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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934
For the quarterly period ended: September 30, 1996
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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 0-19410
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HEMASURE INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 04-3216862
- ------------------------------- ---------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Organization or Incorporation)
140 LOCKE DRIVE, MARLBOROUGH, MASSACHUSETTS 01752
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(Address of Principal Executive Offices) (Zip Code)
(508) 485-6850
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(Registrant's Telephone Number, Including Area Code)
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
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, par value $.01 per share 8,089,124
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Class Outstanding at November 8, 1996
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HemaSure Inc.
<TABLE>
INDEX
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<CAPTION>
PAGE
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<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1996 and December 31, 1995 3
Consolidated Statements of Operations for the Three and Nine Month Periods Ended
September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the Periods Ended September 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
PART II OTHER INFORMATION 12
SIGNATURES 13
</TABLE>
2
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HemaSure Inc.
<TABLE>
Consolidated Balance Sheets
(Unaudited)
<CAPTION>
(In thousands) September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,358 $ 23,028
Marketable securities 10,885 24,813
Accounts receivable 5,859 82
Inventories 23,789 756
Prepaid expenses 1,198 150
-------- --------
Total current assets 55,089 48,829
Property and equipment, net 10,487 1,286
Other assets 152 97
-------- --------
Total assets $ 65,728 $ 50,212
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,178 $1,295
Accrued expenses 2,161 522
Notes payable - current portion 1,441
Capital lease obligations-current portion 188 107
-------- --------
Total current liabilities 7,968 1,924
Capital lease obligations 364 286
Notes payable 20,646
-------- --------
Total liabilities 28,978 2,210
-------- --------
Stockholders' equity:
Common stock 81 80
Additional paid-in capital 60,606 60,372
Unearned compensation (447) (595)
Unrealized holding loss of available for sale marketable securities (1)
Cumulative translation adjustments (1,431)
Accumulated deficit (22,058) (11,855)
-------- --------
Total stockholders' equity 36,750 48,002
-------- --------
Total liabilities and stockholders' equity $ 65,728 $ 50,212
======== ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
3
<PAGE> 4
HemaSure Inc.
<TABLE>
Consolidated Statements of Operations
For The Three and Nine Month Periods Ended
September 30, 1996 and 1995
(Unaudited)
<CAPTION>
Three-month periods Nine-month periods
(In thousands, except per share amounts) ended September 30, ended September 30,
----------------------- ------------------------
1996 1995 1996 1995
------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 4,172 $ 13 $ 6,175 $ 16
Product sales to related parties -- 23 13 503
Collaborative research and development -- 98 54 186
------- ------- -------- -------
Total revenues 4,172 134 6,242 705
------- ------- -------- -------
Costs and expenses:
Cost of products sold 3,096 70 5,765 285
Cost of products sold to related parties -- 15 13 402
Research & development 1,247 1,238 4,271 3,204
Purchase of in process research and development -- -- 500 --
Selling, general and administrative 3,772 916 7,273 2,466
------- ------- -------- -------
Total costs and expenses 8,115 2,239 17,822 6,357
------- ------- -------- -------
Loss from operations (3,943) (2,105) (11,580) (5,652)
Interest income, (net) 409 97 1,377 373
------- ------- -------- -------
Net loss $(3,534) $(2,008) $(10,203) $(5,279)
======= ======= ======== =======
Net loss per share $ (0.44) $ (0.35) $ (1.27) $ (0.94)
Weighted average number of common and
common equivalent shares outstanding 8,077 5,773 8,061 5,593
</TABLE>
The accompanying notes are an integral part
of the financial statements.
4
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HemaSure Inc.
