1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- -----
Exchange Act of 1934. For the quarterly period ended June 30, 1997.
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: 0-19749
CHEMTRAK INCORPORATED
Delaware 77-0295388
- ------------------------------- -----------------------
(State or other jurisdiction of (I.R.S Employer)
incorporation or organization) Identification No.)
929 E. Arques Avenue, Sunnyvale, CA 94086
-----------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 773-8156
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.001 par value
----------------------------
(Title of Class)
2
CHEMTRAK INCORPORATED
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
NO.
---
Item 1: Financial Statements
Condensed Balance Sheets as of June 30, 1997 and December 31, 1996 3
Condensed Statements of Operations for the three and six months ended
June 30, 1997 and 1996 4
Condensed Statements of Cash Flows for the six months ended
June 30, 1997 and 1996 5
Notes to Condensed Financial Statements 6-7
SIGNATURES 13
EXHIBITS
2
3
CHEMTRAK INCORPORATED
CONDENSED BALANCE SHEETS
ASSETS
June 30, 1997 December 30, 1996
------------ ------------
(unaudited) (Note)
Current assets:
Cash and cash equivalents $ 1,875,000 $ 4,125,000
Short-term investments -- 567,000
Accounts receivable, net 520,000 485,000
Inventories 1,523,000 540,000
Prepaid expenses and other current assets 131,000 320,000
------------ ------------
Total current assets 4,049,000 6,037,000
Property and equipment, net 2,286,000 2,738,000
Other assets 66,000 66,000
------------ ------------
Total assets $ 6,401,000 $ 8,841,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 248,000 $ 289,000
Accrued payroll and benefits 165,000 199,000
Other accrued liabilities 791,000 788,000
Accrued royalties 149,000 105,000
------------ ------------
Total current liabilities 1,353,000 1,381,000
Deferred Revenue 350,000 --
Accrued rent 315,000 295,000
Convertible debentures 506,000 2,135,000
Stockholders' equity:
Common stock 13,000 12,000
Additional paid-in capital 43,160,000 41,375,000
Deferred compensation (39,000) (49,000)
Accumulated deficit (39,257,000) (36,308,000)
------------ ------------
Total stockholders' equity 3,877,000 5,030,000
------------ ------------
Total liabilities and stockholders' equity $ 6,401,000 $ 8,841,000
============ ============
Note: The balance sheet at December 31, 1996 has been derived from the
audited financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
See accompanying notes.
3
4
CHEMTRAK INCORPORATED
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended Six months ended
June 30, June 30,
-------------------------------- --------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
Net revenues:
Product sales $ 870,000 $ 581,000 $ 1,478,000 $ 1,437,000
Initial license fee -- -- 333,000 --
Funded research and other revenues -- 25,000 500,000 175,000
------------ ------------ ------------ ------------
Total net revenues 870,000 606,000 2,311,000 1,612,000
Cost and expenses:
Cost of product sales 517,000 824,000 1,221,000 1,555,000
Research and development 579,000 729,000 1,032,000 1,473,000
Marketing, general and administrative 1,530,000 1,179,000 3,153,000 2,273,000
------------ ------------ ------------ ------------
Total costs and expenses 2,626,000 2,732,000 5,406,000 5,301,000
------------ ------------ ------------ ------------
Operating loss (1,756,000) (2,126,000) (3,095,000) (3,689,000)
Interest income and (expense), net 102,000 (663,000) 146,000 (596,000)
------------ ------------ ------------ ------------
Net loss $ (1,654,000) $ (2,789,000) $ (2,949,000) $ (4,285,000)
============ ============ ============ ============
Net loss per share $ (0.13) $ (0.29) $ (0.24) $ (0.44)
============ ============ ============ ============
Shares used in calculating per share amounts 12,855,000 9,773,000 12,470,000 9,743,000
============ ============ ============ ============
4
5
CHEMTRAK INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
Six months ended
June 30,
-------------------------------------
1997 1996
----------------- -----------------
Operating activities:
Net loss $ (2,949,000) $(4,285,000)
Adjustment to reconcile net loss to net cash and
cash equivalents used in operating activities:
Depreciation and amortization 403,000 430,000
Interest expense and financing charges
on convertible debentures 105,000 619,000
Accrued rent 20,000 27,000
Stock option compensation and other -- 2,000
Loss on disposal of assets 170,000 --
Changes in operating assets and liabilities:
Accounts receivable (35,000) (364,000)
Inventories (983,000) (266,000)
Prepaid expenses and other current assets 189,000 167,000
Accounts payable (41,000) (183,000)
Accrued payroll and benefits (34,000) 36,000
Deferred Revenue 350,000 --
Accrued royalties and other accrued liabilities 47,000 349,000
----------------- -----------------
Net cash and cash equivalents
used in operating activities (2,758,000) (3,468,000)
----------------- -----------------
Investing activities:
Proceeds from available-for-sale securities 567,000 514,000
Acquisition of property and equipment, net (121,000) (190,000)
----------------- -----------------
Net cash and cash equivalents provided
by investing activities 446,000 324,000
----------------- -----------------
Financing activities:
Net proceeds from issuance of convertible debentures -- 4,700,000
Issuance of common stock 62,000 182,000
----------------- -----------------
Net cash and cash equivalents provided
by financing activities 62,000 4,882,000
----------------- -----------------
Net increase (decrease) in cash and cash equivalents (2,250,000) 1,738,000
Cash and cash equivalents at beginning of period 4,125,000 4,251,000
----------------- -----------------
Cash and cash equivalents at end of period $ 1,875,000 $ 5,989,000
================= =================
Supplemental disclosure of non-cash financing activities:
Conversion of convertible debentures and accrued
interest to common stock $ 1,629,000 $ --
================= =================
See accompanying notes.
