<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
() TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1010397
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PHYSIOMETRIX, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0248588
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(State or other jurisdiction of (IRS Employer identification
incorporation or organization) No.)
Five Billerica Park, N. Billerica, MA 01862-1256
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(Address of principal executive offices) (Zipcode)
(508) 670-2422
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed 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
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. ITEM 1 - Yes _X_ No ___
ITEM 2 - Yes _X_ No ___
The number of shares outstanding of each of the issuer's classes of common stock
as of
CLASS OUTSTANDING AT JUNE 30, 1996
----- ----------------------------
Common Stock, $.001 par value 5,551,027
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PHYSIOMETRIX, INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE NO.
ITEM 1 Financial Statements
Balance Sheets as of December 31, 1995 3
and June 30, 1996
Statements of Operations for the Three 4
Months and Six Months ended June 30,
1995 and 1996
Statements of Cash Flows for the Six 5
Months ended June 30, 1995 and 1996
Notes to Financial Statements 6
ITEM 2 Management's Discussion and Analysis of 7
Financial Condition and Results of
Operations
PART II OTHER INFORMATION 11
SIGNATURES 12
2
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PHYSIOMETRIX, INC.
BALANCE SHEETS
(UNAUDITED)
DECEMBER 31 JUNE 30
1995 1996
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 432,126 $ 19,251,356
Short-term investments - 500,000
Accounts receivable, net 90,912 104,542
Inventories, net 171,862 175,411
Prepaid expenses 9,357 18,615
----------- ------------
Total current assets 704,257 20,049,924
Property, plant and equipment 447,899 545,350
Less allowances for depreciation (173,474) (220,157)
----------- ------------
274,425 325,193
Due from officer 63,000 84,000
Other assets 6,318 8,568
----------- ------------
Total assets $ 1,048,000 $ 20,467,685
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 255,864 $ 189,251
Accrued expenses 253,089 469,612
Convertible notes payable to
stockholders 308,972 -
Current portion of notes payable to
stockholder 101,042 101,042
Short-term debt - 508,706
----------- ------------
Total current liabilities 918,967 1,268,611
Notes payable to stockholder, net of
current portion 82,089 22,238
Stockholders' equity:
Preferred stock: $.001 par value;
10,000,000 shares authorized:
Series D Convertible Preferred Stock,
2,965,600 shares issued and outstanding 2,966 -
Series E Convertible Preferred Stock,
1,062,062 shares issued and outstanding 1,062 -
Common stock: $.001 par value, 50,000,000
shares authorized; 134,154 shares in 1995
and 5,551,027 shares in 1996 issued and
outstanding 134 5,551
Additional paid-in-capital 10,019,496 30,508,838
Accumulated deficit (9,976,714) (11,337,553)
----------- ------------
Total stockholders' equity 46,944 19,176,836
----------- ------------
Total liabilities and stockholders'
equity $ 1,048,000 $ 20,467,685
----------- ------------
----------- ------------
SEE ACCOMPANYING NOTES.
3
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PHYSIOMETRIX, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------- -------------------------
1995 1996 1995 1996
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 75,951 $ 78,732 $ 138,839 $ 214,958
Costs and expenses:
Cost of goods sold 300,249 292,841 660,678 588,022
Research and development 115,458 237,366 179,310 416,481
Selling, general, and administrative 379,866 363,646 817,434 694,867
---------- ---------- ----------- -----------
795,573 893,853 1,657,422 1,699,370
---------- ---------- ----------- -----------
Operating loss (719,622) (815,121) (1,518,583) (1,484,412)
Interest income 23,049 167,515 55,412 171,522
Interest expense (9,522) (40,080) (19,919) (47,949)
---------- ---------- ----------- -----------
Net loss $ (706,095) $ (687,686) $(1,483,090) $(1,360,839)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Net loss per share $ (0.19) $ (0.14) $ (0.41) $ (0.32)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Shares used in computing net loss per share 3,650,934 4,940,199 3,650,934 4,299,128
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
PHYSIOMETRIX, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
1995 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(1,483,090) $(1,360,839)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 48,277 46,683
Changes in operating assets and liabilities:
Accounts receivable (4,971) (13,630)
Inventories (51,556) (3,549)
Prepaid expenses and other assets (14,217) (32,508)
Accounts payable and accrued expenses (123,711) 149,910
----------- -----------
Net cash used in operating activities (1,629,268) (1,213,933)
INVESTING ACTIVITIES:
Purchase of equipment (65,821) (97,451)
Purchase of short-term investments - (500,000)
----------- -----------
Net cash used in investing activities (65,821) (597,451)
FINANCING ACTIVITIES:
Proceeds from notes payable to stockholders - 380,460
Proceeds from debt financing - 508,706
Principal payments on notes payable to stockholders (42,964) (59,851)
Proceeds from issuance of common stock, net 2,943 19,801,299
----------- -----------
Net cash provided by (used in) financing activities (40,021) 20,630,614
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,735,110) 18,819,230
Cash and cash equivalents at beginning of period 3,019,483 432,126
----------- -----------
Cash and cash equivalents at end of period $ 1,284,373 $19,251,356
----------- -----------
----------- -----------
NON CASH FINANCING ACTIVITIES:
Conversion of notes payable to common stock - $ (689,432)
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in accordance with the instructions for Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.
