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 September 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 November 12, 2004, there were 20,823,394 shares of our common stock outstanding.
INDEX
| Page | ||||||
| Part I |
Item 1. |
|||||
| Condensed Consolidated Balance Sheet - September 30, 2004 and December 31, 2003 |
1 | |||||
| 2 | ||||||
| Condensed Consolidated Statement of Cash Flows - Nine months ended September 30, 2004 and 2003 |
3 | |||||
| 4 | ||||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
10 | ||||
| Item 3. |
18 | |||||
| Item 4. |
18 | |||||
| Part II |
Item 1. |
18 | ||||
| Item 2. |
18 | |||||
| Item 3. |
19 | |||||
| Item 4. |
19 | |||||
| Item 5. |
19 | |||||
| Item 6. |
19 | |||||
PART I – FINANCIAL INFORMATION
Synbiotics Corporation
Condensed Consolidated Balance Sheet
| September 30, 2004 |
December 31, 2003 |
|||||||
| (unaudited) | (audited) | |||||||
| Assets |
||||||||
| Current assets: |
||||||||
| Cash and equivalents |
$ | 846,000 | $ | 1,045,000 | ||||
| Accounts receivable |
2,090,000 | 2,686,000 | ||||||
| Inventories |
6,522,000 | 5,266,000 | ||||||
| Other current assets |
1,523,000 | 878,000 | ||||||
| 10,981,000 | 9,875,000 | |||||||
| Property and equipment, net |
1,027,000 | 1,232,000 | ||||||
| Goodwill |
1,397,000 | 1,397,000 | ||||||
| Intangibles, net |
1,877,000 | 2,358,000 | ||||||
| Deferred debt issuance costs |
74,000 | |||||||
| Other assets |
290,000 | 479,000 | ||||||
| $ | 15,646,000 | $ | 15,341,000 | |||||
| Liabilities and Shareholders Equity: |
||||||||
| Current liabilities: |
||||||||
| Accounts payable and accrued expenses |
$ | 4,655,000 | $ | 4,005,000 | ||||
| Current portion of long-term debt (Note 3) |
519,000 | 4,804,000 | ||||||
| Other current liabilities |
932,000 | |||||||
| 6,106,000 | 8,809,000 | |||||||
| Long-term debt (Note 3) |
3,932,000 | |||||||
| Other liabilities |
1,332,000 | 2,134,000 | ||||||
| 5,264,000 | 2,134,000 | |||||||
| Shareholders’ equity: |
||||||||
| Series C preferred stock, $1,000 liquidation preference per share (aggregating $3,050,000 and $2,800,000 at September 30, 2004 and December 31, 2003), 4,000 shares authorized, 3,050 and 2,800 shares issued and outstanding at September 30, 2004 and December 31, 2003 |
2,853,000 | 2,604,000 | ||||||
| Common stock, no par value, 70,000,000 shares authorized, 20,823,000 and 20,025,000 shares issued and outstanding at September 30, 2004 and December 31, 2003 |
46,578,000 | 46,316,000 | ||||||
| Common stock warrants |
1,110,000 | 1,035,000 | ||||||
| Accumulated other comprehensive loss |
(467,000 | ) | (411,000 | ) | ||||
| Accumulated deficit |
(45,798,000 | ) | (45,146,000 | ) | ||||
| Total shareholders’ equity |
4,276,000 | 4,398,000 | ||||||
| $ | 15,646,000 | $ | 15,341,000 | |||||
See accompanying notes to condensed consolidated financial statements.
-1-
Condensed Consolidated Statement of Operations and Comprehensive (Loss) Income (unaudited)
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| Revenues: |
||||||||||||||||
| Net sales |
$ | 4,208,000 | $ | 4,056,000 | $ | 13,899,000 | $ | 14,978,000 | ||||||||
| Royalties |
125,000 | 113,000 | 340,000 | 212,000 | ||||||||||||
| 4,333,000 | 4,169,000 | 14,239,000 | 15,190,000 | |||||||||||||
| Operating expenses: |
||||||||||||||||
| Cost of sales |
2,051,000 | 1,994,000 | 6,505,000 | 7,297,000 | ||||||||||||
| Research and development |
354,000 | 321,000 | 1,093,000 | 877,000 | ||||||||||||
| Selling and marketing |
860,000 | 982,000 | 2,997,000 | 3,034,000 | ||||||||||||
| General and administrative |
1,191,000 | 928,000 | 4,496,000 | 2,643,000 | ||||||||||||
| Patent litigation settlement |
(850,000 | ) | (515,000 | ) | ||||||||||||
| 4,456,000 | 4,225,000 | 14,241,000 | 13,336,000 | |||||||||||||
| (Loss) income from operations |
(123,000 | ) | (56,000 | ) | (2,000 | ) | 1,854,000 | |||||||||
| Other income (expense): Interest, net |
(98,000 | ) | (115,000 | ) | (354,000 | ) | (389,000 | ) | ||||||||
| (Loss) income before income taxes |
(221,000 | ) | (171,000 | ) | (356,000 | ) | 1,465,000 | |||||||||
| Provision for (benefit from) income taxes |
31,000 | (7,000 | ) | 34,000 | 6,000 | |||||||||||
| Net (loss) income |
(252,000 | ) | (164,000 | ) | (390,000 | ) | 1,459,000 | |||||||||
| Translation adjustment |
54,000 | 35,000 | (56,000 | ) | 424,000 | |||||||||||
| Comprehensive (loss) income |
$ | (198,000 | ) | $ | (129,000 | ) | $ | (446,000 | ) | $ | 1,883,000 | |||||
| Net (loss) income available to common shareholders |
$ | (309,000 | ) | $ | (217,000 | ) | $ | (552,000 | ) | $ | 1,301,000 | |||||
| Basic net (loss) income per share |
$ | (0.02 | ) | $ | (0.01 | ) | $ | (0.03 | ) | $ | 0.07 | |||||
| Diluted net (loss) income per share |
$ | (0.02 | ) | $ | (0.01 | ) | $ | (0.03 | ) | $ | 0.03 | |||||
See accompanying notes to condensed consolidated financial statements.
