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 December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________________________to_____________________
1-10285
Commission File Number:
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BIOMAGNETIC TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
California 95-2647755
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
9727 Pacific Heights Boulevard, San Diego, California 92121-3719
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(Address of principal executive offices) (zip code)
(619) 453-6300
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 February 3, 1998 Registrant had only one class of common stock
of which there were 53,344,123 shares outstanding.
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIOMAGNETIC TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31,
1997 SEPTEMBER 30,
(UNAUDITED) 1997
------------ -----------
ASSETS
Cash and cash equivalents $ 1,027 $ 1,229
Restricted cash and short-term investments 299 500
Accounts receivable, less allowance for doubtful 520 398
accounts of $10
Inventories 2,837 2,388
Prepaid expenses and other current assets 135 270
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Total current assets 4,818 4,785
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Net property and equipment 501 526
Investment in Magnesensors 160 160
Restricted cash 195 192
Other assets 338 339
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TOTAL ASSETS $ 6,012 $ 6,002
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LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Accounts payable $ 1,087 $ 1,341
Accrued liabilities 899 934
Accrued salaries and employee benefits 435 512
Customer deposits 2,172 2,172
Deferred revenue 968 1,135
Note payable to shareholder - 975
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Total current liabilities 5,561 7,069
Other long-term liabilities 211 219
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Total liabilities 5,772 7,288
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COMMITTMENTS AND CONTINGENCIES
SHAREHOLDERS' (DEFICIT) EQUITY
Common stock -- no par value, 100,000,000 shares
authorized; 53,344,123 and 47,720,887 shares issued and
outstanding in December and September, respectively 84,380 81,569
Additonal paid-in capital 3,000 3,000
Accumulated deficit (87,140) (85,855)
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Total shareholders' (deficit) equity 240 (1,286)
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TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT (EQUITY) $6,012 $6,002
------------ -----------
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See notes to consolidated condensed financial statements
2
BIOMAGNETIC TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
THREE MONTHS ENDED
DECEMBER 31,
1997 1996
(Restated Note 6)
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REVENUES
Product sales $ 104 $ 33
Product services 167 135
Contract research 53 -
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324 168
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COST OF REVENUES
Product 108 85
Product services 108 15
Contract research 50 -
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266 100
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GROSS MARGIN 58 68
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OPERATING EXPENSES
Research and development 409 999
Marketing, general and administrative 886 1,514
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1,295 2,513
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OPERATING LOSS (1,237) (2,445)
Interest expense (27) (2,319)
Interest income 15 88
Other income (expense), net (36) 61
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NET LOSS $ (1,285) $(4,615)
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NET LOSS PER SHARE $ (0.03) $ (0.12)
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Weighted average number of
shares outstanding 47,871 39,974
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See notes to consolidated condensed financial statements
3
BIOMAGNETIC TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Three Months Ended
December 31,
1997 1996
(Restated Note 6)
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OPERATING ACTIVITES
Net loss $ (1,285) $ (4,615)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 38 119
Interest cost for conversion feature of note payable to shareholder - 2,250
Changes in operating assets and liabilities:
Restricted cash 198 4,542
Accounts receivable (122) (8)
Inventories (449) (979)
Prepaid and other current assets 135 302
Other assets 1 1
Accounts payable (254) (2)
Accrued liabilities (35) (689)
Accrued salaries and employee benefits (77) (86)
Customer deposits - 1,552
Deferred revenue (167) -
Other liabilities (8) (28)
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Net cash provided by (used in) operating activities (2,025) 2,359
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INVESTING ACTIVITIES
Change in short-term investments - (2,104)
Payments for property and equipment (13) (32)
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Net cash used in investing activities (13) (2,136)
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FINANCING ACTIVITIES
Proceeds from sale of common stock 2,811 -
Proceeds from notes payable 725 -
Repayment of notes payable (1,700) -
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Net cash provided by financing activities 1,836 -
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (202) 223
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,229 1,752
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,027 $ 1,975
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See notes to consolidated condensed financial statements.
