UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: SEPTEMBER 30, 2001
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 Number: 0-27120
KENSEY NASH CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-3316412
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
MARSH CREEK CORPORATE CENTER, 55 EAST UWCHLAN AVENUE, EXTON, PENNSYLVANIA 19341
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (610) 524-0188
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
--- ---
As of October 31, 2001, there were outstanding 10,622,293 shares of Common
Stock, par value $.001, of the registrant.
1
KENSEY NASH CORPORATION
QUARTER ENDED SEPTEMBER 30, 2001
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
as of September 30, 2001 (Unaudited) and June 30, 2001........................ 3
Consolidated Statements of Operations
for the three months ended September 30, 2001 and 2000 (Unaudited)............ 4
Consolidated Statements of Stockholders' Equity as of
September 30, 2001 (Unaudited) and June 30, 2001.............................. 5
Consolidated Statements of Cash Flows
for the three months ended September 30, 2001 and 2000 (Unaudited)............ 6
Notes to Consolidated Financial Statements (Unaudited).......................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................................ 11
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................................... 18
SIGNATURES....................................................................................... 19
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KENSEY NASH CORPORATION
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
SEPTEMBER 30,
ASSETS 2001 JUNE 30,
CURRENT ASSETS: (UNAUDITED) 2001
------------ ------------
Cash and cash equivalents $ 6,935,644 $ 2,841,963
Investments 23,030,324 24,164,887
Trade receivables, net of allowance for doubtful accounts of $16,000
and $1,000 at September 30, 2001 and June 30, 2001, respectively 3,330,983 4,623,456
Royalties receivable 2,211,835 2,270,091
Officer loans 1,188,907 1,170,276
Other receivables (including approximately $145,000 and $41,000 at
September 30, 2001 and June 30, 2001, respectively, due from employees) 279,863 244,601
Inventory 1,605,049 1,321,511
Deferred tax asset, current portion 1,790,503 2,318,741
Prepaid expenses and other 332,312 512,099
------------ ------------
Total current assets 40,705,420 39,467,625
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Leasehold improvements 5,676,760 5,676,760
Machinery, furniture and equipment 9,492,575 7,853,177
Construction in progress 642,100 1,606,181
------------ ------------
Total property, plant and equipment 15,811,435 15,136,118
Accumulated depreciation (6,560,562) (6,105,575)
------------ ------------
Net property, plant and equipment 9,250,873 9,030,543
------------ ------------
OTHER ASSETS:
Restricted investments 2,231,251 2,231,251
Property under capital leases, net 1,525
Deferred tax asset, non-current portion 1,978,871 2,125,407
Acquired patents, net of accumulated amortization of $962,423 and
$896,666 at September 30, 2001 and June 30, 2001, respectively 3,133,943 3,199,700
Goodwill, net of accumulated amortization of $100,037 at September 30, 2001
and June 30, 2001 3,284,303 3,284,303
------------ ------------
Total other assets 10,628,368 10,842,186
------------ ------------
TOTAL $ 60,584,661 $ 59,340,354
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 999,231 $ 1,891,484
Accrued expenses 844,992 544,268
Current portion of debt and capital lease obligations 925,908 910,738
Deferred revenue 132,315 123,352
------------ ------------
Total current liabilities 2,902,446 3,469,842
------------ ------------
LONG TERM PORTION OF DEBT AND CAPITAL LEASE OBLIGATIONS 2,071,436 2,309,385
------------ ------------
Total liabilities 4,973,882 5,779,227
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 100,000 shares authorized, no shares issued
or outstanding at September 30, 2001 and June 30, 2001
Common stock, $.001 par value, 25,000,000 shares authorized, 10,621,035 and
10,509,431 shares issued and outstanding at
September 30, 2001 and June 30, 2001, respectively 10,621 10,509
Capital in excess of par value 64,736,945 63,974,745
Accumulated deficit (9,193,827) (10,196,713)
Accumulated other comprehensive income 57,040 (227,414)
------------ ------------
Total stockholders' equity 55,610,779 53,561,127
------------ ------------
TOTAL $ 60,584,661 $ 59,340,354
============ ============
See notes to consolidated financial statements.
3
KENSEY NASH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
2001 2000
REVENUES:
Net sales $ 4,593,179 $ 2,584,740
Research and development 105,434 1,842
Royalty income 2,211,834 1,996,984
------------ ------------
Total revenues 6,910,447 4,583,566
OPERATING COSTS AND EXPENSES:
Cost of products sold 2,185,323 1,714,823
Research and development 2,698,016 1,637,050
Selling, general and administrative 907,239 512,272
Royalty expense 4,355
------------ ------------
Total operating costs and expenses 5,790,578 3,868,500
------------ ------------
INCOME FROM OPERATIONS 1,119,869 715,066
OTHER INCOME:
Other (4,206)
Interest income 476,085 538,702
Interest expense (60,624) (25,703)
------------ ------------
Total other income - net 411,255 512,999
------------ ------------
INCOME BEFORE INCOME TAXES 1,531,124 1,228,065
Income tax expense (528,238)
------------ ------------
NET INCOME $ 1,002,886 $ 1,228,065
============ ============
BASIC EARNINGS PER SHARE $ 0.10 $ 0.12
============ ============
DILUTED EARNINGS PER SHARE $ 0.09 $ 0.12
============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 10,539,092 10,456,199
============ ============
DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 11,112,732 10,562,564
============ ============
See notes to consolidated financial statements.