5
6
CHEMTRAK INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 1997
(unaudited)
Note 1. Basis of Presentation
The accompanying unaudited financial statements include all adjustments
consisting of normal recurring adjustments which the Company's management
believes to be necessary to fairly present the Company's financial position as
of June 30, 1997, and the results of operations for the three and six month
periods ended June 30, 1997.
The operating results of the interim periods presented are not
necessarily indicative of the results for the full year. The accompanying
financial statements should be read in conjunction with the financial statements
for the year ended December 31, 1996, included in the ChemTrak Incorporated
Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (the
"Form 10-K"), and the 1996 Annual Report to Stockholders (the "Annual Report").
The information set forth in the accompanying balance sheet as of December 31,
1996, has been derived from the audited balance sheet included in the
above-referenced Form 10-K and Annual Report.
Note 2. Revenue Recognition
Product revenues are generally recognized at the time of shipment to
customers or distributors. Initial license revenues are recorded when earned,
which is upon signing of the license agreement, confirmation of collectibility
and when no future obligations remain. The Company recognizes license
termination and conversion fees when earned, which is upon signing of the
license agreement, confirmation of collectibility and when no future obligations
remain. These fees are recognized as operating income to offset the operating
expenses that have been recorded prior to termination or conversion of the
contract. These operating expenses were incurred by the Company to build and
supply the expected product pipeline as part of the original license agreement.
The Company recognized license termination and conversion fees of $3,600,000 in
1995.
Note 3. Deferred Revenue
In April 1997, the Company received a $350,000 payment from Astra Merck,
Inc. This payment was for product that the Company had produced, but not yet
shipped.
Note 4. Net Loss Per Share
Net loss per share is computed using the weighted average number of
shares outstanding. Common equivalent shares from stock options are excluded in
the computation as their effect is antidilutive.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which ChemTrak is required to adopt on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute loss per share and to restate all prior
periods. Under the new requirements for calculating primary loss per share, the
dilutive effect of stock options will be excluded. The primary loss per share
for the three and six month period ended June 30, 1997 and June 30, 1996 would
not change as reported. The impact of Statement 128 is expected not to have a
material effect on fully diluted loss per share.
6
7
CHEMTRAK INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
June 30, 1997
(unaudited)
Note 5. Inventories
Inventories are stated at the lower of standard cost (which approximates
actual costs on a first-in, first-out basis) or market. Inventories consisted of
the following:
June 30, 1997 December 31,1996
---------- ----------
Raw materials....... $ 728,000 $ 289,000
Work in process..... 182,000 63,000
Finished goods...... 613,000 188,000
---------- ----------
Total............. $1,523,000 $ 540,000
========== ==========
Note 6. Convertible Debentures
In May 1996, the Company issued $5,000,000 of convertible debentures
resulting in net proceeds to the company of $4,700,000 after deducting selling
commissions. The debentures, which are due in May 1998, are convertible into
common stock at the lower of 110% of the average closing prices during the
ten-day trading period ending with the initial debenture funding date, or 82.5
percent of the similarly-defined average ten-day market price ending with the
conversion date. The Company has the option to convert the amount of periodic
interest due on the convertible debentures, computed at the rate of 7.5% per
annum, into common stock of the Company in lieu of cash payments. Through June
30, 1997, all interest obligations on the debentures have been settled by the
issuance of common stock.
