<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended December 31,1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 0-10961
QUIDEL CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2573850
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
10165 McKellar Court, San Diego, California 92121
(Address of principal executive offices)
Registrant's telephone number, including area code (619) 552-1100
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock as of
December 31, 1997 was 23,713,815.
<PAGE> 2
QUIDEL CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Numbers
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<S> <C> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets
December 31, 1997 and March 31, 1997.................................3
Condensed Consolidated Statements of Income
Three months ended December 31, 1997 and 1996........................4
Condensed Consolidated Statements of Income
Nine months ended December 31, 1997 and 1996.........................5
Condensed Consolidated Statements of Cash Flows
Nine months ended December 31, 1997 and 1996.........................6
Notes to Unaudited Condensed Consolidated
Financial Statements.................................................7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................8-12
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings...................................................13
ITEM 2. Changes in Securities...............................................13
ITEM 3. Defaults upon Senior Securities.....................................13
ITEM 4. Submission of Matters to a Vote of Security Holders.................13
ITEM 5. Other Information...................................................13
ITEM 6. Exhibits and Reports on Form 8-K....................................13
Signatures...........................................................................14
</TABLE>
2
<PAGE> 3
QUIDEL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1997
=========================================================================================================
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents .................................... $ 8,698,000 $ 10,096,000
Accounts receivable, net ..................................... 8,441,000 8,384,000
Inventories, at lower of cost (first-in, first-out) or market:
Raw materials ............................................ 2,505,000 1,842,000
Work in process .......................................... 1,734,000 1,216,000
Finished goods ........................................... 606,000 726,000
------------- -------------
4,845,000 3,784,000
Prepaid expenses and other current assets .................... 399,000 1,080,000
------------- -------------
Total current assets .................................. 22,383,000 23,344,000
Property and equipment, net ...................................... 16,514,000 13,886,000
Intangible assets, net ........................................... 6,481,000 4,854,000
Other assets ..................................................... 165,000 177,000
------------- -------------
$ 45,543,000 $ 42,261,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................. $ 2,274,000 $ 2,132,000
Deferred contract research revenue ........................... 1,646,000 --
Accrued payroll and related expenses ......................... 668,000 1,123,000
Accrued royalties ............................................ 544,000 85,000
Current portion of long-term debt and obligations
under capital leases ..................................... 197,000 183,000
Other current liabilities .................................... 336,000 377,000
------------- -------------
Total current liabilities ............................. 5,665,000 3,900,000
Long-term debt and obligations under capital leases .............. 3,052,000 3,203,000
Stockholders' equity:
Common stock ................................................. 24,000 24,000
Additional paid-in capital ................................... 116,394,000 115,943,000
Accumulated deficit .......................................... (79,592,000) (80,809,000)
------------- -------------
Total stockholders' equity ............................... 36,826,000 35,158,000
------------- -------------
$ 45,543,000 $ 42,261,000
============= =============
</TABLE>
See accompanying notes.
3
<PAGE> 4
QUIDEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended December 31, 1997 1996
==================================================================================
<S> <C> <C>
Revenues:
Net sales ............................... $ 12,447,000 $ 11,727,000
Research contracts and royalties ........ 995,000 710,000
------------ ------------
Total revenues ................... 13,442,000 12,437,000
Costs and expenses:
Cost of sales ........................... 6,191,000 5,358,000
Research and development ................ 1,888,000 1,595,000
Sales and marketing ..................... 2,621,000 2,560,000
General and administrative .............. 978,000 997,000
------------ ------------
Total costs and expenses ......... 11,678,000 10,510,000
Operating income ............................ 1,764,000 1,927,000
Other income and expense:
Interest and other income ............... 113,000 36,000
Interest and other expense .............. (122,000) (106,000)
------------ ------------
Income before income taxes .................. 1,755,000 1,857,000
Provision for income taxes .................. 51,000 52,000
------------ ------------
Net income $ ................................ $ 1,704,000 $ 1,805,000
============ ============
Basic and diluted earnings per share ........ $ .07 $ .08
============ ============
Shares used in basic per share calculations . 23,714,000 21,744,000
============ ============
Shares used in diluted per share calculations 23,991,000 22,374,000
============ ============
</TABLE>
See accompanying notes.
