<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(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, 1999
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 1-10285
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BIOMAGNETIC TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
California 95-2647755
- ------------------------------------ ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9727 Pacific Heights Boulevard,
San Diego, California 92121-3719
- ------------------------------------------ ---------------------------------
(Address of principal executive offices) (zip code)
(858) 453-6300
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Registrant's telephone number, including area code)
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(Former name, former address and formal fiscal year,
if changed since last report)
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
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court.
[ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of August 12, 1999 Registrant had only one class of common stock of
which there were 83,367,112 shares outstanding.
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIOMAGNETIC TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1999 1998
----------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,568 $ 2,282
Short-term investments 3,914 10,082
Restricted cash 190 138
Accounts receivable, less allowance for
doubtful accounts of $110 630 932
Interest receivable 47 -
Inventories 3,274 2,991
Prepaid expenses and other 335 271
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Total current assets 9,958 16,696
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Net property and equipment 961 304
Restricted cash 54 187
Other assets 121 156
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TOTAL ASSETS $ 11,094 $ 17,343
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 843 $ 783
Accrued liabilities 739 748
Accrued salaries and employee benefits 516 461
Customer deposits 1,714 2,909
Deferred revenue 459 657
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Total current liabilities 4,271 5,558
Other long-term liabilities 157 216
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Total liabilities 4,428 5,774
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Commitments and contingencies
SHAREHOLDERS' EQUITY
Common stock -- no par value, 200,000,000 shares
authorized; 83,367,112 shares issued and outstanding 99,392 99,392
Additional paid-in capital 3,000 3,000
Accumulated deficit (95,726) (90,823)
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Total shareholders' equity 6,666 11,569
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 11,094 $ 17,343
============== ==============
</TABLE>
See notes to consolidated condensed financial statements.
2
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BIOMAGNETIC TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per-share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Product $ 104 $ 416 $ 2,665 $ 2,040
Product services 103 127 294 467
Contract research 26 73 41 169
-------- -------- -------- --------
233 616 3,000 2,676
COST OF REVENUES
Product 444 232 1,930 1,508
Product services 51 107 118 254
Contract research 23 74 37 165
-------- -------- -------- --------
518 413 2,085 1,927
-------- -------- -------- --------
GROSS MARGIN (285) 203 915 749
OPERATING EXPENSES
Research and development 981 501 2,826 1,177
Marketing, general and 1,055 644 3,277 2,426
administrative
-------- -------- -------- --------
2,036 1,145 6,103 3,603
-------- -------- -------- --------
OPERATING LOSS (2,321) (942) (5,188) (2,854)
Interest and other income 43 (84) 285 (54)
(expense), net
-------- -------- -------- --------
NET LOSS $ (2,278) $ (1,026) $ (4,903) $ (2,908)
======== ======== ======== ========
BASIC AND DILUTED NET LOSS PER SHARE
$ (0.03) $ (0.02) $ (0.06) $ (0.06)
======== ======== ======== ========
Weighted average number of
shares outstanding 83,367 53,367 83,367 51,508
======== ======== ======== ========
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE>
BIOMAGNETIC TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
1999 1998
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(4,903) $(2,908)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 109 146
Changes in operating assets and liabilities:
Restricted cash 81 366
Prepaid expenses and other (64) 85
Accounts receivable 302 (554)
Inventories (283) (289)
Other assets 35 (40)
Accounts payable 60 (15)
Accrued liabilities 46 (70)
Customer deposits (1,195) (63)
Deferred revenue (315) (694)
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Net cash used in operating activities (6,127) (4,036)
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INVESTING ACTIVITIES
Net change in short-term investments 6,168
Interest receivable (47) --
Payments for property and equipment (708) (39)
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Net cash provided by (used in)
investing activities 5,413 (39)
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FINANCING ACTIVITIES
Proceeds from notes payable to shareholder -- 2,225
Proceeds from issuances of common stock -- 866
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Net cash provided by financing activities -- 3,091
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NET DECREASE IN CASH AND CASH EQUIVALENTS (714) (984)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,282 1,229
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,568 $ 245
======= =======
</TABLE>
See notes to consolidated condensed financial statements.
