SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1998
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Commission file number 0-10822
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BIOCONTROL TECHNOLOGY, INC.
---------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1229323
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(State of other jurisdiction (IRS Employer
of incorporation or organization) Identification no.)
300 Indian Springs Road, Indiana, Pennsylvania 15701
----------------------------------------------------
(Address of principal executive offices) ( Zip Code)
(412) 349-1811
--------------
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has 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
As of September 30, 1998, 398,402,428 shares of Biocontrol Technology, Inc.
common stock, par value $.10 were outstanding.
<PAGE>1
<TABLE>
PART I FINANCIAL STATEMENTS
Item 1. Financial Statements
BIOCONTROL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
Sep. 30, 1998 Dec. 31, 1997
(Unaudited) (Note)
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 668,868 $ 2,759,067
Accounts receivable-net of allowance for doubtful accounts 162,988 417,329
Notes receivable-related parties - 35,000
Notes receivable 121,050 87,000
Interest receivable - 2,134
Inventory-net of valuation allowance 1,758,378 1,834,018
Prepaid expenses 216,396 164,012
------------- -------------
TOTAL CURRENT ASSETS 2,927,680 5,298,560
PROPERTY, PLANT AND EQUIPMENT
Building 1,444,273 1,444,273
Land 246,250 246,250
Construction in process 1,568,600 1,465,152
Leasehold improvements 1,486,084 1,197,977
Furniture, fixtures and equipment 842,136 812,221
Machinery and equipment 5,162,232 5,042,736
------------- -------------
Subtotal 10,749,575 10,208,609
Less accumulated depreciation 4,124,178 3,516,677
------------- -------------
6,625,397 6,691,932
OTHER ASSETS
Notes receivable - related parties 1,270,900 598,900
Interest receivable - related parties 137,186 75,343
Deposit on Equipment - 300,000
Goodwill, net of amortization 5,172,325 -
Patents, net of amortization 3,516 6,765
Other assets 12,585 9,800
------------- -------------
6,596,512 990,808
------------- -------------
TOTAL ASSETS $ 16,149,589 $ 12,981,300
============= =============
Note: The Balance Sheet at December 31, 1997 has been derived from
audited financial statements at that date.
See notes to consolidated financial statements.
</TABLE>
<PAGE>2
<TABLE>
BIOCONTROL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
<CAPTION>
Sep. 30, 1998 Dec. 31, 1997
(Unaudited) (Note)
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 1,115,811 $ 646,535
Current portion of long-term debt 3,623,217 18,765
Current portion of capital lease obligations 135,725 109,933
Debentures payable 3,125,000 3,301,280
Accrued liabilities 683,925 215,119
Escrow payable 2,700 2,700
Deferred revenue on contract billings 114,403 116,146
------------- -------------
TOTAL CURRENT LIABILITIES 8,800,781 4,410,478
LONG-TERM LIABILITIES
Capital lease obligations 2,594,823 2,688,293
Long-term debt 765,000 8,806
------------- -------------
3,359,823 2,697,099
UNRELATED INVESTORS' INTEREST IN SUBSIDIARY 1,196,002 1,409,647
STOCKHOLDERS' EQUITY
Common stock, par value $.10 per share,
authorized 600,000,000 shares, issued and
outstanding 398,402,428 at Sep. 30, 1998 and
138,583,978 at Dec. 31, 1997 39,830,243 13,858,398
Additional paid-in capital 83,256,032 97,004,067
Note receivable issued for common stock - related party (25,000) (25,000)
Warrants 6,396,994 6,396,994
Accumulated deficit (126,665,286) (112,770,383)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 2,792,983 4,464,076
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 16,149,589 $ 12,981,300
============= =============
Note: The Balance Sheet at December 31, 1997 has been
derived from audited financial statements at that date.
See notes to consolidated financial statements.
