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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(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, 1998
-------------
[ ] 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 0-23678
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BIOSEPRA INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 04-3216867
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (IRS Employer Identification Number)
Organization or Incorporation)
111 LOCKE DRIVE, MARLBOROUGH, MASSACHUSETTS 01752
---------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(508) 357-7500
----------------------------------------------------
(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 [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, par value $.01 per share 8,440,051
-------------------------------------- -----------------------------
Class Outstanding at August 7, 1998
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BioSepra Inc.
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Condensed Balance Sheets as of
June 30, 1998 and December 31, 1997 3
Consolidated Condensed Statements of Operations for the
Three and Six Month Periods Ended June 30, 1998
and 1997 4
Consolidated Condensed Statements of Cash Flows for the
Periods Ended June 30, 1998 and 1997 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II - OTHER INFORMATION 13
SIGNATURES 15
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BioSepra Inc.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1998 1997
-------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,165 $ 2,370
Restricted cash -- 146
Accounts receivable 1,941 2,376
Inventories (Note 2) 3,296 2,722
Prepaid and other current assets 116 57
-------- --------
Total current assets 8,518 7,671
Property and equipment, net (Note 3) 1,491 1,509
Goodwill, net 5,092 5,288
Other assets 503 438
-------- --------
Total assets $ 15,604 $ 14,906
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable, current portion of long-term debt
and capital lease obligations $ 2,423 $ 488
Accounts payable 858 1,307
Related party payable (Note 4) 166 325
Accrued expenses 1,496 1,534
Accrued restructuring -- 161
Deferred contract revenue 157 21
-------- --------
Total current liabilities 5,100 3,836
Long-term debt and capital lease obligations, net of current portion 447 690
-------- --------
Total liabilities 5,547 4,526
Stockholders' equity:
Common stock 84 84
Additional paid-in capital 40,546 40,515
Unearned compensation (81) (161)
Accumulated deficit (30,133) (29,722)
Cumulative translation adjustment (360) (336)
-------- --------
Total stockholders' equity 10,057 10,380
-------- --------
Total liabilities and stockholders' equity $ 15,604 $ 14,906
======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated condensed financial statements.
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BioSepra Inc.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three-month periods Six-month periods
ended June 30, ended June 30,
------------------- ---------------------
1998 1997 1998 1997
------ ------ ------ -------
<S> <C> <C> <C> <C>
Revenue:
Product sales $1,615 $1,606 $3,505 $ 4,994
License fees 15 600 88 600
Research and development 48 128 158 128
------ ------ ------ -------
Total revenue 1,678 2,334 3,751 5,722
Costs and expenses:
Cost of products sold 1,011 994 1,975 2,926
Selling, general and administrative 667 1,295 1,543 2,551
Research and development 346 474 681 1,032
Amortization expense 141 232 282 464
Restructuring costs (benefit) (Note 7) -- -- (351) --
------ ------ ------ -------
Total costs and expenses 2,165 2,995 4,130 6,973
------ ------ ------ -------
Loss from operations (487) (661) (379) (1,251)
Other income (expenses), net (48) 32 (32) 153
------ ------ ------ -------
Net Loss $ (535) $ (629) $ (411) $(1,098)
====== ====== ====== =======
Basic and dilutive net loss per share $(0.06) $(0.07) $(0.05) $ (0.13)
Weighted average number of common and
common equivalent shares outstanding 8,431 8,419 8,431 8,418
</TABLE>
The accompanying notes are an integral part
of the consolidated condensed financial statements.
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BioSepra Inc.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six-month periods
ended June 30,
---------------------
1998 1997
------ -------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (411) $(1,098)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 537 817
Provision for doubtful accounts (235) 93
Loss on disposition of long-term assets 7 5
Changes in operating assets and liabilities:
Accounts receivable 661 834
Inventories (589) (70)
Prepaid and other current assets (59) (61)
Accounts payable (441) (266)
Related party payable (241) 84
Accrued expenses (35) (41)
Accrued restructuring (161) (13)
Deferred revenue 137 (618)
------ -------
Net cash used in operating activities (830) (334)
------ -------
Cash flows from investing activities:
Additions to property and equipment (262) (164)
Proceeds from sales of equipment 11 --
Decrease in marketable securities -- 360
Decrease in restricted cash 146 --
Increase in other assets (71) (71)
------ -------
Net cash (used in) provided by investing activities (176) 125
------ -------
Cash flows from financing activities:
Proceeds from issuance of common stock to minority stockholders 31 22
Borrowings under line of credit agreements 2,020 64
Long-term borrowings -- 47
Repayment of long-term borrowings (239) (238)
------ -------
Net cash provided by (used in) financing activities 1,812 (105)
------ -------
Effect of exchange rate changes on cash
and cash equivalents (11) (141)
------ -------
Net increase (decrease) in cash and cash equivalents 795 (455)
Cash and cash equivalents at beginning of period 2,370 4,142
------ -------
Cash and cash equivalents at end of period $3,165 $ 3,687
====== =======
</TABLE>
The accompanying notes are an integral part
of the consolidated condensed financial statements.
