MINRAD International, Inc. Reports Results for Third Quarter 2008 Summary, Revenue up 163% Compared to Third Quarter Revenue in 2007; Continuing Operations Subsequent to 2008 Dependent Upon Ability to Secure External Funding or Other Strategic Alternative
Published: Nov 14, 2008
ORCHARD PARK, N.Y., Nov. 14 /PRNewswire-FirstCall/ -- MINRAD International, Inc. , an interventional pain management company, today reported revenue of $7.1 million for the third quarter of 2008, up 163% compared to $2.7 million of revenue in the third quarter of 2007. Year-to-date revenue for 2008 increased by 132% compared to 2007.
Net loss for the third quarter 2008 was $10.8 million, or a $0.22 loss per basic and diluted share compared to a net loss of $5.3 million or $0.11 loss per basic and diluted share in the third quarter of 2007. The Company had a year-to-date net loss through September 30, 2008 of $25.6 million, or $0.52 per basic and diluted share, compared to a net loss of $12.0 million or $0.25 per basic and diluted share for the prior year same period.
Dave DiGiacinto, President and Chief Operating Officer said, "The demand for our core anesthetic business continued to grow in the third quarter of 2008, especially in international markets. This was evidenced by our international 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 the third quarter of 2008 but were only able to fulfill $8.9 million of those orders. Our inability to secure additional raw materials to produce sevoflurane left us with insufficient finished goods to ship $2.5 million of these orders. Additionally, while we did not ship anesthetic products to our U.S. distributor in the third quarter of 2008, U.S. end user sales of our anesthetic products continued without interruption from RxElite's inventory."
DiGiacinto continued, "While we have demonstrated our ability to grow revenue, we have not yet been able to generate positive operating profit and operating cash flow. Our lack of liquidity continues to drain our financial strength and flexibility to operate our business and service the needs of our customers. We adopted a near term growth strategy to support our core international anesthetic business. All program and discretionary spending has been directed to growing our international presence in those markets in which we have been able to attain registrations and set up distributors who are able to reach our end-user market. We are also determined to take the necessary actions to continue to grow our U.S. anesthetic presence. Management began the process of evaluating alternative strategies in May 2008 when we retained the services of Barclays Capital Inc. as our strategic advisor. It is also important to note we retained the investment banking team of Barclays Capital Inc. to facilitate our $40 million debt financing in 2008."
"We will be looking at the entire organization to ensure alignment of processes, people, programs and spending with the aforementioned near-term growth strategy. These changes will be announced and implemented in the fourth quarter of 2008. However, I want to emphasize that the above actions will not solve our current and serious lack of liquidity. Our most pressing business priority is to secure funds to operate our business. We have been managing our cash flow diligently since our $40 million financing in May, 2008. Given where MINRAD is in its stage of growth, it will be extremely difficult to execute our business plan beyond 2008 without access to new financing from external sources, or the introduction and completion of a strategic alternative," said DiGiacinto.
The Company has generated substantial operating losses since inception. Additionally, the Company has been unable to generate positive cash flow from operating activities. We cannot provide assurances that it shall be able to do so in the future. The Company has been seeking and is continuing to explore alternatives to secure funds from external sources to continue operations, but cannot provide assurances that such funds will be available. Without the infusion of funds from external sources or introduction and completion of a strategic alternative, the Company will not be able to continue operations beyond the end of calendar year 2008.
Barclays Capital Inc.
The Board of Directors of MINRAD retained the services of Lehman Brothers Inc. (Lehman) as of May 28, 2008 for the purpose of providing financial advisory services to the Company with respect to exploring strategic alternatives including a possible sale of the business. On September 22, 2008, Barclays Capital Inc. acquired the North American investment banking franchise of Lehman and as part of such transaction Barclays Capital Inc. assumed Lehman's role as financial advisor. MINRAD provides no assurance that the conduct of this process with Barclays Capital will result in a transaction. No decision has been made to enter into any transaction at this time. The Company does not currently intend to disclose developments with respect to exploration of strategic alternatives unless and until its Board of Directors 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 ended September 30, 2008 grew $15.4 million or 155% versus the comparable period in 2007. Revenue growth for the third quarter, 2008 was $4.4 million, and includes a $2.3 million revenue reduction for product that was purchased from our U.S. distributor, consumed into the manufacture of new product and subsequently shipped to International customers.
The following table contains geographic revenue for the third quarter and the nine-month period ended September 30, 2008 and 2007:
Revenue increased significantly in the third quarter, 2008 versus the same period in 2007 in all geographies except the United States. New registrations as well as tenders won in key geographies drove the increases in International revenue. 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 as discussed previously.
For the nine-month period ended September 30, 2008, growth was strong and represents positive sequential growth in all international regions.
The following table summarizes the Company's revenue by product line for the 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 in 2007 was driven by increases in sevoflurane revenue and, to a lesser extent, increases in isoflurane. Sevoflurane revenue included a $2.3 million reduction for product that was purchased from our U.S. distributor, as discussed previously. Growth in both product lines was made possible by the completion of the dedicated sevoflurane production line in December, 2007. Prior to that date, productive capacity was limited to one line shared between the sevoflurane and isoflurane product lines. Year to date revenue growth of 132% was also due to significant increases in sevoflurane revenue, net of the purchase discussed above, which was driven by the plant expansion. Revenue was especially strong in the first quarter of 2008 immediately following the start-up of the new sevoflurane line.
