FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
or
[ ] 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.
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(Exact name of registrant as specified in its charter)
Delaware 04-3216862
(State or other jurisdiction of (I.R.S. Employer
organization or incorporation) Identification No.)
140 Locke Drive, Marlborough, Massachusetts 01752
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(Address of principal executive offices)
(zip code)
(508) 490-9500
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year, if changed since last
report)
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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
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 8,991,042
-------------------------------------- --------------------------
Class Outstanding at May 8, 1998
1
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HemaSure Inc.
INDEX
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<TABLE>
<CAPTION>
Page
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements.
<S> <C>
Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997 3
Consolidated Statements of Operations for the Three Month Periods Ended
March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the Periods Ended March 31, 1998
and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations. 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 10
Item 2. Changes in Securities and Use of Proceeds. 10
Item 3. Defaults Upon Senior Securities. 10
Item 4. Submission of Matters to a Vote of Security Holders. 10
Item 5. Other Information. 10
Item 6. Exhibits and Reports on Form 8-K. 11
SIGNATURES 12
</TABLE>
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
HemaSure Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
( In thousands ) March 31, December 31,
1998 1997
(Unaudited) (Audited)
----------------- -------------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 198 $ 1,274
Marketable securities 4,493 6,882
Accounts receivable -- 436
Inventories 145 158
Prepaid expenses 229 347
----------------- -------------------
Total current assets 5,065 9,097
Property and equipment, net 1,511 1,478
Other assets 32 32
----------------- -------------------
Total assets $ 6,608 $ 10,607
================= ===================
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,070 $ 876
Accrued expenses 1,061 1,846
Note payable - current portion 37 37
Capital lease obligations - current portion 237 267
----------------- -------------------
Total current liabilities 2,405 3,026
Capital lease obligations 259 289
Note payable 63 72
Convertible subordinated note payable -- 8,687
----------------- -------------------
Total liabilities 2,727 12,074
----------------- -------------------
Stockholders' equity (deficit):
Common stock 90 82
Additional paid-in capital 69,558 60,878
Unearned compensation -- (89)
Unrealized holding loss of available for sale marketable securities (1) (1)
Accumulated deficit (65,766) (62,337)
----------------- -------------------
Total stockholders' equity (deficit) 3,881 (1,467)
----------------- -------------------
Total liabilities and stockholders' equity (deficit) $ 6,608 $ 10,607
================= ===================
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
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HemaSure Inc.
Consolidated Statements of Operations
For The Three Month Periods Ended
March 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Three-month period
ended March 31,
(In thousands, except per share amounts) 1998 1997
---- ----
<S> <C> <C>
Revenues $ 25 $ 551
Costs and expenses:
Cost of products sold 657 1,032
Research & development 762 885
Legal expense related to patents 1,062 94
Selling, general and administrative 1,011 1,319
------------ -------------
Total costs and expenses 3,492 3,330
------------ -------------
Loss from operations (3,467) (2,779)
Interest income 74 181
Interest expense (36) (291)
Other (expense) --- (1)
------------ -------------
Net (loss) $ (3,429) $ (2,890)
============ =============
Net (loss) per share - basic and diluted $ (0.38) $ (0.36)
============ =============
Weighted average number of shares of common stock
outstanding - basic and diluted 8,991 8,115
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
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Hema Sure Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three-month period
ended March 31,
(In thousands) 1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities: $(3,429) $(2,890)
Net Loss
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 187 273
Accretion of marketable securities discount 15 9
Loss on disposal of equipment 5 ---
Changes in operating assets and liabilities:
Net assets of discontinued business --- 350
Accounts receivable 436 (25)
Inventories 13 (272)
Prepaid expenses 118 151
Accounts payable and accrued expenses (591) (632)
------------ -------------
Net cash used in operating activities (3,246) (3,036)
------------ -------------
Cash flows from investing activities:
Purchase of available-for-sale marketable securities (15,265) (29,772)
Maturities of available-for-sale marketable securities 17,639 32,066
Unrealized holding loss of available-for-sale
marketable securities --- 1
Additions to property and equipment (136) (81)
Decrease in other assets --- (12)
------------ -------------
Net cash provided from investing activities 2,238 2,202
Cash flows from financing activities:
Proceeds from issuance of common stock 1 36
Borrowing from notes payable arrangements --- 140
Repayments of notes payable (9) ---
Repayments of capital lease obligations (60) (58)
------------ -------------
Net cash (used in) provided from financing activities (68) 118
------------ -------------
Net (decrease) in cash and cash equivalents (1,076) (716)
Cash and cash equivalents at beginning of period 1,274 5,527
------------ -------------
Cash and cash equivalents at end of period $ 198 $ 4,811
============ =============
</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.
