<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 No. 0-28034
---------
CardioTech International, Inc.
------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3186647
- ------------------------------------------- ---------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
11 State Street, Woburn, Massachusetts 01801
- ---------------------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 933-4772
--------------
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
--------- ---------
The number of shares outstanding of the registrant's class of Common Stock
as of November 11, 1996 was 4,272,916. No shares were held in treasury.
<PAGE>
CARDIOTECH INTERNATIONAL, INC.
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
Item 1 - Financial Statements
Consolidated Balance Sheets at
September 30, 1996 and March 31, 1996 3
Consolidated Statements of Operations
for the three and six months ended
September 30, 1996, and 1995 4
Consolidated Statements of Cash Flows
for the six months ended
September 30, 1996, and 1995 5
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of
Operations 7-11
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARDIOTECH INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1996 Sept. 30, 1996
--------------- ---------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 504 $ 2,885,617
Accounts Receivable - Trade - 23,747
Accounts Receivable - Other - 132,044
Prepaid Expenses - 132,370
----------- -----------
Total Current Assets 504 3,173,778
Property and Equipment, net 35,190 235,349
----------- -----------
Total Assets $ 35,694 $ 3,409,127
=========== ===========
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities:
Accounts Payable $ - $ 69,982
Accrued Expenses - 52,179
----------- -----------
Total Current Liabilities $ - $ 122,161
----------- -----------
Stockholder's Equity:
Preferred stock $.01 par value;
5,000,000 shares authorized, none
issued or outstanding
Common stock, $.01 par value,
20,000,000 shares authorized,
2,831,491 and 4,272,916 issued
and outstanding at March 31, 1996
and September 30, 1996, respectively 2,831 42,729
Due to Parent 4,063,966 -
Additional Paid in Capital - 8,182,854
Accumulated Deficit (4,031,103) (4,932,400)
Cumulative Translation Adjustment - (6,217)
----------- -----------
Total Stockholder's Equity 35,694 3,286,966
----------- -----------
Total Liabilities and
Stockholder's Equity $ 35,694 $ 3,409,127
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
CARDIOTECH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Sept. 30, 1995 Sept. 30, 1996 Sept. 30, 1995 Sept. 30, 1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Research Revenue $ 29,950 $ 141,921 $ 53,613 $ 220,368
Operating Expenses
Research and Development 162,968 310,283 348,743 462,282
Selling, General and Administrative 74,955 171,452 146,070 305,637
---------- ---------- ---------- ----------
Total Operating Expense 237,923 481,735 494,813 767,919
Other Income and Expenses
Spin Off Transaction Cost - (70,339) - (393,897)
Interest Income - 33,369 - 40,151
---------- ---------- ---------- ----------
- (36,970) - (353,746)
---------- ---------- ---------- ----------
Net Loss $ (207,973) $ (376,784) $ (441,200) $ (901,297)
========== ========== ========== ==========
Net Loss Per Common Share $(0.07) $(0.09) $(0.16) $(0.24)
========== ========== ========== ==========
Weighted Average Number of Shares
Outstanding 2,831,941 4,256,638 2,831,941 3,694,801
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
CARDIOTECH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months ended September 30,
1995 1996
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net Loss $(441,200) $ (901,297)
Adjustments to reconcile net loss to
net cash flows from operating
activities:
Depreciation and Amortization 36,519 18,953
Changes in assets and liabilities
Accounts receivable 22,620 (155,791)
Prepaid expenses (19,386) (75,370)
Accounts payable - 69,982
Accrued expenses 11,427 52,179
--------- ----------
Net cash flows from operating
activities (390,020) (991,344)
========= ==========
Cash flows from investing activities:
Purchase of property, plant and
equipment -- (74,706)
--------- ----------
Net cash flows from investing
activities -- (74,706)
========= ==========
Cash flows from financing activities:
Net proceeds from issuance of common
stock - 3,830,000
Advance from parent 396,075 485,012
Payment of spin-off costs - (393,896)
--------- ----------
Net cash flows from financing activities 396,075 3,921,116
========= ==========
Net increase in cash and cash equivalents 6,055 2,885,066
--------- ----------
Effect of exchange rate changes on cash (6,055) 47
Cash and cash equivalents at beginning
of period 504 504
--------- ----------
Cash and cash equivalents at end of period $ 504 $2,885,617
========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
CARDIOTECH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The unaudited consolidated financial statements included herein have been
prepared by Cardiotech International, Inc. (the "Company"), without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission and include, in the opinion of management, all adjustments,
consisting of normal, recurring adjustments, necessary for a fair presentation
of interim period results. The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes, however, that
its disclosures are adequate to make the information presented not misleading.
The results for the interim periods presented are not necessarily indicative
of results to be expected for the full fiscal year.