4
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 (the "Company") 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. Although the Company believes that the disclosures made in this
report are adequate to make the information not misleading, it is suggested that
these financial statements be read in connection 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, 1997.
As of October 1, 1997 the assets and liabilities of the subsidiary were acquired
by Biomagnetic Technologies, Inc. Niederlassung Germany, newly established as a
branch office of Biomagnetic Technologies, Inc. Biomagnetic Technologies, GmbH
continues to exist as a non-operating wholly owned entity.
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
December 31, 1997 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. RISK FACTORS AND GOING CONCERN
The Company's current financial condition, the uncertainty regarding its ability
to raise additional capital, and the uncertainty and risks associated with
future operations raise substantial doubt about the Company's ability to operate
as a going concern. The Company currently anticipates that its existing capital
resources will be sufficient to provide operating capital required to meet its
obligations in the normal course of business through February 1998.
The accompanying financial statements do not include any adjustments that might
result from the outcome of these uncertainties. See Item 2 "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
3. NET LOSS PER SHARE
Shares used in computing 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 net loss per share.
4. INVENTORIES
The composition of inventories is as follows (In thousands):
December 31, September 30,
1997 1997
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Raw materials $ 251 $ 281
Work-in process 2,007 1,528
Finished goods 579 579
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$2,837 $2,388
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5
5. MAGNES-Registered Trademark- WHOLE HEAD SYSTEM PRODUCTION
The Company's backlog as of December 31, 1997, amounted to $4,549,000, and is
composed primarily of an order for a Magnes 2500 WH shipped in fiscal 1997, but
not yet accepted by the customer, an order for an expanded 248-channel sensor,
and service revenues on systems shipped in fiscal 1997 and fiscal 1996. As of
December 31, 1997, the Company has received related advance payments from
customers totaling approximately $3,050,000. 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.
6. RESTATEMENT OF CERTAIN PRIOR PERIOD BALANCES
The accompanying unaudited consolidated condensed financial statements for the
three month period ended December 31, 1996 have been restated to (i) reflect
$250,000 of executive termination costs charged to operations in the fourth
quarter of fiscal 1997 which should have been expensed in the first quarter of
fiscal 1997 and (ii) reflect $2,250,000 of non-cash interest cost for the
conversion of a note payable to shareholder not previously recorded in
accordance with Topic D-60 issued by the Securities and Exchange Commission
staff in March 1997.
The effect of the restatement is as follows:
As Previously
Three month period ended December 31, 1996: Reported As Restated
(In thousands, except per share amounts) ------------- -------------
Statement of Operations:
Marketing, general and administrative $ 1,264 $ 1,514
Interest expense 69 2,319
Net loss (2,115) (4,615)
Net loss per share (0.05) (0.12)
7. SEGMENT INFORMATION
The Company operates in one segment which includes developing, manufacturing and
selling magnetic source imaging products. The overall market for the Company's
operations can be further divided into three overlapping segments: the basic
research market, the clinical applications development market, and the
commercial clinical market. 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. SUBSEQUENT FINANCING
In February 1998, the Company discounted two customer notes for a net of
$355,000 from Dassesta International, S.A., a principal shareholder. The face
amount of these notes was 2,200,000 French Francs, equal to approximately
$366,000 at the then current exchange rate. In addition, the Company
simultaneously received a 180 day unsecured loan, bearing interest at 10% from
Dassesta in the amount of $145,000, for a total cash influx of $500,000.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Except for the historical information contained herein, the following discussion
may contain (and the Notes to the Unaudited Consolidated Condensed Financial
Statements may contain) forward-looking statements that involve risks and
uncertainties. The Company's future results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not specifically limited to, failure to satisfy performance
obligations, timely product development, changes in economic conditions in
various markets the Company serves, and uncertainty regarding the Company's
patents and propriety rights, as well as the other risks detailed in this
section. The Company does not undertake to update the results discussed herein
as a result of changes in risks or operating results.
OVERVIEW
Biomagnetic Technologies, Inc. ("BTi") is a leader in magnetic source imaging
("MSI") and has developed the Magnes system, a family of instruments designed to
assist in the noninvasive diagnosis of a broad range of medical disorders. The
Magnes systems developed by the Company use advanced superconductor technology
to measure and locate the source of magnetic fields created by the human body.
