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 December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-28034
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CardioTech International, Inc.
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(Exact name of registrant as specified in its charter)
Massachusetts 04-3186647
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
11 State Street, Woburn, Massachusetts 01801
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 933-4772
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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
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The number of shares outstanding of the registrant's class of Common Stock
as of February 11, 1997 was 4,272,916. No shares were held in treasury.
CARDIOTECH INTERNATIONAL, INC.
FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at
March 31, 1996 and December 31, 1996 3
Condensed Consolidated Statements of
Operations for the three and nine months
ended December 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash
Flows for the nine months ended
December 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-11
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 12
Signatures 13
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARDIOTECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Mar. 31, 1996 Dec. 31, 1996
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(unaudited)
ASSETS
Current Assets:
Cash and Cash Equivalents $ 504 $ 2,625,428
Accounts Receivable - Trade - 42,218
Accounts Receivable - Other - 187,435
Prepaid Expenses - 94,219
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Total Current Assets 504 2,949,300
Property and Equipment, net 35,190 249,339
Other Non-Current Assets - 15,883
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Total Assets $ 35,694 $ 3,214,522
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LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities:
Accounts Payable $ - $ 37,453
Accrued Expenses - 182,339
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Total Current Liabilities $ - $ 219,792
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Stockholder's 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 4,272,916 issued
and outstanding at March 31, 1996
and December 31, 1996, respectively 2,831 42,729
Due to Parent 4,063,966 -
Additional Paid in Capital - 8,182,854
Accumulated Deficit (4,031,103) (5,250,265)
Cumulative Translation Adjustment - 19,412
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Total Stockholder's Equity 35,694 2,991,730
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Total Liabilities and
Stockholder's Equity $ 35,694 $ 3,214,522
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
CARDIOTECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Nine Months Ended
Dec. 31, 1995 Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1996
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Research Revenue $ 89,697 $ 281,092 $ 143,310 $ 501,460
Operating Expenses
Research and Development 289,541 367,395 638,285 829,677
Selling, General and
Administrative 101,579 264,796 247,649 570,431
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Total Operating Expense 391,120 632,191 885,934 1,400,108
Other Income and Expenses
Spin Off Transaction Cost - - - (393,897)
Interest Income - 33,234 - 73,385
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- 33,234 - (320,512)
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Net Loss $( 301,423) $ (317,865) $ (742,624) $(1,219,162)
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Net Loss Per Common Share $(0.11) $(0.07) $(0.26) $(0.31)
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Weighted Average Number of Shares
Outstanding 2,831,941 4,272,916 2,831,941 3,888,207
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
CARDIOTECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months ended
Dec 31,1995 Dec 31,1996
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Cash flows from operating activities:
Net Loss $(742,624) $(1,219,162)
Adjustments to reconcile net loss to
net cash flows from operating
activities:
Depreciation and Amortization 54,723 35,554
Non Cash Expenses - 33,000
Changes in assets and liabilities
Accounts receivable (15,116) (229,653)
Prepaid expenses (10,436) (55,219)
Accounts payable - 37,453
Accrued expenses 26,366 182,339
Increase in Non-Current Assets (15,883)
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Net cash flows from operating
activities (687,087) (1,231,571)
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Cash flows from investing activities:
Purchase of property, plant and
equipment - (105,288)
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Net cash flows from Investing
Activities - (105,288)
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Cash flows from financing activities:
Net proceeds from issuance of common
stock - 3,830,000
Advance from parent 693,143 485,012
Payment of spin-off costs - (373,631)
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Net cash flows from financing activities 693,143 3,941,381
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Net increase in cash and cash
equivalents 6,056 2,604,522
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Effect of exchange rate changes on cash (6,056) 20,402
Cash and cash equivalents at beginning
of period 504 504
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Cash and cash equivalents at end of
period $ 504 $ 2,625,428
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
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CARDIOTECH INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The unaudited consolidated financial statements included herein have been
prepared by CardioTech International Inc. (the "Company" or "CardioTech"),
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 Common Stock, par
value of $.01 per share (the "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 PMI. After it acquired these shares, PMI owned 3,929,493
shares, or 92.6% of Common Stock. On June 12, 1996 and June 19, 1996, PMI
distributed (the "Spin Off") all of the shares of Common Stock that it owned
to its 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 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.
4. On October 1, 1996, the Company signed a two (2) year lease agreement
with Poly -Medica Pharmaceuticals, Inc.,(U.S.A.), the owner or lessor of the
office, manufacturing and research facilities currently occupied by the
Company in Woburn, MA and Tarvin, Cheshire, UK. The lease agreement replaces
in its entirety the service agreement between PMI and the Company, signed in
June 1996. The lease agreement expires on September 30, 1998. Thereafter, the
Company has the right upon ninety (90) days written notice to the landlord, to
terminate the lease. The base rent (including payments for electricity) in the
first year is approximately $200,000 and in the second year is $186,000. The
lease agreement also provides for a two (2) year payback of approximately
$20,000 in build out costs increased by the landlord in behalf of the Company.
