<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From __________ to __________.
Commission File Number: 0-27120
Kensey Nash Corporation
(Exact name of registrant as specified in its charter)
Delaware 36-3316412
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
Marsh Creek Corporate Center, 55 East Uwchlan Avenue, Suite 204, Exton,
Pennsylvania 19341
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (610) 524-0188
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No X
--- ---
As of May 10, 1996, there were outstanding 7,156,493 shares of
Common Stock, par value $.001, of the registrant.
1
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KENSEY NASH CORPORATION
QUARTER ENDED MARCH 31, 1996
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
as of March 31, 1996 (Unaudited) and
June 30, 1995............................... 3
Condensed Consolidated Statements of
Operations for the three months and nine
months ended March 31, 1996 and 1995
(Unaudited)................................. 4
Condensed Consolidated Statements of Cash
Flows for the nine months ended March 31,
1996 and 1995 (Unaudited)................... 5
Notes to Condensed Consolidated Financial
Statements (Unaudited)...................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............. 16
SIGNATURES ................................................ 17
2
<PAGE>
PART I - FINANCIAL INFORMATION
Kensey Nash Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
Item 1. Financial Statements
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
--------------- ---------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................ $ 7,355,073 $ 7,866
Short-term investments............................... 7,068,759
Accounts receivable (including approximately
$34,456 and $18,000 at March 31, 1996 and
June 30, 1995, respectively, due from
employees)......................................... 815,779 162,993
Inventory............................................ 508,361 436,055
Prepaid expenses, accrued interest and other......... 331,257 75,750
------------ ------------
Total current assets.............................. 16,079,229 682,664
------------ ------------
Property, plant and equipment, at cost:
Leasehold improvements............................... 752,409 504,813
Machinery, furniture and equipment................... 1,674,517 1,531,984
------------ ------------
Total............................................. 2,426,926 2,036,797
Accumulated depreciation............................. (1,214,690) (974,393)
------------ ------------
Total property, plant and equipment............... 1,212,236 1,062,404
------------ ------------
Other assets:
Restricted investments............................... 2,841,000
Leased property under capital leases, less
accumulated amortization of $80,398 and $42,751 at
March 31, 1996 and June 30, 1995, respectively..... 138,428 154,568
Noncompete agreement, less accumulated amortization
of $83,350 and $68,347 at March 31, 1996 and
June 30, 1995, respectively........................ 16,650 31,653
------------ ------------
Total other assets................................ 2,996,078 186,221
------------ ------------
Total................................................ $ 20,287,543 $ 1,931,289
============ ============
Liabilities and stockholders' equity (deficiency)
Current liabilities:
Accounts payable..................................... $ 926,627 $ 982,151
Accrued expenses..................................... 647,496 371,864
Current portion of notes payable and line of
credit............................................. 6,195,389 11,136,385
Current portion of obligations under capital lease... 60,203 57,276
Advances from American Home Products and others...... 52,500 2,179,022
Deferred income...................................... 274,839
------------ ------------
Total current liabilities......................... 8,157,054 14,726,698
------------ ------------
Deferred compensation (including $2,250,447 due to
officers and directors at June 30, 1995.............. 3,192,262
Obligations under capital leases....................... 63,749 87,921
Notes payable and line of credit, long-term portion.... 19,714
------------ ------------
Total liabilities................................. 8,220,803 18,026,595
------------ ------------
Commitments and Contingencies (Note 5)
Stockholders' equity (deficiency):
Preferred stock, $.001 par value, 100,000 shares
authorized, no shares issued or outstanding at
March 31, 1996 and June 30, 1995...................
