SECURITIES AND EXCHANGE COMMISSION
Washington, DC
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 March 31, 1998
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: 0-28748
CLOSURE MEDICAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 56-1959623
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(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
5250 Greens Dairy Road, Raleigh, North Carolina 27616
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(Address of principal executive offices) (Zip Code)
(919) 876-7800
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at May 6, 1998
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Common Stock, par value $0.01 per share 13,258,460
CLOSURE MEDICAL CORPORATION
INDEX
PART I: FINANCIAL INFORMATION
Page Number
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Item 1. Financial Statements
Balance Sheet as of March 31, 1998 (unaudited) and December 31, 1997...............................3
Statement of Operations (unaudited) for the three months ended March 31, 1998 and 1997.............4
Statement of Cash Flows (unaudited) for the three months ended March 31, 1998 and 1997.............5
Notes to Financial Statements (unaudited)......................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................................. 8
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds........................................................ 11
Item 6. Exhibits and Reports on Form 8-K................................................................. 11
2
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Closure Medical Corporation
Balance Sheet
(In thousands, except per share data)
March 31, December 31,
1998 1997
---- ----
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 4,821 $ 7,277
Short-term investments 13,367 14,417
Accounts receivable 431 1,226
Inventories 538 347
Prepaid expenses 361 367
----------------- -----------------
Total current assets 19,518 23,634
Furniture, fixtures and equipment, net 5,821 3,694
Restricted investments 1,539 1,517
Long-term investments 2,579 1,298
Intangible assets, net 376 276
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Total assets $ 29,833 $ 30,419
================= =================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,342 $ 478
Accrued expenses 1,487 2,598
Deferred revenue 2,025 2,019
Capital lease obligations 98 155
Current portion of long-term debt 350 350
----------------- -----------------
Total current liabilities 5,302 5,600
Capital lease obligations 1,251 1,250
Long-term debt less current portion 2,650 1,150
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Total liabilities 9,203 8,000
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Stockholders' Equity:
Preferred Stock, $.01 par value. Authorized 2,000 shares; none - -
issued or outstanding.
Common Stock, $.01 par value. Authorized 35,000 shares;
issued and outstanding 13,256 and 13,242 shares. 133 132
Additional paid-in capital 46,149 46,058
Accumulated deficit (25,031) (23,075)
Deferred compensation on stock options (621) (696)
----------------- -----------------
Total stockholders' equity 20,630 22,419
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Total liabilities and stockholders' equity $ 29,833 $ 30,419
================= =================
The accompanying notes are an integral part of these financial statements.
3
Closure Medical Corporation
Statement of Operations
(Unaudited)
(In thousands, except per share data)
Three Months Ended
March 31, March 31,
1998 1997
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Product sales $ 770 $ 208
Cost of products sold 534 151
---- ---
Gross profit 236 57
---- --
Research, development and regulatory affairs expenses 1,358 750
Selling and administrative expenses 1,100 1,062
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Total operating expenses 2,458 1,812
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Loss from operations (2,222) (1,755)
Interest expense (88) (1)
Investment and interest income 354 260
---- ---
Net loss $ (1,956) $ (1,496)
======= =======
Shares used in computation of net
loss per share - basic and diluted 13,252 12,210
======= ======
Net loss per share - basic and diluted $ (0.15) $ (0.12)
====== ======
The accompanying notes are an integral part of these financial statements.
