UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 DECEMBER 31, 1997
METRA BIOSYSTEMS, INC.
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(Exact Name of Registrant as specified in its charter)
0-26234
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Commission File Number
CALIFORNIA 33-0408436
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
265 NORTH WHISMAN ROAD, MOUNTAIN VIEW, CA 94043-3911
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(Address of Registrant's principal executive offices)
(650) 903-9100
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(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. [ X ] Yes [ ] No.
The number of shares of the Registrant's common stock outstanding as of
January 30, 1998 was 12,661,922.
METRA BIOSYSTEMS, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AT
DECEMBER 31, 1997 AND JUNE 30, 1997 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31,
1997 AND 1996 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7-9
PART II. OTHER INFORMATION 10
ITEM 1. LEGAL PROCEEDINGS 10
ITEM 2. CHANGES IN SECURITIES 10
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS 10
ITEM 5. OTHER INFORMATION 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 10
SIGNATURE 11
2
PART I. FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
METRA BIOSYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
DECEMBER 31 JUNE 30
1997 1997
---- ----
(unaudited) (1)
Current assets:
Cash and cash equivalents $ 14,121 $ 11,709
Short-term investments 7,788 18,876
Accounts receivable, net 1,522 1,576
Interest receivable 342 503
Inventories 1,632 1,446
Prepaid expenses and other current assets 2,093 736
--------- ---------
Total current assets 27,498 34,846
Property and equipment, net 3,707 4,182
Long-term investments 9,438 8,555
Other assets 357 185
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$ 41,000 $ 47,768
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 844 $ 1,068
Accrued expenses 2,163 2,483
Current portion of capital lease obligations 598 566
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Total current liabilities 3,605 4,117
Long-term portion of capital lease obligations 1,267 1,574
Shareholders' equity:
Preferred stock -- --
Common stock and additional paid-in capital 95,258 95,192
Accumulated deficit and other equity (59,130) (53,115)
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Total shareholders' equity 36,128 42,077
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$ 41,000 $ 47,768
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(1) Derived from audited consolidated financial statements at June 30, 1997
See accompanying notes to condensed consolidated financial statements.
3
METRA BIOSYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- ----------------------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Product sales $ 1,676 $ 1,515 $ 3,198 $ 2,682
Partner revenue 158 137 203 213
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Total revenues 1,834 1,652 3,401 2,895
Operating expenses:
Cost of product sales 903 1,310 1,461 2,282
Research and development 1,595 1,719 2,849 3,396
Sales and marketing 2,420 2,567 5,015 5,409
General and administrative 677 918 1,301 2,084
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Total operating expenses 5,595 6,514 10,626 13,171
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Loss from operations (3,761) (4,862) (7,225) (10,276)
Interest income, net 450 579 927 1,204
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Net loss $ (3,311) $ (4,283) $ (6,298) $ (9,072)
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-------- -------- -------- --------
Basic and diluted net loss per share $ (0.26) $ (0.34) $ (0.50) $ (0.72)
-------- -------- -------- --------
-------- -------- -------- --------
Shares used to compute basic and diluted net
loss per share 12,642 12,607 12,638 12,604
-------- -------- -------- --------
-------- -------- -------- --------
See accompanying notes to condensed consolidated financial statements.
4
METRA BIOSYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
DECEMBER 31,
---------------------------------
1997 1996
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Net cash used in operating activities $ (7,697) $ (8,315)
Cash flows from investing activities:
Purchases of investment securities (7,294) (7,974)
Maturities and sales of investment securities 17,772 15,756
Purchases of property and equipment (158) (887)
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Net cash provided by investing activities 10,320 6,895
Cash flows from financing activities:
Proceeds from capital leases --- 848
Repayments of capital leases (277) (196)
Proceeds from issuance of common stock 66 69
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Net cash provided by (used in) financing activities (211) 721
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Net increase (decrease) in cash and cash equivalents 2,412 (699)
Cash and cash equivalents at beginning of period 11,709 19,217
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Cash and cash equivalents at end of period $ 14,121 $ 18,518
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Supplemental disclosure of cash flow information:
Cash paid for interest $ 124 $ 91
See accompanying notes to condensed consolidated financial statements.
5
METRA BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(UNAUDITED)
1. INTERIM FINANCIAL INFORMATION
(a) THE COMPANY
Metra Biosystems, Inc. ("Metra" or the "Company"), a California
corporation, is engaged in the development and commercialization of
diagnostic products for the detection and management of metabolic bone and
joint diseases.