The accompanying financial statements reflect deemed non-cash interest
expense of $875,000 ($656,250 and $218,750 in the quarters ended June 30, 1996
and September 30, 1996, respectively).
As of June 30, 1997, aggregate principal amount of $4,605,000 had been
converted into 3,013,000 shares of common stock and approximately 84,436 shares
were issued to settle interest obligations.
7
8
CHEMTRAK INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in the Company's 1996 Form
10K and elsewhere in this document.
OVERVIEW
ChemTrak began marketing the AccuMeter(R) Cholesterol Test to the United
States physicians office market in May 1991, following receipt of clearance from
the FDA, and to the international consumer retail and physicians' office
laboratory market in October 1991. In March 1993, the Company received clearance
from the FDA for the United States consumer retail market. In January 1994, the
Company began marketing the AccuMeter(R) Cholesterol Self-Test through United
States consumer catalogs and signed a license and supply agreement with Direct
Access Diagnostics ("DAD"), a Johnson & Johnson company, to market the Company's
Total Cholesterol Test to over-the-counter retail outlets in North America. In
December 1995, the Company regained the exclusive rights to market its Total
Cholesterol Test in the United States retail market and re-launched the product
in January 1996 under the trade name of CholesTrak(R).
In April 1997, the Company entered into an agreement with Parents Alert
to distribute a home drug test kit. Under terms of the agreement, ChemTrak will
assume responsibility for nationwide marketing and distribution of the Parent's
Alert Home Drug Test Service. In return, Parent's Alert will receive royalty
payments and consulting payments from ChemTrak for the use of its name. Product
distribution is expected to begin in the third quarter of this year.
In March 1997, ChemTrak announced its entry into the colorectal disease
testing market with the introduction of ColoCARE(R), a Home Test to Detect the
Early Warning Signs of Colorectal Disease. The Company began shipments of
ColoCARE(R) during the first quarter of 1997.
In July 1996, the Company received clearance from the FDA to market its
first test for infectious diseases, the H. pylori test for use in the
physicians' office laboratory market. The first shipment to Astra Merck, Inc.
as part of the 1995 agreement, is now expected to be delivered in the third
quarter of 1997.
8
9
In January of 1997, ChemTrak announced a pan-European license with
Selfcare Inc. of Waltham, Massachusetts to market the AWARE(TM)home HIV test
service in Europe. As part of the agreement Selfcare will pay for the cost of
regulatory submissions in each of the countries of Europe. Selfcare, does
however, have the option to terminate the agreement if the FDA does not approve
ChemTrak's AWARE(TM) home HIV test service in 1997. In 1995, the Company
acquired technology and filed with the FDA its pre-market approval application
("PMA") for the Company's AWARE(TM) home HIV test service. In June 1997, the FDA
requested additional information regarding the PMA Filing. The Company is
evaluating the FDA information request and the market opportunity for the
product.
As of June 30, 1997, ChemTrak had an accumulated deficit of
approximately $39,257,000. The ability of the Company to achieve profitability
is highly dependent upon numerous factors including, but not limited to, the
Company's ability to directly market and distribute its cholesterol, H. Pylori,
home drug test kit, and colorectal products in the United States, successful
completion of the Company's regulatory approval process to market products
under development, and the Company's ability to provide product in sufficient,
cost effective quantities. Due to the uncertainty of these factors, it is
difficult to reliably predict when such profitability may occur, if at all.
Until such time as it achieves profitability, the Company is likely to require
additional capital to finance its operations.
The development and marketing of consumer medical devices is capital
intensive. The Company has funded its operations to date through product sales,
funded research and other revenues, and public and private equity and debt
financings. The Company will require substantial additional funding in order to
complete the development and marketing activities in which it is currently
engaging, and to launch these products in the consumer marketplace. The Company
intends to seek additional funding through collaborative agreements with
corporate partners or through additional equity or debt financings. There can be
no assurance that the Company will be able to enter into such arrangements on
acceptable terms, or at all.
The Company has historically experienced significant fluctuations in its
operating results and anticipates that these fluctuations may continue. The
market price of the shares of the Company's common stock, like that of other
emerging medical technology companies, has been highly volatile. Various factors
including, but not limited to, fluctuations in the Company's operating results,
technical and regulatory developments, and general market and economic factors,
may have a significant effect on the market price of the Company's common stock.