4
Closure Medical Corporation
Statement of Cash Flows
(Unaudited)
(In thousands)
Three Months Ended
March 31, March 31,
1998 1997
---- ----
Cash flows from operating activities:
Net loss $ (1,956) $ (1,496)
Adjustments to reconcile net loss to net cash provided (used) by operating
activities:
Amortization expense 2 2
Depreciation expense 65 32
Amortization of deferred compensation on stock options 75 76
Net loss on disposals of fixed assets 9 5
Net loss on disposals of intangibles - -
Change in accounts receivable 795 (68)
Change in inventories (191) (38)
Change in prepaid expenses 6 (78)
Change in accounts payable and accrued expenses (247) (52)
Change in deferred revenue 6 (15)
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Net cash used by operating activities (1,436) (1,632)
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Cash flows from investing activities:
Additions to furniture, fixtures and equipment (2,201) (409)
Additions to intangible assets (102) (23)
Purchases of investments (2,805) (1,746)
Proceeds from the sale of investments 2,552 1,681
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Net cash used by investing activities (2,556) (497)
---------------- ----------------
Cash flows from financing activities:
Proceeds from borrowings 1,500 -
Net proceeds from sale of common stock 92 26
Proceeds from capital lease obligations - -
Payments under capital lease obligations (56) (3)
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Net cash provided by financing activities 1,536 23
---------------- ----------------
Increase (decrease) in cash and cash equivalents (2,456) (2,106)
Cash and cash equivalents at beginning of period 7,277 13,024
---------------- ----------------
Cash and cash equivalents at end of period $ 4,821 $ 10,918
================ ================
The accompanying notes are an integral part of these financial statements.
5
CLOSURE MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Operations
Closure Medical Corporation ("Closure" or the "Company"), formerly named
Tri-Point Medical Corporation, develops, manufactures and commercializes medical
tissue cohesive products based on its proprietary cyanoacrylate technology to be
used for human and veterinary wound closure. The Company was incorporated in
Delaware on February 20, 1996. From May 10, 1990 to February 29, 1996, the
business of the Company was conducted by Tri-Point Medical L. P. (the
"Partnership"). On March 1, 1996, substantially all of the assets and
liabilities of the Partnership, except for the indebtedness to Sharpoint
Development Corporation ("Sharpoint"), the Partnership's general partner, were
transferred to the Company in exchange for one share of Common Stock. On the
effective date of the Company's initial public offering, September 25, 1996,
obligations of and interests in the Partnership were contributed to the Company
in exchange for an aggregate of 9,600,000 shares of Common Stock.
In April 1997, the Company completed its follow-on offering. An aggregate of
1,725,000 shares (including the over-allotment option) were sold at $12.875 per
share, of which 1,025,000 shares were sold by the Company and 700,000 shares
were sold by a stockholder, generating net proceeds to the Company of
approximately $12,020,000.
2. Significant Accounting Policies
The significant accounting policies followed by the Company for interim
financial reporting are consistent with the accounting policies followed for
annual financial reporting. These unaudited financial statements have been
prepared in accordance with Rule 10-01 of Regulation S-X, and in management's
opinion, all adjustments of a normal recurring nature necessary for a fair
presentation have been included. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements and should be read in conjunction with the
financial statements and notes thereto for the year ended December 31, 1997
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997.
The results of operations for the three month period ended March 31, 1998 are
not necessarily indicative of the results to be expected for the full year
ending December 31, 1998.
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), was issued in June 1997. SFAS 130 establishes standards
for reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. SFAS 130 is effective for financial
statements for fiscal years beginning after December 31, 1997. The Company
adopted SFAS 130 effective January 1, 1998; the adoption of this statement did
not have a material impact on its financial position or results of operations.
Statement of Financial Accounting Standards No. 131, "Disclosures About Segments
of an Enterprise and Related Information" ("SFAS 131"), was issued in June 1997.
SFAS 131 specifies revised guidelines for determining an entity's operating
segments and the type and level of financial information to be disclosed. The
Company adopted SFAS 131 effective January 1, 1998; the adoption of this
statement did not have a material impact on its financial position or results of
operations.
3. Taxes
No federal or state income tax provision has been provided for income tax
purposes, as the Company does not expect to have a tax liability for the year
ending December 31, 1998. Additionally, the deferred tax asset that might be
recorded as a result of net operating losses under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," has been offset by
a related valuation allowance because realization of the asset is not likely.
