<PAGE>
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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 PERIOD ENDED SEPTEMBER 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
COMMISSION FILE NUMBER: 0-28244
---------------------
IMAGYN MEDICAL, INC.
(Exact name of Registrant as specified in its charter)
------------------------
<TABLE>
<S> <C>
DELAWARE 77-0230712
(State or other (I.R.S. Employer
jurisdiction of Identification
incorporation or Number)
organization)
</TABLE>
27651 LA PAZ ROAD
LAGUNA NIGUEL, CA 92677
(Address of principal executive offices)
Registrant's telephone number, including area code:
(714) 362-2500
------------------------
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 at least the past 90 days.
Yes __X__ No _____
As of November 8, 1996, 7,926,990 shares of the Registrant's Common Stock
were outstanding.
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<PAGE>
IMAGYN MEDICAL, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX
PART I. FINANCIAL INFORMATION
Item 1. a) Consolidated balance sheets at September 30, 1996 and December
31, 1995
b) Consolidated statements of operations for the three month
periods ended September 30, 1995 and September 30, 1996 and nine
month periods ended September 30, 1995 and September 30, 1996
c) Consolidated statements of cash flows for the nine month periods
ended September 30, 1995 and September 30, 1996
d) Notes to interim consolidated financial statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1
<PAGE>
IMAGYN MEDICAL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------- -------------
<S> <C> <C>
(UNAUDITED)
Current Assets:
Cash and cash equivalents........................................................ $ 2,359,773 $ 22,902,754
Short-term cash investments...................................................... 6,980,454 21,787,491
Restricted cash.................................................................. 131,000 195,780
Accounts receivable, net......................................................... 909,139 2,194,855
Inventories...................................................................... 1,063,867 1,660,138
Other current assets............................................................. 172,760 502,346
------------- -------------
Total current assets........................................................... 11,616,993 49,243,364
Long term cash Investments......................................................... 0 2,512,337
Furniture, fixtures and equipment, net............................................. 389,787 1,331,308
Other assets....................................................................... 17,642 165,829
------------- -------------
Total assets................................................................... $ 12,024,422 $ 53,252,838
------------- -------------
------------- -------------
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................................. $ 441,868 $ 1,363,862
Accrued salaries and benefits.................................................... 83,158 111,379
Accrued liabilities.............................................................. 660,889 664,307
------------- -------------
Total current liabilities...................................................... 1,185,915 2,139,548
------------- -------------
Deferred income.................................................................... 1,000,000 1,000,000
------------- -------------
Convertible redeemable preferred stock, 2,715,546 and 0 shares issued and
outstanding in 1995 and at September 30, 1996, respectively...................... 9,935,981 0
------------- -------------
Stockholders' equity (deficit):
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued
and outstanding Common stock, $0.001 par value at September 30, 1996.
