BUF Minrad International

ORCHARD PARK, N.Y., Aug. 14 /PRNewswire-FirstCall/ -- Summary: -- Revenue of $ 4.2 million compared to $4.3 million for the second quarter of 2007. -- Operating loss of $6.3 million compared with $ 3.4 million in prior year quarter -- Net loss of $ 11.7 million compared with $ 3.4 million in prior year quarter -- Loss on early extinguishment of debt of $ 4.6 million included in net loss for second quarter of 2008 MINRAD International, Inc. (AMEX:BUF), an interventional pain management company, today reported revenue of $4.2 million for the second quarter of 2008, down 4 % compared to $4.3 million of revenue in the second quarter of 2007. Year to date revenue increased by 121 %. Net loss for the second quarter 2008 was $ 11.7 million, or a $0.24 loss per basic and diluted share for the quarter of 2008 compared to a net loss of $3.4 million, or $0.07 loss per basic and diluted share in the second quarter of 2007. The Company had a net loss through June 30, 2008 of $ 14.9 million, or $0.30 per basic and diluted share, compared to a net loss of $ 6.8 million or $0.14 per basic and dilutes share for the prior year. "Our second quarter performance was disappointing as we generated less than planned revenue and more than planned operating losses. Several factors contributed to our second quarter operating performance. Revenue growth was constrained due to limitations in production resulting from the following factors: the temporary shutdown of our new sevoflurane line for scheduled cleaning and maintenance, delays in receipts of raw materials prior to our May closing of the $40 million in new financing and the disc rupture of one of our production reactors. Our operating margins were negatively impacted by the lack of revenue and production growth as well the impact of certain charges to establish operating reserves for potentially uncollectible receivables and to set up an obsolescence reserve for our device inventory," said Bill Burns, Chairman and Chief Executive Officer. Dave DiGiacinto, President and Chief Operating Officer said, "Our second quarter performance was below management expectations based on factors discussed above, but we clearly understand what happened and what must be done to significantly improve our performance going forward. Our senior management team had several priorities for the second quarter which were accomplished but are not yet reflected in our operating performance. We successfully refinanced the business in April in a very difficult credit market and reestablished sound relationships with our vendors. The latter consumed significant senior management time and attention. In May and June, we focused on improving output and efficiencies in our Bethlehem plant, continued to secure growth in International sales and registrations, initiated a continuing rationalization of our business and implemented sound cash management practices. All of the latter actions are continuing and will deliver improvements in our revenue growth and profitability in the near term." Revenue Revenue for the second quarter, 2008 declined by $0.1 million, a 4% decline versus second quarter, 2007. Revenue for the six months ended June 30, 2008 grew $8.7 million or 121% over revenue for the comparable period in 2007. The following table contains geographic revenue for the second quarter and the six months ended 2008 and 2007: (Millions) Three months ended Region June 30, 2008 June 30, 2007 % Change United States $1.4 $1.0 37% Europe $0.5 $0.4 47% Western Hemisphere $1.1 $2.6 -59% Pacific Rim $1.2 $0.3 260% Total $4.2 $4.3 -4% (Millions) Six months ended Region June 30, 2008 June 30, 2007 % Change United States $8.4 $1.6 420% Europe $2.0 $0.5 290% Western Hemisphere $2.4 $4.3 -44% Pacific Rim $3.1 $0.8 295% Total $15.9 $7.2 121% Revenue increased in the second quarter, 2008 versus the same period in 2007 in all geographies except Western Hemisphere, where strong Western Hemisphere revenue second quarter, 2007 created a challenging year-on-year comparison for the region. For the six-month period ended June 30, 2008, growth was strong in all regions except Western Hemisphere, driven by very significant growth that occurred during the first quarter, 2008. In particular, U.S. revenue grew significantly versus 2007, where approval to sell sevoflurane did not occur until May, 2007. U.S. revenue accounted for 53% of total six-month revenue in 2008, versus 22% of total revenue in the comparable period last year. The following table summarizes the Company's revenue by product line for the second quarter and the first six months of 2008 versus 2007: (Millions) Three months ended, Product Line June 30, 2008 