<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 MARCH 31, 1999
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.
(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) (Zip code)
(978) 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
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ITEM 2 - Yes X No
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The number of shares outstanding of each of the issuer's classes of common stock
as of
<TABLE>
<CAPTION>
Class Outstanding at March 31, 1999
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<S> <C>
Common Stock, $.001 par value 5,727,366
</TABLE>
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PHYSIOMETRIX, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE NO.
<S> <C>
ITEM 1 Financial Statements
Balance Sheets as of December 31, 1998 and 3
March 31, 1999
Statements of Operations for the Three Months 4
ended March 31, 1998 and 1999
Statements of Cash Flows for the Three Months 5
ended March 31, 1998 and 1999
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
</TABLE>
2
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PHYSIOMETRIX, INC.
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 4,589,585 $ 3,648,045
Accounts receivable, net ....................................... 87,400 96,099
Prepaid expenses ................................................... 127,276 167,095
------------ ------------
Total current assets ............................................... 4,804,261 3,911,239
Property, plant and equipment ...................................... 585,617 587,012
Less allowances for depreciation ................................... (278,822) (305,709)
------------ ------------
306,795 281,303
Due from officer ................................................... 84,000 84,000
Other assets ....................................................... 6,318 6,318
------------ ------------
Total assets ....................................................... $ 5,201,374 $ 4,282,860
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................... $ 107,447 $ 119,124
Accrued expenses ............................................... 242,663 144,577
------------ ------------
Total current liabilities .......................................... $ 350,110 $ 263,701
Stockholders' equity
Preferred stock: $.001 par value; 10,000,000 shares authorized: -- --
Common stock: $.001 par value, 50,000,000 shares authorized;
5,707,366 shares in 1998 and 5,727,366 shares in 1999 issued and
outstanding .................................................... 5,707 5,727
Additional paid-in capital ......................................... 30,770,458 30,771,188
Accumulated deficit ................................................ (25,924,901) (26,757,756)
------------ ------------
Total stockholders' equity ......................................... 4,851,264 4,019,159
------------ ------------
Total liabilities and stockholders' equity ......................... $ 5,201,374 $ 4,282,860
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</TABLE>
See accompanying notes
3
<PAGE>
PHYSIOMETRIX, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------
1998 1999
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<S> <C> <C>
Revenues ......................................... $ 183,840 $ 118,379
Costs and expenses:
Cost of goods sold .......................... 481,092 213,071
Research and development .................... 1,086,415 536,112
Selling, general and administrative ......... 694,571 246,905
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2,262,078 996,088
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Operating loss ................................... (2,078,238) (877,709)
Interest income .................................. 136,365 44,854
Net loss ......................................... $(1,941,873) $ (832,855)
----------- -----------
----------- -----------
Net loss per share ............................... $ (0.34) $ (0.15)
----------- -----------
----------- -----------
Shares used in computing net loss per common share 5,658,325 5,720,699
----------- -----------
----------- -----------
</TABLE>
See accompanying notes
4
<PAGE>
PHYSIOMETRIX, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------
1998 1999
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<S> <C> <C>
Operating activities:
Net loss ...................................................... $ (1,941,873) $ (832,855)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ............................ 56,155 26,887
Changes in operating assets and liabilities:
Accounts receivable ................................. 200,054 (8,699)
Inventories ......................................... (107,012) (0)
Prepaid expenses and other assets ................... 136 (39,819)
Accounts payable and accrued expenses ............... (57,940) (86,409)
------------ ------------
Net cash used in operating activities ......................... (1,850,480) (940,895)
INVESTING ACTIVITIES:
Purchase of equipment ......................................... (35,506) (1,395)
Purchase of available-for-sale securities ..................... (30,745,019) (13,675,416)
Proceeds from maturity of available-for-sale securities ....... 32,541,440 13,675,416
------------ ------------
Net cash provided by investing activities ..................... 1,760,915 (1,395)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net ................... 16,407 750
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Net cash provided by (used in) financing activities ........... 16,407 750
Net increase (decrease) in cash and cash equivalents .......... (73,158) (941,540)
Cash and cash equivalents at beginning of period .............. 9,104,147 4,589,585
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Cash and cash equivalents at end of period .................... $ 9,030,989 $ 3,648,045
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</TABLE>
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,
1999 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, 1998.
