Nordicus Partners Corp - Quarter Report: 2008 June (Form 10-Q)
UNITED
STATES
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 June 30,
2008
or
o 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: 0-28034
CardioTech
International, Inc.
(Exact
name of registrant as specified in its charter)
|
Delaware
(State
or other jurisdiction of
incorporation
or organization)
|
04-3186647
(I.R.S.
Employer Identification No.)
|
|
|
229
Andover Street, Wilmington, Massachusetts
(Address
of principal executive offices)
|
01887
(Zip
Code)
|
(978)
657-0075
(Registrant’s
telephone number, including area code)
(Former
name, former address and former fiscal year, if changed since last
report)
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 q
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
q Large
Accelerated
Filer q Accelerated
Filer
q Non-accelerated
Filer x Smaller
reporting company
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).Yes q No x
As of
August 11, 2008, there were 21,067,313 shares of the registrant’s Common Stock
were outstanding.
TABLE
OF CONTENTS
|
Page
|
||
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
Item
1.
|
Condensed
Consolidated Financial Statements (unaudited)
|
|
|
Condensed
Consolidated Balance Sheets at June 30, 2008 and March 31,
2008
|
3
|
|
|
Condensed
Consolidated Statements of Operations for the three months
ended
June
30, 2008 and 2007
|
4
|
|
|
Condensed
Consolidated Statements of Cash Flows for the three months
ended
June
30, 2008 and 2007
|
5
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
6-12
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
13-21
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
21
|
|
Item
4.
|
Controls
and Procedures
|
21
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
Item
1.
|
Legal
Proceedings
|
22
|
|
Item
1A.
|
Risk
Factors
|
22
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
22
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
22
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
22
|
|
Item
5.
|
Other
Information
|
22
|
|
Item
6.
|
Exhibits
|
22
|
|
Signatures
|
23
|
-2-
PART
I. FINANCIAL
INFORMATION
ITEM
1. FINANCIAL
STATEMENTS
|
CardioTech
International, Inc.
|
||||||||
|
Condensed
Consolidated Balance Sheets
|
||||||||
|
(Unaudited
- in thousands, except share and per share amounts)
|
||||||||
|
June
30,
|
March
31,
|
|||||||
|
2008
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 5,635 | $ | 6,733 | ||||
|
Accounts
receivable-trade, net of allowance of $5 and
$6
as of June 30, 2008 and March 31, 2008, respectively
|
183 | 46 | ||||||
|
Accounts
receivable-other
|
522 | 480 | ||||||
|
Inventories
|
285 | 149 | ||||||
|
Prepaid
expenses and other current assets
|
79 | 149 | ||||||
|
Total
current assets
|
6,704 | 7,557 | ||||||
|
Property,
plant and equipment, net
|
3,481 | 3,339 | ||||||
|
Goodwill
|
487 | 487 | ||||||
|
Other
assets
|
22 | 178 | ||||||
|
Total
assets
|
$ | 10,694 | $ | 11,561 | ||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 304 | $ | 370 | ||||
|
Accrued
expenses
|
336 | 698 | ||||||
|
Deferred
revenue
|
232 | 148 | ||||||
|
Current
liabilities of discontinued operations
|
149 | 149 | ||||||
|
Total
current liabilities
|
1,021 | 1,365 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Stockholders'
equity:
|
||||||||
|
Preferred
stock; $0.01 par value; 5,000,000 shares authorized;
500,000
shares issued and none outstanding as of
June
30, 2008 and March 31, 2008
|
- | - | ||||||
|
Common
stock; $0.001 par value; 50,000,000 shares authorized;
21,067,313
shares issued and outstanding as of June 30, 2008
and
March 31, 2008
|
21 | 21 | ||||||
|
Additional
paid-in capital
|
38,602 | 38,566 | ||||||
|
Accumulated
deficit
|
(28,950 | ) | (28,391 | ) | ||||
|
Total
stockholders' equity
|
9,673 | 10,196 | ||||||
|
Total
liabilities and stockholders' equity
|
$ | 10,694 | $ | 11,561 | ||||
The accompanying notes are an integral part of these financial
statements.
-3-
|
CardioTech
International, Inc.
|
||||||||
|
Condensed
Consolidated Statements of Operations
|
||||||||
|
(Unaudited
- in thousands, except per share amounts)
|
||||||||
|
For
The Three Months Ended
June
30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Revenues:
|
||||||||
|
Product
sales
|
$ | 313 | $ | 354 | ||||
|
Royalties
and development fees
|
561 | 498 | ||||||
| 874 | 852 | |||||||
|
Cost
of sales
|
347 | 175 | ||||||
|
Gross
margin
|
527 | 677 | ||||||
|
Operating
expenses:
|
||||||||
|
Research,
development and regulatory
|
183 | 230 | ||||||
|
Selling,
general and administrative
|
924 | 550 | ||||||
| 1,107 | 780 | |||||||
|
Loss
from operations
|
(580 | ) | (103 | ) | ||||
|
Interest
income
|
21 | 8 | ||||||
|
Net
loss from continuing operations
|
(559 | ) | (95 | ) | ||||
|
Loss
from discontinued operations
|
- | (555 | ) | |||||
|
Loss
on sale of Gish
|
- | (1,178 | ) | |||||
|
Net
loss from discontinued operations
|
- | (1,733 | ) | |||||
|
Net
loss
|
$ | (559 | ) | $ | (1,828 | ) | ||
|
Net
loss per common share, basic and diluted:
|
||||||||
|
Net
loss per share, continuing operations
|
$ | (0.03 | ) | $ | (0.00 | ) | ||
|
Net
loss per common share, discontinued operations
|
- | (0.09 | ) | |||||
|
Net
loss per common share
|
$ | (0.03 | ) | $ | (0.09 | ) | ||
|
Shares
used in computing net loss per common
share,
basic and diluted
|
21,067 | 20,032 | ||||||
The accompanying notes are an integral part of these financial
statements.
-4-
|
CardioTech
International, Inc.
|
||||||||
|
Condensed
Consolidated Statements of Cash Flows
|
||||||||
|
(Unaudited
- in thousands)
|
||||||||
|
For
The Three Months Ended
June
30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
loss
|
$ | (559 | ) | $ | (1,828 | ) | ||
|
Less: Net
loss from discontinued operations
|
- | 1,733 | ||||||
|
Net
loss from continuing operations
|
(559 | ) | (95 | ) | ||||
|
Adjustments
to reconcile net loss to net cash flows:
|
||||||||
|
Depreciation
|
102 | 71 | ||||||
|
Share-based
compensation
|
36 | 35 | ||||||
|
Changes
in assets and liabilities:
|
||||||||
|
Accounts
receivable-trade
|
(137 | ) | (17 | ) | ||||
|
Accounts
receivable-other
|
(42 | ) | 39 | |||||
|
Inventories
|
(136 | ) | (55 | ) | ||||
|
Prepaid
expenses and other current assets
|
70 | 92 | ||||||
|
Accounts
payable
|
(66 | ) | (52 | ) | ||||
|
Accrued
expenses
|
(362 | ) | (16 | ) | ||||
|
Deferred
revenue
|
84 | 87 | ||||||
|
Net
cash flows (used in) provided by operating activities of continuing
operations
|
(1,010 | ) | 89 | |||||
|
Net
cash flows used in operating activities
of
discontinued operations
|
- | (1,407 | ) | |||||
|
Net
cash flows used in operating activities
|
(1,010 | ) | (1,318 | ) | ||||
|
Cash
flows from investing activities:
|
||||||||
|
Purchases
of property, plant and equipment
|
(54 | ) | - | |||||
|
Increase
in other assets
|
(34 | ) | - | |||||
|
Net
cash flows used in investing activities of continuing
operations
|
(88 | ) | - | |||||
|
Net
cash flows used in investing activities of discontinued
operations
|
- | (146 | ) | |||||
|
Net
cash flows used in investing activities
|
(88 | ) | (146 | ) | ||||
|
Net
change in cash and cash equivalents
|
(1,098 | ) | (1,464 | ) | ||||
|
Cash
and cash equivalents at beginning of period
|
6,733 | 4,066 | ||||||
|
Cash
and cash equivalents at end of period
|
$ | 5,635 | $ | 2,602 | ||||
The accompanying notes are an integral part of these financial
statements.
