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 September 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 (781) 933-4772
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Phone Number
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 November 12, 1997 was 4,272,916. No shares were held in treasury.
CARDIOTECH INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at
September 30, 1997 and March 31, 1997 3
Condensed Consolidated Statements of Operations
for the three and six months ended
September 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows
for the six months ended
September 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-12
Item 4 - Submission of Matters to a Vote of Security Holders 13
PART II - OTHER INFORMATION 14
Item 6 - Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit 11 16
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARDIOTECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPT. 30, 1997 MAR. 31, 1997
---------------- ---------------
(unaudited)
ASSETS
Current Assets:
Cash and Cash Equivalents $ 1,426,387 $ 2,346,366
Accounts Receivables --Trade 22,897 8,292
Accounts Receivables -- Other 268,179 93,218
Prepaid Expenses 91,041 87,409
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Total Current Assets 1,808,504 2,535,285
Property and Equipment, net 213,852 231,619
Other non-current assets 15,883 15,883
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Total Assets $ 2,038,239 $ 2,782,787
=========== ============
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities:
Accounts Payables $ 118,904 $ 50,860
Accrued Expenses 145,723 134,076
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Total Current Liabilities 264,627 184,936
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 September 30, 1997 and
March 31, 1997, respectively 42,729 42,729
Additional Paid in Capital 8,232,579 8,232,579
Accumulated Deficit (6,504,345) (5,686,675)
Cumulative Translation Adjustment 2,649 9,218
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Total Stockholders' Equity 1,773,612 2,597,851
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Total Liabilities and Stockholders' Equity $ 2,038,239 $ 2,782,787
=========== ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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CARDIOTECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPT. 30, 1997 SEPT. 30, 1996 SEPT. 30, 1997 SEPT. 30, 1996
-------------- -------------- --------------- --------------
Research Revenue $ 234,480 $ 141,921 $ 320,062 $ 220,368
Operating Expenses
Research and Development 354,802 310,283 657,767 462,282
Selling, General and Admin. 277,512 171,452 529,881 305,637
----------- ----------- ----------- -----------
Total Operating Expenses 632,314 481,735 1,187,648 767,919
Other Income and Expenses
Spin Off Transaction Cost - (70,339) - (393,897)
Interest Income 22,761 33,369 49,916 40,151
----------- ----------- ----------- -----------
22,761 (36,970) 49,916 (353,746)
----------- ----------- ----------- -----------
Net Loss $ (375,073) $ (376,784) $ (817,670) $ (901,297)
=========== =========== =========== ===========
Net Loss Per Common Share $ (0.09) $ (0.09) $ (0.19) $ (0.24)
=========== =========== =========== ===========
Weighted Average Number of
Common Shares Outstanding 4,272,916 4,256,638 4,272,916 3,694,801
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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CARDIOTECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
SIX MONTHS ENDED SEPTEMBER 30,
1997 1996
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Cash flows from operating activities:
Net Loss $ (817,670) $ (901,297)
Adjustments to reconcile net loss to
net cash flows from operating activities:
Depreciation and Amortization 30,614 18,953
Changes in assets and liabilities
Accounts receivables (189,566) (155,791)
Prepaid expenses (3,632) (75,370)
Accounts payable 68,044 69,982
Accrued expenses 11,647 52,179
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Net cash flows from operating activities (900,563) (991,344)
=============== ================
Cash flows from investing activities:
Purchase of property, plant and equipment (12,847) (74,706)
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Net cash flows from Investing activities (12,847) (74,706)
=============== ================
Cash flows from financing activities:
Net proceeds from issuance of common stock - 3,830,000
Advance from parent - 485,012
Payment of spin-off costs - (393,896)
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Net cash flows from financing activities $ - $ 3,921,116
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Net increase in cash and cash equivalents (913,410) 2,855,066
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Effect of exchange rate changes on cash (6,569) 30,047
Cash and cash equivalents at beginning of period 2,346,366 504
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Cash and cash equivalents at end of period $ 1,426,387 $ 2,885,617
=============== ================
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
SEPTEMBER 30, 1997
(UNAUDITED)
1. The unaudited consolidated condensed 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. Actual results could differ from those
estimates. 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 Audited Consolidated Financial Statements and its
notes thereto, for the year ended March 31, 1997, included in the Company's
Annual Report to shareholders. Certain amounts in the prior financial statements
have been reclassified to conform with the current period presentation.
2. The financial statements for the period April 1, 1996 to June 11, 1996
included in the six months ended September 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, and 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 Common
Shares that it owned to its shareholders of record as of June 3, 1996.
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.
