<PAGE> 1
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: SEPTEMBER 30, 1998
Commission File Number: 0-23413
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.)
100 N.E. LOOP 410, SUITE 820
SAN ANTONIO, TEXAS 78216-4749
(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: (210) 349-6400
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 November 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
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets (Unaudited) at
September 30, 1998 and December 31, 1997..................... 1
Condensed Consolidated Statements of Operations
(Unaudited) for the three and nine months ended
September 30, 1998 and September 30,
1997....................................................... 2
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the nine months ended September
30, 1998 and September 30, 1997.............................. 3
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............................................... 13
Item 2. Changes in Securities........................................... 13
Item 3. Default Upon Senior Securities.................................. 13
Item 4. Submission of Matters to a Vote of Security Holders............. 13
Item 5. Other Information............................................... 13
Item 6. Exhibits and Reports on Form 8-K................................ 14
<PAGE> 3
PART I
FINANCIAL INFORMATION
<PAGE> 4
MEDICAL SCIENCE SYSTEMS, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
(Unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 4,601,170 $ 6,005,059
Investments 0 6,007,713
Accounts receivable, net 82,365 37,115
Inventories 38,855 50,212
Prepaid Expenses 68,819 42,512
----------- -----------
Total current assets 4,791,209 12,142,611
Furniture and equipment, net 519,237 221,025
Patents, net of amortization 799,169 459,740
Other assets 570,000 0
----------- -----------
TOTAL ASSETS $ 6,679,615 $12,823,376
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 309,634 $ 550,187
Accrued expenses 504,540 127,682
Deferred income 186,124 73,001
Current portion of long-term debt 81,432 148,732
Current portion of capitalized lease obligations 98,434 56,146
----------- -----------
Total current liabilities 1,180,164 955,748
Long-term debt, net 468,210 483,568
Capitalized lease obligations, net 177,740 97,171
----------- -----------
Total liabilities 1,826,114 1,536,487
----------- -----------
Preferred stock, no par value
5,000,000 shares authorized
none issued and outstanding 0 0
Common stock, no par value
10,000,000 shares authorized
5,540,895 shares issued and outstanding 16,652,199 16,652,199
Retained earnings (Accumulated deficit) (11,798,698) (5,365,310)
----------- -----------
Total shareholders' equity 4,853,501 11,286,889
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,679,615 $12,823,376
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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MEDICAL SCIENCE SYSTEMS, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales $ 107,981 $ 52,187 $ 269,491 $ 152,476
Cost of sales 58,252 45,106 172,344 149,702
----------- ----------- ----------- -----------
Gross profit 49,729 7,081 97,147 2,774
----------- ----------- ----------- -----------
Research and development 513,128 137,279 1,379,860 784,722
Selling, general, and administrative expense 1,584,922 1,012,638 5,405,887 2,164,141
----------- ----------- ----------- -----------
Total expenses 2,098,050 1,149,917 6,785,747 2,948,863
----------- ----------- ----------- -----------
Loss from operations (2,048,321) (1,142,836) (6,688,600) (2,946,089)
----------- ----------- ----------- -----------
Other income (expense):
Interest income 74,130 2,379 326,470 2,417
Interest expense (22,853) (67,967) (70,278) (98,657)
Other income (expense) (2,566) 0 (130) 0
----------- ----------- ----------- -----------
Total other income (expense) 48,711 (65,588) 256,062 (96,240)
----------- ----------- ----------- -----------
Loss before provision for income taxes (1,999,610) (1,208,424) (6,432,538) (3,042,329)
Provision for taxes 0 0 850 0
----------- ----------- ----------- -----------
NET LOSS $(1,999,610) $(1,208,424) $(6,433,388) $(3,042,329)
=========== =========== =========== ===========
Net loss per share, basic and fully diluted (0.36) (0.33) (1.16) (0.86)
Shares used in computing net loss per share 5,540,895 3,703,628 5,540,895 3,554,245
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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MEDICAL SCIENCE SYSTEMS, INC.
