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, 2002
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, Rancho Santa Margarita, California 92688
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(Address of principal executive offices)
(949) 635-6200
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(Issuer's telephone number)
N/A
---
(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
--- ---
State the number of shares outstanding of each of the issuer's classes of
common equity: As of May 8, 2002, 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 BALANCE SHEET
As of March 31, 2002
(Unaudited)
(In thousands, except share data)
ASSETS
Current assets:
Cash $ 275
Accounts receivable, net 2,295
Relocation receivable 156
Inventories 5,754
Other current assets 158
--------
Total current assets 8,638
Property and equipment, at cost 9,616
Less accumulated depreciation ( 6,593)
--------
Net property and equipment 3,023
Other assets 466
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Total assets $ 12,127
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 1,616
Accounts payable 1,597
Accrued compensation and related items 493
Accrued relocation liabilities 367
Other accrued liabilities 22
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Total current liabilities 4,095
Deferred rent 82
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Total liabilities 4,177
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Shareholders' 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
Accumulated deficit ( 2,582)
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Total shareholders' equity 7,950
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Total liabilities and shareholders' equity $ 12,127
========
See accompanying notes to condensed financial statements.
2
GISH BIOMEDICAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
Three and nine months ended March 31, 2002 and 2001
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------ -----------------------
2002 2001 2002 2001
---- ---- ---- ----
(In thousands, except share and
per share data)
Net sales $ 4,041 $ 4,519 $ 11,927 $ 13,296
Cost of sales 3,042 3,812 9,306 10,222
--------- --------- ---------- ---------
Gross profit 999 707 2,621 3,074
Operating expenses:
Selling and marketing 1,042 997 2,995 3,024
Research and development 296 270 806 747
General and administrative 425 447 1,189 1,296
--------- --------- --------- ---------
Total operating expenses 1,763 1,714 4,990 5,067
--------- --------- --------- ---------
Operating loss ( 764) ( 1,007) ( 2,369) ( 1,993)
Gain on relocation, net - 426 - 426
Interest income (expense), net ( 29) ( 46) ( 66) 9
--------- --------- --------- ---------
Net loss ($ 793) ($ 627) ($ 2,435) ($ 1,558)
========= ========= ========= =========
Net loss per share - basic and diluted ($ .22) ($ .17) ($ .68) ($ .43)
========= ========= ========= =========
Basic and diluted weighted average
common shares 3,592,145 3,592,145 3,592,145 3,592,145
========= ========= ========= =========
See accompanying notes to condensed financial statements.
3
GISH BIOMEDICAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Nine months ended March 31, 2002 and 2001
(Unaudited)
(In thousands) 2002 2001
---- ----
OPERATING ACTIVITIES:
Net loss ($ 2,435) ($ 1,558)
Adjustments:
Depreciation 511 549
Amortization 5 5
Deferred rent 40 14
Gain on relocation, net - ( 426)
Changes in operating assets and liabilities 1,633 ( 332)
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Net cash used in operating activities ( 246) ( 1,748)
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INVESTING ACTIVITIES
Sale of short-term investments - 885
Purchases of property and equipment ( 433) ( 1,377)
Decrease (increase) of other long-term assets 23 ( 258)
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Net cash used in investing activities ( 410) ( 750)
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FINANCING ACTIVITIES
Net borrowings on line of credit 821 1,005
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Net cash provided by financing activities 821 1,005
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Net increase (decrease) in cash and cash equivalents 165 ( 1,493)
Cash and cash equivalents at beginning of period 110 1,477
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Cash (overdraft) at end of period $ 275 ($ 16)
======= =======
See accompanying notes to condensed financial statements.
4
GISH BIOMEDICAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 2002 (Unaudited)
1. General
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The condensed 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 nine month periods ended March 31,
2002 and 2001, and financial position at March 31, 2002, pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC").