</TABLE>
<PAGE>3
<TABLE>
BIOCONTROL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
For the nine months ended For the three months ended
Sep. 30, Sep. 30,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues
Sales $ 1,019,520 $ 720,074 $ 86,079 $ 204,190
Interest income 93,060 93,846 32,466 23,597
Other income - 4,119 - 139
-------------- -------------- -------------- --------------
1,112,580 818,039 118,545 227,926
Costs and expenses
Cost of products sold 536,680 443,320 37,820 120,270
Research and development 5,167,106 5,463,301 1,153,474 1,541,640
Selling, general and administrative 8,297,482 10,009,346 2,646,273 3,408,696
Warrant extensions - Subsidiary 1,870,000 4,014,375 - -
Interest expense 245,605 231,047 39,947 87,645
-------------- -------------- -------------- --------------
16,116,873 20,161,389 3,877,514 5,158,251
-------------- -------------- -------------- --------------
Loss before unrelated investors' interest (15,004,293) (19,343,350) (3,758,969) (4,930,325)
Unrelated investors' interest in net loss
of subsidiary 1,109,390 2,326,213 77,385 178,564
-------------- -------------- -------------- --------------
Net loss ($13,894,903) ($17,017,137) ($3,681,584) ($4,751,761)
============== ============== ============== ==============
Loss per common share ($0.06) ($0.27) ($0.02) ($0.08)
============== ============== ============== ==============
See notes to consolidated financial statements.
</TABLE>
<PAGE>4
<TABLE>
BIOCONTROL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the nine months ended For the three months ended
Sep. 30, Sep. 30,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Cash flows used by operating activities:
Net loss ($13,894,903) ($17,017,137) ($3,681,584) ($4,751,761)
Adjustments to reconcile net loss to net
cash used by operating activities :
Depreciation and amortization 707,524 647,131 263,983 227,062
Unrelated investors' interest in subsidiary (213,645) (2,326,213) (77,385) (178,564)
Warrant extensions by subsidiary 974,270 4,014,375 - -
Debebture interest converted to stock 96,697 - 24,033 -
Premium for extensions by subsidiary 680,500 - - -
Stock issued in exchange for services (23,937) 888,710 (6,250) 24,145
Stock issued in exchange for services by subsidiary - 600 - -
(Increase) decrease in receivables 262,923 (168,177) (59,880) (71,271)
(Increase) decrase in inventories 83,135 (602,538) 106,581 (147,654)
(Increase) decrease in prepaid expenses (51,197) 76,968 (35,551) 21,669
Decrease in other assets 35,269 2,087 1,684 600
(Decrease) increase in accounts payable 443,747 (522,667) (229,541) (404,980)
(Decrease) increase in other liabilities 430,975 118,677 45,837 (215,950)
-------------- -------------- -------------- --------------
Net cash flow used by operating activities (10,468,642) (14,888,184) (3,648,073) (5,496,704)
-------------- -------------- -------------- --------------
Cash flows from investing activities:
Purchase of property, plant and equipment (162,766) (1,050,028) (22,583) (338,659)
(Increase) in notes receivable (82,050) (158,000) 743,000 (75,000)
(Increase) in interest receivable (59,709) (16,434) (25,865) (3,666)
Acquistion of ICTI (1,030,000) (75,000) - -
-------------- -------------- -------------- --------------
Net cash provided (used) by investing activities (1,334,525) (1,299,462) (694,552) (417,325)
-------------- -------------- -------------- --------------
Cash flows from financing activities:
Net proceeds from sale of Preferred stock-Series B - 2,027,000 - -
Proceeds from warrants exercised - 38,200 - -
Payments on notes payable (539,354) (34,959) (10,720) (6,780)
Increase in notes payable 250,000 - 250,000 -
Proceeds from debentures payable 10,070,000 18,440,000 3,125,000 12,640,000
Payments on capital lease obligations (67,678) 24,029 (36,426) (15,086)
-------------- -------------- -------------- --------------
Net cash provided by financing activities 9,712,968 20,494,270 3,327,854 12,618,134
-------------- -------------- -------------- --------------
Increase (decrease) in cash and equivalents (2,090,199) 4,306,624 374,333 6,704,105
-------------- -------------- -------------- --------------
Cash and equivalents, beginning of period 2,759,067 3,802,874 294,535 1,405,393
-------------- -------------- -------------- --------------
Cash and equivalents, end of period $668,868 $8,109,498 $668,868 $8,109,498
============== ============== ============== ==============
See notes to consolidated financial statements.
