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 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 0-25406
TECHNICAL CHEMICALS AND PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Florida 65-0308922
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3341 S.W. 15th Street, Pompano Beach, Florida 33069
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (954) 979-0400
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15 (d) of the Exchange Act during the past 12 months
(or such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days. YES x NO___
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
Class Outstanding As Of May 12, 1998
----- ------------------------------
Common Stock $ .001 par value 10,015,036
Transitional Small Business Disclosure Format (check one):
YES_____ NO x
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
March 31, December 31,
1998 1997
-------------------------------
ASSETS (Unaudited) *(Audited)
Current assets:
Cash and cash equivalents $ 719 $ 3,316
Investments 4,120 4,021
Accounts receivable, net 1,924 2,055
Inventory 2,676 1,852
Other 300 226
-------------------------------
Total current assets 9,739 11,470
-------------------------------
Property and equipment, net 2,766 2,831
Patents and trademarks, net 12,664 12,912
Goodwill, net 2,108 2,151
Deferred tax asset, net 4,140 4,140
Other assets 94 93
-------------------------------
Total assets $ 31,511 $ 33,597
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,564 $ 1,729
Accrued expenses 595 340
-------------------------------
Total current liabilities 2,159 2,069
-------------------------------
Other liabilities 170 170
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares--25,000,000;
No issued and outstanding shares -- --
Common stock, $.001 par value:
Authorized shares--100,000,000;
Issued and outstanding shares--
10,015,036 at 3/31/98 and 12/31/97 10 10
Additional paid-in capital 39,807 39,807
Accumulated deficit (10,635) (8,459)
-------------------------------
Total stockholders' equity 29,182 31,358
-------------------------------
Total liabilities and stockholders' equity $ 31,511 $ 33,597
===============================
*Note: The Balance Sheet at December 31, 1997 has been derived from the audited
financial statements at that date.
See accompanying notes to the condensed consolidated financial statements.
<PAGE>
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in thousands, except share data)
Three Months Ended March 31,
-------------------------------
1998 1997
-------------------------------
Gross product sales $ 1,631 $ 1,239
Returns and allowances -- (9)
-------------------------------
Net product sales 1,631 1,230
Cost of product sales 764 629
-------------------------------
Gross profit 867 601
R&D contract revenue 105 50
Operating expenses:
Selling, general and administrative 2,048 1,289
Research and development 744 551
Depreciation and amortization 453 409
-------------------------------
3,245 2,249
-------------------------------
Loss from operations (2,273) (1,598)
Other income (expense):
Interest income 113 371
Interest expense (6) (2)
-------------------------------
Loss before income tax benefit (2,166) (1,229)
Income tax benefit -- 455
-------------------------------
Net loss $ (2,166) $ (774)
===============================
Basic and diluted net loss per common share $ (.22) $ (.08)
===============================
Weighted average number of common shares
outstanding 10,015,036 9,963,170
===============================
See accompanying notes to the condensed consolidated financial statements.
<PAGE>
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in thousands)
Three Months Ended March 31,
-----------------------------
1998 1997
-----------------------------
OPERATING ACTIVITIES
Net loss $ (2,166) $ (774)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 453 410
Deferred income taxes -- (455)
Changes in operating assets and liabilities:
Accounts receivable 131 845
Inventory (824) (342)
Accounts payable and accrued expenses 90 (462)
Other (75) 9
-----------------------------
Net cash used in operating activities (2,391) (769)
INVESTING ACTIVITIES
Purchase of property and equipment (98) (82)
Investment in patents and trademarks 1 --
Purchase of investments (1,108) --
Proceeds from sale of investments 999 506
-----------------------------
Net cash (used in) provided by investing
activities (206) 424
FINANCING ACTIVITIES
Proceeds from stock options exercised -- 92
-----------------------------
Net cash provided by financing activities -- 92
-----------------------------
Net decrease in cash and cash equivalents (2,597) (253)
Cash and cash equivalents at beginning of
period 3,316 1,607
-----------------------------
Cash and cash equivalents at end of period $ 719 $ 1,354
=============================
See accompanying notes to the condensed consolidated financial statements.
<PAGE>
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements (the
"Financial Statements") of Technical Chemicals and Products, Inc. and
Subsidiaries (the "Company" or "TCPI") are unaudited, and in the opinion of
management, include all normal and recurring adjustments which are necessary for
a fair presentation. Accordingly, the Financial Statements should be read in
conjunction with more complete disclosures contained in the Company's audited
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997. The results of operations for
interim periods are not necessarily indicative of the results of operations for
the entire year.
RECLASSIFICATIONS
Certain amounts in the 1997 consolidated financial statements have been
reclassified to conform to the current period's presentation.
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes". Deferred income tax assets and liabilities are determined based
on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
In evaluating whether or not an increase to the prior year valuation
allowance for deferred tax assets was required in the first quarter of 1998, the
Company recognized that all elements of evidence required to recognize the first
quarter of 1998 net operating loss tax benefits were not present. Accordingly,
the Company recorded an additional valuation allowance related to the deferred
tax asset in the amount of $801,000 in the first quarter of 1998.
