<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
----- SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED JUNE 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 0-19975
BIOCIRCUITS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-3088884
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1324 CHESAPEAKE TERRACE
SUNNYVALE, CALIFORNIA 94089
(Address of principal executive offices) (Zip Code)
(408) 745-1961
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
At July 31, 1996, Registrant had 5,445,191 shares of Common Stock issued and
outstanding.
1
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BIOCIRCUITS CORPORATION
INDEX
PART I: FINANCIAL INFORMATION
<TABLE>
<C> <S> <C>
ITEM 1. Financial Statements and Notes
Balance sheets (unaudited) - June 30, 1996 and December 31, 1995 ........ 3
Statements of operations (unaudited) - three months ended June 30,
1996 and 1995 and six months ended June 30, 1996 and 1995
and the period from March 7, 1989 (inception) through
June 30, 1996 ...................................................... 4
Statements of cash flows (unaudited) - six months ended June 30,
1996 and 1995 and the period from March 7, 1989 (inception)
through June 30, 1996 .............................................. 5
Notes to Financial Statements (unaudited) ............................... 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ...................... 8
PART II: OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders ..................... 13
ITEM 6. Exhibits and Reports on Form 8-K ........................................ 14
Signatures ....................................................................... 15
</TABLE>
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIOCIRCUITS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
(NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 6,700 $ 6,028
Short-term investments ..................................................... --- 605
Prepaid expenses and other current assets .................................. 482 544
Inventory .................................................................. 332 ---
Prepaid inventory .......................................................... 489 418
Restricted cash ............................................................ 102 93
------- --------
Total current assets .......................................................... 8,105 7,688
Property and equipment, net of accumulated depreciation and
amortization of $1,474 ($1,298 in 1995) ................................. 1,188 975
Restricted cash ............................................................ 376 479
Other assets ............................................................... 137 125
------- --------
$ 9,806 $ 9,267
------- --------
------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................. $ 901 $ 547
Accrued liabilities .......................................................... 131 205
Accrued compensation and related expenses .................................... 179 198
Current portion of capital lease obligations ................................. 337 547
------- --------
Total current liabilities ....................................................... 1,548 1,497
Long-term portion of capital lease obligations .................................. 111 114
Long-term convertible debt ...................................................... 3,718 3,593
Stockholders' equity:
Preferred stock, $0.001 par value, 40,000,000 shares authorized, issuable
in series: Series A convertible, 30,000,000 shares designated,
13,093,305 shares issued and outstanding (12,999,000 shares
outstanding at December 31, 1995), aggregate liquidation preference
of $.55 per share ......................................................... 9,908 6,320
Common stock, $0.001 par value, 70,000,000 shares authorized,
5,256,892 shares issued and outstanding (3,673,390 shares issued
and outstanding at December 31, 1995) ..................................... 39,441 35,172
Deficit accumulated during the development stage ............................. (44,763) (37,200)
Notes receivable secured by common stock ..................................... (74) (99)
Deferred compensation and other .............................................. (83) (130)
-------- --------
Total stockholders' equity ...................................................... 4,429 4,063
-------- --------
$ 9,806 $ 9,267
-------- --------
-------- --------
</TABLE>
Note: Derived from the audited balance sheet at December 31, 1995.
See accompanying notes
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BIOCIRCUITS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED PERIOD FROM
JUNE 30, JUNE 30, MARCH 7, 1989
------------------ ------------------ (INCEPTION) THROUGH
1996 1995 1996 1995 JUNE 30, 1996
---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Product Sales.................................. $ 111 $ --- $ 156 $ --- $ 156
OPERATING COSTS AND EXPENSES:
Cost of sales.................................. 742 --- 1,049 --- 1,049
Research and development ...................... 1,662 1,115 4,015 2,317 31,291
Sales, general and administrative.............. 1,430 620 2,680 1,179 13,542
------- ------- ------- ------- --------
3,834 1,735 7,744 3,496 45,882
Loss from operations........................... (3,723) (1,735) (7,588) (3,496) (45,726)
Interest and dividend income................... 104 20 196 74 2,199
Interest and other expense..................... (82) (22) (171) (45) (1,236)
------- ------- ------- ------- --------
Net loss ...................................... $(3,701) $(1,737) $(7,563) $(3,467) $(44,763)
------- ------- ------- ------- --------
------- ------- ------- ------- --------
Net loss per share............................. $ (0.80) $ (0.69) $ (1.77) $ (1.38)
------- ------- ------- -------
------- ------- ------- -------
Shares used in computing net loss per share.... 4,626 2,506 4,264 2,505
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
See accompanying notes.
