<PAGE>
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 June 30, 1995
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 August 10, 1995 was 12,171,975 shares.
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INDEX
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PAGE
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PART I -- FINANCIAL INFORMATION
Item 1 -- Financial Statements
1. Consolidated Balance Sheets 3
June 30, 1995
March 31, 1995
2. Consolidated Statements of Operations 5
Three Months Ended June 30, 1995 and 1994
3. Consolidated Statements of Cash Flows 6
Three Months Ended June 30, 1995 and 1994
4. Notes to Financial Statements 7
Item 2 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II -OTHER INFORMATION
Item 1 - Legal Proceedings 11
Item 2 - Changes in Securities 11
Item 3 - Defaults Upon Senior Securities 11
Item 4 - Submission of Matters to a Vote of Securities Holders 11
Item 5 - Other Information 11
Item 6 - Exhibits and Reports on Form 8-K 11
(a)Exhibits
(b)Reports on Form 8-K
Signatures 12
</TABLE>
2
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MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(Dollars in thousands)
<TABLE>
<CAPTION>
JUNE 30,
1995 MARCH 31,
(UNAUDITED) 1995
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<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,209 $ 3,882
Marketable securities, available-for-sale 16,137 15,836
Accounts and notes receivable 2,534 5,180
Inventories 1,551 1,394
Accrued interest receivable 44 51
Prepaid expenses and other assets 222 391
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Total current assets 21,697 26,734
PROPERTY AND EQUIPMENT, at cost:
Building and improvements 18,125 18,125
Equipment, furniture and fixtures 5,244 5,216
Construction in progress 3,743 2,253
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27,112 25,594
Less: Accumulated depreciation and amortization 6,200 5,947
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20,912 19,647
OTHER ASSETS:
Patents and license rights, net of amortization 1,635 1,724
Other assets, net 2,300 2,534
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3,935 4,258
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$46,544 $50,639
======= =======
</TABLE>
See accompanying notes.
3
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MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
JUNE 30,
1995 MARCH 31,
(UNAUDITED) 1995
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<S> <C> <C>
CURRENT LIABILITIES:
Accounts Payable and accrued liabilities $ 4,130 $ 5,089
Current portion of long-term debt 307 307
Compensation accruals 282 411
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Total current liabilities 4,719 5,807
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LONG-TERM DEBT, net of current portion 8,333 8,408
======= =======
COMMITMENTS AND CONTINGENCIES (Note 2)
SHAREHOLDERS EQUITY:
Common stock, $.01 par value,
20,000,000 shares authorized,
12,171,975 and 11,999,561 shares
issued and outstanding, respectively 122 120
Additional paid-in-capital 79,920 78,422
Retained deficit (45,990) (41,472)
Unrealized loss on available-for-sale securities (32) (118)
Less notes receivable from sale of common stock (469) (469)
Less treasury stock, at cost (59) (59)
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Total shareholders' equity 33,492 36,424
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$46,544 $50,639
======= =======
</TABLE>
See accompanying notes.
4
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MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
1995 1994
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<S> <C> <C>
REVENUES:
Revenues under collaborative agreements $ 312 $ -
Product Revenues 28 509
License Fees 10 25
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350 534
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RESEARCH AND DEVELOPMENT COSTS:
Compensation 1,286 1,833
Equipment and supplies 482 711
Outside research, preclinical and clinical trials 270 535
Legal, professional and consulting 345 348
Occupancy costs 365 358
Other 448 929
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3,196 4,714
COST OF PRODUCTS SOLD 106 343
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 1,588 1,604
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Total operating costs and expenses 4,890 6,661
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Loss from operations (4,540) (6,127)
INTEREST EXPENSE (203) (107)
INTEREST INCOME 225 321
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NET LOSS $(4,518) $(5,913)
======= =======
NET LOSS PER COMMON SHARE $ (0.37) $ (0.49)
======= =======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 12,113 11,996
======= =======
</TABLE>
See accompanying notes.
