
U. Spencer Allen
Chief Financial Officer and
Treasurer
12
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<C> <S>
27 Financial Data Schedule
</TABLE>
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,747,249
<SECURITIES> 4,059,698
<RECEIVABLES> 38,443
<ALLOWANCES> 5,000
<INVENTORY> 49,372
<CURRENT-ASSETS> 9,932,998
<PP&E> 483,072
<DEPRECIATION> 203,458
<TOTAL-ASSETS> 10,736,728
<CURRENT-LIABILITIES> 1,075,188
<BONDS> 0
0
0
<COMMON> 16,652,199
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 10,736,728
<SALES> 58,894
<TOTAL-REVENUES> 58,894
<CGS> 30,087
<TOTAL-COSTS> 2,302,440
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,290
<INCOME-PRETAX> (2,152,274)
<INCOME-TAX> 850
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,153,124)
<EPS-PRIMARY> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
