UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(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, 1999
|_| 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.
------------------------------
(Name of small business issuer as specified in its charter)
Massachusetts 04-3186647
- ------------------------------ -------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
78 E Olympia Avenue, Woburn, Massachusetts 01801
- ------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (781) 933-4772
--------------
The number of shares outstanding of the registrant's class of Common Stock as of
November 12 was 6,585,069. No shares were held in treasury.
<PAGE>
CARDIOTECH INTERNATIONAL, INC.
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets at
September 30, 1999, and March 31, 1999 3
Condensed Consolidated Statements of Operations for the three
months and six months ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the three
months and six months ended September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-14
PART II - OTHER INFORMATION
Item 2 - Changes in Securities and Use of Proceeds 15
Item 6 - Exhibits and Reports on Form 8-K 15
Signatures 16
3
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CARDIOTECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30,1999 March 31, 1999
----------------- --------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 789,000 $ 2,392,000
Accounts receivable -- trade 160,000 96,000
Accounts receivable -- other 244,000 292,000
Inventory 55,000 --
Prepaid expenses and other current assets 98,000 56,000
------------ ------------
Total Current Assets 1,346,000 2,836,000
Property and equipment, net 565,000 477,000
Intangible Assets 297,000 --
Goodwill 1,001,000 --
Other non-current assets 83,000 214,000
------------ ------------
Total Assets $ 3,292,000 $ 3,527,000
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable $ 604,000 $ 518,000
Accrued expenses 479,000 418,000
Deferred Revenue 82,000 --
------------ ------------
Total Current Liabilities 1,165,000 936,000
------------ ------------
Long Term Obligations:
7% convertible senior notes due 2003 2,182,000 1,779,000
Convertible loan due 2000 416,000 429,000
------------ ------------
2,598,000 2,208,000
------------ ------------
Total Liabilities 3,763,000 3,144,000
------------ ------------
Series A convertible preferred stock, $.01 par value,
5,000,000 shares authorized, 500,000 issued and
outstanding at liquidation value -- 500,000
------------ ------------
Commitments and Contingencies
Stockholders' (Deficit) Equity:
Common stock, $.01 par value, 20,000,000 shares
authorized, 6,585,069 and 6,138,916 shares issued and
outstanding at September 30, 1999 and March 31, 1999
respectively 66,000 61,000
Series A convertible preferred stock, $.01 par value,
5,000,000 shares authorized, 500,000 issued and
outstanding at liquidation value 5,000 --
Additional paid-in capital 11,384,000 10,151,000
Accumulated deficit (11,723,000) (10,117,000)
Notes receivable from officers (200,000) (200,000)
Cumulative translation adjustment (3,000) (12,000)
------------ ------------
Total Stockholders' (Deficit) Equity (471,000) (117,000)
------------ ------------
Total Liabilities, Convertible Preferred Stock and
Stockholders' (Deficit) Equity $ 3,292,000 $ 3,527,000
============ ============
</TABLE>
4
<PAGE>
CARDIOTECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the For the
Three Months Ended September 30, Six Months Ended September 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Product Sales $ 153,000 $ 35,000 $ 203,000 $ 114,000
Research Grants 139,000 144,000 283,000 280,000
Evaluation Income & Royalties 89,000 66,000 114,000 129,000
----------- ----------- ----------- -----------
381,000 245,000 600,000 523,000
Operating Expense:
Cost of Sales 326,000 104,000 557,000 224,000
Research and development 255,000 338,000 626,000 700,000
Selling, general and administrative 424,000 297,000 925,000 536,000
----------- ----------- ----------- -----------
1,005,000 739,000 2,108,000 1,460,000
----------- ----------- ----------- -----------
Loss from Operations (624,000) (494,000) (1,508,000) (937,000)
----------- ----------- ----------- -----------
Other Income and Expense:
Interest expense (43,000) (55,000) (85,000) (104,000)
Interest income 12,000 20,000 36,000 45,000
----------- ----------- ----------- -----------
(31,000) (35,000) (49,000) (59,000)
----------- ----------- ----------- -----------
Net Loss $ (655,000) $ (529,000) $(1,557,000) $ (996,000)
=========== =========== =========== ===========
Other comprehensive income:
Foreign currency translation adjustments (2,700) 2,000 (2,700) 2,000
----------- ----------- ----------- -----------
Comprehensive loss $ (657,700) $ (527,000) $(1,559,700) $ (994,000)
=========== =========== =========== ===========
Net loss per common share basic and diluted $ (0.10) $ (0.12) $ (0.24) $ (0.23)
=========== =========== =========== ===========
Shares used in computing Net Loss
per common share, basic and diluted 6,585,069 4,272,916 6,365,650 4,272,916
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
CARDIOTECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Six Months Ended September 30,
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net Loss $(1,556,000) $ (996,000)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Interest on convertible senior notes 63,000 59,000