4
KENSEY NASH CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
CAPITAL ACCUMULATED
COMMON STOCK IN EXCESS OTHER
------------------------ OF PAR ACCUMULATED COMPREHENSIVE
SHARES AMOUNT VALUE DEFICIT (LOSS)/GAIN
BALANCE, JUNE 30, 1999 7,470,710 $ 7,470 $ 37,697,452 $ (18,562,619) $ (241,402)
Shares issued upon Secondary Offering 2,959,000 2,959 26,247,007
Secondary Offering costs (501,241)
Exercise of stock options 25,789 26 246,824
Net income 4,749,164
Comprehensive loss (241,284)
Comprehensive income
---------- ------- ------------ -------------- ----------
BALANCE, JUNE 30, 2000 10,455,499 10,455 63,690,042 (13,813,455) (482,686)
---------- ------- ------------ -------------- ----------
Secondary Offering costs (212,681)
Exercise of stock options 53,932 54 497,384
Net income 3,616,742
Comprehensive gain 255,272
Comprehensive income
---------- ------- ------------ -------------- -----------
BALANCE, JUNE 30, 2001 10,509,431 $10,509 $ 63,974,745 $ (10,196,713) $ (227,414)
---------- ------- ------------ -------------- -----------
Exercise of stock options 111,604 112 762,200
Net income 1,002,886
Comprehensive gain 284,454
Comprehensive income
---------- ------- ------------ -------------- -----------
BALANCE, SEPTEMBER 30, 2001 10,621,035 $10,621 $ 64,736,945 $ (9,193,827) $ 57,040
========== ======= ============ ============= ==========
COMPREHENSIVE
INCOME/
(LOSS) TOTAL
BALANCE, JUNE 30, 1999 $ 18,900,901
Shares issued upon Secondary Offering 26,249,966
Secondary Offering costs (501,241)
Exercise of stock options 246,850
Net income $ 4,749,164 4,749,164
Comprehensive loss (241,284) (241,284)
-----------
Comprehensive income $ 4,507,880
===========
BALANCE, JUNE 30, 2000 49,404,356
------------
Secondary Offering costs (212,681)
Exercise of stock options 497,438
Net income $ 3,616,742 3,616,742
Comprehensive gain 255,272 255,272
-----------
Comprehensive income $ 3,872,014
===========
BALANCE, JUNE 30, 2001 $ 53,561,127
------------
Exercise of stock options 762,312
Net income $ 1,002,886 1,002,886
Comprehensive gain 284,454 284,454
-----------
Comprehensive income $ 1,287,340
=========== ------------
BALANCE, SEPTEMBER 30, 2001 $ 55,610,779
============
See notes to consolidated financial statements.
5
KENSEY NASH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
2001 2000
OPERATING ACTIVITIES:
Net income $ 1,002,886 $ 1,228,065
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 522,269 430,596
Changes in assets and liabilities which provided (used) cash:
Accounts receivable 1,296,836 601,225
Deferred tax asset 674,774
Prepaid expenses and other current assets 179,787 6,357
Inventory (283,538) (186,835)
Accounts payable and accrued expenses (591,529) (141,775)
Deferred revenue 8,963 (223,110)
------------ ------------
Net cash provided by operating activities 2,810,448 1,714,523
------------ ------------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (675,317) (527,574)
Acquisition of THM (6,758,108)
Redemption of investments 8,735,000
Purchase of investments (7,315,984) (3,920,646)
------------ ------------
Net cash provided by (used in) investing activities 743,699 (11,206,328)
------------ ------------
FINANCING ACTIVITIES:
Secondary Offering costs (192,877)
Repayments of long term debt (220,910)
Principal payments under capital leases (1,868) (2,903)
Exercise of stock options 762,312 27,148
------------ ------------
Net cash provided by (used in) financing activities 539,534 (168,632)
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,093,681 (9,660,437)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,841,963 24,117,502
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,935,644 $ 14,457,065
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ $ 1,598
============ ============
Cash paid for income taxes $ 20,000 $ 20,000
============ ============
See notes to consolidated financial statements.
6
KENSEY NASH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The consolidated balance sheet at September 30, 2001, the consolidated
statements of operations for the three months ended September 30, 2001 and
2000 and the consolidated statements of cash flows for the three months
ended September 30, 2001 and 2000 have been prepared by Kensey Nash
Corporation (the Company) and have not been audited by the Company's
Independent Auditors. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows at September 30,
2001 and for all periods presented have been made.