-5-
CARDIOTECH
INTERNATIONAL, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
|
1.
|
Description
of Business
|
CardioTech
International, Inc. (“CardioTech” or the “Company”) develops advanced polymer
materials which provide critical characteristics in the design and development
of medical devices. The Company’s biomaterials are used in devices that are
designed for treating a broad range of anatomical sites and disease states. The
Company’s business model leverages its proprietary materials science technology
and manufacturing expertise in order to expand product sales and royalty and
license fee income.
The
Company’s leading edge technology, notably products such as ChronoFlex®,
HydroMed™, and HydroThane™, which have been developed to overcome a wide range
of design and functional challenges such as the need for dimensional stability,
ease of manufacturability and demanding physical properties to overcoming
environmental stress cracking and providing heightened lubricity for ease of
insertion. The Company’s new product extensions customize proprietary
polymers for specific customer applications in a wide range of device
categories.
In June
2008, in connection with our re-branding launch, we formed AdvanSource
Biomaterials Corporation, a wholly-owned subsidiary, as an initial step in our
ongoing efforts to better reflect our strategic plan. As part
of this re-branding effort, we are reorganizing our product line.
The
Company is conducting a clinical trial in Europe for CardioPass™, its synthetic
coronary bypass graft.
The
Company’s corporate, development and manufacturing operations are located in
Wilmington, Massachusetts.
Sale
of Gish
On July
6, 2007, the Company completed the sale of Gish Biomedical, Inc. (“Gish”), its
former wholly-owned subsidiary that developed and manufactured single use
cardiopulmonary bypass products, pursuant to a stock purchase agreement (the
“Gish Purchase Agreement”) entered into with Medos Medizintechnik AG (”Medos”),
a German corporation, on July 3, 2007. The Gish Purchase Agreement
provided for the sale of Gish to Medos for a purchase price of approximately
$7.5 million in cash. The Gish Purchase Agreement also contained
representations, warranties and indemnities that are customary in a transaction
involving the sale of all or substantially all of a company or its
assets. The indemnifications include items such as compliance with
legal and regulatory requirements, product liability, lawsuits, environmental
matters, product recalls, intellectual property, and representations regarding
the fairness of certain financial statements, tax audits and net operating
losses.
Pursuant
to the terms of the Gish Purchase Agreement, $1.0 million of the purchase price
was placed in escrow as a reserve for any indemnity claims by Medos under the
Gish Purchase Agreement, as described above, if any. The
realization of the escrow fund is contingent upon the realization of the Gish
accounts receivable and inventory that were transferred to Medos for one year
from the sale date. The $1.0 million of proceeds being held in escrow
is not included in the calculation of the loss on sale of Gish of $1.2
million.
As
previously reported by the Company, in late 2007 the Company was advised by
Medos that Medos might assert certain indemnity claims against the Company
relating to certain representations and warranties up to the full amount of the
$1.0 million escrow balance established under the Gish Purchase
Agreement. In addition, Medos advised the Company that it might seek
a purchase price adjustment for the period March 31, 2007 through July 6, 2007,
as provided in the Gish Purchase Agreement. The Company advised Medos
that it believed any such claims, if made, would be without merit.
On June
30, 2008, Medos formally notified the Company of its claims in accordance with
the procedure set forth in the Gish Purchase Agreement. Medos claims
aggregate approximately $4.2 million and include allegations that (i) the
Company breached certain representations and warranties in the Gish Purchase
Agreement, including certain representations and warranties concerning the
financial condition of Gish as of March 31, 2007, (ii) the Company is liable for
the severance obligations related to two key Gish employees terminated by Medos
subsequent to the acquisition date, and (iii) Medos is entitled to a purchase
price adjustment for the period between March 31, 2007 and July 6,
2007.
-6-
CARDIOTECH
INTERNATIONAL, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
Company has refuted the claims asserted by Medos and the facts and circumstances
upon which they are based and intends to vigorously pursue the disposition of
those claims. In that regard, on July 25, 2008, as provided in the
Gish Purchase Agreement, the Company initiated an arbitration proceeding with
the American Arbitration Association in New York, New York, and served its
arbitration demand upon Medos that same day. The arbitration demand
seeks a declaration that the amounts claimed by Medos are without merit and
unsupportable. Medos has not yet responded to the
demand. Although the Company denies the claims asserted by Medos, an
adverse finding of liability could have a material impact on the
Company. Until these claims by Medos are resolved, the $1.0 million
of purchase price from the sale of Gish will remain in escrow.
In
connection with the sale of Gish, the Company entered into a non-exclusive,
royalty-free license (the “License Agreement”) with Gish which provides for our
use of certain patented technology of Gish in the Company’s products and
services, provided such products and services do not compete with the cardiac
bypass product development and manufacturing businesses of Gish or
Medos. The Company has determined the License Agreement has de
minimus value and, accordingly, no value has been ascribed to the
license.
After transaction expenses
and certain post-closing adjustments, the Company realized approximately $6.1
million in proceeds from the sale of Gish. Assuming the disbursement
to the Company of all funds held in escrow after July 5, 2008, which
disbursement is not assured, up to an additional $1.0 million may be
realized. Under the terms of the Gish Purchase Agreement, the
Company owes Medos $149,000 as a result of the change in stockholder’s equity of
Gish from March 31, 2007 to June 30, 2007. This amount has not been
paid to Medos, and is reflected as a current liability of discontinued
operations in the accompanying condensed consolidated balance sheets as of June
30, 2008 and March 31, 2008. This adjustment is included in the
calculation of the loss on sale of Gish through June 30, 2007. Under the terms of the
Gish Purchase Agreement, the Company retained Gish’s cash assets of
approximately $2.0 million as of June 29, 2007.
Sale
of CDT
On March
28, 2008, the Company completed the sale of Catheter and Disposables Technology,
Inc. (“CDT”), its former wholly-owned subsidiary engaged in contract
manufacturing and the provision of engineering services, pursuant to a stock
purchase agreement (the “CDT Purchase Agreement”) entered into with TACPRO, Inc.
(“Tacpro”) on March 28, 2008. The CDT Purchase Agreement provided for
the sale of CDT to Tacpro for a purchase price of approximately $1.2 million in
cash. The CDT Purchase Agreement also contained representations,
warranties and indemnities that are customary in a transaction involving the
sale of all or substantially all of a company or its assets. The
indemnifications include items such as compliance with legal and regulatory
requirements, product liability, lawsuits, environmental matters, product
recalls, realization of accounts receivable and inventories at specified time
periods, and tax audits. Pursuant to the terms of the CDT Purchase Agreement,
the Company placed $240,000 in escrow as a reserve for its indemnification
obligations to Tacpro if any, as described above. The escrowed
amount, less any agreed upon amount necessary to satisfy any indemnification
obligations, may be made available to the Company on March 28,
2009. The $240,000 of proceeds being held in escrow is not
included in the calculation of the loss on sale of CDT of $690,000.
After
transaction expenses and certain post-closing adjustments, the Company realized
approximately $696,000 in cash proceeds from the sale of CDT. The
Company also incurred an additional non-cash expense of $76,000 related to
warrants issued in connection with an investment bank that advised the Company
on the transaction. Assuming the disbursement to the Company of all
funds held in escrow after March 28, 2009, up to an additional $240,000 may be
realized.
CorNova
CardioTech
has partnered with CorNova, Inc. (“CorNova”), a privately-held, development
stage company focused on the development of a next-generation drug-eluting
stent. The Company owns common stock in CorNova and has a 15%
ownership interest in the outstanding common and preferred stock of
CorNova. (See Note 11).
|
2.
|
Interim
Financial Statements and Basis of
Presentation
|
The
accompanying condensed consolidated financial statements of the Company have
been prepared in accordance with U.S. generally accepted accounting principles
(“U.S. GAAP”). In the opinion of management, the accompanying
condensed consolidated financials statements include all adjustments (consisting
only of normal recurring adjustments), which the Company considers necessary for
a fair presentation of the financial position at such date and of the operating
results and cash flows for the periods presented. The results of
operations and cash flows for the three months ended June 30, 2008 may not
necessarily be indicative of results that may be expected for any succeeding
quarter or for the entire fiscal year. The information contained in
this Form 10-Q should be read in conjunction with the Company’s audited
financial statements, included in our Form 10-K as of and for the year ended
March 31, 2008 filed with the Securities and Exchange Commission (the
“SEC”).
-7-
CARDIOTECH
INTERNATIONAL, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
balance sheet at March 31, 2008 has been derived from our audited consolidated
financial statements at that date but does not include all of the information
and footnotes required by U.S. GAAP for complete financial
statements.
