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 September 30, 1996
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 1-10546
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 October 1, 1996 was 17,585,215 shares.
<PAGE>
INDEX PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
1. Consolidated Balance Sheets 3
March 31, 1996 and September 30, 1996
2. Consolidated Statements of Operations 4
Three Months Ended September 30, 1995 and 1996 Six Months Ended
September 30, 1995 and 1996
3. Consolidated Statements of Cash Flows 5
Six Months Ended September 30, 1995 and 1996
4. Notes to Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
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 11
<PAGE>
<TABLE>
<CAPTION>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30,
March 31, 1996
1996 (Unaudited)
-------------- ----------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 12,542 $ 981
Marketable securities, available-for-sale 8,028 42,494
Accounts and notes receivable 260 167
License rights 3,000 11,500
Inventories 622 403
Prepaid expenses and other assets 406 380
-------------- -------------
Total current assets 24,858 55,925
-------------- -------------
Property and equipment, at cost:
Building and improvements 14,158 14,184
Equipment, furniture and fixtures 3,943 4,613
Construction in progress 941 756
-------------- -------------
19,042 19,553
Less: Accumulated depreciation and amortization 5,322 5,961
-------------- -------------
Total property and equipment 13,720 13,592
-------------- -------------
Other assets:
Patents and license rights, net of amortization
$932 and $1,022, respectively 297 222
Certificate of deposit, pledged 3,000 3,000
Other assets, net 1,954 1,940
-------------- -------------
Total other assets 5,251 5,162
-------------- -------------
$ 43,829 $ 74,679
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,262 $ 1,262
Accounts payable and accrued liabilities 3,964 3,906
Compensation accruals 1,031 970
Deferred contract revenue - 1,090
-------------- -------------
Total current liabilities 6,257 7,228
-------------- -------------
Long-term debt, net of current portion 8,610 7,983
Other noncurrent liabilities - 3,500
Commitments and contingencies (Note 2)
Stockholders' equity:
Common Stock, $.01 par value, 20,000,000 shares
authorized, 13,296,186 and 17,585,215 shares
issued and outstanding, respectively 133 176
Additional paid-in capital 91,468 126,519
Accumulated deficit (62,185) (70,262)
Unrealized loss on available-for-sale securities (6) (17)
Less notes receivable from sale of Common Stock (281) (281)
Less 18,970 shares of treasury stock, at cost (167) (167)
-------------- -------------
Total stockholders' equity 28,962 55,968
-------------- -------------
$ 43,829 $ 74,679
============== =============
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
September 30, September 30,
1995 1996 1995 1996
----------- ------------- ------------ -------------
Revenues:
<S> <C> <C> <C> <C>
Revenues under collaborative agreements $ 87 $ 1,159 $ 399 $ 2,159
Product revenues 246 32 274 210
License fees 15 25 25 25
----------- ------------- ------------ -------------
348 1,216 698 2,394
----------- ------------- ------------ -------------
Operating expenses:
Research and development costs 3,386 2,328 6,582 4,964
Costs of products sold 618 1,339 724 2,629
Selling, general and administrative expenses 1,524 1,798 3,112 3,563
----------- ------------- ------------ -------------
5,528 5,465 10,418 11,156
----------- ------------- ------------ -------------
Loss from operations (5,180) (4,249) (9,720) (8,762)
Interest expense (198) (214) (401) (413)
Interest income 243 770 468 1,098
----------- ------------- ------------ -------------
Net loss $ (5,135) $ (3,693) $ (9,653) $ (8,077)
=========== ============= ============ =============
Loss per common share $ 0.42) $ (0.21) $ (0.79) $ (0.50)
=========== ============= ============ =============
Weighted average common shares outstanding 12,196 17,560 12,155 16,181
=========== ============= ============ =============
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; dollars in thousands)
Six Months Ended
September 30,
1995 1996
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (9,653) $ (8,077)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,434 729
Loss on disposals of property and equipment 12 -
Changes in operating assets and liabilities:
Receivables 4,199 93
Inventories 293 219
Prepaid expenses and other assets 255 26
Accounts payable and accrued liabilities (530) 3,442
Deferred contract revenues - 1,090
Compensation accruals 180 (61)
------------ -------------
Cash used in operating activities (3,810) (2,539)
