Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from............... to ...............
Commission file number 0-12648
MOLECULAR BIOSYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3078632
(State of Incorporation) (I.R.S. Identification No.)
10030 Barnes Canyon Road
San Diego, California 92121
(619) 452-0681
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
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.
X Yes No
The number of shares outstanding of the issuer's common stock,
$.01 par value, as of February 3, 1995 was 11,999,561 shares.
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
1. Consolidated Balance Sheets
December 31, 1994
March 31, 1994
2. Consolidated Statements of Operations
Three Months Ended December 31, 1994 and 1993
Nine Months Ended December 31, 1994 and 1993
3. Consolidated Statements of Cash Flows
Nine Months Ended December 31, 1994 and 1993
4. Notes to Financial Statements
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Item 2 - Changes in Securities
Item 3 - Defaults Upon Senior Securities
Item 4 - Submission of Matters to a Vote of
Securities Holders
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
Signatures
<TABLE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(Dollars in thousands)
<CAPTION>
December 31,
1994 March 31,
(Unaudited) 1994
___________ _________
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 896 $ 1,557
Marketable securities -
available for sale 21,093 27,943
Inventories 1,120 1,169
Accounts and notes receivable 11,250 901
Accrued interest receivable 162 295
Prepaid expenses and other assets 952 710
_______ _______
Total current assets 35,473 32,575
PROPERTY AND EQUIPMENT, at cost:
Building and improvements 18,079 18,022
Equipment, furniture and fixtures 5,119 5,296
Construction in progress 784 114
_______ _______
23,982 23,432
Less Accumulated depreciation and
amortization 5,633 4,872
_______ _______
18,349 18,560
OTHER ASSETS:
Patents and license rights,
net of amortization 1,731 1,556
Other assets, net 2,722 3,760
_______ _______
4,453 5,316
_______ _______
$58,275 $56,451
See accompanying notes.
</TABLE>
<TABLE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(Dollars in thousands)
<CAPTION>
December 31,
1994 March 31,
(Unaudited) 1994
__________ ________
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities $ 7,386 $ 4,201
Current portion of long-term debt 303 53
Compensation accruals 254 204
_______ _______
Total current liabilities 7,943 4,458
_______ _______
LONG TERM DEBT, net of current
portion 8,487 3,917
_______ _______
COMMITMENTS AND CONTINGENCIES (Note 2)
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value,
20,000,000 shares authorized,
11,999,561 and 11,989,361 shares
issued and outstanding, respectively 120 120
Additional paid-in capital 78,421 78,259
Retained deficit (35,355) (29,290)
Unrealized loss on
available-for-sale securities (348) -
Less notes receivable from sale of
common stock (934) (954)
Less treasury stock, at cost (59) (59)
________ ________
41,845 48,076
________ ________
$58,275 $56,451
________ ________
See accompanying notes.
</TABLE>
<TABLE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except per share amounts)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
<S> <C> <C> <C> <C>
1994 1993 1994 1993
REVENUES
Revenues under
collaborative agreements $ 6,188 $ 5,000 $14,921 $ 5,713
Product Revenues 720 532 1,267 532
License fees - - 40 2,015
______ ______ ______ ______
6,908 5,532 16,228 8,260
RESEARCH AND DEVELOPMENT COSTS:
Compensation 1,519 1,998 5,404 5,971
Equipment and supplies 1,384 672 3,312 2,908
Outside research, preclinical
and clinical trials 345 620 1,512 1,338
Legal, professional and
consulting 275 501 1,093 1,177
Occupancy costs 237 336 1,011 1,113
Other 492 473 1,779 1,261
_____ ______ ______ ______
4,252 4,600 14,111 13,768
COST OF PRODUCTS SOLD 643 295 988 295
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 4,338 2,078 7,628 5,232
_____ ______ _____ ______
Total operating costs and
expenses 9,233 6,973 22,727 19,295
_____ _____ _______ ______
Loss from operations (2,325) (1,441) (6,499) (11,035)
INTEREST EXPENSE (193) (83) (496) (252)
INTEREST INCOME 283 401 930 1,582
______ ______ ______ ______
NET LOSS $(2,235) $(1,123) $ (6,065) $(9,705)
NET LOSS PER
COMMON SHARE $ (0.19) $ (0.09) $ (0.51) $ (0.82)
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 12,000 11,917 11,999 11,884
See accompanying notes.