Depreciation and amortization 143,000 49,000
Changes in assets and liabilities: (net of effects
of Tyndale Plains-Hunter acquisition)
Accounts receivable (62,000) (68,000)
Inventory (32,000) --
Prepaid expenses (41,000) (66,000)
Other non-current assets (140,000) (29,000)
Accounts payable 80,000 31,000
Accrued expenses and other current liabilities (7,000) (108,000)
----------- -----------
Net cash flows used by operating activities (1,552,000) (1,128,000)
Cash flows from investing activities:
Purchase of property and equipment (44,000) (67,000)
Acquisition of Tyndale Plains-Hunter, net (327,000) --
----------- -----------
Net cash flows used by investing activities (371,000) (67,000)
Cash flows from financing activities:
Net proceeds from issuance of convertible notes 340,000 430,000
----------- -----------
Net cash flows provided by financing activities 340,000 430,000
Effect of exchange rate changes on cash (20,000) (3,000)
----------- -----------
Net decrease in cash and cash equivalents (1,603,000) (768,000)
Cash and cash equivalents at beginning of period 2,392,000 2,227,000
----------- -----------
Cash and cash equivalents at end of period $ 789,000 $ 1,459,000
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Taxes Paid $ 5,500 $ 5,500
</TABLE>
6
<PAGE>
CARDIOTECH INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(UNAUDITED)
1. The unaudited consolidated financial statements included herein have been
prepared by CardioTech International, Inc. ("the Company" or "CardioTech"),
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. Actual results could differ from those estimates.
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. It is suggested that these statements be read in conjunction with
the Company's Consolidated Financial Statements and its notes thereto, for the
year ended March 31, 1999, included in the Company's Annual Report to
shareholders.
2. The Company computes basic and diluted earnings/loss per share ("EPS") in
accordance with Statement of Financial Accountings Standards No. 128, "Earnings
Per Share". Basic earnings/loss per share is based upon the weighted average
number of common shares outstanding during the period. Diluted earnings/loss per
share is based upon the weighted average number of common shares outstanding
during the period plus additional weighted average common equivalent shares
issued 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. Common equivalent shares have been excluded from the
computation of diluted loss per share for all periods presented, as their effect
would have been anti-dilutive.
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.
Options to purchase 1,308,055 and 1,045,201 shares of common stock outstanding
during the periods ended September 30, 1999 and 1998, respectively, were
excluded from the calculation of diluted earnings per share because the effect
of their inclusion would have been anti-dilutive.
3. On July 16, 1999, CardioTech International, Inc., a Massachusetts corporation
("CardioTech"), completed the acquisition of Tyndale Plains-Hunter, Ltd., a New
Jersey corporation ("TPH"), pursuant to an Agreement and Plan of Merger, dated
as of May 25, 1999 (the "Merger Agreement"), by and among CardioTech, CardioTech
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of
CardioTech ("Acquisition Sub"), and TPH. TPH manufactures hydrophilic
polyurethanes, which are used to provide permanent lubricity to the surface of
medical devices, improve blood compatibility and act as drug delivery systems.
The hydrophilic polyurethanes manufactured by TPH are also used in personal care
products including hair and skin creams. CardioTech intends to continue to use
the assets and technology of TPH to manufacture hydrophilic polyurethanes and
incorporate such technologies into the Company's medical devices.
TPH merged with and into Acquisition Sub (the "Merger"), with Acquisition
Sub surviving the Merger and remaining a wholly-owned subsidiary of CardioTech.
Each share of TPH common stock was (i) converted into the right to receive 0.24
of a share of CardioTech common stock and (ii) exchanged for additional cash
consideration. The purchase price paid by CardioTech consisted of 446,153 shares
of the Company's common stock (valued at $1.625 per share) and cash of $350,000.
Approximately $100,000 of the cash consideration was placed into escrow
7
<PAGE>
pursuant to terms of the Merger Agreement. In connection with this transaction,
the Company assumed liabilities of approximately $178,000 and incurred
acquisition costs of approximately $78,000. The excess of the purchase price
over the net assets is approximately $1,054,000 and has been allocated to
goodwill. Goodwill will be amortized over five years on a straight-line basis.
The transaction has been recorded in accordance with the purchase method of
accounting and the designated date of the acquisition for accounting purposes
was June 30, 1999.
4. On September 24, 1999, the Company issued a 7% Convertible Senior Note (`the
Note") in the amount of $340,000 with Dresdner Kleinwort Benson Private Equity
Partners LP (DKB), on terms similar to and as an amendment to the Note Purchase
Agreement, as amended , dated March 31, 1998. The principal balance of Senior
Notes outstanding as of September 30, 1999 is $2,182,000.
