PHARMANETICS INC - 10-Q Quarterly Report

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 September 30, 2004.

¨	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 Incorporation or organization)		(IRS Employer Identification Number)

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

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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES ¨ NO x

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 November 8, 2004
Common Stock, no par value		10,490,218

PHARMANETICS, INC.

INDEX TO FORM 10-Q


			PAGE
PART I. FINANCIAL INFORMATION

	Item 1.	Financial Statements

	Consolidated Balance Sheets as of September 30, 2004 (unaudited) and December 31, 2003		3

	Consolidated Statements of Operations for the Three Months and Nine Months ended September 30, 2004 and 2003 (unaudited)		4

	Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2004 and 2003 (unaudited)		5

	Notes to Unaudited Consolidated Financial Statements		6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	17

	Item 4.	Controls and Procedures	17

PART II. OTHER INFORMATION

	Item 1.	Legal Proceedings	18
	Item 6.	Exhibits	18

SIGNATURES			19

PHARMANETICS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


	September 30, 2004			December 31, 2003
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	3,889		$	8,463
Accounts receivable from related party		1			498
Other receivables, net of allowance for doubtful accounts of $21 and $2, respectively		1			54
Inventories		—			567
Other current assets		287			623

Total current assets		4,178			10,205

Property and equipment (available for sale)		4,047			4,656
Patent and intellectual property (available for sale)		384			403
Other noncurrent assets		4			3

Total assets	$	8,613		$	15,267

Liabilities, Convertible Redeemable Preferred Stock and Shareholders’ Equity
Current liabilities:
Accounts payable	$	64		$	800
Accrued expenses		253			538
Deferred revenue, current portion		1,042			1,226
Current portion of long term debt and capital lease obligations		22			514

Total current liabilities		1,381			3,078

Noncurrent liabilities:
Deferred revenue, less current portion		1,216			2,065
Long-term debt and capital lease obligations, less current portion		10			617

Total noncurrent liabilities		1,226			2,682

Total liabilities		2,607			5,760

Series A convertible redeemable preferred stock, no par value; authorized 120,000 shares; 64,500 and 65,5000 shares issued and outstanding at September 30, 2004 and December 31, 2003, respectively (aggregate liquidation value at September 30, 2004 of $6,450,000)		5,360			5,443

Series B convertible redeemable preferred stock, no par value; authorized 130,000 shares; 107,954 and 101,354 shares issued and outstanding at September 30, 2004 and December 31, 2003, respectively (aggregate liquidation value at September 30, 2004 of $10,795,400)		7,527			7,408

Shareholders’ equity:
Common stock, no par value; authorized 40,000,000 shares; 10,490,218 and 10,021,556 issued and outstanding at September 30, 2004 and December 31, 2003, respectively		75,879			75,511
Accumulated deficit		(82,760	)		(78,855	)

Total shareholders’ equity		(6,881	)		(3,344	)

Total liabilities, convertible redeemable preferred stock and shareholders’ equity	$	8,613		$	15,267

The accompanying notes are an integral part of the unaudited consolidated financial statements.

PHARMANETICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except share and per share data)


	Three Months Ended						Nine Months Ended
	September 30 2004			September 30 2003			September 30 2004			September 30 2003
Revenues
Net product sales to related party	$	—		$	1,342		$	1,688		$	4,114
Net product sales to third parties		—			38			180			62
Grant/royalty income		—			—			29			20
Development income		261			261			782			782

Total revenues		261			1,641			2,679			4,978

Operating expenses:
Cost of goods sold		—			956			1,487			2,608
General and administrative		630			883			4,053			2,888
Sales and marketing		—			992			396			2,630
Research and development		—			828			374			3,322

Total operating expenses		630			3,659			6,310			11,448

Operating loss		(369	)		(2,018	)		(3,631	)		(6,470	)

Other income (expense):
Interest income		12			25			40			62
Interest expense		(1	)		(31	)		(27	)		(102	)
Other income (expense)		(5	)		37			100			52

Total other income (expense)		6			31			113			12

Net and comprehensive loss		(363	)		(1,987	)		(3,518	)		(6,458	)

Dividends on preferred stock		110			284			386			652
Amortization of beneficial conversion feature on Series B convertible redeemable preferred stock		—			—			—			3,459

Net loss applicable to common shareholders	$	(473	)	$	(2,271	)	$	(3,904	)	$	(10,569	)

Basic and diluted net loss per common share	$	(0.05	)	$	(0.23	)	$	(0.39	)	$	(1.08	)

Average weighted common shares outstanding		10,249,665			9,815,957			10,120,195			9,766,308

The accompanying notes are an integral part of the unaudited consolidated financial statements.

PHARMANETICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)


	Nine Months Ended
	September 30, 2004			September 30, 2003
Cash flows from operating activities:
Net loss	$	(3,518	)	$	(6,458	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		615			1,338
Amortization of intangible and other assets		79			96
Loss (gain) on trading securities		92			(19	)
Write-down of inventory to net realizable value		378			267
Change in operating assets and liabilities:
Accounts receivable		550			(81	)
Inventories		189			(882	)
Other assets		188			35
Accounts payable and accrued expenses		(1,020	)		(639	)
Deferred revenue		(1,033	)		(612	)

Net cash used in operating activities		(3,479	)		(6,955	)

Cash flows from investing activities:
Payments for purchase of property and equipment		(10	)		(314	)
Disposal of property and equipment		5			5
Costs incurred to obtain patents and intangibles		(6	)		(85	)
Proceeds from sale of investment		—			30

Net cash used in investing activities		(11	)		(364	)

Cash flows from financing activities:
Principal payments on long-term debt and capital lease obligations		(1,101	)		(322	)
Proceeds from issuance of Series B convertible redeemable preferred stock, Net of offering costs		—			8,655
Proceeds from common stock options exercised		17			37

Net cash (used in) provided by financing activities		(1,084	)		8,370


Net (decrease) increase in cash and cash equivalents		(4,574	)		1,051
Cash and cash equivalents at beginning of period		8,463			9,146

Cash and cash equivalents at end of period	$	3,889		$	10,197

Supplemental disclosure of noncash investing and financing activities:

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