SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934. For the quarterly period ended March 31, 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 Number
0-25133
PHARMANETICS, INC.
(Exact Name of Registrant as Specified in its Charter)
North Carolina 56-2098302
(State or other jurisdiction of (IRS Employer Identification Number)
Incorporation or organization)
5301 Departure Drive
Raleigh, North Carolina 27616
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, Including Area Code 919-954-9871
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 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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of May 4, 1999
Common Stock, par value $.001 7,454,521
1
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CARDIOVASCULAR DIAGNOSTICS, INC.
INDEX TO FORM 10-Q
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1999
(unaudited) and December 31, 1998 3
Consolidated Statements of Operations for
the Three Months ended March 31, 1999 and 1998
(unaudited) 4
Consolidated Statements of Cash Flows for the Three Months
ended March 31, 1999 and 1998 (unaudited) 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
INDEX TO EXHIBITS 12
2
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PHARMANETICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $4,407 $3,998
Short term investments, held-to-maturity 2,242 3,703
Accounts receivable 1,996 2,069
Inventories 2,322 2,397
Other current assets 305 299
------- -------
Total current assets 11,272 12,466
Property and equipment, net 4,417 4,543
Intangible assets, net 1,504 1,547
Other assets, net 274 137
------- -------
Total assets $17,467 $18,693
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 449 $ 429
Accrued expenses 123 169
Current portion of long term debt and capital lease obligations 700 725
------- -------
Total current liabilities 1,272 1,323
Long term debt and capital lease obligations, less current portion 1,479 1,626
------- -------
Total liabilities 2,751 2,949
------- -------
Shareholders' equity:
Preferred stock, $.001 par value; authorized 1,000,000 shares- no shares
issued or outstanding at March 31, 1999 and December 31, 1998
Common stock, $.001 par value; authorized 10,000,000 shares;
7,454,521 and 7,452,781 issued and outstanding at
March 31, 1999 and December 31, 1998, respectively 7 7
Additional paid-in capital 40,011 40,010
Accumulated deficit (25,294) (24,262)
Unearned compensation (8) (11)
------- -------
Total shareholders' equity 14,716 15,744
------- -------
Total liabilities and shareholders' equity $17,467 $18,693
======= =======
Commitments and contingencies
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
PHARMANETICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share data)
THREE MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998
---- ----
Net sales $ 2,174 $ 2,404
Cost of goods sold 1,556 1,645
--------- ---------
Gross profit 618 759
--------- ---------
Operating expenses:
General and administrative 739 764
Sales and marketing 205 228
Research and development 691 631
--------- ---------
Total operating expenses 1,635 1,623
--------- ---------
Operating loss (1,017) (864)
--------- ---------
Other income(expense):
Interest expense (88) (76)
Interest income 80 65
Grant/royalty income 7 7
Development income -- 375
--------- ---------
Total other income (expense) (1) 371
--------- ---------
Net loss before taxes (1,018) (493)
Provision for income taxes (14) (26)
--------- ---------
Net and comprehensive loss ($ 1,032) ($ 519)
========= =========
Basic and diluted net loss per common share ($ 0.14) ($ 0.08)
========= =========
Average weighted shares outstanding 7,453,580 6,764,245
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
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PHARMANETICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss ($1,032) ($ 519)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 218 218
Amortization of intangible and other assets 82 65
Amortization of discount on investments (39) --
Provision for inventory obsolescence 20
Change in assets and liabilities:
Accounts receivable 73 7
Inventories 55 103
Other assets (161) (140)
Accounts payable and accrued expenses (26) (960)
------- -------
Net cash used in operating activities (810) (1,226)
------- -------
Cash flows from investing activities:
Payments for purchase of property and equipment (52) (290)
Costs incurred to obtain patents and intangibles (19) (2)
Proceeds from maturities of investments 1,500 --
------- -------
Net cash (used in) provided by investing activities 1,429 (292)
------- -------
Cash flows from financing activities:
Principal payments on long-term debt and capital lease
obligations (211) (94)
Net proceeds from issuance of stock 1 69
------- -------
Net cash used in financing activities (210) (25)
------- -------
Net increase (decrease) in cash and cash equivalents $ 409 $(1,543)
Cash and cash equivalents at beginning of period 3,998 5,885
------- -------
Cash and cash equivalents at end of period $ 4,407 $ 4,342
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
PHARMANETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Organization and Basis of Presentation
PharmaNetics, Inc. (the "Company") is a holding company incorporated in July
1998 as the parent company of Cardiovascular Diagnostics, Inc. ("CVDI"). CVDI
was incorporated in November 1985 and develops, manufactures and markets rapid
turnaround, point-of-care diagnostic tests to assess blood clot formation and
dissolution. CVDI develops tests based on its proprietary, dry chemistry
diagnostic test system, known as the Thrombolytic Assessment System ("TAS"), to
provide rapid and accurate evaluation of hemostasis at the point of patient
care. CVDI's wholly-owned subsidiary, Coeur Laboratories ("Coeur"), manufactures
and sells disposable power injection syringes. The consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. All intercompany activity has been eliminated. The consolidated
financial statements included herein as of any date other than December 31 have
been prepared by the Company without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Financial information as
of December 31 has been derived from the audited financial statements of the
Company, but does not include all disclosures required by generally accepted
accounting principles. In the opinion of management, the accompanying unaudited
consolidated financial statements include all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the consolidated
financial position, results of operations and cash flows of the Company. For
further information regarding the Company's accounting policies, refer to the
Consolidated Financial Statements and related notes included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998. Results for the
interim period are not necessarily indicative of the results for any other
interim period or for the full fiscal year.