Common Stock, $.001 par value, 25,000,000 shares
authorized, 7,156,493 and 4,000,000 shares issued
and outstanding at March 31, 1996 and June 30, 1995,
respectively....................................... 7,156 4,000
Capital in excess of par value......................... 33,815,216 4,000
Accumulated deficit.................................... (21,755,632) (15,906,010)
------------ ------------
Total................................................ 12,066,740 (15,898,010)
Less: Notes receivable_other.......................... (197,296)
------------ ------------
Total stockholders' equity (deficiency).............. 12,066,740 (16,095,306)
------------ ------------
Total.................................................. $ 20,287,543 $ 1,931,289
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
Kensey Nash Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------- -------------------------
1996 1995 1996 1995
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
Net sales............................ $ 104,960 $ 590,742 $ 883,441 $ 975,200
Research and development............. 333,755 106,376 1,215,783 416,552
Milestone fees....................... 2,700,000
Royalty income....................... 70,560
----------- ----------- ------------ -----------
Total revenues.................... 438,715 697,118 2,169,784 4,091,752
----------- ----------- ------------ -----------
Operating costs and expenses:
Cost of products sold................ 177,610 358,094 1,141,700 844,781
Research and development............. 945,054 634,591 2,692,305 2,570,075
Selling, general and administrative.. 364,437 686,923 1,642,668 1,360,045
Deferred compensation, officers and
directors........................... 260,713 1,493,576 696,487
Product return (Note 6).............. 573,961 573,961
----------- ----------- ------------ -----------
Total operating costs and
expenses........................ 2,061,062 1,940,321 7,544,210 5,471,388
----------- ----------- ------------ -----------
Loss from operations.................... (1,622,347) (1,243,203) (5,374,426) (1,379,636)
----------- ----------- ------------ -----------
Other income (expense):
Interest expense..................... (160,203) (285,130) (804,959) (780,089)
Interest income...................... 240,574 31,365 274,249 92,659
Other................................ 34,230 848 55,514 16,056
----------- ----------- ------------ -----------
Total other income (expense)--
net............................. 114,601 (252,917) (475,196) (671,374)
----------- ----------- ------------ -----------
Net loss................................ (1,507,746) (1,496,120) (5,849,622) (2,051,010)
=========== =========== ============ ===========
Loss per common share................... $(.21) $(.32) $(1.06) $(.45)
=========== =========== ============ ===========
Weighted average common shares
outstanding............................ 7,156,493 4,606,437 5,520,605 4,606,437
=========== =========== ============ ===========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
Kensey Nash Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
-----------------------------
1996 1995
-------------- -------------
<S> <C> <C>
Operating activities:
Net loss................................ $ (5,849,622) $(2,051,010)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization.......... 300,369 220,633
Loss on disposal of property, plant
and equipment......................... 4,175
Deferred compensation.................. 1,728,110 1,024,247
Interest expense not requiring cash.... 461,226 771,740
Changes in assets and liabilities which
provided (used) cash:
Accounts receivable.................... (652,786) (17,733)
Prepaid expenses, accrued interest and
other current assets.................. (255,507) 240
Inventory.............................. (72,306) (134,118)
Accounts payable and accrued expenses.. 220,108 (504,646)
------------ -----------
Net cash used in operating activities.... (4,116,233) (690,647)
------------ -----------
Investing activities:
Purchase of investments................. (9,909,759)
Additions to property, plant and
equipment.............................. (401,726) (455,004)
Notes receivable - other................ (92,179)
Redemption of short-term investment..... 31,575
Insurance proceeds on property and
equipment............................ 274,839
------------ -----------
Net cash used in investing activities.... (10,036,646) (515,608)
------------ -----------
Financing activities:
Principal payments under capital leases. (42,752) (21,894)
Repayments of long-term debt............ (6,769,263)
Proceeds from notes payable and line of
credit................................. 1,037,327 7,805
Advances................................ 444,656 1,716,994
Advance repayments................... (2,261,178) (500,000)
Net proceeds from IPO................ 29,091,296
------------ -----------
Net cash provided by financing
activities............................. 21,500,086 1,202,905
------------ -----------
Increase (decrease) in cash and cash
equivalents............................ 7,347,207 (3,350)
Cash and cash equivalents, beginning of
period................................. 7,866 3,350
------------ -----------
Cash and cash equivalents, end of period $ 7,355,073 $ 0
============ ===========
Supplemental disclosure of cash flow
information:
Cash paid during the period for
interest............................ $ 343,733 $ 8,349
============ ===========
</TABLE>
Supplemental Disclosure of Non Cash Transactions:
During the three month period ending March 31, 1996, a capital lease
obligation of $21,507 was incurred when the Company entered into a lease
for new equipment.
During the three month period ending December 31, 1995, the Company
converted $310,000 of advances to borrowings under the line of credit.
On December 13, 1995, the Company canceled notes receivable in the amount
of $197,296 in exchange for cancellation of obligation to provide shares in
the same amount to officers under the Employee Stock Rights plan.
On December 13, 1995, the Company issued 456,493 shares of Common Stock to
settle amounts due under the Employee Stock Rights plan in the amount of
$4,920,372.
See notes to condensed consolidated financial statements.
