SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 2001.
[ ] 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
0-25133
PHARMANETICS, INC.
(Exact Name of Registrant as Specified in its Charter)
North Carolina 56-2098302
(State or other jurisdiction of (IRS Employer Identification Number)
Incorporation or organization)
9401 Globe Center Drive, Suite 140
Morrisville, North Carolina 27560
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, Including Area Code 919-582-2600
5301 Departure Drive, Raleigh North Carolina 27616
(Former Address of Principal Executive Office)
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 such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of May 8, 2001
Common Stock, no par value 9,321,785
PHARMANETICS, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2001
(unaudited) and December 31, 2000 3
Consolidated Statements of Operations for
the Three Months ended March 31, 2001 and 2000
(unaudited) 4
Consolidated Statements of Cash Flows for the Three
Months ended March 31, 2001 and 2000 (unaudited) 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 2. Changes in Securities 9
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 10
2
PHARMANETICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
MARCH 31, DECEMBER 31,
2001 2000
---- ----
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $4,120 $5,344
Short term investments, held-to-maturity - 3.904
Short term investments, trading 56 -
Accounts and other receivables 888 301
Inventories 1,631 1,286
Other current assets 263 218
--- ---
Total current assets 6,958 11,053
Property and equipment, net 8,042 6,424
Patents and intellectual property, net 558 536
Other noncurrent assets 445 301
--- ---
Total assets $16,003 $18,314
======= =======
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $768 $958
Accrued expenses 566 649
Deferred revenue, current portion 232 232
Current portion of long term debt and capital lease obligations 644 861
--- ---
Total current liabilities 2,210 2,700
Noncurrent liabilities:
Deferred revenue, less current portion 839 896
Long term debt and capital lease obligations, less current portion 30 36
-- --
Total noncurrent liabilities 869 932
--- ---
Total liabilities 3,079 3,632
Series A convertible redeemable preferred stock, no par value; authorized
120,000 shares; 97,500 shares issued and outstanding at March 31, 2001 and
December 31, 2000, respectively (aggregate liquidation value at March 31, 2001 of $9,750,000) 8,102 8,102
Contingently redeemable common shares 900 --
Shareholders' equity:
Common stock, no par value; authorized 40,000,000 shares; 7,869,285 and
7,851,225 issued and outstanding at March 31, 2001 and
December 31, 2000, respectively 46,279 47,028
Accumulated deficit (42,357) (40,448)
------- -------
Total shareholders' equity 3,922 6,580
----- -----
Total liabilities, redeemable preferred stock and shareholders' equity $16,003 $18,314
======= =======
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
3
PHARMANETICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share data)
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2001 2000
----------------------
Net sales $ 802 $1,489
Cost of goods sold 746 908
--- ---
Gross profit 56 581
-- ---
Operating expenses:
General and administrative 875 739
Sales and marketing 228 219
Research and development 819 775
--- ---
Total operating expenses 1,922 1,733
----- -----
Loss from operations (1,866) (1,152)
------ ------
Other income(expense):
Interest expense (27) (61)
Interest income 80 111
Gain (loss) on trading securities 2 -
Development income 50 71
-- --
Total other income 105 121
--- ---
Net and comprehensive loss (1,761) (1,031)
Preferred stock dividends 147 71
Amortization of beneficial conversion feature of
Series A convertible preferred stock - 377
--- ---
Net and comprehensive loss attributable to common shareholders ($1,908) ($1,479)
======= =======
Basic and diluted net loss per common share ($0.24) ($0.20)
====== ======
Weighted average number of outstanding common shares 7,851,667 7,502,756
========= =========
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
4
PHARMANETICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Three Months Ended
March 31, March 31,
2001 2000
----------------------
Cash flows from operating activities:
Net loss ($1,761) ($1,031)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 227 238
Amortization of intangible and other assets 44 24
Amortization of discount on investments (31) (19)
Provision for inventory obsolescence 75 -
Change in operating assets and liabilities:
Accounts receivable (587) (232)
Inventories (420) (120)
Other assets (217) 22
Accounts payable and accrued expenses (273) 461
Deferred revenue (57) -
---- ---
Net cash used in operating activities (3,000) (657)
------- -----
Cash flows from investing activities:
Payments for purchase of property and equipment (1,845) (233)
Costs incurred to obtain patents and intangibles (37) (4)
Purchases of investments (57) (6,180)
Proceeds from maturities of investments 3,935 1,500
----- -----
Net cash provided by (used in) investing activities 1,996 (4,917)
----- -------
Cash flows from financing activities:
Principal payments on long-term debt and capital lease
obligations (223) (187)
Proceeds from common stock options exercised 3 26
Proceeds from Series A preferred stock offering, net
of offering costs - 11,337
--- ------
Net cash (used in) provided by financing activities (220) 11,176
----- ------
Net (decrease) increase in cash and cash equivalents (1,224) 5,602
Cash and cash equivalents at beginning of period 5,344 3,661