INVENTORIES
Inventories, consisting of raw materials and finished goods, are valued at
the lower of cost (computed on the first-in, first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets. The cost
of maintenance and repairs are charged to operations as incurred. Significant
renewals and betterments are capitalized or depreciated over their estimated
useful lives.
INTANGIBLE ASSETS
Purchased patents and trademarks are amortized using the straight-line
method over a composite life of 15 years based on the shorter of their legal
life or estimated useful life of the individual patents and trademarks, which
range from 11 to 17 years. Goodwill is amortized using the straight-line method
over 15 years. The realizability of patents, trademarks and goodwill is
evaluated periodically as events or circumstances indicate a possible inability
to recover their carrying amount. At this time, the Company believes that no
significant impairment of these intangible assets has occurred and that no
reduction of the estimated useful lives is warranted.
<PAGE>
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
DETAILS OF BALANCE SHEET
Details of selected balance sheet accounts are as follows (in thousands):
March 31, December 31,
1998 1997
-------------------------
Accounts receivable
Accounts receivable $1,942 $2,073
Allowance for doubtful accounts (18) (18)
-------------------------
$1,924 $2,055
=========================
Property and equipment
Furniture, fixtures and equipment $2,945 $2,849
Real property 217 217
Leasehold improvements 906 904
-------------------------
4,068 3,970
Accumulated depreciation (1,302) (1,139)
-------------------------
$2,766 $2,831
=========================
Patents and trademarks
Patents and trademarks $15,024 $15,025
Accumulated amortization (2,360) (2,113)
-------------------------
$12,664 $12,912
=========================
Goodwill
Goodwill $2,494 $2,494
Accumulated amortization (386) (343)
-------------------------
$2,108 $2,151
=========================
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including the information incorporated
by reference herein, includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Act of 1934, as amended, and is subject to the safe-harbor created by
such sections. The Company's actual results may differ significantly from the
results discussed in such forward-looking statements. See Item 2 "Management's
Discussion And Analysis of Financial Condition And Results Of Operations" for
further information relating to forward-looking statements.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
STRATEGIC DIRECTION
The Company is in the midst of completing a transition. TCPI was formerly
a developmental company that manufactured and sold a narrow range of medical
diagnostic products and specialty chemicals on an Original Equipment Manufacture
("OEM") basis. TCPI is now approaching its goal of being a designer, developer,
manufacturer and global marketer of a wide range of point-of-care medical
diagnostic products for use at home, in physician offices, and other healthcare
locations with growing distribution channels for its products. In addition,
through its Pharmetrix Division located in Menlo Park, California, the Company
is also focused on the research and development and commercialization of
transdermal and dermal drug delivery systems and skin permeation enhancers. TCPI
also manufactures high purity specialty biochemicals.
TCPI is currently scaling-up the manufacture of more than 47
membrane-based diagnostic tests in the United States and internationally, 28 of
which have received 510(k) clearance from the FDA. The Company's products
include tests and screens for pregnancy, ovulation timing, cholesterol levels,
blood glucose levels, infectious diseases, drugs of abuse and certain types of
cancer. In addition, the Company has over 20 other diagnostic and transdermal
drug delivery products in various stages of development and governmental
approval.
The Company's products are distributed worldwide under OEM marketing
relationships with multinational pharmaceutical and diagnostic companies, and
also are directly marketed for over-the-counter use by consumers. The Company
expects to continue developing its medical diagnostic products internally and
also intends to enter into strategic alliances with major international
diagnostic and pharmaceutical companies for the marketing and distribution of
certain of its products. With respect to the development and commercialization
of its transdermal drug delivery systems and skin permeation enhancers, the
Company intends to enter into strategic alliances with third parties that may,
in some cases, fund a portion of the product development costs, participate in
clinical testing, obtain regulatory approvals and market the product.
During the past quarter the Company has engaged in the following
activities:
TD GLUCOSE MONITORING SYSTEM
- In February 1998, TCPI and Daiichi Pharmaceutical Co. Ltd. announced a
letter of intent related to marketing and distribution rights of the
TD Glucose Monitoring System in Japan and Taiwan. Completion of a
definitive $10 million licensing agreement is expected to be finalized
during the third quarter of 1998. TCPI is currently in preliminary
discussions with several multinational pharmaceutical and medical
diagnostics companies with respect to marketing and distribution
rights for the remainder of the world. In January 1998, the SmithKline
Beecham product assessment and option agreement related to TCPI's
non-invasive glucose monitoring system lapsed and was not extended by
either party.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
STRATEGIC DIRECTION (Continued)
- TCPI continues to commit significant resources to the development and
commercialization of its innovative non-invasive transdermal glucose
monitoring system. Development of the TD Glucose Monitoring System has
been completed and the clinical trial process began during the fourth
quarter of 1997. The Company expects these clinical activities to be
substantially completed during the first half of 1998. The
registration studies are being conducted at several undisclosed large
diabetic clinics under the supervision of independent investigators.