5
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MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
(Unaudited; in thousands)
<TABLE>
<CAPTION>
1995 1994
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($4,518) ($5,913)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 649 912
Loss on disposals of property and equipment 11 -
Changes in operating assets and liabilities:
Receivables 2,653 33
Inventories (157) 51
Prepaid expenses and other assets 169 95
Accounts payable and accrued liabilities 541 420
Compensation accruals (129) 15
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Cash used in operating activities (781) (4,387)
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (1,561) (187)
Proceeds from sale of property and equipment 7 -
Additions to patents and license rights (45) -
Increase of other assets (3) -
Decrease in marketable securities (215) 1,850
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Cash provided by (used in) investing activities (1,817) 1,663
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CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common shares - 183
Long-term debt proceeds - 5,000
Principal payments on long-term debt (75) (31)
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Cash provided by (used in) financing activities (75) 5,152
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INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (2,673) 2,428
CASH AND CASH EQUIVALENTS, beginning of period 3,882 1,557
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CASH AND CASH EQUIVALENTS, end of period $ 1,209 $ 3,985
======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest income received $ 232 $ 395
======= =======
Interest paid $ 202 $ 106
======= =======
</TABLE>
See accompanying notes.
6
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION--
The Notes to the Consolidated Financial Statements of Molecular Biosystems,
Inc. (the "Company") were submitted with the Company's Form 10-K for the
year ended March 31, 1995 and should be read in conjunction with this Form
10-Q.
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 June 30, 1995, and the results of
its operations and its cash flows for the three-month period ended June 30,
1995 and June 30, 1994, have been made. The results of operations for
these interim periods are not necessarily indicative of the operating
results for the full year.
(2) CONTINGENCIES--
In May 1993 the Company entered into an exclusive license agreement with
Bracco S.p.A. of Milan, Italy, for the distribution rights in Europe and
the former Soviet Union to the Company's proprietary oral ultrasound agent
for imaging the gastrointestinal tract. At that time Bracco paid the
Company a license fee of $2 million and undertook certain developmental
obligations in the territory. In March 1994, Bracco notified the Company
that it desired to rescind the agreement and demanded that the Company
return the license fee. The Company denied that Bracco was entitled to
rescind the agreement or to the return of any portion of the license fee,
and notified Bracco that it regarded Bracco's notice of rescission as a
breach of contract. In January 1995, Bracco filed a demand for arbitration
claiming return of the $2 million license fee, in addition to other
monetary relief. The Company has filed a response denying the material
allegations of Bracco's demand, and has also filed a counterdemand asking
for damages in the amount of at least $5.5 million and other monetary
relief, claiming that Bracco's purported rescission was in bad faith and
resulted from its acquisition of the exclusive licensee of a competing
agent. The Company also claims that the purported rescission was wrongful
and a breach of the exclusive license. The Company believes that it will
prevail on Bracco's claims. The Company stresses, however, that the course
of arbitration cannot be predicted. In any event, the Company does not
believe an unfavorable ruling in arbitration would have a material adverse
impact on its financial condition.
(3) STOCK SETTLEMENT--
In June 1994, the United States District Court for the Southern District of
California granted final approval to an agreement settling a class action
complaint against the Company, certain of its officers and all of the
members of its Board of Directors (SHERMAN V. WIDDER, ET AL., No. TS 92-
1827-IEG (M)) alleging violations of the Securities Exchange Act of 1934
and California securities laws. Part of the settlement agreement provided
for the Company to issue shares of MBI's common stock worth $1.5 million to
qualifying class members. In May 1995, the stock was transferred to the
qualifying class members.
7
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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 and the Company's
consolidated financial statements and management's discussion and analysis of
financial condition and results of operations in its Annual Report for the
year ended March 31, 1995.
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 June 30, 1995, the Company had net working
capital of $17.0 million compared to $20.9 million at March 31, 1995. Cash
and current marketable securities were $17.3 million at June 30, 1995.