4
<PAGE> 5
QUIDEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended December 31, 1997 1996
=================================================================================
<S> <C> <C>
Revenues:
Net sales .............................. $ 32,448,000 $ 29,676,000
Research contracts and royalties ....... 2,350,000 2,141,000
------------ ------------
Total revenues .................. 34,798,000 31,817,000
Costs and expenses:
Cost of sales .......................... 16,816,000 13,870,000
Research and development ............... 5,672,000 5,044,000
Sales and marketing .................... 7,633,000 7,680,000
General and administrative ............. 3,368,000 2,691,000
------------ ------------
Total costs and expenses ........ 33,489,000 29,285,000
Operating income ........................... 1,309,000 2,532,000
Other income and expense:
Interest and other income .............. 343,000 110,000
Interest and other expense ............. (384,000) (353,000)
------------ ------------
Income before income taxes ................. 1,268,000 2,289,000
Provision for income taxes ................. 51,000 83,000
------------ ------------
Net income $ ............................... $ 1,217,000 $ 2,206,000
============ ============
Basic and diluted earnings per share ....... $ .05 $ .10
============ ============
Shares used in basic per share calculation . 23,622,000 21,644,000
============ ============
Shares used in diluted per share calculation 23,873,000 22,604,000
============ ============
</TABLE>
See accompanying notes.
5
<PAGE> 6
QUIDEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended December 31, 1997 1996
==================================================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................. $ 1,217,000 $ 2,206,000
Adjustments to reconcile net income to net cash
flows provided by operating activities:
Depreciation and amortization ....................... 2,308,000 1,793,000
Changes in assets and liabilities:
Accounts receivable .............................. (57,000) (731,000)
Inventories ...................................... (1,061,000) (732,000)
Prepaid expenses and other current assets ........ 681,000 (9,000)
Accounts payable ................................. 142,000 218,000
Accrued payroll and related expenses ............. (455,000) 356,000
Accrued royalty expense .......................... 460,000 -
Deferred contract research revenue ............... 1,646,000 (267,000)
Other current liabilities ........................ (42,000) 95,000
------------ ------------
Net cash flows provided by operating activities .. 4,839,000 2,929,000
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Additions to equipment and improvements ................. (4,086,000) (1,513,000)
Increase in intangible and other assets ................. (2,465,000) (361,000)
------------ ------------
Net cash flows used for investing activities ..... (6,551,000) (1,874,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock .............. 451,000 773,000
Payments on notes payable, long term debt and
obligations under capital leases .................... (137,000) (973,000)
------------ ------------
Net cash flows from (used in) financing activities 314,000 (200,000)
Net (decrease) increase in cash and cash equivalents ........ (1,398,000) 855,000
Cash and cash equivalents at beginning of period ............ 10,096,000 2,538,000
------------ ------------
Cash and cash equivalents at end of period .................. $ 8,698,000 $ 3,393,000
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ................ $ 250,000 $ 329,000
============ ============
</TABLE>
See accompanying notes.
6
<PAGE> 7
QUIDEL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
QUIDEL Corporation ("QUIDEL" or the "Company") discovers, develops,
manufactures and markets diagnostic products for human health care. The
unaudited financial information included herein is condensed and has
been prepared in accordance with generally accepted accounting
principles applicable to interim periods; consequently it does not
include all generally accepted accounting disclosures required for
complete annual financial statements. The condensed financial
information contains, in the opinion of management, all adjustments,
consisting of normal recurring adjustments, necessary to state fairly
the financial position, results of operations and cash flows. The
results of operations for the nine months ended December 31, 1997 are
not necessarily indicative of the results to be expected for the full
year.
Management suggests that these condensed financial statements be read in
conjunction with the financial statements and notes thereto for the year
ended March 31, 1997, included in the Company's Annual Report on Form
10-K filed with the Securities and Exchange Commission on June 27, 1997.