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BIOCIRCUITS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD FROM
JUNE 30, MARCH 7, 1989
------------------- (INCEPTION) THROUGH
1996 1995 JUNE 30, 1996
-------- -------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................. $(7,563) $(3,467) $(44,763)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization .......................... 232 189 3,290
Other .................................................. 241 --- 319
Changes in:
Prepaid Inventory .................................... (71) (543) (489)
Inventory ............................................ (332) --- (332)
Other current assets ................................. 53 57 (561)
Other assets ......................................... --- -- (69)
Other current liabilities ............................ 260 (82) 1,208
------- ------- --------
Net cash used in operating activities .............. (7,180) (3,846) (41,397)
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ........................ (293) 102 (1,546)
Short-term investments purchased .......................... --- --- (30,337)
Short-term investments sold/redeemed ...................... 597 1,000 30,337
Restricted cash ........................................... 91 626 (514)
------- ------- --------
Net cash provided by (used in) investing activities ..... 395 1,728 (2,060)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of preferred stock, net of issuance costs ........ 7,575 8,600 26,652
Issuance of common stock, net of issuance costs ........... 65 30 21,834
Issuance of long-term debt ................................ 125 --- 5,074
Payments on long-term obligations ......................... (308) (165) (3,403)
------- ------- --------
Net cash provided by (used in) financing activities .... 7,457 8,465 50,157
------- ------- --------
Net increase (decrease) in cash and cash equivalents ......... 672 6,347 6,700
Cash and cash equivalents, beginning of period ............... 6,028 1,601 ---
------- ------- --------
Cash and cash equivalents, end of period ..................... $ 6,700 $ 7,948 $ 6,700
------- ------- --------
------- ------- --------
</TABLE>
See accompanying notes
5
<PAGE>
BIOCIRCUITS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
1. NATURE OF BUSINESS AND FINANCING
Biocircuits Corporation (a development stage company) (the "Company")
was incorporated in Delaware on March 7, 1989. The Company is engaged in
developing and commercializing new immunodiagnostic testing systems.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The Company's first sale
and shipment of its IOS system occurred in March 1996. The Company has
incurred a loss in each period since its inception. At June 30, 1996,
the Company's accumulated deficit was $44,763,000. Biocircuits expects
to incur additional losses over the next several years.
The Company believes that its existing capital resources will be
adequate to satisfy its requirements into the fourth quarter of 1996,
assuming no exercise of outstanding warrants. The Company expects that
existing capital resources will be used primarily for the continued
launch of the IOS system as well as for the development of additional
tests for the IOS system. If the remaining warrants issued in June 1995
(which expire on December 18, 1996) are exercised in full for cash, the
Company would receive an aggregate amount of $2.2 million, which the
company estimates would satisfy the Company's cash requirements into
first quarter 1997. However, there can be no assurance that any of the
remaining warrants will be exercised or that these warrants, which
contain a net exercise provision, will be exercised for cash.
The Company believes that maintaining its listing on the Nasdaq National
Market System ("Nasdaq") is critical to its ability to raise additional
funds as well as to provide liquidity to investors. The Company
anticipates that, unless additional capital is obtained, it will fail to
be in compliance with Nasdaq listing requirements at the end of third
quarter 1996.
Additional funds will be required in 1996 to carry the Company through
the anticipated launch of additional tests and until significant
revenues can be generated from sales of IOS instruments and test
cartridges. The Company's ability to continue operations will be
dependent upon its ability to obtain additional funds in the very near
term. The Company is currently pursuing various alternatives, including
seeking debt or equity financings from existing investors, new
investors, or corporate partners. However, there can be no assurance
the Company will be successful, that funding will be available on a
timely basis or on acceptable terms, that such funding will not result
in significant dilution of existing shareholders, or that the Company
will not be required to relinquish valuable rights to obtaining such
financing. If adequate funding is not available on a timely basis, the
Company will be required to seek sale of the Company or to cease
operations.
