U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: March 31, 2001
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File No.: 0-10728
GISH BIOMEDICAL, INC.
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(Exact name of small business issuer as specified in its charter)
California 95-3046028
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
22942 Arroyo Vista, Santa Margarita, California 92688
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(Address of principal executive offices)
(949) 635-6200
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(Issuer's telephone number)
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(Former name, former address and formal fiscal year,
if changed since last report)
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 issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
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State the number of shares outstanding of each of the issuer's classes of
common equity: As of May 10, 2001, the issuer had 3,592,145 shares of its common
stock, no par value, outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
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PART I - FINANCIAL INFORMATION
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ITEM 1. - Financial Statements
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GISH BIOMEDICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 2001
(unaudited)
(In thousands, except share data)
ASSETS
Current assets:
Accounts receivable, net $ 2,670
Relocation receivable 1,306
Inventories 8,030
Prepaid expenses 143
--------
Total current assets 12,149
Property and equipment, at cost 9,142
Less accumulated depreciation ( 5,930)
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Net property and equipment 3,212
Other assets 493
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Total assets $ 15,854
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 1,005
Cash overdraft 16
Accounts payable 1,237
Accrued compensation and related items 493
Accrued relocation liabilities 1,300
Other accrued liabilities 56
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Total current liabilities 4,107
Deferred rent 28
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Total liabilities 4,135
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Stockholders' equity:
Preferred stock, 1,500,000 shares authorized; no shares outstanding
Common stock, no par value, 7,500,000 shares authorized,
3,592,145 shares issued and outstanding 10,532
Retained earnings 1,187
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Total stockholders' equity 11,719
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Total liabilities and stockholders' equity $ 15,854
========
See accompanying notes to condensed consolidated financial statements.
2
GISH BIOMEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three and nine months ended March 31, 2001 and 2000
(unaudited)
(In thousands, except share and Three months ended Nine months ended
per share data) March 31, March 31,
2001 2000 2001 2000
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Net sales $ 4,519 $ 4,422 $ 13,296 $ 13,370
Cost of sales 3,812 3,103 10,222 9,939
--------- --------- --------- ----------
Gross profit 707 1,319 3,074 3,431
Research and development 270 210 747 900
Selling and marketing 997 1,072 3,024 3,125
General and administrative 447 486 1,296 1,916
--------- --------- --------- ----------
Total operating expenses 1,714 1,768 5,067 5,941
--------- --------- --------- ----------
Operating loss ( 1,007) ( 449) ( 1,993) ( 2,510)
Gain on relocation, net 426 - 426 -
Interest income (expense), net ( 46) 34 9 126
--------- --------- --------- ----------
Net loss ($ 627) ($ 415) ($ 1,558) ($ 2,384)
========= ========= ========= ==========
Basic and diluted net loss per
share ($ .17) ($ .12) ($ .43) ($ .68)
========= ========= ========= ==========
Basic and diluted weighted
average common shares 3,592,145 3,527,555 3,592,145 3,490,342
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
3
GISH BIOMEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended March 31, 2001 and 2000
(unaudited)
(In thousands) 2001 2000
---- ----
Cash flows from operating activities:
Net loss ($ 1,558) ($ 2,384)
Adjustments:
Depreciation 549 669
Loss on disposal of assets - 313
Amortization 5 5
Deferred rent 14 ( 38)
Gain on relocation, net ( 426) -
Changes in operating assets and liabilities ( 332) 430
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Net cash used in operating activities ( 1,748) ( 1,005)
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Cash flows from investing activities:
Purchases of property and equipment ( 1,377) ( 413)
Sale of short-term investments 885 603
Increase in other assets ( 258) ( 6)
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Net cash provided (used) by investing activities ( 750) 184
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Cash flows from financing activities:
Net borrowings on line of credit 1,005 -
Proceeds from stock options exercised - 334
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Net cash provided by financing activities 1,005 334
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Net decrease in cash and cash equivalents ( 1,493) ( 487)
Cash and cash equivalents at beginning of period 1,477 2,792
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Cash and cash equivalents at end of period ($ 16) $ 2,305
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See accompanying notes to condensed consolidated financial statements.