</TABLE>
<TABLE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1994 AND 1993
(Unaudited; in thousands)
<CAPTION>
1994 1993
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ($6,065) ($9,705)
Adjustments to reconcile net loss to cash
provided by operating activities:
Depreciation and amortization 2,455 1,654
Changes in operating assets and liabilities:
Receivables (10,216) 182
Inventories 49 (291)
Prepaid expenses and other assets (242) (241)
Accounts payable and
accrued liabilities 3,185 (128)
Income taxes - 475
Compensation accruals 50 49
Deferred contract revenue - (713)
______ ______
Cash used in operating activities (10,784) (8,718)
______ ______
CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to property
and equipment (882) (7,942)
Additions to patents and
license rights (500) (715)
Decrease in marketable securities 6,502 18,765
_______ ______
Cash provided by investing
activities 5,120 10,108
_______ ______
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of
common shares 183 1,217
Long-term debt proceeds 5,000 -
Principal payments on
long-term debt (180) (27)
_______ ______
Cash provided by financing
activities 5,003 1,190
_______ ______
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (661) 2,580
CASH AND CASH EQUIVALENTS,
beginning of period 1,557 2,764
_______ ______
CASH AND CASH EQUIVALENTS,
end of period $896 $5,344
_______ ______
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest income received $1,063 $2,125
Income tax refunds received $ - $ 475
See accompanying notes.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
(1)Basis of Presentation-
The Notes to the Consolidated Financial Statements of Molecular
Biosystems, Inc. (the "Company") which were submitted with the
Company's Form 10-K for the year ended March 31, 1994 are
incorporated herein by reference.
These interim Consolidated Financial Statements of the Company
have not been audited by independent public accountants. However,
in the opinion of the Company, all adjustments required for a fair
presentation of the financial position of the Company as of
December 31, 1994, and the results of its operations for the
three- and nine-month periods ended December 31, 1994 and 1993,
and its cash flows for the nine-month periods ended December 31,
1994 and 1993, have been made. The results of operations for
these interim periods are not necessarily indicative of the
operating results for the full year.
In April 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." SFAS 115 requires
that the Company classify its marketable securities as available-
for-sale and record unrealized holding gains or losses as a
separate component of stockholders' equity and against the related
asset. Management intends to manage the Company's investments in
order to minimize losses and maximize investment value. The
Company's marketable securities consist of U.S. Government
obligations and corporate and municipal bonds.
(2) Contingencies-
In January 1995 the Company was notified that Bracco S.p.A.
of Milan, Italy, its former licensee for its proprietary
oral ultrasound agent for gastrointestinal imaging, had
filed for arbitration of its dispute with the Company. The
dispute arose over Bracco's notice of rescission of the
license and its demand for return of the $2 million license
fee, claiming that the Company had failed to inform it of
developmental and patent problems with the product.
Bracco's demand for arbitration requests a refund of the
license fee and other relief. The Company has filed an
answer denying Bracco's entitlement to relief and claiming
that Bracco acted in bad faith, seeking to rescind the
license only when it determined to acquire the licensee of a
potentially competing oral contrast agent. The Company
counterclaimed for breach of contract for $5.5 million in
unpaid license fees, lost profits and other damages. The
arbitration will take place in Los Angeles. The Company
expects to prevail in the proceeding but cautions that the
results of litigation are unpredictable. The Company does
not believe an unfavorable ruling in an arbitration would
have a material adverse impact on its financial condition.
PART I - FINANCIAL INFORMATION
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following management discussion and analysis should be read in
conjunction with the consolidated financial statements.
