SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1998
Commission file number 0-10822
BIOCONTROL TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1229323
(State of other jurisdiction (IRS Employer
of incorporation or organization) Identification no.)
300 Indian Springs Road, Indiana, Pennsylvania 15701
(Address of principal executive offices) ( Zip Code)
(412) 349-1811
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
As of June 30, 1998, 316,226,240 shares of Biocontrol
Technology, Inc. common stock, par value $.10 were
outstanding.
1
PART I FINANCIAL STATEMENTS
Item 1. Financial Statements
BIOCONTROL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Jun. 30, 1998 Dec. 31, 1997
------------- -------------
CURRENT ASSETS
Cash and equivalents $ 294,535 $ 2,759,067
Accounts receivable-net of allowance for
doubtful accounts 103,108 417,329
Inventory - net of valuation allowance 1,864,959 1,834,018
Notes receivable - related parties 35,000 35,000
Notes receivable 826,050 87,000
Interest receivable 2,655 2,134
Prepaid expenses 180,845 164,012
------------- -------------
TOTAL CURRENT ASSETS 3,307,152 5,298,560
PROPERTY, PLANT AND EQUIPMENT
Building 1,444,273 1,444,273
Land 246,250 246,250
Construction in process 1,541,609 1,465,152
Leasehold improvements 1,486,083 1,197,977
Machinery and equipment 5,128,623 5,042,736
Furniture, fixture & equipment 880,154 812,221
------------- -------------
Subtotal 10,726,992 10,208,609
Less accumulated depreciation 3,929,366 3,516,677
------------- -------------
6,797,626 6,691,932
OTHER ASSETS
Notes receivable - related parties 1,273,900 598,900
Interest receivable - related parties 108,666 75,343
Deposit on equipment - 300,000
Goodwill, net of amortization 4,954,469 -
Patents, net of amortization 4,599 6,765
Other assets 14,269 9,800
------------- -------------
6,355,903 990,808
------------- -------------
TOTAL ASSETS $ 16,460,681 $ 12,981,300
============= =============
____________________________________________________________________________
Note: The Balance Sheet at December 31, 1997 has been derived from audited
financial statements at that date.
- ----------------------------------------------------------------------------
See notes to consolidated financial statements
2
BIOCONTROL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
Jun. 30, 1998 Dec. 31, 1997
------------- -------------
CURRENT LIABILITIES
Accounts payable $ 1,345,352 $ 646,535
Current portion of long-term debt 2,976,715 18,765
Current portion of capital lease obligations 116,349 109,933
Debentures payable 1,949,300 3,301,280
Accrued liabilities 638,088 215,119
Escrow payable 2,700 2,700
Deferred revenue on contract billings 114,403 116,146
------------- ------------
TOTAL CURRENT LIABILITIES 7,142,907 4,410,478
LONG-TERM LIABILITIES
Capital lease obligations 2,650,625 2,688,293
Long-term debt 1,172,222 8,806
------------- ------------
3,822,847 2,697,099
UNRELATED INVESTORS' INTEREST
IN SUBSIDIARY 1,273,387 1,409,647
STOCKHOLDERS' EQUITY
Common stock, par value $.10 per share
authorized 600,000,000 shares, issued and
outstanding 316,226,240 at Jun. 30,1998 and
138,583,978 at Dec. 31, 1997 31,622,624 13,858,398
Additional paid-in capital 100,056,492 104,932,920
Note receivable issued for
common stock - related party (25,000) (25,000)
Warrants 6,396,994 6,396,994
Accumulated deficit (133,829,570) (120,699,236)
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY 4,221,540 4,464,076
-------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 16,460,681 $ 12,981,300
============= ==============
____________________________________________________________________________
Note: The Balance Sheet at December 31, 1997 has been derived from audited
financial statements at that date.