4
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BIOMAGNETIC TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
1999 1998
---------- ----------
<S> <C> <C>
Note payable to shareholder exchanged
for common stock $ -- $ 1,700
Accrued interest on note payable to shareholder
exchanged for common stock $ -- $ 38
Accounts payable to shareholder
exchanged for common stock $ -- $ 219
Property and equipment acquired under capital
lease obligation $ 58 $ --
</TABLE>
See notes to consolidated condensed financial statements.
5
<PAGE>
BIOMAGNETIC TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited consolidated condensed financial statements of Biomagnetic
Technologies, Inc. and its subsidiary, Biomagnetic Technologies, GmbH, an
inactive wholly owned German entity, (together, the "Company", "we", "our",
or "BTi") have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company suggests that these
financial statements be read in conjunction with the financial statements and
notes thereto included in the Company's annual report on Form 10-K for the
fiscal year ended September 30, 1998.
In the opinion of the Company, the accompanying unaudited consolidated
condensed financial statements contain all adjustments, consisting only of
normal recurring entries, necessary to present fairly its financial position
at June 30, 1999 and the results of its operations and its cash flows for the
periods presented.
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Certain prior period balances have been reclassified to conform to the
current period presentation.
2. BUSINESS RISKS AND UNCERTAINTIES
Biomagnetic Technologies, Inc., founded in 1970 as a California corporation,
is engaged primarily in the business of developing, manufacturing and selling
innovative functional imaging systems to medical institutions located in the
United States, Europe and the Far East. The magnetic source imaging ("MSI")
systems developed by the Company measure magnetic fields created by the human
body for the noninvasive diagnosis of a broad range of disorders.
To date, the Company has been engaged principally in research and development
activities, and has made only low volume sales to medical research
institutions. The Company is currently dependent on its Magnes(R) 2500 WH
system for clinical market sales, for which there are currently limited
clinical applications. Additional clinical applications testing needs to be
conducted with the MSI system at major clinical research centers before a
substantial commercial clinical market emerges. The Company is currently
developing its Magnes 3600 WH system, which is targeted primarily for
research markets, and must continue to depend upon sales to this market to
meet its revenue goals for the very near-term. There can be no assurance that
a substantial commercial market will develop for diagnostic or monitoring
uses of the Company's MSI systems or for the MSI industry to become viable
and profitable. A continued lack of clinical applications and commercial
market for the Company's MSI systems will have a material adverse impact on
the Company's financial position, results of operations and cash flows.
The Company's commercial success is also highly dependent on the availability
of reimbursement for procedures using the MSI system. To date, reimbursements
from third party payors are on a case-by-case basis. As of June 30, 1999,
there have been limited reimbursements from third party payors in the US.
Although the number of third party payors making reimbursements has
increased, there is no assurance that third party reimbursements will become
widely available. Reimbursements are not currently provided for MSI
procedures by the United States government, nor is there any assurance that
the US government will authorize or budget for such procedures in the future.
If widespread availability of reimbursement from the government and private
insurers is not achieved, the Company's financial position, results of
operations and cash flows would be materially adversely affected. The Company
also cannot predict what legislation relating to its business or the health
care industry may be enacted in the future, including legislation relating to
third party reimbursement, or what effect such legislation may have on its
financial position, results of operations and cash flows.
6
<PAGE>
The industry in which the Company operates is characterized by rapid
technological change. New products using other technologies or improvements
to existing products may reduce the size of the potential markets for the
Company's products, and may render them obsolete or non-competitive.
Competitors may develop new or different products using technology or imaging
modalities that may provide or be perceived as providing greater value than
the Company's products. Any such development could have a material adverse
effect on the Company's financial position, results of operations and cash
flows.
Additionally, there has been recently, and continues to be, ongoing
significant price competition from the Company's competitors for the
currently limited number of whole head systems being purchased worldwide.
This aggressive competition may affect future profitability of the Company,
the extent of which is not presently determinable.
For the quarter ended June 30, 1999, the Company incurred a net loss of
$2,278,000 and had negative cash flows from operations of $2,797,000. At June
30, 1999, the Company has an accumulated deficit of $95,726,000, net capital
of $6,666,000 and working capital of $5,687,000. The Company anticipates that
in fiscal 1999, operating and working capital requirements will substantially
exceed cash projected to be generated by product sales.