In connection with the issuance of the Note, DKB also waived the rights
under Section 4(b) of the Series A Preferred Stock as it related to mandatory
redemption in the event of a "change in control" as defined. Accordingly, the
Series A Preferred Stock in the amount of $500,000 has been reclassified as
equity as of September 30, 1999.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
CardioTech International, Inc. ("CardioTech" or the "Company") is using
its proprietary manufacturing technology to develop and manufacture small bore
vascular grafts, or synthetic blood vessels, made of ChronoFlex, a family of
polyurethanes that has been demonstrated to be biocompatible and non-toxic.
Vascular grafts are used to replace, bypass, or provide a new lining or arterial
wall for occluded, damaged, dilated, or severely diseased arteries. The Company
has developed a vascular access graft, called the VascuLink Vascular Access
Graft; used to provide access for patients undergoing hemodialysis treatments,
The Company is also developing two types of layered, microporous small bore
vascular grafts: (i.) a peripheral graft, tradenamed the MyoLink Peripheral
Graft, and (ii) a coronary artery bypass graft, tradenamed the CardioPass(TM)
Coronary Artery Bypass Graft.
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.
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.
CardioTech has developed its grafts using specialized ChronoFlex
polyurethane materials that it believes will provide significantly 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.
Additionally, through its CT Biomaterials(TM) division, the Company
develops, manufactures and markets polyurethane-based biomaterials for use in
both acute and chronically implanted devices such as stents, artificial hearts,
and vascular ports. These premium biomaterials are sold under the tradenames:
ChronoFlex, ChronoThane, HydroThane and ChronoFilm.
With the acquisition of Tyndale Plains-Hunter, CardioTech is now offering
a family of hydrophilic polyurethanes used in medical devices, as well as
personal health care products.
CardioTech owns a number of patents relating to its vascular graft
manufacturing technology. In addition, PolyMedica Corporation ("PMI") has
granted to CardioTech 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., the ChronoFlex polyurethane patents relating to
the ChronoFlex technology. PMI has granted to CardioTech a non-exclusive,
perpetual, worldwide, royalty-free sublicense of these patents for use in the
Implantable Devices and Materials Field.
ChronoFilm is a registered trademark of PMI. ChronoFlex, is a registered
trademark of CardioTech International. ChronoThane, ChronoPrene, HydroThane,
PolyBlend and PolyWeld are tradenames of CardioTech. DuraGraft, VascuLink,
MyoLink, CardioPass are trademarks of CardioTech.
9
<PAGE>
Results of Operations:
Comparison for the Three Months Ended September 30, 1999 and 1998.
Revenue for the quarter ended September 30, 1999 was $381,000 compared to
$245,000 for the quarter ended September 30, 1998, an increase of $136,000, or
55%. This increase was primarily the result of an increase in product sales of
biomaterials of $53,000 and vascular access grafts of $65,000.
Cost of goods sold for the quarter ended September 30, 1999 was $326,000
compared to $104,000 for the quarter ended September 30, 1998, an increase of
$222,000, or 213%. This increase was primarily the result of an increase in
production costs for vascular grafts and the addition of the TPH product line to
the biomaterials division.
Research and development expense for the quarter ended September 30, 1999
was $255,000, compared to $338,000 for the quarter ended September 30, 1998, a
decrease of $83,000, or 24%. This decrease was principally the result of
decreased research and development expenses in relation to completion of the
vascular graft clinical trials.
Selling, general and administrative expense for the quarter ended
September 30, 1999 was $424,000, compared to $297,000 for the quarter ended
September 30, 1998 or an increase of $127,000 or 43%. This increase was
primarily due to increased marketing, advertising, and travel expenses related
to the vascular graft.
Other income and expense for the quarter ended September 30, 1999 was
expense of $31,000 compared to $35,000 for the quarter ended September 30, 1998.
The decrease primarily resulted from a decrease in interest expense of $12,000
on outstanding loans and was partially offset by a decrease in interest income
of $8,000 during the period.
Net loss for the quarter ended September 30, 1999 was $655,000, compared
to $529,000 for the quarter ended September 30, 1998, or an increase in net loss
of $126,000 or 24%. The increase in net loss is primarily attributable to
production ramp up for the vascular grafts. Net loss per share for the quarter
ended September 30, 1999 was $0.10 per share as compared to $0.12 per share for
the quarter ended September 30, 1998, or a decrease in net loss of $0.02 per
share or 16%.
Comparison for the Six Months Ended September 30, 1999 and 1998.
Research revenue for the six months ended September 30, 1999 was $600,000
compared to $523,000 for the six months ended September 30, 1998, an increase of
$77,000, or 15%. This increase was primarily the result of an increase in
product sales of biomaterials of $8,000 and vascular access grafts of $65,000.
Cost of Goods Sold for the quarter ended September 30, 1999 was $557,000
compared to $224,000 for the quarter ended September 30, 1998, an increase of
$333,000, or 148%. This increase was primarily the result of an increase in
production costs for vascular grafts and the addition of the TPH product line to
the biomaterials division.