For the next several years, the Company expects to incur substantial
additional expenditures associated with product development. Product revenues
from sales of ALBUNEX-R- 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 and the interest earned thereon to fund its
operations and capital spending needs. The Company expects that it will need
to raise additional funds. The Company may pursue a number of options to
raise these additional funds including borrowings, lease arrangements,
collaborative research and development arrangements with pharmaceutical
companies, the licensing of product rights to third parties, or additional
public and private financing, as anticipated capital requirements change as a
result of strategic, competitive, technological and regulatory factors.
There can be no assurance that funds from these sources will be available on
favorable terms, if at all.
RESULTS OF CONTINUING OPERATIONS
REVENUES. Revenues under collaborative agreements have been the primary
source of revenues for the Company in the past. The Company has achieved
substantially all of the milestones in these agreements and does not
anticipate earning any additional milestone payments under its existing
distribution agreements for ALBUNEX-R- other than those based upon the
first-year product sales. Of the milestones earned, $750,000 had not yet
been paid to the Company at June 30, 1995; this amount is included in
accounts receivable as of that date.
Under the Mallinckrodt contract, the Company is entitled to receive
additional payments in an amount equivalent to first-year product sales of
ALBUNEX-R-. The Company earned $657,000 through approximately the first eight
months of sales under this provision of which $312,000 was earned in the
quarter ended June 30, 1995. In the previous quarter ended March 31, 1995,
the Company had earned $207,000 in connection with this bonus. Any amounts
earned under this provision of the contract will not be paid until 60 days
after the end of the twelve-month period, in December 1995.
8
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Total revenues were $350,000 and $534,000 for the three months ended
June 30, 1995 and 1994, respectively. Revenues in the current year consist
primarily of the Mallinckrodt bonus discussed above. Revenues for the prior
year three-month period consisted primarily of product sales to Shionogi, the
Company's Japanese marketing partner.
COST OF PRODUCTS SOLD. Cost of products sold totaled $106,000 in the
period ending June 30, 1995, resulting in a negative gross profit margin due
to the current low levels of production. Cost of products sold totaled
$343,000 in the period ending June 30, 1994, resulting in a gross profit
margin of 33%. The higher gross profit margin percentage in the prior year
was due to greater levels of production and a larger proportion of sales to
Japan which are currently sold at greater profit margins. The Company
anticipates an increase in its gross profit margins for both its U.S. and
Japanese sales at such time as ALBUNEX-R- sales volume increases.
RESEARCH AND DEVELOPMENT COSTS. For the three months ended June 30,
1995, the Company's research and development costs totaled $3,196,000, or
approximately 65% of total operating costs and expenses, as compared to
$4,714,000 and 71% for the same period in 1994. This decrease is due in large
part to the decision the Company made to focus its research and development
efforts primarily on its ultrasound contrast agents and reduce its staffing
by approximately twenty five percent. The decision has resulted in
decreased compensation costs, equipment and supplies costs and other costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the three months ended
June 30, 1995, the Company's selling, general and administrative expenses
totaled $1,588,000, or approximately 32% of total operating costs and
expenses, as compared to $1,604,000 and 24% for the same period in 1994.
Selling, general and administrative expenses during the quarter included
increased insurance costs and other costs which were recognized in the first
quarter of this year which were not incurred until the second quarter last
year. Without these differences, total selling, general and administrative
expenses would have declined $149,000 or 9%.
INTEREST EXPENSE AND INTEREST INCOME. Interest expense for the three
months ended June 30, 1995 and 1994 consists of mortgage interest on the
Company's buildings. Interest expense is higher in the current period due to
a note payable which the Company entered into in May 1994 to finance the
purchase of two unimproved buildings and underlying land in December 1993.
The decrease in interest income in the current year is due primarily to
lower average cash and marketable securities balances. 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 bonds,
certificates of deposit and commercial paper.
