10QSB 1 crtq9300310q.txt U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: September 30, 2003 ------------------ OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No.: 0-20726 ------- Cortech, Inc. ------------- (Exact name of small business issuer as specified in its charter) Delaware 84-0894091 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 376 Main Street, PO Box 74, Bedminster, NJ 07921 ------------------------------------------------ (Address of principal executive offices) (908) 234-1881 -------------- (Issuer's telephone number) N/A --- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- State the number of shares outstanding of each of the issuer's classes of common equity: As of October 31, 2003, the issuer had 3,596,280 shares of its common stock, par value $.002 per share, outstanding. Transitional Small Business Disclosure Format (check one): Yes No X --- --- PART I. - FINANCIAL INFORMATION ------- --------------------- ITEM 1. - Financial Statements ------- -------------------- CORTECH, INC. BALANCE SHEET SEPTEMBER 30, 2003 ($000 Omitted) (UNAUDITED) ASSETS ------ Current assets: Cash and cash equivalents $ 11,730 Prepaid expenses and other 21 -------- Total assets $ 11,751 ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accrued liabilities $ 152 -------- Total liabilities 152 -------- Stockholders' equity: Preferred stock, $.002 par value, 2,000,000 shares authorized, none issued - Common stock, $.002 par value, 5,000,000 shares authorized, 3,596,280 shares issued and outstanding 7 Additional paid-in capital 99,446 Accumulated deficit ( 87,854) -------- Total stockholders' equity 11,599 -------- Total liabilities and stockholders' equity $ 11,751 ======== See accompanying notes to financial statements. 2 CORTECH, INC. STATEMENTS OF OPERATIONS ($000 Omitted, except per share data) (UNAUDITED) Three Months Ended September 30, --------------------- 2003 2002 -------- -------- Revenues: Interest income $ 24 $ 50 Expenses: General and administrative 115 2 ------ ------ Income (loss) before income taxes ( 91) 48 Provision benefit for income taxes - - ------ ------ Net income (loss) ($ 91) $ 48 ====== ====== Basic and fully diluted net income (loss) per share ($ .03) $ .01 ====== ====== Basic and fully diluted weighted average common shares outstanding (in 000's) 3,596 3,623 ====== ====== See accompanying notes to financial statements. 3 CORTECH, INC. STATEMENTS OF OPERATIONS ($000 Omitted, except per share data) (UNAUDITED) Nine Months Ended September 30, --------------------- 2003 2002 -------- -------- Revenues: Interest income $ 87 $ 162 Expenses: General and administrative 364 1,178 ------ ------ Loss before income taxes ( 277) ( 1,016) Provision for income taxes 2 - ------ ------ Net loss ($ 279) ($1,016) ====== ====== Basic and fully diluted net loss per share ($ .08) ($ .28) ====== ====== Basic and fully diluted weighted average common shares outstanding (in 000's) 3,596 3,657 ====== ====== See accompanying notes to financial statements. 4 CORTECH, INC. STATEMENTS OF CASH FLOWS ($000 Omitted) (UNAUDITED) Nine Months Ended September 30, --------------------- 2003 2002 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ($ 279) ($ 1,016) Adjustments: Change in prepaid expenses other assets ( 14) 10 Change in accrued liabilities ( 37) 227 -------- -------- Net cash used in operating activities ( 330) ( 779) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES- Repurchase of common stock - ( 278) -------- -------- Net cash used in financing activities - ( 278) -------- -------- Net decrease in cash and cash equivalents ( 330) ( 1,057) Cash and cash equivalents, beginning of period 12,060 13,448 -------- -------- Cash and cash equivalents, end of period $ 11,730 $ 12,391 ======== ======== Supplemental disclosure of cash flow information: Cash paid for taxes $ 2 $ - ======== ======== See accompanying notes to financial statements. 5 CORTECH, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. General ------- The accompanying unaudited financial statements of Cortech, Inc. ("Cortech" or the "Company") as of September 30, 2003 and for the three and nine months ended September 30, 2003 and 2002 reflect all material adjustments consisting of only normal recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. Certain information and footnote disclosures required under accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2002 as filed with the Securities and Exchange Commission. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. The results of operations for the three and nine months ended September 30, 2003 and 2002 are not necessarily indicative of the results to be expected for the entire year or for any other period. 