<TABLE>
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
(In thousands) Nine-month periods
ended September 30,
------------------------------
1996 1995
--------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (10,203) $(5,279)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 1,124 337
Accretion of marketable securities discount (4) -
Purchase of in process research and development 500 -
Changes in operating assets and liabilities:
Accounts receivable (6,146) (69)
Inventories (10,011) 160
Other current assets (847) 47
Accounts payable and accrued expenses 3,464 226
--------- -------
Net cash (used in) operating activities (22,123) (4,578)
Cash flows from investing activities:
Purchase of available for sale marketable securities (181,690) -
Maturities of available for sale marketable securities 195,621 -
Additions to property and equipment (1,438) (647)
Cash paid for acquired business (137) -
Decrease in other assets 45 -
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Net cash provided from (used in) investing activities 12,401 (647)
Cash flows from financing activities:
Proceeds from issuance of common stock 235 43,200
Borrowings under capital lease arrangements 312 197
Repayments of capital lease obligations (153) (37)
--------- -------
Net cash provided from financing activities 394 43,360
Exchange rate changes on cash and equivalents (342) -
Net increase (decrease) in cash (9,670) 38,135
Cash and cash equivalents at beginning of period 23,028 11,704
--------- -------
Cash and cash equivalents at end of period $ 13,358 $49,839
========= =======
Supplemental schedule of cash flow information:
Cash paid during the period for interest $ 62 $ 25
</TABLE>
The accompanying notes are an integral part
of the financial statements.
5
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HemaSure Inc.
Notes To Consolidated Financial Statements
1. Basis of Presentation
The accompanying financial statements are unaudited and have been
prepared on a basis substantially consistent with the audited financial
statements.
In May 1996, the Company acquired the plasma product unit of Novo
Nordisk A/S (the "Denmark Acquisition"), a Denmark corporation through
its newly formed Danish subsidiary, HemaSure A/S. The purchase price
for the transaction is comprised of a combination of Promissory Notes,
Convertible Subordinated Notes (which would convert to common stock of
HemaSure or a subsidiary of HemaSure) and additional consideration
payable in 1998 in cash or stock, at the option of HemaSure, which
would not be paid in certain events. The acquisition was accounted for
under the purchase method of accounting.
Certain information and footnote disclosures normally included in the
Company's annual statements have been condensed or omitted. The
consolidated interim financial statements include the accounts of
HemaSure and its wholly owned subsidiary from the date of acquisition,
and in the opinion of management, reflect all adjustments (including
normal recurring accruals) and the elimination of all material
intercompany transactions necessary for a fair statement of the results
for the interim periods ended September 30, 1996 and 1995.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the fiscal
year. These interim financial statements should be read in conjunction
with the audited financial statements for the year ended December 31,
1995, which are contained in the Company's Form 10K (File No. 0-19410),
filed with the Securities and Exchange Commission on April 1, 1996.
<TABLE>
2. Inventories
Inventories consist of the following:
<CAPTION>
September 30, 1996 December 31, 1995
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<S> <C> <C>
Raw materials $ 6,372 $492
Work in progress 10,992 6
Finished goods 6,425 258
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$23,789 $756
======= ====
</TABLE>
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<TABLE>
3. Property and Equipment
Property and equipment consists of the following:
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
<S> <C> <C>
Property and equipment $13,901 $ 3,733
Less accumulated depreciation and amortization (3,631) (2,650)
------- -------
10,270 1,083
Construction in progress 217 203
------- -------
$10,487 $ 1,286
======= =======
</TABLE>
4. Notes payable
In May 1996, the Company acquired the plasma product unit of Novo
Nordisk A/S (the "Denmark Acquisition"), a Denmark corporation through
its newly formed Danish subsidiary, HemaSure A/S. The purchase price
for the transaction is comprised of three portions.
The first portion of approximately $1,500,000 is in the form of a
Convertible Subordinated Note and is payable in March 1998 in cash or
common stock of HemaSure at the Company's option. This note would
automatically convert to shares of a subsidiary of HemaSure if, prior
to March 1998, certain events occur as described in the terms of the
note. This Convertible Subordinated Note bears interest at 7% per annum
beginning six months from the date of the note.
The second portion of approximately $12,000,000 is in the form of a
Promissory Note and is payable quarterly upon the receipt of funds from
the sale of acquired inventory (valued at approximately $12,000,000) in
the preceding quarter but not later than March 1998, provided that up
to approximately $3,000,000 of this portion may be forgiven in certain
circumstances. The Promissory Note does not bear interest.
