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 December 31, 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.
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(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
February 14 was 6,585,069. No shares were held in treasury.
<PAGE>
CARDIOTECH INTERNATIONAL, INC.
FORM 10-QSB
FOR THE QUARTER ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets at
December 31, 1999, and March 31, 1999 4
Condensed Consolidated Statements of Operations for the three
months and nine months ended December 31, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows for the
nine months ended December 31, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7-8
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-15
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>
December 31,1999 March 31, 1999
----------------- --------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 462,000 $ 2,392,000
Accounts receivable -- trade 158,000 96,000
Accounts receivable -- other 346,000 292,000
Inventory 145,000 --
Prepaid expenses and other current assets 73,000 56,000
------------ ------------
Total Current Assets 1,184,000 2,836,000
Property and equipment, net 540,000 477,000
Intangible Assets 279,000 --
Goodwill 948,000 --
Other non-current assets 99,000 214,000
------------ ------------
Total Assets $ 3,050,000 $ 3,527,000
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable $ 733,000 $ 518,000
Accrued expenses 586,000 418,000
Deferred Revenue 60,000 --
Convertible loan due 2000 409,000 --
------------ ------------
Total Current Liabilities 1,788,000 936,000
------------ ------------
Long Term Obligations:
7% convertible senior notes due 2003 2,220,000 1,779,000
Convertible loan due 2000 -- 429,000
------------ ------------
2,220,000 2,208,000
------------ ------------
Total Liabilities 4,008,000 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:
Common stock, $.01 par value, 20,000,000 shares
authorized, 6,585,069 and 6,138,916 shares issued and
outstanding at December 31, 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. Liquidation value - $500,000 5,000 --
Additional paid-in capital 11,384,000 10,151,000
Accumulated deficit (12,221,000) (10,117,000)
Notes receivable from officers (200,000) (200,000)
Cumulative translation adjustment 8,000 (12,000)
------------ ------------
Total Stockholders' Deficit (958,000) (117,000)
------------ ------------
Total Liabilities, Convertible Preferred Stock and
Stockholders' Deficit $ 3,050,000 $ 3,527,000
============ ============
</TABLE>
4
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CARDIOTECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the For the
Three Months Ended December 31, Nine Months Ended December 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Product Sales $ 180,000 $ 46,000 $ 383,000 $ 160,000
Research Grants 215,000 144,000 498,000 424,000
Evaluation Income & Royalties 121,000 72,000 235,000 201,000
----------- ----------- ----------- -----------
516,000 262,000 1,116,000 785,000
Operating Expense:
Cost of Sales 186,000 130,000 743,000 354,000
Research and development 377,000 410,000 1,003,000 1,110,000
Selling, general and administrative 413,000 439,000 1,338,000 975,000
----------- ----------- ----------- -----------
976,000 979,000 3,084,000 2,439,000
----------- ----------- ----------- -----------
Loss from Operations (460,000) (717,000) (1,968,000) (1,654,000)
----------- ----------- ----------- -----------
Other Income and Expense:
Interest expense (49,000) (46,000) (134,000) (150,000)
Interest income 6,000 24,000 42,000 69,000
Other income 5,000 -- 5,000 --
----------- ----------- ----------- -----------
(38,000) (22,000) (87,000) (81,000)
----------- ----------- ----------- -----------
Net Loss $ (498,000) $ (739,000) $(2,055,000) $(1,735,000)
=========== =========== =========== ===========
Other comprehensive income:
Foreign currency translation adjustments 8,000 (7,000) 8,000 (7,000)
----------- ----------- ----------- -----------
Comprehensive loss $ (490,000) $ (746,000) $(2,047,000) $(1,742,000)
=========== =========== =========== ===========
Net loss per common share basic and diluted
and diluted $ (0.08) $ (0.16) $ (0.32) $ (0.40)
=========== =========== =========== ===========
Shares used in computing Net Loss
per common share, basic and diluted 6,585,069 4,597,438 6,439,055 4,381,483
=========== =========== =========== ===========
</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 Nine Months Ended December 31,