2. Legal Proceedings ----------------- Arbitration I ------------- Subsequent to March 31, 2001, disagreements arose between Cortech and Ono Pharmaceutical Co., Ltd. ("Ono") as to the status of Ono's license rights under the 1999 agreement (see Form 10-KSB for more information). On August 7, 2001, Cortech filed a Demand for Arbitration with the American Arbitration Association against Ono seeking resolution of the dispute. The Arbitration concluded in August 2002, purportedly resolving any questions concerning the ownership of Cortech's Intellectual Property and Ono's development rights. In the Arbitration, among other things, Ono argued that it had the right to name 42 other compounds as "Developed Compounds" giving it the same rights with respect to these other compounds as it had with respect to ONO-6818. Cortech argued that Ono was entitled to designate only one of the 42 compounds as a back-up to ONO-6818. The Arbitration Panel concurred with 6 Cortech and provided Ono with 20 days to name one compound as the back-up which Ono did. Ono also argued and the Arbitration Panel agreed that 15 other compounds were "Improved Compounds" to which Ono was entitled to exclusive rights for oral uses. However the Arbitration Panel gave Cortech the joint right to develop these "Improved Compounds" for non oral use subject to paying a reasonable royalty on any Products developed outside the United States. The Arbitration Panel also held that Ono had no license, express or implied, to Cortech's patent portfolio. Arbitration II -------------- On November 1, 2002, the Company announced that Ono had advised it of Ono's intention to discontinue the development of ONO-6818 because of potential liver toxicity. In a series of subsequent letters, Ono sought to renegotiate its rights to make compounds using Cortech's technology. When Cortech declined, on February 7, 2003 Ono admitted that it had been developing what it called "Improved Compounds" since April of 2002 and that it had not disclosed this development as required by the 1999 Agreement, assuming that these new compounds met the Agreement's definition of "Improved Compounds". In further breach of the 1999 Agreement, Ono refused to reveal the chemical structure of these so-called "Improved Compounds" and announced that Ono had filed a patent in Japan. Within days, Cortech received a notice of Arbitration in which Ono claimed that its rights to develop and designate compounds for development as commercial products extended beyond the termination of the period provided in the 1999 Agreement for designating "Developed Compounds", as defined in such agreement. Cortech intends to defend the arbitration vigorously. 3. Related Party Transactions -------------------------- A management fee of $15,000 per month is paid to Asset Value Fund Limited Partnership ("AVF") for management services performed for the Company. Management services include, among other things, SEC filings, negotiation, evaluating merger and acquisition proposals, licensing, accounting and shareholder relations. The Company believes that the management fee is materially less than the cost for the Company to perform these services. AVF is the beneficial owner of approximately 45% of the Company's Common Stock at September 30, 2003. 4. Common Stock ------------ In October 2000 the Board of Directors approved a stock repurchase program authorizing the Company to repurchase up to 160,000 shares of its Common Stock at prices deemed favorable from time to time in the open market or in privately negotiated transactions subject to market conditions, the Company's financial position and other considerations. As of September 30, 2003, 158,140 shares of Common Stock were repurchased for approximately $555,000. All shares repurchased were returned to the status of authorized but unissued shares. 7 5. Net Income (Loss) Per Share --------------------------- Basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding. Diluted net income (loss) per share is computed by dividing net income (loss) by the sum of the weighted-average number of common shares outstanding plus the dilutive effect of shares issuable through the exercise of stock options. The shares used for basic income (loss) per share and diluted income (loss) per share are reconciled below (in 000's): Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 2003 2002 2003 2002 ---- ---- ---- ---- Average shares outstanding for basic income (loss) per share 3,596 3,623 3,596 3,657 Dilutive effect of stock options - - - - ----- ----- ----- ----- Average shares outstanding for diluted income (loss) per share 3,596 3,623 3,596 3,657 ===== ===== ===== =====