June 30, 2007 % Change Sevoflurane $2.7 $3.2 -13% Other Inhalants 1.4 1.0 29% Total Anesthesia and Analgesia 4.1 4.2 -3% Image Guidance 0.1 0.1 -28% Total $4.2 $4.3 -4% (Millions) Six months ended, Product Line June 30, 2008 June 30, 2007 % Change Sevoflurane $11.7 $4.8 145% Other Inhalants 3.9 2.3 68% Total Anesthesia and Analgesia 15.6 7.1 120% Image Guidance 0.3 0.1 165% Total $15.9 $7.2 121% The 4% decline in second quarter, 2008 revenue versus the same period in 2007 was driven by the shortfall in the sevoflurane product line, due to product availability in the second quarter, 2008 (as discussed in the gross profit section of this MD&A). The decline in sevoflurane was partially offset by growth in other inhalants during the second quarter. The 121% increase in revenue for the six months ended June 30 was driven by growth across all product lines. Sevoflurane growth for the six-month period ended June 30, 2008 was a result of strong performance of this product line in the first quarter. The $6.9 million sevoflurane increase accounted for 79% of the revenue growth for the first six months, 2008. Gross Profit Gross profit grew 104% for the six months ended June 30, 2008. A strong first quarter performance, made possible by the start-up of the new independent sevoflurane production line in December, 2007 was the primary growth driver for gross profit in the six-month period ended June 30, 2008. However, in the second quarter, sevoflurane production, and therefore revenue, was significantly constrained by several factors. Early in the second quarter, 2008, there was a planned shutdown for cleanout of process equipment at our Bethlehem, PA facility. Also early in the quarter, due to the inability to obtain raw materials because of funding constraints, production was limited. In early June, when raw materials became available, an equipment breakdown in a sevoflurane reactor caused equipment damage and loss of production capacity, primarily in the sevoflurane production area. The low production capacity utilization drove unfavorable manufacturing variances in the second quarter and was a contributing factor in the gross profit decline of 148% and decline in the gross profit rate of 3600 basis points versus the prior year. By the end of second quarter, the facility returned to normal operations. Gross profit for the second quarter was also unfavorably impacted by inventory write downs at the Orchard Park, New York facility, primarily for consumable inventory nearing its expiration date and write downs for Image Guidance devices that now are considered obsolete. Operating Expense Operating expenses for the quarter ended June 30, 2008 increased by $1.4 million, or 32%, versus second quarter, 2007. $1.0 million of the increase is due to establishing a non-cash reserve for the accounts receivable due from the Company's U.S. distributor, as discussed in Note 2 to the financial statements. Finance and administration costs increased $1.0 million, while sales and marketing costs and research and development costs decreased by $0.1 million and $0.5 million respectively. Finance and administration cost growth of $1.0 million, which was a 92% increase, was driven by higher stock option expense, bad debt expense on international receivables and increased salary expense and severance costs versus the prior year. The sales and marketing decrease represented a 7% decline versus the prior year, primarily due to lower sales commission expenses. The research and development cost decline of $0.5 million, or 34%, was made possible by several actions. 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. Partially offsetting the research and development cost reductions was $0.1 million increased investment in the conscious sedation project. For the first six months of 2008, operating expenses increased $3.8 million, or 44%, versus the comparable period of 2007. The $3.8 million increase was comprised of the $1.0 million increase due to establishing a non-cash reserve for potentially uncollectible receivable due from the Company's U.S. distributor as previously discussed, $1.7 million sales and marketing and $1.5 million finance and administration increases, less a $0.4 million decrease in research and development spending. The sales and marketing expense growth of $1.7 million or 42% was driven by a $1.5 million expenditure for the World Congress of Anesthesia meeting, a once every four year event, and additional $0.2 million freight expense due to increased volume and air shipment of product. The $1.5 million finance and administration expense growth, which was an increase of 67%, was driven by higher incentive compensation versus the