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BioSepra Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying consolidated condensed financial statements of
BioSepra Inc. (the "Company") are unaudited and have been prepared on a
basis substantially consistent with the annual audited financial
statements. The consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All material
intercompany balances and transactions have been eliminated in
consolidation.
Certain information and footnote disclosures normally included in the
Company's annual statements have been condensed or omitted. The
consolidated financial statements, in the opinion of management,
reflect all adjustments (including normal recurring accruals) necessary
for a fair statement of the results for the periods ended June 30, 1998
and 1997.
The results of operations for the periods are not necessarily
indicative of the results of operations to be expected for the fiscal
year. These consolidated financial statements should be read in
conjunction with the audited financial statements included in the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1997.
2. Inventories
Inventories consist of the following:
June 30, December 31,
1998 1997
-------- ------------
Raw materials $ 807 $ 600
Work in progress 255 129
Finished goods 2,234 1,993
------ ------
$3,296 $2,722
====== ======
3. Property and Equipment
Property and equipment consists of the following:
June 30, December 31,
1998 1997
-------- -----------
Property and equipment $ 4,026 $ 3,878
Less accumulated depreciation
and amortization (2,535) (2,405)
------- -------
1,491 1,473
Construction in progress -- 36
------- -------
$ 1,491 $ 1,509
======= =======
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4. Related party transactions
The payable to related party represents amounts due for certain
services and facilities provided by Sepracor Inc. ("Sepracor"), the
Company's majority stockholder.
In January 1996, the Company entered into a promissory note for
$350,000 with Sepracor. This amount is payable to Sepracor over sixty
months and does not bear interest. The Company utilized the funds for
leasehold improvements to the Company's facilities. As of June 30,
1998, $204,000 was outstanding under the promissory note.
5. Basic and Dilutive Net Loss Per Share
Basic income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding
during the period. Diluted income (loss) per share is the same as basic
income (loss) per share as the effects of common stock equivalents are
antidilutive. Total antidilutive shares of 612,000 and 432,000 for the
three months ended June 30, 1998 and 1997, respectively have been
excluded from the calculation of weighted average number of potentially
diluted common shares outstanding.
6. Statements of Cash Flows
Cash payments for interest for the six months ended June 30, 1998 and
1997 were $98,000 and $33,000, respectively.
7. Distribution Agreement
On March 26, 1998, the Company, Sepracor, and Beckman Instruments, Inc.
("Beckman") entered into an agreement pursuant to which the Company
amended its Distribution Agreement with Beckman and Sepracor amended
its Stock Purchase Agreement with Beckman. Under the amendment, the
Company granted to Beckman a non-exclusive right to manufacture
instruments, is relieved of its obligation to manufacture the
instruments for Beckman and sold the discontinued instrument product
inventory to Beckman for $250,000. The Company recorded the sale of the
inventory as a reduction to the previously recorded restructuring
charge in the first quarter.
8. Comprehensive Income
The Company adopted Statement of Financial Account Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income, effective January 1,
1998. SFAS 130 established standards for reporting and display of
comprehensive income and its components in the financial statements.
The Company's only item of other comprehensive income relates to
foreign currency translation adjustments, and is presented separately
on the balance sheet as required. If presented on the statement of
operations for the six months ended June 30, 1998 and 1997,
comprehensive loss would be approximately $23,000 and $386,000,
respectively greater than reported net loss, due to foreign currency
translation adjustments.
9. New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 131 specifies new guidelines for determining a company's
operating segments and related requirements for disclosure. This
statement will become effective for fiscal years beginning after
December 15, 1997. The Company believes that the adoption of this new
accounting standard will not have a material impact on the Company's
financial statements.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview
BioSepra Inc. and subsidiaries (the "Company") develops, manufactures and sells
chromatographic media and systems for use by biopharmaceutical companies in the
purification and production of biopharmaceuticals. The Company's products enable
pharmaceutical companies to reduce the time and cost required to develop and
manufacture biopharmaceuticals. The Company supplies its process chromatography
media and other proprietary products to drug manufacturers for use in the
commercial production of a wide range of biopharmaceuticals. Among these are
interferon, insulin, human growth hormone, special enzymes and vaccines.
Three and six months ended June 30, 1998 and 1997
Revenue decreased to $1,678,000 for the three months ended June 30, 1998 from
$2,334,000 for the same period in 1997. Revenue for the six months ended June
30, 1998 decreased to $3,751,000 compared to $5,722,000 for the same period in
1997. The decrease in revenue is attributed to $600,000 of non-recurring
licensing revenue in the second quarter of 1997, and to the discontinuation of
the instrument product line at the end of 1997.