------------ -------------
Cash flows from investing activities:
Purchases of property and equipment (1,778) (511)
Proceeds from sale of property and equipment 7 -
Additions to patents and license rights (45) (15)
Purchase of license rights from Shiongi - (8,500)
Decrease in other assets 10 14
(Increase) decrease in marketable securities 4,489 (34,477)
------------ -------------
Cash provided by (used in) investing activities 2,683 (43,489)
------------ -------------
Cash flows from financing activities:
Net proceeds from public offering of Common Stock - 34,098
Net proceeds from sale of Common Stock 11,620 -
Net proceeds from stock options exercised - 996
Principal payments on long-term debt (150) (627)
------------ -------------
Cash provided by financing activities 11,470 34,467
------------ -------------
Increase (decrease) in cash and cash equivalents 10,343 (11,561)
Cash and cash equivalents, beginning of period 3,882 12,542
------------ -------------
Cash and cash equivalents, end of period $ 14,225 $ 981
============ =============
Supplemental cash flow disclosures:
Interest income received $ 510 $ 874
============ =============
Interest paid $ 398 $ 410
============ =============
See accompanying notes.
</TABLE>
<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, 1996 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 September 30, 1996, and the results
of its operations for the three- and six- months ended September 30, 1995
and 1996, and its cash flows for the six-months ended September 30, 1995
and 1996, have been made. The results of operations for these interim
periods are not necessarily indicative of the operating results for the
full year.
Effective April 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123 ("SFAS"), Accounting for Stock-Based
Compensation, which provides companies the option to account for equity
instrument awards based on their estimated fair value at the date of grant
resulting in a charge to income in the periods the awards are expected to
vest. However, companies are permitted to continue to apply APB Opinion No.
25, which recognizes compensation cost based on the intrinsic value of the
equity award. The Company will continue to apply APB Opinion No. 25 and
will present pro forma footnote disclosure describing the effect to the
Company's net income and net income per share data as permitted by SFAS
123.
(2) Shionogi Settlement Agreement-
In September 1996, the Company announced that it had entered into an
agreement with Shionogi & Co., Ltd. ("Shionogi") pursuant to which the
Company reacquired all rights to manufacture, market and sell its
ALBUNEX(R) family of products in the territory, consisting of Japan, Taiwan
and South Korea, formerly exclusively licensed to Shionogi. This agreement
settles an outstanding dispute between the two companies concerning the
license and distribution agreement for ALBUNEX(R) and resulted in the
dismissal of all claims raised by the companies against each other in the
pending arbitration proceeding. Under the agreement, the Company paid $3
million to Shionogi in September 1996 and will pay an additional $5.5
million as follows: $2 million in September 1997, $2 million in September
1998 and $1.5 million in September 1999. The Company is currently in
discussions with potential licensees for Shionogi's territory.
(3) Stockholders' Equity-
On May 30, 1996, the Company completed a public offering of 4.1 million
shares of Common Stock at $9.00 per share. Net proceeds from this offering
(after deducting underwriting discounts and commissions and offering
expenses) amounted to approximately $34.1 million.
<PAGE>
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 (1) the current consolidated financial statements and (2) the
Company's consolidated financial statements and management's discussion and
analysis of financial condition and results of operations in its Annual Report
on Form 10-K for the year ended March 31, 1996.
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, research and development
activities and similar matters. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements. In order to comply
with the terms of the safe harbor, the Company notes that a variety of factors
could cause the Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development and results of the Company's business
include the following: difficulties and delays with respect to the performance
of clinical trials; delays by regulatory authorities; manufacturing problems;
difficulties and delays with respect to marketing and sales activities; and
general uncertainties accompanying the development and introduction of new
products.