NET INCOME PER SHARE - Effective December 31, 1997, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings per
Share." In accordance with this statement, the Company has changed the
method used to calculate earnings per share for the current and prior
periods. The new requirements include a calculation of basic earnings
per share, from which the dilutive effect of stock options are excluded,
and the calculation of diluted earnings per share, both of which did not
differ from the previous primary earnings per share calculation.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for the historical information contained herein, the matters discussed in
this report are by their nature forward-looking. For the reasons stated in this
report or in the Company's Securities and Exchange Commission filings, or for
various unanticipated reasons, actual results may differ materially. The
Company's operating results may continue to fluctuate on a quarter-to-quarter
basis as a result of a number of factors, including the competitive and economic
factors affecting the Company's markets, actions of our major distributors,
adverse actions or delays in product reviews by the United States Food and Drug
Administration, the degree of acceptance that our new products achieve during
the year, and seasonality.
Results of Operations. The Company's financial results for the third quarter
ended December 31, 1997 reflect increased profitability due to increased sales
volume. Net income for the third quarter totaled $1,704,000 or $.07 per share.
NET SALES TRENDS BY MAJOR SALES CHANNELS
<TABLE>
<CAPTION>
INCREASE INCREASE
PERIODS ENDED DECEMBER 31, THREE MONTHS (DECREASE) NINE MONTHS (DECREASE)
(IN THOUSANDS) 1997 1996 % 1997 1996 %
=====================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Domestic sales:
Professional sales $ 8,075 $ 7,338 10% $21,443 $17,941 20%
OTC sales 944 552 71% 1,546 1,121 38%
Clinical lab sales 237 327 (28%) 948 1,040 (9%)
OEM sales 114 141 (19%) 346 612 (44%)
----------------------------------------------------------------
Total domestic sales 9,370 8,358 12% 24,283 20,714 17%
- -----------------------------------------------------------------------------------------------------
International sales:
Export sales 1,766 2,041 (13%) 4,746 5,917 (20%)
European subsidiary sales 1,311 1,328 (1%) 3,419 3,045 12%
----------------------------------------------------------------
Total international sales 3,077 3,369 (9%) 8,165 8,962 (9%)
- -----------------------------------------------------------------------------------------------------
Total net sales $12,447 $11,727 6% $32,448 $29,676 9%
=====================================================================================================
</TABLE>
Overall sales for the third quarter increased $720,000 or 6% over the same
period of the prior year. Year to date sales reached $32 million, reflecting a
9% increase over the prior year.
Domestic sales increased 12% in the third quarter, over the prior year level,
driven by a 10% increase in Professional product sales and a 71% increase in
consumer over-the-counter sales. The Company's strep A products accounted for
the majority of this growth along with increased pregnancy and H. pylori product
sales.
8
<PAGE> 9
International export sales continue to decline from the prior year level. The
decline in the current quarter resulted primarily from the impact of the strong
U.S. dollar, price erosion in Europe and the expiration of distribution
agreements in Japan and Korea. European subsidiary sales reflect a 1% decrease
in the current quarter versus the prior year, which is the net effect of an
approximate 15% sales increase in local currency offset by the translation
effect of the strong U.S. Dollar.
REVENUE FROM RESEARCH CONTRACTS, LICENSE FEES AND ROYALTIES
<TABLE>
<CAPTION>
PERIODS ENDED DECEMBER 31, THREE MONTHS NINE MONTHS
(IN THOUSANDS) 1997 1996 1997 1996
=================================================================================
<S> <C> <C> <C> <C>
Contract research and development $ 892 $ 672 $2,192 $2,083
License Fees 50 -- 75 --
Royalty income 53 38 83 58
------------------------------------------
Total $ 995 $ 710 $2,350 $2,141
=================================================================================
</TABLE>
Contract research revenue in the current quarter and nine month period is
principally related to the Glaxo influenza program which commenced in March 1996
and the Glaxo genital herpes diagnostic development program which commenced in
October 1997. These revenue amounts are equal to the sum of the program direct
research cost (see operating expenses below) and allocated support service cost.