9
10
RESULTS OF OPERATIONS
NET REVENUES
Net revenues increased to $870,000 for the three months ended June 30,
1997 from $606,000 for the three months ended June 30, 1996. Product sales
increased to $870,000 in the three months ended June 30, 1997 from $581,000 in
the three months ended June 30, 1996, primarily due to higher shipments of
CholesTrak(R). Net revenues increased to $2,311,000 for the six months ended
June 30, 1997 from $1,612,000 for the same period last year. The variance is
due to an initial license fee of $333,000 and to Funded research and other
revenues increasing to $500,000 for the six months ended June 30, 1997 from
$175,000 for the six months ended June 30, 1996. Included in funded research
and other revenues, for the six month period ending June 30, 1997, is a
$500,000 milestone payment from Astra Merck, Inc., who will market ChemTrak's
H. pylori test as HpChek. Included in initial license fees is a $333,000
license fee from Selfcare, Inc. of Waltham, Mass. for the Pan-European
licensing and distribution agreement for marketing the AWARE home HIV test
service. COST OF PRODUCT SALES
Cost of product sales for the three months ended June 30, 1997,
decreased to $517,000 from $824,000 for the three months ended June 30, 1996.
For the six months ended June 30, 1997, cost of product sales decreased to
$1,221,000 from $1,555,000 for the six months ended June 30, 1996. The decrease
for both the three and six month periods was primarily due to the sale of
product with lower recorded product cost and cost efficiencies from higher sales
volumes, and an effort by management to reduce manufacturing costs.
Product gross margin as a percentage of product sales increased to 41%
for the three months ended June 30, 1997 from a negative 42% for the same period
in 1996. Product gross margin as a percentage of product sales increased to 17%
for the six months ended June 30, 1997 from a negative 8% for the six months
ended June 30, 1996. These increases were primarily due to the reasons noted in
the prior paragraph.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased to $579,000 in the three
months ended June 30, 1997 from $729,000 for the three months ended June 30,
1996. For the six months ended June 30, 1997, research and development expenses
decreased to $1,032,000 from $1,473,000 for the six month period ended June 30,
1996. These decreases were primarily due to fewer clinical studies, reduction in
use of supplies and cost savings from a departmental reorganization.
10
11
MARKETING, GENERAL AND ADMINISTRATION
Marketing, general and administrative expenses increased to $1,530,000
for the three months ended June 30, 1997 from $1,179,000 for the three months
ended June 30, 1996. For the six months ended June 30, 1997, marketing, general
and administration expenses were $3,153,000 as compared to $2,273,000 for the
six months ended June 30, 1996. These increases were primarily due to selling
and advertising expenses associated with the Company's CholesTrak total
cholesterol test.
INTEREST INCOME AND (EXPENSE), NET
Net interest income and (expense) increased to $102,000 of net interest
income for the three months ended June 30, 1997 from $663,000 of net interest
expense for the three months ended June 30, 1996, and increased to $146,000 of
net interest income for the six months ended June 30, 1997 from $596,000 of net
interest expense for the six months ended June 30, 1996. These increases were
due to the inclusion of non-cash interest expense in the 1996 periods from the
convertible debentures that the Company issued during May 1996.
LIQUIDITY AND CAPITAL RESOURCES
From August 1985 through January 1992 the Company was financed through
private placements of equity securities. In February 1992, the Company completed
its initial public offering, raising approximately $23,500,000 net of issuance
costs.
At June 30, 1997, the Company had approximately $1,875,000 in cash.
The Company had convertible debentures outstanding of $506,000 at June
30, 1997.
The Company believes that its existing capital resources, together with
internally generated funds and funded research, will need to be augmented by
funds received from third parties, through collaboration agreements or equity or
debt financing to complete the development and marketing activities in which it
is currently engaged, and to launch these products in the consumer marketplace.
If such funding cannot be obtained, the Company may be required to implement
significant cost cutting measures to ensure the continuity of operations. The
Company has begun implementing certain cost cutting measures. At the Company's
current spending levels, the Company believes that available cash balances will
be sufficient to fund the Company's operations through October of 1997. The
Company's success is dependent on its ability to achieve profitable operations,
reduce discretionary operating expenses and to obtain additional funds to
support its operations. There can be no assurance that the Company will achieve
profitable operations or successfully reduce discretionary expenses by a
sufficient amount on a timely basis or that additional funds will be available
when and as required by the Company on acceptable terms or at all.
11
12
CHEMTRAK INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this amendment to the quarterly report
on Form 10Q for the quarter ended June 30, 1997 to be signed on its behalf by
the undersigned thereunto duly authorized.
Date: March 10, 1998 CHEMTRAK INCORPORATED
/s/ Donald V. Fluken
-----------------------------------------
Donald V. Fluken
Chief Financial Officer
(Principal Financial and Accounting Officer)