1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998
[ ] 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 1-8366
------
POLYDEX PHARMACEUTICALS LIMITED
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Commonwealth of the Bahamas None
- --------------------------------------------------------------------------------------------------------------
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer
Identification No.)
421 Comstock Road, Toronto, Ontario, Canada M1L 2H5
- --------------------------------------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (416) 755-2231
--------------
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities 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
Indicate the number of shares outstanding of each of the issuer's
classes of common shares, as of the latest practicable date.
Common Shares, $.0167 Par Value 2,998,916 shares
- ------------------------------- ---------------------------------
(Title of Class) (Outstanding at December 2, 1998)
-1-
2
POLYDEX PHARMACEUTICALS LIMITED
-------------------------------
TABLE OF CONTENTS
PAGE
----
PART I FINANCIAL INFORMATION
Item 1 CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Consolidated Balance Sheets
October 31, 1998 and January 31, 1998........................................................3
Consolidated Statements of Operations
Three Months ended October 31, 1998 and 1997 and
Nine Months ended October 31, 1998 and 1997..................................................5
Consolidated Statements of Shareholders' Equity
and Comprehensive Income
Nine Months ended October 31, 1998 and 1997..................................................6
Consolidated Statements of Cash Flows
Nine Months ended October 31, 1998 and 1997..................................................7
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................................8
Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.............................................................................11
PART II OTHER INFORMATION
Item 5 OTHER INFORMATION.............................................................................13
Item 6 EXHIBITS AND REPORTS ON FORM 8-K..............................................................14
Signatures....................................................................................15
-2-
3
PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
POLYDEX PHARMACEUTICALS LIMITED AND
SUBSIDIARIES
Consolidated Balance Sheets
(Expressed in United States dollars)
- ------------------------------------------------------------------------------------------------------------------
(Unaudited)
October 31 January 31
1998 1998
- ------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 444,500 $ 288,527
Trade accounts receivable 945,118 932,745
Inventories 1,767,563 1,678,280
Prepaid expenses and other current assets 125,726 64,727
------------------------------------------------------------------------------------------------------------
3,288,907 2,964,279
Property, plant and equipment, net 3,935,015 3,800,379
Patents, net 195,210 217,374
Due from Novadex Corp. 712,185 712,185
Due from shareholders 1,016,837 935,416
Deferred income taxes 534,307 950,000
Other assets 145,078 161,314
- ------------------------------------------------------------------------------------------------------------------
$ 9,827,539 $ 9,740,947
- ------------------------------------------------------------------------------------------------------------------
-3-
4
- ------------------------------------------------------------------------------------------------------------------
(Unaudited)
October 31 January 31
1998 1998
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,010,028 $ 1,001,620
Accrued liabilities 441,522 355,167
Loan payable 15,835 -
Current portion of long-term debt 61,349 55,392
------------------------------------------------------------------------------------------------------------
1,528,734 1,412,179
Long-term debt 426,263 462,632
Due to shareholders 621,731 590,526
Due to affiliated companies - 425,420
Deferred gain 662,025 672,369
Deferred income taxes 21,013 26,439
- ------------------------------------------------------------------------------------------------------------------
Total liabilities 3,259,766 3,589,565
Redeemable capital stock (149,899 common shares; 98/01/31 - 149,899) 2,000,000 2,000,000
Shareholders' equity:
Capital stock:
Authorized:
100,000 A preferred shares of $0.10 each 899,400 B preferred
shares of $0.0167 each 4,000,000 common shares of $0.0167 each
Issued and outstanding:
899,400 B preferred shares 15,010 15,010
2,847,018 common shares (98/01/31 - 2,846,998) 47,283 47,283
Contributed surplus 21,826,025 21,826,025
Deficit (16,412,792) (17,071,168)
Other comprehensive income (913,753) (665,768)
------------------------------------------------------------------------------------------------------------
4,561,773 4,151,382
- ------------------------------------------------------------------------------------------------------------------
$ 9,821,539 $ 9,740,947
- ------------------------------------------------------------------------------------------------------------------