AND SUBSIDIARY
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Nine
Months Ended
September 30, 1998 September 30, 1997
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $(6,433,388) $(3,042,329)
Reconciling adjustments:
Depreciation and amortization 109,478 48,610
Issuance of stock options for a reduction in salary 0 370,943
Issuance of warrants resulting in additional 0 25,468
interest expense
Accretion of investments (219,082) 0
(Increase) decrease in
Accounts receivable (45,250) 5,994
Inventories 11,357 (6,721)
Prepaid expenses (26,307) 0
Due from shareholder 0 6,565
Deposits 0 (17,816)
Increase (decrease) in
Accounts payable (240,553) 101,253
Accrued expenses 376,858 158,155
Accrued officer compensation 0 (127,500)
Deferred rent 0 (2,486)
Deferred income 113,123 10,400
----------- -----------
Net cash used in operating activities (6,353,764) (2,469,464)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of furniture and equipment (395,275) (35,194)
Increases in patents (351,844) (107,601)
Increases in other assets (570,000) 0
Maturity of investments 6,226,795 0
----------- -----------
Net cash provided by investing activities 4,909,676 (142,795)
----------- -----------
</TABLE>
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<TABLE>
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock 0 1,882,125
Issuance of promissory notes 0 1,550,000
Proceeds from capitalized lease obligations 205,768 0
Increase in deferred offering costs 0 (87,000)
Borrowings on line of credit, net 0 146,277
Retirement of long term debt (558,538) 0
Proceeds from long term borrowings 570,000 0
Principal payments of long-term debt (94,120) (46,463)
Principal payments of capitalized lease obligations (82,911) (19,019)
----------- -----------
Net cash provided by (used in) financing activities 40,199 3,425,920
----------- -----------
Net increase (decrease) in cash and equivalents (1,403,889) 813,661
Cash and equivalents, beginning of period 6,005,059 55,966
----------- -----------
CASH AND EQUIVALENTS, END OF PERIOD $ 4,601,170 $ 869,627
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid 326,470 2,417
Income taxes paid 850 0
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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MEDICAL SCIENCE SYSTEMS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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. It is recommended that these interim consolidated
financial statements be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1997.
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. All significant intercompany transactions
and accounts have been eliminated in consolidation. Results for
interim periods are not necessarily indicative of those to be
expected for the full year. Certain classifications have been made in
prior period financial statements to conform with the current period
presentation.
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 - 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 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
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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 4 - STOCK OPTIONS
During the quarter ended September 30, 1998, the Company issued 14,500
incentive stock options to certain employees. The options entitle the
holder to purchase shares of the Company's common stock at prices from
$1.88 to $3.63 per share and expire ten years from the date of
issuance. Incentive stock options generally are granted with a 4-year
vesting schedule.
NOTE 5 - 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.
The FASB also issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Post-Retirement Benefits." The Company does not
provide post-retirement or post-employment benefits to its employees.
NOTE 6 - SUBSEQUENT EVENT
On November 14, 1998, The Company's Board of Directors voted to reduce
the exercise price for all outstanding options granted under the 1996
Equity Incentive Plan to one half of the previous price per share, but
not to a price below $1.85 per share. The close of the Company's common
stock on the previous day was $1.25 per share.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CERTAIN STATEMENTS CONTAINED IN THIS FORM 10-QSB ARE "FORWARD-LOOKING"
STATEMENTS (AS SUCH TERM IS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995). BECAUSE SUCH STATEMENTS ARE BASED ON MANAGEMENT'S CURRENT
EXPECTATIONS AND ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT MAY CAUSE ACTUAL
RESULTS TO MATERIALLY DIFFER FROM THOSE RESULTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
MATERIALLY DIFFER FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS INCLUDE, BUT ARE LIMITED TO, RISKS INHERENT TO DEVELOPING GENETIC
TESTS ONCE GENES HAVE BEEN DISCOVERED, THE COMPANY'S LIMITED SALES AND MARKETING
EXPERIENCE, RISK OF MARKET ACCEPTANCE OF COMPANY PRODUCTS, RISK OF TECHNOLOGY
AND PRODUCTS OBSOLESCENCE, DELAYS IN DEVELOPMENT OF PRODUCTS, RELIANCE ON
PARTNERS, RISKS RELATED TO THIRD-PARTY REIMBURSEMENT, RISKS REGARDING GOVERNMENT
REGULATION, COMPETITIVE RISKS AND THOSE RISKS AND UNCERTAINTIES DESCRIBED IN THE
COMPANY'S REGISTRATION STATEMENT ON FORM SB-2 FILED OCTOBER 8, 1997, AS AMENDED
(FILE NO. 333-37441) AND IN OTHER FILINGS MADE BY THE COMPANY WITH THE
SECURITIES AND EXCHANGE COMMISSION. THE COMPANY DOES NOT INTEND TO UPDATE THESE
FORWARD-LOOKING STATEMENTS.