RESULTS OF CONTINUING OPERATIONS
REVENUES. In December 1987, December 1988 and March 1989, the
Company entered into collaborative agreements with Nycomed A.S. of
Oslo, Norway, Mallinckrodt Medical, Inc. of St. Louis, Missouri
and Shionogi & Co., Ltd. of Osaka, Japan, respectively, under
which the Company granted each of these parties certain license
rights with respect to its ultrasound imaging contrast agent,
ALBUNEX(R). The agreements provide for payments to the Company
conditioned upon the achievement of certain product development
milestones. In August 1994, the Company received approval from
the U.S. Food and Drug Administration ("FDA") to market ALBUNEX(R)
in the United States. As a result, the Company recognized as
revenue during the quarter ended September 30, 1994 milestone
payments totalling $8.7 million ($8 million from Mallinckrodt and
$733,000 from Nycomed). As of December 31, 1994 the Company had
received payments of $4.7 million. The remaining $4 million will
be received over the next six months in two quarterly installments
of $2 million each.
During the quarter ended December 31, 1994, an additional $6.1
million in milestone payments became due from Mallinckrodt with
the release of ALBUNEX(R) to Mallinckrodt's sales force. The
Mallinckrodt agreement provides that $3.1 million of this amount
is to be distributed "to such employees of MBI as shall be
mutually agreed" by MBI and Mallinckrodt. To date, no such
determination has been made. The Company expects that the parties
will agree that the MBI Board of Directors shall determine the
disposition of this amount. An offsetting expense of $3 million
has been accrued under selling, general and administrative
expenses in the quarter ended December 31, 1994 and the liability
is included in accrued liabilities. This milestone payment which
is also included in accounts receivable at December 31, 1994, was
received in January 1995. The first $750,000 quarterly installment
of the remaining $3 million was received in November 1994.
The remaining $2.25 million will be paid in three quarterly
installments.
Under its collaborative agreement with Mallinckrodt, the Company
will receive, in addition to its standard transfer price for
ALBUNEX(R) (40% of net sales price), an amount equal to 100% of
the net product sales of ALBUNEX(R) in the U.S. during the twelve
months following Mallinckrodt's release of ALBUNEX(R) to its sales
force, up to a maximum payment of $30 million. This amount will
be earned as sales occur, but will be payable at the end of the
twelve month period. For the quarter ended December 31, 1994, the
Company recognized $138,000 of such revenue which is included in
revenues under collaborative agreements.
Total revenues were $6.9 million and $16.2 million for the three-
month and nine-month periods ended December 31, 1994, compared to
$5.5 million and $8.3 million for the same periods in the prior
year. Current year revenues for the nine-month period ended
December 31, 1994, consist primarily of the $14.9 million in
milestone payments discussed above. Prior year revenues for the
same nine-month period consisted primarily of $2 million in
license fee revenues received from Bracco S.p.A. ("Bracco") of
Milan, Italy in connection with an exclusive license agreement for
the Company's oral ultrasound agent (see note 2) and of $5.7
million in research milestone revenues from Shionogi.
RESEARCH AND DEVELOPMENT COSTS. For the three-month and
nine-month periods ended December 31, 1994, the Company's research
and development costs totaled $4.3 million and $14.1 million, or
approximately 46% and 62%, respectively, of total operating costs
and expenses, as compared to $4.6 million and $13.7 million, or
approximately 66% and 71%, respectively, for the same periods in
1993. The dollar increase in 1994 over 1993 was primarily due to
an increase of $404,000 in equipment and supplies expense and an
increase in the amortization of deferred costs of $550,000 which
is included in other costs. These increased costs were offset by a
decrease of $567,000 in compensation expense, primarily due to the
reclassification of the manufacturing labor to cost of products
sold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling,
general and administrative expenses were $4.3 million and $7.6
million for the three- and nine-month periods ended December 31,
1994, or approximately 47% and 34%, respectively, of total
operating costs and expenses, as compared to $2.1 million and $5.2
million or approximately 30% and 27%, respectively, for the
corresponding periods in 1993. Selling, general and administra-
tive expenses for the three and nine months ended December 31,
1994 increased primarily due to the accrual of the payment to key
employees as discussed above under Revenues.
