MINRAD Reports Results for Third Quarter 2008
Net loss for the third quarter 2008 was $10.8 million, or a $0.22 loss perbasic and diluted share compared to a net loss of $5.3 million or $0.11 lossper basic and diluted share in the third quarter of 2007. The Company had ayear-to-date net loss through September 30, 2008 of $25.6 million, or $0.52per basic and diluted share, compared to a net loss of $12.0 million or $0.25per basic and diluted share for the prior year same period.
Dave DiGiacinto, President and Chief Operating Officer said, "The demandfor our core anesthetic business continued to grow in the third quarter of2008, especially in international markets. This was evidenced by ourinternational shipments, which were up 271% over the third quarter, 2007."
"Year-to-date, 2008 shipments were up 247% over third quarter 2007.Notably, we had $11.4 million of international orders for shipment in thethird quarter of 2008 but were only able to fulfill $8.9 million of thoseorders. Our inability to secure additional raw materials to producesevoflurane left us with insufficient finished goods to ship $2.5 million ofthese orders. Additionally, while we did not ship anesthetic products to ourU.S. distributor in the third quarter of 2008, U.S. end user sales of ouranesthetic products continued without interruption from RxElite's inventory."
DiGiacinto continued, "While we have demonstrated our ability to growrevenue, we have not yet been able to generate positive operating profit andoperating cash flow. Our lack of liquidity continues to drain our financialstrength and flexibility to operate our business and service the needs of ourcustomers. We adopted a near term growth strategy to support our coreinternational anesthetic business. All program and discretionary spending hasbeen directed to growing our international presence in those markets in whichwe have been able to attain registrations and set up distributors who are ableto reach our end-user market. We are also determined to take the necessaryactions to continue to grow our U.S. anesthetic presence. Management beganthe process of evaluating alternative strategies in May 2008 when we retainedthe services of Barclays Capital Inc. as our strategic advisor. It is alsoimportant to note we retained the investment banking team of Barclays CapitalInc. to facilitate our $40 million debt financing in 2008."
"We will be looking at the entire organization to ensure alignment ofprocesses, people, programs and spending with the aforementioned near-termgrowth strategy. These changes will be announced and implemented in thefourth quarter of 2008. However, I want to emphasize that the above actionswill not solve our current and serious lack of liquidity. Our most pressingbusiness priority is to secure funds to operate our business. We have beenmanaging our cash flow diligently since our $40 million financing in May,2008. Given where MINRAD is in its stage of growth, it will be extremelydifficult to execute our business plan beyond 2008 without access to newfinancing from external sources, or the introduction and completion of astrategic alternative," said DiGiacinto.
The Company has generated substantial operating losses since inception.Additionally, the Company has been unable to generate positive cash flow fromoperating activities. We cannot provide assurances that it shall be able todo so in the future. The Company has been seeking and is continuing toexplore alternatives to secure funds from external sources to continueoperations, but cannot provide assurances that such funds will be available.Without the infusion of funds from external sources or introduction andcompletion of a strategic alternative, the Company will not be able tocontinue operations beyond the end of calendar year 2008.
Barclays Capital Inc.
The Board of Directors of MINRAD retained the services of Lehman BrothersInc. (Lehman) as of May 28, 2008 for the purpose of providing financialadvisory services to the Company with respect to exploring strategicalternatives including a possible sale of the business. On September 22,2008, Barclays Capital Inc. acquired the North American investment bankingfranchise of Lehman and as part of such transaction Barclays Capital Inc.assumed Lehman's role as financial advisor. MINRAD provides no assurance thatthe conduct of this process with Barclays Capital will result in atransaction. No decision has been made to enter into any transaction at thistime. The Company does not currently intend to disclose developments withrespect to exploration of strategic alternatives unless and until its Board ofDirectors has approved a specific transaction.
Shipments for the third quarter, 2008 increased by $6.7 million, a 247%increase versus the third quarter, 2007. Shipments for the nine months endedSeptember 30, 2008 grew $15.4 million or 155% versus the comparable period in2007. Revenue growth for the third quarter, 2008 was $4.4 million, andincludes a $2.3 million revenue reduction for product that was purchased fromour U.S. distributor, consumed into the manufacture of new product andsubsequently shipped to International customers.