While traditional medical imaging methods provide anatomical detail, the
measurement of the body's magnetic fields by MSI provides information about
normal and abnormal functions of the brain, heart and other organs. The Company
is focusing the development of its technology on potentially large commercial
market applications such as pre-surgical planning for neurosurgery, the
diagnosis and surgical planning for treatment of epilepsy and evaluation of the
fetal heart, among others.
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 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.
Twenty-one (21) Magnes systems were installed in medical and research
institutions worldwide at the end of the first quarter 1998. 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 80 scientific and medical papers.
Since the first reimbursement for MSI procedures was received in September 1993,
111 insurance companies have approved reimbursement for certain MSI procedures
performed with the Company's Magnes MSI systems and 208 reimbursements have been
received on a case-by-case basis.
In fiscal 1995, BTi announced its 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 a
seated or fully reclined position. As of December 31, 1997 the Company had
shipped eight Magnes 2500 WH systems and received seven final acceptances from
customers.
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 generally prices its European sales in the currency of the
country in which the product is sold and the prices of such products in dollars
will vary as the value of the dollar fluctuates 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. The Company periodically
enters into forward exchange contracts to hedge a portion of such foreign
currency exposure.
Due to substantial product research and development expenses and low unit
sales, the Company has incurred net losses every year since fiscal 1982. Since
concentrating on the development of its MSI systems in 1984, the Company's
corporate strategy and commitment of resources have focused on long-term product
applications and continued product development rather than near-term operating
performance. Since the development of the Magnes 2500 WH system was
substantially completed in fiscal year 1996, the Company has significantly
reduced product and applications development expenses and expects that such
expenditures will continue at comparatively reduced levels in 1998.
7
In December 1996, the Company reported a restructuring of its operations due to
lower short-term market projections for its MSI systems. As part of the
restructuring, D. Scott Buchanan, Ph.D. assumed the responsibilities of
President and CEO. The restructuring also resulted in a reduction of 44
employees.
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 U.S. market have
limited system sales through December 31, 1997. 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
and at current sales volumes, 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 first quarter of fiscal 1998 were $324,000 including
$167,000 of service revenues compared to $168,000 of total revenues, including
$135,000 of service revenues in the first quarter of fiscal 1997. Net loss in
the first quarter of fiscal 1998 amounted to $1,285,000 as compared to a
restated net loss of $4,615,000 for the comparable period in the prior fiscal
year. There were no Magnes 2500 WH systems or other Magnes system final
acceptances in the either the first quarter of fiscal 1998 or the first quarter
of fiscal 1997. The $4,615,000 loss in the first quarter of fiscal 1997
included a $2,250,000 non-cash charge to interest expense in connection with the
conversion of a note payable to shareholder. (See Note 6 to unaudited
consolidated condensed financial statements).
Production costs of $108,000 for the first quarter of fiscal 1998 increased
from $85,000 from the first quarter of fiscal 1997. The increase in production
costs is due to increased product sales.
Research and development expenses amounted to $409,000 for the three month
period ended December 31, 1997 These expenses amounted to $999,000 for the
comparable period in the prior year. The decrease is due to the reduction of
research and development expenses related to the completion of the development
of the Magnes 2500 WH system.
Marketing, general and administrative expenses amounted to $886,000 in the first
quarter of fiscal 1998, a decrease of $628,000 from the comparable period in
fiscal 1997 when these restated expenses amounted to $1,514,000. The decrease
was primarily due to the restructuring of operations, including a reduction in
marketing and sales personnel, which commenced in December 1996, and $250,000 of
executive termination costs incurred in the first quarter of fiscal 1997. (See
Note 6 to unaudited consolidated condensed financial statements).
Interest expense amounted to $27,000 in the first quarter of fiscal 1998. In the
first quarter of fiscal 1997, interest expense amounted to $2,319,000 as
restated, of which $2,250,000 was the result of a non-cash interest cost for
conversion of a note payable to shareholder. (See Note 6 to unaudited
consolidated condensed financial statements).
