<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 September 30, 1998
OR
() TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 1010397
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PHYSIOMETRIX, INC.
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(Exact name of registrant as specified in its charter)
Delaware 77-0248588
---------- ------------
(State or other jurisdiction of (IRS Employer identification
incorporation or organization) No.)
Five Billerica Park, N. Billerica, MA 01862-1256
------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(978) 670-2422
----------------------------------------------------
(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 September 30, 1998
-------- --------------------
Common Stock, $.001 par value 5,686,096
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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,
1997 and September 30, 1998........... 3
Statements of Operations for the
Three Month and Nine Month
Periods ended September 30, 1997
and 1998.............................. 4
Statements of Cash Flows for the
Nine Months ended September 30,
1997 and 1998......................... 5
Notes to Financial Statements........... 6
ITEM 2 Management's Discussion and
Analysis of Financial Condition
and Results of Operations............. 7
PART II OTHER INFORMATION................................ 12
SIGNATURES............................................... 13
2
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PHYSIOMETRIX, INC.
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31 September 30
1997 1998
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 9,104,147 $ 5,974,307
Short-term investments...................... 2,484,139 --
Accounts receivable, net.................... 311,194 49,851
Inventories, net............................ 640,131 250,480
Prepaid expenses............................ 81,631 129,823
----------- ------------
Total current assets...................... 12,621,242 6,404,461
Property, plant and equipment.................... 1,152,605 737,600
Less allowances for depreciation................. (490,195) (356,200)
----------- ------------
662,410 381,400
Due from officer................................. 84,000 84,000
Other assets..................................... 8,518 6,318
----------- ------------
Total assets.............................. $13,376,170 $ 6,876,179
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................ $ 621,353 $ 152,052
Accrued expenses............................ 444,765 432,830
----------- ------------
Total current liabilities................. 1,066,118 584,882
Stockholders' equity
Preferred stock: $.001 par value; 10,000,000
shares authorized:........................ -- --
Common stock: $.001 par value, 50,000,000
shares authorized; 5,640,825 shares in
1997 and 5,686,096 shares in 1998 issued
and outstanding........................... 5,641 5,686
Additional paid-in capital....................... 30,698,595 30,758,040
Accumulated deficit.............................. (18,394,184) (24,472,429)
----------- ------------
Total stockholders' equity..................... 12,310,052 6,291,297
----------- ------------
Total liabilities and stockholders' equity..... $13,376,170 $ 6,876,179
----------- ------------
----------- ------------
</TABLE>
See accompanying notes
3
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PHYSIOMETRIX, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------- ----------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues ..................................... $ 476,293 $ 105,407 $ 898,516 $ 438,573
Costs and expenses:
Cost of goods sold.......................... 559,052 340,102 1,362,072 1,597,540
Research and development.................... 614,736 897,631 1,705,568 3,374,626
Selling, general and Administrative......... 790,999 332,488 1,988,654 1,619,923
Equipment writeoff.......................... - - - 266,504
------------ ------------ ------------ ------------
1,964,787 1,570,221 5,056,294 6,858,593
------------ ------------ ------------ ------------
Operating loss................................ (1,488,494) (1,464,814) (4,157,778) (6,420,020)
Interest income............................... 190,997 92,762 617,143 341,775
Interest expense.............................. (1,237) - (21,910) -
------------ ------------ ------------ ------------
Net loss..................................... $ (1,298,734) $ (1,372,052) $ (3,562,545) $ (6,078,245)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net loss per share........................... $ (0.23) $ (0.24) $ (0.64) $ (1.07)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Shares used in computing net loss
per common share............................. 5,628,861 5,686,096 5,609,407 5,670,010
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See accompanying notes
4
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PHYSIOMETRIX, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
------------------------------------
1997 1998
--------------- ---------------
<S> <C> <C>
Operating activities:
Net loss............................................... $ (3,562,545) $ (6,078,245)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization..................... 149,728 123,941
Equipment writeof................................. - 287,725
Stock compensation................................ 53,000 -
Changes in operating assets and liabilities:
Accounts receivable ........................... (335,747) 261,343
Inventories ................................... (430,149) 389,651