Based on its current operating plans, including anticipated product orders
and resulting revenues and cash receipts, capital expenditures, expected
working capital requirements and existing capital resources, the Company
anticipates that it will be able to fund its operations through the second
quarter of fiscal 2000. The realization of the Company's operating plans is
dependent upon its ability to successfully close a number of MSI system sales
in the current highly competitive market for the limited number of systems
being purchased worldwide. There can be no assurance that sufficient sales of
the Company's Magnes systems will be achieved in order to realize its current
operating plans. If these revenues are not achieved, the Company believes its
existing capital resources as of June 30, 1999 will be sufficient to meet its
obligations through calendar 1999 only. In either case, the Company must
continue to fund its operating needs, and is currently considering a number
of financing alternatives, such as corporate partnerships and the sale of
equity or debt securities. There can be no assurance that such financing will
be available on terms acceptable to the Company, if at all.
Additional risks and uncertainties include, but are not limited to,
satisfying customer performance requirements for our systems, unfavorable
medical industry trends, increased government regulations and requirements,
foreign exchange risks and Year 2000 issues. The reader is encouraged to
refer to the MD&A of this 10Q and the Company's other Securities and Exchange
Commission filings, including its most recent Form 10-K as of September 30,
1998, to ascertain the extent and magnitude of these and other risks and
uncertainties the Company may encounter.
3. FINANCING
In August 1998, the Company received total proceeds of $15,000,000 from the sale
of 30,000,000 unregistered shares of common stock at $.50 per share to offshore
investors pursuant to Regulation S. Dassesta International S.A., a major
shareholder of BTi since March 1995 purchased 10,000,000 shares. "La Caixa",
Caja de Ahorros y Pensiones de Barcelona, one of the leading financial
institutions of the Kingdom of Spain purchased 10,000,000 shares. A total of
2,000,000 shares were sold to Swisspartners Investment Network LTD, and the
remaining 8,000,000 shares were purchased by two European banks under the same
terms and conditions.
As of July 1998, the Company had borrowed $2,000,000 from Dassesta
International, S.A. The loan was a 180 day unsecured loan bearing interest at
8%. In August 1998, the Company paid off the total principal of $2,000,000 owed
to Dassesta plus $36,000 of related accrued interest using proceeds from the
August 1998 financing of $15,000,000.
4. BASIC AND DILUTED NET LOSS PER SHARE
Shares used in computing basic and diluted net loss per share include the
weighted average number of common shares outstanding. Common stock equivalents
are antidilutive and are excluded from the computation of basic and diluted net
loss per share.
7
<PAGE>
5. INVENTORIES
The composition of inventories is as follows:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1999 1998
---------- -------------
<S> <C> <C>
Raw materials $ 164 $ 163
Work-in process 3,110 2,328
Finished goods -- 500
--------- ---------
$ 3,274 $ 2,991
========== ==========
</TABLE>
The Company regularly evaluates the composition of its inventories and has
established reserves for estimated obsolete and excess inventories. The
values presented on here and on the Company's most recent balance sheets are
net of these reserve estimates.
6. CUSTOMER BACKLOG AND DELIVERY RISK
The Company's product backlog at June 30, 1999 amounted to $2,163,000 and is
composed primarily of orders for a 248 channel Magnes 3600 WH system and a
Magnes 1300 C cardiac system. Future cash payments to the Company pertaining to
backlog beyond cash deposits already received as of June 30, 1999 total
approximately $448,000. As sales of the Company's systems typically involve
transactions of $1 million or more, the backlog is expected to fluctuate
significantly from fiscal period to fiscal period depending upon timing of
orders received, installations completed, and customer acceptances received
during the reporting period.
7. SEGMENT INFORMATION
The Company operates in one segment that includes developing, manufacturing
and selling magnetic source imaging products. The overall market for the
Company's operations can be further divided into three overlapping
sub-segments: the basic research market, the applications research market,
and the commercial clinical market. To date, substantially all of the
Company's revenues have been derived from, and substantially all of the
Company's assets have been devoted to, the basic research market.
8. COMPREHENSIVE INCOME
The Company has no components of comprehensive income.
9. RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee (AcSEC) issued
AICPA Statement of Position (SOP) 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use." This statement provides
guidance on accounting for the costs of computer software developed or
obtained for internal use and identifies characteristics of internal-use
software and provides assistance in determining when computer software is for
internal use. SOP 98-1 is effective for fiscal years beginning after December
15, 1998, with earlier application permitted. The Company does not anticipate
the adoption of SOP 98-1 having a material impact on the Company's financial
position or results of operations.