4
GISH BIOMEDICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001 (unaudited)
1. General
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The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, and include all adjustments which,
in the opinion of management, are necessary for a fair presentation of the
results of operations and cash flows for the three and nine month periods
ended March 31, 2001 and 2000, and financial position at March 31, 2001,
pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and footnote disclosures normally
included in consolidated 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 in such condensed consolidated financial statements are
adequate to make the information presented not misleading, these condensed
consolidated financial statements should be read in conjunction with the
Company's consolidated financial statements and the notes thereto included
in the Company's Annual Report filed with the SEC on Form 10-KSB for the
year ended June 30, 2000.
Statement of Cash Flows
-----------------------
Changes in operating assets and liabilities as shown in the condensed
consolidated statements of cash flows comprise (in thousands):
Nine Months Ended March 31, 2001 2000
--------------------------- ---- ----
Decrease(increase) in:
Accounts receivable $ 819 ($ 103)
Relocation receivables ( 1,306) -
Note receivable - 54
Inventories ( 555) 561
Prepaid expenses ( 8) 68
Increase (decrease) in:
Accounts payable ( 353) ( 342)
Accrued compensation and related items ( 77) 31
Accrued relocation liabilities 1,300 -
Other accrued liabilities ( 152) 161
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Change in operating assets and liabilities ($ 332) $ 430
======== =======
The Company did not pay any federal income taxes during the nine month
periods ended March 31, 2001 or March 31, 2000. The Company paid $23,000 in
interest during the nine month period ended March 31, 2001. The Company did
not pay any interest in the nine month period ending March 31, 2000.
5
GISH BIOMEDICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2001
(unaudited)
2. Inventories
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Inventories are stated at the lower of cost (first-in, first-out) or net
realizable value and are summarized as follows (in thousands):
March 31, 2001
--------------
Raw materials $ 3,640
Work in progress 1,090
Finished goods 3,300
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$ 8,030
========
3. Revolving Line of Credit
------------------------
Effective December 26, 2000 the Company entered into a $2,000,000 three year
revolving line of credit agreement with Heller Healthcare Finance, Inc.
Advances are secured by the operating assets of the Company and bear
interest at prime (8.5% at March 31, 2001) plus 2%.
4. Loss Per Share
--------------
The Company calculates loss per share pursuant to SFAS 128 "Earnings Per
Share". Due to the incurrence of losses in each reporting period, there is
no difference between basic and diluted per share amounts.
5. Nonrecurring Charges
--------------------
In March 2001, the Company identified slow moving and obsolete inventory of
$300,000 that consisted of custom tubing packs and other items that the
Company wrote off in conjunction with the relocation to its new facilities.
This charge is included in cost of sales during the current period.
In September, 1999 the Company discontinued development of the new infusion
pump for strategic and economic reasons, and recognized $429,000 in charges
related to the discontinuance. The total charge consisted of $140,000
charged to cost of sales for inventory obsolescence, $7,000 charged to
selling and marketing expense for the write-down of field inventories, and
$282,000 charged to general and administrative expense consisting primarily
of software development costs.
Additionally, in the quarter ended September 30, 1999, the Company
recognized obsolete inventory write-offs of $83,000 for custom tubing packs,
consignment inventory shrinkage of $133,000, severance and other costs
associated with the Company's chief executive of $294,000, and severance of
$95,000 resulting from a reduction in work force.
Excluding nonrecurring charges, the Company's gross profit margin for the
quarter ended March 31, 2001 and for the nine month period ended March 31,
2001 was 22.3% and 25.6% as compared to 29.8% and 27.3% reported for the
comparable periods of the prior fiscal year.
6
GISH BIOMEDICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2001
(unaudited)
6. Early Lease Termination
-----------------------
In October 2000 the Company completed negotiations with its then current
landlord to terminate the lease on its Irvine facility that was due to
expire in December 2002. Pursuant to the Agreement the Company vacated the
Irvine facility in stages commencing in October 2000 and ending in January
2001. As the Company vacated the Irvine facility its rental payments were
reduced accordingly.
The Agreement provides for the Irvine facility landlord to pay to the
Company incentive fees for this early termination in the aggregate amount of
$1,550,000, $400,000 of which had been received as of March 31, 2001. The
final payment of $1,150,000 was due on April 24, 2001. The Irvine facility
landlord did not pay the final payment when due, but did make partial
payments of $150,000 in April 2001 and $300,000 in May 2001. The Company has
recorded a Confession of Judgement, previously agreed to by the landlord,
which confirms the amount is owned and no counter claims exist. Certain
officers/owners of the landlord also personally guaranteed the payment. The
Company is taking actions to collect the amount due against the landlord and
those who personally guaranteed the debt and believes the remaining $700,000
will be collected. In addition to the early lease termination incentives
received from its current landlord, a third party paid the Company $300,000
to accelerate the vacating of a portion of the lease space. The cash
incentive fees received will be used to pay for the cost of moving and
constructing leasehold improvements at the Company's new facilities.