During these studies, the Company anticipates testing the glucose
level of approximately 3,000 people with diabetes with its TD Glucose
Monitoring System and obtaining venous blood samples from each patient
for corresponding laboratory analysis. The purpose of collecting
correlation data is to attempt to develop algorithms, or complex
mathematical formulas, which could allow the TD Glucose meter to
display glucose levels equivalent to venous blood glucose. Upon
completion of the registration studies, the Company will submit its
clinical data to the FDA for review as soon as possible thereafter.
There can be no assurance the registration and correlation studies
will be successful or produce data suitable for submission to the FDA.
Based on discussions with the FDA and prior acceptance of TCPI's
protocol to conduct its Clinical Trials, which was acknowledged
without review, the Company believes its TD Glucose Monitoring System
is eligible for the expedited 510(k) clearance process. There can be
no assurances that the FDA will consider the TD Glucose Monitoring
System for 510(k) clearance or, if it is considered, that the TD
Glucose Monitoring System will receive 510(k) clearance.
HEALTHCHECK
- Re-orders for the Company's HealthCheckTM brand of at home diagnostic
products for consumers continue to be received. This line consists of
accurate and easy to use over-the-counter tests and screening products
for cholesterol, diabetes, urinary tract infection, pregnancy,
ovulation, skin cancer and deteriorating vision, as well as a series
of health journals specifically designed for women, men, seniors,
children and pregnant women.
- Since market introduction in the second quarter of 1997, more than 38
chain and independent pharmacies have placed orders for HealthCheck
products, providing the Company with more than 30% market penetration
of the approximately 60,000 pharmacies in the United States. In total,
the Company's at-home diagnostics products are available through such
(i) leading pharmacies as Walgreen Drug Stores, Eckerd Corp.,
CVS-Revco, Thrifty Payless, Thrift Drug, Phar-Mor, Genovese Drug
Stores, Longs Drug Stores, Smiths Food & Drug, Osco Drug, Sav-On
Stores, Snyder Drug, Kinney Drugs, Harco Drug; (ii) leading
supermarkets such as Kroger, Thriftway Foods, Seaway Foods and Ukrop's
Super Markets; and (iii) leading drug wholesale distributors McKesson
Corp., AmeriSource Health Corp., Bindley Western Industries, Bergen
Brunswig Drug Company, Neuman Distributors, KinRay, Allou
Distributors, and F. Dohman Co.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
STRATEGIC DIRECTION (Continued)
OTHER PRODUCTS
- In April 1998, the Company announced the market introduction of its
new One StepTM Drug Scan complete panel of diagnostics for drug of
abuse screening. This new multi-test panel meets the criteria
specified by the National Institute on Drug Abuse (NIDA) for initial
screenings of drugs of abuse in the workplace. It is easy to perform
and provides rapid visually read results with clinical accuracy
without the need for instrumentation or trained technicians. As many
as eight different drugs of abuse can be configured for testing using
the One Step Drug Scan with results provided in approximately five
minutes.
Wholesale pricing for the One Step Drug Scan is highly competitive with
a price more than 30 percent below other drug screening products of
this type currently available. The market for drugs of abuse screening
in the United States is currently estimated to be approximately $225
million a year.
Each of the drug screens in TCPI's One Step Drug Scan are Class II
devices and have received 510(k) clearance by the U.S. Food and Drug
Administration. Marketing will initially focus on the non-clinical
professional marketplace of institutional and workplace testing
situations - and later be expanded to include the clinical sector,
comprised of hospital and clinical laboratories as well as other
healthcare sites.
- In February 1998, TCPI announced a new agreement with Boehringer
Mannheim Italia and began shipping finished and packaged family
planning products directly to Boehringer Mannheim distributors. The
Company has had a non-exclusive worldwide marketing and distribution
agreement with Boehringer Mannheim Italia for its family planning
diagnostic products since 1992.
- Also in February, TCPI announced the market introduction of its new
One-Step One MinuteTM pregnancy test which is being marketed under the
Company's HealthCheckTM brand, as a control brand, and also for
private label.
- During the first quarter of 1998, the Company shipped its first sample
of infectious disease testing products for governmental approval to
Boehringer Mannheim Argentina SACIeI ("BMRA") and continued its
discussions with executives of BMRA to outline product distribution
plans in South America. In March 1997, TCPI established an exclusive
marketing agreement with BMRA to distribute more than $50 million of
the Company's new diagnostic products for infectious diseases, drugs
of abuse and cancer screens throughout Latin America over a 10 year
period.
- The Company's new Total cholesterol monitoring test and meter are
presently in clinical trials and are expected to allow market
introduction of TCPI's new Total and HDL (good) cholesterol tests by
the end of 1998. These new cholesterol tests will be used by
healthcare professionals and patients at home.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
STRATEGIC DIRECTION (Continued)
RESEARCH AND DEVELOPMENT
- TCPI conducts an active research and development program to strengthen
and broaden its existing products and to develop new products and
systems that utilize specific applications related to its patented and
proprietary membrane-based technology. The present diagnostic focus
includes products for glucose and cholesterol monitoring, at home
tests and screens for cholesterol, diabetes, urinary tract infection,
pregnancy and ovulation, skin cancer and deteriorating vision, as well
as drugs of abuse, infectious diseases, cardiac markers, cancer and
urinalysis. TCPI's products are in various stages of
commercialization, and include those already on the market and others
that are in development, in the pre-clinical stage, and seeking
regulatory clearance.