In April 1998, AcSEC issued AICPA SOP 98-5, "Reporting on the Costs of
Start-Up Activities." This statement provides guidance on financial reporting
of start -up costs and organization costs and requires that such costs of
start-up activities be expensed as incurred. SOP 98-5 is effective for fiscal
years beginning after December 15, 1998, with earlier application permitted.
The Company does not anticipate the adoption of SOP 98-5 having a material
impact on the Company's financial position or results of operations.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following information should be read in conjunction with the condensed
consolidated financial statements and the accompanying notes included in Item
1 of this quarterly report, and the audited financial statements,
accompanying notes, Management's Discussion, Analysis of Financial Condition
and Results of Operations contained in our annual report on Form 10-K for the
fiscal year ended September 30, 1998. See "Risks and Uncertainties" for a
discussion of some of the factors known to us that could cause reported
financial information not to be necessarily indicative of future results. We
are not obligated to publicly release the results of any revisions to
forward-looking statements to reflect events and circumstances arising after
the date of this report is filed.
OVERVIEW
Since 1984, the primary business of the Company has been the development of
MSI systems that measure magnetic fields generated by the human body and
assist in the noninvasive diagnosis of a potentially broad range of medical
disorders. The measurement of the body's magnetic fields by MSI provides
information about the normal and abnormal functions of the brain, heart and
other organs. The Company is focusing on the development of its technology
for potential commercial market applications such as mapping of functional
cortex at risk during surgery for tumors and other lesions, and the diagnosis
and planning for surgical treatment of epilepsy. The Company is continuing to
investigate the potential applications of its technology for problems of the
heart, spine, and gastrointestinal system, as well as for disorders of the
brain such as closed-head trauma, schizophrenia and other neuro-psychiatric
disorders. To date, the Company, its competitors and the application
researchers have identified only a limited number of diagnostic applications
for MSI systems.
Twenty four (24) Magnes systems were installed in medical and research
institutions worldwide as of June 30, 1999. To date, more than 5,000 MSI
examinations have been performed on patients and control subjects at the
Company's application development sites. Related findings by BTi and its
collaborators have been published in more than 75 scientific and medical
papers. Since the first reimbursement for MSI procedures was received in
September 1993, more than 140 insurance companies have approved reimbursement
on a case-by-case basis for certain MSI procedures performed with the
Company's Magnes MSI systems.
In fiscal 1995, BTi announced development of the Magnes 2500 WH, an expansion
of the existing Magnes I and Magnes II systems product line. Development of
the Magnes 2500 WH hardware was substantially completed in fiscal year 1996.
The Magnes 2500 WH allows simultaneous examination of the entire brain and is
designed for evaluating ambulatory or critically ill patients in seated or
fully reclined positions. As of June 30, 1999, the Company has sold eleven
Magnes 2500 WH systems.
In fiscal 1998 the Company commenced the development of the Magnes 3600 WH.
This system entered development in response to a continuing need in the
research market for increased sensitivity and deep body imaging, as well as
competitive pressures. BTi expects delivery of its first Magnes 3600 WH
during the second half of calendar 1999.
The current price of BTI's MSI systems ranges from approximately $1.0 to $2.5
million, depending upon system configuration. A significant portion of the
Company's sales have been, and are expected to continue to be, in foreign
markets. The Company has previously priced certain of its European sales in
the currency of the country in which the product was sold and the prices of
such products in dollars varied as the value of the dollar fluctuated against
the quoted foreign currency price. There can be no assurance that currency
fluctuations will not reduce the dollar return to the Company on such sales
if made in the future. At June 30, 1999 and September 30, 1998, the Company
did not have any open forward exchange contracts. The Company may in the
future enter into forward exchange contracts to partially hedge such foreign
currency exposure, if appropriate.
Due to substantial research and development expenses and low unit sales, the
Company has historically reported net losses. Research and development
expenditures have increased significantly since capital funding was received
in August 1998. Such expenditures may continue to increase in the future as
new products enter into development, and Company sponsored clinical testing
is performed to establish a baseline of data for reimbursement approvals and
for substantiating new applications for MSI systems.