Certain information and note disclosures normally included in the Company's
annual financial statements, prepared in accordance with accounting
principles generally accepted in the United States of America, have been
condensed or omitted. These consolidated financial statements should be read
in conjunction with the financial statements and notes thereto included in
the Company's June 30, 2001 consolidated financial statements filed with the
Securities and Exchange Commission on Form 10-K. The results of operations
for the period ended September 30, 2001 are not necessarily indicative of
operating results for the full year.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Kensey Nash
Corporation and Kensey Nash Holding Company. All intercompany transactions
and balances have been eliminated. Kensey Nash Holding Company, incorporated
in Delaware on January 8, 1992, was formed to hold title to certain Company
patents and has no operations.
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
necessarily requires management to make estimates and assumptions. These
estimates and assumptions, which may differ from actual results, will affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, as well as
the reported amounts of revenue and expense during the period.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents represent cash in banks and short-term investments
having an original maturity of less than six months.
EXPORT SALES
There were $82,632 in export sales from the Company's U.S. operations to
unaffiliated customers in Europe in the three months ended September 30,
2001. There were no export sales in the three months ended September 30,
2000.
REVENUE RECOGNITION
Effective in the fiscal year ending June 30, 2001, the Company adopted Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements (SAB 101), which clarifies certain conditions to be met in order
to recognize revenue. The Company's adoption of SAB 101 did not have a
material impact on the results of operations, financial position or cash
flows. Sales revenue is recognized when the related product is shipped.
Revenue under research and development contracts is recognized as the
related costs are incurred. Advance payments received for products or
services are recorded as deferred revenue and are recognized when the
product is shipped or services are performed.
7
The Company receives a royalty (historically 12%, became 9% in October 2000
when a cumulative 1,000,000 units had been sold) on every Angio-Seal unit
sold by our partner, St. Jude Medical. We recognize the revenue, in
accordance with the Licensing Agreement between the Company and St. Jude
Medical, at the end of each month when St. Jude Medical advises us of their
total Angio-Seal sales dollars for the month. We then accrue royalty revenue
equal to 9% of the total sales dollars reported to us. Royalty payments are
received within 45 days of the end of each calendar quarter.
EARNINGS PER SHARE
Earnings per share are calculated in accordance with SFAS No. 128, Earnings
per Share which requires the Company to report both basic and diluted
earnings per share (EPS). Basic and diluted EPS are computed using the
weighted average number of shares of common stock outstanding, with common
equivalent shares from options included in the diluted computation when
their effect is dilutive.
COMPREHENSIVE INCOME
The Company accounts for comprehensive income under the provisions of SFAS
No. 130, Reporting Comprehensive Income (SFAS 130). Accordingly, accumulated
other comprehensive loss is shown in the consolidated statements of
shareholders' equity at September 30, 2001, June 30, 2001, 2000 and 1999,
and is solely comprised of unrealized gains and losses on the Company's
available-for-sale securities. The tax effect of other comprehensive income
for the three months ended September 30, 2001 and for the fiscal years ended
June 30, 2001 and 2000 was $147,000, $117,000 and $0, respectively.
RECENT PRONOUNCEMENTS
In June 2001 the Financial Accounting Standards Board (FASB) issued SFAS No.
141, Business Combinations (SFAS 141), and SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS 142), which were effective July 1, 2001 for the
Company, as the Company early adopted SFAS 142. SFAS 141 requires that the
purchase method of accounting be used for all business combinations
subsequent to June 30, 2001 and specifies criteria for recognizing
intangible assets acquired in a business combination. SFAS 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized upon adoption of this standard, but instead be tested for
impairment at least annually. Intangible assets with definite useful lives
will continue to be amortized over their respective useful lives. The
Company recorded $100,036 in goodwill amortization expense for the year
ended June 30, 2001. Goodwill amortization expense for the year ending June
30, 2002 would have been $205,111 if the Company had decided not to early
adopt SFAS 142. The early adoption of SFAS 142 did not result in the
reclassification of any intangible assets, changes in the amortization
periods for those intangible assets with definite lives or in the impairment
of any intangible assets.
The FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations
(SFAS 143) and SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS 144), which will both be effective for the Company's
fiscal year beginning July 1, 2002. The Company is currently evaluating all
of the provisions of SFAS 143 and SFAS 144 and is therefore not presently
able to quantify the impact of adoption.
8
NOTE 2 -- INVENTORY
Inventory is stated at the lower of cost (determined by the average cost
method, which approximates first-in, first-out) or market. Inventory
primarily includes the cost of material utilized in the processing of the
Company's products and is as follows:
SEPTEMBER 30, JUNE 30,
2001 2001
------------- -----------
Raw materials $ 1,420,014 $ 1,062,626
Work in process 181,568 240,451
Finished Goods 3,467 18,434
------------- -----------
Total $ 1,605,049 $ 1,321,511
============= ===========
NOTE 3 -- COMMITMENTS AND CONTINGENCIES
The Company has pledged $2,231,251 in investments as collateral to secure
certain bank loans to officers which were used by such officers for the
payment of taxes incurred as the result of the receipt of Common Stock at
the Company's Initial Public Offering in December 1995. In exchange for the
Company pledging collateral for such loans, each affected officer has
pledged their Common Stock as collateral to the Company. The loans are
repayable at the sooner of the sale of the officer's stock or December 2001.