The
accompanying condensed consolidated financial statements include the accounts of
the Company and its subsidiaries. All intercompany balances have been
eliminated in consolidation. As a result of the sale of Gish and CDT,
the Company’s financial statements reflect the statement of operations of Gish
and CDT as discontinued operations for the three months ended June 30,
2007. Additionally, the related information contained in the notes to
the condensed consolidated financial statements includes those of the Company’s
continuing operations unless specifically identified as disclosures related to
discontinued operations.
The
Company’s investment in CorNova is accounted for using the equity method of
accounting in accordance with APB Opinion No. 18, “The Equity Method of Accounting for
Investments in Common Stock.”
Significant
accounting policies are described in Note A to the financial statements included
in Item 7 of the Company’s Form 10-K as of March 31, 2008. The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and judgments, which are evaluated on an ongoing
basis, that affect the amounts reported in the Company's condensed consolidated
financial statements and accompanying notes. Management bases its
estimates on historical experience and on various other assumptions that it
believes are reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
and the amounts of revenues and expenses that are not readily apparent from
other sources. Actual results could differ from those estimates and
judgments. In particular, significant estimates and judgments include
those related to revenue recognition, allowance for doubtful accounts, useful
lives of property and equipment, inventory reserves, valuation for goodwill and
acquired intangible assets, and realization of amounts held in
escrow.
|
3.
|
Fair
Value Measurement
|
The
Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 157,
“Fair Value Measurement,”
on April 1, 2008. SFAS No. 157 defines and establishes a
framework for measuring fair value and expands disclosure about fair value
measurements. The standard creates a fair value hierarchy which
prioritizes the inputs to valuation techniques used to measure fair value into
three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in
active markets for identical assets or liabilities; Level 2 inputs are inputs
other than quoted prices included within Level 1 that are observable for the
asset or liability, either directly or indirectly; and Level 3 inputs are
unobservable inputs that reflect the Company’s own assumptions about the
assumptions market participants would use in pricing the asset or
liability.
Financial
assets and liabilities are classified in their entirety based on the lowest
level of input that is significant to the fair value
measurement. Under SFAS No. 157, the Company’s cash and cash
equivalents, which had a balance of approximately $5,635,000, was required to be
measured at fair value at June 30, 2008 and the balance was included in Level 1
inputs.
|
4.
|
Stock
Based Compensation
|
The
Company’s condensed consolidated statements of operations for the three months
ended June 30, 2008 and 2007 include $36,000 and $35,000, respectively, of
compensation costs and no income tax benefit related to the Company’s
stock-based compensation arrangements for employee and non-employee director
awards. As of June 30, 2008, the total amount of unrecognized
stock-based compensation expense was approximately $321,000, which will be
recognized over a weighted average period of 2.0 years.
|
5.
|
Related
Party Transactions
|
On
January 1, 2007, the Company entered into a consulting agreement with Michael L.
Barretti, a member of its Board of Directors, for an annualized fee of
$50,000. During each of the three months ended June 30, 2008 and
2007, the Company recognized approximately $13,000 of expense related to
services incurred under this agreement, which was recorded as selling, general
and administrative expense.
-8-
CARDIOTECH
INTERNATIONAL, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
|
6.
|
Inventories
|
Inventories
consist of the following:
|
(in
thousands)
|
June
30,
2008
|
March
31,
2008
|
||||||
|
Raw
materials
|
$ | 148 | $ | 74 | ||||
|
Work
in progress
|
31 | 3 | ||||||
|
Finished
goods
|
106 | 72 | ||||||
|
Total
inventories
|
$ | 285 | $ | 149 | ||||
|
7.
|
Property,
Plant and Equipment
|
Property,
plant and equipment consists of the following:
|
(in
thousands)
|
June
30,
2008
|
March
31,
2008
|
||||||
|
Land
|
$ | 500 | $ | 500 | ||||
|
Building
|
2,666 | 2,652 | ||||||
|
Machinery,
equipment and tooling
|
1,210 | 1,180 | ||||||
|
Construction
in progress
|
190 | - | ||||||
|
Furniture,
fixtures and office equipment
|
278 | 268 | ||||||
| 4,844 | 4,600 | |||||||
|
Less: accumulated
depreciation and amortization
|
(1,363 | ) | (1,261 | ) | ||||
| $ | 3,481 | $ | 3,339 | |||||
For the
three months ended June 30, 2008 and 2007, depreciation expense was $102,000 and
$71,000, respectively.
|
8.
|
Earnings
Per Share
|
The
Company follows SFAS No. 128, “Earnings Per Share,” where basic earnings per
share is computed by dividing net income (loss) by the weighted average number
of common shares outstanding during the period. Diluted earnings per
share are based upon the weighted average number of common shares outstanding
during the period plus additional weighted average common equivalent shares
outstanding during the period. Common equivalent shares result from
the assumed exercise of outstanding stock options and warrants, the proceeds of
which are then assumed to have been used to repurchase outstanding common stock
using the treasury stock method. In addition, the numerator is
adjusted for any changes in income or loss that would result from the assumed
conversion of potential shares. As of June 30, 2008 and 2007,
potentially dilutive shares of 3,744,471 and 6,292,999, respectively, were
excluded from the earnings per share calculation because their effect would be
antidilutive. Shares deemed to be antidilutive include stock options
and warrants.
|
9.
|
Stockholders’
Equity
|
The
Company, originally incorporated as a Massachusetts corporation at inception,
was reincorporated as a Delaware corporation, as approved by the Company’s
stockholders, in October 2007. As a result of the reincorporation,
the par value of the Company’s common stock, which was previously $0.01 per
share, is now $0.001 per share. Accordingly, the stockholders’ equity
section of both condensed consolidated balance sheets presented reflects the
change in par value.
-9-
CARDIOTECH
INTERNATIONAL, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Common
Stock Options and Warrants
In
connection with a financing transacted in December 2004, the Company issued
warrants to investors to purchase 569,793 shares of common stock at an exercise
price of $3.00 per share, which are exercisable until December 22,
2009. In addition, the placement agent was issued warrants to
purchase 113,959 shares of our common stock at an exercise price of $2.40 per
share and 56,979 shares of our common stock at an exercise price of $3.00 per
share, which are exercisable until December 22, 2009. Warrants for
140,000 shares of common stock, having an exercise price of $2.40, expired on
July 11, 2008 without exercise.
On March
31, 2008, the Company issued warrants to the investment bankers who assisted in
the sale of CDT to purchase 219,298 shares of common stock at an exercise price
of $0.874 per share, which are exercisable until March 31, 2015. The
warrants were valued at $76,000 using the Black-Scholes model and treated as
permanent equity.
The
Company issued no shares of common stock during the three months ended June 30,
2008 and 2007, as a result of the exercise of options by employees and
consultants.
Treasury
Stock and Other Transactions
In June
2001, the Board of Directors authorized the purchase of up to 250,000 shares of
the Company’s common stock. In June 2004, the Board of Directors
authorized the purchase of up to 500,000 additional shares of the Company’s
common stock. The Company announced that purchases may be made from
time-to-time in the open market, privately negotiated transactions, block
transactions or otherwise, at times and prices deemed appropriate by
management. Since June 2001, the Company has purchased a total of
174,687 shares. During the three months ended June 30, 2008 and 2007
the Company repurchased no shares of the Company’s common stock.
|
10.
|
Income
Taxes
|
The
Company uses the liability method of accounting for income taxes as set forth in
SFAS No. 109, “Accounting for
Income Taxes.” Under this method, deferred taxes are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect in the years in
which the differences are expected to reverse. Deferred tax assets
are recognized and measured based on the likelihood of realization of the
related tax benefit in the future.
For the
three months ended June 30, 2008 and 2007, the Company provided for no income
taxes, other than state income taxes, as the Company has significant net loss
carryforwards.
|
11.
|
Investment
in CorNova
|
As of
March 31, 2008 and 2007, CardioTech had a 15% and 16% ownership interest,
respectively, in the outstanding common and preferred stock of
CorNova. CardioTech has accounted for its investment in CorNova using
the equity method of accounting in accordance with APB Opinion No. 18, “The Equity Method of Accounting for
Investments in Common Stock”. During the three months ended
June 30, 2008 and 2007, the Company recorded no additional losses from its
equity ownership in CorNova as the Company’s investment in CorNova was $0 as of
March 31, 2007. The Company has no additional obligation to
contribute assets or additional common stock nor to assume any liabilities or to
fund any losses that CorNova may incur.
|
12.
|
Discontinued
Operations
|
Gish
Biomedical, Inc.