9
<PAGE>
The Company believes that the relatively small number of proven medical
applications for the Magnes systems, the lack of routine reimbursement for
MSI procedures, and the uncertainty of product acceptance in the commercial
marketplace have limited system sales through June 30, 1999. Additionally, it
is not possible to reliably predict the timing and extent of future product
sales due to the uncertainties of medical applications, reimbursement and
product acceptance. The Company does not anticipate multiple sales to the
same end-user at current sales price and volumes, and the sale of one Magnes
system may have a significant impact on the Company's financial position and
results of operations during any reporting period. As a result, quarterly and
annual operating performance will continue to fluctuate.
RESULTS OF OPERATIONS
Total revenues for the third quarter of fiscal 1999 were $233,000, including
$103,000 of service revenues, compared to $616,000 of total revenues,
including $127,000 of service revenues, for the third quarter of fiscal 1998.
The decrease in revenues for the third quarter of fiscal 1999 is attributed
to the lack of system sales in that quarter, whereas in the comparative prior
fiscal period the sale of a Magnes I system was recorded. Total revenues for
the first nine months of fiscal 1999 were $3,000,000, including $294,000 of
service revenues, compared to $2,676,000 of total revenues, including
$467,000 of service revenues for the first nine months of fiscal 1998.
Increased total revenues is attributed to the revenue recognition of two 2500
WH systems and one Magnes I system in fiscal 1999. The decrease in service
revenues reflects a decrease in the amount of service contracts in effect
during this time period.
Cost of sales for the third quarter of fiscal 1999 amounted to $518,000, as
compared to $413,000 in the third quarter of the prior fiscal year. Total
cost of sales for the first nine months of fiscal 1999 were $2,085,000,
versus $1,927,000 for the first nine months of fiscal 1998. These amounts
represent increases of 25% and 8% respectively. The increases were
attributable to a charge in the third quarter of fiscal 1999 for warranty and
support services for an existing customer.
Research and development expenses amounted to $981,000 and $2,826,000 for the
three month and nine month periods ended June 30, 1999, respectively. These
amounts represented increases of 96% for the quarter and 140% for the nine
month period compared to research and development expenses of $501,000 and
$1,177,000 for the same periods in fiscal 1998. These increases are primarily
due to development efforts for software and hardware enhancements to the
Magnes 2500 WH, the construction of product engineering testing equipment,
support of the epilepsy clinical testing program at two research clinics in
the US, and ongoing development of the Magnes 3600 WH system. Further, the
fiscal 1998 periods reflected reductions in project spending and research
staff attributable to very limited cash resources.
Marketing, general and administrative expenses increased by $411,000 to
$1,055,000 for the third quarter of fiscal 1999, a 64% increase versus the
comparable period in fiscal 1998. For the first nine months of fiscal 1999,
such expenses increased by $851,000 to $3,277,000, a 35% increase as compared
to the same period last fiscal year. These increases are primarily
attributable to increased marketing communication expenses, the addition of
sales and customer service personnel and related sales activities, and
increased consulting costs.
Interest income totaled $48,000 and $289,000 for the three and nine month
periods ended June 30, 1999, respectively, as compared to $16,000 and $46,000
during the comparable periods in fiscal 1998. The increase is the result of
investing excess cash generated from the August 1998 financing, described
below in "Liquidity and Capital Resources".
Net loss in the third quarter of fiscal 1999 amounted to $2,278,000 compared
to a net loss of $1,026,000 for the comparable period in the prior fiscal
year. Net loss for the nine months ended June 30, 1999 was $4,903,000 as
compared to $2,908,000, for the comparable period last fiscal year. The
increased net loss for these periods was primarily due to the increase in
research and development costs and increased marketing and general and
administrative costs.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company has working capital of $5,687,000. At September
30, 1998, the Company's working capital was $11,138,000. Cash and cash
equivalents and short-term investments decreased $6,882,000 to $5,482,000 at
June 30, 1999 as compared to $12,364,000 at September 30, 1998. The decline
in cash primarily
10
<PAGE>
reflects the use of working capital to fund operations and to purchase and
construct capital equipment for use in the epilepsy clinical expansion
program and research and development.
Capital equipment expenditures totaled $136,000 for the third quarter of
fiscal 1999, compared with $3,000 for the same period in fiscal 1998. The
increase was due primarily to additional construction related to a 2500 WH
system for use in the epilepsy clinical testing program and the purchase of
computer and other equipment to replace existing outdated equipment.