The third portion of the purchase price of approximately $8,500,000 is
payable in March 1998 in cash or common stock of HemaSure or a
subsidiary of HemaSure, at the Company's option, provided that all of
this portion may be forgiven in certain circumstances.
5. Net loss per share
The net loss per share is based on the weighted average number of
common and common equivalent shares outstanding during the period.
Common equivalent shares are not included in the per share calculation
where the effect of their inclusion would be antidilutive.
7
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6. Litigation
In February 1996, Pall Corporation ("Pall") filed a complaint against
the Company in the United States District Court for the Eastern
District of New York. The Complaint alleges that the Company has
infringed and is infringing a certain U.S. patent assigned to Pall (the
"Pall Patent") by making, using and selling the Company's LeukoNet
System. The Company has received an opinion of its patent counsel to
the effect that a properly informed court would conclude the Company
does not infringe any valid enforceable claims of the Pall Patent.
However, there can be no assurance that HemaSure will prevail in the
pending litigation, and an adverse outcome in the patent infringement
action would have a material adverse effect on the Company's future
business and operations.
On November 1, 1996, the Company filed a complaint in the Supreme
Court, State of New York, County of New York, against Pharmacia &
Upjohn, Inc. ("P&U"). In its complaint, the Company seeks to receive
damages arising out of the alleged breach by P&U of an agreement to
sell to the Company P&U's plasma pharmaceutical business located in
Stockholm, Sweden. The complaint seeks compensatory, consequential and
punitive damages. There can be no assurance that the Company will
prevail in this litigation or, if the Company does so prevail, as to
the amount of damages, if any, that will be awarded or that the Company
may collect.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview
HemaSure was established in December 1993 as a wholly-owned subsidiary of
Sepracor Inc. ("Sepracor"). Prior to that date, its business was conducted as
part of Sepracor's bioprocessing division. Effective as of January 1, 1994, in
exchange for 3,000,000 shares of Common Stock, Sepracor transferred to HemaSure
its technology relating to the manufacture, use and sale of medical devices.
In May 1996, the Company acquired the plasma products unit of Novo Nordisk A/S
(the "Denmark Acquisition"), a Denmark corporation through its newly formed
Danish subsidiary, HemaSure A/S. The purchase price for the transaction is
comprised of three portions. The first portion of approximately $1,500,000 is
payable in 1998 in cash or common stock of HemaSure or a subsidiary of HemaSure,
at the Company's option. The second portion of approximately $12,000,000 is
payable from time to time upon sale of acquired inventory (valued at
approximately $12,000,000) but not later than 1998, provided that up to
$3,000,000 of this portion may be forgiven in certain circumstances. The third
portion of the purchase price of approximately $8,500,000 is payable in 1998 in
cash or common stock of HemaSure or a subsidiary of HemaSure, at the Company's
option, provided that all of this portion may be forgiven in certain
circumstances.
The financial results for the three and nine month periods ended September 30,
1996 include the results of the newly acquired plasma products business from the
date of acquisition. In addition, the Company incurred a non-recurring charge of
$500,000 relating to the purchase of in-process technology associated with the
Denmark Acquisition. The Company believes that comparisons of its financial
results for 1995 and 1996 are not necessarily meaningful.
The Company develops innovative separations and pathogen inactivation
technologies designed to set standards of safety for processing blood components
and plasma pharmaceuticals worldwide. The Company's products are designed for
use in blood centers, hospitals and pharmacies worldwide. From inception through
fiscal 1995, HemaSure has sold non-blood related filter products primarily to
Sepracor, a related party, for use in chemical processing applications. As the
Company continues to focus its efforts in the blood products sector, it does not
expect sales of its non-blood related products to continue in any material
respect. The Company's collaborative research and development efforts have been
with the U.S. Department of the Army for blood filtration related practices.