In
accordance with SFAS No.144, “Accounting for the Impairment or
Disposal of Long-Lived Assets”, the accompanying condensed consolidated
statements of operations present the results of Gish as discontinued
operations. As noted above, the Company’s Board of Directors approved
a plan to sell Gish in June 2007. The Company executed the Gish
Purchase Agreement on July 3, 2007, effective as of June 30, 2007, and closed on
July 6, 2007. The Company has (i) eliminated Gish’s financial results
from its ongoing operations, (ii) determined that Gish, which operated as a
separate subsidiary, was a separate component of its aggregated business as,
historically, management reviewed separately the Gish financial results and cash
flows apart from its ongoing continuing operations, and (iii) determined that it
will have no further continuing involvement in the operations of Gish or cash
flows from Gish after the sale.
-10-
CARDIOTECH
INTERNATIONAL, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
current liabilities of discontinued operations as of June 30, 2008 is comprised
of the amounts owed to Medos due to the change in the stockholder’s equity of
Gish from March 31, 2007 through June 30, 2007 in accordance with the terms of
the Gish Purchase Agreement.
Condensed
results of operations relating to Gish for the three months ended June 30, 2007
are as follows:
|
Three
Months Ended
|
||||
|
(in
thousands)
|
June
30, 2007
|
|||
|
Revenues
|
$ | 3,849 | ||
|
Gross
margin
|
815 | |||
|
Loss
from discontinued operations
|
(309 | ) | ||
|
Loss
on sale of Gish
|
(1,178 | ) | ||
|
Net
loss from discontinued operations
|
(1,487 | ) | ||
Catheter
and Disposables Technology, Inc.
In
accordance with SFAS No.144, “Accounting for the Impairment or
Disposal of Long-Lived Assets”, the accompanying condensed consolidated
statements of operations present the results of CDT as discontinued
operations. As noted above, the Company executed the CDT Purchase
Agreement and simultaneously closed the transaction on March 28,
2008. The Company has (i) eliminated CDT’s financial results from its
ongoing operations, (ii) determined that CDT, which operated as a separate
subsidiary, was a separate component of its aggregated business as,
historically, management reviewed separately the CDT financial results and cash
flows apart from its ongoing continuing operations, and (iii) determined that it
will have no further continuing involvement in the operations of CDT or cash
flows from CDT after the sale.
Condensed
results of operations relating to CDT for the three months ended June 30, 2007
are as follows:
|
Three
Months Ended
|
||||
|
(in
thousands)
|
June
30, 2007
|
|||
|
Revenues
|
$ | 835 | ||
|
Gross
margin
|
(2 | ) | ||
|
Loss
from discontinued operations
|
(246 | ) | ||
|
13.
|
New
Accounting Pronouncements
|
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements—an Amendment of ARB No.
5.” The pronouncement establishes accounting and reporting
standards pertaining to ownership interests in subsidiaries held by parties
other than the parent, the amount of net income attributable to the parent and
to the non-controlling interest, changes in a parent's ownership interest, and
the valuation of any retained non-controlling equity investment when a
subsidiary is deconsolidated. The pronouncement also establishes
disclosure requirements that identify and distinguish between the interests of
the parent and the interests of the non-controlling owners. SFAS No.
160 is effective for fiscal years beginning on or after December 15,
2008. The Company does not believe SFAS No. 160 will have a material
impact on its results of operations or financial position.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” The current hierarchy under Generally
Accepted Accounting Principles in the United States (“GAAP”), as set forth in
the American Institute of Certified Public Accountants (“AICPA”) Statement on
Auditing Standards No. 69, “The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles,” has been criticized because
(1) it is directed to the auditor rather than the entity, (2) it is complex, and
(3) it ranks FASB Statements of Financial Accounting Concepts. The
FASB believes that the GAAP hierarchy should be directed to entities because it
is the entity (not its auditor) that is responsible for selecting accounting
principles for financial statements that are presented in conformity with
GAAP. Accordingly, the FASB concluded that the GAAP hierarchy should
reside in the accounting literature established by the FASB and is issuing this
Statement to achieve that result. This Statement is effective 60 days
following the SEC's approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, “The Meaning of Present Fairly
in Conformity With
Generally Accepted Accounting Principles.” The Company does
not believe that the adoption of SFAS No. 162 will have a material impact on its
results of operations, financial position or cash flow.
-11-
CARDIOTECH
INTERNATIONAL, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
14.
|
Contingencies
|
As
previously reported by the Company, in late 2007 the Company was advised by
Medos that Medos might assert certain indemnity claims against the Company
relating to certain representations and warranties up to the full amount of the
$1.0 million escrow balance established under the Gish Purchase
Agreement. In addition, Medos advised the Company that it might seek
a purchase price adjustment for the period March 31, 2007 through July 6, 2007,
as provided in the Gish Purchase Agreement. The Company advised Medos
that it believed any such claims, if made, would be without merit.
On June
30, 2008, Medos formally notified the Company of its claims in accordance with
the procedure set forth in the Gish Purchase Agreement. Medos claims
aggregate approximately $4.2 million and include allegations that (i) the
Company breached certain representations and warranties in the Gish Purchase
Agreement, including certain representations and warranties concerning the
financial condition of Gish as of March 31, 2007, (ii) the Company is liable for
the severance obligations related to two key Gish employees terminated by Medos
subsequent to the acquisition date, and (iii). Medos is entitled to a purchase
price adjustment for the period between March 31, 2007 and July 6,
2007.
The
Company has refuted the claims asserted by Medos and the facts and circumstances
upon which they are based and intends to vigorously pursue the disposition of
those claims. In that regard, on July 25, 2008, as provided in the
Gish Purchase Agreement, the Company initiated an arbitration proceeding with
the American Arbitration Association in New York, New York, and served its
arbitration demand upon Medos that same day. The arbitration demand
seeks a declaration that the amounts claimed by Medos are without merit and
unsupportable. Medos has not yet responded to the
demand. Although the Company denies the claims asserted by Medos, an
adverse finding of liability could have a material impact on the
Company. Until these claims by Medos are resolved, the $1.0 million
of purchase price from the sale of Gish will remain in escrow.
The
Company is not a party to any other legal proceedings, other than ordinary
routine litigation incidental to its business, which the Company believes will
not have a material affect on its financial position or results of
operations.
-12-
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Cautionary
Note Regarding Forward-Looking Statements
This
Report on Form 10-Q contains certain statements that are
“forward-looking” within the meaning of the Private Securities Litigation Reform
Act of 1995 (the “Litigation Reform Act”). These forward looking
statements and other information are based on our beliefs as well as assumptions
made by us using information currently available.
The words
“anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and
similar expressions, as they relate to us, are intended to identify
forward-looking statements. Such statements reflect our current views
with respect to future events and are subject to certain risks, uncertainties
and assumptions. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described herein as anticipated, believed,
estimated, expected, intended or using other similar expressions.
In
accordance with the provisions of the Litigation Reform Act, we are making
investors aware that such forward-looking statements, because they relate to
future events, are by their very nature subject to many important factors that
could cause actual results to differ materially from those contemplated by the
forward-looking statements contained in this Report on Form 10-Q. For
example, we may encounter competitive, technological, financial and business
challenges making it more difficult than expected to continue to develop and
market our products; the market may not accept our existing and future products;
we may not be able to retain our customers; we may be unable to retain existing
key management personnel; and there may be other material adverse changes in our
operations or business. Certain important factors affecting the
forward-looking statements made herein also include, but are not limited to (i)
continued downward pricing pressures in our targeted markets, (ii) the continued
acquisition of our customers by certain of our competitors, and (iii) continued
periods of net losses, which could require us to find additional sources of
financing to fund operations, implement our financial and business strategies,
meet anticipated capital expenditures and fund research and development
costs. In addition, assumptions relating to budgeting, marketing,
product development and other management decisions are subjective in many
respects and thus susceptible to interpretations and periodic revisions based on
actual experience and business developments, the impact of which may cause us to
alter our marketing, capital expenditure or other budgets, which may in turn
affect our financial position and results of operations. For all of
these reasons, the reader is cautioned not to place undue reliance on
forward-looking statements contained herein, which speak only as of the date
hereof. We assume no responsibility to update any forward-looking
statements as a result of new information, future events, or otherwise except as
required by law. For further information you are encouraged to review
our filings with the Securities and Exchange Commission, including our Annual
Report on Form 10-K for the fiscal year ended March 31, 2008.