Liquidity and Capital Resources
On May 30, 1996, the Company completed a public offering of 4.1 million
shares of Common Stock at $9.00 per share. Net proceeds from this offering
(after deducting underwriting discounts and commissions and offering expenses)
amounted to approximately $34.1 million.
At September 30, 1996, the Company had net working capital of $48.7
million compared to $18.6 million at March 31, 1996. Cash, cash equivalents,
marketable securities and certificates of deposit pledged were $46.5 million at
September 30, 1996 compared to $23.5 million at March 31, 1996. For the next
several years, the Company expects to incur substantial additional expenditures
associated with product development. The Company anticipates that its existing
resources, including the proceeds of the public offering in May 1996 and
interest thereon, plus payments under its existing collaborative agreements,
will enable the Company to fund its operations for at least the next two years.
The Company continually reviews its product development activities in an effort
to allocate its resources to those products that the Company believes have the
greatest commercial potential. Factors considered by the Company in determining
the products to pursue may include, but are not limited to, the projected
markets, potential for regulatory approval, technical feasibility and estimated
costs to bring the product to the market. Based upon these factors, the Company
may from time to time reallocate its resources among its product development
activities. The Company may pursue a number of options to raise 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 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.
In September 1996, the Company announced that it had entered into an
agreement with Shionogi pursuant to which the Company reacquired all rights to
manufacture, market and sell its ALBUNEX(R) family of products in the territory,
consisting of Japan, Taiwan and South Korea, formerly exclusively licensed to
Shionogi. This agreement settled an outstanding dispute between the two
companies concerning the license and distribution agreement for ALBUNEX(R) and
resulted in the dismissal of all claims raised by the companies against each
other in the pending arbitration proceeding. Under the agreement, the Company
paid $3 million to Shionogi and will pay an additional $5.5 million over the
next three years. The Company is currently in discussions with potential
licensees for Shionogi's territory. As a result, included in current assets
under license rights is $8.5 million which represents the Company's rights in
the former Shionogi territory. Also included under license rights is $3 million
related to the Company's reacquisition of the European territory rights from
Nycomed Imaging AS ("Nycomed"). The Company believes that future licensing
agreements for each of these territories will be in excess of the amounts
recorded as assets.
Results of Operations
Revenues Under Collaborative Agreements. Revenues under collaborative
agreements were $1.2 million and $2.2 million for the three-month and six-month
periods ended September 30, 1996, compared to $87,000 and $399,000 for both of
the same periods in the prior year. These revenues in the current year consist
solely of quarterly payments to support clinical trials, regulatory submissions
and product development received from Mallinckrodt Medical Inc. ("Mallinckrodt")
under the Company's amended agreement with Mallinckrodt which the Company
entered into in September 1995. The prior year revenue is attributable to a
bonus paid by Mallinckrodt under the original license agreement equivalent to
Mallinckrodt's first year product sales of ALBUNEX(R) at its sales price to end
users of the product.
Product Revenues. Product revenues are based upon the Company's sales
to Mallinckrodt and Shionogi and are recognized upon shipment of the product.
The transfer prices for the Company's sales of ALBUNEX(R) to Mallinckrodt and
Shionogi are determined under the Company's respective agreements with them and
are equal to 40% of Mallinckrodt's net sales price to its end users of the
product and 30% of Shionogi's net sales price to its end users. Product revenues
were $32,000 and $210,000 for the three-month and six-month periods ended
September 30, 1996, compared to $246,000 and $274,000 for the same periods in
the prior year.