The net gain on relocation of $426,000 recorded in the current period is
comprised of cash incentives of $1,850,000 to vacate the Irvine facility
before the expiration of the lease and the recognition of a gain of $236,000
related to the unamortized portion of deferred rent expense, offset by the
costs associated with the relocation. These costs included the write-off of
assets of $662,000 consisting principally of leasehold improvements, costs
associated with the physical move of $200,000, unabsorbed overhead incurred
during the period of reduced production of $300,000 and costs related to
temporary production facilities of $498,000. Unpaid costs of $550,000 at
March 31, 2001 are included in accrued relocation liabilities. Incentive
fees not yet received at March 31, 2001 of $1,150,000 are included in
relocation receivable.
In conjunction with the early lease termination the Company entered into a
lease during October 2000 for a 52,000 square foot facility in Rancho Santa
Margarita, California. This new lease expires in February 2011 and contains
a five-year renewal option. The lease provides for initial monthly payments,
commencing February 2001, of approximately $34,000 with annual increases,
based on the Consumer Price Index, but in no event less than 3% or more than
5% per annum. A letter of credit in the amount of $300,000 was posted as a
security deposit for this lease with the Company pledging as collateral a
certificate of deposit in a like amount. The security deposit is to be
reduced to $195,000 and $90,000 during February 2002 and 2003, respectively,
based on provisions contained in the lease. The new landlord agreed to
reimburse the Company $156,000 for leasehold improvements, which is included
in the relocation receivable at March 31, 2001. Costs for the construction
of improvements totaled approximately $1,800,000 of which $750,000 is
included in accrued relocation liabilities at March 31, 2001.
7
In November 2000 the Company entered into a lease for an additional 23,000
square foot facility in Irvine, California for storage of finished goods
inventory. This lease expires in January 2006 and contains a five-year
renewal option. The lease provides initial monthly payments commencing
January 2001, of approximately $12,000, increased 3% annually. The lease
required a security deposit of $30,000 and prepayment of approximately
$37,000 representing the first, thirteenth and twenty-fifth months' rent.
8
ITEM 2. - Management's Discussion and Analysis of Financial Condition and
- ------ Results of Operations
---------------------
This Quarterly Report on Form 10-QSB contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and the Company intends that
such forward-looking statements be subject to the safe harbors created thereby.
Words such as "anticipates", "expects", "intends", "plans", "believes", "seeks",
"estimates", variations of such words and similar expressions are intended to
identify such forward-looking statements, which include (i) the existence and
development of the Company's technical and manufacturing capabilities, (ii)
anticipated competition, (iii) potential future growth in revenues and income,
(iv) potential future decreases in costs, and (v) the need for, and availability
of, additional financing.
In light of the important factors that can materially affect results,
including those set forth below and elsewhere in this Quarterly Report on Form
10-QSB, the inclusion of forward-looking information herein should not be
regarded as a representation by the Company or any other person that our
objectives or plans will be achieved. We may encounter competitive,
technological, financial and business challenges making it more difficult than
expected to continue to develop and market our products; the market may not
accept our existing and future products; we may be unable to retain key
management personnel; and there may be other material adverse changes in our
operations or business. Certain important factors affecting the forward-looking
statements made herein include, but are not limited to (i) continued downward
pricing pressures in our targeted markets, and (ii) the continued acquisition of
our customers by certain of our competitors. Assumptions relating to budgeting,
marketing, product development and other management decisions are subjective in
many respects and thus susceptible to interpretations and periodic revisions
based on actual experience and business developments, the impact of which may
cause us to alter our marketing, capital expenditure or other budgets, which may
in turn affect our financial position and results of operations. The reader is
therefore cautioned not to place undue reliance on forward-looking statements
contained herein, which speak as of the date of this report.
The following is management's discussion and analysis of certain
significant factors which have affected the earnings and financial position of
the Company during the period included in the accompanying financial statements.
This discussion compares the three and nine month periods ending March 31, 2001
with the three and nine month periods ended March 31, 2000. This discussion
should be read in conjunction with the financial statements and associated
notes.