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted
pursuant to such rules and regulations. Although the Company believes that
the disclosures in such condensed financial statements are adequate to make
the information presented not misleading, these condensed financial
statements should be read in conjunction with the Company's 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, 2001.
The accompanying financial statements have been prepared assuming the
Company will remain a going concern. The preparation of financial
statements in conformity with accounting principles generally accepted in
the United States of America requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
The Company incurred net losses of $2,435,000 and $2,892,000 and used
$1,879,000 and $2,271,000 of cash in financing such losses during the nine
months ended March 31, 2002 and the year ended June 30, 2001, respectively.
As a result, the Company had a deficit in retained earnings of $2,582,000
at March 31, 2002. Based on the Company's current operating plan, which
includes the sale of certain non-core assets, management believes existing
cash together with cash forecasted by management to be generated by
operations and from borrowings under the Company's existing revolving line
of credit may be sufficient to meet the Company's cash requirements until
at least March 31, 2003. If the financial performance embodied in the
Company's operating plan is not achieved, including a substantial reduction
in its current operating losses, a cash shortage would occur. In such an
event the Company would be required to seek additional debt or equity
financing or obtain cash through the sale of assets; however, no assurance
can be given that additional financing will be available on acceptable
terms or at all or that any potential asset sale will occur. These
conditions raise substantial doubt about the Company's ability to continue
as a going concern. The accompanying balance sheet does not include any
adjustments to reflect the possible future effects on recoverability and
classification of assets or the amounts and classification of liabilities
that may result from the outcome of this uncertainty.
5
GISH BIOMEDICAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
March 31, 2002 (unaudited)
Statement of Cash Flows:
Changes in operating assets and liabilities as shown in the condensed
statements of cash flows comprise (in thousands):
Nine Months Ended March 31,
---------------------------
2002 2001
---- ----
Decrease(increase) in:
Accounts receivable $ 622 $ 819
Relocation receivable - ( 1,306)
Inventories 323 ( 555)
Other current assets ( 73) ( 8)
Increase (decrease) in:
Accounts payable 874 ( 353)
Accrued compensation and related items ( 60) ( 77)
Accrued relocation liabilities ( 58) 1,300
Other accrued liabilities 5 ( 152)
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Net change in operating assets and liabilities $ 1,633 ($ 332)
======= =======
The Company did not pay any federal income taxes during the nine month
periods ended March 31, 2002 or March 31, 2001. The Company paid interest
costs of $74,000 and $23,000 during the nine month periods ended March 31,
2002 and 2001, respectively.
2. Inventories
-----------
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, 2002
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Raw materials $ 2,519
Work in progress 1,085
Finished goods 2,150
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$ 5,754
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3. Amendment of revolving line of credit agreement
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In December 2000, the Company entered into a $2,000,000 three-year
revolving line of credit agreement. In February 2002, the revolving line of
credit agreement was amended to extend the agreement for an additional year
and increase the line to $4,000,000. Advances, based on eligible
receivables, are secured by the operating assets of the Company and bear
interest at prime (4.75% at March 31, 2002) plus 2%. The agreement also
includes various restrictive loan covenants, including a requirement for
the Company to maintain a minimum net worth of $7,000,000, and to obtain an
operating profit on a rolling three-month basis, effective August 2002.
At March 31, 2002 the Company had borrowed $1,616,000 under the revolving
line of credit and, would have been entitled to borrow an additional
$450,000.
4. Commitments and Contingencies
-----------------------------
During the three months ended March 31, 2001, the Company relocated to a
new operating facility in Rancho Santa Margarita, California.
Costs for the construction of improvements to the new facility totaled
approximately $1,800,000 of which $200,000 is included in accrued
relocation liabilities at March 31, 2002. The Company has excluded from the
improvement construction costs at March 31, 2002, approximately $300,000
billed to the Company by the improvement construction contractor. The
accuracy and validity of these billings are currently being disputed by the
Company.