Overview
We
develop advanced polymer materials which provide critical characteristics in the
design and development of medical devices. Our biomaterials are used in devices
that are designed for treating a broad range of anatomical sites and disease
states. Our business model leverages our proprietary materials
science technology and manufacturing expertise in order to expand our product
sales and royalty and license fee income.
Our
leading edge technology, notably products such as ChronoFlex®, HydroMed™, and
HydroThane™, has been developed to overcome a wide range of design and
functional challenges, from the need for dimensional stability, ease of
manufacturability and demanding physical properties to overcoming environmental
stress cracking (ESC) and providing heightened lubricity for ease of
insertion. Our new product extensions allow us to customize our
proprietary polymers for specific customer applications in a wide range of
device categories.
We also
have an antimicrobial extension line that complements the ChronoFlex® and
HydroMed™ product families. Through proprietary manufacturing
techniques, we have produced materials which allow for full homogenous
dispersion throughout the polymer, thus resulting in long lasting and consistent
activity and the prevention of leaching. The end result is a
technologically advanced antimicrobial material which reduces the potential for
foreign body patient infections is less susceptible to bacterial growth and
biofilm formations.
We are
currently conducting a clinical trial in Europe for CardioPass™, our synthetic
coronary artery bypass graft. We have developed our 4 mm and 5 mm
SynCAB grafts using specialized ChronoFlex polyurethane materials designed to
provide improved performance in the treatment of arterial
disorders. The grafts have three layers, similar to natural arteries,
and are designed to replicate the physical characteristics of human blood
vessels.
-13-
We
believe the SynCAB graft may be used initially to provide an alternative to
patients with insufficient or inadequate native vessels for use in bypass
surgery as a result of repeat procedures, trauma, disease or other
factors. We believe, however, that the SynCAB graft may ultimately be
used as a substitute for native saphenous veins, thus avoiding the trauma and
expense associated with the surgical harvesting of the vein. In
January 2007, we announced the initiation of these clinical trials with the
first patient surgically implanted in March 2007.
History
We were
founded in 1993 as a subsidiary of PolyMedica Corporation (“PMI”). In
June 1996, PMI distributed all of the shares of CardioTech’s common stock, par
value $0.01 per share, which PMI owned, to PMI stockholders of
record. Our materials science technology is principally based upon
the ChronoFlexTM
proprietary polymers which represent our core technology.
In July
1999, we acquired the assets of Tyndale-Plains Hunter, Ltd., a manufacturer of
specialty hydrophilic polyurethanes.
In April
2001, we acquired Catheter and Disposables Technology, Inc.
(“CDT”). CDT, located in Minnesota, is an original equipment
manufacturer and supplier of private-label advanced disposable medical devices
from concept to finished packaged and sterilized products, providing engineering
services and contract manufacturing. In the development of our
business model, we continue to review the strategic fit of our various business
operations. As a result, we determined that CDT did not fit our
strategic direction. CDT was sold in March 2008 (See Note 12 to Notes
to Condensed Consolidated Financial Statements appearing elsewhere
herein).
In April
2003, we acquired Gish Biomedical, Inc. (“Gish”). Gish is located in
southern California and manufacturers single use cardiopulmonary bypass products
that have a disposable component. In the development of our business
model, we continue to review the strategic fit of our various business
operations. As a result, we determined that Gish did not fit our
strategic direction. Gish was sold in July 2007 (See Note 12 to Notes
to Condensed Consolidated Financial Statements appearing elsewhere
herein).
In March
2004, we joined with Implant Sciences Corporation (“Implant”) to participate in
the funding of CorNova. CorNova was formed to develop a novel
coronary drug eluting stent using the combined capabilities and technology of
CorNova, Implant Sciences and CardioTech. We currently have a 15%
equity interest in the issued and outstanding common stock of CorNova, based on
the assumed conversion of all outstanding CorNova preferred stock into common
stock. Although CorNova is expected to incur future operating losses,
we have no obligation to fund CorNova.
At our
2007 Annual Meeting, our stockholders approved our reincorporation from
Massachusetts to Delaware. Our Articles of Charter Surrender in
Massachusetts and Certificate of Incorporation and Certificate of Conversion in
Delaware were effective as of October 26, 2007.
In June
2008, in connection with our re-branding launch, we formed AdvanSource
Biomaterials Corporation, a wholly-owned subsidiary, as an initial step in our
ongoing efforts to better reflect our strategic plan. As part
of this re-branding effort, we are reorganizing our product line. At
the same time, we launched a new website at
www.AdvBiomaterials.com. The information available on or through our
website is not a part of this report on Form 10-Q.
Sale
of Gish and CDT
On July
6, 2007, we completed the sale of Gish Biomedical, Inc.(“Gish”), our former
wholly-owned subsidiary that developed and manufactured single use
cardiopulmonary bypass products, pursuant to a stock purchase agreement (the
“Gish Purchase Agreement”) entered into with Medos Medizintechnik AG, a German
corporation (“Medos”), on July 3, 2007. The Gish Purchase Agreement
provided for the sale of Gish to Medos for a purchase price of approximately
$7.5 million in cash. The Gish Purchase Agreement also contained
representations, warranties and indemnities that are customary in a transaction
involving the sale of all or substantially all of a company or its
assets. The indemnifications include items such as compliance with
legal and regulatory requirements, product liability, lawsuits, environmental
matters, product recalls, intellectual property, and representations regarding
the fairness of certain financial statements, tax audits and net operating
losses.
Pursuant
to the terms of the Gish Purchase Agreement, $1.0 million of the purchase price
was placed in escrow as a reserve for any indemnity claims by Medos under the
Gish Purchase Agreement, as described above, if any. The
realization of the escrow fund is contingent upon the realization of the Gish
accounts receivable and inventory that were transferred to Medos for one year
from the sale date. The $1.0 million of proceeds being held in escrow
is not included in the calculation of the loss on sale of Gish of $1.2
million.
-14-
As
previously reported by the Company, in late 2007 the Company was advised by
Medos that Medos might assert certain indemnity claims against the Company
relating to certain representations and warranties up to the full amount of the
$1.0 million escrow balance established under the Gish Purchase
Agreement. In addition, Medos advised the Company that it might seek
a purchase price adjustment for the period March 31, 2007 through July 6, 2007,
as provided in the Gish Purchase Agreement. The Company advised Medos
that it believed any such claims, if made, would be without merit.
On June
30, 2008, Medos formally notified the Company of its claims in accordance with
the procedure set forth in the Gish Purchase Agreement. Medos claims
aggregate approximately $4.2 million and include allegations that (i) the
Company breached certain representations and warranties in the Gish Purchase
Agreement, including certain representations and warranties concerning the
financial condition of Gish as of March 31, 2007, (ii) the Company is liable for
the severance obligations related to two key Gish
employees terminated by Medos subsequent to the acquisition date, and (iii)
Medos is entitled to a purchase price adjustment for the period between March
31, 2007 and July 6, 2007.
The
Company has refuted the claims asserted by Medos and the facts and circumstances
upon which they are based and intends to vigorously pursue the disposition of
those claims. In that regard, on July 25, 2008, as provided in the
Gish Purchase Agreement, the Company initiated an arbitration proceeding with
the American Arbitration Association in New York, New York, and served its
arbitration demand upon Medos that same day. The arbitration demand
seeks a declaration that the amounts claimed by Medos are without merit and
unsupportable. Medos has not yet responded to the
demand. Although the Company denies the claims asserted by Medos, an
adverse finding of liability could have a material impact on the
Company. Until these claims by Medos are resolved, the $1.0 million
of purchase price from the sale of Gish will remain in escrow.
In
connection with the sale of Gish, we entered into a non-exclusive, royalty-free
license (the “License Agreement”) with Gish which provides for our use of
certain patented technology of Gish in our products and services, provided such
products and services do not compete with the cardiac bypass product development
and manufacturing businesses of Gish or Medos. We have determined the
License Agreement has de minimus value and, accordingly, no value has been
ascribed to the license.
After transaction expenses
and certain post-closing adjustments, we realized approximately $6.1 million in
proceeds from the sale of Gish. Assuming the disbursement to us of
all funds held in escrow after July 5, 2008, up to an additional $1.0 million
may be realized. Under the terms of the Gish Purchase
Agreement, we owe Medos $149,000 as a result of the change in stockholder’s
equity of Gish from March 31, 2007 to June 30, 2007. This amount was
recorded as a current liability as of June 30, 2007, has not been paid to Medos,
and is reflected as a current liability of discontinued operations as of March
31, 2008. This adjustment is included in the calculation of the loss
on sale of Gish through March 31, 2008. Under the terms of the
Gish Purchase Agreement, we retained Gish’s cash assets of approximately $2.0
million as of June 29, 2007.