50,000,000 shares authorized, 1,995,361 and 7,926,990 issued and outstanding in
1995 and at September 30, 1996, respectively................................... 21,395,137 7,927
Additional paid in capital....................................................... 74,621,707
Unearned compensation............................................................ (753,640) (789,368)
Amounts due from stockholders.................................................... (195,900) (120,900)
Accumulated deficit.............................................................. (20,543,071) (23,606,076)
------------- -------------
Total stockholders' equity (deficit)........................................... (97,474) 50,113,290
------------- -------------
Total liabilities, redeemable preferred stock and stockholders' equity (deficit)... $ 12,024,422 $ 53,252,838
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
IMAGYN MEDICAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER NINE MONTHS ENDED SEPTEMBER
30, 30,
---------------------------- ----------------------------
1995 1996 1995 1996
------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales............................................. $ 678,337 $ 2,748,906 $ 1,412,820 $ 6,721,526
Cost of sales......................................... 419,457 1,806,413 967,759 4,617,705
------------- ------------- ------------- -------------
Gross profit...................................... 258,880 942,493 445,061 2,103,821
------------- ------------- ------------- -------------
Sales and marketing expenses.......................... 677,076 1,299,354 1,854,411 2,674,189
Research and development expenses..................... 504,107 593,826 1,343,221 2,014,886
General and administrative expenses................... 321,201 586,866 888,916 1,466,800
------------- ------------- ------------- -------------
1,502,384 2,480,046 4,086,548 6,155,875
------------- ------------- ------------- -------------
Loss from operations.............................. (1,243,504) (1,537,553) (3,641,487) (4,052,054)
Other income (expense), net:
Interest income..................................... 27,266 658,493 56,244 998,320
Interest expense.................................... (174,246) 0 (391,923) 0
------------- ------------- ------------- -------------
Other income (expense), net....................... (146,980) 658,493 (335,679) 998,320
------------- ------------- ------------- -------------
Loss before provision for income taxes.............. (1,390,484) (879,060) (3,977,166) (3,053,734)
------------- ------------- ------------- -------------
Provision for income taxes............................ 0 5,219 800 9,271
------------- ------------- ------------- -------------
Net loss.......................................... $ (1,390,484) $ (884,279) $ (3,977,966) $ (3,063,005)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net loss applicable to common stock................... $ (1,410,484) $ (884,279) $ (4,037,966) $ (3,063,005)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net loss per common share and common share
equivalent.......................................... $ (0.33) $ (0.10) $ (0.95) $ (0.45)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average common shares and common share
equivalents outstanding............................. 4,252,000 8,530,000 4,252,000 6,778,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
IMAGYN MEDICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1995 1996
----------- -------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................................................. $(3,977,966) $ (3,063,005)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization...................................................... 157,894 171,663
Loss on disposal of furniture, fixtures and equipment.............................. 23,701
Noncash interest on bridge financing warrants...................................... 331,618
Compensation related to stock options vesting...................................... 23,057 263,315
Increase in accounts receivable.................................................... (467,618) (1,285,716)
Increase in inventories............................................................ (177,572) (596,271)
Increase in other current assets................................................... (64,532) (338,021)
(Increase) decrease in other assets................................................ 33,440 (149,987)
Increase in accounts payable....................................................... 233,585 916,206
Increase (decrease) in accrued salaries and benefits............................... (63,235) 28,221
Increase (decrease) in other accrued liabilities................................... (25,958) 3,418
----------- -------------
Net cash used by operating activities............................................ (3,973,586) (4,050,177)
----------- -------------
Cash flows from investing activities:
Cash proceeds from sale of furniture, fixtures and equipment....................... 433
Purchase of furniture, fixtures and equipment...................................... (80,447) (1,111,384)
Purchase of short and long term cash investments................................... (4,395,477) (26,732,191)
Sale of short-term cash investments................................................ 9,412,817
Increase in restricted cash........................................................ (64,780)
----------- -------------
Net cash used by investing activities............................................ (4,475,491) (18,495,538)
----------- -------------
Cash flows from financing activities:
Proceeds from issuance of bridge financing notes................................... 2,056,586
Proceeds from sale of convertible redeemable preferred stock....................... 7,879,395
Proceeds from sale of common stock................................................. 47,437,500
Costs of equity issuances.......................................................... (90,730) (4,398,646)
Proceeds from exercise of stock options............................................ 2,953 49,842
----------- -------------
Net cash provided by financing activities........................................ 9,848,204 43,088,696
----------- -------------
Net increase in cash and cash equivalents............................................ 1,399,127 20,542,981
Cash and cash equivalents, beginning................................................. 2,021,359 2,359,773
----------- -------------
Cash and cash equivalents, ending.................................................... $ 3,420,486 $ 22,902,754
----------- -------------
----------- -------------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Income taxes..................................................................... $ 800 $ 9,271
----------- -------------
----------- -------------
Interest......................................................................... $ 59,468 $ --
----------- -------------
----------- -------------
Supplemental schedule of noncash investing and financing activities:
Accretion of Series C convertible redeemable preferred stock against accumulated
deficit.......................................................................... $ 60,000
Exchange of convertible redeemable preferred stock for common stock................ $ 20,182,343
Unearned compensation related to stock options granted............................. 849,324 299,043
Settlement of amounts due from stockholder......................................... 83,435
Costs of equity issuances not yet paid............................................. 5,788
Common stock issued for consulting services........................................ 1,250
Exchange of bridge financing warrants for common stock............................. 331,618
Sale of common stock to an officer in exchange for promissory note................. 72,900
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
IMAGYN MEDICAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY:
Imagyn Medical, Inc. (the "Company") was incorporated in 1989. The Company
designs, develops and markets micro-invasive, cost effective devices for the
diagnosis and treatment of gynecological and reproductive disorders.