Accordingly, no benefit has been recorded.
6
CLOSURE MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
4. Inventories
Inventories included the following:
March 31, December 31,
1998 1997
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(In thousands)
Packaging $ 63 $ 45
Raw materials 86 54
Work-in-process 335 224
Finished goods 54 24
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$538 $347
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5. Net Loss Per Share
Basic net loss per share is computed using the weighted average number of common
and common equivalent shares outstanding during the periods.
Diluted net loss per share is computed using the weighted average number of
common and common equivalent shares outstanding during the periods. Common
equivalent shares consist of stock options using the treasury stock method.
Common equivalent shares from stock options are excluded from the computation if
their effect is antidilutive.
7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The following discussion should be read in conjunction with the unaudited
financial statements and notes thereto included in Part I--Item 1 of this Form
10-Q and the audited financial statements and notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations for the
year ended December 31, 1997 contained in the Company's Annual Report on Form
10-K for the year ended December 31, 1997.
The statements set forth below that are not historical facts or statements of
current conditions are forward-looking statements. Such forward-looking
statements may be identified by, among other things, the use of forward-looking
terminology such as "believes," "expects," "forecasts," "estimates," "plans,"
"continues," "may," "will," "should," "anticipates," or "intends" or the
negative thereof or other variations thereon or comparable terminology, or by
discussions of strategy or intentions. These forward-looking statements, such as
statements regarding present or anticipated scientific progress, development of
potential products, future revenues, capital expenditures and research and
development expenditures, future financings and collaborations, management,
manufacturing development and capabilities, and other statements regarding
matters that are not historical facts, involve predictions. The Company's actual
results, performance or achievements could differ materially from the results
expressed in, or implied by, these forward-looking statements. Potential risks
and uncertainties that could affect the Company's actual results, performance or
achievements include, but are not limited to, the "Risk Factors" set forth in
the Company's Annual Report on Form 10-K for the year ended December 31, 1997
filed with the Securities and Exchange Commission. Given these uncertainties,
current or prospective investors are cautioned not to place undue reliance on
any such forward-looking statements. Furthermore, the Company disclaims any
obligation or intent to update any such factors or forward-looking statements to
reflect future events or developments.
Overview
Since its inception in May 1990, the Company has been developing, manufacturing
and commercializing medical tissue cohesive products for use in wound closure in
humans and animals. The Company's products are based on its proprietary
cyanoacrylate technology, and a substantial portion of the Company's historical
expenses has consisted of research and development and clinical trial expenses.
Through September 25, 1996, the effective date of the Company's initial public
offering, the Company had funded its operations with cash borrowed from
Sharpoint Development Corporation ("Sharpoint"), sales of Octyldent(R) and
Nexaband(R) products, and license and product development revenues from
marketing partners. On September 30, 1996, the Company completed its initial
public offering, issuing 2,550,000 shares of Common Stock and generating net
proceeds of approximately $17,926,000. On April 2, 1997, the Company completed
its follow-on public offering, issuing 1,025,000 shares of Common Stock and
generating net proceeds of approximately $12,020,000.
The Company has been unprofitable since its inception and has incurred net
losses in each year, including a net loss of approximately $6,829,000 for the
year ended December 31, 1997. The Company anticipates that its recurring
operating expenses will increase for the next several years, as it expects its
research and development and selling and administrative expenses to increase in
order to develop new products, manufacture in commercial quantities and fund
additional clinical trials. The Company also expects to incur additional capital
expenditures to expand its manufacturing capabilities. The Company expects to
continue to incur a loss in 1998 and may incur losses in subsequent years,
although the amount of future net losses and time required by the Company to
reach profitability are highly uncertain. The Company's ability to generate
significant revenue and become profitable will depend on its success in
commercializing DERMABOND, including the receipt of all regulatory clearances
and approvals, expanding its manufacturing capabilities, developing new products
and entering into additional marketing agreements and on the ability of its
marketing partners to commercialize successfully products incorporating the
Company's technologies. No assurance can be given that the Company will generate
significant revenue or become profitable on a sustained basis, if at all.