Excluded from the calculation of diluted income (loss) per share for the three and nine months ended September 30, 2003 and 2002 are 478,036 and 478,786, respectively, common stock options which, if included, would have an antidilutive effect. 8 ITEM 2. Management's Discussion and Analysis of Financial Condition and ------- --------------------------------------------------------------------- Results of Operations --------------------- The following discussion and analysis should be read in conjunction with Cortech, Inc.'s ("Cortech" or the "Company") 2002 Annual Report on Form 10-KSB as well as the Company's financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-QSB. When used in this discussion, the word "expects" and similar expressions are intended to identify forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. The forward-looking statements contained herein speak only as of the date hereof. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. General ------- Cortech operated as a biopharmaceutical company whose research and development efforts focused primarily on bradykinin antagonists and protease inhibitors. Those efforts produced a technology portfolio which may have potential therapeutic application across a broad range of medical conditions. Cortech's strategy is to seek collaborative partners to conduct and fund future research and development on the components of its portfolio, although there can be no assurance that any particular agreement will be completed. At the same time, the Company is seeking to redeploy its assets into an operating business. Results of Operations --------------------- Cortech had a net loss of $91,000 for the three months ended September 30, 2003 or $.03 basic and fully diluted loss per share and a net loss of $279,000 or $.08 basic and fully diluted loss per share for the nine months ended September 30, 2003, compared to net income of $48,000 or $.01 basic and fully diluted income per share for the three months ended September 30, 2002 and a net loss of $1,016,000 or $.28 basic and fully diluted loss per share for the nine months ended September 30, 2002. Revenues -------- Interest income was $24,000 and $87,000 in the three and nine months ended September 30, 2003, respectively, compared to $50,000 and $162,000 for the same periods in 2002, a decrease of $26,000 and $75,000 in the three and nine month periods, respectively. Lower yields on investments and lower invested balances were the reasons for this decrease. Expenses -------- General and administrative expenses were $115,000 and $364,000 in the three and nine months ended September 30, 2003, respectively, compared to $2,000 and $1,178,000 in the same periods in 2002, respectively. The increase of $113,000 9 in the quarter ended September 30, 2003 compared to the same period in 2002 was due primarily to reimbursement of fees in the third quarter of 2002 that had previously been expensed. For the nine months ended September 30, 2003, general and administrative expenses decreased by $814,000 from the same period in 2002 due primarily to lower legal fees incurred in connection with the Ono Arbitration. (For more information on the Ono Arbitration, See Part II - Other Information, Item 1, Legal Proceedings.) Liquidity and Capital Resources ------------------------------- At September 30, 2003, the Company had cash and cash equivalents of approximately $11.7 million. Cash equivalents of $11.6 million consisted of U.S. Treasury Bills with a maturity of three months or less at the date of purchase with yields ranging between .89% and .95%. Management believes its cash and cash equivalents are sufficient for its remaining business activities and for the costs of seeking an acquisition of an operating business. Net cash of $330,000 was used in operating activities for the nine months ended September 30, 2003 compared to net cash used of $779,000 for the same period in 2002. Cash flows from the net losses were the primary reasons for the cash used in operations. Net cash of $278,000 was used in financing activities in the nine months ended September 30, 2002, due to the repurchase of common stock. Factors Which May Affect Future Results --------------------------------------- Future earnings of the Company are dependent on interest rates earned on the Company's invested balances and expenses incurred, particularly legal expenses associated with the Ono Arbitration. Other Disclosures - Related Party Transactions ---------------------------------------------- A management fee of $15,000 per month is paid to Asset Value Fund Limited Partnership ("AVF") for management services performed for the Company. Management services include, among other things, SEC filings, negotiation, evaluating merger and acquisition proposals, licensing, accounting and shareholder relations. The Company believes that the management fee is materially less than the cost for the Company to perform these services. AVF is the beneficial owner of approximately 45% of the Company's Common Stock at September 30, 2003. 