<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
or
[ ] TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________.
Commission File Number: 0-28078
FemRx, Inc.
(Exact name of registrant as specified in its charter)
Delaware . 77-0389440 .
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1221 Innsbruck Drive
Sunnyvale, CA 94089
(Address of principal executive office)
(408) 752-8580
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
reguired to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [ X ] Yes [ ] No
The number of outstanding shares of the registrant's Common Stock, $.001
par value, was 8,832,317 as of November 5, 1997.
1
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FemRx, Inc.
Index
<TABLE>
<CAPTION>
PAGE
<S> <C>
Part I: Financial Information
Item 1: Financial Statements (Unaudited) Condensed Balance
Sheets - September 30, 1997 and December 31, 1996 3
Condensed Statements of Operations - Three months
ended September 30, 1997 and 1996, and the Nine
Months ended September 30, 1997 and 1996 4
Condensed Statements of Cash Flows - Nine Months
ended September 30, 1997 and 1996 5
Notes to Condensed Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II: Other Information 12
Signature 13
Index to Exhibits 14
</TABLE>
2
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Part I: Financial Information
Item 1: Financial Statements
FemRx, Inc.
Condensed Balance Sheets
(In thousands)
Assets
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
--------------- --------------
(unaudited) (see note below)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,619 $ 2,250
Short term investments 9,929 17,668
Accounts receivable, net 532 60
Inventories 751 340
Prepaid and other current assets 298 256
--------------- --------------
Total current assets 13,129 20,574
Property and equipment, net 1,376 1,429
Deposits and other assets 240 37
--------------- --------------
Total assets $ 14,745 $ 22,040
=============== ===============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued
liabilities $ 2,128 $ 1,344
Current portion of capital lease 158 141
--------------- ---------------
Total current liabilities 2,286 1,485
Noncurrent portion of capital lease
obligations 176 272
Stockholders' equity:
Common stock 33,278 33,247
Deferred compensation (477) (696)
Accumulated deficit (20,518) (12,268)
--------------- ---------------
Total stockholders' equity 12,283 20,283
--------------- ---------------
Total liabilities and
stockholders' equity $ 14,745 $ 22,040
=============== ===============
</TABLE>
Note: The balance sheet at December 31, 1996 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
See accompanying notes to condensed financial statements
3
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FemRx, Inc.
Condensed Statements of Operations
(In thousands, except net loss per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1997 1996 1997 1996
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Net sales $ 529 $ --- $ 1,012 $ ---
Costs and expenses:
Cost of goods sold 557 --- 1,927 ---
Research and development 823 1,499 2,401 3,828
Selling, general and
administrative 2,194 1,599 5,556 3,112
--------- --------- --------- --------
Total cost and expenses 3,574 3,098 9,884 6,940
--------- --------- --------- --------
Loss from operations (3,045) (3,098) (8,872) (6,940)
Interest income 186 331 658 705
Interest expense (12) (13) (36) (37)
--------- --------- --------- --------
Net loss $(2,871) $(2,780) $(8,250) $(6,272)
========= ========= ========= ========
Net loss per share $ (0.33) $ (0.31) $ (0.94) $ (0.95)
========= ========= ========= ========
Shares used in computing net
loss per share 8,769 8,837 8,748 6,575
========= ========= ========= ========
</TABLE>
See accompanying notes to condensed financial statements
4
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FemRx, Inc.
Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1997 1996
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (8,250) $ (6,272)
Adjustments to reconcile net loss to net
cash used by operating
activities:
Depreciation and amortization 762 577
Changes in assets and liabilities:
Accounts receivable (472) ---
Inventory (411) (333)
Prepaids and other (42) (254)
assets
Accounts payable and accrued liabilities 784 1,008
----------- ----------
Net cash used in operating activities (7,629) (5,274)
Cash flows from investing activities:
Purchases of securities available-for-sale (30,880) (154,601)
Proceeds from sale of securities
available-for-sale 38,619 133,129
Capital expenditures (527) (861)
Net change in other assets/liabilities (203) (22)
----------- ----------
Net cash provided by (used in) investing activities 7,009 (22,355)
Cash flows from financing activities:
Capital lease transactions (79) 178
Net proceeds from issuance of stock 68 25,047
----------- ----------
Net cash (used in) provided by financing activities (11) 25,225
----------- ----------
Net decrease in cash and cash equivalents (631) (2,404)
Cash and cash equivalents at beginning of period 2,250 3,457
----------- ----------
Cash and cash equivalents at end of period $ 1,619 $ 1,053
=========== ==========
</TABLE>
See accompanying notes to condensed financial statements
5
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FemRx, Inc.
Notes to Condensed Financial Statements
September 30, 1997
(Unaudited)
1. Basis of presentation
The accompanying unaudited financial statements of FemRx, Inc. (the
"Company") have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions for Form
10-Q and Article 10 of Regulation S-X. In the opinion of management all
adjustments necessary to present fairly the financial position, results of
operations, and cash flows at September 30, 1997, and 1996, have been made.
Although the Company believes that the disclosures in these financial statements
are adequate to make the information presented not misleading, certain
information normally included in financial statements and related footnotes
prepared have been condensed or omitted pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC"). The accompanying financial data
should be reviewed in conjunction with the audited financial statements and
notes thereto included in the Company's Annual Report to Stockholders, and Form
10-K filed with the SEC (File No 000-28078) on March 26, 1997.
The results of operations for the nine months ended September 30, 1997 are
not necessarily indicative of the results that may be expected for the fiscal
year ending December 31, 1997.
2. Recent accounting pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded. The impact of Statement 128 is expected to
result in no change to the Company's net loss per share for the quarters ended
September 30, 1997 and 1996, as stock options have been excluded from the
current computation as they are anti-dilutive.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, Disclosures about Segments of an Enterprise and Related Information.
Statement No. 131 establishes standards for the way that public business
enterprises report information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
Statement No. 131 is effective for financial statements for fiscal years
beginning after December 15, 1997. The adoption of Statement No. 131 will have
no impact on the Company's results of operation, financial position or cash
flows.
3. Inventories
Inventories are stated at lower of cost (first-in, first-out) or market and
consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Raw materials $ 111 $ 46
Work-in-process 274 226
Finished goods 366 68
------------ ------------
Total $ 751 $ 340
</TABLE>
6
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4. Stockholders' equity
In May, 1997 the Company's 1995 Stock Option Plan was amended to increase
the aggregate number of shares of Common Stock authorized for issuance under
such plan by 800,000 to 1,955,625 shares.
7
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Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
financial statements and notes thereto included in Part I Item 1 of this
quarterly report and the audited financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the year ended December 31, 1996 contained in the Company's
Annual Report to Stockholders and Form 10-K filed with the SEC (File No
000-28078) on March 26, 1997.
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section, as well as in
the sections entitled Overview, Results of Operations, Liquidity and Capital
Resources, and Additional Factors That May Effect Future Results, and those
discussed in the Company's Annual Report to Stockholders, and Form 10-K filed
with the SEC (File No 000-28078) on March 26, 1997.
Overview
Since its inception, the Company has been engaged in the development of its
OPERA STAR System and related products, establishment of its administrative
offices, development of its sales and marketing organization and establishment
of its manufacturing capabilities. The OPERA STAR System is an innovative
surgical system for the diagnosis and treatment of gynecologic disorders. OPERA
stands for Out-Patient Endometrial Resection/Ablation. OPERA is a less invasive
alternative to hysterectomy for patients suffering from abnormal uterine
bleeding. OPERA consists of diagnosis by a gynecologic surgeon and the use of
the Company's OPERA STAR resectoscope under visual guidance to collect a
pathology sample, resect the endometrial lining together with any submucosal
fibroids and coagulate the entire uterine cavity. The Company has also developed
a proprietary fluid management system, called the Flo-Stat System, for use in
gynecologic procedures. In September of 1997, the Company introduced Diva, a
proprietary laparoscopic morcellator, designed to be used in surgical myomectomy
as reproductive therapy (SMART) procedures to assist in the removal of
fibroids.
The Company markets its products through its Center of Excellence and
National Providers of Excellence programs which are partnerships between FemRx
and healthcare providers aimed at increasing the awareness of the OPERA
procedure through jointly sponsored patient outreach and physician training.
These programs provides a hospital or surgical center with an OPERA STAR System
and a Flo-Stat System which allow gynecologic surgeons to perform the OPERA
procedure. As part of these programs, the hospital or surgical center purchases
an initial stocking order of disposable resectoscopes. The Company has deferred
from revenue the estimated number of disposable resectoscopes that would not be
used in the period. The revenue from these disposable resectoscopes will be
recognized over their estimated period of usage.
The Company has experienced significant operating losses since inception
and, as of September 30, 1997, had an accumulated deficit of approximately $20.5
million. The Company expects to continue to generate substantial losses due to
increased operating expenditures primarily attributed to research and
development activities, including clinical trials, and development of commercial
manufacturing, marketing and sales capabilities. The Company anticipates that
its research and development expenses will increase in the future to support
increased product development activities, including clinical trials, and that
its selling, general and administrative expenses will increase due to increased
marketing and sales activities. The Company expects that its results of
operations will fluctuate significantly from quarter to quarter due to a variety
of factors including the timing of such expenditures, timing in the receipt of
orders, the rate of acceptance of the Company's products in the marketplace,
introduction of new products by competitors of the Company, pricing of
competitive products and the cost and effect of promotional discounts and
marketing programs. The Company's gross margins, if any, will be depressed for
8
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several quarters due to manufacturing start-up and overhead costs allocated over
low production volumes. There can be no assurance that the Company will ever
achieve significant revenue or profitability.
Results of Operations
Three months ended September 30, 1997 and September 30, 1996
Net Sales were $529,000 for the three months ended September 30, 1997. No
net sales were recorded in the three months ended September 30, 1996.
Cost of goods sold was $557,000 for the three months ended September 30,
1997, primarily consisting of costs related to initial manufacturing. There was
no cost of goods sold in the three months ended September 30, 1996.
Research and development expenses for the three months ended September 30,
1997 decreased to $823,000 from $1,499,000 for the three months ended September
30, 1996, due primarily to costs associated with start-up manufacturing incurred
during the three months ended September 30, 1996.
Selling, general and administrative expenses for the three months ended
September 30, 1997 increased to $2,194,000 from $1,599,000 for the three months
ended September 30, 1996, due primarily to the continued development of the
Company's marketing and sales organization, including the hiring of additional
personnel.
Interest income for the three months ended September 30, 1997 decreased to
$186,000 from $331,000 for the three months ended September 30, 1996, due to
interest received on lower average cash balances.
Nine months ended September 30, 1997 and September 30, 1996
Net Sales were $1,012,000 for the nine months ended September 30, 1997. No
net sales were recorded in the nine months ended September 30, 1996.
Cost of goods sold was $1,927,000 for the nine months ended September 30,
1997, primarily consisting of costs related to initial manufacturing. There was
no cost of goods sold in the nine months ended September 30, 1996.
Research and development expenses for the nine months ended September 30,
1997 decreased to $2,401,000 from $3,828,000 for the nine months ended September
30, 1996, due primarily to costs associated with start-up manufacturing incurred
during the nine months ended September 30, 1996.
Selling, general and administrative expenses for the nine months ended
September 30, 1997 increased to $5,556,000 from $3,112,000 for the nine months
ended September 30, 1996, due primarily to the continued development of the
Company's marketing and sales organization, including the hiring of additional
personnel.
Interest income for the nine months ended September 30, 1997 decreased to
$658,000 from $705,000 for the nine months ended September 30, 1996, due to
interest received on lower average cash balances.
Liquidity and Capital Resources
Net cash used by operations in the nine months ended September 30, 1997 was
$7,629,000 primarily due to the Company's funding of increased sales and
marketing activity and on-going research and development expenses. During the
first nine months of 1997 the Company used $527,000 to purchase equipment for
operations.
9
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The Company believes that its existing cash and short term investments will
be sufficient to finance its capital requirements through at least June 1998.
The Company's future liquidity and capital requirements will depend on numerous
factors, including the resources necessary to develop, manufacture and market
products and the cost of obtaining and enforcing patents important to the
Company's business. The Company may be required to raise additional funds
through public or private financing, collaborative relationships or other
arrangements. There can be no assurance that such additional funding, if needed,
will be available on attractive terms to the Company, or at all.
Additional Factors That May Affect Future Results
Uncertainty of Market Acceptance
The Company believes that market acceptance of the Company's products will
depend, in part, on the Company's ability to provide evidence to the medical
community of the safety, efficacy and cost-effectiveness of its products and the
procedures in which these products are intended to be used. To date, the OPERA
STAR System has only been used to treat a limited number of patients and no
published reports regarding the use of the OPERA STAR System exist to support
the Company's marketing effort. Furthermore, there is little long-term follow-up
data on patients who underwent OPERA using the OPERA STAR System. If the Company
is not able to demonstrate long-term success with the OPERA STAR System, market
acceptance would be materially adversely affected.
The Company's OPERA STAR System is designed for use by a gynecologic
surgeon trained in the OPERA procedure. Market acceptance of the Company's
products will require a willingness on the part of gynecologic surgeons to be
trained to perform OPERA using the Company's products. Furthermore, market
acceptance may be limited because some physicians and payors, recognizing that
the removal of the uterus in a hysterectomy precludes the potential reoccurrence
of uterine disorders, will be reluctant to substitute the OPERA procedure (which
allows the patient to retain her uterus) for hysterectomy. The Company believes
that most gynecologists view hysterectomy as an appropriate therapy to treat a
variety of uterine disorders. As a result, the Company believes that
recommendations and endorsements of its products by influential physicians will
be essential for market acceptance of its products. No assurances can be made
that the Company will receive such recommendations or endorsements.
The Company further believes that the ability of health care providers to
obtain adequate reimbursement for OPERA procedures using the OPERA STAR System
will be critical to market acceptance of the Company's products. There can be no
assurance that the cost of procedures in which the OPERA STAR System is used
will be adequately reimbursed by third-party payors under existing reimbursement
policies and codes. The Company has no experience in gaining reimbursement in
the U.S. or any foreign market. The Company prices its disposable resectoscope
at a premium over the prices currently charged for the disposable components of
competitive resectoscopes. Failure of the Company's products to achieve market
acceptance would have a material adverse effect on the Company's business,
financial condition and results of operations
Limited Operating Experience
The Company has a limited history of operations. Since its incorporation in
November 1994, the Company has focused primarily on research and product
development efforts, clinical trials and seeking regulatory clearance or
approval for the OPERA STAR System, the Flo-Stat System and Diva device. The
Company has never generated significant revenues, and has limited experience
manufacturing in commercial quantities, marketing or selling products. The
Company has experienced significant operating losses since inception and expects
these losses to continue for the next several years. There can be no assurance
that the Company will be successful in commercializing the OPERA STAR System,
the Flo-Stat System and the Diva device or any other products of the Company.
Whether the Company can successfully manage the transition to a large-scale
commercial enterprise will depend upon a number of factors, including obtaining
selected international regulatory and reimbursement approvals for its existing
or potential products, establishing its commercial manufacturing capability,
developing its U.S. marketing and selling capabilities, and establishing a
distribution network in international markets. Failure to make such a transition
successfully would have a material adverse effect on the Company's business,
financial condition and results of operations.