(b) BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements of
the Company have been prepared in conformity with generally accepted
accounting principles, consistent in all material respects with those applied
in the Annual Report on Form 10-K for the year ended June 30, 1997. The
interim financial information is unaudited, but reflects all normal
adjustments which are, in the opinion of management, necessary to provide a
fair statement of results for the interim periods presented. The interim
financial statements should be read in connection with the financial
statements in the Company's Annual Report on Form 10-K for the year ended
June 30, 1997.
2. INVENTORIES
Inventories consist of the following (net of reserves):
December 31, June 30,
1997 1997
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(in thousands)
Raw materials $ 301 $ 224
Work in process 328 95
Finished goods 1,003 1,127
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$1,632 $1,446
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3. NET LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share,"
("SFAS 128") which was adopted by the Company for the three and six month
periods ended December 31, 1997. Earnings per share for the three and six
month periods ended December 31, 1996 have been restated in accordance with
SFAS 128. Under the new requirements for calculating basic earnings per
share, the dilutive effect of stock options is excluded.
Basic earnings per share is computed using the weighted average number
of common shares outstanding during the period. Diluted earnings per common
share incorporates the incremental shares issuable upon the assumed exercise
of stock options and warrants, if dilutive. Shares from stock options and
warrants have been excluded from the computation of diluted earnings per
share for all periods presented, as their effect is anti-dilutive.
4. OTHER AGREEMENTS
In April 1997, the Company entered into a Co-Promotion Agreement with
Berlex Laboratories, Inc. ("Berlex"). The Company paid Berlex approximately
$3.0 million in December 1997 for promotional activities performed by Berlex
over the first year of the promotional agreement, starting on July 1, 1997.
The $3.0 million is being recognized as an expense ratably over the initial
one-year term. During the quarter ended December 31, 1997, $750,000 was
accrued and recognized as expense. In connection with this agreement, the
Company issued Berlex warrants to acquire 413,233 shares of common stock at
an exercise price of $4.84 per share. The warrant has a four-year term. The
Company will amortize $506,000 over the initial one-year service period,
which amount represents the estimated value of the warrants
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at the time of issuance. During the quarter ended December 31, 1997, the
Company amortized $127,000 in connection with the issuance of the warrants.
In addition, the Company will pay Berlex additional commissions based upon
increased sales of the Company's products to the extent such sales are above
previously established levels. After the first promotional year, the future
continuance of the promotional agreement is, in part, dependent upon the
achievement of certain milestones and the mutual consent of both parties.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company's principal sources of revenue are product sales and partner
revenues. Product sales are principally derived from sales of the Company's
biochemical tests for research and clinical use. Partner revenues result from
certain collaborative relationships and primarily consist of milestone
payments, licensing fees and royalties received from these partners, and
revenues from sales to these partners of proprietary reagents for use with
the test formats of these partners.
The Company commenced its clinical marketing efforts in the United States
upon receiving 510(k) clearance for several of its key products in late 1995,
and does not anticipate significant revenues from clinical sales of its
products in the United States unless and until the results of its medical
education efforts are realized. Achieving increased sales growth and improved
product margins depends upon increased awareness and acceptance of the
Company's products among clinicians, the success of the Company's programs
with pharmaceutical partners, adequate levels of third-party reimbursement
for clinical use of its diagnostic tests, the Company's ability to
successfully launch new products, continued sales growth of the Company's
manual test formats and successful market penetration of automated test
formats by the Company's diagnostic partners to the extent that this
substantially increases market demand versus conversion of existing manual
kit business. There can be no assurance the Company can successfully achieve
any of the above items in a timely manner or at all, and failure to do so
could have a material adverse effect on the Company's business, financial
condition and results of operations.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
REVENUES
Product sales for the three months and six months ended December 31, 1997
increased approximately 11% and 19%, respectively, to $1,676,000 and
$3,198,000, as compared to product sales of $1,515,000 and $2,682,000 in the
comparable periods of the prior fiscal year, due to increased domestic demand
for the Company's products. International and domestic product sales for the
quarter were 72% and 28%, respectively, as compared to 78% and 22% in the
corresponding quarter in the prior year.
Partner revenues for the three months and six months ended December 31, 1997
were $158,000 and $203,000 as compared to $137,000 and $213,000 in the
corresponding periods of the prior fiscal year. Included in the three and
six month periods ended December 31, 1997 were $50,000 and $69,000,
respectively, in royalties received from the Company's licensing partners and
through other agreements. These royalties are generated through the sales of
automated tests incorporating the Company's technology. There were no
royalties in the corresponding periods of the prior year. The Company
believes that partner revenue will fluctuate in the future due to the nature
and timing of partner milestone and license fees.