-4-
5
POLYDEX PHARMACEUTICALS LIMITED AND
SUBSIDIARIES
Consolidated Statements of Operations
(Express in United States dollars)
- ----------------------------------------------------------------------------------------------------------------------------------
Quarter Ended Quarter Ended Year to Date Year to Date
October 31 October 31 October 31 October 31
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Sales $ 3,021,142 $ 2,608,933 $ 8,799,121 $ 7,188,527
Cost of products sold 2,004,668 1,907,562 5,979,982 5,152,776
- ----------------------------------------------------------------------------------------------------------------------------------
1,016,474 701,371 2,819,139 2,035,751
Expenses:
General and administrative 396,893 375,635 1,180,276 1,215,357
Depreciation and amortization 126,808 149,731 362,712 445,416
Interest expense 37,773 29,365 104,109 87,400
Research and development 23,214 40,414 98,312 111,982
Selling and promotion 20,661 109,626 104,610 270,611
----------------------------------------------------------------------------------------------------------------------------
605,349 704,771 1,850,019 2,130,766
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 411,125 (3,400) 969,120 (95,015)
Other income:
Gain on sale of equipment 3,894 - 11,140 -
Interest and other 4,601 11,337 45,785 31,177
- ----------------------------------------------------------------------------------------------------------------------------------
8,495 11,337 56,925 31,177
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before the undernoted 419,620 7,937 1,026,045 (63,838)
Provision for income taxes (40,170) - (367,669) -
Minority interest in loss - - - 1,182
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) for the period $ 379,450 $ 7,937 $ 658,376 $ (62,656)
- ----------------------------------------------------------------------------------------------------------------------------------
Per share information:
Earnings (loss) per common share for the period:
Basic $ 0.$3 0.$0 0.$2 (0.02)
Diluted $ 0.$3 0.$0 0.$2 (0.02)
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares
outstanding for the period 2,996,917 2,989,857 2,996,912 2,907,538
- ----------------------------------------------------------------------------------------------------------------------------------
-5-
6
POLYDEX PHARMACEUTICALS LIMITED AND
SUBSIDIARIES
Consolidated Statements of Shareholders' Equity and Comprehensive Income
(Unaudited)
(Expressed in United States dollars)
- ---------------------------------------------------------------------------------------------------
Year to Date Year to Date
October 31 October 31
1998 1997
- ---------------------------------------------------------------------------------------------------
Preferred Shares:
Balance, beginning of period $ 15,010 $ 15,010
Private placement of preferred shares - -
------------------------------------------------------------------------------------------
Balance, end of period $ 15,010 $ 15,010
- ---------------------------------------------------------------------------------------------------
Common Shares:
Balance, beginning of period $ 47,283 $ 44,456
Private placement of common shares - 2,787.00
Exercise of options - 40
------------------------------------------------------------------------------------------
Balance, end of period $ 47,283 $ 47,283
- ---------------------------------------------------------------------------------------------------
Contributed Surplus:
Balance, beginning of period $ 21,826,025 $ 20,735,822
Private placement of common shares - 1,072,243
Exercise of options - 17,960
------------------------------------------------------------------------------------------
Balance, end of period $ 21,826,025 $ 21,826,025
- ---------------------------------------------------------------------------------------------------
Deficit:
Balance, beginning of period $ (17,071,168) $ (17,559,330)
Net income (loss) for the period 658,376 (62,656)
------------------------------------------------------------------------------------------
Balance, end of period $ (16,412,792) $ (17,621,986)
- ---------------------------------------------------------------------------------------------------
Other Comprehensive Income:
Balance, beginning of period $ (665,768) $ (535,230)
Currency translation adjustment for the period (247,985) (54,042)
------------------------------------------------------------------------------------------
Balance, end of period $ (913,753) $ (589,272)
- ---------------------------------------------------------------------------------------------------
Comprehensive Income for the period:
Net income (loss) for the period $ 658,376 $ (62,656)
Currency translation adjustment for the period (247,985) (54,042)
------------------------------------------------------------------------------------------
$ 410,391 $ (116,698)
- ---------------------------------------------------------------------------------------------------
NOTE:
The comparative amount presented for shareholders' equity has been
restated to reclassify the common shares subject to the put option with
Continental Grain Company, as described in note 11 of the Company's
Annual Report.