COST OF SALES AND GROSS PROFIT
<TABLE>
<CAPTION>
PERIODS ENDED DECEMBER 31, THREE MONTHS NINE MONTHS
(IN THOUSANDS) 1997 1996 1997 1996
==========================================================================================================
<S> <C> <C> <C> <C>
Direct Cost - material, labor and other
variable cost $ 4,273 $ 4,173 $ 11,575 $ 10,412
As a percentage of sales 34.3% 35.6% 35.7% 35.1%
Royalty expense - patent licenses 565 75 1,465 207
As a percentage of sales 4.5% 0.6% 4.5% 0.7%
-------------------------------------------------------
Total direct cost 4,838 4,248 13,040 10,619
As a percentage of sales 38.8% 36.2% 40.2% 35.8%
-------------------------------------------------------
Direct Margin - contribution per sales dollar 61.2% 63.8% 59.8% 64.2%
Manufacturing overhead cost 1,353 1,110 3,776 3,251
As a percentage of sales 10.9% 9.5% 11.6% 10.9%
-------------------------------------------------------
Total cost of sales 6,191 5,358 16,816 13,870
-------------------------------------------------------
Gross profit $ 6,256 $ 6,369 $ 15,632 $ 15,806
As a percentage of sales 50.3% 54.3% 48.2% 53.3%
==========================================================================================================
</TABLE>
9
<PAGE> 10
Gross profit as a percentage of sales has declined from the prior year periods.
The most significant component of this change relates to increased patent
license royalty expense which commenced April 1, 1997. This variable cost will
be ongoing as long as the current Generation III format products are sold.
The third quarter's gross profit percentage improved 2.8 points to 50.3% of
sales over that of the second quarter ended September 30, 1997. This improvement
reflects a reduction in the direct cost of products manufactured and the
operating leverage associated with increased sales volume while maintaining a
relatively fixed level of manufacturing overhead cost.
OPERATING EXPENSES
<TABLE>
<CAPTION>
PERIODS ENDED DECEMBER 31, THREE MONTHS NINE MONTHS
(IN THOUSANDS) 1997 1996 1997 1996
====================================================================================================
<S> <C> <C> <C> <C>
Research and development
Quidel research projects $ 1,034 $ 1,103 $ 3,789 $ 3,369
Contract research -- direct costs 854 492 1,883 1,675
-------------------------------------------------
Total research and development 1,888 1,595 5,672 5,044
As a percentage of sales 15% 14% 17% 17%
Sales and marketing
Domestic professional sales and marketing 1,645 1,458 4,874 4,352
Domestic OTC sales and marketing 83 89 230 426
International sales and marketing 893 1,013 2,529 2,902
-------------------------------------------------
Total sales and marketing 2,621 2,560 7,633 7,680
As a percentage of sales 21% 22% 24% 26%
General and administrative 978 997 3,368 2,691
As a percentage of sales 8% 8% 10% 9%
====================================================================================================
Total operating expenses $ 5,487 $ 5,152 $16,673 $15,415
As a percentage of sales 44% 44% 51% 52%
====================================================================================================
Total operating expenses excluding
contract research $ 4,633 $ 4,660 $14,790 $13,740
As a percentage of sales 37% 40% 45% 46%
====================================================================================================
</TABLE>
Research and Development. Research and development expense reflects an increase
in contract research related to the October 1997 commencement of the Company's
second multi-year, multi-million dollar collaborative agreement with Glaxo
Wellcome plc for the development of two rapid point of care tests for genital
herpes. Spending related to non-externally funded Quidel research projects
declined during the quarter ended December 31, 1997 compared to the prior year
period. As the company begins to shift resources into the expanding contract
research programs, this trend is expected to continue.
10
<PAGE> 11
Sales and Marketing. Overall sales and marketing expense increased in the third
quarter from the prior year level as volume related increases in the domestic
professional sales and marketing expenses were offset by reductions in OTC and
international sales and marketing costs. The effectiveness of the sales and
marketing effort improved in the third quarter as the total cost dropped to 21%
of sales from 22% of sales in the comparable prior year period.
General and Administrative. General and administrative expense for the third
quarter was consistent with the prior year level at 8% of sales.
Net Income. The Company increased profitability in the third quarter as gross
profit from increased sales volume more than offset the increased royalty,
research and sales and marketing expenses. The quarter's $1,704,000 ($.07 per
share) net income was $101,000 below the $1,805,000 ($.08 per share) net income
of the comparable prior year period. Results for the nine months ended December
31 have returned to profitability and reflect net income of $1,217,000 or $.05
cents per share, as compared to a net income of $2,206,000, or $.10 per share,
in the prior year period. The current year-to-date results have been impacted by
increased patent license royalty and amortization expense which commenced April
1, 1997 amounting to $1,456,000.