Research and development expense for the six months ended September 30,
1999 was $626,000, compared to $700,000 for the six months ended September 30,
1998, a decrease of $74,000, or 11%. This decrease was principally the result of
decreased research and development expenses in relation to completion of the
vascular graft clinical trials.
Selling, general and administrative expense for the six months ended
September 30, 1999 was $924,000, compared to $536,000 for the six months ended
September 30, 1998 or an increase of $388,000 or 72%. This increase was
primarily due to increased marketing, advertising, and travel expenses related
to the vascular graft.
Other income and expense for the six months ended September 30, 1999 was
expense of $49,000 compared to $59,000 for the six months ended September 30,
1998. The decrease primarily resulted from a decrease in interest expense of
$19,000 on outstanding loans and a decrease in interest income of $9,000 during
the period.
Net loss for the six months ended September 30, 1999 was $1,557,000,
compared to $996,000 for the six months ended September 30, 1998, or an increase
in net loss of $561,000 or 56%. The increase in net loss is primarily
attributable to production ramp up for the vascular grafts. Net loss per share
for the six months ended
10
<PAGE>
September 30, 1999 was $0.24 per share as compared to $0.23 per share for the
six months ended September 30, 1998, or an increase in net loss of $0.01 per
share or 4%.
Liquidity and Capital Resources
The Company used $73,000 to fund operations during the three months ended
September 30, 1999 compared to $590,000 for the three months ended September 30,
1998. The principal uses of funds for the three months ended September 30, 1999
were a net loss of $655,000, increase in other current assets of $100,000, and
an increase in inventory of $32,000. This was partially offset by proceeds of
$340,000 from issuance of convertible notes, increase in accounts payable of
$167,000, increase in accrued expenses of $44,000, and decrease in accounts
receivable relating to trade customers of $45,000.
The Company used $1,603,000 to fund operations during the six months ended
September 30, 1999 compared to $768,000 for the six months ended September 30,
1998. The principal uses of funds for the six months ended September 30, 1999
were a net loss of $1,532,000, the acquisition of Tyndale Plains-Hunter, Ltd. of
$327,000, increase in other non-current assets of $140,000, increase in accounts
receivable of $62,000 relating to trade customers, increase in prepaid expenses
of $41,000 and the purchase of property and equipment of $44,000. This was
partially offset by proceeds from issuance of debt of $340,000, and an increase
of accounts payable of $80,000.
On July 16, 1999, CardioTech International, Inc., a Massachusetts
corporation ("CardioTech"), completed the acquisition of Tyndale Plains-Hunter,
Ltd., a New Jersey corporation ("TPH"), pursuant to an Agreement and Plan of
Merger, dated as of May 25, 1999 (the "Merger Agreement"), by and among
CardioTech, CardioTech Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of CardioTech ("Acquisition Sub"), and TPH. TPH
manufactures hydrophilic polyurethanes, which are used to provide permanent
lubricity to the surface of medical devices, improve blood compatibility and act
as drug delivery systems. The hydrophilic polyurethanes manufactured by TPH are
also used in personal care products including hair and skin creams. CardioTech
intends to continue to use the assets and technology of TPH to manufacture
hydrophilic polyurethanes and incorporate such technologies into the Company's
medical devices. The purchase price paid by CardioTech consisted of 446,153
shares of the Company's common stock (values at $1.625 per share) and cash of
$350,000 in exchange for all the capital stock of TPH. Approximately $100,000 of
the cash consideration was placed into escrow pursuant to terms of the Merger
Agreement. In connection with this transaction, the Company assumed liabilities
of approximately $178,000 and incurred acquisition costs of $78,000. The excess
of the purchase price over the net assets is approximately $1,054,000 and has
been allocated to goodwill.
On September 24, 1999, the Company issued a 7% Convertible Senior Note
(`the Note") in the amount of $340,000 with Dresdner Kleinwort Benson Private
Equity Partners LP (DKB), on terms similar to and as an amendment to the Note
Purchase Agreement, as amended , dated March 31, 1998. The principal balance of
Senior Notes outstanding as of September 30, 1999 is $2,182,000.
In connection with the issuance of the Note, DKB also waived the rights
under Section 4(b) of the Series A Preferred Stock as it related to mandatory
redemption in the event of a "change in control" as defined. Accordingly, the
Series A Preferred Stock in the amount of $500,000 has been reclassified as
equity as of September 30, 1999.
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 revenues from the sale
of vascular grafts, although it has received a minor amount of research revenues
relating to its other biomaterial sales and from the NIH to support graft
research. 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
11
<PAGE>
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.
In addition, CardioTech is currently conducting its operations with
approximately $789,000 in cash. CardioTech estimates such amount will be
sufficient to fund its working capital and research and development activities
through January 2000. Past spending levels are not necessarily indicative of
future spending levels. Future expenditures for product development, especially
relating to outside testing and clinical trials, are discretionary and,
accordingly, can be adjusted based on the availability of cash.