The balance outstanding on such officer loans was $2,192,654 at September
30, 2001.
NOTE 4 -- INCOME TAXES
As of June 30, 2001, the Company had net operating loss (NOL) carryforwards
for federal and state tax purposes totaling $5.4 and $20.0 million,
respectively. A portion of the NOL may be subject to various statutory
limitations as to its usage.
This is our first quarter of recognizing income tax expense as a result of
the recognition of a tax benefit in fiscal year 2001 related to the
realization of certain deferred tax assets which had previously been offset
by a valuation allowance.
NOTE 5 -- THM ACQUISITION
On September 1, 2000 the Company acquired THM Biomedical, Inc. (THM), a
developer of porous, biodegradable, tissue-engineering devices for the
repair and replacement of musculoskeletal tissues, for approximately $10.5
million plus acquisition costs of approximately $239,000. The transaction
was financed with $6.6 million of the Company's cash and a note payable to
the shareholders of THM in the amount of $4.5 million (the Acquisition
Obligation). The Acquisition Obligation is due in equal quarterly
installments of $281,250 beginning on December 31, 2000 and ending on
September 30, 2004. Accordingly, the present value of the cash payments
(discounted based upon the Company's available borrowing rate of 7.5%) of
$3,833,970 was recorded as a liability on the Company's financial
statements, with a remaining balance of $2,997,276 at September 30, 2001.
The acquisition has been accounted for under the purchase method of
accounting and THM's results of operations are included in those of the
Company since the date of acquisition. The purchase price has been allocated
to the assets acquired and liabilities assumed based on their estimated fair
values on the date of acquisition. The allocation has resulted in goodwill
of approximately $3.4 million, which was originally being amortized, on a
straight-line basis over 17 years. The following is a summary of the
allocation (in thousands):
Assets $ 400
Accrued expenses and other liabilities (702)
In-process research and development 7,594
Excess of cost over net assets acquired (goodwill) 3,384
--------
$ 10,676
========
9
A significant portion of the purchase price was identified as acquired
in-process research and development (IPR&D). The valuation of IPR&D was
performed in an independent appraisal using proven valuation procedures and
techniques and represents the estimated fair market value based on
risk-adjusted cash flows related to the IPR&D programs. The IPR&D consists
of four primary research and development programs that are expected to reach
completion between late 2002 and 2005. At the date of acquisition, the
development of these programs had not yet reached technological feasibility
and the IPR&D had no alternative future uses. Accordingly, these costs were
immediately expensed in the consolidated statement of operations on the
acquisition date.
The following unaudited pro-forma financial information assumes that the
acquisition had occurred as of the beginning of the earliest period
presented:
THREE MONTHS THREE MONTHS
ENDED ENDED
09/30/01 09/30/00
------------ ------------
Total revenue $ 6,910,447 $ 5,850,461
============ ============
IPR&D Charge $ - $ (7,593,597)
============ ============
Net income $ 1,002,886 $ 2,440,886
============ ============
Basic earnings per share $ 0.10 $ (0.51)
============ ============
Diluted earnings per share $ 0.09 $ (0.51)
============ ============
These pro forma results are based on certain assumptions and estimates. The
pro forma results do not necessarily represent results that would have
occurred if the acquisition had taken place at the beginning of the
specified periods, nor are they indicative of the results of future combined
operations.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with and our
financial statements and the related notes included in this report.
OVERVIEW
We were founded in 1984 and our common stock became publicly traded in December
1995. We have been profitable in our last fifteen fiscal quarters (excluding the
one time IPR&D charge taken in our second quarter of fiscal year 2001).
Revenues
Our revenues consist of three components: net sales, research and development
revenue and royalty income.
Net Sales. Net sales is comprised of absorbable biomaterials products and
Angio-Seal(TM)devices we manufacture.
Biomaterials. The biomaterials component of net sales represents the sale
of our biomaterials products to customers for use in the following markets:
orthopedics, cardiology, drug/biologics delivery, dental and wound care. In
1997, our biomaterials sales were comprised almost 100% of the absorbable
collagen and polymer components of the Angio-Seal supplied to our strategic
alliance partner. Since that time we have experienced significant sales
growth in our biomaterials products as we have brought in new customers,
increased sales to those customers over the past four years, assisted in
the development of new product offerings and expanded our marketing
activities. In three months ended September 30, 2001, the Angio-Seal
components represent only 41% of our total biomaterial sales. We believe
this growth will continue because of greater acceptance by the medical
community of biomaterials and technological advances which have expanded
the applications for our biomaterials products.
Angio-Seal. In the three months ended September 30, 2000 we manufactured
and sold 6F Angio-Seal devices to St. Jude Medical to supplement their
production requirements. In August 2000, St. Jude Medical transitioned the
manufacturing of these devices to their facility. We do not expect any
revenue from the manufacture of completed Angio-Seals in the future. The
manufacture of the 6F Angio-Seal represented $358,000, or 13% of our total
net sales for the three months ended September 30, 2000. While this was a
significant portion of our total net sales for the three months ended
September 30, 2000, because of the substantial growth of our biomaterials
business from fiscal year 2001 to fiscal year 2002, we were able to achieve
a 78% increase in net sales despite the loss of the 6F Angio-Seal device
manufacturing business.