8
Results of Operations
Total revenues were $770,000 for the three months ended March 31, 1998, compared
to $208,000 for the three months ended March 31, 1997. This increase in 1998
product sales was primarily a result of increased sales volume of DERMABOND.
Cost of products sold were $534,000 for the three months ended March 31, 1998,
compared to $151,000 for the three months ended March 31, 1997. Cost of products
sold as a percentage of product sales decreased to 69% in the three months ended
March 31, 1998, compared to 73% during the same period of 1997. The decrease in
cost of products sold as a percentage of product sales was primarily a result of
the increased sales volume of DERMABOND resulting in the fixed portion of cost
of products sold being allocated over higher sales volume.
Operating expenses were $2,458,000 for the three months ended March 31, 1998,
compared to $1,812,000 for the three months ended March 31, 1997. This increase
was primarily attributable to the addition of personnel, expansion of the
Company's facilities and increased research and development and regulatory
affairs expenses. In February 1998, the Company relocated its corporate offices
into a new 50,000 square feet facility and expects to relocate its manufacturing
operations to the same facility in late 1998. Prior to the move the Company
occupied approximately 15,000 square feet.
Interest expense was $88,000 for the three months ended March 31, 1998, compared
to $1,000 for the three months ended March 31, 1997. This increase was a result
of the Company entering into a new lease line and term loan during March and
November 1997, respectively. Additionally, the Company increased its borrowings
under the term loan in February 1998.
Investment and interest income was $354,000 for the three months ended March 31,
1998, compared to $260,000 for the same period of 1997. This increase was
attributed to interest earned from higher average cash and investment balances
resulting from the proceeds of the Company's follow-on public offering in April
1997.
Liquidity and Capital Resources
The Company has financed its operations to date primarily through the sale of
equity securities, borrowings from Sharpoint and other lenders, license and
product development revenues, and product sales revenues. Through March 31,
1998, the Company had raised approximately $30 million in equity financing. As
of March 29,1996, all long-term debt to Sharpoint, including accrued interest,
was contributed as partners' capital to the Partnership. The Company has entered
into and received approximately $4.5 million from a lease line and term loan
since March 1997. In addition, the Company has received approximately $5.5
million related to the supply and distribution agreement for DERMABOND entered
into with Ethicon, Inc. ("Ethicon") in March 1996, of which $2.0 million has
been classified as deferred revenue and will be credited against future
royalties and product purchases expected to be paid by Ethicon.
Cash used by operating activities was $1,436,000 and $1,632,000 for the three
months ended March 31, 1998 and 1997, respectively.
Cash used for investing activities was $2,556,000 and $497,000 for the three
months ended March 31, 1998 and 1997, respectively. The increase for the 1998
period is primarily related to leasehold improvements of the Company's new
50,000 square feet facility and acquiring capital equipment. During the same
period of 1997, cash was used primarily to acquire capital equipment.
Cash provided by financing activities was $1,536,000 and $23,000 for the three
months ended March 31, 1998 and 1997, respectively. The Company's primary
financing activity during the three months ended March 31, 1998 was the
Company's additional borrowings under its term loan whereby the Company had
borrowed $3.0 million as of March 31, 1998.
9
The Company believes that existing cash and cash equivalents and investments,
which totaled approximately $22.3 million at March 31, 1998, will be sufficient
to finance its capital requirements for at least 12 months. The Company expects
to incur a loss in 1998 and may incur losses in subsequent years, although the
amount of future net losses and time required by the Company to reach
profitability are highly uncertain. The Company anticipates that its recurring
operating expenses will increase for the next several years, as it expects its
research and development and selling and administrative expenses to increase in
order to develop new products, manufacture in commercial quantities and fund
additional clinical trials. The Company also expects to incur additional capital
expenditures to expand its manufacturing capabilities.
