FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (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, 1996 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________ Commission File No. 0-28034 ------- CardioTech International, Inc. -------------------------------------------------- (Exact name of registrant as specified in its charter) Massachusetts 04-3186647 - -------------------------- ---------------- State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) 11 State Street, Woburn, Massachusetts 01801 - ------------------------------------------ --------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (617) 933-4772 -------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value per share -------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _______ ----- The number of shares outstanding of the registrant's class of Common Stock as of August 13, 1996 was 4,244,116. No shares were held in treasury. CARDIOTECH INTERNATIONAL, INC. TABLE OF CONTENTS Page ---- PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Consolidated Balance Sheets at June 30, 1996 and March 31, 1996 3 Consolidated Statements of Operations for the three months ended June 30, 1996, and 1995 4 Consolidated Statements of Cash Flows for the three months ended June 30, 1996, and 1995 5 Statement of Stockholders' Equity for the years ended March 31, 1996 and quarter ended June 30, 1996 6 Notes to Consolidated Financial Statements 7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K 11 Signatures 12 -2- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CARDIOTECH INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS March 31, 1996 June 30, 1996 --------------- ------------- (unaudited) ASSETS Current Assets: Cash and Cash Equivalents $ 504 $ 3,319,620 Accounts Receivable -- Trade - 23,200 Accounts Receivable -- Other - 2,059 Prepaid Expenses - 104,695 ----------- ----------- Total Current Assets 504 3,449,574 Property and Equipment, net 35,190 173,276 ----------- ----------- Total Assets $ 35,694 $ 3,622,850 =========== =========== LIABILITIES AND STOCKHOLDERS EQUITY Current Liabilities: Accounts Payable $ - $ 9,842 Accrued Expenses - 24,269 ----------- ----------- Total Current Liabilities $ - $ 34,111 =========== =========== Stockholders' Equity: Preferred stock $.01 par value; 5,000,000 shares authorized, none issued or outstanding Common Stock, $.01 par value, 20,000,000 shares authorized, 2,831,491 and 4,244,116 issued and outstanding at March 31, 1996 and June 30, 1996, respectively 2,831 42,441 Due to Parent 4,063,966 Additional Paid in Capital 8,111,143 Accumulated Deficit (4,031,103) (4,555,616) Cumulative Translation Adjustment (9,229) ----------- ----------- Total Stockholders' Equity 35,694 3,588,739 ----------- ----------- Total Liabilities and Stockholders' Equity $ 35,694 $ 3,622,850 =========== =========== The accompanying notes are an integral part of these consolidated financial statements. -3- CARDIOTECH INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Three Months Ended June 30, 1995 June 30, 1996 ------------- ------------- Research Revenue $ 23,663 $ 78,447 Operating Expenses Research and Development 185,775 151,999 Selling, General and Administrative 71,115 134,185 --------- --------- Total Operating Expenses 256,890 286,184 --------- --------- Other Income and Expenses Spin Off Transaction Cost - (323,558) Interest Income - 6,782 --------- ----------- - (316,776) --------- ----------- Net Loss $(233,227) $(524,513) ========= =========== Net Loss Per Common Share $ (0.08) $ (0.17) ========= =========== Weighted Average Number of Shares Outstanding 2,831,941 3,082,555 The accompanying notes are an integral part of these consolidated financial statements. -4- CARDIOTECH INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Three months ended June 30, 1995 1996 ------------ ------------- Cash flows from operating activities: Net Loss $ (233,227) $ (524,513) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation 3,979 7,320 Changes in assets and liabilities Accounts receivable 27,292 (25,259) Prepaid expenses (29,328) (104,695) Accounts payable 9,842 Accrued expenses (4,901) 24,269 ---------- ---------- Net cash flows from operating activities (236,185) (613,036) Cash flows from financing activities: Net proceeds from issuance of common stock 3,830,000 Advance from parent 242,241 485,012 Payment of spinoff costs (373,631) ---------- ---------- Net cash flows from financing activities 242,241 3,941,381 Net increase in cash and cash equivalents 6,056 3,328,345 ---------- ---------- Effect of exchange rate changes on cash (6,056) (9,229) Cash and cash equivalents at beginning of period 504 504 ---------- ---------- Cash and cash equivalents at end of period $ 504 $ 3,319,620 ========== ========== The accompanying notes are an integral part of these consolidated financial statements. -5- CARDIOTECH INTERNATIONAL, INC. STATEMENT OF STOCKHOLDERS' EQUITY For the year ended March 31, 1996 and Quarter Ended June 30, 1996 (unaudited) Common Stock