GENERAL
OVERVIEW
Medical Science Systems, Inc. is dedicated to the development and
commercialization of genetic susceptibility tests for common diseases that are
treatable and, to some extent, preventable. Discovery and development work is
focused on identifying markers and therapeutic targets for common, chronic
inflammatory diseases where genetics play an important role. The Company's
mission is to improve wellness, clinical outcomes and healthcare delivery by
incorporating genetic information on disease susceptibility into overall risk
assessment, treatment planning, and disease management. Products under
development by the Company include genetic susceptibility testing products for
coronary artery disease, osteoporosis, diabetic retinopathy (blindness
associated with diabetes), and asthma. PST(R), a genetic susceptibility test for
periodontal disease, was made commercially available by the Company in the U.S.
in the fourth quarter of 1997.
The Company has followed a strategy of working with strategic
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 Department of Molecular and
Genetic Medicine at Sheffield University in the United Kingdom ("Sheffield").
Under this alliance, Sheffield has provided to the Company the fundamental
discovery and genetic analysis from Sheffield'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 Sheffield, and
anticipates entering into additional collaborative arrangements with Sheffield
and other parties in the future.
In December 1997, the Company entered into an agreement with
Medicadent, a French corporation ("Medicadent"), to market and sell PST in
France. In August 1998, the Company entered into an agreement with H.A. Systems,
Ltd. to market and sell PST in Israel. Medicadent commenced offering PST in
France in June 1998, and the Company expects H.A.
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<PAGE> 11
Systems to commence offering PST in Israel in early 1999. No assurances can be
made regarding the commercial acceptance of PST. The Company anticipates
additional international agreements for the distribution of PST in late 1998 or
early 1999, but no assurances can be made that such agreements will be entered
into by the Company
The Company has been awarded four patents, and has thirteen patents
pending. The U.S. Patent & Trademark Office awarded patents to the Company for
its osteoporosis and periodontal disease susceptibility tests and two patent
awards 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 for sales, marketing and commercial operations for its
genetic susceptibility testing business and continued research and development
of new genetic susceptibility tests.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 VERSUS THREE MONTHS ENDED
SEPTEMBER 30, 1997
Gross revenue for the three months ended September 30, 1998 was
$107,981 as compared to $52,187 for the same period ended September 30, 1997,
representing an increase of $55,794 or 107%. The increases in revenue are
primarily attributable to the introduction of the Company's first genetic test.
Cost of sales was $58,252 for the three months ended September 30, 1998 as
compared to $45,106 for the same period in 1997, representing an increase of
29%. This increase is largely the result of an increase volume of tests
processed by the Company in the current quarter compared to the third quarter of
last year.
For the three months ended September 30, 1998, the Company had research
and development expenses of $513,128 as compared to $137,279 for the third
quarter of 1997, an increase of $375,849 or 274%. This increase is due to the
addition of key scientists for research related to our coronary artery disease
and osteoporosis genetic susceptibility tests and an increase in the number and
scope of clinical trials which have commenced and are continuing to run for the
same two tests.
Selling, general and administrative expenses increased in the third
quarter of 1998 to $1,584,922 from $1,012,638 in the third quarter of 1997, an
increase of $572,284 or 57%. Such increase is primarily attributable to building
the infrastructure required to support increasing commercial operations and the
increased marketing and sales efforts required to support the Company's
business. Additionally, general and administrative expenses increased to support
the research and development efforts of the Company and due to increased legal
and accounting expenses related to complying with SEC reporting obligations.
Interest income from the third quarter of 1998 increased to $74,130
from $2,376 in the third quarter of 1997. Such increase is attributable entirely
to an increase in the average balances of cash and cash equivalents from
proceeds of the initial public offering. Interest expense of $22,853 was
incurred during the period ended September 30, 1998, a decrease of 66% from the
$67,967 over the same period in 1997. Such decrease is attributable to a
decrease in outstanding debt obligations. The Company retired $1,780,000 of debt
with the proceeds of the initial public offering.
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Total loss increased to $1,999,610 for the third quarter of 1998, as
compared to $1,208,424 for the third quarter of 1997, an increase of $791,186 or
65%. Such increased loss is attributable to the increased expenses set forth
above. During the fourth quarter of 1998, the Company has taken steps to reduce
its operating expenses by a reduction in work force and deferring certain
clinical trials. As a result, the Company anticipates that its quarterly loss
commencing in the first quarter of 1999 will be reduced; provided, however, no
such assurances can be given in this regard.
NINE MONTHS ENDED SEPTEMBER 30, 1998 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1997
Gross revenue for the nine months ended September 30, 1998 was $269,491
as compared to $152,476 for the same period ended September 30, 1997,
representing an increase of $117,015 or 77%. The increase in revenue is
primarily attributable to the introduction of the Company's first genetic test
in the fourth quarter of 1997 and increased sales of that product. Cost of sales
was $172,344 for the nine months ended September 30, 1998 as compared to
$149,702 for the same period in 1997, representing an increase of 15%. This low
increase is a result of the Company's ability to take advantage of volume
processing discounts provided to it by its outside laboratory vendors.
