FORM 10-QSB
Securities and Exchange Commission
Washington, D. C. 20549
(Mark One)
ý QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
OR
o 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 0-16257
Pace Medical, Inc.
(Exact name of small business issuer as specified in its charter)
Massachusetts |
| 04-2867416 |
(State or other jurisdiction of |
| (I.R.S. Employer |
incorporation or organization) |
| identification No.) |
|
|
|
391 Totten Pond Road, Waltham, Massachusetts 02451 | ||
(Address of principal executive offices) | ||
|
|
|
(781) 890-5656 | ||
(Issuer’s telephone number, including area code) |
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ý No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of November 14, 2005.
3,354,870 shares of Common Stock, par value $.01 per share
Transitional Small Business Disclosure format: Yes o No ý
PART I - - FINANCIAL INFORMATION
Item 1. |
| Financial Statements. |
|
|
|
| ||
|
|
|
| ||
|
|
|
| ||
|
|
|
|
2
PACE MEDICAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
|
| SEPTEMBER 30, 2005 |
| DECEMBER 31, 2004 |
| ||
|
| (Unaudited) |
| (See note below) |
| ||
ASSETS |
|
|
|
|
| ||
|
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 705,180 |
| $ | 902,198 |
|
Accounts receivable |
| 160,640 |
| 215,504 |
| ||
Inventories: |
|
|
|
|
| ||
Raw materials |
| 251,407 |
| 271,812 |
| ||
Work-in-process |
| 51,342 |
| 119,876 |
| ||
Finished goods |
| 169,122 |
| 79,707 |
| ||
|
| 471,871 |
| 471,395 |
| ||
Other current assets |
| 39,276 |
| 39,309 |
| ||
Total current assets |
| 1,376,967 |
| 1,628,406 |
| ||
|
|
|
|
|
| ||
Property and equipment, net |
| 10,758 |
| 18,812 |
| ||
Other assets |
| 254,025 |
| 248,626 |
| ||
TOTAL ASSETS |
| $ | 1,641,750 |
| $ | 1,895,844 |
|
|
|
|
|
|
| ||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
| ||
|
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Accounts payable |
| $ | 183,714 |
| $ | 241,779 |
|
Accrued expenses |
| 55,317 |
| 118,396 |
| ||
Total current liabilities |
| 239,031 |
| 360,175 |
| ||
|
|
|
|
|
| ||
Shareholders’ equity: |
|
|
|
|
| ||
Common stock, $.01 par value, 5,000,000 shares authorized, 3,400,870 issued |
| 34,009 |
| 34,009 |
| ||
Additional paid-in capital |
| 3,147,151 |
| 3,147,151 |
| ||
Accumulated other comprehensive income |
| 244,109 |
| 355,011 |
| ||
Accumulated deficit |
| (1,990,803 | ) | (1,968,755 | ) | ||
|
| 1,434,466 |
| 1,567,416 |
| ||
Less Treasury Stock, at Cost, 46,000 shares |
| (31,747 | ) | (31,747 | ) | ||
Total Shareholders’ Equity |
| 1,402,719 |
| 1,535,669 |
| ||
|
|
|
|
|
| ||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
| $ | 1,641,750 |
| $ | 1,895,844 |
|
Note: The balance sheet at December 31, 2004 has been taken from the audited financial statements at that date.