In future periods, the Company expects to incur substantial additional
costs, including costs related to ongoing research and development
activities, either alone or in collaboration with strategic partners,
clinical trials, expansion of manufacturing, development of
manufacturing capabilities, obtaining regulatory approvals and
establishing sales, marketing and distribution capabilities. The
Company's longer-term capital requirements will depend on numerous
factors, including the success of the Company's products and the rate of
increase in product revenue, the progress of the Company's research and
development, the timing and cost of obtaining regulatory approvals, the
costs associated with patents and other intellectual property rights,
the levels of resources devoted to the development of manufacturing and
marketing capabilities, and establishment of potential collaborative
partnerships. The rate of increase in product revenue will
significantly influence the financing requirements and cannot be
predicted nor can there be any assurance that it will occur according to
the Company's expectations. The Company intends to seek additional
funding through various means, including public or private financings.
Other methods of financing, including
6
<PAGE>
working capital financing for accounts receivable and lease financing
for the acquisition of capital equipment, may be utilized if available
on attractive terms. The Company also will attempt to obtain funds
through arrangements with strategic partners or others that will require
the Company to relinquish additional rights to certain of its
technologies, products or marketing territories in exchange for funding.
If adequate funds are not available from these sources, the Company
will be required to curtail its operations significantly. No assurance
can be given that any additional financing will be available or, if
available, that it will be available on acceptable terms.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the six month period ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the year
ended December 31, 1996. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31,
1995.
Net loss per share is computed on the basis of the weighted average
number of common shares outstanding. Common equivalent shares are
excluded from the computation as their effect is anti-dilutive.
Following is supplemental pro forma earnings per share, calculated
giving effect to the conversion of the outstanding convertible preferred
stock on an if converted basis (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
1996 1995 1996 1995
------- ------- ------- ------
<S> <C> <C> <C> <C>
Net loss as reported .......................... $(3,701) $(1,737) $(7,563) $(3,467)
------- ------- ------- -------
------- ------- ------- -------
Shares used in computing net
loss per share as reported .................. 4,626 2,506 4,264 2,505
Adjustment to include outstanding convertible
preferred stock previously excluded
as it is anti-dilutive ...................... 3,623 574 3,494 287
------- ------- ------- -------
Shares used in computing pro forma net
loss per share .............................. 8,249 3,080 7,758 2,792
------- ------- ------- -------
------- ------- ------- -------
Pro forma net loss per share .................. $ (0.45) $ (0.56) $ (0.97) $(1.24)
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
IN ADDITION TO THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS SECTION
AND IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER
31, 1995.
RESULTS OF OPERATIONS
The Company has incurred a loss in each period since its inception. At June
30, 1996, the Company's accumulated deficit was $44.8 million. Biocircuits
expects to incur additional losses over the next several years. The Company
expects that currently available funds will be used primarily for the
continued launch of the IOS point-of-care system and development of
additional tests for the IOS point-of-care system. The losses may vary from
period to period, including from quarter to quarter, and are generally
expected to increase, due to the recent launch of the Company's IOS
point-of-care system. Accordingly, the Company believes that
quarter-to-quarter results are not a useful indicator of the Company's
performance.
The Company's first sale and shipment of its IOS system occurred in March
1996, with cartridges capable of performing the T4 and T Uptake tests. The
selling process typically requires the Company's sales force to work closely
with distributors, generate qualified physician leads and perform
demonstrations of the IOS system in physicians' offices. The selling process
can be time-consuming and there can be no assurance that the Company will be
successful in marketing the IOS system, that the rate of sales growth will
meet expectations or that the marketing programs of the Company will achieve
the desired results.
To date, the number of instrument sales to distributors and placements in
physicians' offices have been significantly less than the Company's
expectations. Certain design changes to the IOS instrument were required
since the first sale and shipment of the IOS system. In April 1996, problems
in some of the instrument circuitry and software required certain parts and
software modifications. Further product shipments were suspended, at that
time, while the problems were diagnosed and corrected and all changes were
validated and documented. Shipments to distributors were resumed in the
middle of June. In addition, all instruments previously shipped to
customers have been retrofitted. There can be no assurance that additional
design changes may not be required in the future or that the system
performance will be reliable over time.