The net gain on relocation of $426,000 recorded in the period ended March
31, 2001 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.
5. 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.
7
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations
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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.
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 Gish 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,
(ii) the continued acquisition of our customers by certain of our competitors
and (iii) continued periods of net losses, which could require the Company to
find additional sources of financing to fund operations, implement its financial
and business strategies, meet anticipated capital expenditures and fund research
and development costs. 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 Company assumes no
responsibility to update any forward-looking statements as a result of new
information, future events, or otherwise.
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, 2002 with
the three and nine month periods ended March 31, 2001. This discussion should be
read in conjunction with the financial statements and associated notes.
Results of Operations:
- ----------------------
The Company incurred a net loss of $793,000, or $.22 basic and diluted net loss
per share, for the three months ended March 31, 2002 compared to a net loss of
$627,000, or $.17 basic and diluted net loss per share, for the comparable
period in the prior fiscal year.
For the nine months ended March 31, 2002, the Company incurred a net loss of
$2,435,000, or $.68 basic and diluted net loss per share, compared to a net loss
of $1,558,000 or $.43 basic and diluted net loss per share, for the nine months
ended March 31, 2001.
8
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.
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 in the three months ended March 31, 2001. 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.
The Company had sales of $4,041,000 for the three months ended March 31, 2002
compared to sales of $4,519,000 for the comparable period in the prior fiscal
year. For the nine months ended March 31, 2002, the Company had sales of
$11,927,000 compared to sales of $13,296,000 for the nine months ended March 31,
2001.
The $478,000 net sales decrease for the quarter ended March 31, 2002 compared to
the quarter ended March 31, 2001 included a general reduction of sales volume
across all product lines.
The net sales decrease for the nine months ended March 31, 2002, compared to the
nine months ended March 31, 2001, continued the trend of a general reduction of
sales volume across all product lines, except for oxygenator sales.
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. In response to the events which occurred on September
11, 2001, most healthcare facilities immediately ceased non-emergency surgeries
in an effort to conserve the nations blood supply and reserve their care
capacity for potential future emergency needs. The Company experienced a
significant reduction in orders in September 2001, which in turn had the effect
of September revenue being approximately $500,000 lower than the prior months
revenue and budgeted revenue. The Company has continued to be negatively
affected by the economic downturn which has followed the events which occurred
on September 11, 2001.
The Company believes that sales have also been negatively affected by the
growing trend to perform cardiac surgery without stopping the heart ("Beating
Heart"), the growing demand for products to have a biocompatible coating
("Coated Products") and by doubt of its ability to continue as a going concern.
Beating Heart cardiac surgery may be involved in 10% to 20% of the cardiac
surgeries currently performed in the United States of America. The Company has a
biocompatible coating under development, but does not currently offer Coated
Products. The Company believes its lack of Coated Products may have contributed
to its inability to retain certain customers and prevented the opportunity to
acquire certain new customers. While the current effect on the Company's sales
of the demand for Coated Products cannot be determined, if the Company is unable
to develop Coated Products and the demand for Coated Products continues to
increase, the lack of Coated Products could have a significant negative impact
on future Company sales.
9
The reduction in sales of products, other than oxygenators, also resulted from
factors which include a loss of market share in these products and a shift in
customer purchasing patterns from separate components to integrated oxygenator
systems which include those components.
Oxygenator sales were $1,363,000 for the three months ended March 31, 2002
compared to $1,492,000 for the three months ended March 31, 2001. For the nine
months ended March 31, 2002, oxygenator sales were $3,970,000 compared to
$3,899,000 for the comparable period in the prior fiscal year.
Gross profit decreased to $999,000 for the three months ended March 31, 2002
compared to $1,007,000 (after adjustment for previously discussed non-recurring
items) for the three months ended March 31, 2001. For the nine months ended
March 31, 2002, gross profit was $2,621,000 compared to $3,374,000 (after
adjustment for previously discussed non-recurring items) for the nine months
ended March 31, 2001. The primary cause of the gross profit decrease was the
decrease in sales compared to the prior year periods, and the continued increase
in the percentage of total sales derived from sales of oxygenators, on which the
Company achieves a lower gross profit percentage than its other product groups.