12
<PAGE>
Exchange Listing
Going Concern Opinion and Possible AMEX Delisting
The common stock is listed on the American Stock Exchange, or the AMEX,
and CardioTech is subject to the AMEX's maintenance requirements. CardioTech's
failure to meet the AMEX's maintenance requirements may result in a delisting of
the common stock. CardioTech cannot assure you that its common stock will not be
delisted by the AMEX. The determination by the AMEX to delist a company is not
based on a precise mathematical formula, but rather on a review of all relevant
facts and circumstances in light of the AMEX's policies. The AMEX will normally
consider delisting a company which:
(1) has stockholders' equity of less than $2,000,000 if such company has
sustained losses from continuing operations and/or net losses in two of its
three most recent fiscal years; or
(2) has sustained losses which are so substantial to its overall
operations or its existing financial resources, or its financial condition has
become so impaired that it appears questionable, in the opinion of the AMEX, as
to whether such company will be able to continue operations and/or meet its
obligations as they mature.
As of September 30, 1999, CardioTech had stockholders' deficit of
$446,000, and losses in its last three fiscal years. If CardioTech is unable to
increase its stockholders' equity and its net losses continue, CardioTech's
common stock may be delisted. CardioTech's future financing activities may not
provide the Company with sufficient stockholders' equity to avoid being
delisted. Further, CardioTech received a "going concern" opinion from its
independent public accountants as of March 31, 1999. This "going concern"
opinion may be considered by AMEX in determining whether it will delist
CardioTech's common stock.
On August 17, 1999, the Company received a written notification that the
AMEX was reviewing CardioTech's listing eligibility on the basis that the
Company's financial condition is impaired, raising questions about whether it
will be able to continue operations. The written notification also states that
the review process allows the Company to meet with AMEX's Listing Qualifications
representatives to present information in support of continued listing. The
Company met with the AMEX's Listing Qualifications representatives on August 26,
1999 to present information and a plan in support of continued listing. This
presentation included, but was not limited to, information regarding: (i) the
Company's current efforts to raise additional equity financing, (ii) the
Company's projected incremental increase in cash flow as a result of its
acquisition of TPH, and (iii) the Company's availability of an approved vascular
access graft product for which orders are currently being taken from the
Company's European distributors and product shipments scheduled to occur in
September 1999. Subsequent to the meeting, the AMEX notified the Company that it
will review the financial condition of the Company immediately after the
issuance of the second quarter report ending September 30, 1999. There can also
be no assurance that CardioTech will be able to avoid delisting subsequent to
the issuance of its second quarter report.
Delisted securities would probably trade in the over-the-counter markets.
The liquidity of securities traded in the over-the-counter markets may be
impaired, not only in the number of shares that could be bought or sold, but
also through delays in the timing of transactions, reductions in securities
analysts' and media coverage and lower prices.
If CardioTech's common stock were to be delisted by AMEX, this would
constitute a default condition under the Senior Note and Preferred Stock
agreement with Dresdner Kleinwort Benson ("DKB"), where upon DKB may give notice
to CardioTech of this default condition, and CardioTech would have 25 days to
cure this default. If CardioTech were unable to cure a default condition
resulting in the event of a delisting, then an event of default would occur and
DKB would be entitled to demand immediate payment of the Senior Notes. Further,
upon the occurrence of an event of default, the interest rate on the Senior
Notes and the dividend rate on the Preferred Stock
13
<PAGE>
would each increase to 13% per annum. The principal balance of Senior Notes
outstanding as of September 30, 1999 was $2,182,000.
The Company has pledged a life insurance policy on the life of Dr. Michael
Szycher and all of the common stock of the Company's wholly owned subsidiary,
CardioTech International, Ltd. ("CTI"), to secure the repayment of the Senior
Notes. Upon the occurrence of an event of default, DKB would have the right to
foreclose on this collateral. If DKB foreclosed on the CTI stock pledged to it
or if CardioTech winds up, makes an assignment for the benefit of its creditors,
goes into liquidation or an administrator is appointed for its assets, then,
such actions would be a default under the Freemedic loan and Freemedic would be
entitled to immediate repayment of the loan. As of September 30, 1999, the
outstanding principal balance of the Freemedic loan was (pound)253,000
($416,000).
Forward Looking Statements
The Company believes that this FORM 10-QSB 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 and the Company's intention to sell equity to
raise its stockholders' equity. Such statements are based on management's
current expectations and are subject to a number of factors that could cause
actual results to differ materially from the forward-looking statements. The
Company cautions investors that there can be no assurance that actual results or
business conditions will not differ materially from those projected or suggested
in such forward-looking statements, as a result of various factors including but
not limited to the following: the Company's ability to obtain financing (with or
without the sale of equity) to support its working capital needs on acceptable
terms, the Company's ability to avoid the delisting of its Common Stock, the
timely development of products by the Company, intense competition related to
the development of synthetic grafts and difficulties inherent in developing
synthetic grafts. As a result, the Company's further development involves an
high degree of risks. For further information, refer to the more specific risks
and uncertainties discussed throughout this report.