INTEREST EXPENSE AND INTEREST INCOME. Interest expense for the
three- and nine-month periods ended December 31, 1994 and 1993
consists of mortgage interest on the Company's buildings. In May
1994, the Company entered into a new credit agreement with a bank
to finance the purchase of two unimproved buildings which the
Company had acquired in December 1993 and planned modifications of
the two buildings. The terms of the agreement provide for two
separate loans of $5 million each which initially accrued interest
at the bank's prime rate plus two percent. In August 1994, the
rate declined to prime plus one percent as a result of the U.S.
approval of ALBUNEX(R). The increase in interest expense during
the current period is due entirely to the funding of the initial
$5 million loan in May 1994.
The decrease in interest income in the current year was
primarily due to lower average cash and marketable securities
balances in the current period. Also contributing to this decline
was a general decline in market interest rates as compared to the
rates at the time of the original investments.
The Company's cash is invested primarily in short-term, fixed
principal investments, such as U.S. Government agency issues,
corporate and municipal bonds, certificates of deposit and
commercial paper.
PROSPECTIVE INFORMATION
REVENUE RECOGNITION AND OPERATING EXPENSES. Revenues may
fluctuate significantly from quarter to quarter based on the level
of ALBUNEX(R) product sales. As mentioned above under Revenue,
under its collaborative agreement with Mallinckrodt, the Company
will receive, in addition to its standard transfer price for
ALBUNEX(R), an amount equal to 100% of the net product sales of
ALBUNEX(R) in the U.S. during the twelve months following
Mallinckrodt's release of ALBUNEX(R) to its sales force, up to a
maximum payment of $30 million.
Operating results for the foreseeable future are expected to
result in operating losses at least until after a significant
product revenue stream from ALBUNEX(R) sales has been established.
Operating costs may decrease as the Company improves its
manufacturing efficiencies and focuses its product development
efforts in ultrasound imaging.
SALES OF ALBUNEX(R) IN JAPAN. Although sales in Japan have
been below the Company's expectations, Shionogi, the Company's
distributor in Japan, and the Company have engaged in an intensive
cooperative study of the situation in Japan. They believe that
the lower-than-expected sales are the result of the unique nature
of the Japanese market. Among the possible reasons for the slow
Japanese launch are Shionogi's expectation that U.S. launch would
precede their own, giving them a model for their own launch.
Additionally, the relative unfamiliarity of Japanese clinicians
with the intended uses for the product may have also contributed
to the lower-than-expected sales. Finally, the packaging and
transport of the product for Japan may have adversely affected the
early shipments. With respect to this last factor, changes in
vial and packaging configuration and transportation practices
appear to have corrected the issue. None of these factors is
expected to apply to the U.S. launch of ALBUNEX(R).
The Company is working closely with Shionogi to resolve any
and all issues that the Japanese launch has raised. To increase
the likelihood of improved sales performance in future quarters,
Shionogi has, with the Company's concurrence, decided to curtail
current promotional efforts and limit current Japanese sales to
selected accounts until these issues have been resolved.
While the Company expects ALBUNEX(R) to be successful in
Japan, it is unlikely that the Company will be making any signif-
icant shipments to Japan through the remainder of the fiscal year
as Shionogi has sufficient inventory at the current time.
TECHNOLOGICAL DEVELOPMENT. On July 11, 1994, the Company
filed an Investigational New Drug (IND) application with the FDA
to initiate human clinical trials of its proprietary abdominal
ultrasound imaging agent, ORALEX(TM). The FDA approved the IND in
September 1994 and clinical trials began in October 1994. The
Phase I clinical trials, which are being sponsored by the Company
and are being conducted at a major university center, were
approximately half complete as of December 31, 1994.
With the exception of ALBUNEX(R), the Company's technologies
must be regarded as being at a very early stage of development.