- ----------------------------------------------------------------------------
See notes to consolidated financial statements
3
BIOCONTROL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the six months ended For the three months ended
Jun. 30, Jun. 30,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
Revenues
Sales $ 933,441 $ 515,884 $ 475,736 $ 366,563
Interest income 60,594 70,249 15,116 30,030
Other income - 3,980 - 3,980
-------------- -------------- -------------- --------------
994,035 590,113 490,852 400,573
Costs and expenses
Cost of products sold 498,860 323,050 229,880 238,575
Research and development 4,013,632 3,921,661 1,360,098 2,005,829
Selling, general and administrative 5,937,153 6,600,650 4,058,399 3,957,896
Warrant extensions - Subsidiary 1,870,000 4,014,375 1,870,000 299,375
Interest expense 205,658 143,402 112,851 64,566
Beneficial convertible debt feature 2,631,071 1,683,766 670,833 1,433,766
-------------- -------------- -------------- --------------
15,156,374 16,686,904 8,302,061 8,000,007
-------------- -------------- -------------- --------------
Loss before unrelated investors' interest (14,162,339) (16,096,791) (7,811,209) (7,599,434)
Unrelated investors' interest in net loss
of subsidiary 1,032,005 2,147,649 967,377 236,019
-------------- -------------- -------------- --------------
Net loss ($13,130,334) ($13,949,142) ($6,843,832) ($7,363,415)
============== ============== ============== ==============
Loss per common share ($0.06) ($0.24) ($0.03) ($0.13)
============== ============== ============== ==============
See notes to consolidated financial statements.
4
BIOCONTROL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months ended For the three months ended
Jun. 30, Jun. 30,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
Cash flows used by operating activities:
Net loss ($13,130,334) ($13,949,142) ($6,843,832) ($7,363,415)
Adjustments to reconcile net loss to net
cash used by operating activities :
Depreciation and amortization 768,884 420,069 423,567 206,678
Unrelated investors' interest in subsidiary (1,032,005) (2,147,649) (967,377) (236,019)
Warrant extensions by subsidiary 1,870,000 4,014,375 1,870,000 299,375
Debenture interest converted to stock 72,665 - 53,800 -
Premium for extention on debenture 680,500 - 680,500 -
Beneficial convertible debt feature 2,631,071 1,683,766 670,833 1,433,766
Acquistion of ICTI 621,517 - 871,517 -
Stock issued in exchange for services (17,688) 864,565 7,499 846,196
Stock issued in exchange for services by subsidiary - 600 - 600
(Increase) in receivables 314,221 (96,906) 218,869 (64,820)
(Increase) in inventories (30,941) (454,884) 2,800 (105,219)
(Increase) decrease in prepaid expenses (16,833) 55,299 4,913 46,671
(Increase) decrease in other assets (4,469) 1,487 4,074 1,467
(Decrease) increase in accounts payable 698,817 (117,687) 841,682 (52,866)
Increase in other liabilities 422,969 334,627 489,141 299,575
(Decrease) in deferred revenue on contract billing (1,743) (75,000) (1,743) (75,000)
-------------- -------------- -------------- --------------
Net cash flow (used) by operating activities (6,153,369) (9,466,480) (1,673,757) (4,763,011)
-------------- -------------- -------------- --------------
Cash flows from investing activities:
Purchase of property, plant and equipment (784,082) (711,369) (48,118) (382,129)
(Increase) in notes receivable (825,050) (83,000) (175,050) -
(Increase) in interest receivable (33,844) (12,768) (19,212) (5,474)
Acquisition of ICTI (1,030,000) - (1,030,000) -
-------------- -------------- -------------- --------------
Net cash provided (used) by investing activities (2,672,976) (807,137) (1,272,380) (387,603)
-------------- -------------- -------------- --------------
Cash flows from financing activities:
Net proceeds from sales of Preferred stock-Series B - 2,027,000 - -
Proceeds from warrants exercised - 38,200 - 38,200
Proceeds from debentures payable 6,945,000 5,800,000 1,725,000 4,800,000
Payments on notes payable (528,634) (28,179) (374,474) (6,607)
Payments on capital lease obligations (54,553) 39,115 (28,781) (18,791)
-------------- -------------- -------------- --------------
Net cash provided by financing activities 6,361,813 7,876,136 1,321,745 4,812,802
-------------- -------------- -------------- --------------
Decrease in cash and equivalents (2,464,532) (2,397,481) (1,624,392) (337,812)
-------------- -------------- -------------- --------------
Cash and equivalents, beginning of period 2,759,067 3,802,874 1,918,927 1,743,205
-------------- -------------- -------------- --------------
Cash and equivalents, end of period $ 294,535 $1,405,393 $ 294,535 $1,405,393
============== ============== ============== ==============
See notes to consolidated financial statements.
BIOCONTROL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - Basis of Presentation
The accompanying consolidated financial statements of
Biocontrol Technology, Inc. (the "Company") and its 89.9%
owned subsidiary, Coraflex, Inc., and its 52% owned
subsidiary, Diasense, Inc., and its 67% owned subsidiary,
Petrol Rem, Inc., and its 99.1% owned subsidiary, IDT, Inc.,
and its 99.4% owned subsidiary, Barnacle Ban Inc., and its
58.4% owned subsidiary, ICTI, Inc., have been prepared in
accordance with generally accepted accounting principles for
interim financial information, and with the instructions to
Form 10-Q and Rule 10-O 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. For further information, refer to the consolidated
financial statements and footnotes included in the Company's
annual report on Form 10-K for the year ended December 31,
1997.