Prepaid expenses and other assets.............. (16,036) (45,992)
Accounts payable and accrued expenses.......... (27,737) (481,236)
-------------- --------------
Net cash used in operating activities ................. (4,169,486) (5,542,813)
Investing activities:
Purchase of equipment.................................. (248,070) (130,656)
Purchase of available-for-sale securities.............. (103,823,010) (81,727,423)
Proceeds from maturity of
available-for-sale securities........................ 109,128,921 84,211,562
-------------- --------------
Net cash provided by investing activities.............. 5,057,841 2,353,483
Financing activities:
Proceeds from issuance of common stock, net............ 47,836 59,490
Principal payments on demand note...................... (541,334) -
Principal payments on notes payable to stockholders.... (62,718) -
-------------- --------------
Net cash provided by (used in) financing activities.... (556,216) 59,490
-------------- --------------
Net increase (decrease) in cash and cash equivalents... 332,139 (3,129,840)
Cash and cash equivalents at beginning of period....... 328,331 9,104,147
-------------- --------------
Cash and cash equivalents at end of period............. $ 660,470 $ 5,974,307
-------------- --------------
-------------- --------------
</TABLE>
5
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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, 1998 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, 1997.
Note B - Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31 September 30
1997 1998
----------- ------------
<S> <C> <C>
Raw materials $ 405,446 $ 167,218
Work-in-process 67,391 53,241
Finished goods 167,294 30,021
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$ 640,131 $ 250,480
--------- ---------
--------- ---------
</TABLE>
Note C - Net Loss Per Common Share
In accordance with Financial Accounting Standards Board statement No.
128, Earnings per share, the company is required to calculate basic and
diluted earnings per share. Basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings
per share is very similar to the previously reported primary diluted earnings
per share. Basic and diluted earnings per share are the same for the Three
Month and Nine Month Periods ended September 30,1998 and 1997.
Note D - Discontinued Product Line
The Company discontinued its Equinox Product Line during May, 1998. As
a result, the Company incurred costs for writedowns of fixed assets and
inventory and for severance related to head count reductions aggregating
approximately $650,000 in the second quarter, ended June 30, 1998.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following discussion of the financial condition and results of
operations of Physiometrix, Inc. should be read in conjunction with the
Financial Statements and related Notes thereto included elsewhere in this
Form 10-Q. This Form 10-Q contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. Actual events or results may differ
materially from those projected in the forward-looking statements as a result
of the factors described herein and other risks detailed from time to time in
the Company's SEC reports, including its annual report on Form 10-K for the
year ended December 31, 1997. Such forward-looking statements include, but
are not limited to, statements concerning (i) business strategy; (ii)
products under development; (iii) marketing and distribution; (iv) research
and development; (v) manufacturing; (vi) competition; (vii) government
regulation especially as it relates to FDA approvals; (viii) third-party
reimbursement (ix) operating and capital requirements and (x) clinical trials.
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 which
incorporate proprietary materials and electronics technology 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 also
has two additional neurological monitoring products, the Equinox EEG System
which was commercially introduced in February 1997 and subsequently
discontinued in June 1998 and the Patient State Analyzer, which is currently
in clinical trials. The Company believes that the Patient State Analyzer
will be subject to FDA 510(k) clearance notification. However, the FDA may
require the Company to submit a premarket approval ("PMA") application for
this product. 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 September 30, 1998,
the Company had an accumulated deficit of approximately $24.5 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 1998. The Company anticipates that its operating results
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
7
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channels for its products domestically and internationally. There can be no
assurance the Company will achieve significant commercial revenues or
profitability.
Three Months Ended September 30, 1997 and 1998
Revenues
Revenues decreased 78% to $105,407 for the three months ended September
30, 1998 from $476,293 for the three months ended September 30, 1997. This
decrease is primarily the result of a lower level of sales of the Company's
Equinox EEG System, which was discontinued in the second quarter of 1998 due
to slow demand in the market and increased competition.
Cost of Goods Sold
Cost of goods sold decreased 39% to $340,102 for the three months ended
September 30, 1998 from $559,052 for the three months ended September 30,
1997. This decrease was primarily due to discontinuance of the Company's
Equinox product line.