Costs of Products Sold. Cost of products sold totaled $1.3 million and
$2.6 million for the three-month and six-month periods ended September 30, 1996,
resulting in a negative gross profit margin. This negative gross profit margin
was due to the fact that the current low levels of production are insufficient
to cover the Company's fixed manufacturing overhead expenses. For the same
periods in the prior year, cost of products sold totaled $618,000 and $724,000,
respectively. In the prior year, certain expenses associated with the
manufacturing of the product had been recorded as research and development costs
as they represented the cost of developing the Company's manufacturing process.
Because the Company has left the pilot manufacturing phase, these costs are now
classified as cost of goods sold. The Company anticipates an increase in its
gross profit margins if and when ALBUNEX(R) sales volume increases and if and
when FS069, the Company's second generation ultrasound imaging agent, receives
regulatory approval and obtains market acceptance. Thus permitting the fixed
costs included in manufacturing overhead to be allocated over a larger number of
vials produced. The amount of any increase in the Company's margins, and the
time required by the Company to achieve higher margins, are highly dependent on
the market acceptance of ALBUNEX(R) and FS069 and are therefore uncertain.
Research and Development Costs. For the three-month and six-month
periods ended September 30, 1996, the Company's research and development costs
totaled $2.3 million and $4.9 million, as compared to $3.4 million and $6.6
million for the same periods in 1995. This current decrease of 25% is due to the
fact that the Company is no longer incurring significant costs related to the
development of its manufacturing process as in prior years.
Selling, General and Administrative Expenses. For the three-month and
six-month periods ended September 30, 1996, the Company's selling, general and
administrative expenses totaled $1.8 million and $3.6 million, as compared to
$1.5 million and $3.1 million for the same period in 1995. This increase in the
current year is attributable in part to legal expenses related to the
arbitration with Shionogi. See discussion under "Prospective Information." The
increase is also attributable to increased compensation costs.
Interest Expense and Interest Income. Interest expense for the
three-month and six-month periods ended September 30, 1996 amounted to $214,000
and $413,000, respectively, and consisted of mortgage interest on the Company's
manufacturing building and interest on a second note payable which is secured by
the tangible assets of the Company. The interest rate on the mortgage was 8% in
September 1996. Interest expense for the same periods in the prior year amounted
to $198,000 and $401,000 and included interest on a loan that the Company
obtained in May 1994 to finance the purchase of two unimproved buildings and
underlying land in December 1993. In March 1996, after the buildings were sold,
the loan was restructured into the second note payable mentioned above, in the
amount of $6.0 million, which bears interest at prime plus 1% and is payable in
monthly installments of principal plus interest over five years. The interest
rate on the note was 9.25% in September 1996.
The increase in interest income in the current year is due to higher
average cash and marketable securities balances as a result of the public
offering in May 1996 as discussed above.
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
In October 1996, the Company filed a pre-marketing approval application
with the U.S. Food and Drug Administration ("FDA") for FS069. FS069 is designed
to enhance ultrasound imaging by enabling physicians to visualize blood flow and
enhance resolution of anatomical structures in those patients with suboptimal
non-contrast ultrasound exams. This submission involved studies for cardiac
function focusing on enhancing endocardial border delineation and secondarily
determining the ability of the agent to opacify the left ventricular chamber.
In September 1995, the Company entered into an amended and restated
distribution agreement with Mallinckrodt which will provide the company with
between $33 million and $47.5 million. This amended distribution agreement
modifies the original December 1988 distribution agreement between the Company
and Mallinckrodt in a number of respects. Under the amended agreement, the
geographical scope of Mallinckrodt's exclusive right to market the Company's
proprietary contrast agent for transpulmonary cardiac ultrasound imaging,
ALBUNEX(R), the Company's second generation ultrasound contrast agent, and
related products was expanded to include all of the countries of the world other
than those covered by the Company's license agreements with Shionogi and
Nycomed. The duration of Mallinckrodt's exclusive right was also extended from
October 1999 until the later of July 1, 2003 or three years after the date that
Company obtains approval from the FDA to market FS069 for an intravenous
myocardial perfusion indication (use).