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
PACE MEDICAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
| For the Three Months |
| For the Nine months |
| ||||||||
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||
Net sales |
| $ | 289,572 |
| $ | 398,577 |
| $ | 1,205,063 |
| $ | 1,008,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
| 141,232 |
| 237,691 |
| 527,680 |
| 589,766 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Gross Margin |
| 148,340 |
| 160,886 |
| 677,383 |
| 418,725 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating expenses |
| 254,146 |
| 196,345 |
| 726,908 |
| 598,128 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Loss from operations |
| (105,806 | ) | (35,459 | ) | (49,525 | ) | (179,403 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Other income |
| 1,632 |
| 6,953 |
| 27,477 |
| 15,245 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net loss |
| $ | (104,174 | ) | $ | (28,506 | ) | $ | (22,048 | ) | $ | (164,158 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share: |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Basic |
| $ | (.03 | ) | $ | (.01 | ) | $ | (.01 | ) | $ | (.05 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
| $ | (.03 | ) | $ | (.01 | ) | $ | (.01 | ) | $ | (.05 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
PACE MEDICAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| NINE MONTHS ENDED |
| ||||
|
| SEPTEMBER 30 |
| ||||
|
| 2005 |
| 2004 |
| ||
|
|
|
|
|
| ||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
| ||
|
|
|
|
|
| ||
Net income (loss) |
| $ | (22,048 | ) | $ | (164,158 | ) |
Adjustments to reconcile net income (loss) to net cash used in operating activities: |
|
|
|
|
| ||
Depreciation and amortization |
| 10,085 |
| 1,588 |
| ||
Changes in assets and liabilities, net: |
| (183,024 | ) | (175,429 | ) | ||
|
|
|
|
|
| ||
Net cash used in operating activities |
| (194,987 | ) | (337,999 | ) | ||
|
|
|
|
|
| ||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
| ||
|
|
|
|
|
| ||
Purchases of property and equipment |
| 2,031 |
| 1,435 |
| ||
|
|
|
|
|
| ||
NET DECREASE IN CASH AND CASH EQUIVALENTS |
| (197,018 | ) | (339,434 | ) | ||
|
|
|
|
|
| ||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
| 902,198 |
| 1,060,791 |
| ||
|
|
|
|
|
| ||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
| $ | 705,180 |
| $ | 721,357 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
PACE MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited consolidated financial statements and these notes have been condensed and do not contain all disclosures required by generally accepted accounting principles. See notes to audited consolidated financial statements contained in the Company’s annual report.
2. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, all of which are normal and recurring, necessary to present fairly the financial position of the Company and its subsidiary as of September 30, 2005 and the results of their operations for the three and nine months ended September 30, 2005 and September 30, 2004 and their cash flows for the nine months ended September 30, 2005 and September 30, 2004.
3. The results of operations for the three and nine months ended September 30, 2005 are not necessarily indicative of the results to be expected for the full year.
4. Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income by the weighted average number of common and dilutive common equivalent shares outstanding during the period, except where the effect would be anti-dilutive. The number of dilutive common equivalent shares outstanding during the period has been determined in accordance with the treasury-stock method. Common equivalent shares consist of common stock issuable upon the exercise of outstanding options.
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) |
| $ | (104,174 | ) | $ | (28,506 | ) | $ | (22,048 | ) | $ | (164,158 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Weighted-average shares outstanding |
| 3,354,870 |
| 3,354,870 |
| 3,354,870 |
| 3,354,870 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Basic net income (loss) per share |
| $ | (.03 | ) | $ | (.01 | ) | $ | (.01 | ) | $ | (.05 | ) |
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Weighted-average shares outstanding |
| 3,354,870 |
| 3,354,870 |
| 3,354,870 |
| 3,354,870 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Dillutive Common Equivalent Shares |
| — |
| — |
| — |
| — |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Diluted net income (loss) per share |
| $ | (.03 | ) | $ | (.01 | ) | $ | (.01 | ) | $ | (.05 | ) |
6
5. For the periods ended September 30, 2005 and 2004, options to purchase 755,000 and 360,000 common shares, respectively, were outstanding.
6. Comprehensive loss includes net loss and foreign currency translation adjustments. Comprehensive loss for the three and nine months ended September 30, 2005 and 2004 was as follows:
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||
Net (loss) |
| $ | (104,174 | ) | $ | (28,506 | ) | $ | (22,048 | ) | $ | (164,158 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Currency Translation Adjustment |
| 9,126 |
| (14,405 | ) | (110,902 | ) | 4,801 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total |
| $ | (113,300 | ) | $ | (42,911 | ) | $ | (132,950 | ) | $ | (159,357 | ) |
7. Stock-Based Compensation
The Company applies Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock Based Compensation Transition and Disclosure, an amendment to FASB Statement No. 123, to its stock compensation arrangements, which requires entities to recognize as expense over the vesting period the fair value of stock-based awards on the date of grant or measurement date. For employee stock-based awards, however, SFAS Nos. 123 and 148 allow entities to continue to apply the intrinsic value method under the provisions of Accounting Principles Board (“APB”) Opinion No. 25 and provide pro forma net earnings disclosures as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosures of SFAS Nos. 123 and 148.