Order backlog for the Company's products at December 31, 1997 was $4,549,000, as
compared to $4,763,000 at September 30, 1997. There were no new system orders
received in the first quarter of fiscal 1998.
LIQUIDITY, CAPITAL RESOURCES
At December 31, 1997, the Company's current liabilities exceeded current assets,
resulting in a working capital deficiency of $743,000. At September 30, 1997,
the Company had a working capital deficiency of $2,284,000. The decrease in the
working capital deficiency is primarily due to the receipt of cash from equity
placements which were used to repay a note payable to shareholder and certain
trade payables. Cash and cash equivalents and short-term investments, exclusive
of any restricted cash, declined by $202,000 to $1,027,000 at December 31, 1997.
The Company's operations were funded by existing cash and short-term investment
resources, the release of restricted cash, a working capital loan from Dassesta
International, S.A. ("Dassesta"), a principal shareholder of the Company and
equity placements to Dassesta and a foreign investor.
8
In February 1998, the Company discounted two customer notes for a net of
$355,000 from Dassesta International, S.A., a principal shareholder. The face
amount of these notes was 2,200,000 French Francs, equal to approximately
$366,000 at the then current exchange rate. In addition, the Company
simultaneously received an unsecured loan from Dassesta in the amount of
$145.000, for a total cash influx of $500,000.
ADDITIONAL RISK FACTORS
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 incurred a net loss of $1,285,000 in the first quarter of fiscal
1998 and has reported losses in every year since 1982. The Company also had
negative cash flows from operations of $2,025,000 in the first quarter of
fiscal 1998 and at December 31 1997 has an accumulated deficit of $87,140,000
and a working capital deficiency of $743,000. Management anticipates that
capital and working capital requirements in the remainder of fiscal 1998 will
substantially exceed cash projected to be generated by operations.
The Company currently anticipates that its existing capital resources, including
the discounting of its customer notes and unsecured loan received from Dassesta
in February 1998, the net proceeds from the December 1997 sale of 5,500,000
shares of common stock to Dassesta and another foreign investor for a combined
total of $2,750,000, and the reduction in the scope of its operations will be
sufficient to provide operating capital required to meet its obligations in the
normal course of business through February 1998.
The Company is dependent on its current Magnes 2500 WH system as its principal
product for which there are currently limited clinical applications. Additional
clinical applications development needs to be conducted with the MSI system at
major medical centers before the Company can begin to penetrate the commercial
clinical market. There can be no assurance that a commercial market will
develop for diagnostic or monitoring uses of the MSI system. A continued lack of
clinical applications and commercial market for the Company's Magnes 2500 WH
system would 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 December 31, 1997 there
have been limited reimbursements from third party payors in the U.S. 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 U.S. government will
authorize or budget for such procedures in the future. If widespread
availability of reimbursement from 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.
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 is likely to affect future profitability of the Company's Magnes
2500 WH system, the extent of which is not presently determinable.
9
Item 3. Quantitative and Qualitative Disclosures About Market Risk
None.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
In December 1997, the Company sold 4,000,000 unregistered shares of common stock
to Dassesta and 1,500,000 additional unregistered shares of common stock to Bank
Leu under Regulation S at $.50 per share. Consideration received by the Company
in relation to the common stock sales consisted of cash totaling $793,000 and
cancellation of loan principal of $1,700,000, related accrued interest of
$38,000 and accounts payable of $219,000, all owed to Dassesta.
Item 3. Defaults in Securities
None .
Item 4. Submission of Matters to Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits:
Exhibit No. Description
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27 Financial Data Schedule
b) Reports on Form 8-K
A Form 8-K dated September 26, 1997 was filed with Securities and
Exchange Commission on October 2, 1997, regarding a change in
accountants.
10
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.
February 5, 1998 /s/ D. Scott Buchanan
Date -----------------------------------------
D. Scott Buchanan
President and Chief Executive Officer
February 5, 1998 /s/ Herman Bergman
Date ------------------------------------------
Herman Bergman
Vice President of Finance, Chief Financial
Officer Secretary
11