Additional Total Currency ---------------------- Due to Paid In Accumulated Translation Stockholders' Number of Parent Capital Deficit Adjustment Equity Shares Amount --------------------------------------------------------------------------------------------- Balance at March 31, 1996 2,831,491 2,831 4,063,966 (4,031,103) 35,694 Issuance of Common Stock to Parent 1,412,625 39,610 3,960,375 3,999,985 Payment of shared spin off costs to former parent (373,631) (373,631) Forgiveness of advances from Parent and adjustment of APIC (4,063,966) 4,524,399 460,433 Effect of Cumulative Translation Adjustment (9,229) (9,229) Net Loss June 30, 1996 (524,513) (524,513) --------------------------------------------------------------------------------------------- Balance at June 30, 1996 4,244,116 $42,441 $ - $8,111,143 $(4,555,616) $(9,229) $3,588,739 ============================================================================================= The accompanying notes are an integral part of these consolidated financial statements. -6- CARDIOTECH INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. The unaudited consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and include, in the opinion of management, all adjustments, consisting of normal, recurring adjustments, necessary for a fair presentation of interim period results. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Company believes, however, that its disclosures are adequate to make the information presented not misleading. The results for the interim periods presented are not necessarily indicative of results to be expected for the full fiscal year. 2. In June 1996, the Company issued 1,412,625 shares of CardioTech Common Stock for $3.8 million in cash, equipment having an estimated market value of $147,000, the transfer of certain vascular graft manufacturing patents, and the forgiveness of certain amounts due to its former parent PolyMedica Industries, Inc. ("PMI"). After it acquired these shares, PMI owned 3,929,493 shares, or 92.6% of CardioTech Common Stock. On June 12, 1996 and June 19, 1996, PMI distributed (the "Spin Off") all of the shares of common stock that PMI owned to stockholders of record as of June 3, 1996. On June 11, 1996 all advances from PMI to CardioTech were forgiven and are classified by the Company as equity as additional paid in capital. 3. Net Loss per share is computed using the weighted average number of shares of common stock outstanding. Common equivalent shares from stock options and warrants are excluded from the computation as their effect is anti-dilutive. -7- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONDITION AND RESULTS OF OPERATIONS OVERVIEW CardioTech synthesizes, designs and manufactures medical-grade polymers, particularly polyurethanes that are useful in the development of vascular graft technology and other implantable medical devices because they can be synthesized to exhibit compatibility with human blood and tissue. CardioTech uses proprietary manufacturing technology to fabricate small bore synthetic vascular grafts made of ChronoFlex(R), a family of polyurethanes that has been demonstrated to be biodurable, blood, tissue compatible and non-toxic. In addition to the graft research and development program, since 1990 CardioTech has been engaged in various internal and joint venture programs with corporate partners for the development and sale of ChronoFlex and other proprietary biomaterials for use in medical devices manufactured by third parties. This activity has generated research revenues for CardioTech. As CardioTech is now focusing more of its research and development resources on the vascular graft program, period to period comparisons of changes in research revenues are not necessarily indicative of results to be expected for any future period. CardioTech was established as a separate subsidiary of PMI in March 1993 to focus on PMI's existing biomaterials business, with a particular emphasis on accelerating the research, development and commercialization of small bore vascular graft products through external funding and a more focused and strategic product development effort. In June 1996; PMI spun off the Company. See Note 2 of Notes to Consolidated Financial Statements. CardioTech is headquartered in Massachusetts and operates from manufacturing and laboratory facilities located in Massachusetts and the United Kingdom. -8- RESULTS OF OPERATIONS: Comparison for the Quarters Ended June 30, 1996 and 1995. Research Revenues for the quarter ended June 30, 1996 were $78,447 compared to $23,663 for the quarter ended June 30, 1995. The majority of this increase $40,000, represents royalty income on specially designed polyurethanes for a major medical device manufacture. The balance of this increase was due to an increase in the shipment of biomaterials for scientific research for the quarter ended June 30, 1996. Research and Development expenses for the quarter ended June 30, 1996 were $151,999 compared to $185,775 for the quarter ended June 30, 1995. This decrease