same period last year, as well as the other factors previously disclosed in the quarter discussion. Research and development cost reductions of 17% versus the prior year, or $0.4 million all occurred in the second quarter as discussed above, with the first quarter, 2008 costs being roughly comparable to the same period, 2007. Operating Loss Loss from operations was $6.3 million for the second quarter, 2008 versus $3.4 million in 2007 for the same period, driven largely by the gross profit shortfall and the non-cash U.S. distributor receivable provision. The loss from operations for the six-month period ended June 30, 2008 was $8.9 million versus $6.9 million loss in the comparable period last year. Non-operating income/expense Non-operating expense was $5.4 million for the second quarter, 2008 as compared to minimal non-operating income or expense in the same period prior year. The non-operating expense includes $1.1 million interest expense, $4.6 million loss on early extinguishment of debt, less interest income and other income of $0.3 million. Interest expense of $1.1 million consists primarily of interest on two long term debt arrangements in place for portions of the period. The Laminar Direct Capital L.P. term loan was put in place in February and was extinguished on May 9, 2008. Senior secured convertible notes were issued on May 5, 2008. Interest expense during the second quarter from these two arrangements totaled $1.0 million. The remaining interest related to two development loans with the Commonwealth of Pennsylvania. The loss on early extinguishment of debt was due to the retirement of the Laminar term loan prior to maturity. Included in this charge are a 5% redemption fee of $0.8 million, the write-off of the unamortized balance of warrant expense of $3.2 million and unamortized loan fees of $0.6 million. Remaining other income of $0.3 million includes primarily $0.4 million income on the receipt of shares of common stock of RxElite in consideration for extended payment terms. Non-operating expense for the six-month period ending June 30, 2008 was $6.0 million as compared to net non-operating income of $0.1 million in the comparable 2007 period. Of the increase in expense of $6.1 million, $5.3 million related to the second quarter, which was discussed in the previous paragraph. The balance of the increase, which is $0.8 million increase in the first quarter, 2008 was driven by $0.6 million of additional interest due to the Laminar debt, the Commonwealth of Pennsylvania development loans and a demand facility with First Niagara Bank extinguished early in 2008. Second Quarter Conference Call The Company will host a conference call at 4:30 PM Eastern Time today to provide additional detail related to second quarter performance. The call can be accessed by dialing toll free in the United States (866) 866-1333. The International access is (404) 260-1421. 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 SabreSourcetm system and the accompanying Light Sabretm 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. Forward-Looking Statements 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 (716) 855-1068 MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) Item 1. Financial Statements June 30, 2008 December 31, 2007 (unaudited) ASSETS Current assets: Cash and cash equivalents $7,604 $238 Investments 540 - Accounts receivable, net 10,334 3,310 Inventories, net 8,877 12,402 Prepaid expenses and other 1,275 2,121 Total current assets 28,630 18,071 Property and equipment: Machinery and equipment 15,542 15,169 Computers 1,482 1,471 Furniture and fixtures 919 815 Leasehold improvements 385 385 Construction in progress 8,373 7,692 26,701 25,532 Less accumulated depreciation 4,276 2,247 Net property and equipment 22,425 23,285 Other assets, net 3,938 639 Total assets $54,993 $41,995 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Demand notes payable $- $6,000 Accounts payable 2,221 12,983 Accrued expenses 841 1,004 Current portion of long-term debt 210 206 Current portion of deferred revenue 391 103 Total current liabilities 3,663 20,296 Long-term liabilities: Long-term debt 41,619 1,725 Long-term deferred revenue 845 897 Total long-term liabilities 42,464 2,622 Commitments and Contingencies(Note 12) - - Stockholders' equity: Common stock 490 487 Additional paid-in-capital 85,656 80,869 Accumulated other comprehensive loss (150) - Accumulated deficit (77,130) (62,279) Total stockholders' equity 8,866 19,077 Total liabilities and stockholders' equity $54,993 $41,995 MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) Three month periods Six month periods ended ended June 30, June 30, June 30, June 