The requirements to make certain design changes to the instrument and the
suspension of product shipments had an adverse impact on second quarter 1996
revenue and overall financial performance. Furthermore, a $49,000 backlog of
shipments existed at June 30, 1996. This backlog has been filled and the
related revenue will be recorded in the third quarter 1996. There can be no
assurance that similar backlogs will not be encountered in the future. In
the event that shipments are delayed and orders for the IOS point-of-care
system become significantly backlogged, the delay could have a material
adverse impact on the Company.
In order for the Company to have success in penetrating the point-of-care
immunodiagnostic market and to achieve significant sales of IOS systems and
test cartridges, the Company believes it will need to expand its menu of
tests beyond the T4 and T Uptake tests. The Company's initial marketing
efforts indicate that offering a test for Thyroid Stimulating Hormone ("TSH")
to diagnose and manage thyroid function may be a key element in penetrating
the physicians' office market. On April 23, 1996, the Company filed a 510(k)
pre-market notification with the Food and Drug Administration ("FDA") for
marketing clearance of its TSH test. On May 8, 1996, the Company filed a
510(k) pre-market notification with the FDA for marketing clearance for the
Company's qualitative serum pregnancy test. The Company currently is
developing a quantitative hCG test to track progress of early pregnancies and
the Company expects to file a 510(k) pre-market notification on this test
with the FDA in
8
<PAGE>
the third quarter 1996. In addition, the Company has commenced development
of a Prostate Specific Antigen ("PSA") test for management of prostate cancer
patients and a digoxin test for monitoring the therapeutic usage of this drug
in the treatment of heart disease. In the past, the Company has experienced
delays in completing the development of new tests. There can be no assurance
that the Company will be successful in expanding its menu of tests and
according to schedule, as well as obtaining regulatory approvals for such
tests.
Beginning in the second quarter 1996, the Company developed and initiated
testing of a modified cartridge design. The Company believes this modified
design will be required for the market launch of the TSH, qualitative serum
pregnancy and quantitative hCG tests. Any cartridge design typically
requires certain changes to the mold prior to finalization of the cartridge
design. The Company currently believes the modified cartridge will be
completed for a market launch of the TSH and qualitative serum pregnancy
tests in the fourth quarter 1996. Consequently, even if the Company receives
timely clearance of the TSH test from the FDA, the Company does not expect to
realize any significant revenue from related instrument sales until at least
the fourth quarter of 1996. There can be no assurance that the Company will
not encounter difficulties in finalizing cartridge design which would result
in a delay in the market launch of the new tests, that the Company will be
successful in completing the modified cartridge design at all, that the test
cartridges using the design will perform as planned, or that Nalge Nunc
International, Inc., the Company's cartridge supplier, will be able to
deliver the required quantities of test cartridge components on schedule or
at costs acceptable to the Company.
The Company's other near term cartridge manufacturing milestones include:
improving manufacturing efficiencies, expanding mold and cartridge
manufacturing capacity as both the test menu and test manufacturing volume
expand, initiating manufacturing automation efforts and manufacturing the
cartridge at the Company's targeted cost. There can be no assurance that the
Company will be successful in achieving these milestones or that these
milestones will be achieved on a timely basis.
In December 1992, the Company entered into an agreement with KMC Systems,
Inc. ("Kollsman") pursuant to which Kollsman was appointed the exclusive
North American supplier of the IOS instrument. The agreement with Kollsman
contained certain minimum purchase requirements and would expire three years
from the date of first commercial production, subject to certain rights of
earlier termination. In April 1996, the Company and Kollsman executed a
letter agreement to amend the 1992 agreement (the "Letter Agreement"),
pursuant to which Kollsman will be the exclusive supplier of the IOS
instrument through 1997, the minimum purchase requirements were eliminated
and the Company and Kollsman agreed to an acceptable transfer price to be
paid through 1997, the revised term of the agreement. Also pursuant to the
Letter Agreement, the Company agreed to issue Kollsman a warrant to purchase
250,000 shares of Common Stock, subject to an increase of 50,000 shares under
certain circumstances. The warrant expires at year end 1997, subject to
certain extension rights, and has an exercise price of $7.00 per share. In
order to secure an adequate supply of IOS instruments, the Company has
established a standby letter of credit for the benefit of Kollsman. The
Company is entirely dependent on Kollsman as the sole source of production of
its IOS instruments. Kollsman, in turn, relies upon sole-source suppliers
for certain components. Failure of Kollsman's suppliers to deliver the
required quantities on a timely basis and at commercially reasonable prices,
or Kollsman's failure to deliver the IOS instruments to the Company on a
timely basis or at commercially reasonable costs could materially adversely
affect the Company.