Operating results for the interim periods presented are not necessarily
indicative of the results that may be expected for the year ended December 31,
1996 or any other interim period. The accompanying financial statements should
be read in conjunction with the audited financial statements for the period
ending December 31, 1995 included in the Registrant's Registration Statement on
Form S-1 (Reg. No. 333-2138).
NOTE B - INVENTORIES
Inventories consist of the following:
December 31 June 30
1995 1996
----------- ----------
Raw materials $ 120,878 $117,328
Work-in-process 20,622 31,456
Finished goods 30,362 26,627
----------- ----------
$ 171,862 $175,411
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----------- ----------
NOTE C - INITIAL PUBLIC OFFERING
On April 30, 1996, the Company sold 2,000,000 shares of common stock at
$11.00 per share through an initial public offering. Net proceeds from this
transaction, before deducting expenses payable by the Company, were $20,460,000.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
Since its inception in January 1990, Physiometrix has been engaged
primarily in the design and development and more recently the manufacture and
sale of noninvasive, advanced medical products. The Company's products
incorporate proprietary materials and electronics technology and are used in
neurological monitoring applications. The Company's initial products are its
e-Net headpiece and disposable HydroDot biosensors and custom electronics, which
are packaged as the HydroDot NeuroMonitoring System. The Company is also
developing two additional neurological monitoring products, the Equinox EEG
System and the Patient State Analyzer. The Company believes that the Patient
State Analyzer, Equinox EEG System and other potential products currently under
development will be subject to FDA clearance by 510(k) notification; however the
FDA may require the Company to submit a pre-market approval ("PMA") application
for such products. The Company submitted a 510(k) application to the FDA for
the Equinox EEG System in June, 1996. There can be no assurance that the
Company will be able to obtain necessary 510(k) clearance or PMA application
approval to market the Patient State Analyzer or any other products on a timely
basis, if at all.
Physiometrix has a limited history of operations and has experienced
significant operating losses since its inception. As of June 30, 1996, the
Company had an accumulated deficit of approximately $11.3 million. The HydroDot
NeuroMonitoring System is currently the Company's principal commercial product
and is expected to account for most of the Company's revenue through 1997.
The Company anticipates that its operating losses will continue for at
least the next few years as the Company continues to expend substantial
resources to expand marketing and sales activities, scale up of manufacturing
capabilities, increase research and development and support regulatory and
reimbursement approvals. There can be no assurance that the Company will ever
achieve significant commercial revenues or profitability or that profitability,
if achieved, will be sustained.
The Company anticipates that its results of operations will fluctuate on a
quarterly basis for the foreseeable future due to several factors, including
actions relating to regulatory and reimbursement matters, the extent to which
the Company's products gain market acceptance, introduction of alternative means
for neurophysiological monitoring and competition. Results of operations will
also be affected by the progress of clinical trials and in-house development
activities, and the extent to which the Company establishes distribution
channels for its products domestically and internationally.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains certain forward looking statements. The
Company's actual results of operations may differ materially from those
anticipated by such forward looking statements. Factors that may affect
future results of operations include those described herein.