- TCPI is continuing development of several transdermal drug delivery
products at its Pharmetrix Division based in Menlo Park, California
and is actively working on the commercialization of several products
by completing the development, and planning for manufacturing,
marketing and distribution. Pharmetrix is currently involved in a
contract development services program with a major pharmaceutical
company, and has also been asked to prepare feasibility studies on
behalf of several clients to evaluate the applicability of its
transdermal drug delivery technology with various compounds. The
present transdermal drug delivery focus includes systems related to
hormone replacement therapy, cardiovascular disease, smoking cessation
and skin permeation enhancers, among others.
MANUFACTURING SCALE-UP
- Expansion at the Company's facilities located in Florida have been
expanded to accommodate full-scale manufacturing of medical diagnostic
products and continues to include:
- acquisition of major production equipment for manufacturing of
the products
- re-tooling and refurbishing of equipment to significantly
increase its capacity
- purchase and installation of custom high-speed packaging
equipment
- expansion of sales and marketing, production and warehouse
facilities
- to accommodate the in-house manufacturing program
- additions to the Florida research and development facilities and
professional staff to increase product development capabilities
KEY ADDITION TO THE BOARD OF DIRECTORS AND MANAGEMENT
- In April 1998, Jay E. Eckhaus joined the Company as vice president and
general counsel, replacing Brian Foremny, who left to pursue interests
in investment banking. Mr. Eckhaus has more than 25 years of
experience in the legal profession. From 1973 to 1989, he held various
senior level positions at General Foods Corporation, including vice
president and chief counsel of its baking operations as well as
assignments in both domestic and international food operations. He
also served as vice president, general counsel and secretary for the
U.S. operations of Alfa-Laval, Inc., a leading European technology
company. Since 1990, Mr. Eckhaus has been practicing corporate and
commercial law.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
STRATEGIC DIRECTION (Continued)
- In April 1998, the Board of Directors appointed Noel Buterbaugh to
TCPI's Board, replacing Dr. Stephen Dresnick. Mr. Buterbaugh is the
President and Chief Executive Officer of BioWhittaker, Inc., which was
acquired by Cambrex Corporation (NYSE: CMB) in 1997. Mr. Buterbaugh
has been with BioWhittaker since the early 1950's and served as
President and Chief Executive Officer of BioWhittaker, Inc. (NYSE:
BWI) from 1992 to 1997 and President and Chief Operating Officer since
1991. From 1979 to 1991, he was President of Whittaker Bioproducts,
Inc., a subsidiary of Whittaker Corporation, which was spun-off to
shareholders in 1991. From 1958 to 1979, he held numerous senior
management positions in sales and marketing and product manufacturing
with Microbiological Associates, Inc., a Division of Whittaker
Corporation.
- In January 1998, Gregory J. Candelmo joined the Company as Vice
President of Sales. He directs the domestic sales programs for TCPI's
diagnostic testing products and transdermal drug delivery systems used
by consumers and healthcare professionals. Mr. Candelmo has more than
12 years sales and sales management experience in medical diagnostics
and scientific instruments which includes Director of Sales and
Marketing for GDS Diagnostics, as well as various sales management
positions with Boehringer Mannheim Corporation from 1991 to 1997 that
included Diagnostic Systems Director of Sales, Lab Diagnostics
Regional Business Manager, AccuData System Product and Marketing
Manager, and Diabetes Care Division Regional Sales Manager. He also
held sales management and field sales positions with Behring
Diagnostics, Cooper Biomedical/Technicon Instruments, and Proctor and
Gamble.
BACKGROUND
The Company's roots date back more than 29 years. During this time, TCPI
or its founder have developed more than 330 medical diagnostic and
pharmaceutical products which have received marketing clearance by the United
States Food and Drug Administration (the "FDA")-- including those related to its
patented membrane-based technology platform -- and also has manufactured OEM
products for leading multinational pharmaceutical and medical diagnostic
companies. The Company presently holds 22 U.S. and 29 foreign patents, and has
five pending patent applications in the U.S. and more than 30 foreign patent
applications pending.