The Company has recently entered into clinical research agreements with three
medical institutions. Under the terms of the agreements, the Company will
reimburse an aggregate of approximately $400,000 to the institutions for
costs incurred related to operation of, and research performed with, the
Company's MSI systems.
The Company anticipates that in fiscal 1999, operating and working capital
requirements will substantially exceed cash projected to be generated by
product sales. Historically, the Company has offset this deficit by raising
capital funds from private placements of its common stock and from debt
offerings. The Company anticipates that it will continue to incur operating
losses for the foreseeable future, until market acceptance of MSI
applications and corresponding product sales are sufficient to generate
continuing profits.
In August 1998 the Company received $15,000,000 in proceeds from the sale of
30,000,000 shares of unregistered common stock at $.50 per share to offshore
investors pursuant to Regulation S. Dassesta International S.A. ("Dassesta"),
a major shareholder of the Company since March 1995, purchased 10,000,000
shares, "La Caixa", Caja de Ahorras y Pensiones de Barcelona, one of the
leading financial institution of the Kingdom of Spain, purchased 10,000,000
shares. A total of 2,000,000 shares were sold to Swisspartners Investment
Network LTD, and the remaining 8,000,000 shares were purchased by two
European banks under the same terms and conditions.
From January to July 1998 the Company had borrowed a total of $2,000,000 from
Dassesta for working capital requirements. In August 1998, out of the
proceeds received from the above offering, the Company paid off the Dassesta
principal, plus $36,000 of accrued interest.
In December 1997, the Company sold 4,000,000 unregistered shares of common
stock to Dassesta and an additional 1,500,000 unregistered shares of common
stock to Bank Leu under Regulation S at $.50 per share. Consideration
received by the Company for the sale consisted of cash totaling $793,000 and
cancellation of its then outstanding loan principal of $1,700,000, related
accrued interest of $38,000 and accounts payable of $219,000, all owed to
Dassesta.
Based on its current operating plans, including anticipated product orders
and resulting revenues and cash receipts, capital expenditures, expected
working capital requirements and existing capital resources, the Company
anticipates that it will be able to fund operations through the second
quarter of fiscal 2000. The realization of the Company's operating plans is
dependent upon its ability to successfully close a number of MSI system sales
in the current highly competitive market for the limited number of systems
being purchased worldwide. There can be no assurance that sufficient sales of
the Company's Magnes systems will be achieved in order to realize its current
operating plans. If these revenues are not achieved, the Company believes its
existing capital resources as of June 30, 1999 will be sufficient to meet its
obligations through calendar 1999 only. In either case, the Company must
continue to fund its operating needs, and is currently considering a number
of financing alternatives, such as corporate partnerships and the sale of
equity or debt securities. There can be no assurance that such financing will
be available on terms acceptable to the Company, if at all.
YEAR 2000 ASSESSMENT
Many currently installed computer systems and software products are coded to
accept only 2 digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept 4 digit entries to
distinguish 21st century dates from the 20th century dates. Systems that do
not properly recognize such information could generate erroneous data or
cause a system to fail. As a result, computer systems, software and
industrial controls used by many companies may need to be upgraded to comply
with Year 2000 requirements.
We are utilizing both internal and external resources to identify, correct or
reprogram, and test our internal systems for Year 2000 compliance. We have
determined that it is necessary to acquire new Year 2000 compliant computer
11
<PAGE>
hardware and software systems for our accounting, purchasing, production
control and inventory management systems. Also, our security system and
portions of our telephone system have been upgraded.
We are currently seeking to ensure that the software and operating systems
included in our Magnes systems are Year 2000 compliant. Our current testing
has indicated that earlier models of our products purchased from us used
computer hardware and software that requires modification or replacement. We
are developing a new version of our software that when combined with a new
computer and operating system should be Year 2000 compliant; we have made
this solution available to our customers that have earlier models and have
distributed it to many of them at a price of $35,000. Our current Magnes 2500
WH product has been tested and customer systems in the field should not
require modification.
We are also in the process of requesting information and assurances from our
major vendors, service providers and customers about their state of Year 2000
compliance and readiness. In the event that significant Year 2000 issues are
identified with such parties, we will identify contingency plans such as the
use of alternate vendors or manual systems.