The following table contains geographic revenue for the third quarter andthe nine-month period ended September 30, 2008 and 2007:
Revenue increased significantly in the third quarter, 2008 versus the sameperiod in 2007 in all geographies except the United States. New registrationsas well as tenders won in key geographies drove the increases in Internationalrevenue. There were no sales to our U.S. distributor in the third quarter,2008 and U.S. revenue was further reduced by the $2.3 million purchase asdiscussed previously.
For the nine-month period ended September 30, 2008, growth was strong andrepresents positive sequential growth in all international regions.
The following table summarizes the Company's revenue by product line forthe third quarter and the nine-month period ended September 30, 2008 and 2007:
The 163% growth in third quarter, 2008 revenue versus the same period in2007 was driven by increases in sevoflurane revenue and, to a lesser extent,increases in isoflurane. Sevoflurane revenue included a $2.3 millionreduction for product that was purchased from our U.S. distributor, asdiscussed previously. Growth in both product lines was made possible by thecompletion of the dedicated sevoflurane production line in December, 2007.Prior to that date, productive capacity was limited to one line shared betweenthe sevoflurane and isoflurane product lines. Year to date revenue growth of132% was also due to significant increases in sevoflurane revenue, net of thepurchase discussed above, which was driven by the plant expansion. Revenue wasespecially strong in the first quarter of 2008 immediately following thestart-up of the new sevoflurane line.
Gross Profit (Loss):
Gross profit (loss) was essentially flat in the third quarter, 2008 versusthird quarter, 2007, despite revenue growth of 163%. Gross margin was a lossof $0.6 million in both years, resulting in a gross margin rate of negative 8%in 2008 versus negative 22% in the same period last year. Contributingfactors to the negative gross margin in third quarter, 2008 were the returnand reprocessing of the distributor material, unfavorable customer and productmix, and increased inventory write-downs versus the prior year. Included inthe inventory write-downs in third quarter, 2008 were increases in the ImageGuidance inventory reserve of $0.5 million and revaluations of anesthesiainventory of $0.9 million.
For the nine months ended September 30, 2008, gross profit grew $1.8million versus the same period last year. While the gross profit rateimproved to 13% compared to last year's rate of 11%, the expected improvementsfrom the new sevoflurane line have not been achieved in the first nine monthsof 2008 due to start-up shakedown periods, other production interruptions andthe inability to obtain raw materials on a consistent basis.
Operating expenses for the quarter ended September 30, 2008 increased by$4.3 million, or 94%, versus third quarter, 2007. Included in third quarter,2008 operating expense is a $4.5 million non-cash charge for potentiallyuncollectible accounts receivable due from the Company's U.S. distributor.Excluding the non-cash charge, operating expenses declined from the sameperiod in 2007 by $0.2 million, or 4%. Sales and Marketing expenses in thethird quarter, 2008 declined from 2007 by $0.4 million or 20%, driven by lowercompensation costs. Research and development costs were down $0.9 million or54%, also due to $0.3 million lower compensation costs, with the remainingreductions inout-of-pocket expenditures. The completion of several projects, reductions inspending in non-core areas and transfer of resources to address otherpriorities within the Company drove decreased spending. Finance andadministrative costs increased $1.1 million or 126% in third quarter, 2008versus the same period in 2007 due to $0.3 million of prepaid loan feeamortization, higher insurance costs due to coverage increases, increasedcompensation due to management structure changes, and higher legal andaccounting fees.
For the first nine months of 2008, operating expenses increased $8.1million, or 61%, versus the comparable period of 2007. The increase includes$5.8 million due to the non-cash reserve for potentially uncollectiblereceivables, as previously discussed. Sales and marketing expense growth of$1.2 million or 20% was driven by a $1.5 million expenditure for the WorldCongress of Anesthesia meeting in the first quarter, 2008, a once every fouryear event, partially offset by lower compensation expense. Finance andadministration expenses grew $2.4 million in 2008 versus the same period lastyear due to $0.5 million of prepaid loan fee amortization, higher compensationcosts and increased insurance, legal and accounting fees as discussed above.Lower compensation and out-of-pocket expenditures drove reduced research anddevelopment costs of $1.3 million in the first nine months of 2008 versus2007, as discussed previously.
Loss from operations was $9.5 million for the third quarter, 2008 versus$5.2 million in 2007 for the same period, with the increase driven largely bythe provision for potentially uncollectible receivables. The loss fromoperations for the nine-month period ended September 30, 2008 was $18.4million versus $12.1 million loss in the comparable period last year.