Imagyn International, Inc. was organized as a wholly-owned subsidiary of the
Company in 1993. Imagyn International, Inc. was created to facilitate the
marketing, sales and distribution of the Company's product in international
markets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary. All significant intercompany
accounts and transactions have been eliminated in consolidation.
REVENUE RECOGNITION
Sales and related cost of goods sold are recognized when goods are shipped
to customers. The majority of the Company's customers are distributors which
sell goods to third-party end-users. The Company is not contractually obligated
to repurchase any inventory from its distributors. The Company records a
warranty accrual at the time of sale for estimated claims.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash in banks, certificates of deposit,
and short-term investments with acquired maturities of three months or less. The
carrying amount of cash and cash equivalents approximates market value.
SHORT TERM AND LONG TERM CASH INVESTMENTS
The short-term and long term cash investments are managed by an outside
brokerage firm and consist primarily of commercial paper, certificates of
deposit, and short-term bond instruments. Short-term cash investments have
acquired maturities of one year or less, while long term cash investments have
maturities of greater than one year. The carrying amount of short-term and long
term cash investments are the cost plus interest earned as of September 30,
1996, which approximates market value.
5
<PAGE>
IMAGYN MEDICAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market, cost being determined
on the first-in, first-out (FIFO). Inventories consisted of the following:
<TABLE>
<CAPTION>
DEC. 31, SEPT. 30,
1995 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
Raw material............. $ 372,730 $ 747,052
Work in-process.......... 248,097 464,839
Finished goods........... 443,040 448,247
------------ ------------
$ 1,063,867 $ 1,660,138
------------ ------------
------------ ------------
</TABLE>
FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment are stated at cost and depreciated using
the straight-line method over the estimated useful lives of the assets which
range from three to five years. Leasehold improvements are amortized on a
straight-line basis over the lesser of the term of the related lease or its
estimated useful life.
Repairs and maintenance are expensed as incurred while renewals or
betterments are capitalized. Upon the sale or retirement of furniture, fixtures
and equipment, the accounts are relieved of the cost and the related accumulated
depreciation and amortization, and any resulting gain or loss is included in
operations.
INTERIM FINANCIAL STATEMENTS
The financial statements at September 30, 1996 and for the three and nine
month periods ended September 30, 1995 and 1996 are unaudited but include all
adjustments (consisting only of normal recurring adjustments) which the Company
considers necessary for a fair presentation of the financial position at such
date and the operating results and cash flows for those periods. Results of the
September 30, 1996 period are not necessarily indicative of the results for the
entire year.
3. NET LOSS PER COMMON SHARE:
Net loss per common share is based on reported net loss, with such reported
net loss increased for accretion of the Series C preferred stock. The resulting
amount is presented below as loss applicable to common stock.