Current estimates of total costs of Year 2000 compliance amount to
approximately $350,000, including internal and external hardware, software
and labor costs for systems implementation and testing. Installation,
replacement and updating of these systems is currently in process. It is
estimated that installation, replacement, updating and testing will be
ongoing through September 1999 and completed by December 1999.
If our systems are not made compliant by year-end it could significantly and
adversely affect our sales. Year 2000 issues could cause potential customers
to reevaluate their current needs and consider deferring purchase of our
Magnes systems or decide to purchase from a competitor. Additionally, we
could have potential warranty or other claims with existing Magnes systems
placed with customers if such systems are not made Year 2000 compliant. Any
of the foregoing could result in a material adverse effect on our business,
financial position and results of operations.
RISKS AND UNCERTAINTIES
This quarterly report may contain forward-looking statements based on our
current expectations, assumptions, estimates and projections about us and our
industry. These forward-looking statements involve risks and uncertainties.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of factors, such as those more fully
described in this "Risks and Uncertainties" section and elsewhere in this
report. We are not obligated to update or revise these forward-looking
statements to reflect new events or circumstances.
IF WE CONTINUE TO INCUR OPERATING LOSSES, WE MAY BE UNABLE TO CONTINUE OUR
OPERATIONS.
Our financial position reflects that we have been principally focused on
research and development, with only low volume sales to medical research
institutions. For the first nine months of fiscal 1999, our net loss was
$4,903,000 and we had negative cash flows from operations of $6,127,000.
At June 30, 1999, our accumulated deficit was $95,726,000 with working
capital of $5,687,000. Our cash and investments balance at June 30, 1999 was
$5,482,000. This balance reflects the sale during August 1998 of 30,000,000
shares of common stock for proceeds of $15,000,000, and the sale of two 2500
WH systems and the sale of one Magnes I system, less usage of cash from
ongoing operations.
We anticipate that in fiscal 1999 we will incur a net loss from operations,
and cash usage will substantially exceed that projected to be received from
product sales.
IF WE ARE UNABLE TO SATISFY CUSTOMER PERFORMANCE REQUIREMENTS, WE MAY BE
UNABLE TO COMPETE EFFECTIVELY.
Our success may be limited by our ability to complete, in a timely fashion,
product developments and enhancements to satisfy customer requirements for
our systems.
12
<PAGE>
IF WE ARE UNABLE TO DEVELOP ADDITIONAL PRODUCTS, OUR ABILITY TO COMMERCIALIZE
OUR PRODUCTS WILL BE ADVERSELY IMPACTED.
Our success may be limited by our dependence on our one current product, the
Magnes 2500 WH system. Before we can more fully penetrate the research and
commercial markets, we need to have additional products. In development is
our Magnes 3600 WH, which is intended to address more fully the needs of
research institutions. Our Magnes 2500 WH system is more appropriate for the
commercial market. Our financial results will be materially adversely
affected if our Magnes 2500 WH system does not suit the majority of
commercial applications that emerge, or we are not able to offer new products
in a timely and cost effective manner that meet the emerging needs of the
marketplace.
IF WE ARE UNABLE TO IDENTIFY ADDITIONAL CLINICAL APPLICATIONS FOR OUR MSI
SYSTEMS, THERE WILL BE NO COMMERCIALLY VIABLE MARKETS FOR OUR PRODUCTS
Currently, there are only a few established diagnostic uses for MSI systems
that the medical industry is aware of. Although we have started our own
clinical research and testing to identify new, large application areas, we
cannot assure you that a commercial market will develop for multiple uses of
our products.
IF WE FAIL TO OBTAIN AN ADEQUATE LEVEL OF REIMBURSEMENT FOR MSI PROCEDURES BY
THIRD PARTY PAYORS, SALES WILL SUFFER.
Our commercial success is also highly dependent on reimbursement for
procedures using the MSI system. Currently, Medicare, insurance companies and
other healthcare providers approve payment for MSI procedures on a
case-by-case basis. As of June 30, 1999, these third party payors have only
approved limited reimbursements in the United States. Although third party
payors have increasingly approved reimbursements, we cannot assure you that
third party reimbursements will become widely available. The United States
government does not currently reimburse for MSI procedures. If reimbursement
does not become more widely available, our financial position will be
materially adversely affected. In addition, there is currently no
reimbursement for MSI procedures outside of the United States.
