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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1996.
/ / 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 1-8366
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POLYDEX PHARMACEUTICALS LIMITED
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(Exact Name of Registrant as specified in its charter)
BAHAMAS NONE
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
421 Comstock Road, Scarborough, Ontario, Canada M1L 2H5
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(Address of principal executive offices)
Registrant's telephone number, including area code (416) 755-2231
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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 Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Common Shares 28,252,182
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(Title of Class) (Outstanding at July 31, 1996)
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POLYDEX PHARMACEUTICALS LIMITED
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TABLE OF CONTENTS
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PART I FINANCIAL INFORMATION
Item 1 CONSOLIDATED FINANCIAL STATEMENTS
- ------ (UNAUDITED)
CONSOLIDATED CONDENSED BALANCE SHEETS
July 31, 1996 and January 31, 1996................................................ 2
CONSOLIDATED STATEMENTS OF OPERATIONS
Year to date July 31, 1996 and 1995............................................... 4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Year to date July 31, 1996 and 1995............................................... 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year to date July 31, 1996 and 1995............................................... 6
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------ OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................................................................ 7
PART II OTHER INFORMATION
Item 6 EXHIBITS AND REPORT ON FORM 8-K
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Signatures........................................................................ 11
Exhibit Index..................................................................... 12
Exhibit 27 - Financial Data Schedule
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POLYDEX PHARMACEUTICALS LIMITED AND SUBSIDIARIES
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Consolidated Condensed Balance Sheets (Unaudited)
(Expressed in United States dollars)
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<CAPTION>
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July 31 January 31
1996 1996
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ASSETS
CURRENT ASSETS
Cash $ 1,078,665 $ 12,321
Trade accounts receivable, net of
allowance 743,009 727,135
Interest receivable 9,701 --
Inventories:
Finished goods 699,216 802,812
Work in process 50,212 98,281
Raw materials 501,252 506,862
----------- -----------
1,250,680 1,407,955
Prepaid expenses and other current
assets 63,933 64,394
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TOTAL CURRENT ASSETS .......... 3,145,988 2,211,805
Property, plant and equipment
(at cost)
Land and buildings 2,379,195 2,320,588
Machinery and equipment 4,816,707 4,689,083
----------- -----------
7,195,902 7,009,671
Less allowances for depreciation and
amortization (3,728,479) (3,506,611)
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3,467,423 3,503,060
Patents and animal drug 942,151 991,731
applications at cost, net of
accumulated amortization
Investment in Novatek International, -- 400,000
Inc.
Due from affiliated companies 838,911 838,911
Goodwill, net of accumulated 24,646 38,396
amortization
Other Assets 73,145 81,087
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TOTAL ASSETS ...................... $ 8,492,264 $ 8,064,990
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POLYDEX PHARMACEUTICALS LIMITED AND SUBSIDIARIES
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Consolidated Condensed Balance Sheets (Unaudited)
(Expressed in United States dollars)
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July 31 January 31
1996 1996
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 907,751 $ 1,307,588
Accrued liabilities 748,823 582,612
Current portion of long-term debt 72,531 78,097
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TOTAL CURRENT LIABILITIES $ 1,729,105 $ 1,968,297
Long-term debt 525,353 558,829
Due to shareholders 584,496 648,792
Due to affiliated companies 425,420 425,420
Minority interest 22,935 22,935
SHAREHOLDERS' EQUITY
Capital stock:
Authorized:
1,000,000 A preferred shares
of $0.01 each
8,994,000 B preferred shares
of $0.00167 each
40,000,000 common shares of