TCPI is currently scaling-up the manufacture of more than 47 patented
membrane-based diagnostic tests in the U.S. and internationally, 28 of which
have received 510(k) clearance from the FDA. In addition, the Company has over
20 other diagnostic and transdermal drug delivery products in various stages of
development and governmental approval. Foremost in TCPI's product portfolio is
its TD GlucoseTM Monitoring System (the "TD Glucose Monitoring System") -- an
innovative non-invasive glucose testing system for diabetics. The Company's
present portfolio of diagnostic products also include tests and screens for
cholesterol monitoring, pregnancy, ovulation timing, urinary glucose levels,
urinary tract infection, skin cancer, deteriorating vision, infectious diseases,
drugs of abuse, cardiac markers and certain types of cancer. TCPI's portfolio of
transdermal drug delivery technology focuses on smoking addiction, hormone
replacement therapy, cardiovascular disease and other areas.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
BACKGROUND (Continued)
The Company's products are distributed worldwide under OEM marketing
relationships with multinational pharmaceutical and diagnostic companies, and
also are directly marketed for over-the-counter use by consumers. In the OEM
sector, most of TCPI's tests were sold through the Company's alliance with
Boehringer Mannheim. This alliance also extends to the marketing and
distribution of certain other products, including its Serum Dilution Reagent
(hCG Test) and its One Step LH Ovulation Tests. In February 1998, the Company
established a new agreement to supply finished and packaged family planning
products directly to Boehringer Mannheim distributors. This replaced an earlier
worldwide marketing and distribution agreement where the Company's family
planning products utilizing TCPI's technology were packaged in Europe.
Over-the-counter products are marketed to consumers in the U.S. and Canada for
at-home use under TCPI's proprietary HealthCheckTM and private-label brands.
These over-the-counter products are sold in pharmacies, supermarkets and mass
merchandise retail stores. The HealthCheck line consists of 14 testing and
screening products for cholesterol, diabetes, urinary tract infection,
pregnancy, ovulation, skin cancer, deteriorating vision and a series of health
journals. Since market introduction in the second quarter of 1997, more than 38
chain and independent pharmacies have placed orders for HealthCheck products,
providing the Company with more than 30% market penetration of the approximately
60,000 pharmacies in the United States. TCPI distributes its private label
family planning products to approximately 20 leading drug, discount and
supermarket chains and catalog retailers. In total, the Company's at-home
diagnostics products are available through such leading pharmacies as Walgreen
Drug Stores, Eckerd Corp., CVS-Revco, Rite Aid, Thrifty Payless, Thrift Drug,
Phar-Mor, Genovese Drug Stores, Longs Drug Stores, Smiths Food & Drug, Osco
Drug, Sav-On Stores, Snyder Drug, Kinney Drugs, Harco Drug; leading supermarkets
such as Kroger, Thriftway Foods, Seaway Foods and Ukrop's Super Markets; and
leading drug wholesale distributors McKesson Corp., AmeriSource Health Corp.,
Bindley Western Industries, Bergen Brunswig Drug Company, Neuman Distributors,
KinRay, Allou Distributors, and F. Dohman Co.; and are featured in Amway
Corporation's Personal Shopper catalog. In 1997, sales of the Company's family
planning products to Boehringer Mannheim and CVS were each greater than 10% of
TCPI's total product sales.
Statements regarding future products, future prospects, business plans and
strategies, future revenues and revenue sources, future liquidity and capital
resources, health care market directions, future acceptance of the Company's
products, possible recommendations of health care professionals or governmental
agencies regarding use of diagnostic products, possible growth in markets for
at-home diagnostic testing, as well as other statements contained in this report
that address activities, events or developments that the Company expects,
believes or anticipates will or may occur in the future, and similar statements
are forward looking statements. These statements are based upon assumptions and
analyses made by the Company in light of current conditions, future developments
and other factors the Company believes are appropriate in the circumstances, or
information obtained from third parties and are subject to a number of
assumptions, risks and uncertainties. Readers are cautioned that forward-looking
statements are not guarantees of future performance and that actual results
might differ materially from those suggested or projected in the forward-looking
statements. Some of the factors that may cause actual future events to differ
from those predicted or assumed include: future advances in technologies and
medicine; the uncertainties of health care reform; risks related to the early
stage of the Company's existence and its products' development; the Company's
ability to execute on its business plans; the Company's dependence on outside
parties such as its key customers and alliance partners; competition from major
pharmaceutical, medical and diagnostic companies; risks and expense of
government regulation and affects of changes in regulation; the limited
experience of the Company
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
BACKGROUND (Continued)
in manufacturing and marketing products; uncertainties connected with product
liability exposure and insurance; risks associated with growth and expansion;
risks associated with obtaining patents and other protections on intellectual
property; uncertainties in availability of expansion capital in the future and
other risks associated with capital markets. The Company may determine to
discontinue or delay the development of any or all of its products under
development at any time.
For a complete description of the Company's products and business, see
Part I, Item 1 of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997.
RESULTS OF OPERATIONS
Due to the timing of the FDA clearance process and the expenses incurred
in the manufacturing scale-up for the Company's products, the Company's results
of operations vary from quarter to quarter.
PRODUCT SALES. The Company's net product sales for the three months ended
March 31, 1998 rose sharply by approximately 32% to $1.6 million from $1.2
million in the first quarter of 1997. The month of March was TCPI's largest
sales month in its history. This increase resulted primarily from the successful
launch of and ongoing roll out of the Company's HealthCheck at home diagnostic
tests and screening products, as well as sales growth related to TCPI's OEM
family planning products and new diagnostic products for drugs of abuse,
infectious diseases and several others.