5
5
<PAGE>
KENSEY NASH CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1--Condensed Consolidated Financial Statements
Basis of Presentation
The condensed consolidated balance sheet at June 30, 1995 has been
condensed from the audited balance sheet at that date. The condensed
consolidated balance sheet at March 31, 1996, the condensed consolidated
statements of operations for the nine and three months ended March 31, 1996
and 1995 and the condensed consolidated statements of cash flows for the
nine months ended March 31, 1996 and 1995 have been prepared by Kensey Nash
Corporation (the Company) and have not been audited by the Companys
Independent Auditors. In the opinion of management, all adjustments (which
include only normal recurring adjustments and the adjustments described in
Notes 2, 6, 7) necessary to present fairly the financial position, results
of operations and cash flows at March 31, 1996 and for all periods
presented have been made.
Certain information and note disclosures normally included in the Companys
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Companys June 30,
1995 consolidated financial statements filed with the Securities and
Exchange Commission on Form S-1. The results of operations for the periods
ended March 31, 1996 are not necessarily indicative of operating results
for the full year.
Net Loss Per Share
For the three and nine months ended March 31, 1995, and the period from
July 1, 1995 through December 12, 1995, the weighted average common shares
outstanding have been increased by 446,437 shares, which is the number of
Common Stock equivalents issued within one year of the Companys initial
public offering (see Note 2), with exercise or issue prices below the
initial public offering price. No adjustments have been made for Common
Stock equivalents other than the above shares, as such Common Stock
equivalents had an antidilutive effect on the loss per share.
Statement of Cash Flows
For purposes of reporting cash flows, all highly liquid investments with
original maturities of three months or less are considered cash
equivalents.
Investments
Investments at March 31, 1996 consist of short-term Certificates of Deposit
and U.S. Treasury Bills. Such investments have been classified as available
for sale securities except for those pledged as collateral which are
included in restricted investments (see Note 5). As of March 31, 1996, the
fair market value of all investments approximates original cost.
New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121. Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, which will become effective in the Companys 1997 fiscal year. This
statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The resultant impairment, if
any, would be measured based on the fair value of the asset. The Company
believes that the adoption of SFAS No. 121 will not have a material effect
on the Companys results of operations or financial position.
6
<PAGE>
SFAS No. 123, Accounting for Stock-Based Compensation which must be adopted
in the Companys 1997 fiscal year, includes certain elective provisions
which, if followed, would significantly change the way the Company measures
compensation under its stock based compensation plans. However, the Company
has elected to continue to measure compensation using the method prescribed
by APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No.
123, when adopted, will not have a significant effect on the financial
position or results of operations of the Company but will require expanded
disclosure regarding the Companys stock based compensation plans.
Note 2--Public Offering
On December 13, 1995, the Company sold 2,700,000 shares of Common Stock in
an initial public offering. The net proceeds from the sale of such Common
Stock (approximately $29.1 million) have been/are to be used primarily for
research and development, including clinical trials; expansion of the
Companys manufacturing capabilities; repayment of certain indebtedness (see
Note 4); and working capital and general corporate purposes.
In connection with the initial public offering, the Companys Board of
Directors authorized a one-for-two reverse stock split to shareholders,
effective December 6, 1995, and increased the authorized number of shares
to 25,000,000. Accordingly, all share and per share amounts have been
retroactively restated.
An additional charge of approximately $1.2 million was recorded in the nine
months ended March 31, 1996 resulting from the settlement at the offering
of the Companys liability under its stock appreciation plans (for each
stock appreciation right issued the excess of the gross public offering
price per share over the initial value of $8.00 per share); phantom stock
plans (for each share of Common Stock issued, the excess of the fair value
per share over the value per share previously reflected which is $10.80 for
vested units and $0.00 for unvested units); and for its stock awards
($200,000) (together, the Employee Stock Rights). In conjunction therewith,
456,493 shares of Common Stock were issued to settle the awards above and
certain notes receivable.
The related impact on certain components of stockholders equity
(deficiency) are as follows:
<TABLE>
<CAPTION>
Common Shares
------------------------ Capital in
Number of Shares Amount Excess of Par
----------------------------------------------
<S> <C> <C> <C>
June 30, 1995 4,000,000 $4,000 $ 4,000
Issuance of Shares In Connection with
Initial Public Offering 2,700,000 2,700 28,891,300
Settlement of Employee Stock Rights 456,493 456 4,919,916
--------------------------------------------
March 31, 1996 7,156,493 $7,156 $33,815,216
============================================
</TABLE>
7
<PAGE>
Note 3--Inventory
Inventory primarily includes the cost of material utilized in the
processing of the Companys products. Inventory is as follows:
<TABLE>
<CAPTION>
March 31, 1996 June 30, 1995
-------------- -------------
<S> <C> <C>
Raw Materials $507,688 $414,168
Work in Process 673 21,887
-------------- -------------
Total $508,361 $436,055
============== =============
</TABLE>
Note 4--Notes Payable and Line of Credit
Amounts outstanding under notes payable and the Companys credit agreement
with American Home Products (AHP) (the Credit Agreement) are shown in the
following table.
