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, 1997
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
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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 August 12, 1997 was 4,272,916. No shares were held in treasury.
CARDIOTECH INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited) 3
Condensed Consolidated Balance Sheets at June 30, 1997 and
March 31, 1997 3
Condensed Consolidated Statements of Operations for the
three months ended June 30, 1997, and 1996 4
Condensed Consolidated Statements of Cash Flows for the
three months ended June 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-10
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.
CONDENSED CONSOLIDATED
BALANCE SHEETS
JUNE 30, 1997 MARCH 31, 1997
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ASSETS (unaudited)
Current Assets:
Cash and Cash Equivalents $ 1,923,231 $ 2,346,366
Accounts Receivables --Trade 22,597 8,292
Accounts Receivables -- Other 101,723 93,218
Prepaid Expenses 43,182 87,409
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Total Current Assets 2,090,733 2,535,285
Property and Equipment, net 217,111 231,619
Other non-current assets 15,883 15,883
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Total Assets $ 2,323,727 $ 2,782,787
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LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities:
Accounts Payables 90,224 $ 50,860
Accrued Expenses 82,688 134,076
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Total Current Liabilities 172,912 184,936
Stockholders' Equity:
Preferred stock, $.01par value;
5,000,000 shares authorized,
none issued or outstanding
Common Stock, $.01 par value;
20,000,000 shares authorized,
4,272,916 issued and outstanding
at both June 30, 1997 and
March 31, 1997, respectively 42,729 42,729
Additional Paid in Capital 8,232,579 8,232,579
Accumulated Deficit (6,129,272) (5,686,675)
Cumulative Translation Adjustment 4,779 9,218
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Total Stockholders' Equity $ 2,150,815 2,597,851
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Total Liabilities and Stockholders'
Equity $ 2,323,727 $ 2,782,787
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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
June 30, 1997 June 30, 1996
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Research Revenue $ 85,582 $ 78,447
Operating Expenses
Research and Development 302,965 151,999
Selling, General and Administrative 252,369 134,185
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Total Operating Expenses 555,334 286,184
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Other Income and Expenses
Spin Off Transaction Cost - (323,558)
Interest Income 27,155 6,782
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27,155 (316,776)
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Net Loss $(442,597) $(524,513)
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Net Loss Per Common Share $ (0.10) $ (0.17)
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Weighted Average Number of
Shares Outstanding 4,272,916 3,082,555
The accompanying notes are an integral part
of these condensed consolidated financial statements.
4
CARDIOTECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended June 30,
1997 1996
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Cash flows from operating activities:
Net Loss $ (442,597) $(524,513)
Adjustments to reconcile net loss
to net cash flows from operating
activites:
Depreciation and Amortization 15,671 7,320
Changes in assets and liabilities
Accounts receivables (22,810) (25,259)
Prepaid expenses 44,227 (104,695)
Accounts payable 39,364 9,842
Accrued expenses (51,388) 24,269
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Net cash flows from
operating activities (417,533) (613,036)
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Cash flows from investing activities:
Purchase of property, plant
and equipment (1,834) -
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Net cash flows from Investing
activities (1,834) -
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Cash flows from financing
activities:
Net proceeds from issuance
of common stock - 3,830,000
Advance from parent - 485,012
Payment of spinoff costs - (373,631)
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Net cash flows from financing
activities $ - $3,941,381
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Net increase in cash and cash
equivalents (419,367) 3,328,345
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Effect of exchange rate changes
on cash (3,768) (9,229)
Cash and cash equivalents at beginning
of period 2,346,366 504
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Cash and cash equivalents at end
of period $1,923,231 $3,319,620
========== ==========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
5
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. It
is suggested that these statements be read in conjunction with the Company's
Consolidated Financial Statements and its notes thereto, for the year ended
March 31, 1997, included in the Company's Annual Report to Shareholders.
2. The financial statements for the period April 1, 1996 to June 11, 1996
included in the three months ended June 30, 1996 are intended to present
management's estimates of the results of consolidated operations and financial
condition of CardioTech as if it had operated as a stand-alone company since
inception. Certain of the costs and expenses for the period to June 12, 1996
presented in these consolidated financial statements represent inter-company
allocations and management estimates of the cost of services provided by PMI
and its subsidiaries.
In June 1996, the Company issued 1,412,625 shares of Common Stock, par
value of $.01 per share (the "Common Stock"), to PolyMedica Industries, Inc.
("PMI") for $3.8 million in cash, equipment having an estimated market value
of $147,000, the transfer of certain amounts due to PMI. After it acquired
these shares, PMI owned 3,929,423 shares, or 92.6% of the 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 converted
to equity and are now classified 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. In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings per
Share." SFAS No. 128 establishes a different method of computing net income
per share than is currently required under the provisions of the Accounting
Principles Board Opinion No. 15 (AFB 15"). Under SFAS No. 128, CardioTech will
be required to present both basic net income per share and diluted net income
per share (the principal difference being that common stock equivalents would
not be considered in the computation of basic EPS). CardioTech plans to adopt
SFAS No. 128 in its fiscal quarter ending December 31, 1997 and at the time
all historical net income per share data presented will be restated to conform
to the provisions of SFAS No. 128. The Company has not calculated the impact
of SFAS No. 128 and does not expect the effect to be material.
6
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, CardioTech,
since 1990, 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 Condensed Consolidated Financial
Statements.
CardioTech is headquartered in Massachusetts and operates from
manufacturing and laboratory facilities located in Woburn, Massachusetts and
Tarvin, Cheshire, United Kingdom.
7
RESULTS OF OPERATIONS:
Comparison for the Three Months Ended June 30, 1997 and 1996.
Research revenues for the quarter ended June 30, 1997 were $85,582,
compared to $78,447 for the quarter ended June 30, 1996, an increase of
$7,135, or 9.1%. This increase was primarily generated by higher research
revenues ($27,000) 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 June 30, 1997
were $302,965, compared to $151,999 for the quarter ended June 30, 1996, an
increase of $150,996, or 99.3%. This increase was primarily the result of
increased research and development related to clinical trials of the Company's
vascular access graft in Europe.
Selling, general and administrative expenses for the quarter ended June
30, 1997 were $252,369, compared to $134,185 for the quarter ended June 30,
1996, an increase of $118,184, or 88.1%. The increase in selling, general and
administrative expenses reflects the additional costs incurred by the Company
as a stand alone company. These costs include, but are not limited to,
expenses related to the June 1996 establishment of a separate finance,
accounting and administrative function ($30,000), investor and public
relations ($18,000), legal representation ($15,000), insurance ($24,200) and
rent ($30,000).
Other income and expenses for the quarter ended June 30, 1997 were income
of $27,155, compared to expenses of $316,766 for the quarter ended June 30,
1996. Income for the quarter ended June 30, 1997 was interest income received
on available cash and investment balances of the Company. Other income and
expenses for the quarter ended June 30, 1996 was attributable to Spin Off
transaction costs of $323,558, which were partially offset by interest income
of $6,782.
8
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 the sale of
Common Shares as part of the Spin Off 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
$1,900,000 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 $4.0 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.
9
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 further 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.
10
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT 11 STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(b) REPORTS ON FORM 8-K:
NONE
11
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: August 12, 1997
12