Results of Operations:
- ---------------------
The Company incurred a net loss of $627,000, or $.17 basic and diluted net
loss per share, for the three months ended March 31, 2001 compared to a net loss
of $415,000, or $.12 basic and diluted net loss per share, for the comparable
period in the prior fiscal year.
For the nine months ended March 31, 2001, the Company incurred a net loss
of $1,558,000, or $.43 basic and diluted net loss per share, compared to a net
loss of $2,384,000, or $.68 basic and diluted net loss per share, for the nine
months ended March 31, 2000.
The net loss for the three and nine months ended March 31, 2001 after
eliminating non-recurring items was $753,000 and $1,684,000, respectively, or
$.21 and $.47 per share. The net loss for the three and nine months ended March
31, 2000 after eliminating non-recurring items was $415,000 and $1,350,000,
respectively, or $.12 and $.39 per share.
9
In March 2001, the Company identified slow moving and obsolete inventory of
$300,000 that consisted of custom tubing packs and other items that the Company
wrote off in conjunction with the relocation to its new facilities. This charge
is included in cost of sales during the current period. Also in March 2001 the
Company recorded a net gain on relocation of $426,000. This gain is comprised of
cash incentives of $1,850,000 to vacate the Irvine facility before the
expiration of the lease and the recognition of a gain of $236,000 related to the
unamortized portion of deferred rent expense, offset by the costs associated
with the relocation. These costs included the write off of assets of $662,000
consisting principally of leasehold improvements, costs associated with the
physical move of $200,000, unabsorbed overhead incurred during the period of
reduced production of $300,000 and costs related to temporary production
facilities of $498,000. The Company completed its use of the temporary
facilities in April 2001.
In the fiscal 2000 periods the non-recurring charges included $429,000
related to the discontinuance of the Company's infusion pump business, $294,000
in severance and costs related to the resignation of the Company's chief
executive, obsolete inventory write-offs of $83,000 for custom tubing packs,
$133,000 write-down of field inventories, and $95,000 severance from the
Company's reduction in force in September, 1999. The $95,000 severance included
$24,000 charged to selling and marketing expense, $15,000 charged to research
and development, and $56,000 charged to general and administrative costs.
In September, 1999 the Company concluded that its ambulatory infusion pump
business was not viable due to the large number of competitive models available
and the downward trend in market pricing of both hardware and disposable pump
products. Consequently, the Company discontinued development of a new infusion
pump then under development, and wrote off inventory and other assets associated
with the infusion pump product line.
The $429,000 charge related to the discontinuance of the infusion pump
business included $140,000 in obsolete inventories charged to cost of sales,
$7,000 charged to selling and marketing for obsolete field inventories, and
$282,000 charged to general and administrative expenses which included the
write-off of capitalized software development costs for the infusion pump
product previously under development.
Excluding non-recurring items, the primary factor causing the increase in
losses for the periods in 2001 as compared to 2000 was the shift in product mix
from products with higher gross margins to the oxygenator which carries a lower
gross margin. However, the Company has continued to improve the oxygenator gross
profit margins. The periods in fiscal 2001 have also been burdened with
production inefficiencies caused by the relocation, the use of temporary
production facilities and the start up of the new production facility.
The Company had sales of $4,519,000 for the quarter ended March 31, 2001
compared to sales of $4,422,000 for the comparable quarter in the prior fiscal
year. For the nine months ended March 31, 2001, the Company had sales of
$13,296,000 compared to sales of $13,370,000 for the nine months ended March 31,
2000. Although net sales for the three and nine month periods ended March 31,
2001 are comparable to the prior fiscal year periods, they include a general
reduction of sales volume of 10% to 20% across all product lines, except for
oxygenator sales, which increased 46%.
The reduction in sales of products, other than oxygenators, resulted from
factors which include a loss of market share in these products to other
competitors, a shift in customer purchasing patterns from separate components to
integrated oxygenator systems which include those components, and the increasing
percentage of open heart surgeries which are performed without stopping the
heart. A majority of the Company's sales are derived from products used in the
open heart bypass circuit which is employed when a patient's heart is stopped
during cardiac surgery.
10
Oxygenator sales were $1,492,000 for the three months ended March 31, 2001
compared to $1,014,000 for the three months ended March 31, 2000. For the nine
months ended March 31, 2001, oxygenator sales were $3,899,000 compared to
$2,676,000 for the comparable period in the prior fiscal year. The sales
increase resulted from additional market penetration by the VisionTM oxygenator
which was introduced in August, 1997. The Vision oxygenator has been favorably
received by the market due to product features and operating performance.