In June 1995, the Company closed a private placement of 17,399,000 units
consisting of convertible Preferred Stock and Warrants at $0.50 per unit.
Proceeds to the Company were approximately $8.5 million, net of issuance
costs. Each unit consisted of one share of Series A Preferred Stock and one
warrant to purchase approximately .60 shares of Series A Preferred Stock at
$0.60 per share (Common Stock equivalent price of $2.40 per share and the
"1995 Warrants"). Series A Preferred Stock converts to .25 shares of Common
Stock.
In January 1996, the Company amended outstanding 1995 Warrants to purchase
2,666,514 shares of Series A Preferred Stock and closed a private placement
pursuant to which the Company issued new warrants (the "1996 Warrants") to
purchase 2,852,998 shares of Series A Preferred Stock. One half of the
amended 1995 Warrants and one half of the 1996 Warrants were exercisable at a
purchase price of 70% of the current market price upon exercise and expired
on May 31, 1996. Ninety six percent of the warrants expiring on May 31, 1996
were exercised at an average purchase price of $1.18 per share (Common Stock
equivalent price of $4.72 per share). The remaining one half of the amended
1995 Warrants and 1996 Warrants were subject to automatic exercise at a
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purchase price of $1.46 per share (Common Stock equivalent price of $5.84 per
share) upon the Company's shipment of the first ten IOS instruments and
accompanying cartridges, which occurred in March 1996. 1995 Warrants to
purchase approximately 4.9 million shares of Series A Preferred Stock
remained outstanding at a purchase price of $0.60 per share (Common Stock
equivalent price of $2.40 per share), expiring on December 18, 1996.
SECOND QUARTER FY 1996 COMPARED TO SECOND QUARTER FY 1995
Revenue in the second quarter totaled $111,000, including the shipment of the
$51,000 backlog that existed at the end of the first quarter 1996. The
second quarter 1996 ended with a backlog of $49,000. The latter backlog has
been filled and the related revenues will be recorded in the third quarter
1996.
Total operating costs and expenses increased from $1,735,000 in the second
quarter of 1995 to $3,834,000 in the second quarter of 1996, an increase of
$2,099,000 or 121%.
The Company recorded $742,000 of cost of sales in the second quarter of 1996.
These costs consisted primarily of manufacturing overhead and startup costs
associated with the production of revenue generating product and the Kollsman
warrant.
Research and development expenses increased from $1,115,000 in the second
quarter of 1995 to $1,662,000 in the second quarter of 1996, an increase of
$547,000 or 49%. This increase was due primarily to outside services,
primarily non-recurring engineering charges from Kollsman, additional
staffing and increased general operating expenses.
Sales, general and administrative expenses increased from $620,000 in the
second quarter of 1995 to $1,430,000 in the second quarter of 1996, an
increase of $810,000 or 131%. This increase was due primarily to the
increased sales and marketing expenses resulting from the launch of the IOS
point-of-care system and general operating expenses.
Net other income and expense increased from a negative $2,000 in the second
quarter of 1995 to $22,000 in the second quarter of 1996, an increase of
$24,000. Interest income increased from $20,000 in the second quarter of
1995 to $104,000 in the second quarter of 1996, an increase of $84,000 or
420%. The increase was due to increased cash balances arising from funds
received from the 1995 and 1996 private placements and Beckman, offset by
losses, purchases of property and equipment and payments on long-term
obligations. Interest and other expense increased from $22,000 in the second
quarter of 1995 to $82,000 in the second quarter of 1996, an increase of
$60,000 or 273%. Interest expense results from the Company's long-term debt
and capital leases related to its property and equipment.