Certain information and footnote disclosures normally included in the
Company's annual statements have been condensed or omitted. The
condensed interim financial statements, in the opinion of management,
reflect all adjustments (including normal recurring accruals) necessary
for a fair statement of the results for the interim periods ended March
31, 1998 and 1997.
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,
1997, which are contained in the Company's Annual Report on Form 10-K
(File No. 000-23776), filed with the Securities and Exchange Commission
on March 31, 1998.
2. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Raw Materials $ - $ -
Work in progress - -
Finished goods 145 158
------------------- --------------------
$ 145 $ 158
=================== ====================
3. Property and Equipment
Property and equipment consists of the following:
March 31, 1998 December 31,1997
-------------- ----------------
Property and equipment $ 3,011 $ 3,176
Less accumulated depreciation and
amortization (1,557) (1,771)
------------------- --------------------
1,454 1,405
Construction in progress 57 73
$ 1,511 $ 1,478
=================== ====================
</TABLE>
4. Convertible subordinated note payable
In January 1997, the Company entered into a Restructuring Agreement of
the debt related to its acquisition of Novo Nordisk A/S plasma products
unit. The amount included in the balance sheet at December 31, 1997
includes the effect of the Restructuring Agreement net of a $3,000,000
contingency amount to reflect the most probable result of the Company's
decision to exit the plasma business. On January 6, 1998, $8,687,000 of
debt, which the Company believes was the entire amount outstanding as of
the date of conversion, was converted into common stock, par value $0.01
per share, of the Company (the "Common Stock") at a conversion price of
$10.50 per share, or 827,375 shares, pursuant to the terms of the note.
The holder of the note has contested the conversion of the note,
including the forgiveness of the $3,000,000 amount.
6
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5. Net loss per share
The net loss per share is based on the weighted average number of common
stock outstanding during the period. Common equivalent shares are not
included in the per share calculation where the effect of their
inclusion would be antidilutive.
6. Litigation
The Company is a defendant in two lawsuits brought by Pall Corporation
("Pall"). In complaints filed in February 1996 and November 1996, Pall
alleged that HemaSure's manufacture, use and/or sale of the LeukoNet
product infringes upon three patents held by Pall.
On October 14, 1996 in connection with the first action
concerning U.S. Patent No. 5,451,321, ( the "'321 patent") the Company
filed for summary judgment of noninfringement. Pall filed a cross
motion for summary judgment of infringement at the same time.
In October 1997, the Eastern District of New York granted in part Pall's
summary judgment motion relating to the '321 patent. The Company has
agreed to terminate the manufacture, use, sale and offer for sale of the
filter subject to the court's order. In April 1998, the Eastern District
of New York granted to HemaSure its request to appeal the October 1997
decision.
With respect to the second action concerning U.S. Patent No. 4,952,572
(the "'572 patent"), the Company has answered the complaint stating that
it does not infringe any claim of the asserted patents. Further, the
Company has counterclaimed for declaratory judgment of invalidity,
noninfringement and unenforceability of the '572 patent.
The Company believes, based on advice of its patent counsel, that a
properly informed court should conclude the manufacture, use and/or sale
by the Company or its customers of the LeukoNet product did not infringe
any valid enforceable claim of the two Pall patents. However, there can
be no assurance that the Company will prevail in the pending
litigations, and an adverse outcome in a patent infringement action
would have a material adverse effect on the Company's future business
and operations.
7
<PAGE>
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.
Results of Operations
Overview
HemaSure Inc. (the "Company") 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 for the separation and purification of blood, blood products and blood
components and its membrane filter design technologies.
The Company is utilizing its proprietary filtration technologies to develop
products to increase the safety of donated blood and to improve certain blood
transfusion procedures. The Company's products are designed for use in blood
centers and hospital blood banks worldwide. From inception through fiscal 1995,
HemaSure has sold non-blood related filter products primarily to Sepracor. In
February 1998, the Company determined to discontinue manufacturing the LeukoNet
System and focus on the completion of development and market introduction of its
next-generation red cell filtration product. All of the Company's planned
blood-related products are in the research and development state, and certain of
these products may require preclinical and clinical testing prior to submission
of any regulatory application for commercial use. The Company's success will
depend on development and commercial acceptance of these blood- related products
and its ability to raise capital through strategic partnerships, public or
private equity and/or debt financing.