Research and Development Revenue. Historically, research and development revenue
has been derived solely from development work performed on the Angio-Seal. As
anticipated, these research and development activities have transitioned to St.
Jude Medical and no significant Angio-Seal research and development revenue is
expected in the future. Research and development revenue in the three months
ended September 30, 2000 was derived from work performed on the Angio-Seal under
the research and development agreement with St. Jude Medical. Research and
development revenue in the three months ended September 30, 2001 was derived
from a National Institute of Standards & Technology (NIST) grant, under which we
are researching cartilage regeneration utilizing our porous tissue matrix (PTM)
technology. This project will continue through early fiscal year 2003. This
grant was acquired in conjunction with our acquisition of THM in September 2000.
11
Royalty Income. We receive a royalty on every Angio-Seal unit sold worldwide. We
anticipate sales of the Angio-Seal will continue to grow as St. Jude Medical
continues to expand its sales and marketing efforts and releases future
generations of the Angio-Seal. As a result, royalty income will continue to be a
significant source of revenue. The unit growth for the three months ended
September 30, 2001 over the three months ended September 30, 2000 was partially
offset by the reduction in our royalty rate, from 12% to 9%, in accordance with
our licensing agreements. This rate reduction occurred during the quarter ended
December 31, 2000, when a cumulative one million Angio-Seal units had been sold.
There will be one further decrease in the royalty rate, to 6%, upon reaching
four million cumulative units sold. We anticipate this next reduction will not
occur until fiscal year 2005.
Cost of Products Sold. We have experienced an overall increase in gross margin
during the three months ended September 30, 2001 reflecting the shift to higher
margin sales of biomaterials products and the elimination of lower margin
Angio-Seal device sales. In addition, our net sales have increased and we have
been able to spread our fixed costs of manufacturing over a greater number of
units. We anticipate our gross margin will continue to improve as our
biomaterials sales levels increase and our product mix becomes more favorable.
Research and Development Expense. Research and development expense consists of
expenses incurred for the development of our proprietary technologies such as
the TriActiv(TM) system, absorbable biomaterials products and technologies and
other development programs, including expenses under the NIST program. While
research and development on the Angio-Seal has become an insignificant portion
of our overall development costs, the progression of the TriActiv system into
the clinical trial phase and our continued development of proprietary
biomaterials products and technologies has offset this decrease. We anticipate
research and development expense will continue to increase as we pursue
commercialization of the TriActiv system as well as explore opportunities for
our other technologies.
Selling, General and Administrative. Selling, general and administrative
expenses include general and administrative costs as well as costs related to
the marketing of our products. During the three months ended September 30, 2001
and 2000, the costs of our patent litigation are also included within selling,
general and administrative expenses. The marketing component of selling, general
and administrative expenses has increased as we move toward commercialization of
the TriActiv system. We anticipate sales and marketing expenses will continue to
increase as we evaluate opportunities for commercialization of the TriActiv
system and expand the marketing efforts for our biomaterials business.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Revenues. Revenues increased 51%, to $6.9 million in the three months ended
September 30, 2001 from $4.6 million in the three months ended September 30,
2000. Net sales of products increased 78%, to $4.6 million from $2.6 million for
the three months ended September 30, 2001 and 2000, respectively. Biomaterials
sales increased 106%, as 100% of sales for the three months ended September 30,
2001 (or $4.6 million) were biomaterials sales compared to $2.2 million in the
three months ended September 30, 2000. During the three months ended September
2000, we provided St. Jude Medical with 6F Angio-Seal devices for the
international and U.S. markets ($358,000 in sales). However, St. Jude Medical
transitioned the manufacturing of these devices to their facility in August
2000.
Research and Development Revenues. Research and development revenues increased
to $105,000 from $2,000, for the three months ended September 30, 2001 and 2000,
respectively. Current year revenues were generated under the NIST articular
cartilage development grant acquired in conjunction with the THM acquisition.
Research and development revenues for the same period a year earlier were
generated by work performed on
12
the Angio-Seal product for St. Jude Medical. As St. Jude Medical has
transitioned the Angio-Seal product research and development to their
facilities, we do not expect Angio-Seal product research and development
revenues in the future.
Royalty Income. Royalty income increased 11% to $2.2 million from $2.0 million
in the three months ended September 30, 2001 and 2000, respectively. This
increase was achieved despite the contractual 25% reduction in the Angio-Seal
royalty rate from 12% to 9% during the quarter ended December 31, 2000 and
reflects a greater number of units sold as well as an increase in average
selling price for the Angio-Seal. Royalty units increased 43% as approximately
139,000 Angio-Seal units were sold to end-users during the three months ended
September 30, 2001 compared to approximately 97,000 units sold during the three
months ended September 30, 2000. This unit increase was due to St. Jude
Medical's increased sales and marketing efforts and continued strong sales of
the 6F and 8F Angio-Seal in the worldwide market.