2. In June 1996, the Company issued 1,412,625 shares of CardioTech Common
Stock for $3.8 million in cash, equipment having an estimated market value of
$147,000, the transfer of certain vascular graft manufacturing patents, and
the forgiveness of certain amounts due to its former parent PolyMedica
Industries, Inc. ("PMI"). After it acquired these shares, PMI owned 3,929,493
shares, or 92.6% of CardioTech Common Stock. On June 12, 1996 and June 19,
1996, PMI distributed (the "Spin Off") all of the shares of common stock that
PMI owned to stockholders of record as of June 3, 1996. On June 11, 1996 all
advances from PMI to CardioTech were forgiven and are classified by the
Company as additional paid in capital.
3. Net Loss per share is computed using the weighted average number of
shares of common stock outstanding. Common equivalent shares from stock
options and warrants are excluded from the computation as their effect is
anti-dilutive.
4. On October 1, 1996, the Company signed a two (2) year lease agreement with
Poly Medica Pharmaceuticals, Inc., the owner of the office, manufacturing and
research facilities currently occupied by the company. The agreement replaces
in its entirety the service agreement between PMI, and the Company signed in
June 1996. The term of the lease agreement is one year longer that the service
agreement it replaces, and the base rent in the first year is $180,000 the
same base rent under the service agreement. The agreement, however, provides
for a two (2) year payback of build out costs for the office space occupied by
the Company in Woburn, MA, and a factor for increased utility costs.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
CardioTech synthesizes, designs and manufactures medical-grade polymers,
particularly polyurethanes that the Company believes are useful in the
development of vascular graft technology and other implantable medical devices
because they can be synthesized to exhibit compatibility with human blood and
tissue. CardioTech is using proprietary manufacturing technology to develop
and fabricate small bore synthetic vascular grafts made of ChronoFlex(R), a
family of polyurethanes that has been demonstrated to be biodurable, blood and
tissue compatible and non-toxic.
In addition to the graft research and development program, since 1990
CardioTech has been engaged in various internal and joint venture programs
with corporate partners and internal programs for the development and sale of
ChronoFlex and other proprietary biomaterials for use in medical devices
manufactured by third parties. This activity has generated research revenues
for CardioTech.
As CardioTech is now focusing more of its research and development
resources on the vascular graft program, period to period comparisons of
changes in research revenues are not necessarily indicative of results to be
expected for any future period.
CardioTech was established as a separate subsidiary of PMI in March 1993,
to focus on PMI's existing biomaterials business, with a particular emphasis
on accelerating the research, development and commercialization of small bore
vascular graft products through external funding and a more focused and
strategic product development effort. In June 1996, PMI spun off the Company.
See Note 2 of Notes to Consolidated Financial Statements.
CardioTech is headquartered in Massachusetts and operates from
manufacturing and laboratory facilities located in Massachusetts and the
United Kingdom.
7
<PAGE>
RESULTS OF OPERATIONS:
Comparison for the Quarters Ended September 30, 1996 and 1995.
Research revenues for the quarter ended September 30, 1996 were $141,921
compared to $29,950 for the quarter ended September 30, 1995. The majority of
this increase $110,000, represents income derived from activities under
research grants from the National Institute of Health, the remainder of the
increase is due to increased sales of medical grade polyurethanes to
medical device manufacturers and contract research activities.
Research and development expenses for the quarter ended September 30,
1996 were $310,283 compared to $162,968 for the quarter ended September 30,
1995. The increase reflects the focusing of management on continued research
and development activity related to preparations for clinical trials of the
vascular access graft in Europe. In addition, this increase reflects
activities related to the National Institute of Health Grant and the design
and formulation of medical grade polyurethanes for sale to medical devices
manufacturer.
Selling, general and administrative expenses for the quarter ended
September 30, 1996 were $171,452 compared to $74,955 for the quarter ended
September 30, 1995. The increase in selling, general and administrative
expenses reflects the costs incurred by the Company as a stand alone company
subsequent to the Spin Off. These costs include but are not limited to the
establishment of a finance and accounting group ($30,000), legal fees
($31,200), and investor relations and public reporting fees ($40,330) offset
by a greater amount of the Chief Executives salary being directed to
research efforts ($5,000).
Other income and expenses for the quarter ended September 30, 1996 were
$36,970, compared to $0 during the quarter ended September 30, 1995. The
Company incurred $70,339 of additional Spin Off costs partially offset by
interest income of $33,369.
Comparison of the Six Months ended September 30, 1996 to the Six Months
ended September 30, 1995.
Research revenues for the six months ended September 30, 1996 were
$220,368 compared to $53,613 for the six months ended September 30, 1995.