PROSPECTIVE INFORMATION
REVENUES AND OPERATING EXPENSES.
The Company anticipates that its current capital resources, including
expected revenues from the sales of ALBUNEX-R- and related bonuses to be paid
by Mallinckrodt on the first twelve
9
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months sales in the United States should be adequate to satisfy its capital
requirements and fund current and planned operations for the next twelve
months. As a result, the Company is actively seeking other sources of
financing. The Company's future capital requirements will depend on many
factors but will be heavily reliant on the market acceptance of ALBUNEX-R- in
the United States, the re-launch date of the product in Japan and the launch
of the product in Europe.
SALES OF ALBUNEX-R-. In October 1993, ALBUNEX-R- was approved for
marketing in Japan and became the first ultrasound contrast agent available
in that country. As initial sales were below the Company's expectations,
Shionogi and the Company engaged in an intensive cooperative study of the
situation. However, to increase the likelihood of improved sales performance
in the future, Shionogi, with the Company's concurrence, decided during the
first quarter of fiscal 1995 to curtail promotional efforts and limit current
Japanese sales to selected accounts until these issues have been resolved.
The Company has had limited sales to Shionogi since the second quarter of
fiscal 1995. The Company is continuing to work with Shionogi to resolve all
issues regarding the Japanese re-launch.
In August 1994, the Company received clearance for the marketing and
sale of ALBUNEX-R- in the United States. Product sales from the Company to
Mallinckrodt, the Company's distributor in the United States, totaled $1.1
million for the first eight months the product has been marketed in the
United States. Product sales are booked by the Company at forty percent of
the sales price Mallinckrodt sells the product to its customers. End-user
sales in the U.S. (by Mallinckrodt) continue to increase. End-user sales
increased from $138,000 for the quarter ended December 31, 1994 to $207,000
and $312,000, for the quarters ended March 31, 1995 and June 30, 1995,
respectively. Under the Mallinckrodt contract, the Company is entitled to
receive additional payments in an amount equivalent to first year product
sales of ALBUNEX-R-. The Company will continue to earn this bonus through
mid-October 1995. Any amounts earned under this provision of the contract
will not be paid until 60 days after the end of the twelve-month period, in
December 1995.
Nycomed, the Company's European licensee, has received approval to
market ALBUNEX-R- in Sweden, Finland and in the United Kingdom. Nycomed has
filed for applications in the remaining European countries and anticipates
filing other approval applications in selected countries outside the European
community. Although approved, Nycomed has not yet begun to market ALBUNEX-R-
in Europe.
TECHNOLOGICAL DEVELOPMENT. With the exception of ALBUNEX-R-, the
Company's technologies must be regarded as being at a very early stage of
development. Like any new technology, 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 may dictate
changes in the mix 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
10
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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.
PART II -- OTHER INFORMATION
Item 1-5 - The Company has nothing to report with respect to these items
during the quarter ended June 30. 1995.
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
June 30, 1995.
11
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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
Vice President Finance and
Chief Financial Officer
8/10/95
------------------
Date
12
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<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of Molecular Biosystems, Inc. dated June 30,
1995 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> JUN-30-1995
<CASH> 1,209
<SECURITIES> 16,137
<RECEIVABLES> 2,339
<ALLOWANCES> 0
<INVENTORY> 1,551
<CURRENT-ASSETS> 21,697
<PP&E> 27,112
<DEPRECIATION> 6,200
<TOTAL-ASSETS> 46,544
<CURRENT-LIABILITIES> 4,719
<BONDS> 8,333
<COMMON> 122
0
0
<OTHER-SE> 33,370
<TOTAL-LIABILITY-AND-EQUITY> 46,544
<SALES> 28
<TOTAL-REVENUES> 350
<CGS> 106
<TOTAL-COSTS> 4,890
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 203
<INCOME-PRETAX> (4,518)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,518)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,518)
<EPS-PRIMARY> (.37)
<EPS-DILUTED> 0
</TABLE>