Gross Margin
The negative gross profit margin results from fixed headcount and
overhead in the quality assurance and manufacturing groups. The gross margin
produced by the e-Net/HydroDot business does not provide enough dollars to
cover these fixed expenses.
Research and Development Expenses
Research and development expenses consisting principally of salaries,
consulting fees, pilot production units and clinical trial expenses increased
46% to $897,631 for the three months ended September 30, 1998 from $614,736
for the three months ended September 30, 1997. This increase is primarily
the result of ongoing development and clinical evaluation for the Patient
State Analyzer. The Company expects the clinical study to cost approximately
$1.1 million, of which approximately $150,000 of costs have been incurred,
and will conclude in the second quarter of 1999. The Company has several
areas where additional testing of the Patient State Analyzer will be
required. These include hardware to be used in clinical trials, final
versions of software for clinical trials and the electrode set which feeds
EEG data to the device. The Company has no assurance that the testing which
will be undertaken will ensure the device functions adequately to
successfully complete the clinical trials.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 58% to $332,488
for the three months ended September 30, 1998 from $790,999 for the three
months ended September 30, 1997. This decrease is primarily due to the
discontinuation of the Equinox product line which resulted in a reduction of
the Company's outside sales force and related expenses.
8
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Interest Income and Expense:
Interest income decreased $98,235 to $92,762 for the three months ended
September 30, 1998 from $190,997 for the three months ended September 30,
1997. This was the result of a lower average cash balance in the third
quarter of 1998 versus the third quarter of 1997. Interest expense decreased
$1,237 to zero for the three months ended September 30, 1998. This decrease
was primarily the result of a repayment of a note payable during 1997.
Nine Months Ended September 30, 1997 and 1998
Revenues
Revenues decreased 51% to $438,573 for the nine months ended September
30, 1998 from $898,516 for the nine months ended September 30, 1997. This
decrease is primarily the result of a lower level of sales of the Company's
Equinox EEG System, which was discontinued in the second quarter of 1998 due
to slow demand in the market and increased competition.
Cost of Goods Sold
Cost of goods sold increased 17% to $1,597,540 for the nine months ended
September 30, 1998 from $1,362,072 for the nine months ended September 30,
1997. This increase was primarily due to inventory writedowns of $354,319
related to discontinuance of the Company's Equinox product line.
Gross Margin
The negative gross profit margin results from fixed headcount and
overhead in the quality assurance and manufacturing groups, as well as,
charges related to the discontinuance of the Equinox product line. The gross
margin produced by the e-Net/HydroDot business does not provide enough
dollars to cover these fixed expenses.
Research and Development Expenses
Research and development expenses consisting principally of salaries,
consulting fees, pilot production units and clinical trial expenses increased
98% to $3,374,626 for the nine months ended September 30, 1998 from
$1,705,568 for the nine months ended September 30, 1997. This increase is
primarily the result of ongoing development and clinical evaluation for the
Patient State Analyzer including the assembly of units for an upcoming
clinical study. The Company expects the clinical study to cost approximately
$1.1 million, of which approximately $150,000 of costs have been incurred,
and expects that the study will be concluded in the second quarter of 1999.
The Company has several areas where additional testing of the Patient State
Analyzer will be required. These include hardware to be used in clinical
trials, final versions of software for
9
<PAGE>
clinical trials and the electrode set which feeds EEG data to the device.
The Company has no assurance that the testing which will be undertaken will
demonstrate that the device functions adequately to successfully complete the
clinical trials.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 19% to $1,619,923
for the nine months ended September 30, 1998 from $1,988,654 for the nine
months ended September 30, 1997. This decrease is primarily due to
discontinuation of the Equinox product line which resulted in a reduction of
the Company's outside sales force and related expenses.
Writedown of Assets
The Company took a $266,504 charge in the three months ended June 30,
1998 related to long lived assets no longer utilized by the Company as a
result of the discontinuance of the Equinox product line.
