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, 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
-------
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 (781) 933-4772
--------------
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
--- ---
The number of shares outstanding of the registrant's class of Common
Stock as of February 13, 1997 was 4,272,916. No shares were held in treasury.
CARDIOTECH INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited) 3
Condensed Consolidated Balance Sheets at
December 31, 1997 and March 31, 1997 3
Condensed Consolidated Statements of Operations
for the three and nine months ended
December 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended
December 31, 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
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 13
Signatures 14
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
CARDIOTECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Dec. 31, 1997 Mar. 31, 1997
------------- -------------
ASSETS (unaudited)
Current Assets:
Cash and Cash Equivalents $ 1,137,415 $ 2,346,366
Accounts Receivables --Trade 14,037 8,292
Accounts Receivables -- Other 247,298 93,218
Prepaid Expenses 56,499 87,409
------------------- ------------------
Total Current Assets 1,455,249 2,535,285
Property and Equipment, net 197,268 231,619
Other non-current assets 15,883 15,883
------------------- ------------------
Total Assets $ 1,668,400 $ 2,782,787
=================== ==================
Liabilities and Stockholders Equity
Current Liabilities:
Accounts Payables $ 39,033 $ 50,860
Accrued Expenses 287,295 134,076
------------------- ------------------
Total Current Liabilities 326,328 184,936
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 December 31, 1997 and March 31, 1997. 42,729 42,729
Additional Paid in Capital 8,232,579 8,232,579
Accumulated Deficit (6,938,310) (5,686,675)
Cumulative Translation Adjustment 5,074 9,218
------------------- ------------------
Total Stockholders' Equity 1,342,072 2,597,851
------------------- ------------------
Total Liabilities and Stockholders' Equity $ 1,668,400 $ 2,782,787
=================== ==================
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, 1997 Dec. 31, 1996 Dec. 31, 1997 Dec. 31, 1996
------------- ------------- ------------- -------------
Research Revenue $ 250,772 $ 281,092 $ 570,834 $ 501,460
Operating Expenses
Research and Development 433,114 367,395 1,090,881 829,679
Selling, General and Admin. 265,591 264,796 795,472 570,431
------------------ ------------------ ----------------- -------------------
Total Operating Expenses 698,705 632,191 1,886,353 1,400,110
Other Income and Expenses
Spin Off Transaction Cost - - - (393,897)
Interest Income 13,968 33,234 63,884 73,385
------------------ ------------------ ----------------- -------------------
13,968 33,234 63,884 (320,512)
------------------ ------------------ ----------------- -------------------
Net Loss $ (433,965) $ (317,865) $ (1,251,635) $ (1,219,162)
================== ================== ================= ===================
Net Loss Per Common Share
Basic and Diluted (0.10) (0.07) (0.29) (0.31)
================== ================== ================= ===================
Weighted Average Number of
Common Shares Outstanding
Basic and Diluted 4,272,916 4,272,916 4,272,916 3,888,207
The accompanying notes are an integral part of these condensed financial
statements.
4
CARDIOTECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine months ended December 31,
1997 1996
---- ----
Cash flows from operating activities:
Net Loss $ (1,251,635) $ (1,219,162)
Adjustments to reconcile net loss to
net cash flows from operating activites:
Depreciation and Amortization 47,197 35,554
Changes in assets and liabilities
Accounts receivables (159,825) (229,653)
Prepaid expenses 30,910 (55,219)
Accounts payable (11,827) 37,453
Accrued expenses 153,219 182,339
Increase in non-current assets - (15,883)
------------- -------------
Net cash flows from operating activities (1,191,961) (1,264,571)
============= =============
Cash flows from investing activities:
Purchase of property, plant and equipment (12,847) (105,288)
------------- -------------
Net cash flows from Investing activities (12,847) (105,288)
============= =============
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)
------------- -------------
Net cash flows from financing activities $ - $ 3,941,381
============= =============
Net increase in cash and cash equivalents (1,204,808) 2,571,522
------------- -------------
Effect of exchange rate changes on cash (4,143) 53,402
Cash and cash equivalents at beginning of period 2,346,366 504
------------- -------------
Cash and cash equivalents at end of period $ 1,137,415 $ 2,625,428
============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
CARDIOTECH INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 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 nine months ended December 31, 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
Stock that it owned to its shareholders of record as of June 3, 1996.
3. In its fiscal quarter ended December 31, 1997, the Company adopted Statement
of Financial Accounting Standards No. 128, "Earnings per Share," which modifies
the calculation of earnings per share ("EPS"). The Standard replaces the
previous presentation of primary and fully diluted EPS to basic and diluted EPS.
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS includes the dilution of common stock equivalents,
and is computed similarly to fully diluted EPS pursuant to APB Opinion 15. All
prior periods presented have been restated to reflect this adoption.