----- -----
Cash and cash equivalents at end of period $4,120 $9,263
------ ------
Supplemental disclosure of noncash investing and financing activities:
Preferred stock issuance costs $ - $62
Preferred stock dividends paid with common shares $147 71
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
5
PHARMANETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Organization and Basis of Presentation
PharmaNetics, Inc. (the "Company") is a holding company incorporated in July
1998 as the parent company of Cardiovascular Diagnostics, Inc. ("CVDI"). CVDI
was incorporated in November 1985 and develops, manufactures and markets rapid
turnaround diagnostics to assess blood clot formation and dissolution. CVDI
develops tests based on its proprietary dry chemistry diagnostic test system,
known as the Thrombolytic Assessment System ("TAS"), to provide rapid and
accurate evaluation of hemostasis at the point of patient care. Coeur
Laboratories, Inc. ("Coeur"), which sold and manufactured disposable power
injection syringes, is a wholly-owned subsidiary of Cardiovascular Diagnostics,
Inc. In June 1999, substantially all of the operating assets and liabilities of
Coeur were sold. Cardiovascular Diagnostics Europe, BV ("CDE") is a wholly-owned
Dutch company that distributed the Company's products in Europe until March 1997
when it ceased operations. The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, including Coeur
through June 15, 1999. All intercompany activity has been eliminated. The
consolidated financial statements included herein as of any date other than
December 31 have been prepared by the Company without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Financial
information as of December 31 has been derived from the audited financial
statements of the Company, but does not include all disclosures required by
generally accepted accounting principles. In the opinion of management, the
accompanying unaudited consolidated financial statements include all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the consolidated financial position, results of operations and cash flows of the
Company. For further information regarding the Company's accounting policies,
refer to the Consolidated Financial Statements and related notes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000.
Results for the interim period are not necessarily indicative of the results for
any other interim period or for the full fiscal year.
Note 2. Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents.
Note 3. Investments
The Company makes investments in accordance with its investment policy which
seeks to minimize the possibility of loss. Investments with original maturities
at date of purchase beyond three months and which mature at or less than twelve
months from the balance sheet date are classified as current. Investments are
accounted for in accordance with Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities."
Investments held-to-maturity at December 31, 2000 consisted of United States
government agency obligations and corporate bonds. Trading investments at March
31, 2001 consisted of marketable equity securities. These securities are
classified as trading securities as the Company may hold these securites for
only a short period of time.
Note 4. Inventory
Inventories consisted of the following (in thousands):
March 31, 2001 December 31, 2000
-------------- -----------------
Raw materials $1,212 $1,132
Finished goods 419 154
--- ---
$1,631 $1,286
====== ======
Note 5. Loss Per Common Share
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share" ("EPS"), the Company is required to present both basic and
diluted EPS on the face of the Statement of Operations. Basic EPS excludes
dilution and is computed by dividing income (loss) attributable to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted EPS is the same as basic EPS for the Company's quarters ended
March 31, 2001 and 2000, because, for loss periods, potential common shares
(such as options) are not included in computing diluted EPS since the effect
would be antidilutive.
6
Note 6. Preferred Stock
During the first quarter of 2000, the Company completed a private placement of
120,000 shares of Series A convertible preferred stock ("Series A"), resulting
in net proceeds of $11,219,621. The Company also issued five-year warrants to
acquire 240,000 shares of common stock at $10.00 per share. Approximately
$1,275,000 of the net proceeds was allocated to the warrants based on their
relative fair value. The Series A has a dividend of 6% payable quarterly in cash
or in shares of common stock at the option of the Company. For the quarter ended
March 31, 2001 and the year ended December 31, 2000, the Series A dividend was
paid by issuing 17,337 and 40,065 shares of common stock, respectively.
Each share of the Series A is convertible into ten shares of common stock at
$10.00 per share. The Series A is convertible at the option of the holder or may
be redeemed at the option of the Company upon the occurrence of any of the
following events: (a) the common stock closes at or above $20.00 per share for
20 consecutive trading days, (b) a completion by the Company of a follow-on
public offering of at least $10 million at a per share price of at least $15.00,
(c) the acquisition of the Company by another entity by means of a transaction
that results in the transfer of 50% or more of the outstanding voting power of
the Company, (d) a sale of all or substantially all of the Company's assets, or
(e) at any time after February 28, 2004.