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net Loss $(2,055,000) $(1,735,000)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Interest on convertible senior notes 91,000 89,000
Depreciation and amortization 253,000 79,000
Changes in assets and liabilities: (net of effects
of Tyndale Plains-Hunter acquisition)
Accounts receivable (157,000) 77,000
Inventory (121,000) --
Prepaid expenses (17,000) (61,000)
Other non-current assets (190,000) (24,000)
Accounts payable 229,000 (62,000)
Accrued expenses and other current liabilities 78,000 82,000
----------- -----------
Net cash flows used by operating activities (1,889,000) (1,555,000)
Cash flows from investing activities:
Purchase of property and equipment (53,000) (202,000)
Acquisition of Tyndale Plains-Hunter, net (327,000) --
----------- -----------
Net cash flows used by investing activities (380,000) (202,000)
Cash flows from financing activities:
Net proceeds from issuance of convertible notes 340,000 420,000
Net proceeds from issuance of preferred stock -- 500,000
Net proceeds from issuance of common stock -- 1,783,000
----------- -----------
Net cash flows provided by financing activities 340,000 2,703,000
Effect of exchange rate changes on cash (1,000) (11,000)
----------- -----------
Net decrease in cash and cash equivalents (1,930,000) 935,000
Cash and cash equivalents at beginning of period 2,392,000 2,227,000
----------- -----------
Cash and cash equivalents at end of period $ 462,000 $ 3,162,000
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Issuance of Notes Receivable from Officers $ (200,000) $ (200,000)
Taxes Paid $ 5,500 $ 5,500
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE>
CARDIOTECH INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 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 December 31, 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
7
<PAGE>
$1.625 per share) and cash of $350,000. 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 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 December 31, 1999 is $2,220,000.
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 December 31, 1999 and 1998.
Revenue for the quarter ended December 31, 1999 was $516,000 compared to
$262,000 for the quarter ended December 31, 1998, an increase of $254,000, or
97%. This increase was primarily the result of increases in product sales of
biomaterials of $30,000, TPH Biomaterials sales of $71,000, and vascular access
grafts of $33,000. The increase was also a result of an increase in SBIR
research grant revenue of $71,000 and license and royalties of $49,000.
Cost of Sales for the quarter ended December 31, 1999 was $186,000
compared to $130,000 for the quarter ended December 31, 1998, an increase of
$56,000, or 43%. 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 December 31, 1999
was $377,000, compared to $410,000 for the quarter ended December 31, 1998, a
decrease of $33,000, or 8%. This decrease was principally the result of
decreased research and development expenses related to completion of the
vascular graft clinical trials.
Selling, general and administrative expense for the quarter ended December
31, 1999 was $413,000, compared to $439,000 for the quarter ended December 31,
1998 or a decrease of $26,000 or 6%. This decrease was primarily due to
increased cost control for general and administrative expenses, but was
partially offset by increases for marketing, advertising, and travel expenses
related to the vascular graft.
Other income and expense for the quarter ended December 31, 1999 was
expense of $38,000 compared to $22,000 for the quarter ended December 31, 1998.
The increase in expense primarily resulted from a decrease in interest income of
$18,000.
Net loss for the quarter ended December 31, 1999 was $498,000, compared to
$739,000 for the quarter ended December 31, 1998, or a decrease in net loss of
$241,000 or 33%. The decrease in net loss is primarily attributable to increases
in sales of vascular grafts and biomaterials, reduction of research expense, and
G&A cost controls. Net loss per share for the quarter ended December 31, 1999
was $0.08 per share as compared to $0.16 per share for the quarter ended
December 31, 1998, or a decrease in net loss of $0.08 per share or 20%.
Comparison for the Nine Months Ended December 31, 1999 and 1998.
Revenue for the nine months ended December 31, 1999 was $1,116,000
compared to $785,000 for the nine months ended December 31, 1998, an increase of
$331,000, or 42%. This increase was primarily the result of an increase in
product sales of biomaterials of $34,000, TPH Biomaterials sales of $91,000,
vascular access grafts of $98,000, and SBIR grant revenue of $74,000.