Net loss increased from $1,737,000 or $0.69 per share in the second quarter
of 1995 to $3,701,000 or $0.80 per share in the second quarter of 1996, an
increase of $1,964,000 or 113%.
SIX MONTHS FY 1996 COMPARED TO SIX MONTHS FY 1995
Following the Company's March 1996 launch of the IOS system, the Company
recorded revenue for the six months of $156,000 and had a backlog of $49,000
at June 30, 1996.
Total operating costs and expenses increased from $3,496,000 in the first six
months of 1995 to $7,744,000 in the first six months of 1996, an increase of
$4,248,000 or 122%.
The Company recorded $1,049,000 of cost of sales in the first six months of
1996. These costs consisted primarily of manufacturing overhead and startup
costs associated with the production of revenue generating product and the
Kollsman warrant.
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<PAGE>
Research and development expenses increased from $2,317,000 in the first six
months of 1995 to $4,015,000 in the first six months of 1996, an increase of
$1,698,000 or 73%. This increase was due primarily to outside services,
primarily non-recurring charges from Kollsman, additional staffing and
increased general operating expenses.
Sales, general and administrative expenses increased from $1,179,000 in the
first six months of 1995 to $2,680,000 in the first six months of 1996, an
increase of $1,501,000 or 127%. This increase was due primarily to the
increased sales and marketing expenses resulting from the launch of the IOS
point-of-care system and general operating expenses.
Net other income and expense decreased from $29,000 in the first six months
of 1995 to $25,000 in the first six months of 1996, a decrease of $4,000 or
14%. Interest income increased from $74,000 in the first six months of 1995
to $196,000 in the first six months of 1996, an increase of $122,000 or 165%.
The increase was due to increased cash balances arising from funds received
from the 1995 and 1996 private placements and Beckman, offset by losses,
purchases of property and equipment and payments on long-term obligations.
Interest and other expense increased from $45,000 in the first six months of
1995 to $171,000 in the first six months of 1996, an increase of $126,000 or
280%. Interest expense results from the Company's long-term debt and capital
leases related to its property and equipment.
Net loss increased from $3,467,000 or $1.38 per share in the first six months
of 1995 to $7,563,000 or $1.77 per share in the first six months of 1996, an
increase of $4,096,000 or 118%.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed its operations primarily through sales
of Common and Preferred Stock, interest income on the cash balances available
after such financings, long term debt and capital asset lease financings.
Since its inception through June 30, 1996, the Company raised a total of
approximately $51.6 million in the sale of Common and Preferred Stock.
The Company's cash and cash equivalents and short-term investments were $6.70
million as of June 30, 1996, compared to $6.63 million at the end of 1995.
The increase was due primarily to the receipt of approximately $7.7 million
in gross proceeds from the exercise of warrants, including approximately $7.1
million from the exercise of warrants to purchase Series A Preferred Stock
which expired on either March 31, 1996 or May 31, 1996 and approximately $0.6
million from the early exercise of the remaining 1995 Warrants, offset by
losses in the first half of 1996. The Company believes that its existing
capital resources will be adequate to satisfy its requirements into the
fourth quarter of 1996, assuming no exercise of outstanding warrants. The
Company expects that existing capital resources will be used primarily for
the continued launch of the IOS system as well as for the development of
additional tests for the IOS system. If the remaining warrants issued in
June 1995 (which expire on December 18, 1996) are exercised in full for cash,
the Company would receive an aggregate amount of $2.2 million, which the
company estimates would satisfy the Company's cash requirements into first
quarter 1997. However, there can be no assurance that any of the remaining
warrants will be exercised or that the 1995 Warrants, which contain a net
exercise provision, will be exercised for cash.
The Company believes that maintaining its listing on the Nasdaq National
Market System ("Nasdaq") is critical to its ability to raise additional funds
as well as to provide liquidity to investors. The Company anticipates that,
unless additional capital is obtained, it will fail to be in compliance with
Nasdaq listing requirements at the end of third quarter 1996.