Gross Profit (Loss):
Gross profit (loss) was essentially flat in the third quarter, 2008 versus third quarter, 2007, despite revenue growth of 163%. Gross margin was a loss of $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. Contributing factors to the negative gross margin in third quarter, 2008 were the return and reprocessing of the distributor material, unfavorable customer and product mix, and increased inventory write-downs versus the prior year. Included in the inventory write-downs in third quarter, 2008 were increases in the Image Guidance inventory reserve of $0.5 million and revaluations of anesthesia inventory of $0.9 million.
For the nine months ended September 30, 2008, gross profit grew $1.8 million versus the same period last year. While the gross profit rate improved to 13% compared to last year's rate of 11%, the expected improvements from the new sevoflurane line have not been achieved in the first nine months of 2008 due to start-up shakedown periods, other production interruptions and the 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 potentially uncollectible accounts receivable due from the Company's U.S. distributor. Excluding the non-cash charge, operating expenses declined from the same period in 2007 by $0.2 million, or 4%. Sales and Marketing expenses in the third quarter, 2008 declined from 2007 by $0.4 million or 20%, driven by lower compensation costs. Research and development costs were down $0.9 million or 54%, also due to $0.3 million lower compensation costs, with the remaining reductions in out-of-pocket expenditures. The completion of several projects, reductions in spending in non-core areas and transfer of resources to address other priorities within the Company drove decreased spending. Finance and administrative costs increased $1.1 million or 126% in third quarter, 2008 versus the same period in 2007 due to $0.3 million of prepaid loan fee amortization, higher insurance costs due to coverage increases, increased compensation due to management structure changes, and higher legal and accounting fees.
For the first nine months of 2008, operating expenses increased $8.1 million, or 61%, versus the comparable period of 2007. The increase includes $5.8 million due to the non-cash reserve for potentially uncollectible receivables, as previously discussed. Sales and marketing expense growth of $1.2 million or 20% was driven by a $1.5 million expenditure for the World Congress of Anesthesia meeting in the first quarter, 2008, a once every four year event, partially offset by lower compensation expense. Finance and administration expenses grew $2.4 million in 2008 versus the same period last year due to $0.5 million of prepaid loan fee amortization, higher compensation costs and increased insurance, legal and accounting fees as discussed above. Lower compensation and out-of-pocket expenditures drove reduced research and development costs of $1.3 million in the first nine months of 2008 versus 2007, 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 by the provision for potentially uncollectible receivables. The loss from operations for the nine-month period ended September 30, 2008 was $18.4 million versus $12.1 million loss in the comparable period last year.
Non-operating expense was $1.3 million for the third quarter, 2008 compared to $0.1 expense in the same period last year. The non-operating expense includes $0.9 million interest expense, of which $0.8 million was interest on the senior secured convertible notes entered into on May 5, 2008. The senior convertible notes agreement contains a registration rights provision that if the registration of additional shares is not declared effective 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 million penalty, as the registration was not effective until September 3, 2008 due to a full review by the Securities and Exchange Commission. Also included in the net non-operating expense for the quarter is a $0.5 million reclassification of unrealized loss on the valuation of securities previously reported within comprehensive income, to a realized loss due to a determination that it is now an other than temporary decline in value.
Non-operating expense for the nine-month period ending September 30, 2008 was $7.2 million compared to minimal non-operating income or loss in the comparable 2007 period. Of the expense increase of $7.2 million, a loss on early extinguishment of debt accounted for $4.6 million. The loss on early extinguishment of debt was due to the retirement of a Laminar Direct Capital L.P. term loan, which was entered into in February, 2008 and was extinguished on May 9, 2008, prior to maturity. Included in this charge is a 5% redemption fee of $0.8 million, a write-off of the unamortized balance of warrant expense of $3.2 million and unamortized loan fees of $0.6 million. In addition to the early extinguishment charge, non-operating expense includes interest expense of $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 paid on the Commonwealth of Pennsylvania development loans, a demand facility with First Niagara Bank extinguished early in 2008, customer discounts and interest paid to vendors.
About the Company
The Company is an interventional pain management company with three focus areas: (1) anesthesia and analgesia, (2) real-time image guidance, and (3) conscious sedation. The Company's products are sold throughout the world. The anesthesia and analgesia business currently manufactures and sells generic inhalation anesthetics that are used for human and veterinary surgical procedures. The Company manufactures patented real-time image guidance technologies that facilitate minimally invasive surgery. The SabreSource(TM) system and the accompanying Light Sabre(TM) disposable products have broad applications in orthopedics, neurosurgery, interventional radiology and anesthesia. They enable improved accuracy and reduced radiation in interventional procedures and support the transfer of these procedures to the outpatient setting. The Company is in the process of developing a drug/drug delivery system for the use of halogenated ethers as inhalation analgesics for conscious sedation.
The information contained in this news release, other than historical information, consists of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may involve risks and uncertainties that could cause actual results to differ materially from those described in such statements. Factors that may cause actual results to differ materially from those expressed or implied by its forward-looking statements include, but are not limited to, MINRAD International's limited operating history and business development associated with being a growth stage company; its dependence on key personnel; its need to attract and retain technical and managerial personnel; its ability to execute its business strategy; the intense competition it faces; its ability to protect its intellectual property and proprietary technologies; its exposure to product liability claims resulting from the use of its products; general economic and capital market conditions; financial conditions of its customers and their perception of its financial condition relative to that of its competitors; as well as those risks described under the heading "Risk Factors" of MINRAD International's Form 10-KSB/A, filed with the Securities and Exchange Commission on April 21, 2008. Although MINRAD International, Inc. believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct.
CONTACT: Charles R. Trego, Jr., Executive Vice President and CFO of MINRAD
International, Inc., +1-716-855-1068
Web site: http://www.minrad.com/