10 PART II - OTHER INFORMATION ------- ----------------- ITEM 1. - LEGAL PROCEEDINGS ------- ----------------- Arbitration I ------------- Subsequent to March 31, 2001, disagreements arose between Cortech and Ono Pharmaceutical Co., Ltd. ("Ono") as to the status of Ono's license rights under the 1999 agreement (see form 10-KSB for more information). On August 7, 2001, Cortech filed a Demand for Arbitration with the American Arbitration Association against Ono seeking resolution of the dispute. The Arbitration concluded in August 2002, purportedly resolving any questions concerning the ownership of Cortech's Intellectual Property and Ono's development rights. In the Arbitration, among other things, Ono argued that it had the right to name 42 other compounds as "Developed Compounds" giving it the same rights with respect to these other compounds as it had with respect to ONO-6818. Cortech argued that Ono was entitled to designate only one of the 42 compounds as a back-up to ONO-6818. The Arbitration Panel concurred with Cortech and provided Ono with 20 days to name one compound as the back-up which Ono did. Ono also argued and the Arbitration Panel agreed that 15 other compounds were "Improved Compounds" to which Ono was entitled to exclusive rights for oral uses. However the Arbitration Panel gave Cortech the joint right to develop these "Improved Compounds" for non oral use subject to paying a reasonable royalty on any Products developed outside the United States. The Arbitration Panel also held that Ono had no license, express or implied, to Cortech's patent portfolio. Arbitration II -------------- On November 1, 2002, the Company announced that Ono had advised it of Ono's intention to discontinue the development of ONO-6818 because of potential liver toxicity. In a series of subsequent letters, Ono sought to renegotiate its rights to make compounds using Cortech's technology. When Cortech declined, on February 7, 2003 Ono admitted that it had been developing what it called "Improved Compounds" since April of 2002 and that it had not disclosed this development as required by the 1999 Agreement, assuming that these new compounds met the Agreement's definition of "Improved Compounds". In further breach of the 1999 Agreement, Ono refused to reveal the chemical structure of these so-called "Improved Compounds" and announced that Ono had filed a patent in Japan. Within days, Cortech received a notice of Arbitration in which Ono claimed that its rights to develop and designate compounds for development as commercial products extended beyond the termination of the period provided in the 1999 Agreement for designating "Developed Compounds", as defined in such agreement. Cortech intends to defend the Arbitration vigorously. ITEM 3. - Controls and Procedures ------- ----------------------- Within the 90-day period prior to the filing of this report, the Company carried out, under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial 11 Officer, an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-14(c) and 15d-14 under the Securities Exchange Act of 1934). Based upon and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures are effective. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these internal controls subsequent to the date of their evaluation. ITEM 6. - Exhibits and Reports on Form 8-K ------- -------------------------------- (a) Exhibits -------- 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K ------------------- No reports on Form 8-K were filed during the quarter for which this report is being filed. 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CORTECH, INC. Date: November 13, 2003 /s/ Sue Ann Merrill -------------------------------- Sue Ann Merrill Treasurer (Principal Accounting and Financial Officer) 13 EXHIBIT 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Paul O. Koether, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Cortech, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. November 13, 2003 /s/ PAUL O. KOETHER ---------------------------- Paul O. Koether Chairman, President and Chief Executive Officer EXHIBIT 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Sue Ann Merrill, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Cortech, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. November 13, 2003 /s/ Sue Ann Merrill --------------------------- Sue Ann Merrill (Principal Accounting and Financial Officer) Exhibit 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. 1350, as adopted), Paul O. Koether, the Chairman, President and Chief Executive Officer of Cortech, Inc., (the "Company"), and Sue Ann Merrill, the Chief Financial Officer, Treasurer and Secretary of the Company each hereby certifies that, to the best of their knowledge: 1. The Company's Quarterly Report on Form 10-QSB for the period ended September 30, 2003, to which this Certification is attached as Exhibit 32 (the "Periodic Report"), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition of the Company at the end of the period covered by the Periodic Report and results of operations of the Company for the period covered by the Periodic Report. Dated: November 13, 2003 /s/ Paul O. Koether ------------------------------- Paul O. Koether Chairman, President and Chief Executive Officer /s/ Sue Ann Merrill -------------------------------- Sue Ann Merrill Chief Financial Officer, Treasurer and Secretary