Under the terms of the agreement, Mallinckrodt will pay the Company $20
million over four years to support clinical trials of FS069, related regulatory
submissions and associated product development. These payments will be made in
16 quarterly installments starting at $1 million for the first four quarters,
$1.25 million for the following eight quarters and $1.5 million for the final
four quarters. The first five quarterly payments have been received by the
Company.
The amended distribution agreement requires the Company to spend at
least $10 million of this $20 million on clinical trials to support regulatory
filings with the FDA for cardiac indications of FS069. After the Company has
spent this $10 million, the amended distribution agreement requires the Company
and Mallinckrodt to share equally in the cost of any additional clinical trials
of FS069 in the United States, up to a maximum total of $5 million ($2.5 million
each).
The Company's expenditure of this $10 million will be made in
accordance with the directions of a joint steering committee which the Company
and Mallinckrodt established in order to expedite the development and regulatory
approval of FS069 by enabling the parties to share their expertise relating to
clinical trials and the regulatory approval process. The Company and
Mallinckrodt each appoint two of the four members of the joint steering
committee.
The amended distribution agreement also provides for potential payments
to the Company of up to $12 million upon the satisfaction of certain milestones.
There can be no assurance, however, that all or any of these milestones will be
satisfied.
In addition, the amended distribution agreement grants the Company the
option (at its own discretion) to repurchase all of the shares of the Company's
common stock that Mallinckrodt purchased under the investment agreement for $45
million, subject to various price adjustments. This option is exercisable
beginning the later of July 1, 2000 or the date that the Company obtains
approval from the FDA to market FS069 for an intravenous myocardial perfusion
indication and ending on the later of June 30, 2003 or three years after the
date that the Company obtains approval from the FDA to market FS069 for an
intravenous myocardial perfusion. If the Company exercises this option, the
Company may co-market ALBUNEX(R), FS069 and related products in all of the
countries covered by the amended distribution agreement.
In connection with the amended distribution agreement, the Company also
entered into an investment agreement whereby the Company sold 1,118,761
unregistered shares of its common stock to Mallinckrodt for $13 million, or a
price of $11.62 per share before related costs.
In October 1995, the Company entered into an agreement whereby it
reacquired all rights to INFOSON(R) (the European designation for ALBUNEX(R)),
FS069 and related products from Nycomed, the Company's European licensee.
Nycomed had received approval to market INFOSON(R) in Sweden, Finland and the
United Kingdom and had filed applications in several other European countries,
but had not yet begun to market the product when the Company reacquired the
product rights. The Company is currently in discussions with another potential
licensee for Nycomed's territory, which includes Europe, Africa, parts of Asia
and India.
PART II - OTHER INFORMATION
Item 1-5 - The Company has nothing to report with respect to these items during
the quarter ended September 30, 1996.
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
September 30, 1996.
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 Wills
Gerard A. Wills
Vice President Finance and
Chief Financial Officer
11/1/96
Date
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information
extracted from the consolidated financial statements of Molecular Biosystems,
Inc. dated September 30, 1996 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> SEP-30-1996
<CASH> 981
<SECURITIES> 42494
<RECEIVABLES> 167
<ALLOWANCES> 0
<INVENTORY> 403
<CURRENT-ASSETS> 55,925
<PP&E> 19,553
<DEPRECIATION> 5,961
<TOTAL-ASSETS> 74,679
<CURRENT-LIABILITIES> 7,228
<BONDS> 0
0
0
<COMMON> 176
<OTHER-SE> 55,792
<TOTAL-LIABILITY-AND-EQUITY> 74,679
<SALES> 210
<TOTAL-REVENUES> 2,394
<CGS> 2,629
<TOTAL-COSTS> 11,156
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 413
<INCOME-PRETAX> (8,077)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,077)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,077)
<EPS-PRIMARY> (0.50)
<EPS-DILUTED> 0
</TABLE>