Non-operating expense was $1.3 million for the third quarter, 2008compared to $0.1 expense in the same period last year. The non-operatingexpense includes $0.9 million interest expense, of which $0.8 million wasinterest on the senior secured convertible notes entered into on May 5, 2008.The senior convertible notes agreement contains a registration rightsprovision that if the registration of additional shares is not declaredeffective by the SEC before August 20, 2008, a penalty will be assessed.Non-operating expense in the third quarter, 2008 also includes a $0.2 millionpenalty, as the registration was not effective until September 3, 2008 due toa full review by the Securities and Exchange Commission. Also included in thenet non-operating expense for the quarter is a $0.5 million reclassificationof unrealized loss on the valuation of securities previously reported withincomprehensive income, to a realized loss due to a determination that it is nowan other than temporary decline in value.
Non-operating expense for the nine-month period ending September 30, 2008was $7.2 million compared to minimal non-operating income or loss in thecomparable 2007 period. Of the expense increase of $7.2 million, a loss onearly extinguishment of debt accounted for $4.6 million. The loss on earlyextinguishment of debt was due to the retirement of a Laminar Direct CapitalL.P. term loan, which was entered into in February, 2008 and was extinguishedon May 9, 2008, prior to maturity. Included in this charge is a 5% redemptionfee of $0.8 million, a write-off of the unamortized balance of warrant expenseof $3.2 million and unamortized loan fees of $0.6 million. In addition to theearly extinguishment charge, non-operating expense includes interest expenseof $2.6 million, of which $0.9 million is interest paid on the Laminar debt,$1.3 million paid on the senior secured notes, with the balance interest paidon the Commonwealth of Pennsylvania development loans, a demand facility withFirst Niagara Bank extinguished early in 2008, customer discounts and interestpaid to vendors.
About the Company
The Company is an interventional pain management company with three focusareas: (1) anesthesia and analgesia, (2) real-time image guidance, and (3)conscious sedation. The Company's products are sold throughout the world. Theanesthesia and analgesia business currently manufactures and sells genericinhalation anesthetics that are used for human and veterinary surgicalprocedures. The Company manufactures patented real-time image guidancetechnologies that facilitate minimally invasive surgery. The SabreSource(TM)system and the accompanying Light Sabre(TM) disposable products have broadapplications in orthopedics, neurosurgery, interventional radiology andanesthesia. They enable improved accuracy and reduced radiation ininterventional procedures and support the transfer of these procedures to theoutpatient setting. The Company is in the process of developing a drug/drugdelivery system for the use of halogenated ethers as inhalation analgesics forconscious sedation.
The information contained in this news release, other than historicalinformation, consists of forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995. These statements may involverisks and uncertainties that could cause actual results to differ materiallyfrom those described in such statements. Factors that may cause actualresults to differ materially from those expressed or implied by itsforward-looking statements include, but are not limited to, MINRADInternational's limited operating history and business development associatedwith being a growth stage company; its dependence on key personnel; its needto attract and retain technical and managerial personnel; its ability toexecute its business strategy; the intense competition it faces; its abilityto protect its intellectual property and proprietary technologies; itsexposure to product liability claims resulting from the use of its products;general economic and capital market conditions; financial conditions of itscustomers and their perception of its financial condition relative to that ofits competitors; as well as those risks described under the heading "RiskFactors" of MINRAD International's Form 10-KSB/A, filed with the Securitiesand Exchange Commission on April 21, 2008. Although MINRAD International, Inc.believes that the expectations reflected in such forward-looking statementsare reasonable, it can give no assurance that such expectations will prove tohave been correct.($ Millions) Three months ended September 30 ------------------------------------------- % Region 2008 2007 Change Change ------- ------ ------ ------ ------ United States (1.8) 1.3 (3.1) -240% Europe 3.4 0.1 3.3 3579% Western Hemisphere 3.9 0.9 3.0 326% Pacific Rim 1.6 0.4 1.2 295% ------ ------ ------ Total revenue 7.1 2.7 4.4 163% ====== ====== ====== ($ Millions) Nine months ended September 30 ------------------------------------------- % Region 2008 2007 Change Change ------- ------ ------ ------ ------ United States 6.5 2.9 3.6 125% Europe 5.5 0.6 4.9 802% Western Hemisphere 6.3 5.2 1.1 21% Pacific Rim 4.7 1.2 3.5 296% ------ ------ ------ Total revenue 23.0 9.9 13.1 132% ====== ====== ======
SOURCE MINRAD International, Inc.
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