IF DISCOVERIES OR DEVELOPMENTS OF NEW TECHNOLOGIES OCCUR, OUR PRODUCTS AND
TECHNOLOGY MAY BECOME OBSOLETE.
Our industry is characterized by rapid technological change, which may also
impact our commercial success. Competitors may develop products using other
technologies or may improve existing products. This competition may reduce
the size of the potential market for our products or make them obsolete or
non-competitive. Competitors may also develop new or different products using
technology or imaging modalities that provide, or are perceived as providing,
greater value than the Company's products. Our financial position will be
materially adversely affected if such competitive developments occur.
IF WE FAIL TO COMPETE SUCCESSFULLY, OUR REVENUES AND OPERATING RESULTS WILL
BE ADVERSELY AFFECTED.
Our industry is characterized by ongoing significant price competition, due
to the existence of a number of competitors in a fledgling marketplace with a
limited number of MSI systems being purchased worldwide. The future
profitability of our systems may be negatively impacted by this aggressive
competition; we currently cannot predict how rapidly the market may expand to
provide MSI system manufacturers with appropriate shareholder returns.
IF NEW GOVERNMENT LEGISLATION IS ENACTED OR UNFAVORABLE MEDICAL INDUSTRY
TRENDS ARISE, WE MAY BE UNABLE TO SELL OUR PRODUCTS AND OUR REVENUES WILL
SUFFER.
We cannot predict what adverse effect, if any, future legislation or Food and
Drug Administration regulations may have on the MSI market and our financial
results. Medical industry cost containment trends may impose restrictions on
sizeable third-party reimbursements for diagnostic procedures, limiting the
market opportunity. Further, if Federal government agencies or any state
legislature enacts legislation or guidelines relating to our business or the
health care industry that create additional business hurdles, including
legislation relating to third party reimbursement, our financial position
could be negatively affected.
13
<PAGE>
IF FOREIGN CURRENCY EXCHANGE RATES FLUCTUATE, OUR RETURN ON SALES IN U.S.
DOLLARS MAY SUFFER.
Because we sell in foreign markets, we are exposed to potential risks of
increases and decreases in foreign currency exchange rates. When appropriate,
we enter into forward exchange contracts to partially hedge (or protect)
against such foreign currency exchange fluctuations. Nonetheless, these
fluctuations may reduce the return in U.S. dollars that we actually receive
on our sales. These risks may become material as our sales increase or
dramatic currency fluctuations occur from outside events.
IF WE EXPERIENCE ANY PROBLEMS WITH YEAR 2000 COMPLIANCE, OUR OPERATIONS AND
SALES OF OUR PRODUCTS MAY BE INTERRUPTED.
If our systems are not made compliant by year-end it could significantly and
adversely affect our sales. Year 2000 issues could cause potential customers
to reevaluate their current needs and consider deferring purchase of our
Magnes systems or decide to purchase from a competitor. Additionally, we
could have potential warranty or other claims with existing Magnes systems
placed with customers if such systems are not made Year 2000 compliant. Any
of the foregoing could result in a material adverse effect on our business,
financial position and results of operations.
For additional information regarding the status of our Year 2000 issues,
please see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Year 2000 Assessment".
14
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
PART II. OTHER INFORMATION
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) EXHIBIT NO. DESCRIPTION
3.1(1) Certificate of Amendment to
Fourth Restated Articles of
Incorporation
3.2(1) Fourth Restated Articles of
Incorporation, as amended
3.3(1) Restated Bylaws
27 Financial Data Schedule
b) Reports on Form 8-K None
(1) These exhibits were previously filed as part of, and hereby incorporated
by reference to, the same numbered exhibits to the Company's Quarterly
Report on Form 10-Q filed with the SEC on May 17, 1999.
15
<PAGE>
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.
BIOMAGNETIC TECHNOLOGIES, INC.
August 10, 1999 /s/ D. SCOTT BUCHANAN
------------------- ------------------------------------------
Date D. Scott Buchanan
President and Chief Executive Officer
August 10, 1999 /s/ ARON P. STERN
------------------- ------------------------------------------
Date Aron P. Stern
Vice President of Finance,
Chief Financial Officer
Secretary
Principal Financial and Accounting Officer
16
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
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<MULTIPLIER> 1,000
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<OTHER-EXPENSES> 6103
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