<TABLE>
<CAPTION>
March 31, 1996 June 30, 1995
-------------- -------------
<S> <C> <C>
Credit Agreement $6,195,168 $4,722,047
Investor Notes 0 6,411,900
Other 221 22,152
------------- ------------
Total 6,195,389 11,156,099
Current portion (6,195,389) (11,136,385)
Long-term notes payable and line of
credit $0 $19,714
============= ============
</TABLE>
Credit Agreement
At March 31, 1996 and June 30, 1995, the amount available under the Credit
Agreement was $5,000,000 and $4,000,000, respectively. Debt outstanding
under the Credit Agreement includes accrued interest of $1,195,168 and
$722,047 at March 31, 1996 and June 30, 1995, respectively. Interest
accrues at a rate of prime plus 2% (10.25% at March 31, 1996 and 11% at
June 30, 1995) and is payable at maturity. Under the terms of the Credit
Agreement, the Company may not pay any cash dividends. Patent rights for
the Angio-Seal Device are pledged as collateral. Under the terms of the
Credit Agreement, AHP may offset fiscal 1996 milestones and advances
against amounts due under the Credit Agreement at March 31, 1996 and June
30, 1995. Loans made under this facility mature at the sooner of a receipt
of premarket approval for the Angio-Seal from the Food and Drug
Administration or December 31, 1996. Accordingly, the Company has
classified this obligation as a current liability in its condensed
consolidated balance sheets at March 31, 1996 and June 30, 1995.
Investor Notes
Amounts outstanding at June 30, 1995 represent principal and accrued
interest due on notes held by former investors which were due in January
1995 (the Investor Notes). The Investor Notes were repaid in full during
December 1995.
8
<PAGE>
Note 5--Commitments and Contingencies
The Company entered into an agreement whereby the Company pledged
$2,841,000 in investments as collateral to secure certain bank loans to
employees which were used by such employees for the payment of taxes
incurred by such employees as the result of the receipt of Common Stock in
settlement of the Employee Stock Rights. In exchange for the Company
pledging collateral for such loans, each affected employee has pledged
their Common Stock as collateral to the Company. The balance outstanding on
such employee loans was $1,338,077 at March 31, 1996.
Note 6--Product Return
As previously announced, in January 1996, as a result of internal routine
testing, the Company and AHP withdrew two production lots from sale in
Europe, although neither the Company nor AHP had received any complaints
concerning the product. After further testing on the withdrawn production
lots, it was determined as a precautionary measure to withdraw the
remaining inventory at AHPs European facility. In connection with this
withdrawal, the Company recognized a pretax charge of $573,961 in its
condensed consolidated statements of operations during the three months
ended March 31, 1996. The Company has since taken corrective action to
resolve this issue and resumed production after the reconstruction of the
damaged facility. Management does not believe there will be any further
impact of such withdrawal on the consolidated financial statements of the
Company.
Note 7--Major Damage to Facility
On January 8, 1996, the Companys facility sustained significant damage from
a roof collapse resulting from a major snowstorm. The production of the
Companys products was halted until the destroyed facilities could be
reconstructed. Construction was completed in late March 1996 and
production resumed at such time.
The Company maintains insurance for both property damage and business
interruption. The policy providing the coverage is subject to a $1,000
deductible. During the three months ended March 31, 1996, the Company
incurred reimbursable losses and expenses of $235,345 relating to such
property damage. Such amounts have been offset by proceeds received from
the Companys insurance carrier and presented net in the selling, general
and administrative expense line item in the condensed consolidated
statements of operations. The Company also expended $274,839 for capital
expenditures to reconstruct the damaged facility and replace destroyed
equipment during the three months ended March 31, 1996. Proceeds received
for such capitalized items have been presented as deferred income in the
condensed consolidated balance sheet and will be earned when the related
claim is settled.
The Company has also incurred continuing fixed expenses during the
reconstruction period. Such amounts are covered expenses under the
Companys business interruption policy. As such, the Company has recorded
$287,742 in continuing fixed payroll costs and related benefits as a
receivable at March 31, 1996. The related cost of products sold, selling
general and administrative expense and research and development expense
have been offset in the condensed consolidated statements of operations by
$199,642, $29,073 and $59,027, respectively. Any amounts received in
excess of continuing fixed expenses will be recorded as income when the
related claim is settled.