The holders of the Series A have a liquidation preference of $100 per share plus
any accrued but unpaid dividends then held, such amounts subject to certain
adjustments. The liquidation preference is payable upon a change in control of
the Company, thus the Series A is carried in the mezzanine section of the
balance sheet. The holders also have the right to vote together with the common
stock on an as-if-converted basis.
On the date of issuance of the Series A, the effective conversion price of the
Series A was at a discount to the price of the common stock into which the
Series A is convertible. In accordance with EITF 98-5, "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios", this discount totaled $3,003,590 and was recorded
as a preferred stock dividend during 2000.
Note 7. Common Stock
The 1998 common stock purchase agreement with Bayer contains a provision that,
upon the occurrence of a "change in control", as defined in the agreement, the
Company may be required to compensate Bayer, in cash or common shares, for any
difference between the per share price originally paid by Bayer and the amount
received by the Company's shareholders. In accordance with the implementation
requirements of recently issued and adopted Emerging Issues Task Force Abstract
No. 00-19, the Company has transferred to temporary equity an amount equal to
the "change in control" payment called for by the purchase agreement. Under the
new accounting guidelines, this temporary transfer is required only for those
reporting periods in which the price per share paid by Bayer is in excess of the
fair market value of a common share, as measured by reference to the NASDAQ
National Market.
Note 8. Development Income and Deferred Revenue
In 2000, the Company began recognizing development income in accordance with SEC
Staff Accounting Bulletin No. 101. Under SAB 101, payments received under
collaboration agreements are deferred and recognized as income over the period
of the respective agreements. During 2000, the Company received payments as part
of collaboration agreements with other entities. Revenue recognized related to
collaboration agreements for the quarters ended March 31, 2001 and 2000 were
$50,000 and $71,000, respectively.
Note 9. Significant Customers
During the quarters ended March 31, 2001 and 2000, the Company had sales to one
customer totaling $685,332 and $957,921 respectively. At March 31, 2001 and
December 31, 2000, outstanding receivables from that customer totaled 84% and
92%, respectively, of total receivables.
Note 10. Subsequent Event
In April 2001, Bayer Diagnostics, the Company's distributor, purchased at $12
per share 1,450,000 common shares of the Company for $17.4 million with terms
consistent with the 1998 stock purchase agreement. This investment increased
Bayer's ownership percentage in the Company from approximately 7% to 19.9%. The
Company and Bayer entered into an amended distribution agreement to replace the
previous distribution agreement between the parties.
Note 11. New Accounting Pronouncements
In June 1998, the FASB issued SFAS 133, Accounting for Derivative Instruments
and Hedging Activities and in July 1999 issued SFAS 137 which deferred the
effective date of SFAS 133, as it pertains to the Company, for fiscal years
beginning after July 1, 2000. This statement has not had a material impact on
the Company.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements. Our actual results might differ
materially from those projected in the forward-looking statements due to any
number of factors, including those set forth below under "--Factors That May
Affect Future Results". Additional information concerning factors that could
cause actual results to materially differ from those in the forward-looking
statements is contained in our other SEC filings, copies of which are available
upon request to us.
The following discussion should be read in connection with the unaudited
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
report. Unless the context indicates otherwise, all references to us include our
wholly-owned subsidiary, Cardiovascular Diagnostics, Inc., or CVDI.
CVDI develops, markets and manufactures a Thrombolytic Assessment System, or
TAS, consisting of a compact, portable analyzer and disposable test cards which
are inserted into the analyzer to perform a variety of hemostasis tests. In
August 1998, CVDI signed a global distribution agreement with Chiron
Diagnostics, which is now a part of the diagnostics division of the Bayer
Corporation ("Bayer"), to distribute CVDI's PT, aPTT, HMT, and LHMT test cards
in North America and certain South American, European and Asian countries. At
that time, we received an equity investment of $6 million. This distribution
agreement was replaced by an amended distribution agreement in April 2001, at
which time Bayer invested $17.4 million in exchange for 1,450,000 shares of our
common stock.