Note 2. Income Taxes
The Company has no federal income tax provision or benefit, as the Company has
not realized net income for the quarter ended March 31, 1999 and has net
operating loss carryforwards to offset any net income when realized. Income tax
expense recognized represents Coeur's state income tax expense.
Note 3. Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents.
Note 4. Inventory
Inventories consisted of the following:
March 31, 1999 December 31, 1998
-------------- -----------------
Raw materials $1,815,000 $1,860,000
Finished goods 507,000 537,000
---------- ----------
$2,322,000 $2,397,000
========== ==========
Note 5. Loss Per Common Share
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share" ("EPS"), the Company is required to present both basic and
diluted EPS on the face of the Statement of Operations. Basic EPS excludes
dilution and is computed by dividing income (loss) available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted EPS is the same as basic EPS for the Company's quarters ended
March 31, 1999 and 1998, because, for loss periods, potential common shares
(such as options) are not included in computing diluted EPS since the effect
would be antidilutive.
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Note 6. Segment Information
The Company has adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 requires the Company to report
selected information about operating segments beginning as of December 31, 1998.
The Company is organized and manages its business primarily on the basis of its
operating divisions, CVDI and Coeur. Each of these segments earns revenue,
incurs expenses and has discrete financial information available to it. Segment
expenses include allocations of certain expenses to each segment. Management
evaluates the performance of its segments based on net income (loss).
The table below presents information concerning revenues, net income (loss) and
segment assets:
Three Months Ended March 31, 1999
------------------------------------------
CVDI Coeur Consolidated
---- ----- ------------
Revenues $ 1,011,000 $ 1,163,000 $ 2,174,000
Net income (loss) $ (1,207,000) $ 175,000 $ (1,032,000)
Total assets $ 13,026,000 $ 4,441,000 $ 17,467,000
Three Months Ended March 31, 1998
------------------------------------------
CVDI Coeur Consolidated
---- ----- ------------
Revenues $ 1,081,000 $ 1,323,000 $ 2,404,000
Net income (loss) $ (767,000) $ 248,000 $ (519,000)
Total assets $ 12,093,000 $ 4,089,000 $ 16,182,000
Note 7. Distribution Agreement
In August 1998, the Company signed a five-year distribution agreement with
Chiron Diagnostics ("Chiron"), now a part of Bayer Diagnostics ("Bayer"). Bayer
will distribute the Company's PT, aPTT, HMT, and LHMT test cards in North
America and certain South American, European and Asian countries, subject to
minimum annual sales. At the time the distribution agreement was signed, the
Company received an equity investment of $6 million from Chiron.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements. The Company's actual results
might differ materially from those projected in the forward-looking statements
due to any number of factors, including those set forth below under "--Factors
That May Affect Future Results". Additional information concerning factors that
could cause actual results to materially differ from those in the
forward-looking statements is contained in the Company's other SEC filings,
copies of which are available upon request from the Company.
The following discussion should be read in connection with the unaudited
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
report. Unless the context indicates otherwise, all references to the Company
include PharmaNetics, Inc., its subsidiary Cardiovascular Diagnostics, Inc.
("CVDI") and CVDI's subsidiary, Coeur Laboratories, Inc.("Coeur").
CVDI develops, markets and manufactures a Thrombolytic Assessment System
("TAS"), consisting of a compact, portable analyzer and disposable test cards
which are inserted into the analyzer to perform a variety of hemostasis tests.
Coeur manufactures and sells a line of disposable syringes used in angiography
injectors.