The Company's future capital requirements, however, will depend on numerous
factors, including (i) the Company's ability to manufacture and commercialize
successfully its lead product, DERMABOND, (ii) the progress of its research and
product development programs for future nonabsorbable and absorbable products,
including clinical studies, (iii) the effectiveness of product commercialization
activities and marketing agreements for its future products, including
additional scale-up of manufacturing capability in anticipation of product
commercialization and development and progress of sales and marketing efforts,
(iv) the ability of the Company to maintain existing marketing agreements,
including its agreement with Ethicon for DERMABOND, and establish and maintain
new marketing agreements, (v) the costs involved in preparing, filing,
prosecuting, defending and enforcing intellectual property rights and complying
with regulatory requirements, (vi) the effect of competing technological and
market developments and (vii) general economic conditions. There can be no
assurance that the Company will not be required to seek additional capital to
finance its operations in the future. If the Company's currently available funds
and internally generated cash flow are not sufficient to satisfy its financing
needs, the Company will be required to seek additional funding through bank
borrowings and additional public or private sales of its securities, including
equity securities, or through other arrangements with marketing partners. Other
than the Company's equipment financing line of credit and term loan, the Company
has no credit facility or other committed sources of capital. There can be no
assurance that additional funds, if required, will be available to the Company
on favorable terms, if at all.
10
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
The Company's Registration Statement on Form S-1 (Registration No. 333-5425)
(the "Registration Statement") for the Company's initial public offering ("IPO")
of 3,000,000 shares of Common Stock, of which 2,550,000 shares were sold by the
Company, was declared effective by the Securities and Exchange Commission on
September 25, 1996 (the "Effective Date"). The net proceeds to the Company from
the Offering were approximately $17,926,000.
For the period beginning on the Effective Date of the Registration Statement on
September 25, 1996 through March 31, 1998, reasonable estimates of the uses of
proceeds from the Offering are as follows:
(millions)
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Working capital $ 3.9
Research and development and regulatory affairs 6.0 (a)
Capital expenditures .9 (b)
Obtain and protect patents .2
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TOTAL $ 11.0
Of the above uses of proceeds attributed to working capital, approximately
$115,000 represented direct payments to directors for annual board compensation
and meeting fees and expenses and approximately $1,827,000 represented payments
to officers of the Company for compensation. Included in the payments to
directors was approximately $38,000 to two individuals beneficially owning ten
percent or more of the Common Stock of the Company. Additionally, reflected in
working capital is approximately $180,000 paid to a consultant who provides
services to the Company.
Temporary investments during this period have consisted primarily of corporate
and municipal bonds and money market funds. The Company invested all of the net
proceeds, approximately $18 million, upon the completion of the Offering and
such amount has been reduced as the expenditures described above have been
incurred. As of March 31, 1998, the Company had approximately $17.5 in
short-term and long-term investments, which amount also includes proceeds of the
Company's follow-on offering in April 1997.
(a) Regulatory affairs expenses primarily consist of clinical trials expenses.
(b) Of the Company's capital expenditures of approximately $5.4 million for
this period, approximately $4.5 million has been financed through a capital
lease agreement and term loan (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources" included in Item 1 of Part I of this Form 10-Q).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
11 Computation of pro forma net income (loss) per share (see
Note 5 to Notes to Financial Statements in Item 1 of this
Form 10-Q).
27 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CLOSURE MEDICAL CORPORATION
Date: May 13, 1998 By: \s\ Robert V. Toni
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Robert V. Toni
President and Chief Executive Officer
Date: May 13, 1998 By: \s\ J. Blount Swain
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J. Blount Swain
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
11 Computation of Pro Forma Net Income (Loss) Per Share.
27 Financial Data Schedule.