Year 2000 Compliance
The Year 2000 Issue refers to potential problems with computer systems or
any equipment with computer chips or software that use dates where the date has
been stored as just two digits (e.g., 97 for 1997.) On January 1, 2000, any date
recording mechanism incorporating the date sensitive software which uses only
two digits to represent the year may recognize a date using 00 as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar business activities. To address the Year 2000 issue, CardioTech has
implemented a program with respect to its 1) internal information technology
systems, 2) non-information technology systems, and 3) external suppliers of
goods and services.
CardioTech has completed a review of its internal information systems to
determine the extent of any Year 2000 problem. Based on this review, CardioTech
does not currently believe that it has material exposure to the Year 2000 issue
with respect to its own information systems, since its core existing business
information systems correctly define the year 2000. Additionally, CardioTech has
completed an evaluation of its internal non-information systems and expects to
have its remediation and testing phases for these systems completed by the end
of September 1999.
CardioTech is contacting its major customers and suppliers regarding their
Year 2000 problems. To date, CardioTech is unaware of any problems that would
materially adversely affect its operations or financial condition. However,
CardioTech cannot assure its stockholders:
o that it will be able to identify third party year 2000 problems;
o that third party year 2000 problems will be corrected on a timely basis;
or
14
<PAGE>
o that a failure by such entities to correct a Year 2000 problem or a
correction which is incompatible with the Company's information systems
would not have a material adverse effect on the Company's operations or
financial condition.
In addressing Year 2000 issues, CardioTech estimates that total costs will
be approximately $10,000. To date, $6,000 of such expenses have been incurred
and expensed. Total costs consist primarily of external consulting fees and
personal computer replacements. The estimated costs are based on management's
current assessment and could change in the future. CardioTech cannot assure that
actual Year 2000 costs incurred will be equal to or less than those estimated at
this time.
Although CardioTech believes that its primary IT system correctly defines
the Year 2000, prudent business practices call for the development of
contingency plans. CardioTech's contingency plans will include strategies for
dealing with Year 2000 related system failures or malfunctions due to
CardioTech's internal systems or from external parties. A Year 2000 systems
failure, either internal or that of an external provider, could prevent
CardioTech from being able to continue its operations, or could disrupt
financial and management controls and reporting systems. The Company expects to
complete its contingency plans by September 30, 1999.
CardioTech does not expect the Year 2000 issue to have a material adverse
effect on its results of operations or financial position. However, if not
effectively remediated, negative effects from Year 2000 issues, including those
related to internal systems, vendors, or customers, could have a material
adverse effect on CardioTech's operations or financial condition. CardioTech
cannot assure its stockholders that even if all planned actions are completed,
it will not experience some adverse effects from Year 2000 related issues.
15
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On August 12, 1999 the Company held its annual meeting of its stockholders. The
following matters were voted on at that meeting:
1. The reelection of Michael Szycher as a class III director.
2. The ratification upon a proposal to increase by 1,938,971 shares the
aggregate number of shares for which stock options may be granted under
CardioTech's 1996 Employee, Director and Consultant Stock Option Plan.
The following chart shows the number of votes cast for or against, as well as
the number of abstentions and board non-votes, at to each matter voted on at the
special meeting:
<TABLE>
<CAPTION>
Matter For Against Abstain Non-votes
------ --- ------- ------- ---------
<S> <C> <C> <C> <C>
Reelection of Dr. Szycher 4,567,468 165,256 n/a n/a
Ratification of Increase in Stock Options 2,359,377 386,015 227,596 1,759,736
</TABLE>
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
Exhibit 27 Financial Data Schedule
Exhibit 10.16.1 Amendment to Note Purchase Agreement, dated September 24,
1999, related to the issuance of additional 7% Senior Convertible Notes to
Dresdner Kleinwort Benson Private Equity Partners LP.
(b) Reports on Form 8-K
Current Report on Form 8-K/A dated September 29,1999 related to the
acquisition of Tyndale Plains-Hunter, Ltd.
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.
CARDIOTECH INTERNATIONAL, INC.
/s/ Michael Szycher
------------------------------------
Michael Szycher, Ph.D.
Chairman and Chief Executive Officer
/s/ Pam McCarthy
------------------------------------
Pam McCarthy, CPA, MST
Controller
Dated: November 15, 1999
17
Dresdner Kleinwort Benson Private Equity Partners LP
75 Wall Street
New York, New York 10005
September 24, 1999
CardioTech International, Inc.