-6-
7
POLYDEX PHARMACEUTICALS LIMITED AND
SUBSIDIARIES
Consolidated Statements of Cash Flows
(Expressed in United States dollars)
- ---------------------------------------------------------------------------------------------------------------------
Year to Date Year to Date
October 31 October 31
1998 1997
- ---------------------------------------------------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Net income (loss) for the period $ 658,376 $ (62,656)
Add (deduct) items not affecting cash:
Depreciation and amortization 362,712 445,416
Deferred income taxes 367,669 -
Loss (gain) on sale of equipment (11,140) -
Legal expenses charged to deferred gain (10,344) (106,024)
Minority interest - (1,182)
Expenses paid by issuance of common shares - 18,000
Change in non-cash operating working capital (197,439) (107,383)
--------------------------------------------------------------------------------------------------------------
1,169,834 186,171
--------------------------------------------------------------------------------------------------------------
Investing activities:
Additions to property, plant and equipment (469,996) (270,589)
Additions to patents (5,188) (1,108)
Proceeds from sale of equipment 11,140 -
--------------------------------------------------------------------------------------------------------------
(464,044) (271,697)
--------------------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from (repayment of) loan payable 15,835 -
Private placement of common shares - 1,000,000
Repayment of long-term debt (50,412) (48,066)
Proceeds from long-term debt 20,000 -
Proceeds from advances from shareholders 31,205 34,303
Advances to shareholders (81,421) (691,150)
Repayment of loans from shareholders - (308,850)
Repayment of due to affiliated companies (425,420) -
Advances from (repayment to) Novadex Corp. - (5,609)
--------------------------------------------------------------------------------------------------------------
(490,213) (19,372)
Effect of exchange rate changes on cash (59,604) (27,437)
- ---------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash position 155,973 (132,335)
Cash, beginning of period 288,527 603,491
- ---------------------------------------------------------------------------------------------------------------------
Cash, end of period $ 444,500 $ 471,156
- ---------------------------------------------------------------------------------------------------------------------
-7-
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
(a) RESULTS OF OPERATIONS
During the fiscal quarter ended October 31, 1998, the Registrant's pre-tax
income from operations amounted to $411,125, as compared to a loss of $3,400 for
the same period last year. This improvement in results is due to an increase in
such profits during the quarter at Dextran Products Limited ("Dextran") of
$79,629 and at Veterinary Laboratories Inc. ("Vet Labs") of $224,211, as well as
a decrease in expenses at the corporate head office of $147,460. The decrease in
head office expenses during the quarter is mainly due to decreases in selling
and promotion expenses and patent amortization expenses described below. The
Registrant's year to date operating profit amounted to $969,120, as compared to
a loss of $95,015 for last year. Consistent with the quarterly changes, both
Dextran and Vet Labs have achieved significant year to date increases in such
profits, while corporate head office expenses have decreased significantly.
Sales volume this quarter increased from the same period last year by $412,209,
which is attributable to an increase in sales at Vet Labs in the quarter of
$472,054 offset by a slight decrease in third-party sales at Dextran of $59,845.
The increase in sales at Vet Labs relative to the third quarter last year is a
result of strong demand for Iron Dextran in the U.S. market and the introduction
of new injectable products. The main reason for the decrease in sales volume at
Dextran is the increase in intercompany sales of bulk materials to Vet Labs in
order to meet their sales demands. On a year to date basis, both Dextran and Vet
Labs have sales volume increases.