Additional funds will be required in 1996 to carry the Company through the
anticipated launch of additional tests and until significant revenues can be
generated from sales of IOS instruments and test cartridges. The Company's
ability to continue operations will be dependent upon its ability to obtain
additional funds in the very near term. The Company is currently pursuing
various alternatives, including seeking debt or equity financings from
existing
11
<PAGE>
investors, new investors, or corporate partners. However, there can be no
assurance the Company will be successful, that funding will be available on a
timely basis or on acceptable terms, that such funding will not result in
significant dilution of existing shareholders, or that the Company will not
be required to relinquish valuable rights to obtaining such financing. If
adequate funding is not available on a timely basis, the Company will be
required to seek sale of the Company or to cease operations.
In future periods, the Company expects to incur substantial additional costs,
including costs related to ongoing research and development activities,
either alone or in collaboration with strategic partners, clinical trials,
expansion of manufacturing, development of manufacturing capabilities,
obtaining regulatory approvals and establishing sales, marketing and
distribution capabilities. The Company's longer-term capital requirements
will depend on numerous factors, including the success of the Company's
products and the rate of increase in product revenue, the progress of the
Company's research and development, the timing and cost of obtaining
regulatory approvals, the costs associated with patents and other
intellectual property rights, the levels of resources devoted to the
development of manufacturing and marketing capabilities, and establishment of
potential collaborative partnerships. The rate of increase in product
revenue will significantly influence the financing requirements and cannot be
predicted nor can there be any assurance that it will occur according to the
Company's expectations. The Company intends to seek additional funding
through various means, including public or private financings. Other methods
of financing, including working capital financing for accounts receivable and
lease financing for the acquisition of capital equipment, may be utilized if
available on attractive terms. The Company also will attempt to obtain funds
through arrangements with strategic partners or others that will require the
Company to relinquish additional rights to certain of its technologies,
products or marketing territories in exchange for funding. If adequate funds
are not available from these sources, the Company will be required to curtail
its operations significantly. No assurance can be given that any additional
financing will be available or, if available, that it will be available on
acceptable terms.
12
<PAGE>
BIOCIRCUITS CORPORATION
PART II: OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
a) The Company's Annual Meeting of Stockholders was held on May 17,
1996.
b) The following individuals were elected to the Company's Board of
Directors for a three-year term expiring at the 1999 Annual Meeting and
received the number of votes in favor and votes withheld indicated:
Hans O. Ribi, Ph.D.
Common Votes in favor: 3,542,151 Common Votes withheld: 94,875
Preferred Votes in favor: 3,331,758 Preferred Votes withheld: 0
Harry F. Hixson, Jr., Ph.D.
Common Votes in favor: 3,542,151 Common Votes withheld: 94,875
Preferred Votes in favor: 3,331,758 Preferred Votes withheld: 0
The following individuals' term of office as a director continued after
the meeting:
Robert Curry, Ph.D.
David Rubinfien
John Kaiser
Patrick Latterell
c) In addition to the election of directors, the following matters
were voted upon at the meeting and received the number of affirmative
votes, negative votes, abstentions and broker non-votes indicated:
(i) Amendment to the Company's Dual Stock Option Plan
to increase the aggregate number of shares of Common Stock
authorized for issuance under the Dual Stock Option Plan from a
total of 1,375,000 to 1,675,000.
Common Votes:
In favor: 2,415,178 Against: 341,135
Abstentions: 6,627 Broker non-votes: 874,086
Preferred Votes:
In favor: 3,246,268 Against: 0
Abstentions: 85,490 Broker non-votes: 0
(ii) Amendment to the Company's 1992 Non-Employee Directors' Stock
Option Plan to (1) change the automatic grant provision to
each non-employee director of the Company, who has been a
non-employee director for at least one year, from an
13
<PAGE>
automatic grant of an option to purchase 3,750 shares of
Common Stock every three years, to an automatic grant of an
option to purchase 5,000 shares of Common Stock on November 1,
1995 and on each November 1, thereafter; and (2) increase the
aggregate number of shares of Common Stock authorized for
issuance under the Non-Employee Directors' Stock Option Plan
from a total of 63,750 to 113,750.
Common Votes:
In favor: 2,624,443 Against: 130,097
Abstentions: 8,400 Broker non-votes: 874,086
Preferred Votes:
In favor: 3,246,268 Against: 0
Abstentions: 85,490 Broker non-votes: 0
(iii) Ratify the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending December 31,
1996.