The Company is pursuing additional recoveries under both its property
damage and business interruption policies related to the damage of the
facility. The full recovery amount of the insurance claim is still being
investigated and, as such, has not been filed with the carrier as of March
31, 1996.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company designs, develops and manufactures a proprietary line of
absorbable medical devices for the sealing of arterial punctures created during
diagnostic and therapeutic cardiovascular procedures such as angiography,
angioplasty, atherectomy and the placement of stents. The Companys proprietary
principal product, the 8 French (F) size Angio-Seal Device (the Angio-Seal) has
been designed to provide a safe, effective and rapid method of sealing arterial
punctures. The Companys goal is to replace the current standard of care, manual
compression, with the Angio-Seal by introducing a device which allows for faster
treatment, reduced procedure cost, reduction of certain puncture site
complications and increased patient comfort. The time required for manual
pressure generally ranges from 10 to 30 minutes and in some instances may take
several hours. The Angio-Seal is designed to take a trained physician less than
two minutes to place and eliminates the need for manual pressure following the
procedure. The Company is developing other sizes of the Angio-Seal, including 6F
and 10F sizes (together with Angio-Seal, the Angio-Seal Product Line), to
address broader market applications. In addition to the Angio-Seal Product Line,
the Company manufactures its proprietary collagen for use by third parties, and
is developing additional products related to its puncture closure technology,
including the Laparo-Seal, a device for closing punctures from laparoscopic
surgery. The Company is also developing rotary technology for application in
opening occluded bypass grafts.
The Company has a strategic relationship with American Home Products (AHP)
whereby AHP will manufacture and market the Angio-Seal Product Line worldwide.
The Angio-Seal received CE Mark approval from the European Economic Community
(EEC) in September 1995, which permits marketing of the Angio-Seal in EEC member
countries. The Angio-Seal is also approved for sale in Canada.
The regulatory approval necessary to market the Angio-Seal in the United
States is pending before the Food and Drug Administration (FDA). A facility
inspection at AHPs Bothell, Washington site by the FDA commenced on May 6, 1996.
The Company believes the inspection will be completed by the end of May,
however, there can be no assurance of the time frame or the outcome of the
inspection. The inspection must be completed prior to approval and the Companys
proprietary collagen must be approved by the FDA for use in the Angio-Seal. The
Company has submitted all of the requested information to the FDA.
As previously announced, on January 8, 1996, a portion of the roof at the
Companys Exton facility collapsed as a result of the record snowfall in the
Philadelphia area. The damage to the manufacturing areas, including the Companys
cleanroom, was extensive. Production at the Companys facility was halted until
the destroyed facilities could be reconstructed. Such construction was completed
in late March 1996 and shipments resumed in April 1996. The Company maintains
insurance for both property damage and business interruption.
10
<PAGE>
The Company has incurred reimbursable losses and expenses of $235,345
relating to such property damage. The Company has also made capital expenditures
of $274,839 in the quarter ended March 31, 1996 in order to reconstruct the
damaged facility and replace destroyed equipment. In addition, the Company
incurred continuing fixed expenses during the reconstruction period of $287,742.
The continuing fixed expenses are covered expenses under the Companys business
interruption policy. The Company expects that further expenses resulting from
this incident will be incurred in the fourth fiscal quarter of 1996. To date,
the Company has recovered $500,000 related to the aforementioned amounts from
its insurer. The Company is pursuing additional recoveries under both its
property damage and business interruption policies. The full recovery amount of
the insurance claim is still being investigated and, as such, has not been filed
with the carrier as of March 31, 1996.
As previously announced, in January 1996, the Company and AHP withdrew two
production lots from sale in Europe as a result of internal routine testing,
although neither the Company nor AHP had received any complaints concerning the
product. After further testing, it was determined as a precautionary measure to
withdraw the remaining inventory at AHPs European facility. The Company has
since taken corrective action to resolve this issue and resumed production after
the reconstruction of the damaged facility. In connection with this withdrawal,
the Company recognized a pretax charge of $573,961 in its condensed consolidated
statements of operations during the three months ended March 31, 1996.
Management does not believe there will be any further impact of such withdrawal
on the consolidated financial statements of the Company.