CVDI began marketing TAS products in May 1995 through a direct sales force. In
October 1996, given the consolidation in the hospital industry, the marketing
focus was shifted to begin targeting major corporate accounts and integrated
health networks ("IHNs") and soon after, CVDI signed development and
distribution agreements with Dade International, Inc. ("Dade") and Avecor
Cardiovascular to distribute its products. In August 1998, CVDI signed a global
distribution agreement with Chiron Diagnostics, which is now a part of the
diagnostics division of the Bayer Corporation, to distribute CVDI's PT, aPTT,
HMT, and LHMT test cards in North America and certain South American, European
and Asian countries. At that time, the Company received an equity investment of
$6 million from Chiron. This distribution agreement has or will replace the
distribution agreements which existed prior to such date. In connection with
CVDI's termination of the distribution agreement with Dade, the Company agreed
to continue to supply test cards to Dade's existing customers for three years.
Given the consolidating hospital market and pricing pressures, the Company's
strategy has evolved towards becoming more focused on the development of
specialty tests for drugs, some with narrow ranges between over- and
under-dosage. The Company believes that rapid diagnostic capabilities improve
patient care and turnover, and that there is a market trend to obtain diagnostic
information faster in order to effect therapy sooner. The Company also believes
that these trends should allow the Company to obtain higher pricing for these
specialty tests. As a result, during 1997 and 1998 the Company exhibited the
flexibility of the TAS platform and the potential to expand its menu of
specialty tests by signing collaboration agreements with Knoll AG, Eli Lilly and
Company and Astra AB to monitor the effects of certain new drugs that are in
clinical trials. The Company believes that these and other collaborations for
specialty tests will also further demand for analyzers and routine anticoagulant
tests. The Company believes it is well positioned in its development efforts to
expand its menu of tests to monitor developmental drugs where rapid therapeutic
intervention is needed.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 VS MARCH 31, 1998
Net sales for the quarter ended March 31, 1999 were $2,174,000 compared to
$2,404,000 in the same period in 1998. Net sales were comprised of $1,011,000 of
TAS product sales and $1,163,000 of syringe product sales. Revenues from TAS
product sales decreased approximately $70,000 compared to the quarter ended
March 31, 1998. The 1998 quarter included a large shipment of TAS analyzers to
Knoll AG in connection with their clinical trials. Coeur product sales for the
1999 quarter of $1,163,000 was a decrease of approximately $159,000 compared to
the three months ended March 31, 1998. Sales were higher in 1998 due to a major
customer securing a new contract with a large purchasing group which led to some
large initial orders for Coeur products.
Cost of goods sold of $1,556,000 represented a decrease of $89,000 from the
comparable period in 1998. The resulting 28% gross profit percentage for the
first quarter of 1999 was lower than the 32% gross profit percentage for the
corresponding period in 1998. This decrease was mainly due to the decreased
volumes of syringes and a
8
<PAGE>
decrease in the average sale price of TAS analyzers sold in 1999 compared to the
first quarter of 1998.
Total operating expenses for the quarter ended March 31, 1999 were $1,635,000, a
1% increase from the first quarter of 1998. General and administrative and sales
and marketing expenses decreased slightly and research and development expenses
increased 9% compared to the quarter ended March 31, 1998, principally due to
increased personnel and increased research trial expenses related to development
of specialty tests.
Other income (expense) for the quarter ended March 31, 1999, which is composed
of interest income, interest expense, royalty income and development income, was
a net expense of $1,000 compared to a net income of $371,000 in the quarter
ended March 31, 1998. The decrease was principally the result of development
income of $375,000 recognized in the quarter ended March 31, 1998 when
milestones related to collaborative agreements were achieved.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had cash and cash equivalents and short-term
investments of $6.7 million and working capital of $10 million, as compared to
$7.7 million and $11.1 million, respectively, at December 31, 1998. During the
quarter ended March 31, 1999, the Company used cash in operating activities of
$810,000. The use of cash was primarily due to funding the net operating loss of
the Company. Net cash provided by investing activities during the quarter was
$1.4 million resulting mainly from the maturity of short-term investments. Net
cash used in financing activities was due to paydown of the Company's long-term
debt.