Gross margins increased from 27% in the third quarter last year to 34% this
quarter. Dextran's quarter over quarter gross margin decreased from 46% to 41%
while Vet Labs' gross margin increased from 11% to 23%. The margin decrease at
Dextran is due to increased intercompany sales. The intercompany product sales
are lower margin because they are further refined at Vet Labs. The increase in
margin at Vet Labs is attributable to increased sales of higher margin products,
primarily in the injectable and solution product groups. This trend in improved
margin has carried over from the previous two quarters.
Management expects strong sales and margins to continue at both Vet Labs and
Dextran.
General and administrative expenses have increased by $21,258 this quarter as
compared to the same quarter last year, primarily due to the accrual of a
retiring allowance to the former President of Chemdex, Inc., partially offset by
-8-
9
a reduction in salary expense due to the January 1998 departure of the former
Chairman, Dr. Alec Keith.
Depreciation and amortization expenses have decreased by $22,923 as compared to
the third quarter last year primarily due to the reduction in patent
amortization resulting from the write-down of the cellulose sulphate patent at
January 31, 1998.
Selling and promotion expenses in the quarter decreased by $88,965 as compared
to the third quarter last year due to the termination during the first quarter
this year of a contract with a marketing company.
There was no significant quarter over quarter change in either research and
development expenses or interest expense.
Research and development, in conjunction with the University of British
Columbia, involving the treatment of cystic fibrosis using a form of Dextran is
continuing. Research and development, by the Rush Institute of the University of
Chicago, relating to Cellulose Sulphate gel is progressing. Clinical trials for
both projects are expected to commence in 1999, once funding and government
approvals are obtained.
Operating results for the three and nine months ended October 31, 1998 are not
necessarily indicative of the results that may be expected for the year ended
January 31, 1999. For further information, refer to the consolidated statements
and footnotes thereto included in the Registrant's annual report on Form 10-K
for the year ended January 31, 1998.
(b) LIQUIDITY AND CAPITAL RESOURCES
During the third quarter, the Registrant generated cash flow from operations of
$483,618 compared to the prior year third quarter cash flow from operations of
$139,400 which increase is primarily attributable to the large increase in net
income for the quarter as compared to the prior year.
There were no significant changes in receivables or inventory levels at either
Dextran or Vet Labs during the quarter.
During the third quarter, $78,561 was spent on new equipment for the plant
refurbishment at Dextran. There are no production interruptions planned for the
next quarter due to this refurbishment.
FORWARD-LOOKING STATEMENTS SAFE HARBOR
This Form 10-Q, including the Management's Discussion and Analysis of Financial
Condition and Results of Operations, contains various "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
which represent the Company's expectations or beliefs concerning future events,
including, but not limited to statements regarding
-9-
10
management's expectations of regulatory approval and the commencement of sales.
In addition, statements containing expressions such as "believes", "anticipates"
or "expects" used in this Form 10-Q, the Company's Annual Report, and the
Company's periodic reports on Forms 10-K and 10-Q previously filed with the
Securities and Exchange Commission are intended to identify forward-looking
statements. The Company cautions that these and similar statements in this Form
10-Q, the Company's Annual Report, and in previously filed periodic reports
including reports filed on Forms 10-K and 10-Q are further qualified by
important factors that could cause actual results to differ materially from
those in the forward-looking statements. These factors include, without
limitation, changing market conditions, the progress of clinical trials, and the
results obtained, the establishment of new corporate alliances, the impact of
competitive products and pricing, and the timely development, FDA approval and
market acceptance of the Company's products, none of which can be assured.
Results actually achieved may differ materially from expected results included
in these statements as a result of these or other factors.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normally recurring accruals) considered necessary for a fair presentation
have been included.
-10-
11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
POLYDEX PHARMACEUTICALS LIMITED
OCTOBER 31, 1998
INTEREST RATE SENSITIVITY
The table below provides information about the Company's financial instruments
that are sensitive to changes in interest rates. All financial instruments are
held for other than trading purposes. The Company does not have a material
exposure to interest rate risk.