On March
28, 2008, we completed the sale of Catheter and Disposables Technology, Inc.
(“CDT“) our former wholly-owned subsidiary, that is a contract manufacturer and
provider of engineering services, pursuant to a stock purchase agreement (the
“CDT Purchase Agreement”) entered into with TACPRO, Inc. (“Tacpro”) on March 28,
2008. The CDT Purchase Agreement provided for the sale of CDT to
Tacpro for a purchase price of approximately $1.2 million in
cash. The CDT Purchase Agreement also contained representations,
warranties and indemnities that are customary in a transaction involving the
sale of all or substantially all of a company or its assets. The
indemnifications include items such as compliance with legal and regulatory
requirements, product liability, lawsuits, environmental matters, product
recalls, realization of accounts receivable and inventories at specified time
periods, and tax audits. Pursuant to the terms of the CDT Purchase Agreement, we
placed $240,000 in escrow as a reserve for our indemnification obligations to
Tacpro if any, as described above. The escrowed
amount, less any agreed upon amount necessary to satisfy any indemnification
obligations, may be made available to us on March 28,
2009. The $240,000 of proceeds being held in escrow is not
included in the calculation of the loss on sale of CDT of $690,000.
After
transaction expenses and certain post-closing adjustments, we realized
approximately $696,000 in cash proceeds from the sale of CDT. We also
incurred an additional non-cash expense of $76,000 related to warrants issued in
connection with an investment bank that advised us. Assuming the
disbursement to us of all funds held in escrow after March 28, 2009, up to an
additional $240,000 may be realized.
-15-
Technology
and Intellectual Property
Our
unique materials science strengths are embodied in our family of proprietary
polymers. We manufacture and sell our custom polymers under the trade
names ChronoFilm, ChronoFlex, ChronoThane, ChronoPrene, HydroThane, and
PolyBlend. The ChronoFlex family of polymers has the potential to be
marketed beyond our existing customer base. Our goal is to fulfill
the market’s need for advanced materials science capabilities, thereby enabling
customers to improve devices that utilize polymers. Our chemists
continue to develop the ChronoFlex family of medical-grade
polymers. Conventional polymers are susceptible to degradation
resulting in catastrophic failure of long-term implantable devices such as
pacemaker leads. ChronoFlex and ChronoThane polymers are designed to
overcome such degradation and reduce the incidents of infections associated with
invasive devices.
Key
characteristics of our polymers are i) optional use as lubricious coatings for
smooth insertion of a device into the body, ii) antimicrobial properties that
are part of the polymer itself, and iii) mechanical properties, such as hardness
and elasticity, sufficient to meet engineering requirements. We
believe our technology has wide application in increasing biocompatibility, drug
delivery, infection control and expanding the utility of complex devices in the
hospital and clinical environment.
We also
manufacture and sell our proprietary HydroThane polymers to medical device
manufacturers that are evaluating HydroThane for use in their
products. HydroThane is a thermoplastic, water-absorbing,
polyurethane elastomer possessing properties which we believe make it well
suited for the complex requirements of a variety of catheters. In
addition to its physical properties, we believe HydroThane exhibits an inherent
degree of bacterial resistance, clot resistance and
biocompatibility. When hydrated, HydroThane has elastic properties
similar to living tissue.
We also
manufacture specialty hydrophilic polyurethanes that are primarily sold to
customers as part of an exclusive arrangement. Specifically, these
customers are supplied tailored, patented hydrophilic polyurethanes in exchange
for multi-year, royalty-bearing exclusive supply contracts.
The
development and manufacture of our products are subject to good laboratory
practices (“GLP”) and quality system regulations (“QSR”) requirements prescribed
by the Food and Drug Administration (“FDA”) and other standards prescribed by
the appropriate regulatory agency in the country of use. There can be
no assurance that we will be able to obtain or manufacture products in a timely
fashion at acceptable quality and prices, that we or any suppliers can comply
with GLP or the QSR, as applicable, or that we or such suppliers will be able to
manufacture an adequate supply of products.
ChronoFilm
is a registered trademark of PMI. ChronoFlex is our registered
trademark. ChronoThane, ChronoPrene, HydroThane, and PolyBlend are
our tradenames. CardioPass is our trademark.
We own or
license 4 patents relating to our vascular graft manufacturing and polymer
technology and products. While we believe our patents secure our
exclusivity with respect to certain of our technologies, there can be no
assurance that any patents issued would afford us adequate protection against
competitors which sell similar inventions or devices, nor can there be any
assurance that our patents will not be infringed upon or designed around by
others. However, we intend to vigorously enforce all patents issued
to us.
In June
2007, we filed for a U.S. patent on our proprietary antimicrobial formulation
for ChronoFlex. Current technology in the marketplace uses antibiotic
drugs. The antimicrobial component of our polymers has been designed
to be non-leaching as a result of the polymerization process. In
addition, PMI has granted us an exclusive, perpetual, worldwide, royalty-free
license for the use of one polyurethane patent and related technology in the
field consisting of the development, manufacture and sale of implantable medical
devices and biodurable polymer material to third parties for the use in medical
applications (the “Implantable Device and Materials Field”). PMI also
owns, jointly with Thermedics, Inc., an unrelated company that manufactures
medical grade polyurethane, the ChronoFlex polyurethane patents relating to the
ChronoFlex technology (the “Joint Technology”). PMI has granted us a
non-exclusive, perpetual, worldwide, royalty-free sublicense of these patents
for use in the Implantable Devices and Materials Field.
Development
Blood is
pumped from the heart throughout the body via arteries. Blood is
returned to the heart at relatively low pressure via veins, which have thinner
walls than arteries and have check valves, which force blood to move in one
direction. Because a specific area of the body is often supplied by a
single main artery, rupture, severe narrowing or occlusion of the artery
supplying blood to that area is likely to cause an undesirable or catastrophic
medical outcome.
-16-
Vascular
grafts are used to replace or bypass occluded, damaged, dilated or severely
diseased arteries and are sometimes used to provide access to the bloodstream
for patients undergoing hemodialysis treatments. Existing small bore
graft technologies suffer from a variety of disadvantages in the treatment of
certain medical conditions, depending upon the need for biodurability,
compliance (elasticity) and other characteristics necessary for long-term
interface with the human body.
Coronary
artery bypass graft (“CABG”) surgery is performed to treat the impairment of
blood flow to portions of the heart. CABG surgery involves the
addition of one or more new vessels to the heart to re-route blood around
blocked coronary arteries.
According
to the 2004 report of the American Heart Association, approximately 500,000
bypass operations were performed in the U.S. in 2003. We estimate
approximately 750,000 CABG procedures were performed worldwide during the same
year. We believe approximately 20% of these CABG procedures were
performed on patients who had previously undergone bypass surgery, and that the
number of repeat procedures will continue to increase as a percentage of
procedures performed, even though the overall number of bypass procedures is
declining. Currently, approximately 70% of CABG procedures are
performed utilizing the saphenous vein.
We have
developed our 4 mm and 5 mm SynCAB grafts using specialized ChronoFlex
polyurethane materials designed to provide improved performance in the treatment
of arterial disorders. The grafts have three layers, similar to
natural arteries, and are designed to replicate the physical characteristics of
human blood vessels.
We
believe the SynCAB graft may be used initially to provide an alternative to
patients with insufficient or inadequate native vessels for use in bypass
surgery as a result of repeat procedures, trauma, disease or other
factors. We believe, however, that the SynCAB graft may ultimately be
used as a substitute for native saphenous veins, thus avoiding the trauma and
expense associated with the surgical harvesting of the vein.
We
initiated plans in fiscal 2006 to obtain European marketing
approvals. In May 2006, we received written acknowledgement from our
Notified Body in Europe that our clinical trial plan had been
accepted. The planned 10 patient clinical trial protocol allows
surgeons to intraoperatively decide to use the SynCAB instead of suboptimal
autologous vessels. The patient enrollment process is not an easy one
for a long-term surgical implant that is designed to improve outcomes for very
sick patients. Prior to each surgery, our investigators must receive
patient consent for participation in the trials. The surgeon then
decides at the time of the operation whether or not to utilize the
graft. Patients will be followed for 90 days and assessed for graft
patency and quality of life measures. Following the completed
clinical trial, we intend to submit the analyzed data to the Notified Body in
support of our application for CE Mark.