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31,
1995
Revenues for these periods consisted of net sales and research &
development revenue. There was no royalty income for the three months ended
March 31, 1996 due to the facility damage and related lack of Angio-Seal
production because of the withdraw of product. However, as the Company resumes
production and AHP continues to introduce the Angio-Seal in Europe, and if the
Angio-Seal receives FDA approval in the United States, the Company expects
royalty income to become a significant source of revenue. In addition, upon FDA
approval of the Angio-Seal, AHP is obligated to pay the Company $1.05 million as
a milestone payment and $3.0 million as an advance against future royalties.
Although sales of the Angio-Seal in Europe to date have been at an average price
of approximately $215 per device, due to the limited number of sales, the
Company believes this average price may not reflect the eventual prevailing
price for the Angio-Seal or AHPs ultimate pricing strategy. As was the case in
Europe, the selling price in the United States will be established by AHP. The
Company believes that AHP has not established a price for the Angio-Seal in the
United States. Royalty rates are based on volume of units sold and are
comparable in both the domestic and foreign licensing agreements with AHP.
Revenues decreased 37% to $438,715 in the three months ended March 31, 1996
from $697,118 in the three months ended March 31, 1995. Net sales of products
decreased 82% to $104,960 in the three months ended March 31, 1996 from $590,742
in the three months ended March 31, 1995. This decrease is a result of the
Angio-Seal being unavailable for sale in Europe in the three months ended
March 31, 1996. Research and development revenue increased to $333,755 in the
three months ended March 31, 1996 from $106,376 in the three months ended
March 31, 1995. This increase relates to contract research and development
from AHP for additional sizes of and product enhancements to the Angio-Seal.
Cost of products sold decreased 50% to $177,610 in the three months ended
March 31, 1996 from $358,094 in the three months ended March 31, 1995. This
decrease is primarily due to a $200,000 insurance recovery related to continuing
fixed expenses incurred during the reconstruction period which offset the cost
of products sold for the three month period ending March 31, 1996. The negative
gross profit in the three months ended March 31, 1996 reflects the unabsorbed
fixed manufacturing costs associated with the production of Angio-Seal
subassemblies, anchors and collagen.
11
<PAGE>
Research and development expense, including regulatory and clinical
expense, increased 49% to $945,054 in the three months ended March 31, 1996 from
$634,591 in the three months ended March 31, 1995. This increase was primarily
due to an increase in personnel costs and consultant services in conjunction
with the development of the Angio-Seal, Laparo-Seal and rotary technology.
Furthermore, additional expenses were incurred to resolve the product withdrawal
issue. The Company expects research and development expense to continue at
recent levels as it develops additional sizes of the Angio-Seal, investigates
and develops new products, conducts clinical trials, seeks regulatory approval
for its products and implements manufacturing improvements related to the
collagen business.
Selling, general and administrative expense decreased 47% to $364,437 in
the three months ended March 31, 1996 from $686,923 in the three months ended
March 31, 1995. This decrease was primarily due to the recording of deferred
compensation in the quarter ended March 31, 1995. Since the initial public
offering in December 1995, no deferred compensation expense has been recorded.
Deferred compensation expense, officers and directors, decreased to zero in
the three months ended March 31, 1996 from $260,713 in the three months ended
March 31, 1995. This reflects the settlement of the Employee Stock Rights at the
initial public offering.
The Company has taken corrective action to resolve the aforementioned
product withdrawal issue and resumed production after the reconstruction of the
damaged facility. In connection with this withdrawal, the Company recognized a
pretax charge of $573,961 in its condensed consolidated statements of operations
during the three months ended March 31, 1996. Management does not believe there
will be any further impact of such withdrawal on the consolidated financial
statements of the Company.
Interest expense decreased 44% to $160,203 in the three months ended March
31, 1996 from $285,130 in the three months ended March 31, 1995. This decrease
was due to the payment of the Investor Notes from the proceeds of the initial
public offering in December 1995 therefore eliminating that portion of interest
expense. Interest expense for the quarter ended March 31, 1996 relates to the
AHP Credit Agreement. Interest income increased 667% to $240,574 in the three
months ended March 31, 1996 from $31,365 in the three months ended March 31,
1995. The three months ended March 31, 1996 reflect interest earned on the cash
equivalents and investments purchased with the proceeds of the Companys initial
public offering.