Had compensation expense for awards under the Company’ s Stock Option Plans been determined based on the fair value method set forth in SFAS No. 123, the effect on the Company’s net income (loss) and per share amounts would have been as follows:
7
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||
Net income (loss), as reported |
| $ | (104,174 | ) | $ | (28,506 | ) | $ | (22,048 | ) | $ | (164,158 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Less: Compensation expense for option awards determined under fair value based method. |
| (8,932 | ) | — |
| (64,877 | ) | — |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Pro forma net income (loss) |
| $ | (113,106 | ) | $ | (28,506 | ) | $ | (86,925 | ) | $ | 164,158 |
|
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) per share: |
|
|
|
|
|
|
|
|
| ||||
As reported—basic and diluted |
| $ | (.03 | ) | $ | (.01 | ) | $ | (.01 | ) | $ | (.05 | ) |
Pro forma—basic and diluted |
| $ | (.03 | ) | $ | (.01 | ) | $ | (.03 | ) | $ | (.05 | ) |
8. Recent Accounting Pronouncements
Stock Based Compensation
In December 2004, the FASB issued Financial Accounting Standards No. 123 (revised 2004) (FAS 123R), “Share-Based Payment”. FAS 123R replaces FAS No. 123, “Accounting for Stock Based Compensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. FAS 123R requires compensation expense, measured as the fair value at the grant date, related to share-based payment transactions to be recognized in the financial statements over the period that an employee provides service in exchange for the award. The Company intends to adopt FAS 123R using the “modified prospective” transition method as defined in FAS 123R. Under the modified prospective method, companies are required to 1) record compensation cost prospectively for the unvested portion, as of the date of adoption, of previously issued and outstanding awards over the remaining vesting period of such awards. FAS 123R is effective January 1, 2006. Based on the current options outstanding, we do not anticipate the adoption of this statement to result in the recognition of material additional compensation cost in the year of adoption.
Inventory Costs
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No 43. Chapter 4”. SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. SFAS No. 151 is effective for the inventory costs incurred during fiscal years beginning after June 15, 2005. We do not believe the adoption of SFAS No. 151 will have a material effect on our consolidated financial position, results of operations or cash flows.
8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
General
Revenues for the third quarter of 2005 were lower than expected due primarily to component shortages as discussed in more detail below. The Company reported a net loss for the quarter of $104,174, compared to a net loss of $28,506 in the corresponding prior year period.
Liquidity and Capital Resources
As of September 30, 2005, the Company had cash and cash equivalents of $705,180 and working capital of $1,137,936. The working capital at September 30, 2005 was $130,295 less than the amount at December 31, 2004, owing primarily to lower sales and exchange rate variations. The Company’s cash flows have historically tracked its operating results.
Management believes that its working capital should suffice to ensure that its on-going operations are financed adequately. In the short term, however, additional equity and or debt financing may be sought to continue funding research and development, capital equipment, replacement inventories, and to expand the Company’s marketing operations. The obtaining of additional capital through the issuance of equity securities may result in dilution of existing shareholders’ interests.
Results of Operations - Three Months ended September 30, 2005 versus Three Months ended September 30, 2004
Net sales in the third quarter of 2005 decreased 27% from the sales in the third quarter of 2004. This was due primarily to lower than expected sales revenue caused by our inability to ship product. Delays in obtaining certain components from vendors was the major factor affecting our ability to ship customer orders. These components have since been obtained, and the Company expects the resulting backlog to increase sales in the fourth quarter.
The Company’s margins in the third quarter were substantially higher than those seen in 2004 (51% in 2005 compared to 40% in 2004). This occurred due to the product mix of sales.
Operating expenses increased 29% during the three months ended September 30, 2005 versus the three months ended September 30, 2004, primarily due to the hiring of additional management personnel. Management anticipates some increase in its operating expenditures during the balance of 2005.
No tax benefit was recorded for the three months ended September 30, 2005 owing to uncertainty regarding the Company’s ability to use net operating loss carryforwards in both the U.S. and U.K.
9
Net loss for the quarter was $104,174 or $.03 per share in contrast to a net loss of $28,506 or $.01 per share in the third quarter of 2004.