We have
hired a European-based contract research organization (“CRO”) to assist in
management of the entire clinical process. The CRO helped us review
possible sites in the European Union for the selection of investigators to
follow the approved protocols. Our first site was selected and a
Principal Investigator was engaged to conduct the trial and provide the
necessary data for the clinical research report. All necessary
approvals from the Ethics Committee were also received. Our Principal
Investigator has participated in a wide range of cardiovascular clinical
trials. Achievement of this important milestone fits within our
planned timeline and is an important benchmark in the commencement and
completion of the clinical trial. We have undergone a rigorous review
by the Ministry of Health and completed paperwork for an import license, and
prepared for patient selection. In January 2007, we announced the
initiation of these clinical trials with the first patient surgically implanted
in March 2007.
In April
2008, we announced a second site for the CardioPass trial. A second
site for the 10-patient clinical trial offers a larger potential pool of
patients to be reviewed for graft implant eligibility for the
trial.
The
objective of the trial is to work towards obtaining European CE Marking for the
CardioPassTM. Approval
by the Notified Body and obtaining CE Marking would allow CardioPassTM to be
marketed and sold in all European Union countries as well as other countries
worldwide that accept this approval for registration within those
countries.
We have
applied for and are awaiting for a Certificate of Product Export from the U.S.
Food and Drug Administration that will allow us to send 4 mm grafts to the
site.
-17-
Manufacturing
Operations
We
manufacture polymers at our Massachusetts facility.
Critical
Accounting Policies
Our
significant accounting policies are summarized in Note A to our consolidated
financial statements included in Item 7 of our Annual Report on Form 10-K for
the fiscal year ended March 31, 2008. However, certain of our
accounting policies require the application of significant judgment by our
management, and such judgments are reflected in the amounts reported in our
consolidated financial statements. In applying these policies, our
management uses its judgment to determine the appropriate assumptions to be used
in the determination of estimates. Those estimates are based on our
historical experience, terms of existing contracts, our observance of market
trends, information provided by our strategic partners and information available
from other outside sources, as appropriate. Actual results may differ
significantly from the estimates contained in our consolidated financial
statements. There has been no change
to our critical accounting policies through the fiscal quarter ended June 30,
2008.
Results
of Operations
Three Months Ended June 30,
2008 vs. June 30, 2007
Revenues
The
following table presents revenues for the three months ended June
30,
|
2008
|
2007
|
|||||||||||||||
|
(in
thousands)
|
Revenues
|
%
of Revenues
|
Revenues
|
%
of Revenues
|
||||||||||||
|
Product
sales
|
$ | 313 | 35.8 | % | $ | 354 | 41.5 | % | ||||||||
|
Royalties
and development fees
|
561 | 64.2 | % | 498 | 58.5 | % | ||||||||||
| $ | 874 | 100.0 | % | $ | 852 | 100.0 | % | |||||||||
Product
sales of our biomaterials for the three months ended June 30, 2008 were $313,000
as compared with $354,000 for the comparable prior year period, a decrease of
$41,000, or 11.6%. The decrease in product sales is primarily a
result of fewer biomaterial shipments to existing customers and larger shipments
to a single customer in the prior-year period. As part of the
Company’s re-branding efforts launched in June 2008, biomaterials will be
categorized into standard and customized products to better meet customer
specifications for biomaterials properties and characteristics.
Royalties
and development fees for the three months ended June 30, 2008 were $561,000 as
compared with $498,000 for the comparable prior year period, an increase of
$63,000 or 12.7%. We have agreements to license our proprietary
biomaterial technology to medical device manufacturers. Royalties are
earned when these manufacturers sell medical devices which use our biomaterials;
accordingly, the increase in royalties during the three months ended June 30,
2008 is a result of increased shipments of existing and new products to one
manufacturer.
Gross
Margin
The
following table presents gross margin for the three months ended June
30,
|
2008
|
2007
|
|||||||||||||||
|
(in
thousands)
|
Gross
Margin
|
%
of Revenues
|
Gross Margin
|
%
of Revenues
|
||||||||||||
|
Gross
margin
|
$ | 527 | 60.3 | % | $ | 677 | 79.5 | % | ||||||||
Gross
margin (including royalty and development fees) for the three months ended June
30, 2008 was $527,000, or 60.3% of revenues, compared with $677,000, or 79.5% of
revenues, for the comparable prior year period. Gross margin
(excluding royalty and development fees) for the three months ended June 30,
2008 was ($34,000), or (10.9%) of revenues, compared with $179,000, or 50.6% of
revenues, for the comparable prior year period. The decrease in gross
margin is primarily due to i) scrap incurred in the production of biomaterials,
and ii) increased overhead costs resulting from additional staffing and other
costs intended as an investment to improve our manufacturing processes and
quality systems, in the three months ended June 30, 2008.
-18-
Research,
Development and Regulatory Expenses
The
following table presents research and development expenses for the three months
ended June 30,
|
(in
thousands)
|
2008
|
%
of Revenues
|
2007
|
%
of Revenues
|
||||||||||||
|
Research,
development and regulatory
|
$ | 183 | 20.9 | % | $ | 230 | 27.0 | % | ||||||||
Research,
development and regulatory expenses for the three months ended June 30, 2008
were $183,000 as compared with $230,000 for the comparable prior year period, a
decrease of $47,000 or 20.4%. Our research and development efforts
are focused on developing new applications for our
biomaterials. Research and development expenditures consisted
primarily of the salaries of full time employees and related expenses, and are
expensed as incurred. We added staff, primarily polymer chemists, to
support development activities in the three months ended June 30,
2008. These individuals work on a variety of projects, including
production support. During the three months ended June 30, 2007,
research, development and regulatory expenses included approximately $86,000 of
salary paid to the former Chairman and CEO of the Company who was providing
services as a special science advisor.
Selling,
General and Administrative Expenses
The
following table presents selling, general and administrative expenses for the
three months ended June 30,
|
(in
thousands)
|
2008
|
%
of Revenues
|
2007
|
%
of Revenues
|
||||||||||||
|
Selling,
general and administrative
|
$ | 924 | 105.7 | % | $ | 550 | 64.6 | % | ||||||||
Selling, general and administrative expenses for the three months ended June 30, 2008 were $924,000 as compared with $550,000 for the comparable prior year period, an increase of $374,000 or 68.0%. The increase is attributable, in part, to incremental legal, professional and recruiting fees; the hire of our first-time Global Sales Director for materials science and significant expansion of marketing and branding initiatives.
Interest
Income
Interest
income for the three months ended June 30, 2008 was $21,000, as compared with
$8,000 for the comparable prior year period, an increase of $13,000 or
162.5%. The increase is primarily due to an increase in interest
income for the three months ended June 30, 2008 as a result of higher average
cash and cash equivalent balances in the three months ended June 30,
2008.
Net
Loss from Discontinued Operations
During
the three months ended June 30, 2008, net loss from discontinued operations was
$1,733,000; and was composed of i) loss from discontinued operations of
approximately $555,000 due to the sales of Gish and CDT and ii) loss on sale of
Gish of approximately $1.2 million.
Liquidity
and Capital Resources
As
previously reported by the Company, in late 2007 the Company was advised by
Medos that Medos might assert certain indemnity claims against the Company
relating to certain representations and warranties up to the full amount of the
$1.0 million escrow balance established under the Gish Purchase
Agreement. In addition, Medos advised the Company that it might seek
a purchase price adjustment for the period March 31, 2007 through July 6, 2007,
as provided in the Gish Purchase Agreement. The Company advised Medos
that it believed any such claims, if made, would be without merit.
-19-
On June
30, 2008, Medos formally notified the Company of its claims in accordance with
the procedure set forth in the Gish Purchase Agreement. Medos claims
aggregate approximately $4.2 million and include allegations that (i) the
Company breached certain representations and warranties in the Gish Purchase
Agreement, including certain representations and warranties concerning the
financial condition of Gish as of March 31, 2007, (ii) the Company is liable for
the severance obligations related to two key Gish
employees terminated by Medos subsequent to the acquisition date, and (iii).
Medos is entitled to a purchase price adjustment for the period between March
31, 2007 and July 6, 2007.