-2-
Condensed Consolidated Statement of Cash Flows (unaudited)
| Nine Months Ended September 30, |
||||||||
| 2004 |
2003 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net (loss) income |
$ | (390,000 | ) | $ | 1,459,000 | |||
| Adjustments to reconcile net (loss) income to net cash (used for) provided by operating activities: |
||||||||
| Depreciation and amortization |
864,000 | 829,000 | ||||||
| Receivable from patent litigation settlement |
(425,000 | ) | (265,000 | ) | ||||
| Changes in assets and liabilities: |
||||||||
| Accounts receivable |
557,000 | 227,000 | ||||||
| Inventories |
(1,271,000 | ) | 488,000 | |||||
| Other assets |
(229,000 | ) | (108,000 | ) | ||||
| Accounts payable and accrued expenses |
700,000 | (1,613,000 | ) | |||||
| Other liabilities |
132,000 | 121,000 | ||||||
| Net cash (used for) provided by operating activities |
(62,000 | ) | 1,138,000 | |||||
| Cash flows from investing activities: |
||||||||
| Acquisition of property and equipment |
(196,000 | ) | (190,000 | ) | ||||
| Receipts from notes receivable |
174,000 | |||||||
| Net cash (used for) investing activities |
(22,000 | ) | (190,000 | ) | ||||
| Cash flows from financing activities: |
||||||||
| Payments of long-term debt |
(353,000 | ) | (1,021,000 | ) | ||||
| Proceeds from issuance of preferred stock |
250,000 | |||||||
| Net cash (used for) financing activities |
(103,000 | ) | (1,021,000 | ) | ||||
| Net (decrease) in cash and equivalents |
(187,000 | ) | (73,000 | ) | ||||
| Effect of exchange rates on cash |
(12,000 | ) | 49,000 | |||||
| Cash and equivalents – beginning of period |
1,045,000 | 869,000 | ||||||
| Cash and equivalents – end of period |
$ | 846,000 | $ | 845,000 | ||||
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 September 30, 2004 and the condensed consolidated statements of operations and comprehensive income (loss) and of cash flows for the three and nine months ended September 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 nine months ended September 30, 2004, the Company incurred a net loss of $390,000, and had an accumulated deficit of $45,798,000 as of September 30, 2004.
The Company has a $1,000,000 contractual obligation due in July 2005, and another $1,500,000 contractual obligation, to the same party, due in July 2006. These obligations are recorded at their accreted value in the accompanying condensed consolidated balance sheet under other current liabilities and other liabilities. The Company does not believe that its cash position will be sufficient to fund its operations and service its bank debt for the next twelve months if it also pays the $1,000,000 contractual obligation when it becomes due in July 2005. The contractual obligation is unsecured. In the event that the Company does not make the payment when it comes due, the $1,500,000 due in July 2006 becomes immediately due, and the entire $2,500,000 will begin bearing interest at 10.5%. The Company plans to renegotiate this unsecured debt; however, there can be no assurance that any such renegotiation will be successful.
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.
Note 3 – Debt Restructuring:
On September 23, 2004, the Company entered into an amendment (the “Credit Agreement Amendment”) of its credit agreement with Comerica Bank (“Comerica”), effective as of September 1, 2004. The outstanding principal balance of the Company’s bank debt immediately prior to the Credit Agreement Amendment was $4,472,000. Under the Credit Agreement Amendment, the Company issued an amended promissory note to Comerica in the amount of $599,000 (the “Comerica Note”), and Comerica sold the remaining principal of $3,873,000 to Remington Capital, LLC (“Remington”). The Company simultaneously issued an amended promissory note to Remington in the amount of $3,873,000 (the “Remington Note”).