GROSS PROFIT. TCPI's gross profit on product sales increased to $867
thousand in the first quarter of 1998. Gross profit as a percent of net sales
also advanced to 53% in the first quarter of 1998 from 49% in the same quarter a
year earlier. These gains were achieved principally due to increased in-house
manufacturing which provided various economies of scale-up, and a change in
product mix that included the market introduction of the HealthCheck family of
at home diagnostic products as well as start-up of a more favorable packaging
and distribution program related to the Company's OEM family planning products.
SELLING, GENERAL AND ADMINISTRATIVE. Selling general and administrative
(SG&A) expenses increased substantially in the first quarter of 1998 as compared
to the same period in 1997. This increase was primarily due to the ongoing
implementation of strategic marketing programs, including those related to the
HealthCheck product line and introduction of various new products. The Company
also continues to hire operating personnel for the further scale-up of in-house
manufacturing as well as make ongoing facility upgrades and expansion at its
Pompano Beach, Florida manufacturing, laboratory, warehouse, and office space.
The Company's SG&A expenses increased to $2.0 million in the first quarter of
1998 from $1.3 million in the same quarter a year ago. This increase included
the payment of significantly higher than usual nonrecurring legal fees that
coincided in the period. These fees primarily relate to the filing of certain
patents associated with the TCPI's non-invasive glucose monitoring system,
participation in the successful appeal connected to patents utilized in the
Company's family planning products, as well as the pursuit of a trade libel and
slander matter and vigorous defense of a patent infringement action, which
management believes is without merit.
RESEARCH AND DEVELOPMENT. The Company continued to advance its various
diagnostic testing products and transdermal drug delivery systems through
development towards commercialization. The Company's investment in R&D has
contributed to the development of several new products with sizeable market
potential, including its TD Glucose Monitoring System, HealthCheck family of at
home diagnostics, and visual and meter-read Total and HDL cholesterol monitoring
products, infectious diseases and drugs of abuse, as well as several other
products. The Company's R&D expenses increased by 35% in the first quarter of
1998 to $744 thousand from $551 thousand in the same quarter a year earlier.
NET LOSS. The Company posted a net loss of $2.17 million in the first three
months of 1998, which increased from a net loss of $774 thousand in the first
quarter of 1997. This increase resulted primarily from an increase in the
valuation allowance related to the deferred tax asset for the first quarter of
1998. Without this increase, the Company would have had a net loss of $1.37
million in the first quarter of 1998. This included expenses associated with the
planned scale-up of manufacturing and certain start-up expenses related to the
new Boehringer Mannheim Italia program; ongoing investment in personnel,
research and development and facility expansion; expenses for ongoing clinical
trials of TCPI's non-invasive glucose monitoring system and its cholesterol
testing and screening products; and substantially higher than usual nonrecurring
legal fees that coincided in the period which relate to the filing of certain
patents associated with the TCPI's non-invasive glucose monitoring system,
participation in the successful appeal connected to patents utilized in the
Company's family planning products, as well as the pursuit of a trade libel and
slander matter and vigorous defense of a patent infringement action, which
management believes is without merit.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION
The Company had cash and investments of more than $4.8 million at March
31, 1998. Working capital at the end of the first quarter was approximately $7.6
million. The Company expects to continue to draw upon its working capital to
purchase production equipment, develop and manufacture the TD Glucose Monitoring
System, engage in research and development related to transdermal drug delivery,
develop new diagnostic products, conduct clinical trials and continued
investment in personnel and facility expansion.
LIQUIDITY AND CAPITAL RESOURCES
The Company plans to earmark funds to (i) increase its R&D budget related
to the completion and commercialization of the Company's products currently
under development, including its non-invasive transdermal glucose monitoring
system (TD Glucose Monitoring System), its meter-read and visually-read
cholesterol monitoring system, and various transdermal drug delivery technology
and skin permeation enhancers, (ii) expand direct distribution of medical
diagnostic products, (iii) introduce direct distribution of its meter-read
cholesterol monitoring system, (iv) hire additional personnel, and (v) expand
its facilities and revenue generating manufacturing equipment.
The Company's future long-term capital expenditure requirements will depend
on the following factors: (i) the time required to obtain regulatory approvals;
(ii) the progress of the Company's research and development program; and (iii)
the ability of the Company to develop additional marketing and distribution
alliances. The Company anticipates that it will continue to incur net losses
until such time, if any, as the Company is able to generate sufficient revenues
from product sales to sustain its operations and cover expenses related to its
growth.
The Company's future working capital and capital expenditure requirements
may vary materially from those now planned depending on numerous factors,
including additional manufacturing scale-up for the Company's current and future
products, possible future acquisitions, the focus and direction of the Company's
research and development programs, competitive and technological advances,
future relationships with corporate marketing partners, the FDA regulatory
process and the Company's marketing and distribution strategy. The Company is
also exploring opportunities to secure additional manufacturing capabilities for
its TD Glucose Monitoring System as well as other future products, and such
action will also require additional capital. Additional working capital will be
needed to fund the Company's operations as well as its growth plans.