In November 1996, the Company filed a complaint in the Supreme Court, State of
New York, County of New York, against Pharmacia & Upjohn, Inc. ("P&U") seeking
damages arising out of the alleged breach by P&U of an agreement to sell to the
Company P&U's plasma pharmaceutical business located in Stockholm, Sweden. The
Company had planned on operational synergy's between the P&U plasma products
business and its HemaSure A/S plasma products business. As a result, the Company
is reevaluating all strategic alternatives with regard to its current plasma
products business.
The Company's future operating results are subject to risks common to companies
in the medical technology industry, including, but not limited to, development
by the Company or its competitors of new technological innovations, dependence
on key personnel, protection of proprietary technology, sufficiency of funds to
finance operations, successful commercialization of products, successful
integration of acquired businesses and compliance with FDA regulations and
similar authorities in foreign countries.
9
<PAGE> 10
Three and nine months ended September 30, 1996 and 1995
Revenues were $4,172,000 for the quarter ended September 30, 1996
compared to $134,000 in the same period in 1995. Revenues in the third quarter
of 1996 include sales of the plasma products of HemaSure A/S of $3,654,000.
Revenues in the third quarter of 1995 include product sales to Sepracor, a
related party, of $23,000 and collaborative research and development revenues
of $98,000 related to the Company's SBIR grant.
Revenues were $6,242,000 for the first nine months of 1996 compared to $705,000
for the first nine months of 1995. Revenues for the nine month period ended
September 30, 1996 include sales of the plasma products of HemaSure A/S of
$5,621,000 and collaborative research and development revenues of $54,000
related to the Company's SBIR grant. Revenues for the nine month period ended
September 30, 1995 include product sales to Sepracor of $476,000 and
collaborative research and development revenues of $186,000 related to the
Company's SBIR grant.
Total cost of products sold exceeded total product sales in both periods of 1995
due to the start-up costs of new product introduction and the high costs
associated with low-volume production. This trend has continued in both periods
of 1996 for the Company's medical device products but was offset by positive
margins on the sale of its plasma pharmaceutical products.
Research and development expenses were $1,247,000 in the third quarter of 1996
compared to $1,238,000 in the third quarter of 1995, and were $4,271,000 in
the nine months ended September 30, 1996 compared to $3,204,000 in the nine
months ended September 30, 1995. The increase in the nine month period is
primarily attributable to a higher level of spending associated with the
Company's SteriPath Blood Pathogen Inactivation System and preparation for
commercialization of the Company's LeukoNet Pre-Storage Leukoreduction System
(the "LeukoNet System"), which received marketing clearance from the United
States Food and Drug Administration in June 1995.
In 1996, the Company incurred a non-recurring charge of $500,000 relating to the
purchase of in-process technology associated with the Denmark Acquisition.
Selling, general and administrative expenses were $3,772,000 in the three months
ended September 30, 1996 compared to $916,000 in the three months ended
September 30, 1995, and were $7,273,000 in the first nine months of 1996
compared to $2,466,000 in the first nine months of 1995. Selling, general and
administrative expenses for the three and nine month periods ended September
30, 1996 include $1,989,000 and $2,474,000, respectively, related to
activities at HemSure A/S. The increase in both periods, after consideration
of the HemaSure A/S amounts, is primarily attributable to expenses associated
with preparation for commercialization of the LeukoNet System and increased
costs related to the hiring of management with specific industry experience.
Interest income, (net) increased for both the three and nine month periods ended
September 30, 1996 from the same periods in 1995 primarily due to higher
available cash balances during the periods offset in part by lower average
interest rates and higher interest expense costs associated with higher average
capital lease obligation balances.
LIQUIDITY AND CAPITAL RESOURCES
The net decrease in cash and cash equivalents for the nine months ended
September 30, 1996 was $9,670,000. This decrease is attributable primarily to
net cash used in operating activities of $22,123,000. Net cash used in
operating activities is primarily attributable to the net loss of $10,203,000
and an increase in both the accounts receivable and inventory balances of
$6,146,000 and $10,011,000, respectively, offset in part by an increase in
accounts payable and accrued expenses of $3,464,000. This
10
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decrease was offset by net cash provided from investing activities of
$12,401,000 and net cash provided from financing activities of $394,000. Net
cash provided from investing activities resulted principally from net maturities
of available for sale marketable securities of $13,931,000 offset by investments
in property and equipment of $1,438,000.