Cost of products sold as a percentage of product sales was 62.6% for the three
months ended June 30, 1998 compared to 61.8% for the same period in 1997. For
the six months ended June 30, 1998 and 1997 the cost of products sold as a
percentage of product sales was 56.3% and 58.6%, respectively. The Company
expects that its gross profit margins will fluctuate in future periods because
of changes in product mix.
Selling, general and administrative expenses decreased to $667,000 for the three
months ended June 30, 1998 from $1,295,000 for the three months ended June 30,
1997. For the first six months of 1998, selling, general and administrative
expenses decreased to $1,543,000 from $2,551,000 for the comparable period in
1997. The decrease in expenditures is related primarily to a reduction in
overall personnel costs associated with the cost reduction program implemented
in December 1997.
Research and development expenses decreased to $346,000 for the second quarter
of 1998 from $474,000 in the second quarter of 1997. For the first six months of
1998, research and development expenses decreased to $681,000 from $1,032,000
for the comparable period in 1997. This decrease is primarily attributable to
the instrument product line discontinued at the end of 1997.
Amortization expenses decreased to $141,000 for the second quarter of 1998 from
$232,000 in the second quarter of 1997. For the first six months of 1998,
amortization expense decreased to $282,000 from $464,000 for the comparable
period in 1997. The decrease in amortization expense is primarily attributable
to the write down, in the fourth quarter of 1997, of intangible assets to their
estimated net realizable in accordance with SFAS No 121.
Other income (expense), net, was $(48,000) for the three months ended June 30,
1998 as compared to other income, net of $32,000 for the comparable period in
1997. Other income (expense), net was $(32,000) for the six months ended June
30, 1998 as compared to other income, net of $153,000 for the comparable period
in 1997. This change is due to the increase in interest expense from the
activation of the line of credit in 1998 and foreign currency exchange gains
recognized in the previous year.
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The Company's net loss decreased to $535,000 for the three months ended June 30,
1998 compared to net loss of $629,000 for the three months ended June 30, 1997.
For the first six months of 1998, the Company's net loss decreased to $411,000
from $1,098,000 for the comparable period in 1997. The decrease is attributed to
reduced operating expenses offset by reduced revenue as described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily from net proceeds
provided from the Company's initial public offering, funds provided by Sepracor,
equipment financing leases and product sales. As of June 30, 1998, the Company
had $3,165,000 of cash and cash equivalents and $3,418,000 of working capital.
Cash and cash equivalents for the quarter ended June 30, 1998 increased by
$649,000 from $2,516,000 at December 31, 1997. The Company utilized cash for
operations of $830,000 primarily to fund its operations. The Company used cash
from investing activities of $176,000 primarily due to increased patent costs
and purchases of property and equipment, partially offset by the maturity of
cash held in escrow. The Company generated cash from financing activities of
$1,812,000 primarily due to $2,000,000 additional borrowings under one of the
Company's line of credit agreements with a bank.
The Company has access to a revolving line of credit under which the Company may
borrow up to $3,000,000. Sepracor guarantees this revolving line of credit. As
of June 30, 1998, there was $2,000,000 outstanding under this agreement.
As of June 30, 1998, there was $516,000 outstanding under a French loan, which
is guaranteed by Sepracor. In addition, Sepracor guarantees certain capital
lease obligations of the Company. The outstanding balance of the capital lease
obligation guaranteed by Sepracor was $102,000 as of June 30, 1998.
Based upon the Company's current operating plan, the Company believes that its
current cash balance is sufficient to fund the Company's operations into mid
1999. The Company's cash requirements may vary materially from those now planned
because of factors such as the timing of significant product orders, commercial
acceptance of new products, patent developments, the introduction of competitive
products, acquisitions and the factors discussed below under "Future Operating
Results." Accordingly, the Company may be required to raise additional financing
within the next twelve months, and there can be no assurance that such financing
will be available on favorable terms, if at all.
FUTURE OPERATING RESULTS
Certain of the information contained in this Quarterly Report on Form 10-Q,
including information with respect to the ability of the Company to obtain
additional financing within the next twelve months, the success of the Company's
HyperD media and information with respect to the Company's other plans and
strategy for its business, consist of forward-looking statements. Important
factors that could cause actual results to differ materially from the
forward-looking statements are described in the Company's Annual Report on Form
10-K for the year ended December 31, 1997. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects," "intends," and similar
expressions are intended to identify forward-looking statements. There are a
number of factors that could cause the Company's actual results to differ
materially from those indicated by such forward-looking statements. These
factors include, without limitation, the following:
The future success of the Company will depend largely on the success of its
HyperD media product line, which was introduced in March 1993. There can be no
assurance that the Company's HyperD media product line will achieve commercial
success and any failure of such products to achieve such success would have a
materially adverse effect on the business and results of operations of the
Company.