$0.00167 each
Issued and outstanding:
8,994,000 B preferred shares 15,010 15,010
28,252,182 common shares
(January 31, 1996 -
28,052,182) of which 82,400
are held in treasury 46,959 46,625
Contributed surplus 22,733,319 22,583,653
Deficit (17,069,767) (17,681,720)
Currency translation adjustments (520,566) (522,851)
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TOTAL SHAREHOLDERS' EQUITY 5,204,955 4,440,717
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TOTAL LIABILITIES & SHAREHOLDERS' $ 8,492,264 $ 8,064,990
EQUITY ============ ============
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POLYDEX PHARMACEUTICALS LIMITED AND SUBSIDIARIES
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Consolidated Statements of Operations (Unaudited)
(Expressed in United States dollars)
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Quarter ended Year to date Quarter ended Year to date
July 31 July 31 July 31 July 31
1996 1996 1995 1995
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Sales $ 1,902,118 $ 4,149,078 $ 1,990,817 $ 4,103,589
Cost of products sold,
exclusive of depreciation 1,477,652 3,154,405 1,561,857 3,339,591
reported below ----------- ----------- ----------- -----------
424,466 994,673 428,960 763,998
Expenses:
Selling and promotion 39,598 67,372 36,848 99,083
General and administrative 442,846 759,589 254,581 504,625
Depreciation and amortization 157,026 300,237 139,479 261,098
Interest expense 38,657 77,826 29,509 54,764
Research and development 24,521 85,355 66,024 95,408
----------- ----------- ----------- -----------
702,648 1,290,379 526,441 1,014,978
Loss from operations (278,182) (295,706) (97,481) (250,980)
Other income and expenses:
Gain on disposal of long-term
investments 878,412 878,412 -- --
Interest and other 23,405 29,247 12,693 50,621
----------- ----------- ----------- -----------
901,817 907,659 12,693 50,621
Profit (loss) before the
undernoted 623,635 611,953 (84,788) (200,359)
Provision for income taxes -- -- -- --
Minority interest in loss -- -- 10,115 10,115
----------- ----------- ----------- -----------
Profit(loss) for the period 623,635 611,953 (74,673) (190,244)
Per share information:
Profit (loss) per common
share:
For the period $ 0.02 $ 0.02 $ 0.00 $ (0.01)
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POLYDEX PHARMACEUTICALS LIMITED AND SUBSIDIARIES
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Consolidated Statements of Shareholders' Equity (Unaudited)
(Expressed in United States dollars)
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<CAPTION>
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Year to date Year to date
July 31 July 31
1996 1995
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PREFERRED SHARES
Balance, beginning of period $ 15,010 $ 4,990
Private placement of preferred shares -- --
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Balance, end of period $ 15,010 $ 4,990
COMMON SHARES
Balance, beginning of period $ 46,625 $ 46,609
Exercise of options 334 --
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Balance, end of period $ 46,959 $ 46,609
CONTRIBUTED SURPLUS
Balance, beginning of period $ 22,583,653 $ 22,573,669
Exercise of options $ 149,666 $ --
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Balance, end of period $ 22,733,319 $ 22,573,669
DEFICIT
Balance, beginning of period $(17,681,720) $(16,516,186)
Net income (loss) for the period (611,953) (190,244)
------------ ------------
Balance, end of period $(17,069,767) $(16,706,430)
CURRENCY TRANSLATION ADJUSTMENTS
Balance, beginning of period $ (522,851) $ (463,689)
Currency translation adjustment for the
period 2,285 37,997
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Balance, end of period $ (520,566) $ (425,692)
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POLYDEX PHARMACEUTICALS LIMITED AND SUBSIDIARIES
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Consolidated Statements of Cash Flows (Unaudited)
(Expressed in United States dollars)
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<CAPTION>
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Year to date Year to date
July 31 July 31
1996 1995
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Cash provided by (used in):
OPERATING ACTIVITIES
Profit (loss) for the period $ (611,953) $(190,244)
Add (deduct) items not affecting cash:
Depreciation and amortization 300,237 261,098
Gain on sale of investment in Novatek
International Inc. (878,412) --
Minority interest -- (10,115)
Change in non-cash operating working
capital (101,465) (224,255)
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(67,687) (163,516)
INVESTING ACTIVITIES
Proceeds from sale of investment in 1,278,412 --
Novatek International Inc.
