U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
OR
¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-11303
SYNBIOTICS CORPORATION
(Exact name of registrant as specified in its charter)
| California | 95-3737816 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| 11011 Via Frontera San Diego, California |
92127 | |
| (Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (858) 451-3771
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 ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of August 16, 2004, there were 20,378,479 shares of our common stock outstanding.
INDEX
| Page | ||||||
| Part I |
Item 1. | |||||
| Condensed Consolidated Balance Sheet - June 30, 2004 and December 31, 2003 |
1 | |||||
| 2 | ||||||
| Condensed Consolidated Statement of Cash Flows - Six months ended June 30, 2004 and 2003 |
3 | |||||
| 4 | ||||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
9 | ||||
| Item 3. | 16 | |||||
| Item 4. | 16 | |||||
| Part II |
Item 1. | 17 | ||||
| Item 2. | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities |
17 | ||||
| Item 3. | 17 | |||||
| Item 4. | 17 | |||||
| Item 5. | 17 | |||||
| Item 6. | 17 | |||||
PART I – FINANCIAL INFORMATION
Condensed Consolidated Balance Sheet
| June 30, 2004 |
December 31, 2003 |
|||||||
| (unaudited) | (audited) | |||||||
| Assets |
||||||||
| Current assets: |
||||||||
| Cash and equivalents |
$ | 808,000 | $ | 1,045,000 | ||||
| Accounts receivable |
2,527,000 | 2,686,000 | ||||||
| Inventories |
5,931,000 | 5,266,000 | ||||||
| Other current assets |
1,442,000 | 878,000 | ||||||
| 10,708,000 | 9,875,000 | |||||||
| Property and equipment, net |
1,029,000 | 1,232,000 | ||||||
| Goodwill |
1,397,000 | 1,397,000 | ||||||
| Intangibles, net |
1,979,000 | 2,358,000 | ||||||
| Other assets |
354,000 | 479,000 | ||||||
| $ | 15,467,000 | $ | 15,341,000 | |||||
| Liabilities and Shareholders Equity: |
||||||||
| Current liabilities: |
||||||||
| Accounts payable and accrued expenses |
$ | 4,549,000 | $ | 4,005,000 | ||||
| Current portion of long-term debt |
4,549,000 | 4,804,000 | ||||||
| 9,098,000 | 8,809,000 | |||||||
| Other liabilities |
2,219,000 | 2,134,000 | ||||||
| Shareholders’ equity: |
||||||||
| Series C preferred stock, $1,000 liquidation preference per share (aggregating $2,800,000 at June 30, 2004 and December 31, 2003), 4,000 shares authorized, 2,800 shares issued and outstanding at June 30, 2004 and December 31, 2003 |
2,604,000 | 2,604,000 | ||||||
| Common stock, no par value, 70,000,000 shares authorized, 20,379,000 and 20,025,000 shares issued and outstanding at June 30, 2004 and December 31, 2003 |
46,473,000 | 46,316,000 | ||||||
| Common stock warrants |
1,035,000 | 1,035,000 | ||||||
| Accumulated other comprehensive loss |
(521,000 | ) | (411,000 | ) | ||||
| Accumulated deficit |
(45,441,000 | ) | (45,146,000 | ) | ||||
| Total shareholders’ equity |
4,150,000 | 4,398,000 | ||||||
| $ | 15,467,000 | $ | 15,341,000 | |||||
See accompanying notes to condensed consolidated financial statements.
-1-
Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) (unaudited)
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| Revenues: |
||||||||||||||||
| Net sales |
$ | 4,560,000 | $ | 4,774,000 | $ | 9,691,000 | $ | 10,922,000 | ||||||||
| Royalties |
168,000 | 97,000 | 215,000 | 99,000 | ||||||||||||
| 4,728,000 | 4,871,000 | 9,906,000 | 11,021,000 | |||||||||||||
| Operating expenses: |
||||||||||||||||
| Cost of sales |
2,006,000 | 2,340,000 | 4,454,000 | 5,303,000 | ||||||||||||
| Research and development |
316,000 | 291,000 | 739,000 | 556,000 | ||||||||||||
| Selling and marketing |
1,025,000 | 988,000 | 2,138,000 | 2,052,000 | ||||||||||||
| General and administrative |
1,727,000 | 897,000 | 3,304,000 | 1,715,000 | ||||||||||||
| Patent litigation settlement |
(850,000 | ) | (850,000 | ) | (515,000 | ) | ||||||||||
| 4,224,000 | 4,516,000 | 9,785,000 | 9,111,000 | |||||||||||||
| Income from operations |
504,000 | 355,000 | 121,000 | 1,910,000 | ||||||||||||
| Other income (expense): |
||||||||||||||||
| Interest, net |
(147,000 | ) | (139,000 | ) | (257,000 | ) | (274,000 | ) | ||||||||
| Income (loss) before income taxes |
357,000 | 216,000 | (136,000 | ) | 1,636,000 | |||||||||||
| Provision for (benefit from) income taxes |
(8,000 | ) | 2,000 | 13,000 | ||||||||||||
| Net income (loss) |
357,000 | 224,000 | (138,000 | ) | 1,623,000 | |||||||||||
| Translation adjustment |
(23,000 | ) | 191,000 | (110,000 | ) | 389,000 | ||||||||||
| Comprehensive income (loss) |
$ | 334,000 | $ | 415,000 | $ | (248,000 | ) | $ | 2,012,000 | |||||||
| Net income (loss) available to common shareholders |
$ | 304,000 | $ | 171,000 | $ | (243,000 | ) | $ | 1,518,000 | |||||||
| Basic net income (loss) per share |
$ | 0.01 | $ | 0.01 | $ | (0.01 | ) | $ | 0.08 | |||||||
| Diluted net income (loss) per share |
$ | 0.01 | $ | 0.01 | $ | (0.01 | ) | $ | 0.04 | |||||||
See accompanying notes to condensed consolidated financial statements.