Cost of Products Sold. Cost of products sold increased 27% to $2.2 million in
the three months ended September 30, 2001 from $1.7 million in the three months
ended September 30, 2000. In addition, gross margin increased to 52% from 34%.
This increase reflects the higher margins on our biomaterials products as well
as continued allocation of overhead across greater sales volumes, which results
in a decrease in per unit costs.
Research and Development Expense. Research and development expense increased to
65% to $2.7 million in the three months ended September 30, 2001 from $1.6
million in the three months ended September 30, 2000. This increase was mainly
attributable to our continued development efforts on the TriActiv system,
including clinical trial expenses. We also continued to expand our development
efforts on our biomaterials products including our work under the NIST articular
cartilage development grant. We expect research and development expense to
increase as we investigate and develop new products, conduct clinical trials and
seek regulatory approvals for our proprietary products.
Selling, General and Administrative. Selling, general and administrative expense
increased 77% to $907,000 in the three months ended September 30, 2001 from
$512,000 in the three months ended September 30, 2000. This increase was
primarily the result of sales and marketing expenses which increased to $257,000
in the three months ended September 30, 2001 from $77,000 in the three months
ended September 30, 2000 related to increased marketing efforts on the TriActiv
system and our biomaterials products. In addition, general and administrative
expenses increased $180,000, to $617,000 in the three months ended September 30,
2001 from $437,000 in the three months ended September 30, 2000. This was
attributable to $110,000 of increased personnel costs to support our current
sales and research and development growth as well as an increase in corporate
legal fees and general expenses. Litigation expenses for our patent infringement
suit increased $31,000, to $34,000 for the three months ended September 30,
2001.
Net Interest Income. Interest expense increased 136% to $61,000 in the three
months ended September 30, 2001 from $26,000 in the three months ended September
30, 2000. This increase was the result of interest expense on the THM Biomedical
acquisition obligation for a full quarter in the current year as opposed to one
month of expense in the prior year. Interest income decreased 12% to $476,000 in
the three months ended September 30, 2001 from $539,000 in the three months
ended September 30, 2000. This decrease was the result of a decrease in average
cash and investment balances, as $6.6 million of the THM Acquisition was paid in
cash on September 1, 2000, as well as an overall decline in interest rates .
Other Non-Operating Income (Expense). Other non-operating expense was $4,000 for
the three months ended September 30, 2001 and represents a loss on the sale of
fixed assets.
Net Income before Income Taxes. Net income before income taxes increased 25%, to
$1.5 million from $1.2 million in the three months ended September 30, 2001 and
2000.
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Net Income. Net income decreased 18% to $1.0 million in the three months ended
September 30, 2001 from $1.2 million in the three months ended September 30,
2000 as a result of $528,00 in income tax expense. This is our first quarter of
recognizing income tax expense as a result of the recognition of a tax benefit
in fiscal year 2001 related to the realization of certain deferred tax assets
which had previously been offset by a valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by our operating activities was $2.8 million and $1.7 million
in the three months ended September 30, 2001 and 2000, respectively. In the
three months ended September 30, 2001, changes in asset and liability balances
provided $1.3 million of cash, in addition to net income of $1.0 million and
non-cash depreciation and amortization of $522,000. In the three months ended
September 30, 2000, changes in asset and liability balances provided $56,000 of
cash, in addition to net income of $1.2 million and non-cash depreciation and
amortization of $431,000.
Our cash, cash equivalents and short-term investments were $30.0 million at
September 30, 2001. In addition, we had $2.2 million in restricted investment
accounts. We have pledged $2.2 million in investments as collateral to secure
bank loans made to employees to pay taxes incurred by these employees when they
received common stock at the time of our initial public offering. In exchange
for our pledging this collateral, the employees have pledged their common stock
to us as collateral.
We have a $4.0 million capital spending plan for fiscal 2002, of which $675,000
has been expended primarily on machinery and equipment. These expenditures are
related to the continued expansion of our manufacturing capabilities,
principally for our biomaterials and TriActiv product lines.
We plan to continue to spend substantial amounts to fund clinical trials, to
gain regulatory approvals and to continue to expand research and development
activities, particularly for the TriActiv system and our biomaterials products.
We believe our current cash and investment balances in addition to cash
generated from operations will be sufficient to meet our operating and capital
requirements through at least fiscal 2003. Our future capital requirements and
the adequacy of available funds will depend, however, on numerous factors,
including market acceptance of our existing and future products; the successful
commercialization of products in development; progress in our product
development efforts; the magnitude and scope of such efforts; progress with
pre-clinical studies, clinical trials and product clearance by the FDA and other
agencies, the cost and timing of our efforts to expand our manufacturing
capabilities; the cost of filing, prosecuting, defending and enforcing patent
claims and other intellectual property rights; competing technological and
market developments; and the development of strategic alliances for the
marketing of certain of our products. There can be no assurance that we will
record profits in future periods.