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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 it believes 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 is using proprietary manufacturing technology to develop and
fabricate small bore synthetic vascular grafts made of ChronoFlex(R), a family
of polyurethanes that has been demonstrated to be biodurable, blood and tissue
compatible and non-toxic.
In addition to the graft research and development program, since 1990
CardioTech has been engaged in various internal programs and joint venture
programs with corporate partners and internal programs 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 most 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
(the "Spin Off"). See Note 2 of Notes to Consolidated Financial Statements.
CardioTech is headquartered in Massachusetts and operates from
manufacturing and laboratory facilities located in Woburn, Massachusetts and
Tarvin, Cheshire, United Kingdom.
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RESULTS OF OPERATIONS:
Comparison for the Three Months Ended December 31, 1996 and 1995.
Research revenues for the quarter ended December 31, 1996 were $281,092
compared to $89,697 for the quarter ended December 31, 1995, an increase of
$191,395 or 213%. This increase was primarily generated by higher research
revenues ($209,000) received, under research grants from the National
Institute of Health, ("NIH"), and under research contracts ($10,000), offset
by lower sales of medical grade polyurethanes ($14,700) and decreased royalty
revenue ($13,000).
Research and development expenses for the quarter ended December 31, 1996
were $367,395, compared to $289,541 for the quarter ended December 31, 1995,
an increase of $77,854 or 27%. This increase was primarily the result of
increased research and development related to clinical trials of the Company's
vascular access graft in Europe and the NIH grants. Some expenses ($80.000)
related to the NIH grants were incurred by the Company was a result of the
Company contracting work to outside laboratories and hospitals.
Selling, general and administrative expenses for the quarter ended
December 31, 1996 were $264,796, compared to $101,579 for the quarter ended
December 31, 1995 an increase of $163,217 or 160%. The increase in selling,
general and administrative expenses reflects the additional costs incurred by
the Company subsequent to the Spin Off on June 11, 1996. These costs include,
but are not limited to expenses related to the establishment of a separate
finance, accounting and administrative function ($50,000), investor and public
relations ($65,000) legal representation ($18,700), insurance ($15,000), rent
($10,000) and advertising ($4,000).
Interest income for the quarter ended December 31, 1996 was $33,234,
compared to $0 during the quarter ended December 31, 1995. This income was
received on available cash and investment balances of the Company.
Comparison of the Nine Months ended December 31, 1996 to the Nine Months
ended December 31, 1995.
Research revenues for the nine months ended December 31, 1996 were
$501,460, compared to $143,310 for the nine months ended December 31, 1995.
An increase of $358,150 or 250 %. This increase was primarily generated by
higher research revenues ($358,150) under the NIH grants, higher product sales
($21,265), and higher royalty income on specialty designed polyurethanes for a
medical device manufacture ($34,639) offset by reduced contract research
income ($44,016).
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Research and development expenses for nine month period ended December
31, 1996 were $829,677, compared to $638,285 for the period ended December 31,
1995, a increase of 191,392 or 30%. This increase was primarily the result of
increased expeditions related to clinical trials of the Company's vascular
access graft in Europe and the NIH grants.
Selling, general and administrative expenses for the nine months ended
December 31, 1996 were $570,431, compared to $247,649 for the nine months
ended December 31, 1995, an increase of 322,782 or 130%. This increase
reflects the additional costs incurred by the Company subsequent to the Spin
Off, including expenses related to the establishment of a separate finance and
accounting group, ($65,000), investor relations and public reporting fees,
($110,000), rent, ($32,000), insurance ($58,600) and legal representation,
($57,000).
Other income and expenses for the nine months ended December 31,1996 was
expenses of $320,512, compared to $0 during the nine months ended December 31,
1995. During the nine months ended December 31, 1996, the Company incurred
$393,879 in Spin Off transaction costs offset by interest income of $73,385.
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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 and funding from the
NIH to support graft research. 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
$2,600,000 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 financing, 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 commercialization 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.
10
FORWARD LOOKING STATEMENTS
The Company believes that 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 and are subject to a number of factors that could cause
actual results to differ materially from the forward-looking statements. The
Company cautions investors that there can be no assurance that actual results
or business conditions will not differ materially from those projected or
suggested in such forward-looking statements, as a result of various factors
including but not limited to the following: the timely development of
products by the Company, the Company's ability to obtain financing to support
its working capital needs, intense competition related to the development of
synthetic grafts and difficulties inherent in developing synthetic grafts. As
a result, the Company's further development involves an high degree of risks.
For future information, refer to the more specific risks and uncertainties
discussed throughout this report.
ChronoFlex(R) is a registered trademark of PMI, that has been licensed to
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CardioTech.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit:
10.1 Lease Agreement dated October 1, 1996 between PolyMedica
Pharmaceuticals
(U.S.A.), Inc. and the Company.
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None
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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.
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Michael Szycher, Ph.D.
Chairman and Chief Executive Officer
/s/ John E. Mattern
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John E. Mattern
Chief Financial Officer and Chief Operating Officer
(Principal Financial and
Accounting Officer)
Dated: February 11, 1997
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