OPERATING EXPENSES
Product costs were $903,000 for the second quarter and $1,461,000 for the
first six months of fiscal 1998, as compared to $1,310,000 and $2,282,000 in
the corresponding periods of fiscal 1997. The product margin for the second
quarter and first six months of fiscal 1998 was 46% and 54%, respectively,
compared to 14% and 15% in the corresponding periods of fiscal 1997. These
decreases in product costs and increase in product margins are related to
increased sales by the direct sales operations (Italy, the United Kingdom,
and the U.S.), which achieve higher average selling prices than sales to
distributors, process improvements in the manufacturing process, and
economies of scale associated with the increase
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in sales volume. The Company believes that the product margin will fluctuate
from quarter to quarter and will be dependent upon future sales volume and
product mix, as well as the Company's ability to continue to achieve
efficiencies and improvements in the manufacturing process.
Research and development expenses for the three months and six months ended
December 31, 1997 were $1,595,000 and $2,849,000 as compared to $1,719,000
and $3,396,000 in the corresponding periods of the prior fiscal year
representing a 7% and 16% decrease in research and development expenditures,
respectively. These decreases are largely due to reduced personnel costs.
The Company believes that research and development expenses will increase
through at least the end of fiscal 1998 in order to support ongoing clinical
trials and product development of the Company's portable ultrasound product.
Sales and marketing expenses were $2,420,000 in the second quarter and
$5,015,000 for the first six months of fiscal 1998, as compared to $2,567,000
and $5,409,000 in the corresponding periods of fiscal 1997, a decrease of 6%
and 7% respectively. This decrease is primarily related to reduced spending
in the promotional, advertising and public relations areas and was partially
offset by increased expenses related to the Co-Promotion Agreement entered
into between the Company and Berlex and other marketing programs aimed at
increasing physician awareness of the Company's products. The costs
associated with the Berlex agreement were $877,000 and $1,754,000 for the
second quarter and for the first six months of fiscal 1998, respectively.
The Company believes that sales and marketing expenses will remain relatively
flat through the remainder of 1998. In addition, there may be potential
commissions payable to Berlex that is contingent upon increased sales of the
Company's products to the extent that such sales are above previously
established levels.
General and administrative expenses were $677,000 and $1,301,000 for the
three and six months ended December 31, 1997, as compared to $918,000 and
$2,084,000 for the corresponding periods in the prior fiscal year. This
represents decreases of 26% and 38% in general and administrative costs,
respectively. The Company has undertaken efforts to implement cost
reductions in all general and administrative areas and these reductions on a
comparative basis were primarily related to reduced personnel costs, legal
and consulting fees, and insurance costs. The Company believes that general
and administrative expenses should remain relatively flat in subsequent
periods.
NET INTEREST INCOME
Net interest income for the second quarter and first six months of fiscal
1998 was $450,000 and $927,000 as compared to $579,000 and $1,204,000 in the
corresponding periods of fiscal 1997. The reduction in net interest income
is primarily the result of reduced cash resources available for investment as
well as increased interest expenditures related to additional capital
financing incurred at the end of the second quarter in fiscal 1997.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash, cash equivalents, and investment securities of $31.3
million at December 31, 1997. The Company's use of cash in operating
activities was $7.7 million in the first six months of fiscal 1998 compared
to cash usage of $8.3 million in the first two quarters of fiscal 1997. This
reduction in cash usage is primarily related to reduced operating expenses
and the corresponding $2.8 million decrease in net loss in the first two
quarter of fiscal 1998 as compared to the corresponding periods of fiscal
1997. This was partially offset by a $3,000,000 payment made in the second
quarter to fulfill the Company's obligation to Berlex and results in a
prepaid expense of $1,500,000 as of December 31, 1997. Net cash proceeds
from investing activities was $10.3 million for the six months ended December
31, 1997 which included the maturity of longer term investment securities
which were reinvested as cash and cash equivalents. Net cash used in
financing activities in the first two quarters of fiscal 1998 was $211,000
which is related to the interest costs of the Company's capital leases offset
partially by purchases of stock through the Company's Employee Stock Purchase
Program.
Net capital expenditures for the first six months of fiscal 1998 were
$158,000, compared to $887,000 for the corresponding periods of fiscal 1997.
This decrease is related to equipment purchases made in fiscal 1997 in
support of the scale-up of the Company's manufacturing plant in Mountain
View, CA. The majority of these expenditures have
8
now been incurred. The Company believes that there is sufficient capacity to
meet product demands for the foreseeable future.