The terms of any future equity financing may be dilutive to our stockholders and
the terms of any debt financing may contain restrictive covenants, which limit
our ability to pursue certain courses of action. Our ability to obtain financing
is dependent on the status of our future business prospects as well as
conditions prevailing in the relevant capital markets. No assurance can be given
that any additional financing will be made available to us or will be available
on acceptable terms should such a need arise. Our estimate of the time periods
for which cash and cash equivalents will be adequate to fund operations is a
forward looking statement within the meaning of Private Securities Litigation
Reform Act of 1995 and is subject to risks and uncertainties. Actual results may
differ materially from those contemplated in such forward-looking statements. In
addition to those described above, factors which may cause such a difference are
set forth under the caption "Risks Related to Our Business " as well as in our
annual report on form 10-K generally.
14
ACQUISITION OF THM BIOMEDICAL, INC. AND IN-PROCESS RESEARCH AND DEVELOPMENT
CHARGE
On September 1, 2000 we acquired THM Biomedical, Inc. (THM), a developer of
porous, biodegradable, tissue-engineering devices for the repair and replacement
of muskuloskeletal tissues, for approximately $10.5 million plus acquisition
costs of approximately $228,000. The transaction was financed with $6.6 million
in cash and a note payable to the shareholders of THM in the amount of $4.5
million (the Acquisition Obligation). The Acquisition Obligation is due in equal
quarterly installments of $281,250 beginning on December 31, 2000 and ending on
September 30, 2004. Accordingly, the present value of the cash payments
(discounted based upon our available borrowing rate of 7.5%) of $3.9 million was
recorded as a liability on the Company's financial statements, with a remaining
balance of $3.0 million at September 30, 2001.
The $7.6 million IPR&D charge represents the estimated fair value of purchased
in-process technology which has not yet reached technological feasibility and
has no alternative future use and was comprised of the following projects:
Articular Cartilage ($5.4 million), Bone Fusion ($389,000), Other Bone
Applications ($261,000), and Drug Delivery ($1.5 million). Each of the four
projects utilizes the core open-cell poly lactic acid (OPLA) technology, a
porous tissue matrix (PTM) technology developed by THM. PTM technology
facilitates wound healing in both bone and soft tissue and is bioabsorbable at
controlled rates for specific functions and tissues. Each of the IPR&D projects
utilizes these properties of the PTM technology to address its respective
market. For example, the articular cartilage project uses the PTM technology as
the foundation for an articular cartilage repair and regrowth product. The total
IPR&D value was determined by estimating the stage of completion of each IPR&D
project at the date of the acquisition, estimating the costs to develop each
IPR&D project into commercially viable products, estimating the resulting net
cash flows from such projects, and discounting the net cash flows back to their
present values. The discount rate in each project takes into account the
uncertainty surrounding the successful development and commercialization of the
purchased in-process technology.
The stage of completion for all projects ranged from 48% to 72% as of the
acquisition date with the weighted average completion rate approximately 56%. As
of that date, the estimated costs to bring the projects under development to
technological feasibility and through clinical trials were approximately $7.3
million.
Since the date of the acquisition, as planned, we have primarily devoted our
development efforts on PTM technology to the articular cartilage application and
have expended $433,000 on such efforts through September 30, 2001. In addition,
we are currently seeking regulatory approval for two proprietary PTM based
products with applications in the orthopedics market.
The net cash flows from IPR&D projects were based on management's best estimates
of revenue, cost of sales, research and development costs, general and
administrative costs, and income taxes from such projects. These estimates were
determined considering our historical experience and industry trends and
averages. The cash flow estimates from sales of products incorporating these
technologies are expected to commence between the fiscal years 2003 and 2005,
depending on the project, with revenue growth rates in the 50% range in the
immediate years following worldwide market launch, declining to the 5% range as
each market nears maturity. These projections were based on our best estimates
of market size and growth, expected trends in technology and the nature and
expected timing of new product introductions by us and our competitors. The cash
flows from revenues in each period are reduced by related expenses, capital
expenditures, the cost of working capital and an assigned contribution to the
core technology serving as a foundation for the research and development.
The discount rates used in discounting the net cash flows from purchased
in-process technology were 80% for articular cartilage, 85% for bone fusion, 78%
for other bone applications and 83% for drug delivery. These discount rates for
each project were determined upon consideration of the stage of completion of
the project,
15
the assumptions, nature and timing of the remaining efforts for completion and
risks and uncertainties of the project.
Substantial further research and development, pre-clinical testing and clinical
trials will be required to determine the technical feasibility and commercial
viability of the products under development. There can be no assurance such
efforts will be successful. If these projects are not successfully developed,
our revenue and profitability may be adversely affected in future periods. We
are continuously monitoring our development projects and believe that the
assumptions used in the valuation of purchased in-process technology reasonably
estimate the future benefits attributable to such purchased in-process
technology. No assurance can be given that actual results will not deviate from
those assumptions in future periods.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our interest income and expense are sensitive to changes in the general level of
interest rates. In this regard, changes in interest rates affect the interest
earned on our cash, cash equivalents and investments as well as interest paid on
our debt.