NOTE B - Net Loss Per Common Share
Net loss per common share is based on the average number
of outstanding common shares. The loss per share does not
include common stock equivalents since the effect would be
anti-dilutive. The weighted average shares used to calculate
the loss per share for the period ending June 30, 1998, and
June 30, 1997, were 202,083,593 and 57,253,388, respectively.
NOTE C - Stockholders Equity
During the three months ended June 30, 1998, the Company
issued 4% Subordinate Convertible Debentures totaling
$1,725,000 to entities which are not a U.S. person as that
term is defined in Rule 902(O) of Regulation S and were not
saleable or convertible for a minimum of 45 days from issuance
(See "Management's Discussion and Analysis").
The Company's common stock is currently traded on the
NASDAQ Small-Cap Market. Revised requirements for this
market include a minimum trading price of $1.00 which will
limit the Company's option to continue to trade on NASDAQ.
During the period ending June 30, 1998, Diasense Inc.,
extended the exercise date of warrants to purchase 748,000
shares of common stock to certain directors, consultants and
employees. The warrants were originally granted at an
exercise price of $.50 per share and extended at the same
price. The assigned value of the stock when the extensions
were granted was $3.50. Diasense Inc. recorded a $1,870,000
expense for the difference between the assigned value and the
warrant price times the number of shares.
NOTE E - Legal Proceedings
During April 1998, the Company and its affiliates were served
with subpoenas by the U.S. Attorneys' office for the U.S.
District Court for the Western District of Pennsylvania. The
subpoenas requested certain corporate, financial and
scientific documents and the Company has provided documents in
response to such requests. The class action lawsuit which
names the Company and certain officers and directors as
defendants is pending in the U.S. District Court for the
Western District of Pennsylvania. The action has been
certified as a class action, and remains in the pre-trial
pleading stage pursuant to consent of all the parties.
NOTE F Year 2000 Issue
The Company is currently working to resolve the potential
impact of the Year 2000 on the processing of date-sensitive
information. The Year 2000 Issue is the result of computer
programs being written using two digits (rather than four) to
define the applicable year. Programs which are susceptible to
problems after December 31, 1999 are those which recognize a
date using "00" as the year 1900 rather than the year 2000,
which could result in miscalculations or system failures.
Based upon a review of its own internal programs and software,
the Company currently believes that the Year 2000 will not
pose significant operational problems to its information
systems, because such systems are already compliant or will be
made compliant with minor adjustments. In addition,
ChaseMellon Shareholder Services, the Company's transfer
agent, has disclosed that it will be Year 2000 compliant and
that no interruptions in service will occur. The Company is
also conducting an investigation of its major suppliers,
vendors and other parties to determine their respective plans
for the Year 2000 compliance. The Company's common stock
currently trades on the Nasdaq Small-Cap Market, Nasdaq and
its parent, the NASD, have analyzed its products and systems;
are addressing their Year 2000 issues; and are implementing a
plan to test their systems and to remediate any Year 2000
problems. As of this date, Nasdaq has not made a definitive
statement regarding when it will be compliant, but has stated
that it is making all necessary changes to its trading
systems. The Company's current estimates indicate that the
costs of addressing potential problems are not expected to
have a material impact upon the Company's financial position,
results of operations or cash flows in future periods. There
can be no assurance, however, that modifications to
information systems which impact the Company and which are
required to remediate year 2000 issues will be made on a
timely basis and that they will not adversely affect the
Company's systems or operations.
NOTE G - RESTATEMENT
The accompanying financial statements include the effect of
adjustments which were made to financial statements previously
issued by the Company.
Subsequent to the issuance of its consolidated financial
statements for the quarter ended June 30, 1998, the Company
determined that beneficial conversion terms included in its
convertible debentures issued in 1996, 1997, and 1998 should
be reflected in its financial statements as expense and as
additional paid-in capital. The amount of expense charged to
operations as a result of this adjustment was $1,650,000 in
1996; $6,278,853 in 1997; $2,631,071 for the six months ended
June 30, 1998; $1,683,766 for the six months ended June 30,
1997; $670,833 for the three months ended June 30, 1998; and
$1,433,766 for the three months ended June 30, 1997.
Corresponding amounts were recognized as additional paid-in
capital and there was no effect to the total Stockholders
Equity as a result of these adjustments.