Selling and marketing expenses for the three months ended March 31, 2002 were
$1,042,000 and $997,000 for the three months ended March 31, 2001. Selling and
marketing expenses for the nine months ended March 31, 2002 were $2,995,000
compared to $3,024,000 for the nine months ended March 31, 2001. The decline in
selling and marketing expenses results primarily from the decline in revenue and
decreased commissions on sales, partially offset by $73,000 of severance costs
related to the restructure or its sales organization during the three months
ended March 31, 2002.
Research and development expenses for the three months ended March 31, 2002 were
$296,000 compared to $270,000 for the three months ended March 31, 2001.
Research and development expenses for the nine months ended March 31, 2002 were
$806,000 compared to $747,000 for the comparable period in the prior year. The
increase in research and development expenses results from increased product
development activity related to the completion of a new cardioplegia device,
which the Company, on April 10, 2002, was granted clearance by the FDA to sell
in the United States of America, and the development of a biocompatible coating
for the Company's oxygenator and custom cardiovascular tubing systems.
For the three months ended March 31, 2002, general and administrative expenses
were $425,000 compared to $447,000 for the three months ended March 31, 2001.
For the nine months ended March 31, 2002, general and administrative expenses
were $1,189,000 compared to $1,296,000 for the nine month period ended March 31,
2001. The decrease from the prior year periods is primarily due to the timing of
expenses.
To reduce the current level of operating losses being incurred by the Company
and the cash requirement to fund those losses, effective April 2002 the Company
restructured its sales organization to return to greater representation by
distributors and manufacturer's representatives instead of by a direct sales
force. This change resulted in the elimination of seven direct sales positions.
During the same period, the Company also restructured its non-production work
force, resulting in the elimination of 17 positions. Effective April 15, 2002
the Company had 115 employees. Severance costs related to these decisions
totaled $95,000 and have been included in the three month period ended March 31,
2002.
The cost effect of the restructure can not be determined at this time. However,
the Company expects a 15% reduction in future selling and marketing expenses and
10
a 10% reduction in future research and development expenses. The Company also
expects the restructure to increase future gross profit by in excess of 1% of
sales.
Liquidity and Capital Resources:
- --------------------------------
At March 31, 2002, the Company had cash of $275,000.
For the nine months ended March 31, 2002 net cash used in operating activities
was $246,000 compared to $1,748,000 for the nine months ended March 31, 2001.
The decrease in cash used by operating activities, compared to the comparable
period in the prior year, results primarily from the Company's ability to reduce
inventory in the nine months ended March 31, 2002, compared to an increase in
inventory in the nine months ended March 31, 2001, which was related to the
build-up of inventory in anticipation of the relocation of the Company to a new
facility, and increased trade payable financing.
Under its current operating plan, the Company believes its existing cash,
together with cash forecasted to be generated by operations, including proceeds
from the sale of non-core assets, and from borrowings under the existing
revolving line of credit may be sufficient to meet the Company's cash
requirements through March 31, 2003. However, if the Company is unable to
achieve the financial performance embodied in the Company's current operating
plan, including a substantial reduction in its current level of operating
losses, a cash shortage would occur earlier and it would require either
additional sources of funding or raising additional cash through the sale of
assets. 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 or that any potential asset sale will occur.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The Company's balance sheet at March 31, 2002 presented
elsewhere in this Form 10-QSB does not include any adjustments to reflect the
possible future effects on recoverability and classification of assets or the
amounts and classification of liabilities that may result from the outcome of
this uncertainty.
11
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.
12
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 13, 2002 /s/ Leslie M. Taeger
-----------------------------
Leslie M. Taeger
Vice President/CFO
13