The Company is 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 and compliance with regulations.
Three months ended March 31, 1998 and 1997
Revenues were $25,000 for the quarter ended March 31, 1998 compared to $551,000
in the same period in 1997. Revenues for all periods represent the sale of the
Company's LeukoNet System. In February 1998, the Company determined to
discontinue manufacturing the LeukoNet System and focus on the completion of
development and market introduction of its next generation red cell filtration
product.
Total cost of products sold exceeded total product sales in all periods due to
the high costs associated with low volume production.
Research and development expenses were $762,000 in the first quarter of 1998
compared to $885,000 in the first quarter of 1997. The decrease in the three
month period is primarily attributable to a lower level of engineering support
costs related to the Company's decision to discontinue manufacturing the
LeukoNet System.
Legal expenses related to patents were $1,062,000 in the first quarter of 1998
compared to $94,000 in the first quarter of 1997. The increase in the three
month period is due to costs associated with defending the Company's patent
position in its outstanding litigation with Pall Corp.
Selling, general and administrative expenses were $1,011,000 in the three months
ended March 31, 1998 compared to $1,319,000 in the three months ended March 31,
1997. The decrease in the three month period is primarily attributable to lower
administrative costs associated with the Company's decision to focus on its core
blood filtration business.
Interest income for the quarter ended March 31, 1998 of $74,000 decreased
compared to the quarter ended March 31, 1997 of $181,000 due to lower average
cash and marketable securities balances available for investment. Interest
expense for the quarter ended March 31, 1998 of
8
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$36,000 decreased compared to the quarter ended March 31, 1997 of $291,000
related to a convertible subordinated note payable which was not in existence
during the first quarter 1998 and a lower average capital lease obligation
balance.
Liquidity and Capital Resources
The net decrease in cash and cash equivalents for the three months ended March
31, 1998 was $1,076,000. This decrease is attributable primarily to net cash
used in operating activities of $3,246,000 and net cash used in financing
activities of $68,000 offset in part by net cash provided from investing
activities of $2,238,000.
Net cash used in operating activities is primarily attributable to the net loss
of $3,429,000 and a decrease in accounts payable and accrued expenses balances
of $591,000 offset in part by depreciation and amortization of $187,000, a
decrease in accounts receivable of $436,000 and lower prepaid expense balances
of $118,000. Net cash provided from investing activities relates to
available-for-sale marketable securities investing activities of $2,374,000
offset in part by additions to property and equipment of $136,000.
In January 1997, the Company entered into a Restructuring Agreement of the debt
related to its acquisition of Novo Nordisk's plasma products unit. The amount
included in the balance sheet at December 31, 1997 includes the effect of the
Restructuring Agreement net of a $3,000,000 contingency amount to reflect the
most probable result of the Company's decision to exit the plasma business. On
January 6, 1998, $8,687,000 of debt, which the Company believes was the entire
amount outstanding as of the date of conversion, was converted into Common Stock
at a conversion price of $10.50 per share, or 827,375 shares, pursuant to the
terms of the note. The holder of the note has contested the conversion of the
note, including the forgiveness of the $3,000,000 amount.
The Company believes based on its current operating plan, that, in addition to
its available cash and marketable securities balances, it will need additional
capital in order to fund the Company's operations beyond the first half of 1998.
Possible sources of capital include strategic partnerships, public or private
equity and/or debt financing, all of which the Company is pursuing. No assurance
can be given, however, that the Company will be able to obtain additional
financing on terms acceptable to the Company, if at all. Should the Company fail
to obtain any such financing, or to obtain such financing on terms favorable to
the Company, the Company may be unable to continue or complete the development
of its proposed products and/or market such products successfully, or to
continue its current operations as presently conducted, if at all. 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.
9
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is a defendant in two lawsuits brought by Pall Corporation
("Pall"). In complaints filed in February 1996 and November 1996, Pall
alleged that HemaSure's manufacture, use and/or sale of the LeukoNet
product infringes upon three patents held by Pall.