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Pro forma net income per share for the three and six months ended September
30, 1997 and 1996, respectively, as computed under the new standard is as
follows:
Three Months Ended Six Months Ended
---------------------- ----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
Net income per weighted average
share, basic $(0.09) $(0.09) $(0.19) $(0.24)
Net income per weighted average
share, diluted $(0.09) $(0.09) $(0.19) $(0.24)
-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 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.
-8-
RESULTS OF OPERATIONS:
Comparison for the Three Months Ended September 30, 1997 and 1996
Research revenues for the quarter ended September 30, 1997 were $234,480
compared to $141,921 for the quarter ended September 30, 1996, an increase of
$92,559, or 65.2%. This increase was primarily generated by increased sales of
biomaterials ($33,760), increased royalty income from Bard Access Systems
($29,166) and, increased revenue from the National Institute of Health research
grants ($25,938).
Research and development expenses for the quarter ended September 30, 1997
were $354,802 compared to $310,283 for the quarter ended September 30, 1996, an
increase of $44,519, or 14.3%. 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
September 30, 1997 were $272,512 compared to $171,452 for the quarter ended
September 30, 1996, an increase of $106,060, or 61.9%. The increase in selling,
general and administrative expenses reflects the additional costs of
establishing a selling and marketing function for biomaterials ($15,391),
increased legal and professional expenses ($53,905), increased investor
relations expenses ($9,100), increased rental expenses ($10,189), increased
office expenses ($7,508) and increased payroll expense ($9,662).
Other income and expenses for the quarter ended September 30, 1997 were
interest income of $22,761 compared to expenses of $36,970 in the quarter ended
September 30, 1996. The change is due to Spin Off costs of $70,339 in the
quarter ended September 30, 1996, partially offset by a reduction in interest
income of $10,608.
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Comparison of the Six Months ended September 30, 1997 to the Six Months ended
September 30, 1996
Research revenues for the six months ended September 30, 1997 were $320,062
compared to $220,368 for the six months ended September 30, 1996, an increase of
$99,694, or 45.2%. This $99,694 increase is primarily due to increased
biomaterial sales ($18,047), increased revenues from National Institute of
Health Grants ($55,007), increased royalty income from Bard Access Systems
($14,165) and increased contract development revenues ($9,975).
Research and development expenses for the six months ended September 30,
1997 were $657,767 compared to $462,282 for the six months ended September 30,
1996, an increase of $195,485, or 42.3%. This increase was principally due to
costs related to increased European clinical trials ($109,419), increased
outside contract research expenses ($40,459), increased salaries and fringe
benefits ($38,272) related to the National Institute of Health Grants and
increased production cost of biomaterials ($7,000).
Selling, general and administrative expenses for the six months ended
September 30, 1997 were $529,881 compared to $305,637 for the six months ended
September 30, 1996, an increase of $224,244, or 73.4%. The increase in selling,
general and administrative expenses reflects the additional costs incurred by
the Company as a stand-alone company, and the establishment of a selling and
marketing function for biomaterials. These increased costs include but are not
limited to selling and marketing expense ($39,667), legal and professional
expense ($65,083), insurance expense ($16,032), rent and facilities expense
($28,678), investor and public relations expense ($31,807) and increased salary
costs ($9,996).
Other income and expense for the six months ended September 30, 1997 was
interest income of $49,916 compared to expense of $353,476, which was the result
of transaction costs of $393,897 partially off set by interest income of
$40,151.
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LIQUIDITY AND CAPITAL RESOURCES
The Company used $900,563 to fund operations during the six months ended
September 30, 1997, compared to $991,344 for the six months ended September 30,
1996. The principal uses of funds for the six months ended September 30, 1997
were a net loss of $817,670 and increases in accounts receivable of $189,566
relating to trade customers, royalties and the National Institute of Health.
These increases were partially off set by increases in accounts payable and
accrued expenses of $68,044 and $11,647, respectively.
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
National Institute of Health 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
$1,400,000 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
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 based on availability of 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.
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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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On August 27, 1997, the Company held its annual meeting of its
stockholders. The following matters were voted on at the annual meeting:
1. The election of Generio Gargiulo as a Class I director;
2. The amendment of the Company's 1996 Employee, Director and Consultant Stock
Option Plan (the "1996 Plan"); and
3. The ratification of the appointment of Coopers & Lybrand L.L.P. as auditors
for the Company for the fiscal year ending March 31, 1998.
The following chart shows the number of votes cast for or against, as
well as the number of abstentions and broker nonvotes, as to each matter voted
on at the special meeting:
Broker
Matter For Against Abstain Nonvotes
------ --- ------- ------- --------
Election of Mr. Gargiulo 3,521,636 149,554 N/A N/A
Amendment of 1996 Stock Plan 3,017,333 374,566 156,059 123,232
Appointment of Coopers & Lybrand
L.L.P. 3,658,298 6,534 6,358 N/A
13
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
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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.
------------------------------------
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: November 12, 1997
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