The termination of the Company's revolving credit agreement with a commercial
bank, which was a collaboration arrangement with Sepracor and its subsidiaries,
took effect as of July 1, 1996. The Company does not currently plan to renew the
arrangement.
In June 1994, the Company executed an agreement with a third party to license
certain technology. The Company agrees to pay to the third party, pursuant to
the terms of the agreement, license fees of $1,200,000 payable in four equal
annual installments, and royalties for commercial sale of any product
incorporating this technology. To date the Company has paid $900,000 under this
agreement.
Based on its current operating plan, the Company believes that its available
cash, cash equivalent and marketable securities balances will be sufficient to
fund the Company's operations into 1997. The Company's cash requirements may
vary materially from those now planned because of factors such as successful
development of products, results of product testing, approval process at the FDA
and similar foreign agencies, commercial acceptance of its products, patent
developments and the introduction of competitive products.
11
<PAGE> 12
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
In February 1996, Pall Corporation ("Pall") filed a complaint
against the Company in the United States District Court for
the Eastern District of New York. The Complaint alleges that
the Company has infringed and is infringing a certain U.S.
patent assigned to Pall (the "Pall Patent") by making, using
and selling the Company's LeukoNet System. The Company has
received an opinion of its patent counsel to the effect that a
properly informed court would conclude the Company does not
infringe any valid enforceable claims of the Pall Patent.
However, there can be no assurance that HemaSure will prevail
in the pending litigation, and an adverse outcome in the
patent infringement action would have a material adverse
effect on the Company's future business and operations.
On November 1, 1996, the Company filed a complaint in the
Supreme Court, State of New York, County of New York, against
Pharmacia & Upjohn, Inc. ("P&U"). In its complaint, the
Company seeks to receive damages arising out of the alleged
breach by P&U of an agreement to sell to the Company P&U's
plasma pharmaceutical business located in Stockholm, Sweden.
The complaint seeks compensatory, consequential and punitive
damages. There can be no assurance that the Company will
prevail in this litigation or, if the Company does so prevail,
as to the amount of damages, if any, that will be awarded or
that the Company may collect.
Items 2 - 5. None
----
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits
27.1 Financial Data Schedule
b) Reports on Form 8-K
None
12
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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.
HEMASURE INC.
Date: November 8, 1996 /s/ Steven H. Rouhandeh
---------------------------------------------
Steven H. Rouhandeh
President
(Principal Executive Officer)
Date: November 8, 1996 /s/ Jeffrey B. Davis
---------------------------------------------
Jeffrey B. Davis
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
Date: November 8, 1996 /s/ James B. Murphy
---------------------------------------------
James B. Murphy
Sr. Vice President Finance and Administration
(Principal Accounting Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HEMASURE INC. FOR THE SIX MONTHS ENDED JUNE 30,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 13,358
<SECURITIES> 10,885
<RECEIVABLES> 5,859
<ALLOWANCES> 0
<INVENTORY> 23,789
<CURRENT-ASSETS> 55,089
<PP&E> 14,118
<DEPRECIATION> 3,631
<TOTAL-ASSETS> 65,728
<CURRENT-LIABILITIES> 7,968
<BONDS> 0
<COMMON> 81
0
0
<OTHER-SE> 36,669
<TOTAL-LIABILITY-AND-EQUITY> 65,728
<SALES> 6,242
<TOTAL-REVENUES> 6,242
<CGS> 5,778
<TOTAL-COSTS> 5,778
<OTHER-EXPENSES> 12,044
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (10,203)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,203)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,203)
<EPS-PRIMARY> (1.27)
<EPS-DILUTED> 0
</TABLE>