On October 14, 1996 in connection with the first action
concerning U.S. Patent No. 5,451,321, (the "'321 patent") the Company
filed for summary judgment of noninfringement. Pall filed a cross
motion for summary judgment of infringement at the same time.
In October 1997, the Eastern District of New York granted in part Pall's
summary judgment motion relating to the '321 patent. The Company has
agreed to terminate the manufacture, use, sale and offer for sale of the
filter subject to the court's order. In April 1998, the Eastern District
of New York granted to HemaSure its request to appeal the October 1997
decision.
With respect to the second action concerning U.S. Patent No. 4,952,572
(the "'572 patent"), the Company has answered the complaint stating that
it does not infringe any claim of the asserted patents. Further, the
Company has counterclaimed for declaratory judgment of invalidity,
noninfringement and unenforceability of the '572 patent.
The Company believes, based on advice of its patent counsel, that a
properly informed court should conclude the manufacture, use and/or sale
by the Company or its customers of the LeukoNet product did not infringe
any valid enforceable claim of the two Pall patents. However, there can
be no assurance that the Company will prevail in the pending
litigations, and an adverse outcome in a patent infringement action
would have a material adverse effect on the Company's future business
and operations.
Items 2 - 4. None
Item 5. Other information
On January 14, 1998 HemaSure's shares of Common Stock were included for
quotation on the OTC bulletin board and not The Nasdaq SmallCap Market.
This transition resulted from a determination of the Nasdaq Listing and
Hearing Review Committee that, as of January 13, 1998, HemaSure did not
meet Nasdaq's $5 million market value of public float maintenance
requirement. The Company has appealed the decision of the Hearing
Review Committee. No final determination has been made and no assurance
can be given that the Company will be successful in its appeal, or
that, if successful, it will continue to meet Nasdaq's listing
maintenance requirements.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits
The exhibits listed in the Exhibit Index immediately preceding
the exhibits are filed as part of this Quarterly Report on
Form 10-Q.
b) Reports on Form 8-K
Current Report on Form 8-K, dated January 12, 1998, which
reported under Item 5 thereof the Company's conversion of its
convertible subordinated debt into Common Stock of the Company
pursuant to a certain Restructuring Agreement dated as of
January 23, 1997 by and between the Company and the Company's
U.S. and Danish subsidiaries and Novo Nordisk A/S, and
included the Company's consolidated balance sheets as of
November 30, 1997, historical (unaudited) and pro forma as
adjusted.
<PAGE>
SIGNATURES
Pursuant to 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.
(Registrant)
/s/ John F. McGuire
Date: May 15, 1998 ------------------------------------------------
Name: John F. McGuire
Title: President and Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 1998 /s/ James B. Murphy
------------------------------------------------
Name: James B. Murphy
Title: Senior Vice President Finance
and Administration
(Principal Financial Officer)
12
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<TABLE>
<CAPTION>
Sequential
Exhibit No. Description Page No.
- ----------- ------------------------------------------------------------- ---------------
<S> <C> <C>
2.1** Heads of Agreement, dated as of January 31, 1996, between the
Company and Novo Nordisk A/S.
3.1* Certificate of Incorporation of the Company.
3.2* By-Laws of the Company.
4.1* Specimen Certificate for shares of Common Stock, $.01 par
value, of the Company.
10
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4.2*** Registration Rights Agreement, dated January 23, 1997, by and
among the Company and Novo Nordisk A/S.
27.1 Financial Data Schedule.
- ---------------------------------------
</TABLE>
* Incorporated herein by reference to the Company's Registration
Statement on Form S-1, as amended (File No. 33-75930).
** Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
*** Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1996.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF HEMASURE INC., FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 198
<SECURITIES> 4,493
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 145
<CURRENT-ASSETS> 5,065
<PP&E> 3,068
<DEPRECIATION> 1,557
<TOTAL-ASSETS> 6,608
<CURRENT-LIABILITIES> 2,405
<BONDS> 0
<COMMON> 90
0
0
<OTHER-SE> 3,791
<TOTAL-LIABILITY-AND-EQUITY> 6,608
<SALES> 25
<TOTAL-REVENUES> 25
<CGS> 657
<TOTAL-COSTS> 657
<OTHER-EXPENSES> 2,835
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (36)
<INCOME-PRETAX> (3,429)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,429)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,429)
<EPS-PRIMARY> (0.38)
<EPS-DILUTED> 0
</TABLE>