Our investment portfolio consists primarily of high quality U.S. government
securities and certificates of deposit with an average maturity of eight years.
We mitigate default risk by investing in what we believe are the safest and
highest credit quality securities and by monitoring the credit rating of
investment issuers. The portfolio includes only marketable securities with
active secondary or resale markets to ensure portfolio liquidity and there are
limitations regarding duration of investments. These available-for-sale
securities are subject to interest rate risk and decrease in market value if
interest rates increase. At September 30, 2001, our total portfolio consisted of
approximately $23.0 million of investments, with maturities ranging from one to
fifteen years. Additionally, we generally hold securities until the earlier of
their call date or their maturity. Therefore, we do not expect our results of
operations or cash flows to be materially impacted due to a sudden change in
interest rates. We have $3.0 million in outstanding debt at September 30, 2001
related to the acquisition of THM.
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS
This document and other documents we have filed with the Securities and Exchange
Commission (SEC) have forward-looking statements. In addition, our senior
management may make forward-looking statements orally to analysts, investors,
the media and others. Forward-looking statements might include one or more of
the following:
- - Projections of revenues, income earnings per share, capital expenditures,
capital structure or other financial items;
- - Descriptions of plans or objectives of management for future operations,
products or services, including future acquisition objectives;
- - Forecasts of future economic performance; and
- - Descriptions of assumptions underlying or relating to any of the foregoing
Forward-looking statements can be identified by the fact that they do not relate
strictly to historical or current facts. They often include words such as
"believe", "expect", "anticipate", "intend", "plan", "estimate", or words of
similar meaning, or future conditional verbs such as "will", "would", "should",
"could" or "may". Such statements give our expectations or predictions of future
conditions, events or results. They are not guarantees of future performance. By
their nature, forward-looking statements are subject to risks and uncertainties.
There are a number of factors, many of which are beyond our control, that could
cause actual conditions, events or results to differ significantly from those
described in the forward-looking statements. Some of these factors are described
as "Risks Related to our Business" below. Factors relating to the regulation
16
and supervision of our company are also described or incorporated in our Annual
Report on Form 10-K filed with the SEC. There are other factors besides those
described or incorporated in this report or in the Form 10-K that could cause
actual conditions, events or results to differ from those in the forward-looking
statements.
Forward-looking statements speak only as of the day they are made. We do not
undertake to publicly update or revise forward-looking statements to reflect
circumstances or events that occur after the date the forward-looking statements
are made.
RISKS RELATED TO OUR BUSINESS
There are many risk factors that could adversely affect our business, operating
results and financial condition. These risk factors, described in detail in our
Annual Report on Form 10-K, include but are not limited to:
- - the success of our biomaterials products;
- - our dependence on our biomaterials customers for marketing and obtaining
regulatory approval for their products;
- - our ability to obtain regulatory approvals for the TriActiv system;
- - subsequent to regulatory approval, the successful commercialization of the
TriActiv system;
- - our reliance on revenues from the Angio-Seal product line;
- - the performance of St. Jude Medical as the manufacturer, marketer and
distributor of the Angio-Seal product;
- - our ability to obtain any additional required funding for future development
and marketing of the TriActiv product as well as our biomaterials products;
- - the competitive markets for our products and our ability to respond more
quickly than our competitors to new or emerging technologies and or changes
in customer requirements;
- - the acceptance of our products by the medical community;
- - our dependence on key vendors and key personnel;
- - the use of hazardous materials which could expose us to future environmental
liabilities;
- - our failure to expand our management systems and controls to support
anticipated growth;
- - the ownership of our stockholders may be diluted by future acquisitions or
strategic alliances;
- - risks related to our intellectual property, including patent and proprietary
rights and trademarks; and
- - risks related to our industry including potential for litigation, ability to
obtain reimbursement for our products and our products exposure to extensive
government regulation.
Statements contained in this Form 10-Q that are not historical facts are
forward-looking statements that are made pursuant to the Safe Harbor provisions
of the Private Securities Litigation Reform Act of 1995. We caution that a
number of important factors could cause our actual results for fiscal year 2002
and beyond to differ materially from those in any forward-looking statements
made by us or on our behalf. These important factors include, without
limitation, the success of our biomaterials products, our ability to obtain the
necessary regulatory approvals for, fund and commercialize the TriActiv system,
the success of St. Jude Medical in manufacturing, marketing and distributing the
Angio-Seal product line, the ability of our customers to market and obtain
regulatory approvals for their biomaterials products, the acceptance of our
products by the medical community, our ability to maintain key vendors and
personnel, competition in our markets, general business conditions in the
healthcare industry and general economic conditions. Our results of operations
in any past period should not be considered indicative of the results to be
expected for future periods. Fluctuations in operating results may also result
in fluctuations in the price of our common stock.
17
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. Exhibits.
3.3 Second Amended and Restated Bylaws
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.
KENSEY NASH CORPORATION
Date: November 14, 2001 By: /s/ Wendy F. DiCicco
-------------------------------
Wendy F. DiCicco
Chief Financial Officer
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