This $166,755 increase is principally due to increased research revenue under
a research grants from the National Institute of Health ($110,000), increased
research revenues from the sale of medical grade polyurethanes for use in
medical device research, royalty income on specially designed polyurethanes
for a medical device manufacture ($48,333) and increased contract
research revenues ($5,000).
Research and development expenses for six month period ended September
30, 1996 were $462,282 compared to $348,743 for the period ended September 30,
1995. The increase of $113,539 reflects the Company's continued
research and development activities in preparing for clinical trials of the
vascular access graft in Europe, activities related to the National Institute
of Health Grant and work in the design and production of medical
8
<PAGE>
polyurethanes for sales to medical devices manufacturers.
Selling, general and administrative expenses for the six months ended
September 30, 1996 were $305,637, compared to $146,070 for the six months
ended September 30, 1995. The increase reflects the additional costs
associated with being a separate company subsequent to the Spin Off. These
costs include, but are not limited to the establishment of a separate finance
and accounting group ($31,200), office space and related expenses ($8,850),
investor relations and public reporting fees ($43,590), insurance expense
($37,643) and legal fees ($38,228).
Other income and expenses for the six months ended September 30,1996,
were expenses of $353,746, compared to $0 during the six months ended
September 30, 1995. During the six months ended September 30, 1996, the
Company incurred $393,879 in Spin Off transaction costs offset by interest
income of $40,151.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CardioTech's future growth will depend on its ability to raise capital to
support research and development activities and to commercialize its vascular
graft technology. To date, CardioTech has not generated any revenue from the
sale of vascular grafts, although it has received a minor amount of research
revenues relating to its other biomaterials applications. Since inception,
funding from PMI has been used to finance the development of CardioTech's
technologies. CardioTech expects to continue to incur operating losses unless
and until product sales and/or royalty payments generate sufficient revenue to
fund its continuing operations.
CardioTech will require substantial funds for further research and
development, future pre-clinical and clinical trials, regulatory approvals,
establishment of commercial-scale manufacturing capabilities, and the
marketing of its products. CardioTech's 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 CardioTech's
development of commercialization activities and arrangements, and the purchase
of additional facilities and capital equipment.
CardioTech is currently conducting its operations with approximately
$2,900,000 in cash contributed by PMI in connection with the Spin Off.
CardioTech estimates such amounts will be sufficient to fund its initial
working capital and research and development activities through June 1998.
Past spending levels are not necessarily indicative of future spending
levels. From the inception of CardioTech's business through March 31, 1996,
PMI has funded approximately $4.1 million in operating losses to support
CardioTech's research activities. Future expenditures for product development,
especially relating to outside testing and clinical trials, are discretionary
and, accordingly, can be adjusted to available cash.
CardioTech will seek to obtain additional funds through public or private
equity or debt financing, collaborative arrangements, or from other sources.
There can be no assurance that additional financing will be available at all
or on acceptable terms to permit successful commercialization of CardioTech's
technology and products. If adequate funds are not available, CardioTech may
be required to curtail significantly one or more of its research and
development programs, or obtain funds through arrangements with collaborative
partners or others that may require CardioTech to relinquish rights to certain
of its technologies, product candidates or products.
10
<PAGE>
Forward Looking Statements
The Company believes that Form 10-Q contains forward-looking statements
that are subject to certain risks and uncertainties. These forward-looking
statements include statements regarding the sufficiency of the Company's
liquidity and capital. Such statements are based on management's current
expectations. The forward looking statements are subject to a number of
factors that could cause actual results to differ materially from the
Company's projections. Such factors include the timely development of products
by the Company and the Company's ability to obtain financing to support its
working capital needs. For more explanation of these and other risk factors,
please see the Company's Form 10-K for the year ended March 31, 1996.
ChronoFlex(R) is a registered trademark of PMI.
11
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None
12
<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.
CardioTech International, Inc.
/s/ Michael Szycher, Ph.D.
---------------------------------------
Michael Szycher, Ph.D.
Chairman and Chief Executive Officer
/s/ John E. Mattern
--------------------------------------------
John E. Mattern
Chief Financial Officer and Chief Operating Officer
(Principal Financial and
Accounting Officer)
Dated: November 14, 1996
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,885,617
<SECURITIES> 0
<RECEIVABLES> 155,791
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,173,778
<PP&E> 235,349
<DEPRECIATION> 18,953
<TOTAL-ASSETS> 3,409,127
<CURRENT-LIABILITIES> 122,161
<BONDS> 0
0
0
<COMMON> 42,729
<OTHER-SE> 3,244,237
<TOTAL-LIABILITY-AND-EQUITY> 3,409,127
<SALES> 0
<TOTAL-REVENUES> 220,368
<CGS> 0
<TOTAL-COSTS> 767,919
<OTHER-EXPENSES> 353,746
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (901,297)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (901,297)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