Future Income Taxes/FASB109. The Company is currently evaluating, from an
accounting standpoint, the future utilization of its net operating loss ("NOL")
carryforwards. A demonstrated history of profitable operations for three
consecutive years and the expectation of continued future income provide the
basis for recording the benefit of a portion of the Company's NOL carryforward.
It is likely that this accounting standard will result in an adjustment in the
fourth quarter ended March 31, 1998 to record a significant income tax credit
(increasing net income) in order to recognize a portion of this deferred tax
asset.
In previous periods the Company recognized the tax benefit of its NOL
carryforward only as income was earned, the impact of which reduced the
effective income tax rate to be equivalent to the alternative minimum tax rate
of approximately three percent. In future periods, commencing in fiscal 1999,
and assuming the recognition of the NOL credit discussed above, the Company will
record an income tax provision at the normal statutory tax rate currently
amounting to approximately forty percent of pre-tax income.
Although this adjustment would have the effect of increasing current fiscal year
net income and reducing future periods' net income as a result of the timing of
the NOL benefit recognition, it will not affect the Company's cash flow as the
NOL will continue to offset the income tax payable on a year-by-year basis.
Liquidity and Capital Resources. At December 31, 1997, the Company had cash and
cash equivalents of $8,698,000, compared to $10,096,000 at March 31, 1997.
During the nine months ended December 31, 1997, the Company generated $4,839,000
in cash from operating activities. Net cash provided by operating activities
reflects cash generated from net income, the non-cash impact of depreciation and
amortization and the increase in deferred contract research revenue offset by
increased inventory in support of the current increasing level of sales volume.
11
<PAGE> 12
Net cash used for investment activities of $6,551,000 is related to $4,086,000
in capital expenditures for increased production capacity and product cost
reduction and $2,465,000 paid for patent licenses and capitalized patent
application costs.
Net cash from financing activities totaled $314,000 related to proceeds from the
exercise of employee stock options offset by debt repayment.
The Company has a domestic accounts receivable-based bank line of credit in an
amount up to $3,000,000 which provides for interest at the bank's prime rate
plus two percent. The line of credit expires August 5, 1998. As of December 31,
1997, there were no outstanding borrowings under this line of credit.
QUIDEL's principal capital requirements are for working capital. These
requirements fluctuate as a result of numerous factors, such as the extent to
which the Company uses or generates cash in operations, progress in research and
development projects, competition and technological developments and the time
and expenditures required to obtain governmental approval of its products. Based
on its current cash position and its current assessment of future operating
results, management believes that its existing sources of liquidity should be
adequate to meet its operating needs during fiscal 1999.
12
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS N/A
ITEM 2. CHANGES IN SECURITIES N/A
ITEM 3. DEFAULTS
UPON SENIOR SECURITIES N/A
ITEM 4. SUBMISSION OF MATTERS TO A VOTE N/A
OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION N/A
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Exhibit
------- -------
27 Financial Data Schedule
(b) Reports on Form 8-K filed in the third quarter of fiscal 1998
None.
13
<PAGE> 14
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.
QUIDEL CORPORATION
----------------------------------------
(Registrant)
Date: February 6, 1998 /S/ STEVEN C. BURKE
----------------------------------------
Steven C. Burke
Chief Accounting Officer
Signed both as a duly authorized officer
sign on behalf of the Registrant and as
Chief Accounting Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,698
<SECURITIES> 0
<RECEIVABLES> 8,441
<ALLOWANCES> 1,075
<INVENTORY> 4,845
<CURRENT-ASSETS> 22,383
<PP&E> 24,544
<DEPRECIATION> 8,030
<TOTAL-ASSETS> 45,543
<CURRENT-LIABILITIES> 5,665
<BONDS> 3,052
0
0
<COMMON> 24
<OTHER-SE> 36,802
<TOTAL-LIABILITY-AND-EQUITY> 45,543
<SALES> 32,448
<TOTAL-REVENUES> 34,798
<CGS> 16,816
<TOTAL-COSTS> 33,489
<OTHER-EXPENSES> (343)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 384
<INCOME-PRETAX> 1,268
<INCOME-TAX> 51
<INCOME-CONTINUING> 1,217
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,217
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