Additions to property, plant and
equipment (175,462) (71,840)
Additions to patents (1,877) --
Acquisition of subsidiary company -- 250,000
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1,101,073 (178,160)
FINANCING ACTIVITIES
Increase in (repayment of) loan payable -- 45,611
Repayment of long-term debt (39,042) (2,141)
Increase in (repayment of) due to
shareholders 85,704 420,152
Decrease (increase) in due from
affiliated companies -- (80,803)
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46,662 382,819
Effect of exchange rate changes on cash (13,704) (9,890)
----------- ---------
Increase (decrease) in cash position 1,066,344 (387,573)
Cash position, beginning of period 12,321 135,195
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Cash position, end of period $ 1,078,665 $ 522,768
=========== =========
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS.
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(a) AND (b) LIQUIDITY AND CAPITAL RESOURCES
In the second quarter, the Registrant generated a negative cash flow from
operations of $29,545 compared to the first quarter negative cash flow from
operations of $38,142 and the prior year's second quarter positive cash flow
from operations of $85,483. The modest reduction in second quarter negative
cash flow from operations is due to a significant increase in profitability at
Dextran Products Limited ("Dextran") along with reductions in both accounts
receivable and inventory levels offset by a large loss at Veterinary
Laboratories Inc. ("Vet Labs"). Dextran realized an increase in net profits of
$81,970 over the first quarter of the current fiscal year. This increase is the
result of a significant increase in customer orders. Orders placed by MTC
Animal Health account for 11.5% of Dextran's total annual sales. Sales to Vet
Labs account for less than 10% of Dextran's total annual sales.
Vet Labs' loss increased by $176,122 in the second quarter. The loss originally
stemmed from the severe drought experienced by the midwestern region of the
United States beginning in May of 1996 and the ten-year beef cycle that forced
the price of beef downward. As farmers began to experience financial
difficulties, they were forced to significantly decrease the amount of
medication purchased for their livestock. Consequently, Vet Labs' sales to
farmers in the midwest decreased significantly and the company sustained a
significant loss of revenue. This loss of revenue was further compounded by a
price war initiated by a competitor of Vet Labs for the sale of Iron Dextran
injectibles. Vet Labs, a major producer of Iron Dextran, acquires the raw
materials to manufacture this product from Dextran. During the price war, Vet
Labs, in order to remain competitive, had to lower the price of its Iron
Dextran injectibles to $2.00 per bottle. Currently, the price of Iron Dextran
is $2.70 per bottle.
Accounts receivable decreased by $109,821 during the second quarter of this year
as a result of the decreased sales at Vet Labs. Inventories decreased by $98,139
during the second quarter as a result of the increased sales at Dextran and Vet
Labs' efforts to control inventory costs.
During the second quarter, Thomas C. Usher exercised options to purchase 200,000
common shares of the Registrant. The exercise price of the option was $0.75 per
share or $150,000 in the aggregate. In lieu of payment to the Registrant, the
shareholder reduced the amount owing to him from the Registrant
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by $150,000. Since this was a non-cash transaction, it has been excluded from
the Registrant's consolidated statement of cash flows.
Positive operational cash flows are anticipated in the future, but should the
need for further cash infusions arise, the Registrant believes that continued
loans and/or capital contributions from principal shareholders will meet these
requirements.
(c) RESULTS OF OPERATIONS
During the second quarter, the Registrant's pre-tax loss from operations prior
to research and development, interest charges, depreciation and interest and
other income amounted to $57,978, as compared to a similarly calculated pre-tax
profit of $137,531 for the same period last year and $225,690 for the first
quarter of this year. This decrease in results, as compared to the previous
quarter and the same quarter in the previous year, is primarily due to the large
loss incurred at Vet Labs and increased legal fees, as described below. As
discussed above, sales at Vet Labs during the second quarter decreased
significantly due to the drought experienced in the midwestern region of the
United States and the drop in beef prices.