10
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Additional Capital Requirements
The Company's future liquidity and capital requirements will depend on
numerous factors including the resources necessary to develop, manufacture and
market its products and the cost of obtaining and enforcing patents important to
the Company's business. The Company may be required to raise additional funds
through public or private financing, collaborative relationships or other
arrangements. There can be no assurance that such additional funding, if needed,
will be available on terms attractive to the Company, or at all. Furthermore,
any additional equity financing may be dilutive to stockholders, and debt
financing, if available, may involve restrictive covenants. The failure of the
Company to raise capital when needed could have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence on OPERA STAR System and Flo-Stat System
The OPERA STAR System and Flo-Stat System are currently the Company's main
products. The Company expects that the OPERA STAR System and, the Flo-Stat
System, will account for most of the Company's revenues for the foreseeable
future. Even though the OPERA STAR System and Flo-Stat System have received FDA
clearance, there can be no assurance that the Company can successfully market or
realize any significant revenues from these products on a timely basis. The
Company's products will require further development and regulatory clearances or
approvals before they can be marketed internationally. There can be no assurance
that the Company's development and marketing efforts will be successful or that
the OPERA STAR System, Flo-Stat System, the Diva device or other products
developed by the Company will be capable of being manufactured in commercial
quantities at acceptable costs. Failure to manufacture in commercial quantities
at acceptable cost the OPERA STAR System, Flo-Stat System, Diva device and other
products would have a material adverse effect on the Company's business,
financial condition and results of operations.
History of Losses
The Company has experienced significant operating losses since its
inception and, as of September 30, 1997 had an accumulated deficit of
approximately $20.5 million. The Company expects to generate substantial
additional losses for the next several years due to increased operating
expenditures primarily attributable to research and development activities,
including clinical trials, seeking regulatory and reimbursement approvals and
establishing manufacturing, marketing and sales activities. There can be no
assurance that the Company will ever achieve significant revenue or
profitability. Failure to achieve significant revenue or profitability would
have a material adverse effect on the Company's business, financial condition
and results of operations.
11
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Part II: Other Information
Item 1. Legal Proceedings
None
Item 2. Change in Securities
None
Item 3. Defaults in Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
12
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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.
FemRx, Inc.
By: /s/ EDWARD W. UNKART
--------------------
Edward W. Unkart
Vice President, Finance and Administration,
Chief Financial Officer and Assistant Secretary
(Duly Authorized and Principal Financial and
Accounting Officer)
Date: November 11, 1997
13
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FemRx, Inc.
Index to Exhibits
Exhibit
Number___ Exhibit Page
None
14
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEETS
AND STATEMENTS OF OPERATIONS FOUND ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,619
<SECURITIES> 9,929
<RECEIVABLES> 532<F1>
<ALLOWANCES> 0
<INVENTORY> 751<F1>
<CURRENT-ASSETS> 13,129
<PP&E> 1,376<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,745
<CURRENT-LIABILITIES> 2,286
<BONDS> 0
0
0
<COMMON> 33,278
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 14,745
<SALES> 1,012
<TOTAL-REVENUES> 1,012
<CGS> 1,927
<TOTAL-COSTS> 1,927
<OTHER-EXPENSES> 2,401<F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36
<INCOME-PRETAX> (8,250)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,250)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,250)
<EPS-PRIMARY> (0.94)
<EPS-DILUTED> 0
<FN>
<F1>ITEM SHOWN NET OF ALLOWANCES, CONSISTENT WITH THE BALANCE
SHEET PRESENTATION.
<F2>ITEM SHOWN NET OF DEPRECIATION, CONSISTENT WITH THE BALANCE
SHEET PRESENTATION.
<F3>ITEM CONSISTS OF RESEARCH AND DEVELOPMENT.
</FN>
</TABLE>