Interest Income and Expense:
Interest income decreased $275,368 to $341,775 for the nine months ended
September 30, 1998 from $617,143 for the nine months ended September 30,
1997. This was the result of a lower average cash balance in 1998 versus
1997. Interest expense decreased $21,910 to zero for the nine months ended
September 30, 1998. This decrease was primarily the result of a repayment of
a note payable during 1997.
Liquidity And Capital Resources
At September 30, 1998, the Company's cash, cash equivalents and
short-term investments were $5,974,307 as compared to $11,588,286 at December
31, 1997.
The Company's operating activities used cash of $5,542,813 in the nine
months ended September 30, 1998 as compared to $4,169,486 in the nine months
ended September 30, 1997. The $1,373,327 increase in net cash used was
primarily the result of the increased net loss of the company.
The Company's financing activities provided cash of $59,490 in the nine
months ended September 30, 1998 as compared to $556,216 used in the nine
months ended September 30, 1997. The 1997 financing activities included a
repayment of the line of credit of $541,334.
Net cash provided by investing activities in the nine months ended
September 30, 1998 was $2,353,483, as compared with $5,057,841 provided in
the nine months ended September 30, 1997. The decrease was due to reduced
short term investing activity as the Company attempts to keep its funds
liquid to fund operating expenses.
10
<PAGE>
The Company's principal source of liquidity at September 30,
1998 consisted of cash and cash equivalents of $5,974,307. The Company
believes that its capital resources will be sufficient to meet the Company's
operating and capital requirements through 1999. 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
approvals, the cost 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. The
Company may in the future seek to raise additional funds through bank
facilities, debt equity offerings or other sources of capital. There can be
no assurance that additional financing, if required, will be available on
satisfactory terms, if at all.
The factors with the largest impact on the financial condition
of the Company are as follows: completion of the clinical study which will
cost the Company approximately $1.1 million, the continued investment in the
research and development group which will continue to consume approximately
$600,000 per quarter and the continued sales of the e-net/HydoDot business
which the Company has approximately $250,000 of inventory investment at
September 30, 1998. Additionally, the Company is currently aware of one
company that has a product on the market under the same category of
monitoring.
The Company has reviewed its computer systems for Year 2000
compliance and tested whether the systems will conform to Year 2000
requirements. The Company is in the process of bringing its internal
financial systems into comp1iance and has determined that the Patient State
Analyzer is year 2000 compliant. The total cost of this effort is not
expected to exceed $50,000 and is expected to be completed in November 1998.
The Company is capitalizing the hardware and software components and
expensing all other costs of this effort. The company does not anticipate
that these costs will have a material impact on its financial position or
results of operations. The company does not believe that it has material
exposure due to a third party compliance issues. There are no contingency
plans in place as there is not an identified issue requiring action at this
time, but the company will continually evaluate issues which may arise that
would present a significant risk to the company and implement contingency
plans if required. The company's management does not expect Year 2000 issues
to have a material impact on its business or results of operations.
11
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PHYSIOMETRIX, INC.
September 30, 1998
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:
None.
ITEM 5 Other information:
None.
ITEM 6 Exhibits and reports on Form 8-K:
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K - None
12
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September 30, 1998
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.
PHYSIOMETRIX, INC.
DATE: November 13, 1998
BY: /s/John A. Williams
----------------------------
John A. Williams
President, Chief Executive
Officer
BY: /s/Daniel W. Muehl
-----------------------------
Daniel W. Muehl
Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,974,307
<SECURITIES> 0
<RECEIVABLES> 49,851
<ALLOWANCES> 0
<INVENTORY> 250,480
<CURRENT-ASSETS> 6,404,461
<PP&E> 737,600
<DEPRECIATION> 356,200
<TOTAL-ASSETS> 6,876,179
<CURRENT-LIABILITIES> 584,882
<BONDS> 0
0
0
<COMMON> 5,686
<OTHER-SE> 6,285,611
<TOTAL-LIABILITY-AND-EQUITY> 6,876,179
<SALES> 105,407
<TOTAL-REVENUES> 105,407
<CGS> 340,102
<TOTAL-COSTS> 1,570,221
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,372,052)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,372,052)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.24)
</TABLE>