The Company is currently engaged in discussions with one or more investment
banking firms with respect to conducting an offering of its securities pursuant
to Regulation D promulgated under the Securities Act of 1933. It is anticipated
that such securities will be a new series of convertible preferred stock. It is
also anticipated that the proceeds from such offering will be used (i) to
establish manufacturing capabilities for certain electronic devices related to
the Company's non-invasive glucose monitoring system, its cholesterol testing
products, and other future applications, and (ii) for working capital and
general corporate purposes. There can be no assurances that any such offering
will ever be consummated, that such financing would be on favorable terms to the
Company, or that the Company will be successful in establishing such
manufacturing capabilities. If the Company is unsuccessful in raising additional
capital on a timely basis, it may be required to scale-back certain operations
to better match expenses with near-term revenue generating opportunities. To the
extent that capital requirements should exceed available funds, the Company
would be required to delay capital expenditures, reduce inventory levels,
scale-back certain operations to better match costs with revenues, slow the pace
of hiring additional personnel, and seek additional equity and debt financing in
order to continue its business operations.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
Statements regarding future products, future prospects, business plans and
strategies, future revenues and revenue sources, future liquidity and capital
resources, health care market directions, future acceptance of the Company's
products, possible growth in markets for at-home diagnostic testing, as well as
other statements contained in this report that address activities, events or
developments that the Company expects, believes or anticipates will or may occur
in the future, and similar statements are forward looking statements. These
statements are based upon assumptions and analyses made by the Company in light
of current conditions, future developments and other factors the Company
believes are appropriate in the circumstances, or information obtained from
third parties and are subject to a number of assumptions, risks and
uncertainties. Readers are cautioned that forward-looking statements are not
guarantees of future performance and that actual results might differ materially
from those suggested or projected in the forward-looking statements. Some of the
factors that may cause actual future events to differ from those predicted or
assumed include: future advances in technologies and medicine; the uncertainties
of health care reform; risks related to the early stage of the Company's
existence and its products' development; the Company's ability to execute on its
business plans; the Company's dependence on outside parties such as its key
customers and alliance partners; competition from major pharmaceutical, medical
and diagnostic companies; risks and expense of government regulation and affects
of changes in regulation; the limited experience of the Company in manufacturing
and marketing products; uncertainties connected with product liability exposure
and insurance; risks associated with growth and expansion; risks associated with
obtaining patents and other protections on intellectual property; acceptance of
the Company's new products in the professional and over-the-counter
marketplaces; uncertainties in availability of capital and other risks
associated with capital markets.
<PAGE>
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Exhibit Description
Number
3.1 * Articles of Incorporation of the Company, as amended.
3.2 * By-laws of the Company.
3.3 **** Amended and Restated Articles of Incorporation of the Company.
3.4 **** Amended and Restated Bylaws of the Company.
4.1 **** See Exhibits 3.3 and 3.4 for provisions of the Amended and
Restated Articles of Incorporation and the Amended and Restated
Bylaws of the Company defining the rights of holders of Common
Stock of the Company.
4.2 ** Form of Common Stock Certificate of the Company.
10.1 **** Employment Agreement between Jack L. Aronowitz and the Company
dated December 31, 1992, as amended.
10.2 **** Amended and Restated 1992 Incentive Stock Option Plan.
10.3 **** Cancellation and Exclusive License Agreement between Jack
Aronowitz and the Company dated January 31, 1996.
10.6 * Lease-Pompano Beach, Florida.
10.6.1 **** Business Lease Extension-Pompano Beach, Florida.
10.6.2 **** Main Lease-Menlo Park, California; Sublease-Menlo Park.
10.6.3 **** Assignment and Assumption of Sublease and Landlord's
Consent Thereto between Menlo Business Park, Patrician
Associates, Inc., Flora, Inc., Pharma Patch PLC and Technical
Chemicals and Products, Inc. dated November 15, 1995.
10.7 * Health-Mark Diagnostics, Inc. Shareholders Agreement dated March
7,1994.
10.9 * Letter Agreement with John Faro (for stock options) dated
August 12, 1994.
10.10 ** Warrant Agreement between the Company and Jack L. Aronowitz.
10.11 **** Supplemental Agreement by and between Pharma Patch Public
Limited Company and PP Holdings, Inc. dated January 16, 1996.
10.12 **** Stock Option Agreement with John Pippert.
10.13 * Agreement between Company and Equity Communications dated
January 6, 1995.
10.14 **** Letter Agreement between the Company and Redstone Securities,
Inc. dated January 15, 1996.
10.15 **** Letter Agreement between the Company and Ira Weingarten
dated January 15, 1996.
10.16 **** Letter Agreement with Flora, Inc. dated February 5, 1996.
10.17 ***** Employment Agreement between the Company and Martin Gurkin dated
January, 1996.
10.18 ***** Stock Option Agreement with Martin Gurkin dated November, 1996.
27 Filed Financial Data Schedule (EDGAR Filing)
Herewith
99.1 * Licenses, Permits and Approvals-Federal.
99.2 * Licenses, Permits and Approvals-State.
99.3 * Licenses, Permits and Approvals-County.
99.4 * FDA Product List.
99.5 * United States Patents.
99.7 ***** Pharmetrix Division of TCPI Patents.