The Company expects to incur additional operating losses during the remainder of
1999 and 2000. The Company's working capital requirements will depend on many
factors, primarily the volume of future orders of TAS products from the
Company's distributors, primarily Bayer Diagnostics. In addition, the Company
expects to incur costs associated with clinical trials for development of new
test cards. The Company may acquire other products, technologies or businesses
that complement the Company's existing and planned products, although the
Company currently has no understanding, commitment or agreement with respect to
any such acquisitions. Management believes that its existing capital resources
and cash flows from operations, including that from its distribution agreement
with Bayer Diagnostics, will be adequate to satisfy its planned capital
requirements through 1999. To enhance liquidity, the Company plans to consider
external sources of financing as needed. In addition to other debt financings
such as a working capital line of credit, the Company also plans to consider
equity financings such as a private placement, a follow-on public offering of
common stock or additional equity infusions from collaborative partners.
YEAR 2000
Computers, software and microprocessors that use only two digits to identify a
year in a date field may be unable to process accurately certain date-based
information at or after the year 2000. This is commonly referred to as the "Year
2000 issue". The Company is addressing the issue in several ways. First, the
Company has established a team to monitor product compliance and believes that
all Company products are Year 2000 compliant. Secondly, the Company is in the
process of seeking Year 2000 compliance certification from its major suppliers
and vendors related to their products and internal business applications.
Finally, the Company has established a team to coordinate Year 2000 compliance
related to internal systems.
Many of the Company's systems use vendor-provided software and Year 2000
compliance is expected to be achieved through vendor-provided upgrades. For
other internal systems, testing will be completed internally to ensure Year 2000
compliance. Currently, the Company has completed its assessment and testing of
Year 2000 compliance with respect to all of its own products, 74% of its own
internal systems and approximately 71% of its vendor-provided systems and
applications. The Company anticipates all of its systems will have been
assessed, tested and updated through vendor provider upgrades or through
completion of internal testing prior to June 30, 1999. The Company believes that
the cost of its Year 2000 compliance program, which solely relates to internal
personnel time, has been approximately $30,000 through March 31, 1999 and will
be approximately $50,000 in total. The Company does not believe that its
business will be materially adversely affected by the Year 2000 issue. However,
the Company continues to bear risk related to the Year 2000 and could be
materially adversely affected if significant customers or suppliers fail to
address the issue or if vendor upgrades are not provided to the Company as
required. In a worst case scenario, the Company could be forced to spend
significant resources and funds to find alternative providers of systems and
applications used by the Company. If completion of the Company's assessment of
vendor-provided systems reveals Year 2000 non-compliance, the Company's
contingency plan is to insist upon vendor compliance a reasonable time in
advance of Year 2000 and to pursue arrangements with other vendors.
9
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FACTORS THAT MAY AFFECT FUTURE RESULTS
A number of uncertainties exist that may affect the Company's future operating
results and stock price, including: risks associated with development of new
tests, particularly specialty tests that rely on development, regulatory
approval, commercialization and market acceptance of collaborators' new drugs;
market acceptance of TAS; the Company's continuing losses and the resulting
potential need for additional capital in the future; managed care and continuing
market consolidation, which may result in price pressure, particularly on
routine tests; and FDA regulations and other regulatory guidelines affecting the
Company and/or its collaborators. The market price of the common stock could be
subject to significant fluctuations in response to variations in the Company's
quarterly operating results as well as other factors which may be unrelated to
the Company's performance. The stock market in recent years has experienced
extreme price and volume fluctuations that often have been unrelated or
disproportionate to the operating performance of and announcements concerning
public companies. Such broad fluctuations may adversely affect the market price
of the Company's common stock. Securities of issuers having relatively limited
capitalization or securities recently issued in an initial public offering are
particularly susceptible to volatility based on short-term trading strategies of
certain investors.
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed during the period.
10
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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.
PHARMANETICS, INC.
Date: May 13, 1999 By: /s/ Paul Storey
-------------------
Paul Storey
Treasurer
(Principal Financial and Accounting Officer)
11
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INDEX TO EXHIBITS
Exhibit Description
------- -----------
27.1 Financial Data Schedule
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,407
<SECURITIES> 2,242
<RECEIVABLES> 2,011
<ALLOWANCES> (15)
<INVENTORY> 2,322
<CURRENT-ASSETS> 305
<PP&E> 9,009
<DEPRECIATION> (4,592)
<TOTAL-ASSETS> 17,467
<CURRENT-LIABILITIES> 1,272
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 14,709
<TOTAL-LIABILITY-AND-EQUITY> 17,467
<SALES> 2,174
<TOTAL-REVENUES> 2,174
<CGS> (1,556)
<TOTAL-COSTS> (1,556)
<OTHER-EXPENSES> (1,635)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (88)
<INCOME-PRETAX> (1,018)
<INCOME-TAX> (14)
<INCOME-CONTINUING> (1,032)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,032)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