6
CARDIOTECH INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
(Unaudited)
(In thousands except per share data)
For the Three Months For the Nine Months
Ended December 31, Ended December 31,
1997 1996 1997 1996
--------------- -------------- ---------------- ----------------
Net Loss $ (433,965) $(317,865) $(1,251,635) $(1,219,162)
=============== ============== ================ ================
Basic and Diluted
Number of Common Shares 4,272,916 4,272,916 4,272,916 2,831,941
Outstanding at beginning of the period
Effect of Shares issued in June 1996
to PolyMedica Corporation - - - 1,042,442
Effect of Shares issued in
July 1996 for Services - - - 13,824
--------------- -------------- ---------------- ----------------
Weighted average number of
Common Shares Outstanding 4,272,916 4,272,916 4,272,916 3,888,207
=============== ============== ================ ================
Loss per common share $ (0.10) $ (0.07) $ (0.29) $ (0.31)
=============== ============== ================ ================
4. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and display of comprehensive income
and its components (revenue, expenses, gains and losses) in a full set of
general-purpose financial statements. Management has not yet evaluated the
effects of this change on its reporting of income. The Company will adopt SFAS
No. 130 for its fiscal year ending March 31, 1999.
5. In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which changes the way public companies
report information about operating segments. SFAS No. 131, which is based on the
management approach to segment reporting, establishes requirements to report
selected segment information quarterly and to report entity-wide disclosures
about products and services, major customers and the material countries in which
the entity holds assets and reports revenue. The Company will adopt SFAS No.
131 for its fiscal year ending March 31, 1999.
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 of the Three Months Ended December 31, 1997 to the Three Months Ended
December 31, 1996
Research revenues for the quarter ended December 31, 1997 were $250,772
compared to $281,092 for the quarter ended December 31, 1996, a decrease of
$30,320, or 10.8%. This decrease is the result of timing differences in the
recognition of revenue due to the timing of costs incurred related to the
National Institute of Health grants during the period, compared to the
corresponding quarter in 1996 ($73,000). In addition this decrease was also the
result of lower fees earned from contract research ($10,000). These decreases
were partially offset by higher product sales ($15,000) and higher royalty
income ($37,500).
Research and development expenses for the quarter ended December 31,
1997 were $433,114 compared to $367,395 for the quarter ended December 31, 1996,
an increase of $65,719, or 17.9%. This increase was principally 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
December 31, 1997 were $265,591 compared to $264,796 for the quarter ended
December 31, 1996, an increase of $795, or 0.3%. The modest increase in selling,
general and administrative expenses is the result of the following changes in
spending patterns; increases in selling and marketing expenses ($15,500), legal
and accounting fees ($24,000) and outside consultant fees ($35,000). These
expenses were partially offset by public relations expenses ($54,000), travel
expenses ($18,400) and insurance costs ($2,000).
Other income and expenses for the quarter ended December 31, 1997 were
interest income of $13,968 compared to $33,234 for the quarter ended December
31, 1996, a decrease of $19,266 or 58%. The reason for the decrease in interest
income for the period was a lower cash balance available for investing.
9
Comparison of the Nine Months ended December 31, 1997 to the Nine Months ended
December 31, 1996
Research revenues for the nine months ended December 31, 1997 were
$570,834 compared to $501,460 for the nine months ended December 31, 1996, an
increase of $69,374, or 13.8%. This $69,374 increase is primarily due to
increased biomaterial sales ($33,200), increased royalty income ($51,600) and an
increased contract development fee ($2,500). These increases were offset by
lower revenues from National Institute of Health Grants ($18,000), due to timing
differences in the recognition of income.
Research and development expenses for the nine months ended December
31, 1997 were $1,090,881 compared to $829,679 for the nine months ended December
31, 1996, an increase of $261,202, or 31.5%. This increase was principally due
to costs related to increased European clinical trial expenses ($143,000),
increased outside contract research expenses ($81,700), increased salaries and
fringe benefits ($29,600) and increased production costs of biomaterials
($7,000).
Selling, general and administrative expenses for the nine months ended
December 31, 1997 were $795,472 compared to $570,431 for the nine months ended
December 31, 1996, an increase of $225,041, or 39.5%. 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 ($47,500), legal and professional
expense ($89,200), outside consultants fees ($51,500), rent and facility expense
($20,000), insurance expense ($14,000), and increased salary and fringe benefit
cots ($32,300). These increases were partially offset by lower spending for
investor and public relations ($22,200) and office supplies and services
($6,000).
Other income and expense for the nine months ended December 31, 1997
was interest income of $63,884 compared to expense of $320,512, which was the
result of transaction costs of $393,897 partially offset by interest income of
$73,385.
10
Liquidity and Capital Resources
The Company used $1,191,961 to fund operations during the nine months
ended December 31, 1997, compared to $1,264,571 for the nine months ended
December 31, 1996. The principal uses of funds for the nine months ended
December 31, 1997 were to fund a net loss of $1,251,635 increases in accounts
receivable of $159,825 relating to trade customers, royalties and the National
Institute of Health and a decrease in trade accounts payable of ($11,827). These
increases were partially offset by increases in accrued expenses of ($153,219).
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 Stock 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
$1,137,000 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.
11
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 a 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 CardioTech.
12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
None
13
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: February 12, 1997
14