reflects the fact that during the quarter certain members of management devoted substantial time to effectuating the Spin Off, rather than research and development efforts. Selling, general and administrative expenses for the quarter ended June 30, 1996 were $134,185 compared to $71,115 for the quarter ended June 30, 1995. The increase in selling, general and administrative expenses reflects the costs incurred by the Company in establishing itself as a stand alone company prior to the Spin Off. Other income and expenses for the quarter ended June 30, 1996 were $316,776 compared to $0 during the quarter ended June 30, 1996. The Company incurred $323,558 in Spin Off transaction costs, which were partially offset by interest income of $6,782. -9- LIQUIDITY AND CAPITAL RESOURCES CardioTech's future growth will depend on its ability to raise capital to support research and development activities and to commercialize its vascular graft technology. To date, CardioTech has not generated any revenue from the sale of vascular grafts, although it has received a minor amount of research revenues relating to its other biomaterials applications. Since inception, funding from PMI has been used to finance the development of CardioTech's technologies. CardioTech expects to continue to incur operating losses unless and until product sales and/or royalty payments generate sufficient revenue to fund its continuing operations. CardioTech will require substantial funds for further research and development, future pre-clinical and clinical trials, regulatory approvals, establishment of commercial-scale manufacturing capabilities, and the marketing of its products. CardioTech's capital requirements depend on numerous factors, including but not limited to, the progress of its research and development programs, the progress of pre-clinical and clinical testing, the time and costs involved in obtaining regulatory approvals, the cost of filing, prosecuting, defending and enforcing any intellectual property rights, competing technological and market developments, changes in CardioTech's development of commercialization activities and arrangements, and the purchase of additional facilities and capital equipment. CardioTech is currently conducting its operations with approximately $3,300,000 in cash contributed by PMI in connection with the Spin Off. CardioTech estimates such amounts will be sufficient to fund its initial working capital and research and development activities through June 1998. Past spending levels are not necessarily indicative of future spending levels. From the inception of CardioTech's business through March 31, 1996, PMI has funded approximately $4.1 million in operating losses to support CardioTech's research activities. Future expenditures for product development, especially relating to outside testing and clinical trials, are discretionary and, accordingly, can be adjusted to available cash. CardioTech will seek to obtain additional funds through public or private equity or debt financings, collaborative arrangements, or from other sources. There can be no assurance that additional financing will be available at all or on acceptable terms to permit successful commericialization of CardioTech's technology and products. If adequate funds are not available, CardioTech may be required to curtail significantly one or more of its research and development programs, or obtain funds through arrangements with collaborative partners or others that may require CardioTech to relinquish rights to certain of its technologies, product candidates or products. Inflation - --------- The moderate rate of inflation has not had a material effect on the Company's operations. -10- Forward Looking Statements - -------------------------- This Form 10-Q contains forward-looking statements that are subject to certain risks and uncertainties. These forward-looking statements include statements regarding the sufficiency of the Company's liquidity and capital. Such statements are based on management's current expectations. The forward looking statements are subject to a number of factor's that could cause actual results to differ materially from the Company's projections. Such factors include the timely development of products by the Company and the Company's ability to obtain financing to support its working capital needs. For more explanation of these and other risk factors, please see the Company's Form 10-K for the year ended March 31, 1996. ChronoFlex(R) is a registered trademark of PMI. -11- PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit: 27.1 Financial Data Schedule (b) Reports on Form 8-K: None -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. CARDIOTECH INTERNATIONAL, INC. /s/ Michael Szycher, Ph.D. --------------------------------- Michael Szycher, Ph.D. Chairman and Chief Executive Officer /s/ John E. Mattern --------------------------------- John E. Mattern Chief Financial Officer and Chief Operating Officer (Principal Financial and Accounting Officer) Dated: August 13, 1996 -13-