30, 2008 2007 2008 2007 Revenue $4,152 $4,304 $15,947 $7,230 Cost of goods sold 4,637 3,287 12,471 5,523 Gross profit (loss) (485) 1,017 3,476 1,707 Operating expenses: Sales and marketing 1,818 1,962 5,512 3,872 Research and development 917 1,386 2,026 2,447 Finance and administrative 2,102 1,097 3,824 2,293 Reserve for potential uncollectible receivable - Note 2 1,023 - 1,023 - Total operating expenses 5,860 4,445 12,385 8,612 Operating loss (6,345) (3,428) (8,909) (6,905) Interest expense (1,052) (17) (1,681) (20) Interest income 40 57 45 151 Loss on early extinguishment of debt (4,587) - (4,587) - Other income and expense 260 - 281 - Total non-operating income (expense) (5,339) 40 (5,942) 131 Net loss (11,684) (3,388) (14,851) (6,774) Net Loss per share basic and diluted $(0.24) $(0.07) $(0.30) $(0.14) Weighted average common shares outstanding basic and diluted 48,869,217 47,213,653 48,802,367 47,142,763 MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY SIX-MONTH PERIOD ENDED JUNE 30, 2008 (UNAUDITED) (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) Accumulated Other Additional Compre- Accum- Common Stock Paid-In hensive ulated Shares Amount Capital Loss Deficit Total Balance at December 31, 2007 48,688,802 $487 $80,869 $- $(62,279) $19,077 Stock options exercised 20,000 - 36 - - 36 Warrants exercised 59,464 1 53 - - 54 Discount on long-term debt, net of tax effect - - 3,056 - - 3,056 Stock based compensation - - 502 - - 502 Net loss - - - - (3,167) (3,167) Other comprehensive loss: Unrealized loss on investments - - - (195) - (195) Total comprehensive loss - - - - - (3,362) Balance at March 31, 2008 48,768,266 $488 $84,516 $(195) $(65,446) $19,363 Stock options exercised 71,500 1 100 - - 101 Warrants exercised 87,026 1 99 - - 100 Stock based compensation - - 524 - - 524 Tax effect on early extinguishment of debt - - 417 - - 417 Net loss - - - - (11,684) (11,684) Other comprehensive gain: Unrealized gain on investments - - - 45 - 45 Total comprehensive loss - - - - - (11,639) Balance at June 30, 2008 48,926,792 $490 $85,656 $(150) $(77,130) $8,866 MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY SIX-MONTH PERIOD ENDED JUNE 30, 2008 (UNAUDITED) (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) Additional Common Stock Paid-In Accumulated Shares Amount Capital Deficit Total Balance at December 31, 2006 47,048,240 $470 $76,513 $(43,481) $33,502 Conversion of preferred stock and accrued dividends to common stock Stock options exercised 45,291 1 116 - 117 Stock based compensation - - 122 - 122 Stock warrants exercised - - - - - Net loss - - - (3,386) (3,386) Balance at March 31, 2007 47,093,531 $471 $76,751 $(46,867) $30,355 Stock options exercised 241,331 2 407 - 409 Stock based compensation - - 275 - 275 Stock warrants exercised 389,400 3 553 - 556 Net loss - - - (3,388) (3,388) Balance at June 30, 2007 47,724,262 $476 $77,986 $(50,255) $28,207 MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) Six-month period ended June 30, 2008 June 30, 2007 Cash flows from operating activities: Net loss $(14,851) $(6,774) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 2,041 478 Stock based compensation 1,026 397 Loss on debt extinguishment 4,058 - Amortization of capitalized fees associated with long-term debt 240 - Provision for potentially uncollectible receivable 1,243 - Provision for inventory reserves 853 - Change in operating assets and liabilities: Accounts receivable (8,266) 1,302 Inventories 2,672 (5,932) Other assets 744 (1,502) Accounts payable (4,893) 1,789 Accrued and other liabilities (617) (548) Net cash used by operating activities (15,750) (10,790) Cash flows from investing activities: Purchases of property and equipment (7,037) (6,838) Proceeds from sale of investments - 7,249 Acquisition of other assets, net (136) 7 Net cash (used) provided by investing activities (7,173) 418 Cash flows from financing activities: Proceeds under long-term debt borrowings, net of costs 51,100 2,063 Borrowings under demand notes payable - 3,800 Repayments under demand notes payable (6,000) - Principal payments on long-term debt (15,102) (33) Proceeds from options exercised 137 525 Proceeds from warrants exercised 154 555 Net cash provided by financing activities 30,289 6,910 Net increase (decrease) in cash and cash equivalents 7,366 (3,462) Cash and cash equivalents - Beginning of period 238 4,664 Cash and cash equivalents - End of period $7,604 $1,202 DATASOURCE: MINRAD International, Inc. CONTACT: Charles R. Trego, Jr., Executive Vice President and CFO of MINRAD International, Inc., +1-716-855-1068 Web site: http://www.minrad.com/

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