Results of Operations - Nine Months ended September 30, 2005 versus Nine Months ended September 30, 2004
Net sales in the nine months ended September 30, 2005 increased 19% from the sales in the nine months ended September 30, 2004. This was due primarily to increased product availability in the first two quarters, strong international sales and attending major industry trade shows.
The Company’s margins in the first three quarters of 2005 were higher than those seen in 2004 (56% in 2005 compared to 42% in 2004). This occurred due to a change in product mix. It should be noted that pricing has remained firm on all products.
Operating expenses increased 22% during the nine months ended September 30, 2005 compared to the nine months ended September 30, 2004, primarily due to the hiring of additional management personnel. Management anticipates some increase in its operating expenditures during the balance of 2005.
No tax provision was recorded for the nine months ended September 30, 2005 owing to the Company’s ability to use net operating loss carryforwards in the United States.
Net loss for the first three quarters of 2005 was $22,048 or $.01 per share in contrast to a net loss of $164,158 or $.05 per share in the first three quarters of 2004.
Factors That May Affect Future Results
From time to time, information provided by the Company or statements made by its employees may contain “forward-looking” information which involves risks and uncertainties. In particular, statements contained in this report which are not historical facts (including but not limited to the Company’s expectations regarding business strategy, new product availability, pricing, anticipated operating results, market share, the rate at which backlogs of orders can be filled, operating expenses and anticipated working capital) may be “forward-looking” statements. The Company’s actual results may differ from those stated in any forward-looking statements. Factors that may cause such differences include, but are not limited to, risks associated with the introduction of new products including supplier performance, risks associated with the manufacture of existing products, including supplier performance, development of markets for new products and existing products offered by the Company, personnel requirements, the Company’s relationships with distributors and OEM’s, the economic health of such OEM’s, government regulation, competition and general economic conditions.
10
Critical Accounting Policies
The critical accounting policies are those that the Company believes are the more significant judgments and estimates used in the preparation of the Company’s condensed consolidated financial statements. As of September 30, 2005 there have been no material changes to the critical accounting policies as described in the Company’s Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.
Item 3. Controls and Procedures
As of the end of the period covered by this report, our President and Chief Executive Officer and our Treasurer performed an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the President and Chief Executive Officer and the Treasurer concluded that the Company’s disclosure controls and procedures are effective in ensuring the reporting of material information required to be included in the Company’s periodic filings with the Securities and Exchange Commission. There were no significant changes in the Company’s internal controls over financial reporting or in other factors that could significantly affect these internal controls over financial reporting subsequent to the date of the most recent evaluation.
11
PART II - - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Company’s Annual Meeting of Stockholders held on September 3, 2005, the following persons were elected as Directors of the Company:
|
| Votes |
| Votes |
|
|
|
|
|
Steven E. Hanson |
| 2,455,434 |
| 74,200 |
Ralph E. Hanson |
| 2,455,434 |
| 74,200 |
George F. Harrington |
| 2,455,434 |
| 74,200 |
Derrick Ebden |
| 2,455,434 |
| 74,200 |
Item 6. Exhibits
Exhibits:
31.1 |
| Certification of the President and Chief Executive Officer pursuant to Rules 13a -14 and 15d -14 promulgated under the Securities Exchange Act of 1934, as amended, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2 |
| Certification of the Treasurer pursuant to Rules 13a -14 and 15d -14 promulgated under the Securities Exchange Act of 1934, as amended, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32 |
| Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
12
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.
|
| PACE MEDICAL, INC. | |||
|
| (Registrant) | |||
|
|
| |||
|
|
| |||
Date: | November 14, 2005 |
|
| /s/ Steven E. Hanson |
|
|
| Steven E. Hanson, President | |||
|
| and Chief Executive Officer | |||
13
PACE MEDICAL, INC.
FORM 10-QSB
September 30, 2005
EXHIBIT INDEX
Exhibit No. |
| Description |
|
|
|
31.1 |
| Certification of President and Chief Executive Officer pursuant to Rules 13a -14 and 15d -14 promulgated under the Securities Exchange Act of 1934, as amended, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2 |
| Certification of Treasurer pursuant to Rules 13a -14 and 15d -14 promulgated under the Securities Exchange Act of 1934, as amended, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32 |
| Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |