PharmEng Reports Second Quarter Earnings for 2008: Financial News

PharmEng Reports Second Quarter Earnings for 2008
Friday August 29, 2008 1:43 pm ET

TORONTO, ONTARIO--(MARKET WIRE)--Aug 29, 2008 -- PharmEng International Inc. (CDNX:PII.V - News), a full-service consulting and contract manufacturing company, today reported its results for the period ended June 30, 2008. Following on the transitional first quarter where for the first time in Company history, the revenue generated in the second quarter from the contract manufacturing division (operating as Keata Pharma Inc. "Keata") exceeded the revenue generated from the consulting division (operating as PharmEng Technology Inc. "PTI"), the Company continued the trend of manufacturing revenue exceeding consulting revenue in the second quarter.

- For the quarter ended June 30, 2008, the Company had revenues of $9,364K on a consolidated basis, representing a 190% increase compared to the second quarter of 2007 of $3,224K. The main reason for the dramatic revenue growth was the acquisition of the Arnprior pharmaceutical manufacturing facility from Pfizer Canada that closed December 31, 2007 and the resulting impact on Keata's contract manufacturing revenue.

- EBITDA (earnings before interest, taxes, depreciation and amortization) for the second quarter ending June 30, 2008 was a loss $1,266K representing an increase of 128% compared to a loss of $610K in the second quarter of 2007. This loss was mainly due to the ramping up of the Sydney manufacturing facility, under utilization of the consulting staff due to a downturn in the pharmaceutical consulting industry, and reduced volume at the Arnprior manufacturing facility. The consolidated loss for the period was $1,495K ($0.02 per share) compared to a loss of $687K ($0.02) for the second quarter of 2007.

- The acquisition of Pfizer's Arnprior manufacturing facility impacted the Company in the second quarter ended June 30, 2008 in the following areas:

(i) Keata's contract manufacturing revenues increased $6.7 million in the quarter ending June 30, 2008 to $7.3 million from $0.6 in the same quarter in the prior year.

(ii) Company full time employees increased to over 300 people from approximately 130 in the prior year due to the addition of 165 people through the Arnprior acquisition.

(iii) Keata is now selling to more than 30 countries worldwide and is the exclusive pharmaceutical manufacturer for certain products distributed in Canada.

(iv) Keata's manufacturing capabilities have expanded to include pilot laboratories for formulation development, various capabilities of high shear mixing, container blending and equipment for modified release technology. The facilities also have the necessary equipment and approvals to provide formulation development and testing services to manufacture and package products in solid and liquid dosage forms, including aseptic manufacturing.

- The phasing out and relocation of manufacturing from the Company's manufacturing facility in Perth, Ontario to the newly constructed plant in Nova Scotia was completed in Q2 of 2008.

- In the second quarter of 2008 the consulting division, PharmEng Technology Inc. "PTI"), provided $2,090 or 22% of total Company revenue compared to historical rates for consulting revenue of almost 70%. Consulting had been the dominant focus of the company since the Company's inception. In Q2, 2008 the contract manufacturing division, Keata, provided $7.3 million or 78% of total revenues. This shift from the consulting division to the contract manufacturing divisions for revenue generation is expected to continue for the balance of the year and into the foreseeable future.

Financial Highlights

- For the three-month period ended June 30, 2008, consolidated revenue increased 190% to $9,364K from $3,224K during the same period in 2007. Consulting revenues decreased 22% to $2,090K from $2,674K during the same period in 2007. The decrease in consulting revenues was primarily due to a general slow of growth opportunities in Canada and the US.

- Revenues from the Company's manufacturing facility for the second quarter of 2008 increased to $7,274K from $550K during the same period in 2007. Management remains confident that 2008 manufacturing volumes will continue to generate significant revenue increases for Keata for the balance of 2008 leading to greatly improved financial performance in 2008.

- On a consolidated basis for the period ended June 30, 2008 EBITDA, representing earnings before interest, income taxes, and depreciation and amortization, the Company reported a loss of $1,266K compared to an EBITDA loss of $610K during the same period in 2007.

- Net losses after taxes for the three months ended June 30, 2008 was $1,495K ($0.02 per share) as compared to a loss of $687 for the same period in 2007($0.02 per share.)

"We continue to believe we are well positioned to execute our strategy and build our pipeline in consulting and pharmaceutical manufacturing markets, and we remain highly focused on sales and marketing activities to turn these opportunities into new projects and supply contracts respectively," commented Alan Kwong, CEO of PharmEng. "While there were several important operating achievements in the quarter, including the receipt of Health Canada licenses, opportunities in Indian and China, and some positive developments with our business development initiatives, we have seen delays in the timing of anticipated new business," said Mr. Kwong. "As a result, we felt it was prudent to initiate a cost reduction plan that reduces our cost structure to reflect these current delays but does not impact our ability to service existing business or pursue new opportunities that have been identified. This plan is expected to save approximately $2.6 million annually, increase our average margins and enable us to achieve profitability in the fourth quarter of 2008."

Cost Reduction Plan

The cost reduction plan is aimed at reducing the Company's costs and overall operating expenses by approximately 20% annually. A combination of workforce reductions and other cost-cutting measures are expected to result in annual savings of approximately $2.6 million beginning in the third quarter. This plan will result in staff reductions for our manufacturing and consulting operations resulting in one time termination benefits of approximately $77K, to be largely recorded in the third quarter of 2008. The cost reduction plan is not expected to impact the Company's ability to service current contracts or pursue new opportunities that have been identified.

Senior Lending and Subordinated Debenture Covenants

As at June 30, 2008, the Company is in breach of certain financial loan covenants in respect of the credit facilities including equity coverage, EBITDA and borrowing base requirements. The lenders have provided forbearance from proceeding on this breach of covenants.

The Company is currently in discussions with the senior lender and subordinated debt lender to remedy the covenant breaches and is concurrently investigating alternate sources of financing in the amount of $3.0 million. Although the Company has suffered from significant losses and has a negative working capital, it is of the opinion it can meet its financial obligation and continue to pursue its business strategy due to the rebuilding activities of the first six months of 2008, the expected cash flow from the restructured operations and management's cost reduction plan.

The following are financial highlights for the quarter ending June 30, 2008.

Selected Financial Highlights:

 

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                                                                         Q3
                                   Q2           Q1           Q4    restated
(in thousands)                 Jun-08       Mar-08       Dec-07      Sep-07
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Revenue : Consulting            2,090        1,920        2,664       2,830
          Manufacturing         7,274        7,282          583         289
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                                9,364        9,202        3,247       3,119
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Cost of
 revenues : Consulting          1,271        1,243        1,215       1,454
            Manufacturing       5,949        5,865        1,155         572
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                                7,220        7,108        2,370       2,026
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Gross Margin: Consulting          819          677        1,449       1,376
              Manufacturing     1,325        1,417         (572)       (283)
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                                2,144        2,094          877       1,093
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Selling, general &
 administrative                 3,877        2,005        1,351       1,297
Amortization and interest
 expense                          529          499          215         248
Financing costs                     -            -        1,677           -
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Loss before income taxes
 recovery                      (2,262)        (410)      (2,366)       (452)
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Income taxes recovery            (767)        (109)        (741)       (141)
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Net loss and comprehensive
 loss                          (1,495)        (301)      (1,625)       (311)
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Weighted average number
 of shares outstanding     76,709,000   76,709,000   64,936,709  55,345,709
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Loss per share                 ($0.02)      ($0.00)      ($0.03)     ($0.01)
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EBITDA
Loss before income taxes
 recovery                      (2,262)        (410)      (2,366)       (452)
Amortization-property,
 plant & equipment                505          286          185         181
Amortization of imputed
 interest                         109           80           82          86
Interest                          382          382           59         110
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EBITDA income (loss)
 per share                     (1,266)         338       (2,040)        (75)
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Assets                         34,015       34,959       29,132      20,042
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Liabilities                    29,881       29,439       23,312      11,849
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                                   Q2           Q1           Q4          Q3
                             restated     restated     restated    restated
(in thousands)                 Jun-07       Mar-07       Dec-06      Sep-06
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Revenue : Consulting            2,674        2,178        3,084       2,043
          Manufacturing           550          621          659         549
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                                3,224        2,799        3,743       2,592
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Cost of
 revenues : Consulting          1,529        1,437        2,124       1,045
            Manufacturing       1,089        1,229        1,163         968
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                                2,618        2,666        3,287       2,013
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Gross Margin: Consulting        1,145          741          960         998
              Manufacturing      (539)        (608)        (504)       (419)
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                                  606          133          456         579
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Selling, general &
 administrative                 1,341        1,164        1,464       1,014
Amortization and interest
 expense                          264          236          231         211
Financing costs                     -            -            -           -
----------------------------------------------------------------------------
Loss before income taxes
 recovery                        (999)      (1,267)      (1,239)       (646)
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Income taxes recovery            (312)        (396)        (445)       (236)
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Net loss and comprehensive
 loss                            (687)        (871)        (794)       (410)
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Weighted average number of
 shares outstanding        43,281,277   44,430,709   41,323,108  41,323,108
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Loss per share                 ($0.02)      ($0.02)      ($0.02)     ($0.01)
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EBITDA
Loss before income taxes
 recovery                        (999)      (1,267)      (1,239)       (646)
Amortization-property,
 plant & equipment                171          153          266         260
Amortization of imputed
 interest                          84           78            -           -
Interest                          134          125           89          78
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EBITDA income (loss) per
 share                           (610)        (911)        (884)       (308)
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Assets                         17,686       12,833       13,133      10,420
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Liabilities                    12,005       12,432       10,224       5,548
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Note: EBITDA is not in accordance with GAAP. See note page 9.
Prior periods have been adjusted for comparative purposes.

Business Highlights in the First Quarter

- Keata received a drug establishment license on June 26, 2008 for its manufacturing facility located in Sydney, Nova Scotia. The establishment license was issued after a Good Manufacturing Practices (GMP) inspection was conducted under the authority of the Food and Drugs Act to verify compliance with the applicable regulations. The establishment license is for the manufacturing, testing and packaging of the following drug dosage forms; capsules, powders, solutions and tablets.

- Keata relocated contract manufacturing operations from the Perth, Ontario ("Perth") facility to their state-of-the-art pharmaceutical manufacturing facility in Sydney, Nova Scotia. Included in the relocation from Perth are existing pharmaceutical supply contracts, manufacturing equipment and personnel.

Executive Management and Board of Director Changes

At a Board meeting held August 29, 2008, Bernie Boudreau announced his resignation as Executive Vice President of PharmEng International Inc. effective as of August 31, 2008 and will remain as an independent member of PharmEng's board. Paul Kirkconnell, elected to the Board at the June 30, 2008 AGM resigned from the Board effective August 26, 2008.

About PharmEng International Inc.

PharmEng International Inc., headquartered in Toronto, Canada, is a full-service consulting and contract manufacturing company that serves the pharmaceutical and biotechnology industries in North America and internationally. Consulting services include project management, engineering, GMP, validation, calibration, regulatory compliance and certified training. Contract manufacturing includes pharmaceutical support, formulation development, laboratory testing, and finished solid dosage and liquid products. PharmEng's shares trade on the TSX Venture Exchange under the symbol PII. For more information about PharmEng, please visit the Company's website at www.pharmeng.com.

FORWARD LOOKING STATEMENTS

Certain statements in this press release may include "forward-looking" statements which involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements of PharmEng to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. When used in this press release, such statements use such words as "may", "will", "expect", "anticipate", "project", "believe", "plan", and other similar terminology. The risks and uncertainties are detailed from time to time in reports filed by PharmEng with the securities regulatory authorities in all of the provinces and territories of Canada. New risk factors may arise from time to time and it is not possible for management to predict all of those risk factors or the extent to which any factor or combination of factors may cause actual results, performance and achievements of PharmEng to be materially different from those contained in forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction actual results.