</TABLE>
<PAGE>5
BIOCONTROL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - Basis of Presentation
The accompanying consolidated financial statements of
Biocontrol Technology, Inc. (the "Company") and its 89.9%
owned subsidiary, Coraflex, Inc., and its 52% owned
subsidiary, Diasense, Inc., and its 67% owned subsidiary,
Petrol Rem, Inc., and its 99.1% owned subsidiary, IDT, Inc.,
and its 99.4% owned subsidiary, Barnacle Ban Inc., and its
58.4% owned subsidiary, ICTI, Inc., have been prepared in
accordance with generally accepted accounting principles for
interim financial information, and with the instructions to
Form 10-Q and Rule 10-O Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by
generally accepted accounting principles for complete
financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been
included. For further information, refer to the consolidated
financial statements and footnotes included in the Company's
annual report on Form 10-K for the year ended December 31,
1997.
The Company has expensed approximately $8.4 million through
December 31, 1997 in connection with development efforts by
its subsidiary, IDT, Inc., in a hyperthermia project. All such
funding has been expensed either as General and Administrative
expenses or as Research and Development expenses, based upon
Management's evaluation of the costs incurred. Through
December 31, 1997, approximately 62% of this funding had been
expensed as Research and Development costs with the remaining
38% being expensed as General and Administrative costs.
The Company's consolidated net income (loss) is substantially
the same as comprehensive income required to be disclosed by
SFAS130.
No portion of the proceeds from the issuance of convertible
debt securities has been accounted for as attributable to the
conversion feature of these securities. In a comment letter
dated November 10, 1998 the SEC Staff has requested that the
Company account for such transactions in accordance with
EITF-60 which would recognize a value on any beneficial
conversion features. Management is currently evaluating the
Staff's recommendation and accumulating necessary information
to evaluate the effects of such a change on its current and
previously issued financial statements.
NOTE B - Net Loss Per Common Share
Net loss per common share is based on the average number of
outstanding common shares. The loss per share does not
include common stock equivalents since the effect would be
anti-dilutive. The weighted average shares used to calculate
the loss per share for the period ending September 30, 1998,
and September 30, 1997, were 241,246,805 and 62,461,671,
respectively.
NOTE C - Stockholders Equity
During the three months ended September 30, 1998, the Company
issued 4% Subordinate Convertible Debentures totaling
$3,125,000 pursuant to sections 4 (2) and or Regulation D.
Such debentures are convertible to the Company's restricted
common stock at a price of approximately $.059 per share as of
the date of this filing. The debentures were not saleable or
convertible for a minimum of 90 days from issuance. (See
"Management's Discussion and Analysis").
The Company's common stock is currently traded on the Nasdaq
electronic bulletin board.
NOTE D - Goodwill
The company recognized $5,310,501 of goodwill in connection
with a Stock Purchase Agreement dated February 20, 1998 to
acquire 58.4% of International Chemical Technologies, Inc.
For purposes of amortizing this goodwill, Management has
determined a useful life of 20 years.
NOTE E - Legal Proceedings
During April 1998, the Company and its affiliates were served
with subpoenas by the U.S. Attorneys' office for the U.S.
District Court for the Western District of Pennsylvania. The
subpoenas requested certain corporate, financial and
scientific documents and the Company continues to provide
documents in response to such requests.
On April 30, 1996, a class action lawsuit was filed against
the Company, Diasense, Inc., and individual officers and
directors. The suit, captioned Walsingham v. Biocontrol
Technology,etal., has been certified as a class action, and is
pending in the U.S. District Court for the Western District
of Pennsylvania. The suit alleges misleading discolsures in
connection with the Company's FDA application for the
Noninvasive Glucose Sensor and other related activities. By
mutual agreement of the parties, the suit remains in the
pre-trial pleading stage, and the Company is unable to
determine the outcome or its impact upon the Company at this
time.
The Company had leased space in two locations in Indiana
County for its manufacturing facilities. One space, which has
been upgraded with leasehold improvements, is still being used
for manufacturing of the Noninvasive Glucose Sensor. The
other space, which had been leased as expansion space, was the
subject of a judgment proceeding. The Company has given up
possession of its expansion space in Indiana County in
response to the filing of a judgment for nonpayment of lease
fees. In return for possession of the space, the leaseholder
had agreed not to pursue any action on the judgment at this
time.
NOTE F Year 2000 Issue
The Company is currently working to resolve the potential
impact of the Year 2000 on the processing of date-sensitive
information. The Year 2000 Issue is the result of computer
programs being written using two digits (rather than four) to
define the applicable year. Programs which are susceptible to
problems after December 31, 1999 are those which recognize a
date using "00" as the year 1900 rather than the year 2000,
which could result in miscalculations or system failures.