99.8 ***** Pharmetrix Division of TCPI Licenses, Permits and Approvals.
99.6 * Canadian Patents.
* Incorporated by reference to exhibit of the same number in
Registration Statement on Form SB-2 filed on October 28, 1994
(No. 33-85756).
** Incorporated by reference to exhibit of the same number in
Amendment No. 4 to the Registration Statement on Form S-1 filed
April 23, 1996 (No. 333-1272).
*** Incorporated by reference to exhibit of the same number in
Amendment No. 1 to Registration Statement on Form SB-2 filed on
January 13, 1995 (No.33-85756).
**** Incorporated by reference to exhibit of same number filed in the
Company's Registration Statement on Form S-1 on February 12,1996
(No. 333-1272).
(b)Reports On Form 8-K
No reports on Form 8-K were filed during the quarter for which this
report is being filed.
<PAGE>
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.
TECHNICAL CHEMICALS AND PRODUCTS, INC.
Date: May 15, 1997 By: /S/
--------------
Stuart R. Streger
Vice President and
Chief Financial Officer
(Duly authorized officer
and principal accounting
officer)
<PAGE>
Exhibit Index to Exhibit
Number
2. * Asset Purchase Agreement among Pharma Patch Public Limited
Company, PP Holdings, Inc. and the Company.
3.1 ***** Amended and Restated Articles of Incorporation of the Company.
3.2 ***** Amended and Restated Bylaws of the Company.
4.1 ***** See Exhibits 3.3 and 3.4 for provisions of the Amended and
Restated Articles of Incorporation and the Amended and Restated
Bylaws of the Company defining the rights of holders of Common
Stock of the Company.
4.2 *** Form of Common Stock Certificate of the Company.
10.1 ***** Employment Agreement between Jack L. Aronowitz and the Company
dated December 31, 1992, as amended.
10.2 ***** Amended and Restated 1992 Incentive Stock Option Plan.
10.3 ***** Cancellation and Exclusive License Agreement between Jack
Aronowitz and the Company dated January 31, 1996.
10.4 ***** Stock Option Agreement between the Company and Martin Gurkin,
Stuart R. Streger, Colin Morris, Kathryn Harrigan, Clayton
Rautbord and Stephen Dresnick.
10.5 ** Lease-Pompano Beach, Florida.
10.5.1 ***** Business Lease Extension-Pompano Beach, Florida.
10.5.2 ***** Main Lease-Menlo Park, California; Sublease-Menlo Park.
10.5.3 ***** Assignment and Assumption of Sublease and Landlord's Consent
Thereto between Menlo Business Park, Patrician Associates,
Inc., Flora, Inc., Pharma Patch PLC and Technical Chemicals and
Products, Inc. dated November 15, 1995.
10.6 ** Health-Mark Diagnostics, Inc. Shareholders Agreement dated
March 7, 1994.
10.7 **** Stock Option Agreement with Cleve Laird dated July 29, 1994.
10.8 *** Warrant Agreement between the Company and Jack L. Aronowitz.
10.9 ***** Supplemental Agreement by and between Pharma Patch Public
Limited Company and PP Holdings, Inc. dated January 16, 1996.
10.10 ** Agreement between the Company and Equity Communications dated
January 6, 1995.
10.11 ***** Letter Agreement between the Company and Redstone Securities,
Inc. dated January 15, 1996.
10.12 ***** Letter Agreement between the Company and Ira Weingarten
dated January 15, 1996.
10.13 ***** Letter Agreement with Flora, Inc. dated February 5, 1996.
10.14 ****** Employment Agreement between the Company and Martin Gurkin
dated January 1996.
10.15 ****** Stock Option Agreement with Martin Gurkin dated November 1996.
21 ***** Subsidiaries of the Company.
27 Filed Financial Data Schedule (EDGAR Filing)
Herewith
99.1 ** Licenses, Permits and Approvals-Federal.
99.2 ** Licenses, Permits and Approvals-State.
99.3 ** Licenses, Permits and Approvals-County.
99.4 ** FDA Product List.
99.5 ** United States Patents.
99.7 ****** Pharmetrix Division of TCPI Patents.
99.8 ****** Pharmetrix Division of TCPI Licenses, Permits and Approvals.
99.6 ** Canadian Patents.
* Incorporated by reference to the exhibit of the same number in
the Company's Form 8-K filed on November 29, 1995.
** Incorporated by reference to exhibit of the same number in
Registration Statement on Form SB-2 filed on October 28, 1994
(No. 33-85756).
*** Incorporated by reference to exhibit of the same number in
Amendment No. 4 to the Registration Statement on Form S-1 filed
April 23, 1996 (No. 333-1272).
**** Incorporated by reference to exhibit of the same number in
Amendment No. 1 to Registration Statement on Form SB-2 filed on
January 13, 1995 (No. 33-85756).
***** Incorporated by reference to exhibit of same number filed in
the Company's Registration Statement on Form S-1 on February
12, 1996 (No. 333-1272).
****** Incorporated by reference to exhibit of the same number filed
in Amendment No. 2 to the Company's Registration Statement on
Form S-1 on March 20, 1996.
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