Nine Months Ended March 31, 1996 Compared to Nine Months Ended March 31, 1995
Revenues for these periods consisted of net sales, research and development
revenue, milestone fees and royalty income. Revenues decreased 47% to $2,169,784
in the nine months ended March 31, 1996 from $4,091,752 in the nine months ended
March 31, 1995. Net sales of products decreased 9% to $883,441 in the nine
months ended March 31, 1996 from $975,200 in the nine months ended March 31,
1995. Prior to the quarter ended March 31, 1996, the Company was approximately
$400,000, or 103%, ahead of the same period a year ago for product sales. The
unfavorable results of the three months ended March 31, 1996, due to the Angio-
Seal being unavailable for sale in Europe, are responsible for the decline in
net product sales to date. Research and development revenue increased 192% to
$1,215,783 in the nine months ended March 31, 1996 from $416,552 in the nine
months ended March 31, 1995. This increase was due to increased development
funding from AHP for additional sizes of and product enhancements to the Angio-
Seal. Milestone fees decreased to zero in the nine months ended March 31, 1996
from $2.7 million in the nine months ended March 31, 1995. The $2.7 million in
1995 represented the milestone fee received from AHP for the approval of the
Angio-Seal in France. The royalty income represents Angio-Seal royalties from
European sales. Because no products were sold pursuant to the
12
<PAGE>
license agreements with AHP in the nine months ended March 31, 1995, no royalty
income was earned in this period.
Cost of products sold increased 35% to $1,141,700 in the nine months ended
March 31, 1996 from $844,781 in the nine months ended March 31, 1995. Prior to
this quarter, the 103% increase in product sales resulted in a 98%, or $477,000,
increase in the cost of products sold. In the third quarter, due to lack of
production as well a $200,000 insurance recovery, the increase over prior year
nine months fell to $297,000. The negative gross profit in the nine months ended
March 31, 1996 continues to reflect the unabsorbed fixed manufacturing costs
associated with the production of Angio-Seal subassemblies and collagen.
Research and development expense, including regulatory and clinical
expense, increased 5% to $2,692,305 in the nine months ended March 31, 1996 from
$2,570,075 in the nine months ended March 31, 1995. This increase was primarily
due to an increase in personnel costs in conjunction with the development of the
Angio-Seal, Laparo-Seal, and Rotary technology.
Selling, general and administrative expense increased 21% to $1,642,668 in
the nine months ended March 31, 1996 from $1,360,045 in the nine months ended
March 31, 1995. This increase was primarily due to the final recording of
deferred compensation in December 1995 to reflect settlement of the Employee
Stock Rights in the initial public offering.
Deferred compensation expense, officers and directors increased 114% to
$1,493,576 in the nine months ended March 31, 1996 from $696,487 in nine months
ended March 31, 1995. This increase was due to the final recording of deferred
compensation in December 1995 to reflect settlement of the Employee Stock Rights
in the initial public offering.
The Company has taken corrective action to resolve the aforementioned
product withdrawal issue and resumed production after the reconstruction of the
damaged facility. In connection with this withdrawal, the Company recognized a
pretax charge of $573,961 in its condensed consolidated statements of operations
during the nine months ended March 31, 1996. Management does not believe there
will be any further impact of such withdrawal on the consolidated financial
statements of the Company.
Interest expense increased 3% to $804,959 in the nine months ended March
31, 1996 from $780,089 in the nine months ended March 31, 1995. This increase
was partially due to interest accumulating on the outstanding balance under the
Credit Agreement as well as additional borrowings in fiscal year 1996. In
addition, interest on the Investor Notes increased, reflecting an increase in
the interest rate from 14% to 18%, effective January 1995. The Investor Notes
were paid in full from the proceeds of the initial public offering in December
1995. Interest income increased 196% to $274,249 in the nine months ended March
31, 1996 from $92,659 in the nine months ended March 31, 1995. The nine months
ended March 31, 1996, reflect interest earned on the cash equivalent and
investment balances resulting from the proceeds of the Companys initial public
offering. The nine months ended March 31, 1995, included interest due on notes
from officers and former officers of the Company which were subsequently repaid
or canceled in connection with settlement arrangements in fiscal year 1995.
Liquidity and Capital Resources
The Company has financed its operations since inception through licensing
of technology, research and development arrangements, debt, product sales and
the private sale of preferred stock in 1984. On December 13, 1995, the Company
completed an initial public offering, selling 2,700,000 shares of Common Stock
at $12.00 per share, resulting in approximately $29,091,000 in net proceeds to
the Company.
13
<PAGE>
Net cash used in the Companys operating activities during the nine months
ended March 31, 1996 and 1995 was $4,116,233 and $690,647, respectively. The
increase in net cash used in operating activities was due primarily to a $3.8
million increase in the Companys net loss in the nine months ended March 31,
1996. The nine months ended March 31, 1995 included a $2,700,000 milestone
payment from AHP which resulted in a substantially reduced loss for that period.