The Company could require additional funds in 1998 if, and to the extent, it
fails to achieve its operating plan, which contemplates increases in sales of
HyperD media. At such time, as the Company requires additional financing, there
can be no assurance that such financing will be available on favorable terms, if
at all. If the Company requires additional financing and such capital is not
available on acceptable terms from third parties, Sepracor may, but is not
obligated to, guarantee or provide such financing.
Sales to process customers of chromatographic media products, such as HyperD
media, typically involve long lead times, and customers generally evaluate
several different media products before committing to a volume purchase. Also,
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customers are typically reluctant to change media used in the production process
for a pharmaceutical previously approved by the FDA because such a change may
require additional FDA approval. There can be no assurance that the Company will
be able to compete effectively against its existing or future competitors.
In December 1997, the Company implemented a cost reduction program that involved
the discontinuation of its instrument product line and a reduction in the number
of employees. The principal purpose of the program was to enable the Company to
focus on higher margin consumable products for the research and process segments
of the biopharmaceutical and genomics markets. In connection with this program,
the Company recorded restructuring charges totaling $851,000 in the fourth
quarter of 1997. There can be no assurance that this program will not result in
loss of customers or temporary sales or production disruptions that could have a
materially adverse effect on the Company's business, financial condition and
results of operations.
Other factors that may adversely affect the Company's future operating results
include: intense competition from other companies selling or developing
biosepration products, the loss of any significant customer, risks attendant to
the conduct of business in foreign countries, risks relating to the Company's
ability to maintain meaningful patent protection of its proprietary information
and the risk of product liability claims associated with the testing, marketing
and sale of the Company's media products.
The Company is currently working to resolve the potential impact of the year
2000 on the processing of date-sensitive information by the Company's
computerized information systems. The year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognized a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculation or system failures. Based on
preliminary information, costs of addressing potential problems are not expected
to have a material adverse impact on the Company's financial position, results
of operations or cash flows in future periods. However, failure of the Company,
its customer or vendors to resolve such processing issues in a timely manner,
could have a material adverse effect on the Company's business, financial
condition and results of operations. Accordingly, the Company plans to devote
the necessary resources to resolve all significant year 2000 issues in a timely
manner.
Because of the foregoing factors, the Company believes that period-to-period
comparisons of its financial results are not necessarily meaningful and it
expects that its results of operations may continue to fluctuate from period to
period in the future.
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PART II.
OTHER INFORMATION
Items 1 - 3. None
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on May 26, 1997,
the following proposals were adopted by the vote specified below:
<TABLE>
<CAPTION>
Broker
Proposal For Against Abstain Non-votes
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. Election of Directors
Timothy J. Barberich 8,096,053 38,875 0
William M. Cousins, Jr 8,096,053 38,875 0
Alexander M. Klibanov, Ph.D. 8,096,053 38,875 0
Paul A. Looney 8,096,053 38,875 0
Riccardo Pigliucci 8,096,053 38,875 0
William E. Rich, Ph.D. 8,096,053 38,875 0
David P. Southwell 8,096,053 38,875 0
Jean-Marie Vogel 8,095,053 39,875 0
2. Approve the amendment to the Company's
1994 Director Stock Option Plan 5,872,029 119,682 1,105 2,142,112
3. Approve the amendment to the Company's
1997 Stock Incentive Plan 5,830,629 149,182 13,005 2,142,112
</TABLE>
Item 5. None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
None
b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BIOSEPRA INC.
Date: August 12, 1998 /s/ Jean-Marie Vogel
--------------------------------------------
Jean-Marie Vogel
President, Chief Executive
Officer and Director
(Principal Executive Officer)
Date: August 12, 1998 /s/ Philip V. Holberton
--------------------------------------------
Philip V. Holberton
Chief Financial Officer
(Principal Financial and Accounting officer)
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 3,165,000
<SECURITIES> 0
<RECEIVABLES> 2,075,000
<ALLOWANCES> 134,000
<INVENTORY> 3,296,000
<CURRENT-ASSETS> 8,518,000
<PP&E> 4,026,000
<DEPRECIATION> 2,535,000
<TOTAL-ASSETS> 15,604,000
<CURRENT-LIABILITIES> 5,100,000
<BONDS> 447,000
0
0
<COMMON> 84,000
<OTHER-SE> 9,973,000
<TOTAL-LIABILITY-AND-EQUITY> 15,604,000
<SALES> 1,615,000
<TOTAL-REVENUES> 1,678,000
<CGS> 1,011,000
<TOTAL-COSTS> 1,011,000
<OTHER-EXPENSES> 1,165,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 113,000
<INCOME-PRETAX> (487,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (487,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (487,000)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