-2-
Condensed Consolidated Statement of Cash Flows (unaudited)
| Six Months Ended June 30, |
||||||||
| 2004 |
2003 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net income (loss) |
$ | (138,000 | ) | $ | 1,623,000 | |||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
576,000 | 546,000 | ||||||
| Receivable from patent litigation settlement |
(425,000 | ) | (265,000 | ) | ||||
| Changes in assets and liabilities: |
||||||||
| Accounts receivable |
102,000 | 247,000 | ||||||
| Inventories |
(705,000 | ) | 571,000 | |||||
| Other assets |
(131,000 | ) | 10,000 | |||||
| Accounts payable and accrued expenses |
645,000 | (1,782,000 | ) | |||||
| Other liabilities |
87,000 | 80,000 | ||||||
| Net cash provided by operating activities |
11,000 | 1,030,000 | ||||||
| Cash flows from investing activities: |
||||||||
| Acquisition of property and equipment |
(83,000 | ) | (115,000 | ) | ||||
| Receipts from notes receivable |
116,000 | |||||||
| Net cash provided by (used for) investing activities |
33,000 | (115,000 | ) | |||||
| Cash flows from financing activities: |
||||||||
| Payments of long-term debt |
(256,000 | ) | (786,000 | ) | ||||
| Net cash (used for) provided by financing activities |
(256,000 | ) | (786,000 | ) | ||||
| Net (decrease) increase in cash and equivalents |
(212,000 | ) | 129,000 | |||||
| Effect of exchange rates on cash |
(25,000 | ) | 37,000 | |||||
| Cash and equivalents – beginning of period |
1,045,000 | 869,000 | ||||||
| Cash and equivalents – end of period |
$ | 808,000 | $ | 1,035,000 | ||||
See accompanying notes to condensed consolidated financial statements.
-3-
Notes to Condensed Consolidated Financial Statements (unaudited)
Note 1 - Interim Financial Statements:
The accompanying condensed consolidated balance sheet as of June 30, 2004 and the condensed consolidated statements of operations and comprehensive income (loss) and of cash flows for the three and six months ended June 30, 2004 and 2003 have been prepared by Synbiotics Corporation (the “Company”) and have not been audited. The condensed consolidated financial statements of the Company include the accounts of its wholly-owned subsidiary Synbiotics Europe SAS (“SBIO-E”). All significant intercompany transactions and accounts have been eliminated in consolidation. These financial statements, in the opinion of management, include all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial position, results of operations and cash flows for all periods presented. The financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed for the year ended December 31, 2003. Interim operating results are not necessarily indicative of operating results for the full year.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Note 2 – Going Concern:
The accompanying consolidated condensed financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Although the Company was profitable in 2003, during the six months ended June 30, 2004, the Company incurred a net loss of $138,000, and had an accumulated deficit of $45,441,000 as of June 30, 2004.
As of June 30, 2004, the Company had an outstanding principal balance under its bank debt totaling $4,549,000 (Note 5), all of which was due and payable in January 2004. The bank had informally reduced the monthly principal payments to $30,000 for the payments due February 1, 2004, and March 1, 2004. On March 29, 2004, the Company entered into a forbearance agreement with the bank whereby the bank agreed not to exercise any of its rights under the credit agreement through May 5, 2004, and agreed to formally reduce the monthly principal payments to $30,000 for the payments due April 1, 2004, and May 1, 2004; the forbearance agreement has now expired. The Company believes it will be able to restructure or refinance the bank debt. However, no assurance can be given that the Company will be successful in this effort to restructure or refinance the bank debt. The Company’s resources do not enable it to repay the note in its entirety immediately.
These factors raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time. The consolidated condensed financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
-4-
SYNBIOTICS CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited)
Note 3 - Inventories:
Inventories consist of the following:
| June 30, 2004 |
December 31, 2003 | |||||
| (unaudited) | (audited) | |||||
| Raw materials |
$ | 3,422,000 | $ | 2,532,000 | ||
| Work in process |
416,000 | 477,000 | ||||
| Finished goods |
2,093,000 | 2,257,000 | ||||
| $ | 5,931,000 | $ | 5,266,000 | |||
Note 4 – Goodwill and Other Intangible Assets:
The Company has allocated all of its goodwill to its only reporting unit, which is also its only reportable segment (Note 10). There were no changes in the carrying amount of goodwill from December 31, 2002 to June 30, 2004.
Other intangible assets were as follows:
| June 30, 2004 |
December 31, 2003 | |||||||||||
| Gross Carrying Value |
Accumulated Amortization |
Gross Carrying Value |
Accumulated Amortization | |||||||||
| Patents |
$ | 4,972,000 | $ | 3,136,000 | $ | 5,108,000 | $ | 2,922,000 | ||||
| Licenses |
618,000 | 475,000 | 618,000 | 446,000 | ||||||||