The table presents principal cash flows and related weighted average interest
rates by expected maturity dates.
Expected Maturity Date Fair
----------------------------------------------------------------------------
31-Jan-99 31-Jan-00 31-Jan-01 31-Jan-02 31-Jan-03 Thereafter Total Value
--------- --------- --------- --------- --------- ---------- ----- -----
(US$ Equivalent)
ASSETS
Notes receivable:
Variable rate ($US) 58,642 70,468 59,346 12,315 13,362 733,648 947,781 947,781
Average interest rate 8.24% 8.32% 8.41% 8.50% 8.50% 8.50% 8.41%
LIABILITIES:
Long-term debt:
Fixed rate ($US) 11,234 357,766 16,015 1,297 - - 386,312 386,312
Average interest rate 10.41% 10.42% 9.50% 9.50% 0.00% 0.00% 9.96%
Fixed rate ($CDN) 6,621 28,972 31,487 34,220 - - 101,300 101,300
Average interest rate 8.50% 8.50% 8.50% 8.50% 8.50% 8.50% 8.50%
Variable rate ($US) (52,847) (57,339) (62,213) (67,501) (73,239) 934,870 621,731 621,731
Average interest rate 8.50% 8.50% 8.50% 8.50% 8.50% 8.50% 8.50%
-11-
12
POLYDEX PHARMACEUTICALS LIMITED
OCTOBER 31, 1998
EXCHANGE RATE SENSITIVITY
The table below provides information about the Company's financial instruments
that are sensitive to changes in foreign currency exchange rates. All financial
instruments are held for other than trading purposes. The Company's major
exposure to exchange rate risk is that the Canadian dollar rises dramatically in
relation to the U.S. dollar and that this significantly reduces the gross margin
experienced at Dextran Products. Management monitors the margin at Dextran to
ensure that an acceptable margin level is maintained. Management has the
ability, to some extent, to adjust sales prices to maintain an acceptable margin
level.
The table presents principal cash flows and related weighted average interest
rates by expected maturity dates.
Expected Maturity Date Fair
-------------------------------------------------------------------------------
31-Jan-99 31-Jan-00 31-Jan-01 31-Jan-02 31-Jan-03 Thereafter Total Value
(US$ Equivalent)
LIABILITIES:
Long-term debt:
Fixed rate ($CDN) 6,621 28,972 31,487 34,220 - - 101,300 101,300
Average interest rate 8.50% 8.50% 8.50% 8.50% 8.50% 8.50% 8.50%
-12-
13
PART II
OTHER INFORMATION
Item 5. Other Information.
The Registrant's proxies for its 1999 Annual General Meeting of the
Members will confer discretionary authority to vote on any matter if
a shareholder does not give written notice of the matter by April 3,
1999.
-13-
14
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Memorandum of Association of Polydex
Pharmaceuticals Limited, as amended to date
(filed as Exhibit 3.1 to the Annual Report
on Form 10-K filed April 30, 1997, and
incorporated herein by reference)
3.2 Articles of Association of Polydex
Pharmaceuticals Limited, as amended to date
(filed as Exhibit 3.2 to the Quarterly
Report on Form 10-Q filed September 9, 1998,
and incorporated herein by reference)
27 Financial Data Schedule
(b) Reports on Form 8-K
Not applicable.
-14-
15
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.
Date: December 14, 1998
POLYDEX PHARMACEUTICALS LIMITED
(Registrant)
By \s\ George G. Usher
-----------------------------------------------
George G. Usher, Chairman, President and Chief
Executive Officer
(Principal Executive Officer)
By \s\ Sharon L. Wardlaw
-----------------------------------------------
Sharon L. Wardlaw, Treasurer, Secretary and
Chief Financial and Accounting Officer
(Principal Financial Officer)
-15-
16
EXHIBIT INDEX
Exhibit Number Exhibit Description
- -------------- -------------------
27 Financial Data Schedule