Cost of Sales for the nine months December 31, 1999 was $743,000 compared
to $354,000 for the nine months ended December 31, 1998, an increase of
$389,000, or 110%. 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 nine months ended December 31,
1999 was $1,003,000, compared to $1,110,000 for the nine months ended December
31, 1998, a decrease of $107,000, or 10%. This decrease was principally the
result of decreased research and development expenses related to completion of
the vascular graft clinical trials.
Selling, general and administrative expense for the nine months ended
December 31, 1999 was $1,338,000, compared to $975,000 for the nine months ended
December 31, 1998 or an increase of $363,000 or 37%. This increase was primarily
due to increased marketing, advertising, and travel expenses related to the
vascular graft.
Other income and expense for the nine months ended December 31, 1999 was
expense of $87,000 compared to $81,000 for the nine months ended December 31,
1998. The increase in expense primarily resulted
10
<PAGE>
from a decrease in interest income of $27,000, and was partially offset by a
decrease in interest expense of $16,000 on outstanding loans.
Net loss for the nine months ended December 31, 1999 was $2,055,000,
compared to $1,735,000 for the nine months ended December 31, 1998, or an
increase in net loss of $320,000 or 18%. The increase in net loss is primarily
attributable to increased production costs for the vascular graft and TPH
biomaterials, as well as increased marketing costs related to introduction of
the vascular access graft in Europe. Net loss per share for the nine months
ended December 31, 1999 was $0.32 per share as compared to $0.40 per share for
the nine months ended December 31, 1998, or a decrease in net loss of $0.08 per
share or 19%.
Liquidity and Capital Resources
The Company used $327,000 to fund operations during the three months ended
December 31, 1999 compared to $1,703,000 for the three months ended December 31,
1998. The principal uses of funds for the three months ended December 31, 1999
were a net loss of $498,000, increase in accounts receivable of $950,000, and an
increase in inventory of $89,000. This was partially offset by an increase in
accounts payable of $149,000, and an increase in accrued expenses of $85,000.
The Company used $1,930,000 to fund operations during the nine months
ended December 31, 1999 compared to $935,000 provided for the nine months ended
December 31, 1998. The principal uses of funds for the nine months ended
December 31, 1999 were a net loss of $2,055,000, the acquisition of Tyndale
Plains-Hunter, Ltd. of $327,000, increase in other non-current assets of
$190,000, increase in accounts receivable of $157,000 relating to trade
customers, increase in inventory of $121,000, increase in prepaid expenses of
$17,000 and the purchase of property and equipment of $53,000. This was
partially offset by proceeds from issuance of debt of $340,000, and an increase
of accounts payable of $229,000.
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 to 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 December 31, 1999 is $2,220,000.
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.
11
<PAGE>
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 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 $462,000 in cash as of December 31, 1999. CardioTech estimates
such amount will be sufficient to fund its working capital and research and
development activities through March 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 December 31, 1999, CardioTech had stockholders' deficit of $958,000,
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 third quarter report ending December 31, 2000. There can also be
no assurance that CardioTech will be able to avoid delisting subsequent to the
issuance of its third 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 December 31, 1999 was $2,220,000.
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 December 31, 1999, the
outstanding principal balance of the Freemedic loan was (pound)253,000
($409,000).
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 a 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.) After December 31, 1999, 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.
As of February 14, 2000, CardioTech has not experienced any material
adverse effects on its results of operations or financial position nor did
CardioTech experience any adverse effects related to internal systems, vendors,
or customers related to the Year 2000 Issues.
14
<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:
Matter For Against Abstain Non-votes
------ --- ------- ------- ---------
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
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.
Current Report on Form 8-K dated December 7, 1999 related to a change in
the registrant's certifying Accountants.
Current Report on Form 8-K dated January 13, 2000 related to the
resignation of board members.
15
<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: February 22, 2000
16
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