The Company has also revised its previously issued financial
statements to reflect a reduction in the amorization period
for goodwill associated with its acquisition of ICTI from 20
years to 5 years. The additional amortization expense for the
quarter and six months ended June 30, 1998 was $197,436 and
$285,944 respectively.
Management's Discussion and Analysis of Financial Condition
and Cash Flows
Liquidity and Capital Resources
Cash decreased from $2,759,067 at December 31, 1997 to
$294,535 at June 30, 1998. This decrease was attributable to
the Company's $6,153,369 net operating expenditures which
primarily related to the research and development of the non
invasive glucose sensor (Sensor), Sensor related general and
administrative expenses and costs associated with the
acquisition of ICTI, Inc.. The Company also had net cash used
by investing activities of $2,672,976, which includes
equipment consolidated from ICTI, Inc. and the making of Notes
Receivable to related parties.
Furthermore, the Company had net cash provided by financing
activities of $6,361,813 of which $6,945,000 was provided from
debentures sold pursuant to regulation S. Net cash provided
by financing activities was primarily used to continue to fund
the Company's research and development projects, payments in
connection with the acquisition of ICTI, Inc. and to provide
working capital for the Company.
Results of Operations
Sales during the second quarter increased to $475,736 in 1998
from $366,563 in 1997 and increased for the six month period
to $933,441 in 1998 from $515,884 in 1997. The increase was
primarily due to increased sales of the Functional Electrical
Stimulators, the sales of which have been suspended.
Interest income decreased during the second quarter to $15,116
in 1998 from $30,030 in 1997 and decreased for the six month
period to $60,594 in 1998 from $70,249 in 1997. The decrease
was due to the Company's having less cash to invest during the
periods in 1998 than in 1997.
Costs of Products Sold during the second quarter decreased to
$229,880 in 1998 from $238,575 in 1997 and increased for the
six month period to $498,860 in 1998 from $323,050 in 1997.
The fluctuations were primarily due to varying orders for the
Functional Electrical Stimulators.
Research and Development expenses during the second quarter
decreased to $1,360,098 in 1998 from $2,005,829 in 1997 and
increased for the six month period to $4,013,632 in 1998 from
$3,921,661 in 1997 The second quarter decrease was due to a
reduction in research and development expenditures.
Selling, General and Administrative expenses during the second
quarter increased to $4,058,399 in 1998 from $3,957,896 in
1997 and decreased for the six month period to $5,651,209 in
1998 from $6,600,650 in 1997. The overall decrease was due to
the Company's reduction in personnel and expenditures. The
increase from 1997 to 1998 was due to goodwill expenses
related to the ICTI acquisition.
Interest expense during the second quarter increased to
$112,851 in 1998 from $64,566 in 1997 and increased for the
six month period to $205,658 in 1998 from $143,402 in 1997.
The increase was due to the Company's continued efforts in
acquiring capital through 4% convertible debentures and to
Notes Payable in connection with the acquisition of ICTI.
The Company's cash flow problems resulted in a reduction in
personnel during the quarter ended June 30,1998. In addition,
such problems resulted in the Company's inability to meet its
full payroll during June, 1998.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
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) Exhibits
(B) Reports on Form 8-K
(1) A report on form 8-K dated July 02, 1998, with
respect to Item 5 other events and Item 7 (c),
Exhibit.
(2) A report on form 8-K dated July 06, 1998, with
respect to Item 5 other events. and Item 7 (c),
Exhibit.
(3) A report on form 8-K dated July 07, 1998, with
respect to Item 5 other events and Item 7 (c),
Exhibit.
(4) A report on form 8-K dated July 15, 1998, with
respect to Item 5 other events and Item 7 (c),
Exhibit.
(5) A report on form 8-K dated July 16, 1998, with
respect to Item 5 other events and Item 7 (c),
Exhibit.
(6) A report on form 8-K dated August 04, 1998,
with respect to Item 5 other events and Item 7
(c), Exhibit.
(7) A report on form 8-K dated August 05, 1998,
with respect to Item 5 other events and Item 7
(c), Exhibit.
(8) A report on form 8-K dated August 07, 1998,
with respect to Item 5 other events and Item 7
(c), Exhibit.
(9) A report on form 8-K dated August 07, 1998,
with respect to Item 5 other events and Item 7
(c), Exhibit.
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 on this 14th day of August, 1998.
BIOCONTROL TECHNOLOGY, INC.
By /s/ Fred E. Cooper
Fred E. Cooper
CEO