For the nine months ended September 30, 1998, the Company had research
and development expenses of $1,379,860 as compared to $784,722 for the same
period of 1997, an increase of $595,138 or 76%. This planned increase was the
result of our continued investment in genetic research projects. In addition to
the full time employment of key scientists for our coronary artery disease and
osteoporosis genetic susceptibility tests, and for new clinical trials which
have commenced and are continuing to run for the same two tests, the Company
continues to perform science enhancement studies for our PST(R) product, as well
as invest in our previously disclosed research projects related to diabetic
retinopathy and asthma.
Selling, general and administrative expenses increased for the nine
months ended September 30, 1998 to $5,405,887 from $2,164,141 in the same period
of 1997, an increase of $3,241,746 or 150%. This increase is primarily
attributable to building the infrastructure required to support commercial
operations 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, and due to increased legal and accounting expenses
related to complying with SEC reporting obligations.
During the second quarter of 1998, the Company consolidated its
corporate headquarters from Newport Beach, California into the Company's San
Antonio Research Facility. As a result of this relocation, the Company amended
its existing lease in San Antonio to extend the term and expand its premises.
The amended lease expires on May 31, 2003 and extends its square footage from
approximately 1,961 square feet to 8,131 square feet. Also, as a result of the
move from California, the Company has subleased its leased office space in
Newport Beach. The sublease expires on the same date of the Company's lease,
April 30, 2001.
Interest income from the nine months ended September 30, 1998 increased
to $326,470 from $2,417 in the same period in 1997. Such increase is
attributable entirely to the interest income generated by the unused net
proceeds of the initial public offering. Interest expense of $70,278 was
incurred during the period ended September 30, 1998, a decrease of 29% from the
$98,657 over the same period in 1997. Such decrease is attributable to a
decrease in the
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Company's debt obligations, which were substantially reduced with the net
proceeds of the Company's initial public offering.
Total losses increased to $6,433,388 for the nine months ended
September 30, 1998, as compared to $3,042,329 for the same period in 1997, an
increase of $3,391,059 or 111%. Such increased loss is a result of the increased
expenses set forth above. As previously discussed, during the fourth quarter,
the Company has taken steps to reduce its operating expenses through a
combination of a reduction in work force and deferring certain clinical trials.
As a result, the Company anticipates that its quarterly loss commencing in the
first quarter of 1999 will be reduced; provided, however, no such assurances can
be given in this regard.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that its cash and cash equivalents are the most
significant indicators of the Company's liquidity position. As of September 30,
1998, the Company had cash and cash equivalents of $4,601,170. The cash and cash
equivalents position generated interest income of $74,130 in the third quarter
of 1998.
The Company currently does not have any commitments for material
capital expenditures. The Company's obligation at September 30, 1998 for
capitalized lease obligations totaled $276,174, of which long-term debt is
$177,740 and short-term debt is $98,434.
During the second quarter of 1998 the Company changed the terms of its
long-term bank loan with the Bank of America NT&SA. The two existing loans were
combined into a single term loan which matures in June 2005, representing a
three-year extension from the previous loans. The principal balance at September
30, 1998 is $549,642, of which $468,210 is long-term debt and $81,432 is
short-term debt. Three officers and directors of the Company who had served as
guarantors on the two previous loans were removed as guarantors on the new loan.
The Company has provided a $570,000 certificate-of-deposit as security for this
loan. The Company believes that its obligations will be paid and payable from
its cash and cash equivalents.
Based on reductions in operating expenses which the Company has
undertaken during the fourth quarter of 1998, the Company anticipates that the
existing cash and cash equivalents, together with anticipated interest income
and revenue, will be sufficient to conduct its operations as planned through
June 1999. 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, continued research and development efforts, the protection of
the Company's intellectual property rights (including preparing and filing of
patent applications), as well as operational, administrative, legal and
accounting expenses. The Company plans to raise capital through equity and/or
debt issuance when, and if, such capital is available to it. There can be no
assurance that the additional financing will be available on favorable terms, if
at all.
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YEAR 2000 COMPLIANCE
The efficient operation of the Company's business is dependent on its
computer software programs and operating systems (collectively, "Programs and
Systems"). These Programs and Systems are used in several key areas of the
Company's business, including information management services and financial
reporting, as well as in various administrative functions. The Company has been
evaluating its Programs and Systems to identify potential year 2000 compliance
problems, as well as manual processes, external interfaces with customers, and
services supplied by vendors to coordinate year 2000 compliance and conversion.