Gross profit decreased to $1,007,000 (after adjustment for previously
discussed non-recurring items) for the three months ended March 31, 2001
compared to $1,319,000 for the three months ended March 31, 2000. For the nine
months ended March 31, 2001, gross profit was $3,374,000 compared to $3,654,000
(after adjustment for previously discussed non-recurring charges) for the nine
months ended March 31, 2000. The primary factors in the gross profit decrease
was the increase in margins on oxygenators, offset by the shift in product mix
to oxygenators from other products with higher margins and production
inefficiencies caused by the Company's relocation to new facilities in January
2001 and the use of temporary production facilities in the quarter ended March
31, 2001.
Research and development expenses for the nine months ended March 31, 2001
were $747,000 compared to $900,000 for the comparable period in the prior year.
The decrease in expense from the comparable period in the prior year resulted
from the staff reduction and discontinuation of the Company's infusion pump
business, both of which occurred in September, 1999.
Selling and marketing expenses for the three months ended March 31, 2001
were $997,000 compared to $1,072,000 for the three months ended March 31, 2000.
Selling and marketing expenses for the nine months ended March 31, 2001 were
$3,024,000 compared to $2,961,000 for the nine months ended March 31, 2000
(after adjustment to remove $164,000 in nonrecurring charges incurred in the
quarter ended September 1999, consisting of $24,000 severance, $133,000
write-down of field inventories, and $7,000 write-down of discontinued infusion
pumps in field inventory.)
General and administrative expenses for the three months ended March 31,
2001 were $447,000 compared to $486,000 for the three months ended March 31,
2000.
For the nine month period ending March 31, 2001, general and administrative
expenses were $1,296,000 compared to $1,284,000 for the nine month period ended
March 31, 2000 (after adjustment to remove 1999 non-recurring costs).
The non-recurring general and administrative costs included $294,000 in
severance and other costs related to the resignation the Company's chief
executive, Jack W. Brown, in September, 1999. An employment agreement between
the Company and Mr. Brown provides for Mr. Brown's continued compensation by the
Company until September 15, 2001 at an annual salary of $100,000, for which the
Company recorded in September 1999 a $225,000 charge including fringe benefits.
As part of the agreement, Mr. Brown also received forgiveness of debt of $54,000
and title to a former company automobile valued at $15,000.
The non-recurring general and administrative costs for nine months ended
March 31, 2000 also included a charge of $282,000 relating to the Company's
ambulatory infusion pump product previously under development. The charge
included the write-off of capitalized software development costs for the new
pump. Product development activities for the pump ceased in September, 1999. In
addition, the period included $56,000 in severance related to the September,
1999 reduction in force.
11
Liquidity and Capital Resources:
- -------------------------------
For the nine months ended March 31, 2001 net cash used by operating
activities was $1,748,000 compared to net cash used by operating activities of
$1,005,000 for the nine months ended March 31, 2000.
The increased use of cash by operating activities, when compared to the
comparable period in the prior fiscal year, results primarily from the increase
in inventory produced in anticipation of the Company's relocation to its new
operating facility, the cost of temporary production facilities, and an
increased operating loss in the current period.
The financial incentives remaining to be received for the early termination
of the lease on the Irvine facility combined with the reimbursement of tenant
improvements to be received from the current landlord should be sufficient to
cover the remaining costs associated with the relocation. Effective December 26,
2000 the Company entered into a $2,000,000 three year revolving line of credit
agreement with Heller Healthcare Finance, Inc. Advances are secured by the
operating assets of the Company and bear interest at prime (8.5% at March 31,
2001) plus 2%. The Company believes its current financing source, the financial
incentives remaining to be received and planned inventory reductions, will be
sufficient to cover its cash requirements through the fiscal year 2002, however,
this is based on factors over which the Company may have little or no control.
If the Company is unable to reduce its current level of operating losses or is
unable to achieve its planned inventory reductions, it will require additional
sources of funding. There can be no assurances that additional sources of
funding will be available when needed or will be available at rates and terms
favorable to the Company.
12
PART II - OTHER INFORMATION
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ITEM 6. - Exhibits and Reports on Form 8-K
- ------ --------------------------------
a. Exhibits
None
b. Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GISH BIOMEDICAL, INC.
Date: May 15, 2001 /s/ Leslie M. Taeger
-----------------------------
Leslie M. Taeger
Vice President/CFO
14