Common Votes:
In favor: 3,626,077 Against: 4,085
Abstentions: 6,864 Broker non-votes: 0
Preferred Votes:
In favor: 3,246,268 Against: 0
Abstentions: 85,490 Broker non-votes: 0
ITEM 6. Exhibits and Reports on Form 8-K.
a) Exhibits
+10.39 Confidential letter of understanding dated April 18, 1996 between
the Registrant and KMC Systems, Inc.
27.1 Financial Data Schedule
_______________________________________________
+ Confidential treatment has been requested for portions of this
Exhibit.
b) Reports on Form 8-K
None
14
<PAGE>
BIOCIRCUITS CORPORATION
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.
BIOCIRCUITS CORPORATION
Date: August 13, 1996
By: /s/ Donald Hawthorne
------------------------------
Donald Hawthorne
Vice President, Chief Financial Officer and
Secretary
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
15
<PAGE>
CONFIDENTIAL LETTER OF UNDERSTANDING
April 18, 1996
To: Pat McNallen
From: John Kaiser
cc: Don Hawthorne
The following summarizes the terms we discussed today for the manufacture of the
IOS System (Sunrise). These terms have been agreed to today by the Biocircuits
Board of Directors and it is my understanding that they are agreeable with KMC
Systems (Kollsman) as well. The effective date of the warrant agreement and the
amendment to the contract will be April 18, 1996.
1. Kollsman will manufacture all of the Biocircuits US requirements for the
years 1996 and 1997.
2. The transfer price for all units produced during the period will be
[ ] per unit.
3. Biocircuits will issue to Kollsman a warrant for 250,000 shares of common
stock. The exercise price of the warrant will be $7.00 per share. The
warrants will expire on December 31, 1997 and will include a net exercise
provision.
4. If the average closing price of the common stock for the ten trading days
of December 2, 1997 through December 13, 1997, as reported by the Wall
Street Journal, is [ ] per share or greater all obligations of
Biocircuits with respect to the warrants will have been met.
5. If the average closing price of the common stock for the ten trading days
of December 2, 1997 through December 13, 1997, as reported by the Wall
Street Journal, is less than [ ] per share but greater than [ ]
per share, the expiration date of the warrant will be extended to December
31, 1998.
6. If the average closing price of the common stock for the ten trading days
of December 2, 1997 through December 13, 1997,
<PAGE>
as reported by the Wall Street Journal, is less than [ ] per share
the expiration date of the warrant will be extended to December 31,
1998. In addition, Biocircuits will issue on January 1, 1998 a warrant
for 50,000 shares of common stock with an exercise price equal to the
then market price and an expiration date of December 31, 1998. For the
purpose of the additional 50,000 shares the market price is defined as
the average closing price for the ten trading days prior to January 1,
1998.
7. Kollsman will purchase all necessary raw materials and Biocircuits agrees
to provide some form of security to be triggered by an as of yet to be
determined cash balance.
8. Effective January 1, 1998 Biocircuits will have the right to manufacture or
engage a third party to manufacture all or part of the Biocircuits
requirements.
9. Biocircuits agrees to use best efforts to reduce the total ATP time to less
than the planned [ ]. To the extent
that the time can be reduced, all cost benefit will accrue to Biocircuits
in the form of a reduced transfer price.
10. Biocircuits agrees to pay the following NRE invoices submitted by Kollsman
for cost incurred through March 8, 1996 within 5 business days of the
execution of this agreement. Invoice numbers 6KA553, 6KA282, 6KA552,
6KA576 comprising [ ].
I believe that this covers the substance of the verbal agreement reached during
our telephone conversations and signature will signify that both parties intend
to enter into a final agreement via a contract amendment. We will start
immediately to draft the appropriate amendment, and as stated above the
effective date of both the warrant agreement and the contract amendment will be
April 18, 1996.
Please sign this document, retain a copy for your files and return a copy to
me. A signed original copy will be sent by mail immediately. Please then
sign and return a copy of the original.
<PAGE>
Signed: /s/ Patrick W. McNallen
-----------------------
Patrick W. McNallen
Vice President/General Manager
KMC Systems
Signed: /s/ John Kaiser
---------------
John Kaiser
President and CEO
Biocircuits Corp.
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<FISCAL-YEAR-END> DEC-31-1996
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