Sales volume this quarter was $88,699 lower than the same quarter of the prior
year. This decrease in sales is attributable to the large drop in sales at Vet
Labs compared to the same quarter last year offset, in part, by the increase
in sales at Dextran.
Gross margins decreased from 25% in the first quarter of this year to 22% this
quarter due to decreased gross margins experienced by Vet Labs. Dextran's gross
margin held consistent at 37% while Vet Labs' gross margin decreased from 13% to
- -1%.
In the second quarter, the Registrant also recorded a gain of $878,412. This
gain was a result of the sale of shares of Novatek International, Inc.
("Novatek Shares"). Up until April 28, 1996, the Novatek Shares were subject
to options held by third parties. After April 28, 1996, the options expired and
the Registrant sold the Novatek Shares on the open market realizing the gain.
Subsequently, the former option holders alleged that they had exercised their
option and have filed a lawsuit against the Registrant for damages. The
Registrant does not believe that the option was exercised. The loss, if any, as
a result of this lawsuit is not determinable at this time, however, the
Registrant has reserved $100,000 for potential legal fees to fight this claim.
This cost has been charged to general and administrative expenses in the
Registrant's statement of operations.
Selling and promotion expenses decreased by $31,711 during the second quarter of
this year as a result of a reclassification of
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prior expenses and the savings that resulted from the Registrant discontinuing
its use of an outside marketing company.
Interest expenses have increased by $23,062 during the second quarter. This
increase is the result of the acquisition of an office building in Toronto
Canada, which is occupied by Dextran, in September of 1995. The office
building had previously been leased by Dextran.
The additional increase in general and administrative expenses during the second
quarter are a result of several factors. Salaries increased as a result of Natu
Patel, a member of the Registrant's Board of Directors, being named the
technical director of Vet Labs. Mr. Patel has overseen the operations of Vet
Labs since the third quarter of last fiscal year. In addition, legal expenses
increased as a result of retaining new legal counsel.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normally recurring accruals) considered necessary for a fair presentation
have been included.
Operating results for the second quarter ended July 31, 1996 are not necessarily
indicative of the results that may be expected for the year ended January 31,
1997. For further information, refer to the consolidated statements and
footnotes thereto included in the Registrant's annual report on Form 10-K for
the year ended January 31, 1996.
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PART II - OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
None.
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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.
Date: September 10, 1996
POLYDEX PHARMACEUTICALS LIMITED
(Registrant)
By /s/ George Usher
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George Usher, President
(Chief Operating Officer)
By /s/ Sharon Wardlaw
------------------------------
Sharon Wardlaw, Treasurer
(Chief Financial Officer)
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EXHIBIT INDEX
Description
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Financial Data Schedule
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JUL-31-1996
<EXCHANGE-RATE> 1
<CASH> 1,078,665
<SECURITIES> 0
<RECEIVABLES> 770,486
<ALLOWANCES> 27,477
<INVENTORY> 1,250,680
<CURRENT-ASSETS> 3,145,988
<PP&E> 7,195,902
<DEPRECIATION> 3,728,479
<TOTAL-ASSETS> 8,492,264
<CURRENT-LIABILITIES> 1,729,105
<BONDS> 525,353
<COMMON> 46,959
0
15,010
<OTHER-SE> 22,733,319
<TOTAL-LIABILITY-AND-EQUITY> 8,492,264
<SALES> 1,902,118
<TOTAL-REVENUES> 1,902,118
<CGS> 1,477,652
<TOTAL-COSTS> 1,477,652
<OTHER-EXPENSES> 663,991
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,657
<INCOME-PRETAX> 623,635
<INCOME-TAX> 0
<INCOME-CONTINUING> 623,635
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 623,635
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