Like all new technologies, their respective prospects are subject
to many uncertainties. Early test results may prove to have been
in error; new competitive products may obviate the need for the
Company's product; unexpected patent problems may appear; the
Company's strategy or financial condition may dictate changes in
the mix and number of pipeline products; large-scale manufacturing
may prove to be unfeasible; later studies may reveal safety or
efficacy concerns not apparent earlier on; the Company's marketing
partner(s) may change its strategic focus; the technology may fall
prey to regulatory difficulties; and other unpredictable
difficulties may arise. While the Company believes that each of
its emerging early-stage technologies has the potential to evolve
into safe and useful medical products, the Company continually
evaluates each of them for commercializability, and at this point
cannot accurately predict the likelihood or extent of successful
product development.
LIQUIDITY AND CAPITAL RESOURCES
Since the Company's founding, funds for its operations have
been provided primarily by private and public equity financing,
research and licensing revenues and interest income. Product
revenues from sales of ALBUNEX(R) are expected to be an increasing
source of funds for Company operations in the future. At December
31, 1994, the Company had cash and current marketable securities
aggregating $22 million, as compared to $29.5 million at March 31,
1994. Additionally, the Company has included in accounts
receivable $9.3 million related to milestones achieved which will
be received over the next three quarters.
The Company expects to make additional modifications and
improvements to its current manufacturing facility during fiscal
1995 to support the development programs of its new contrast
agents. As a result, in December 1994, the Company notified the
lessor of one of their facilities that the Company intends to
exercise their option to expand the square footage which the
Company is leasing in that facility. This will allow for the
relocation of some of the Company's research and development
facilities and administrative offices. In addition, the Company
is currently exploring its options with regards to the sale of two
unimproved buildings and the underlying land in San Diego,
California. As discussed under "Results of Continuing Operations
- - - Interest Expense and Interest Income," in May 1994, the Company
entered into a credit agreement with a bank to finance the
purchase of the two buildings referred to above. An initial $5
million loan was funded in May 1994. The Company may draw on the
second $5 million loan in $500,000 increments for a period of 18
months from the funding of the initial loan. The loans will be due
in April 2000 and are collateralized by certain assets of the
Company.
For the near future, product revenues from the sale of
ALBUNEX(R) and milestone payments derived from the Company's re-
search contract with Mallinckrodt will support a portion of the
Company's operating costs and expenses. The Company will also
continue to utilize its existing cash and marketable securities
resources and the interest earned thereon to fund its operations
and capital spending needs. The Company may seek financing from
additional sources, such as borrowings, technology licenses, lease
arrangements or additional equity financing, as anticipated
capital requirements change as a result of strategic, competitive,
technological and regulatory factors.
PART II - OTHER INFORMATION
Items 1-5 - The Company has nothing to report with respect to
these items during the quarter ended December 31, 1994.
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(b) No reports on Form 8-K were filed by the Company during the
quarter ended December 31, 1994.
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.
MOLECULAR BIOSYSTEMS, INC.
s/GERARD A. WILLS
Gerard A. Wills
Chief Financial Officer
DATE: February 13, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF MOLECULAR BIOSYSTEMS, INC. DATED DECEMBER
31, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-END> DEC-31-1994
<CASH> 896
<SECURITIES> 21,093
<RECEIVABLES> 10,330
<ALLOWANCES> 37
<INVENTORY> 1,120
<CURRENT-ASSETS> 35,473
<PP&E> 23,982
<DEPRECIATION> 5,633
<TOTAL-ASSETS> 58,275
<CURRENT-LIABILITIES> 7,943
<BONDS> 0
<COMMON> 120
0
0
<OTHER-SE> (41,725)
<TOTAL-LIABILITY-AND-EQUITY> 58,275
<SALES> 1,267
<TOTAL-REVENUES> 16,228
<CGS> 988
<TOTAL-COSTS> 15,099
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 496
<INCOME-PRETAX> (6,065)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,065)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,065)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
</TABLE>