There were $401,726 of capital expenditures for the nine months ended March
31, 1996 of which $275,000 related to reconstruction of the damage facility and
replacement of destroyed equipment. The remaining capital expenditures related
to the expansion of the Companys manufacturing capabilities.
The Companys cash, cash equivalents and short-term investments were
$14,424,000 at March 31, 1996. In addition, the Company has pledged $2,841,000
in investments (not included in the $14,424,000) as collateral to secure bank
loans made to employees for the payment of taxes incurred by such employees as a
result of their receipt of Common Stock in settlement of the Employee Stock
Rights at the initial public offering. In exchange for the Companys pledging
this collateral, the employees have pledged their Common Stock as collateral to
the Company.
During the nine months period ended March 31, 1996, the Company received
$1,482,000 under the Credit Agreement, advances from AHP and other notes
payable. In December 1995, the Company paid $6,744,000 in full settlement of the
18% Investor Notes. In addition, the Company repaid to AHP the outstanding
advance balance (not under the Credit Agreement) of $1,945,127 in February 1996.
The Company also repaid a $25,000 expansion loan in the three months ended March
31, 1996.
The Company had $6,195,000 of debt and accrued interest outstanding under
the AHP Credit Agreement as of March 31, 1996. Interest accrues at prime rate of
interest plus 2% (10.25% at March 31, 1996). The debt matures at the earlier of
premarket approval for the Angio-Seal from the FDA or December 31, 1996. The FDA
approval will require AHP to pay the Company a total of $4,050,000 ($1,050,000
milestone fee and $3,000,000 royalty advance). Managements current intention is
to use the milestone fee and royalty advance to repay a portion of the Credit
Agreement balance and the remainder will be repaid from cash on hand or bank
financing.
The Company anticipates that its results of operations will fluctuate for
the foreseeable future due to a number of factors. Such factors include the
timing of FDA approval, AHPs performance in the manufacturing, marketing and
distribution of the Angio-Seal Product Line, its pursuit of regulatory approvals
in the United States and in countries outside of Europe including Japan and
Australia, the results of ongoing and planned clinical trials for the Angio-Seal
and other products, the acceptance of the Companys products in the marketplace
and competitive products generally and in particular those designed for the
sealing of arterial site punctures.
The Company anticipates that its operating losses will continue at least
through June 30, 1996, the end of fiscal year 1996. The Company plans to expend
substantial resources in funding clinical trials to gain regulatory approvals
and make additional marketing claims and continue to expand research and
development activities for the Angio-Seal, Laparo-Seal and collagen products.
The Company believes the initial public offering proceeds combined with the
anticipated cash generated from operations will be sufficient to meet the
Companys operating and capital requirements through at least the end of fiscal
year 1997.
14
<PAGE>
Statements contained in this Form 10-Q that are not historical facts are
forward-looking statements that are made pursuant to the Safe Harbor provisions
of the Private Securities Litigation Reform Act of 1995. The Company cautions
that a number of important factors could cause the Companys actual results for
1996, 1997 and beyond to differ materially from those expressed in any forward-
looking statements made by, or on behalf of, the Company. These important
factors include, without limitation, timing of FDA approval of the Angio-Seal,
announcements of technological innovations or the introduction of new products
by the Company or its competitors, the time, effort and priority level that AHP
attaches to the Angio-Seal and AHPs ability to successfully market the Angio-
Seal, the Companys ability to manufacture Angio-Seal components, competition by
rival developers of puncture closure devices, general business conditions in the
healthcare industry and general economic conditions. These important factors and
other factors which could affect the Companys results are more fully discussed
in the Companys Prospectus dated December 13, 1995 under Risk Factors and are
detailed in the Companys filing with the Securities and Exchange Commission. The
Company cannot assure that it will be able to anticipate or respond timely to
changes in any of the factors listed above, which could adversely affect the
operating results in one or more fiscal quarters. Results of operations in any
past period should not be considered indicative of the results to be expected
for future periods. Fluctuations in operating results may also result in
fluctuations in the price of the Common Stock.
15
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits.
B. Reports on Form 8-K.
1. The Company filed Form 8-K on January 8, 1996, to report damage to
the facility from record snowfall and a withdrawal of two production
lots, reporting Items 5 and 7.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KENSEY NASH CORPORATION
Date: May 14, 1996 By: /s/ Joseph W. Kaufmann
----------------------
Joseph W. Kaufmann
President, Chief Executive Officer and
Chief Financial Officer
17
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<PERIOD-END> MAR-31-1996
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<SECURITIES> 7,068,759
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