In April 1997 the Company entered into a Co-Promotion Agreement with Berlex
under which the Company paid Berlex a fee of $3,000,000 on December 31, 1997
in consideration of promotional services rendered by Berlex. Additional fees
in fiscal year 1999 and fiscal year 2000 will be paid if specified minimum
sales targets are achieved. The Company will use a portion of its existing
cash resources to make such fee payments when and if they come due.
The Company's current financial information system is not Year 2000
compliant. The Company anticipates converting to a financial information
system which is Year 2000 compliant or upgrading the current system to Year
2000 compliance within the next year. The Company does not expect the amount
to be expensed to convert this system to have a material effect on its
financial position and results of operation.
The Company's future capital requirements depend upon, among other things,
the pace of market acceptance of the Company's products, the costs of
research and development programs, the funding of clinical and regulatory
related studies, the expansion of marketing and selling activities, costs
involved in filing, prosecuting, enforcing, and defending patent claims, and
the time and costs associated with obtaining regulatory approvals for future
products. Funds may also be used for investments in, or acquisitions of,
complementary businesses, products or technologies, in expanding the
Company's manufacturing capacity or in improving its existing facilities.
Although the Company believes its current cash, cash equivalents and
investment securities will be sufficient to meet the Company's operating
expenses and capital requirements into fiscal 1999, the Company's future
liquidity and capital requirements will depend on the factors noted above,
among others. The Company may, however, seek additional equity or debt
financing to fund further expansion of its manufacturing capacity, or to fund
other projects or acquisitions. There can be no assurance that if it becomes
necessary to raise additional capital, such capital will be available on
acceptable terms, if at all.
DISCLOSURE PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
THE STATEMENTS CONTAINED IN THE REPORT ON FORM 10-Q THAT ARE NOT PURELY
HISTORICAL ARE "FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A
OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED INCLUDING, WITHOUT LIMITATION, STATEMENTS
REGARDING THE COMPANY'S FUTURE PRODUCT DEVELOPMENT AND COMMERCIALIZATION,
PRODUCT SALES AND OTHER REVENUES, MARKET OPPORTUNITIES AND ACCEPTANCE,
BELIEFS, EXPECTATIONS, GOALS, FINANCIAL PERFORMANCE, AND FUTURE STRATEGIES,
ALL OF WHICH ARE DEPENDENT ON CERTAIN RISKS AND UNCERTAINTIES THAT MAY CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN THESE OR ANY
OTHER FORWARD LOOKING STATEMENTS MADE BY OR ON BEHALF OF THE COMPANY. THESE
RISKS AND UNCERTAINTIES INCLUDE THE UNCERTAINTY OF REALIZING INCREASED MARKET
AWARENESS AND ACCEPTANCE FOR THE COMPANY'S PRODUCTS, THE SUCCESS OF THE
COMPANY'S COLLABORATIVE RELATIONSHIPS, THE UNCERTAINTY OF OBTAINING ADEQUATE
LEVELS OF THIRD-PARTY REIMBURSEMENT FOR CLINICAL USE OF THE COMPANY'S
PRODUCTS, AND THE UNCERTAINTY AND VARIABILITY OF CONTINUING SALES GROWTH OF
THE COMPANY'S PRODUCTS. FOR A MORE DETAILED DISCUSSION OF THESE RISKS, SEE
THE RISK FACTORS DISCUSSED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR
THE YEAR ENDED JUNE 30, 1997.
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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 SECURITIES HOLDERS
At the Company's Annual Shareholders' Meeting, which was held on
December 8, 1997, the shareholders adopted the following management proposals:
1. The election of the following individuals as directors of the Company:
Claude D. Arnaud, M.D.
For 10,237,070 Against 101,913 Abstain 0
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John L. Castello
For 10,236,570 Against 102,413 Abstain 0
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George W. Dunbar, Jr.
For 10,228,599 Against 110,384 Abstain 0
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Mary Lake Polan, M.D., Ph.D.
For 10,238,070 Against 100,913 Abstain 0
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Craig C. Taylor
For 10,236,570 Against 102,413 Abstain 0
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2. An amendment to the 1995 Stock Option Plan to increase the number of
shares available for grant thereunder by 300,000 shares
For 7,629,508 Against 2,648,231 Abstain 15,600 Broker non-vote 45,644
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3. The ratification of the appointment of Ernst & Young LLP as the
Company's independent auditors for the fiscal year ending June 30,
1998
For 10,316,143 Against 18,840 Abstain 4,000
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ITEM 5. - OTHER INFORMATION
None
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
Exhibits Description
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27 Financial Data Schedule
10
SIGNATURE
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.
/s/ Kurt E. Amundson February 11, 1998
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Kurt E. Amundson
Vice President and Chief Financial Officer
(duly authorized principal financial and
accounting officer)
11