Given the consolidating hospital market and pricing pressures, our strategy has
evolved towards becoming more focused on the development of specialty tests for
drugs, some with narrow ranges between over- and under-dosage. We believe that
rapid diagnostic capabilities improve patient care and turnover, and that there
is a market trend to obtain diagnostic information faster in order to effect
therapy sooner. We also believe that these trends should allow us to obtain
higher pricing for these specialty tests. As a result, we have exhibited the
flexibility of the TAS platform and the potential to expand its menu of
specialty tests by signing collaboration agreements with pharmaceutical
companies to monitor the effects of new drugs that are in clinical trials. We
believe that these and other collaborations for specialty tests will also
further demand for analyzers and routine anticoagulant tests. We believe we are
well positioned in our development efforts to expand our menu of tests to
monitor developmental drugs where rapid therapeutic intervention is needed.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 VS MARCH 31, 2000
Net sales for the quarter ended March 31, 2001 were $802,000 compared to
$1,489,000 in the same period in 2000. Revenues decreased due to the sale of
more analyzers to Bayer in the first quarter of 2000 as Bayer prepared for
increased promotion of the product and also due to sales of specialty cards for
clinical trials during 2000 that did not occur in 2001.
Cost of goods sold for the quarter ended March 31, 2001 was $746,000 compared to
$908,000 in the comparable period in 2000. The decrease was due to lower
material costs as a result of lower volumes of card and analyzer sales compared
to the first quarter of 2000.
Total operating expenses for the quarter ended March 31, 2001 were $1,922,000
compared to $1,733,000 in the first quarter of 2000. General and administrative
expenses were higher due to increases in payroll costs because of planned
headcount additions and budgeted increases and also due to facility relocation
costs in 2001. Research and development expenses increased due to higher
clinical trial costs associated with on-going research and development projects.
Other income (expense) for the quarter ended March 31, 2001, which is composed
of interest income, interest expense and development income, was a net income of
$105,000 compared to a net income of $121,000 in the first quarter ended March
31, 2000. Interest income decreased due to lower cash and investment balances
during the first quarter of 2001 compared to 2000. We recognized development
income in the first quarter of 2001 related to our collaboration with Aventis
Pharmaceuticals entered into during 2000.
8
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2001, we had cash and cash equivalents of $4.1 million and working
capital of $4.7 million, as compared to $5.3 million and $8.4 million,
respectively, at December 31, 2000. During the quarter ended March 31, 2001, we
used cash in operating activities of $3.0 million. The use of cash was primarily
due to funding our net operating loss, increased receivable and inventory
balances and decreased payables. Investing activities mainly consisted of
purchasing fixed assets, consisting mainly of equipment and improvements for our
new facility, which was funded through maturing short-term investments.
In April 2001, Bayer Diagnostics, our distributor, invested $17.4 million and
received 1,450,000 shares of our common stock at $12 per share. This increased
Bayer's ownership percentage from approximately 7% to 19.9%. We plan to use the
proceeds to fund our operations and to fund development and marketing of new
specialty test cards.
We expect to incur additional operating losses during the remainder of 2001. Our
working capital requirements will depend on many factors, primarily the volume
of future orders of TAS products from our distributor, Bayer Diagnostics. In
addition, we expect to incur costs associated with clinical trials for
development of new test cards. We may acquire other products, technologies or
businesses that complement our existing and planned products, although we
currently have no understanding, commitment or agreement with respect to any
such acquisitions. Management believes that our existing capital resources and
cash flows from operations, including that from our distribution agreement with
Bayer Diagnostics, will be adequate to satisfy our planned capital and
operational requirements through 2001.
FACTORS THAT MAY AFFECT FUTURE RESULTS
A number of uncertainties exist that may affect our future operating results and
stock price, including: risks associated with development of new tests,
particularly specialty tests that rely on development, regulatory approval,
commercialization and market acceptance of collaborators' new drugs; market
acceptance of TAS; our continuing losses and the resulting potential need for
additional capital in the future; managed care and continuing market
consolidation, which may result in price pressure, particularly on routine
tests; and FDA regulations and other regulatory guidelines affecting us and/or
our collaborators. The market price of our common stock could be subject to
significant fluctuations in response to variations in our quarterly operating
results as well as other factors which may be unrelated to our performance. The
stock market in recent years has experienced extreme price and volume
fluctuations that often have been unrelated or disproportionate to the operating
performance of and announcements concerning public companies. Such broad
fluctuations may adversely affect the market price of our common stock.
Securities of issuers having relatively limited capitalization or securities
recently issued in an initial public offering are particularly susceptible to
volatility based on short-term trading strategies of certain investors.
Part II. OTHER INFORMATION
Item 2. Changes in Securities
None
Item 6. Exhibits and Reports on Form 8-K
None
9
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.
PHARMANETICS, INC.
Date: May 11, 2001 By: ____________________________
James McGowan
Chief Financial Officer
(Principal Financial Officer)
By: ____________________________
Paul Storey
Director of Finance/Treasurer
(Principal Accounting Officer)
10