The
Company has refuted the claims asserted by Medos and the facts and circumstances
upon which they are based and intends to vigorously pursue the disposition of
those claims. In that regard, on July 25, 2008, as provided in the
Gish Purchase Agreement, the Company initiated an arbitration proceeding with
the American Arbitration Association in New York, New York, and served its
arbitration demand upon Medos that same day. The arbitration demand
seeks a declaration that the amounts claimed by Medos are without merit and
unsupportable. Medos has not yet responded to the
demand. Although the Company denies the claims asserted by Medos, an
adverse finding of liability could have a material impact on the
Company. Until these claims by Medos are resolved, the $1.0 million
of purchase price from the sale of Gish will remain in escrow.
As of
June 30, 2008, we had cash and cash equivalents of $5.6 million, a decrease of
$1.1 million when compared with a balance of $6.7 million as of March 31,
2008.
During
the three months ended June 30, 2008, we had net cash outflows of $1.0 million
from operating activities of continuing operations as compared to net cash
inflows from continuing operations of approximately $89,000 for the comparable
prior year period. The approximate $1.1 million increase in net cash
outflows used in operating activities of continuing operations during the three
months ended June 30, 2008, as compared to the comparable prior year period, was
primarily a result of the $464,000 increase in net loss from continuing
operations and cash used from increases in accounts receivable-trade and
inventories and a decrease in accounts payable and accrued
expenses.
During
the three months ended June 30, 2008, we had net cash outflows of $88,000 from
investing activities of continuing operations primarily due to net purchases of
approximately $54,000 of property, plant and equipment.
At June
30, 2008, we had no debt. We believe our June 30, 2008 cash position
will be sufficient to fund our working capital and research and development
activities for at least the next twelve months.
Our
future growth may depend upon our ability to raise capital to support research
and development activities and to market and sell our vascular graft technology,
specifically the coronary artery bypass graft. We may require
substantial funds for further research and development, future pre-clinical and
clinical trials, regulatory approvals, resolution of the indemnity claims by
Medos, establishment of commercial-scale manufacturing capabilities, and the
marketing of our products. Our capital requirements depend on
numerous factors, including but not limited to, the progress of its research and
development programs; the progress of pre-clinical and clinical testing; the
time and costs involved in obtaining regulatory approvals; the cost of filing,
prosecuting, defending and enforcing any intellectual property rights; competing
technological and market developments; changes in our development of
commercialization activities and arrangements; and the purchase of additional
facilities and capital equipment.
With
respect to the Exchange and Venture Agreement with CorNova, we have no
additional obligation to contribute assets or additional common stock nor to
assume any liabilities or to fund any losses that CorNova may
incur.
Off-Balance
Sheet Arrangements
As of
June 30, 2008, we did not have any off-balance sheet arrangements that have, or
are reasonably likely to have, a current or future material effect on our
consolidated financial condition, results of operations, liquidity, capital
expenditures or capital resources.
New
Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements—an Amendment of ARB No.
5.” The pronouncement establishes accounting and reporting
standards pertaining to ownership interests in subsidiaries held by parties
other than the parent, the amount of net income attributable to the parent and
to the non-controlling interest, changes in a parent's ownership interest, and
the valuation of any retained non-controlling equity investment when a
subsidiary is deconsolidated. The pronouncement also establishes
disclosure requirements that identify and distinguish between the interests of
the parent and the interests of the non-controlling owners. SFAS No.
160 is effective for fiscal years beginning on or after December 15,
2008. The Company does not believe SFAS No. 160 will have a material
impact on its results of operations or financial position.
-20-
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” The current hierarchy under Generally
Accepted Accounting Principles in the United States (“GAAP”), as set forth in
the American Institute of Certified Public Accountants (“AICPA”) Statement on
Auditing Standards No. 69, “The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles,” has been criticized because
(1) it is directed to the auditor rather than the entity, (2) it is complex, and
(3) it ranks FASB Statements of Financial Accounting Concepts. The
FASB believes that the GAAP hierarchy should be directed to entities because it
is the entity (not its auditor) that is responsible for selecting accounting
principles for financial statements that are presented in conformity with
GAAP. Accordingly, the FASB concluded that the GAAP hierarchy should
reside in the accounting literature established by the FASB and is issuing this
Statement to achieve that result. This Statement is effective 60 days
following the SEC's approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, “The Meaning of Present Fairly
in Conformity With
Generally Accepted Accounting Principles.” The Company does
not believe that the adoption of SFAS No. 162 will have a material impact on its
results of operations, financial position or cash flow.
|
Quantitative
and Qualitative Disclosures About Market
Risk.
|
Not
required pursuant to Item 305(e) of Regulation S-K.
|
Controls
and Procedures
|
The
certificates of the Company’s chief executive officer and chief financial
officer attached as Exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Q
include, in paragraph 4 of such certifications, information concerning the
Company’s disclosure controls and procedures, and internal control over
financial reporting. Such certifications should be read in
conjunction with the information contained in this Item 4T for a more complete
understanding of the matters covered by such certifications.
Disclosure
Controls and Procedures
The
Company’s management, with the participation of the Company’s chief executive
officer and chief financial officer, evaluated the effectiveness of the
Company’s disclosure controls and procedures as of June 30, 2008. The
term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), means controls and other procedures of a company that are designed to
ensure that information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act is recorded, processed,
summarized, and reported, within the time periods specified in the SEC’s rules
and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by a company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the company’s management,
including its chief executive officer and chief financial officer, as
appropriate, to allow timely decisions to be made regarding required
disclosure. It should be noted that any system of controls and
procedures, however well designed and operated, can provide only reasonable, and
not absolute, assurance that the objectives of the system are met and that
management necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Based on the
evaluation of the Company’s disclosure controls and procedures as of June 30,
2008, the Company’s chief executive officer and chief financial officer
concluded that, as of such date, the Company’s disclosure controls and
procedures were effective at the reasonable assurance level.
Changes
in Internal Control Over Financial Reporting
There
were no changes to the Company’s internal control over financial reporting
during the quarter ended June 30, 2008 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
-21-
PART
II. OTHER
INFORMATION
|
Legal
Proceedings
|
As
previously reported by the Company, in late 2007 the Company was advised by
Medos that Medos might assert certain indemnity claims against the Company
relating to certain representations and warranties up to the full amount of the
$1.0 million escrow balance established under the Gish Purchase
Agreement. In addition, Medos advised the Company that it might seek
a purchase price adjustment for the period March 31, 2007 through July 6, 2007,
as provided in the Gish Purchase Agreement. The Company advised Medos
that it believed any such claims, if made, would be without merit.
On June
30, 2008, Medos formally notified the Company of its claims in accordance with
the procedure set forth in the Gish Purchase Agreement. Medos claims
aggregate approximately $4.2 million and include allegations that (i) the
Company breached certain representations and warranties in the Gish Purchase
Agreement, including certain representations and warranties concerning the
financial condition of Gish as of March 31, 2007, (ii) the Company is liable for
the severance obligations related to two key Gish
employees terminated by Medos subsequent to the acquisition date, and (iii)
Medos is entitled to a purchase price adjustment for the period between March
31, 2007 and July 6, 2007.
The
Company has refuted the claims asserted by Medos and the facts and circumstances
upon which they are based and intends to vigorously pursue the disposition of
those claims. In that regard, on July 25, 2008, as provided in the
Gish Purchase Agreement, the Company initiated an arbitration proceeding with
the American Arbitration Association in New York, New York, and served its
arbitration demand upon Medos that same day. The arbitration demand
seeks a declaration that the amounts claimed by Medos are without merit and
unsupportable. Medos has not yet responded to the
demand. Although the Company denies the claims asserted by Medos, an
adverse finding of liability could have a material impact on the
Company. Until these claims by Medos are resolved, the $1 million of
purchase price from the sale of Gish will remain in escrow.
We are
not a party to any other legal proceedings, other than ordinary routine
litigation incidental to our business, which we believe will not have a material
affect on our financial position or results of operations.
|
Item
1A.
|
Risk
Factors
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
None.
|
Defaults
Upon Senior Securities
|
None.
|
Submission
of Matters to a Vote of Security
Holders
|
None.
|
Other
Information
|
None.
|
Item
6.
|
Exhibits
|
Exhibit
No.
|
31.1
|
Certification
of Principal Executive Officer pursuant to Section 3.02 of the
Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Certification
of Principal Financial Officer pursuant to Section 3.02 of the
Sarbanes-Oxley Act of 2002.
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
-22-
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
CardioTech
International, Inc.
By: /s/ Michael F.
Adams
Michael
F. Adams
President
& Chief Executive Officer
By: /s/ Eric G.
Walters
Eric G.
Walters
Vice
President & Chief Financial Officer
Dated: August
13, 2008
-23-