Based upon a review of its own internal programs and software,
the Company currently believes that the Year 2000 will not
pose significant operational problems to its information
systems, because such systems are already compliant or will be
made compliant with minor adjustments. In addition,
ChaseMellon Shareholder Services, the Company's transfer
agent, has disclosed that it will be Year 2000 compliant and
that no interruptions in service will occur. The Company is
also conducting an investigation of its major suppliers,
vendors and other parties to determine their respective plans
for the Year 2000 compliance. The Company's common stock
currently trades on the Nasdaq electronic bulletin board;
Nasdaq and its parent, the NASD, have analyzed its products
and systems; are addressing their Year 2000 issues; and are
implementing a plan to test their systems and to remediate any
Year 2000 problems. As of this date, Nasdaq has not made a
definitive statement regarding when it will be compliant, but
has stated that it is making all necessary changes to its
trading systems. The Company's current estimates indicate
that the costs of addressing potential problems are not
expected to have a material impact upon the Company's
financial position, results of operations or cash flows in
future periods. There can be no assurance, however, that
modifications to information systems which impact the Company
and which are required to remediate year 2000 issues will be
made on a timely basis and that they will not adversely affect
the Company's systems or operations.
BIOCONTROL TECHNOLOGY, INC.
Management's Discussion and Analysis of Financial Condition
and Cash Flows
Liquidity and Capital Resources
Cash decreased from $2,759,067 at December 31, 1997 to
$668,868 at September 30, 1998. This decrease was
attributable to the Company's $10,468,642 net operating
expenditures which primarily related to the research and
development of the NonInvasive Glucose Sensor (Sensor)
(which were approximately $5 million), Sensor related
general and administrative expenses (which were
approximately 7 million) and costs associated with the
acquisition of ICTI, Inc. (as set forth below). The Company
also had net cash used by investing activities of
$1,334,525, which includes equipment consolidated from
ICTI, Inc. and the making of Notes Receivable to related
parties.
During the first quarter of 1998, with a view to diversi-
fication and enghancing shareholder value, the Company
acquired a majority interest in ICTI, Inc. from its
existing majority shareholders, Farrel B. and Brenda K.
Jones. In connection with such purchase, the Company made
payments totaling $1,528,000 and issued 2 million shares of
the Company's common stock to the sellers, which the
Company agreed to register on the Jones' behalf. In
connection with its purchase of ICTI, the Company made
certain undertakings to make capital contributions of $3.0
million to ICTI during 1998. Due to its cash flow problems,
the Company has been negotiating with the seller to
restructure and redefine its obligations to make capital
contributions to ICTI.
Furthermore, the Company had net cash provided by financing
activities of $9,712,968 of which $10,070,000 was provided
from debentures sold pursuant to Regulation S, section 4 (2)
or Regulation D during the nine-month period ended September
30, 1998. Net cash provided by financing activities was
primarily used to continue to fund the Company's research and
development projects, payments in connection with the
acquisition of ICTI, Inc. and to provide working capital for
the Company.
Results of Operations
Sales during the third quarter decreased to $86,079 in 1998
from $204,190 in 1997 and increased for the nine month period
to $1,019,520 in 1998 from $720,074 in 1997. The decrease and
increase were primarily due to that periods fluctuation in
sales of its Functional Electrical Stimulators, which
accounted for 51% of sales during the nine-month period ended
September 30, 1998.
The sales of functional electrical stimulators have been
suspended, and no orders are currently pending. The Company is
unable to determine at this time whether the suspension is
permanent, or when future orders will be received, if any.
Due to the significance of the sales of functional electrical
stimulators when considered as a percentage of total revenues,
in the event that no future orders are received, it will have
a negative impact upon the Company's liquidity and results of
operations.
Interest income increased during the third quarter to $32,466
in 1998 from $23,597 in 1997 and decreased from the nine month
period to $93,060 in 1998 from $93,846 in 1997. The increase
and decrease were due to the Company's fluctuation in cash
available to invest in those periods.
Management's Discussion and Analysis of Financial Condition
and Cash Flows
Continued
Results of Operations continued
Costs of Products Sold during the third quarter decreased to
$37,820 in 1998 from $120,270 in 1997 and increased for nine
month period to $536,680 in 1998 from $443,320 in 1997. The
fluctuations were primarily due to various orders for the
Functional Electrical Stimulators, which have been suspended.