78 East Olympia Avenue
Woburn, MA 01801
Gentlemen:
Pursuant to the Note Purchase Agreement, dated as of March 31, 1998, by
and between CardioTech International, Inc., a Massachusetts corporation (the
"Company"), and Dresdner Kleinwort Benson Private Equity Partners LP, a Delaware
limited partnership (the "Purchaser"), as amended by the Amendment to the Note
Purchase Agreement and Registration Rights Agreement, dated as of November 12,
1998 (the "Note Purchase Agreement"), the Purchaser agreed to purchase, and the
Company agreed to issue, up to an additional $340,000 aggregate principal amount
of the Company's 7% Convertible Senior Notes due March 30, 2003 (the "Purchased
Notes"). Capitalized terms used herein by not otherwise defined shall have the
same meanings as defined in the Note Purchase Agreement.
When signed on behalf of the Company and the Purchaser, this letter (the
"Letter Agreement") will constitute an amendment to the Note Purchase Agreement
and the agreement of the parties hereto that the Purchaser will purchase, and
the Company will issue, the Purchased Notes pursuant to the Note Purchase
Agreement and under the following terms and conditions:
1. At the Closing (as hereinafter defined), the Company will issue and
sell to the Purchaser, and the Purchaser will purchase from the Company,
$340,000 aggregate principal amount of the Purchased Notes. The purchase price
for the Purchased Notes shall be $340,000 (the "Purchase Price"). The Purchase
Price shall be payable by wire transfer of immediately available funds to the
Company (or by such payment to a bank and account number previously notified by
the Company in writing to the Purchaser).
2. The closing with respect to the issuance and sale of the Purchased
Notes pursuant to Section 1 (the "Closing") shall take place at the offices of
O'Sullivan Graev & Karabell, LLP, 30 Rockefeller Plaza, New York, New York or
via facsimile.
<PAGE>
CardioTech International, Inc.
September 24, 1999
Page 2
3. The proceeds received by the Company from the sale of the Purchased
Notes shall be used by the Company solely for (a) research and development
related to the business of the Company, (b) the payment of fees and expenses
incurred in connection with the consummation of this transactions and (c)
working capital needs of the Company.
4. By executing this Letter Agreement, the Purchaser, as a holder of
500,000 shares of Series A Preferred Stock, hereby irrevocably waives its rights
under Section 4(b) of such Series A Preferred Stock and, accordingly, if the
Purchaser sells or otherwise transfers all or a portion of its Series A
Preferred Stock to any Person, the Purchaser will ensure that such transferee
will take such Series A Preferred Stock subject to the provisions set forth in
this paragraph 4.
5. The Company shall list within 60 days of the Closing on the American
Stock Exchange and, as of the Closing, reserve for issuance, 370,068 Reserved
Common Shares with respect to the conversion of the Purchased Notes acquired
pursuant to this Letter Agreement.
6. (a) The Company hereby reaffirms to the Purchaser that each of the
representations and warranties set forth in Sections 2.1, 2.2, 2.3 and 2.20 of
the Note Purchase Agreement is true and correct as of the date hereof as they
relate to the transactions contemplated by this Letter Agreement.
(b) The Purchaser hereby reaffirms to the Company that each of the
representations and warranties set forth in Sections 3.1 and 3.2 of the Note
Purchase Agreement is true and correct as of the date hereof as they relate to
the transactions contemplated by this Letter Agreement.
(c) The Company hereby represents and warrants to the Purchaser that
as of the date hereof no Event of Default has occurred and is continuing.
7. The Company shall duly execute and deliver, or cause to be duly
executed and delivered, at its own cost and expense, such further instruments
and documents and take all such action, in each case as may be necessary or
proper in the reasonable judgment of the Purchaser, to carry out the provisions
and purposes of this Letter Agreement.
8. In case any one or more of the representations, warranties, covenants
and/or agreements set forth in this Letter Agreement shall have been breached by
the Company, the Purchaser may proceed to protect and enforce its rights either
by suit in equity and/or by action at law, including an action for damages as a
result of any such breach and/or an action for specific performance of any such
covenant or agreement contained in this Letter Agreement.
<PAGE>
CardioTech International, Inc.
September 24, 1999
Page 3
9. At the Closing, the Company shall deliver to the Purchaser:
(a) one or more certificates representing the Purchased Notes being
purchased by the Purchaser at the Closing, registered in the name of the
Purchaser, against receipt of the Purchase Price;
(b) a telegram, telex or other acceptable method of confirmation
from the Secretary of the Commonwealth of Massachusetts, dated as of the close
of business on the next business day preceding the date of the Closing, as to
the due incorporation or organization and in good standing of the Company;
(c) a certificate of the Secretary of the Company, dated as of the
Closing, certifying (i) that the Company's Articles of Incorporation and Bylaws
in the form delivered to the Purchaser on November 12, 1998 are in effect on the
date of the Closing and no amendment or other document relating to or affecting
such Articles of Incorporation and Bylaws has been filed with the Secretary of
the Commonwealth of Massachusettes since November 12, 1998, (ii) that true,
correct and complete copies of all resolutions adopted by the board of directors
of the Company authorizing the execution, delivery and performance of this
Letter Agreement and any related documents and the issuance, sale and delivery
of the Purchaser Notes are attached thereto and that such resolutions are still
in full force and effect; and (iii) as to the incumbency and genuineness of the
signatures of each officer of the Company executing this Letter Agreement and
any related documents;
(d) an executed copy of the letter from the Company to the Purchaser
representing that the Company is in compliance with the requirements of the
Small Business Administration (the "SBA Letter");
(e) a cross receipt evidencing the issuance and sale of the
Purchased Notes and the payment of the Purchase Price.