7
<PAGE>
THREE MONTHS ENDED JUNE 30, 1995 AND 1996
REVENUES
Revenues were $78,732 for the three months ended June 30, 1996 which was
approximately the same as $75,951 for the three months ended June 30, 1995.
GROSS MARGIN
Gross margin was $(214,109) for the three months ended June 30, 1996 which
was approximately the same as $(224,298) for the three months ended June 30,
1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased 4% to $363,646 for
the three months ended June 30, 1996 from $379,866 for the three months ended
June 30, 1995. This decrease is primarily the result of lower personnel costs
and facilities costs due to the relocation of the Company's operations from
California to Massachusetts in late 1994 and early 1995.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consisting principally of salaries,
consulting fees and clinical trial expenses increased 106% to $237,366 for the
three months ended June 30, 1996 from $115,458 for the three months ended June
30, 1995. This increase is primarily the result of ongoing development and
clinical evaluation for the Company's Patient State Analyzer, development of the
Equinox low cost EEG System and continued enhancements to and support for the
Company's existing products.
INTEREST INCOME
Interest income increased $144,466 to $167,515 for the three months ended
June 30, 1996, from $23,049 for the three months ended June 30, 1995 as a result
of higher cash balances from the Company's initial public offering. Interest
expense increased $30,558 to $40,080 for the three months ended June 30, 1996
from $9,522 for the three months ended June 30, 1995. This increase is the
result of additional notes payable and borrowings under a revolving line of
credit.
8
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SIX MONTHS ENDED JUNE 30, 1995 AND 1996
REVENUES
Revenues increased 55% to $214,958 for the six months ended June 30, 1996
from $138,839 for the six months ended June 30, 1995. This growth was primarily
the result of sales of the Company's NeuroLink product, which was introduced in
the fourth quarter of 1995.
GROSS MARGIN
Gross margin improved from $(521,839) for the six months ended June 30,
1995 to $(373,064) for the six months ended June 30, 1996. This improvement was
primarily the result of a higher sales volume and NeuroLink product sales. To
a lesser extent lower personnel costs contributed to the gross margin
improvement.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased 15% to $694,867 for
the six months ended June 30, 1996 from $817,434 for the six months ended June
30, 1995. This decrease is the result of lower personnel costs and facilities
costs due to the relocation of the Company's operations from California to
Massachusetts in late 1994 and early 1995.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consisting principally of salaries,
consulting fees and clinical trial expenses increased 132% to $416,481 for the
six months ended June 30, 1996 from $179,310 for the six months ended June 30,
1995. This increase is primarily the result of ongoing development and clinical
evaluation for the Company's Patient State Analyzer, development of the Equinox
low cost EEG System and continued enhancements to and support for the Company's
existing products.
INTEREST INCOME
Interest income increased $116,110 to $171,522 for the six months ended
June 30, 1996 from $55,412 for the six months ended June 30, 1995. This
increase is the result of higher cash balances from the Company's initial public
offering. Interest expense increased $28,030 to $47,949 for the six months
ended June 30, 1996 from $19,919 for the six months ended June 30, 1995. This
increase is the result of additional notes payable and borrowings under a
revolving line of credit.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996 the Company had $19,251,356 in cash and cash
equivalents as compared to $432,126 at December 31, 1995. On May 3, 1996, the
Company received net proceeds of $20,460,000 (prior to offering expenses)
relating to the initial public offering of 2,000,000 shares of common stock.
The Company expects to use the net proceeds to fund development activities and
expansion of marketing, sales and manufacturing activities for the Company's
HydroDot NeuroMonitoring System and other products. The Company expects to use
the balance of the net proceeds for working capital, general and administrative
expenses and general corporate purposes.
Cash used for operating activities was $1,213,933 for the six months ended
June 30, 1996. The lower use of cash in 1996 as compared to $1,629,268 used
for operating activities for the six months ended June 30, 1995, was primarily
the result of a lower net loss and an increase in the accounts payable and
accrued expenses. $20,630,614 in cash was provided by financing activities.
This was the result of the Company receiving $19,784,623 from its initial public
offering and $500,000 under its revolving credit agreement.
In March 1996, the Company entered into a one year $500,000 revolving
credit agreement with a lending institution. Under the terms of the credit
agreement, the Company may make borrowings based on 80% of eligible accounts
receivable and various percentages of most fixed assets and inventory.