Research and Development expenses during the third quarter
decreased to $1,153,474 in 1998 from $1,541,640 in 1997 and
decreased for the nine month period to $5,167,106 in 1998 from
$5,463,301 in 1997. The decrease was due to a reduction in
research and development expenditures, driven by the Company's
cash flow problems and reduction in personnel.
Selling, General and Administrative expenses during the third
quarter decreased to $2,646,273 in 1998 from $3,408,696 in
1997 and decreased for the nine month period to $8,297,482 in
1998 from $10,009,346 in 1997. The decrease was due to the
Company's reduction in personnel and expenditures.
In connection with the Company's $8.4 million investment in
HemoCleanse, Inc. (the company which, along with IDT, is
engaged in the hyperthermia project) the Company recorded
approximately 38% of such investment as General and
Administrative expenses; and approximately 62% as Research and
Development expenses. The determination of allocation was
based upon the use of the funds by HemoCleanse, direct
expenses paid, and the overall use of the funds for the
hyperthermia project. The amounts were recorded as expenses,
rather than capitalized, due to the research and development
nature of the use of funds, as well as the financial condition
of HemoCleanse.
Interest expense decreased during the third quarter to $39,947
in 1998 from $87,645 in 1997 and increased to $245,605 for the
nine month period ended September 30, 1998 from $231,047 for
the nine month period ended September 30, 1997. The
fluctuations was primarily due to the Company's varied use of
convertible debentures as a means to generate capital. The
increase was due to the Company's continued efforts in
acquiring capital through 4% convertible debentures and to
Notes Payable in connection with the acquisition of ICTI.
The Company's cash flow problems resulted in a reduction in
personnel during the quarter ended September 30,1998. In
addition, such problems resulted in the Company's inability to
meet its full payroll during June, 1998.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security
Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
(B) Reports on Form 8-K
(1) A report on form 8-K dated August 25, 1998,
with respect to Item 6 Resignation of
Registrants Directors and Item 7 (c), Exhibit.
(2) A report on form 8-K dated September 02, 1998,
with respect to Item 5 other events and Item 7
(c), Exhibit.
(3) A report on form 8-K dated September 04, 1998,
with respect to Item 5 other events and Item 7
(c), Exhibit.
(4) A report on form 8-K dated September 18, 1998,
with respect to Item 5 other events and Item 7
(c), Exhibit.
(5) A report on form 8-K dated September 28, 1998,
with respect to Item 5 other events and Item 7
(c), Exhibit.
(6) A report on form 8-K dated October 01, 1998,
with respect to Item 5 other events and Item 7
(c), Exhibit.
(7) A report on form 8-K dated October 14, 1998,
with respect to Item 5 other events and Item 7
(c), Exhibit.
(8) A report on form 8-K/A dated March 05, 1998,
sent 10/19/98, with respect to Item 5 other
events and Item 7 (c), Exhibit.
PART II - OTHER INFORMATION Continued
Item 6. Exhibits and Reports on Form 8-K Continued
(B) Reports on Form 8-K Continued
(9) A report on form 8-K dated October 22, 1998,
with respect to Item 6 Resignation of
Registrant's Directors.
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 on this 16th day of November, 1998.
BIOCONTROL TECHNOLOGY, INC.
By /s/ Fred E. Cooper
Fred E. Cooper, CEO
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 668,868
<SECURITIES> 0
<RECEIVABLES> 1,702,148
<ALLOWANCES> (10,024)
<INVENTORY> 1,758,378
<CURRENT-ASSETS> 2,927,680
<PP&E> 10,749,575
<DEPRECIATION> (4,124,178)
<TOTAL-ASSETS> 16,149,589
<CURRENT-LIABILITIES> 8,800,781
<BONDS> 0
0
0
<COMMON> 39,830,243
<OTHER-SE> (37,830,243)
<TOTAL-LIABILITY-AND-EQUITY> 16,149,589
<SALES> 1,019,520
<TOTAL-REVENUES> 1,112,580
<CGS> 536,680
<TOTAL-COSTS> 536,680
<OTHER-EXPENSES> 15,580,193
<LOSS-PROVISION> (15,004,293)
<INTEREST-EXPENSE> 245,605
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,894,903)
<EPS-PRIMARY> 0
<EPS-DILUTED> (0.06)
</TABLE>