10. This Letter Agreement shall bind and inure to the benefit of the
Company and the Purchaser and their respective successors, transferees, assigns,
heirs and personal representatives. Upon any transfer of the Purchased Notes or
the Reserved Common Shares, the transferee shall be bound by, and entitled to
the benefits of, this Letter Agreement with respect to such transferred shares
in the same manner as the transferring Purchaser.
11. This Letter Agreement, the certificates representing the Purchased
Notes, the Registration Rights Agreement, the Security and Pledge Agreement, the
SBA Letter, the Note Purchase Agreement (as amended hereby) and the other
writings specifically referred to herein or delivered pursuant hereto which form
a part hereof contain the entire agreement among the parties with respect to the
subject matter hereof and thereof and supersede all prior and contemporaneous
arrangements or understandings with respect thereto.
<PAGE>
CardioTech International, Inc.
September 24, 1999
Page 4
12. The terms and provisions of this Letter Agreement may not be modified
or amended, nor may any of the provisions hereof be waived, temporarily or
permanently, except pursuant to a written instrument executed by the Company and
the Purchaser.
13. (a) All questions concerning the construction, interpretation and
validity of this Letter Agreement shall be governed by and construed and
enforced in accordance with the domestic laws of the State of New York, without
giving effect to any choice or conflict of law provision or rule (whether in the
State of New York or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of New York. In furtherance of
the foregoing, the internal law of the State of New York will control the
interpretation and construction of this Letter Agreement, even if under such
jurisdiction's choice of law or conflict of law analysis, the substantive law of
some other jurisdiction would ordinarily or necessarily apply.
(b) BECAUSE DISPUTES ARISING IN CONNECTION WITH COMPLEX FINANCIAL
TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN EXPERIENCED AND
EXPERT PERSON AND THE PARTIES WISH APPLICABLE LAWS TO APPLY (RATHER THAN
ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A
JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION
OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO
WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING BROUGHT TO
ENFORCE OR DEFEND ANY RIGHTS OR REMEDIES UNDER THIS LETTER AGREEMENT OR ANY
DOCUMENTS RELATED HERETO.
14. The parties acknowledge and agree that the Purchased Notes acquired
pursuant to this Letter Agreement shall be deemed to be included within the
definition of "Purchase Notes" for purposes of the Note Purchase Agreement;
provided, however, that any conflict between the Note Purchase Agreement and
this Letter Agreement shall be resolved by reference to the provisions of this
Letter Agreement.
15. This Letter Agreement may be executed in any number of counterparts,
and each such counterpart hereof shall be deemed to be an original instrument,
but all such counterparts together shall constitute but one agreement. Facsimile
counterpart signatures to this Letter Agreement shall be acceptable and binding.
<PAGE>
If the above constitutes your understanding of the agreement between the
parties, please acknowledge by signing the enclosed copy of this Letter
Agreement in the space provided and returning it to the undersigned.
DRESNER KLEINWORT BENSON
PRIVATE EQUITY PARTNERS LP
By: Dresdner Kleinwort Benson
Private Equity Managers LLC,
its general partner
By: /s/ Jonathan Walker By: /s/ Christopher Hammond
------------------------------- ---------------------------
Name: Jonathan Walker Name: Christopher Hammond
Title: Executive Vice President Title: Vice President
AGREED AS OF THE DATE
FIRST SET FORTH ABOVE:
CARDIOTECH INTERNATIONAL, INC.
By: /s/ Michael Szycher
-----------------------
Name: Michael Szycher
Title: Chairman and CEO
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 787
<SECURITIES> 0
<RECEIVABLES> 484
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,346
<PP&E> 905
<DEPRECIATION> (340)
<TOTAL-ASSETS> 3,292
<CURRENT-LIABILITIES> (1,165)
<BONDS> (2,598)
0
(500)
<COMMON> (66)
<OTHER-SE> 95
<TOTAL-LIABILITY-AND-EQUITY> (3,292)
<SALES> (203)
<TOTAL-REVENUES> (600)
<CGS> 0
<TOTAL-COSTS> 2,108
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36
<INCOME-PRETAX> (1,557)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,557)
<EPS-BASIC> 0.00
<EPS-DILUTED> (0.24)
</TABLE>