Borrowings under the credit agreement bear interest at 12.5% and are
collateralized by a $500,000 certificate of deposit which allows full
utilization of the facility.
Although the Company believes that the proceeds from the initial public
offering together with current cash balances and cash generated from future
sales of products will be sufficient to meet the Company's operating and capital
requirements at least through 1997, there can be no assurance that the Company
will not require additional financing within this time frame. There can be no
assurance that additional financing, if required, will be available on
satisfactory terms if at all. In addition, the Company may in the future seek
to raise additional funds through bank facilities, debt or equity offerings or
other sources of capital. The Company's future liquidity and capital
requirements will depend on numerous factors, including progress of the
Company's clinical trials, actions relating to regulatory and reimbursement
matters, the costs and timing of expansion of marketing, sales, manufacturing
and product development activities, the extent to which the Company's products
gain market acceptance, and competitive developments.
10
<PAGE>
PHYSIOMETRIX, INC.
JUNE 30, 1996
PART II Other Information
ITEM 1 Legal Proceedings:
Not applicable.
ITEM 2 Changes in Securities:
Not applicable.
ITEM 3 Defaults upon Senior Securities:
Not applicable.
ITEM 4 Submission of matters to a vote of security holders:
On April 25, 1996, the Company held its 1996 annual meeting of
shareholders. The matters voted upon at the meeting and the vote with respect
to each such matter are set forth below:
1. Election of John A. Williams, Harold C. Hohbach, Annette Campbell-White,
Thomas J. Toy, Thomas Baruch, Mir A. Imran and Thomas J. Fogarty as directors of
the Company:
NOMINEE FOR WITHHELD
------- --- --------
John A. Williams 3,020,530 0
Harold C. Hohbach 3,020,530 0
Annette Campbell-White 3,020,530 0
Thomas J. Toy 3,020,530 0
Thomas Baruch 3,020,530 0
Mir A. Imran 3,020,530 0
Thomas J. Fogarty 3,020,530 0
2. Approval of a change in the Company's state of incorporation from California
to Delaware by means of a merger into a wholly-owned Delaware subsidiary:
For: 3,020,530 Against: 0 Abstain: 0
11
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3. Adoption of the 1996 Director Option Plan:
For: 3,020,530 Against: 0 Abstain: 0
4. Adoption of the 1996 Employee Stock Purchase Plan:
For: 3,020,530 Against: 0 Abstain: 0
5. Approval of an amendment to the Company's 1991 Incentive Stock Plan:
For: 3,020,530 Against: 0 Abstain: 0
6. Ratification of the selection of Ernst & Young LLP as the independent public
accountants of the Company for the fiscal year ending December 31, 1996:
For: 3,020,530 Against: 0 Abstain: 0
ITEM 5 Other information:
None.
ITEM 6 Exhibits and reports on Form 8-K:
(a) Exhibits - None
27.1 Financial Data Schedule
(b) Reports on Form 8-K - None
12
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PHYSIOMETRIX, INC.
JUNE 30, 1996
SIGNATURE
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.
PHYSIOMETRIX, INC.
DATE: August 13, 1996
BY: /s/ John A. Williams
---------------------------
John A. Williams
President and Chief
Executive Officer
BY: /s/ Michael J. Tubridy
---------------------------
Michael J. Tubridy
Duly Authorized Officer and
Chief Financial Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 19,251,356
<SECURITIES> 500,000
<RECEIVABLES> 104,542
<ALLOWANCES> 0
<INVENTORY> 175,411
<CURRENT-ASSETS> 20,049,924
<PP&E> 325,193
<DEPRECIATION> 220,157
<TOTAL-ASSETS> 20,467,685
<CURRENT-LIABILITIES> 1,268,611
<BONDS> 0
0
0
<COMMON> 5,551
<OTHER-SE> 19,171,285
<TOTAL-LIABILITY-AND-EQUITY> 20,467,685
<SALES> 214,958
<TOTAL-REVENUES> 214,958
<CGS> 588,022
<TOTAL-COSTS> 1,699,370
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,484,412
<INTEREST-EXPENSE> 47,949
<INCOME-PRETAX> (1,360,839)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,360,839)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,360,839)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> (0.32)
</TABLE>