NOTE B - ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," and
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" in 1998. The new accounting standards have no impact on the
Company's financial statements.
In June 1998, SFAS No. 133, "Accounting For Derivative Instruments and
Hedging Activities" was issued which is effective for fiscal year 2000. The
Company believes that the adoption of this statement will not have a material
impact on the Company's financial statement.
6
<PAGE>
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, 1998. 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
eoNet 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 discontinued in June 1998 and the
Patient State Analyzer (PSA), 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 March 31, 1999, the
Company had an accumulated deficit of approximately $26.8 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 1999. 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
channels for its products domestically and internationally. There can be no
assurance the Company will achieve significant commercial revenues or
profitability.
7
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THREE MONTHS ENDED MARCH 31, 1999 AND 1998
REVENUES
Revenues decreased 36% to $118,000 for the three months ended March 31,
1999 from $184,000 for the three months ended March 31, 1998. This decrease is
primarily the result of a lower sales volume of the Company's Equinox EEG System
and Hydrodot Neuromonitoring products.
COST OF GOODS SOLD
Cost of goods sold decreased 56% to $213,000 for the three months ended
March 31, 1999 from $481,000 for the three months ended March 31, 1998. This
decrease was primarily due to headcount reductions due to discontinuance of the
Company's Equinox product line and lower sales volume of Equinox and HydroDot
Neuromonitoring products.
GROSS MARGIN
The negative gross profit margin results from fixed headcount and
overhead in the quality assurance and manufacturing group. The gross margin
produced by the HydroDot Neuromonitoring business does not provide enough sales
volume to cover these fixed expenses. Gross margin related to the HydroDot
Neuromonitoring business in 1999 was slightly higher in percentage terms
compared with gross margin produced in 1998 . Pricing of the product did not
change in 1999, but material costs of inventory were lower comparable to 1998.
The Company wrote down to zero the HydroDot Neuromonitoring inventory to reflect
the net realizable value at December 31, 1998. The Company intends to either
license the technology to another company or transition out of the business by
the end of 1999.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consisting principally of salaries,
consulting fees, and clinical trial expenses decreased 51% to $536,000 for the
three months ended March 31, 1999 from $1,086,000 for the three months ended
March 31, 1998. This decrease is primarily the result of lower headcount and
outside consulting related to ongoing development for the Patient State
Analyzer. The Company expects the final clinical study for the PSA to cost
approximately $1.1 million, of which approximately $190,000 of costs have been
incurred. The Company expects that the final study of the PSA will be concluded
in the third quarter of 1999. The Company has no assurance that the testing
which has occurred to date will demonstrate that the device functions adequately
to successfully complete the clinical trials.
8
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased 64% to $247,000
for the three months ended March 31, 1999 from $695,000 for the three months
ended March 31, 1998. 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 and continued cost controls.
INTEREST INCOME AND EXPENSE:
Interest income decreased to $45,000 for the three months ended March
31, 1999 from $136,000 for the three months ended March 31, 1998. This was the
result of a lower average cash balance in 1999 versus 1998.
LIQUIDITY AND CAPITAL RESOURCES
At quarter ended March 31, 1999, the Company's cash and cash
equivalents were $3,648,000 as compared to $4,590,000 at year ended December 31,
1998.
The Company's operating activities used cash of $941,000 in the three
months ended March 31, 1999 as compared to $1,850,000 in the three months ended
March 31, 1998. The decrease in net cash used in 1999 compared to 1998 was
primarily the result of the decreased net loss of the Company.
The Company's financing activities provided cash of $750 in the three
months ended March 31, 1999 as compared to $16,000 in the three months ended
March 31, 1998.
Net cash used by investing activities in the three months ended March
31, 1999 was $1,400, as compared with $1,761,000 provided in the three months
ended March 31, 1998. The decrease was due to reduced short term investing
activity as the Company attempts to keep its funds liquid to fund operating
expenses.
The Company's principal source of liquidity at March 31, 1999 consists
of cash and cash equivalents in the amount of $3,648,000. The Company believes
it has the necessary cash and cash equivalents on hand at March 31, 1999 to fund
its operations and execute its operating plan through May 2000. The Company has
already taken the necessary actions in the first quarter of 1999, to manage its
cash consistent with its operating plan by reducing its workforce to 18
employees and eliminating specifically identified incremental costs including
outside consultants.
9
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The Company believes that the success of the PSA is the most critical
component to the Company's ability to continue as a going concern. The Company's
plan for 1999 is to conduct the final clinical study of the PSA, which is
expected to cost approximately $1 million. The Company has engaged a reputable
third party administrator to oversee the clinical study process in 1999 for a
fee of approximately $400,000. The Company has also engaged a group of six
hospitals to perform the clinical study for an estimated $400,000. The remaining
costs will be incurred through the use of outside consultants. The Company does
not believe the cost of the clinical trials will exceed $1 million. The Company
is in the process of identifying qualified strategic partners to serve as
external manufacturer and as the worldwide distributors of the product. The
Company expects to incur $1.6 million of salary and benefit costs for the 18
remaining employees in 1999 and $ 690,000 in overhead costs. The Company does
not expect any additional costs in 1999.
Once the Company completes a successful clinical study, secures
regulatory approval and has determined its strategic partner, the Company will
require additional equity funding to contract with an outside party to
manufacture the PSA. The Company believes it has sufficient cash to operate
through May 2000, which allows management the necessary time to complete these
critical activities. In the unlikely event the clinical study is not successful
and regulatory approval is denied, the Company would consider further refinement
or development of the technology or a new technology altogether. Under these
circumstances, the Company would continue to pursue completion of clinical
trials, securing regulatory approval and launching a product based on the
technology of the PSA.
Although management and the current investors of the Company do not
have any intention of liquidating the business, the Company would, however,
consider a sale of the technology, if in early 2000, its cash constraints will
not allow it to execute its plan. The Company is aware of one other company with
similar products to the PSA. The Company does not believe it will be at a
significant disadvantage in marketing its products against this company.
YEAR 2000 CONSIDERATIONS
The Company has reviewed its computer systems for Year 2000 compliance
and tested whether the systems will conform to Year 2000 requirements. The
Company has brought its internal financial systems into compliance and has
determined that the Patient State Analyzer is Year 2000 compliant. There are no
current products for sale that the Company will continue into Year 2000. The
total cost of this effort did not exceed $50,000 and was 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 have exposure due
to third party compliance issues. The Company believes it will incur no
additional expenses related to Year 2000 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.
10
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PHYSIOMETRIX, INC.
MARCH 31, 1999
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
11
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MARCH 31, 1999
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: May 12, 1999
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)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,648,045
<SECURITIES> 0
<RECEIVABLES> 96,099
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,911,239
<PP&E> 587,012
<DEPRECIATION> 305,709
<TOTAL-ASSETS> 4,282,860
<CURRENT-LIABILITIES> 263,701
<BONDS> 0
0
0
<COMMON> 5,727
<OTHER-SE> 4,013,432
<TOTAL-LIABILITY-AND-EQUITY> 4,282,860
<SALES> 118,379
<TOTAL-REVENUES> 118,379
<CGS> 213,071
<TOTAL-COSTS> 996,088
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (832,855)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (832,855)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
</TABLE>