The year 2000 problem refers to the limitations of the programming code in
certain existing software programs to recognize date sensitive information for
the year 2000 and beyond. Unless modified prior to the year 2000, such systems
may not properly recognize such information and could generate erroneous data or
cause a system to fail to operate properly. Based on current information, the
Company expects to attain year 2000 compliance and institute appropriate testing
of its modifications and replacements in a timely fashion and in advance of the
year 2000 date change. It is anticipated that modification or replacement of the
Company's Programs and Systems will be performed in-house by company personnel.
The Company believes that, with modifications to existing software and
conversions to new software, the year 2000 problem will not pose a significant
operational problem for the Company. However, because most computer systems are,
by their very nature, interdependent, it is possible that non-compliant third
party computers may not interface properly with the Company's computer systems.
The Company could be adversely affected by the year 2000 problem if it or
unrelated parties fail to successfully address this issue. Management of the
Company currently anticipates that the expenses and capital expenditures
associated with its year 2000 compliance project, including costs associated
with modifying the Programs and Systems as well as the cost of purchasing or
leasing certain hardware and software, will not have a material effect on its
business, financial condition or results of operations and are expenses and
capital expenditures the Company anticipated incurring in the ordinary course of
business regardless of the year 2000 problem. Purchased hardware and software
has been and will continue to be capitalized in accordance with normal policy.
Personnel and other costs related to this process are being expensed as
incurred.
The costs of year 2000 compliance and the expected completion dates are
the best estimates of Company management and are believed to be reasonably
accurate. In the event the Company's plan to address the year 2000 problem is
not successfully or timely implemented, the Company may need to devote more
resources to the process and additional costs may be incurred, which could have
a material adverse effect on the Company's financial condition and results of
operations. Problems encountered by the Company's vendors, customers and other
third parties also may have a material adverse effect on the Company's financial
condition and results of operations.
In the event the Company's determines following the year 2000 date
change that its Programs and Systems are not year 2000 compliant, the Company
will likely experience considerable delays in processing customer orders and
invoices, compiling information required for financial reporting and performing
various administrative functions. In the event of such occurrence, the Company's
contingency plans call for it to switch vendors to obtain hardware and/or
software that is 2000 compliant, and until such hardware and/or software can be
obtained, the Company will plan to use non-computer systems for its business,
including information management services and financial reporting, as well as
its various administrative functions.
11
<PAGE> 15
YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT
To the maximum extent permitted by applicable law, the above
information is being designated as "Year 2000 Readiness Disclosure" pursuant to
the "Year 2000 Information and Readiness Disclosure Act" which was signed into
law on October 19, 1998.
12
<PAGE> 16
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 in November 1997, from the closing of such offering
until September 30, 1998:
<TABLE>
<CAPTION>
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).
<S> <C>
- -------------------------------------------------------------- --------------
Cash, investments and changes in working capital $ 5,557,743
- -------------------------------------------------------------- --------------
Retirement of debt 1,780,000
- -------------------------------------------------------------- --------------
Research and development expenses 1,416,658
- -------------------------------------------------------------- --------------
Marketing and sales expenses 3,286,431
- -------------------------------------------------------------- --------------
General and administrative expenses 2,863,168
- -------------------------------------------------------------- --------------
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
September 30, 1998.
ITEM 5. OTHER INFORMATION
None.
13
<PAGE> 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K
Not applicable
14
<PAGE> 18
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: November __, 1998 By: /s/ U. SPENCER ALLEN
---------------------------------------
U. Spencer Allen
Chief Financial Officer and Treasurer
(Duly authorized signatory and
Principle Financial and Accounting
Officer)
15
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,601,170
<SECURITIES> 0
<RECEIVABLES> 87,350
<ALLOWANCES> 4,984
<INVENTORY> 38,855
<CURRENT-ASSETS> 5,361,209
<PP&E> 789,244
<DEPRECIATION> 270,007
<TOTAL-ASSETS> 6,679,615
<CURRENT-LIABILITIES> 1,180,164
<BONDS> 0
0
0
<COMMON> 16,652,199
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,679,615
<SALES> 107,981
<TOTAL-REVENUES> 107,981
<CGS> 58,252
<TOTAL-COSTS> 2,098,050
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,853
<INCOME-PRETAX> (1,999,610)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,999,610)
<EPS-PRIMARY> (.36)
<EPS-DILUTED> (.36)
</TABLE>