Such loss applicable to common stock in each period presented is divided by
the weighted average number of outstanding common shares which, along with
shares issuable under other equity securities, have been computed in accordance
with Securities and Exchange Commission Staff Accounting Bulletin ("SAB") Topic
4-D. The SAB requires that common stock issued by the Company in the twelve
months immediately preceding a proposed public offering plus the number of
common equivalent shares which become issuable during the same period pursuant
to the issuance of warrants or grant of stock options (using the treasury stock
method), and the issuance of convertible preferred stock, at prices less than
the
6
<PAGE>
IMAGYN MEDICAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. NET LOSS PER COMMON SHARE: (CONTINUED)
per share initial public offering price be included in the calculation of common
stock and common stock equivalent shares as if they were outstanding for all
periods presented.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED SEPTEMBER
SEPTEMBER 30, 30,
----------------------------------- ------------------------------------
1995 1996 1995 1996
----------------- ---------------- ----------------- -----------------
PER PER PER PER
AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE
-------- ------ ------- ------ -------- ------ -------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Reported net loss.......................... $(1,390) $(0.33) $ (885) $(0.10) $(3,978) $(0.94) $(3,063) $(0.45)
Adjustment for accretion of Series C
preferred stock.......................... (20) (60) (0.01)
-------- ------ ------- ------ -------- ------ -------- ------
Net loss applicable to common stock and net
loss per common share and common
equivalent share......................... $(1,410) $(0.33) $ (885) $(0.10) $(4,038) $(0.95) $(3,063) $(0.45)
-------- ------ ------- ------ -------- ------ -------- ------
-------- ------ ------- ------ -------- ------ -------- ------
Weighted average number of:
Common shares.............................. 585 7,877 585 4,636
Common equivalent shares................... 3,667 653 3,667 2,142
-------- ------- -------- --------
Weighted average common shares and common
equivalent shares outstanding............ 4,252 8,530 4,252 6,778
-------- ------- -------- --------
-------- ------- -------- --------
</TABLE>
Primary and fully-diluted loss per share amounts do not differ.
4. SALE OF COMMON STOCK:
In June 1996, the Company completed the initial public offering of its
common stock in which 3,125,500 shares of common stock were sold raising net
proceeds of $43 million. In connection with this offering, all outstanding
shares of preferred stock were automatically converted into 2,715,546 shares of
common stock.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and the related Notes thereto included herein. The
following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. The Company's actual results of operations could differ
materially from those anticipated in such forward-looking statements as a result
of certain factors set forth under "Factors Affecting Operating Results" below.
BACKGROUND
Imagyn Medical, Inc. ("Imagyn" or the "Company") was formed in 1989 to
advance the development of gynecological applications of novel catheter
technology licensed by the Company from Baxter Healthcare Corporation and Dr.
Thomas J. Fogarty. In 1992, the Company commenced commercial shipments of its
Ovation systems, based on this technology, to international distributors for
resale to physicians and hospitals. In 1994 and 1995, the Company realigned its
international distribution for the Ovation systems. This realignment involved
both a reduction in the number of distributors and the establishment of direct
sales activities through a limited number of employees and agents in the
Company's most important markets, the United Kingdom, Germany and Australia.
In November 1992, the Company entered into an agreement with Terumo
Corporation ("Terumo") for the sale and licensed manufacture of the Ovation
systems in Japan. In connection with the granting of the distribution and
license rights under this agreement, Terumo paid the Company distribution and
license fees aggregating $2.1 million. Based on the Company's continuing
obligations under the agreement to transfer manufacturing know-how for the
Ovation systems to Terumo, the license fees of $1.0 million have been treated as
deferred income until such time as the Company completes the transfer of the
manufacturing know-how pursuant to the agreement. The Company is required to
complete such transfer by August 1997, after which the Company will receive
royalties on product sales by Terumo. During 1993 and 1994, Terumo conducted
clinical trials in Japan for the purpose of supporting regulatory and
reimbursement approvals for the Ovation system. In August 1995, Terumo received
Japanese regulatory approval for marketing of the Ovation tubal recanalization
system.
In 1994, the Company commenced international commercial shipments of its
MicroLap microlaparoscopy system. By February 1995, the Company had received
three FDA 510(k) clearances for the MicroLap system, after which the Company
commenced marketing the system in the United States. The Company engaged the
services of non-stocking sales representative organizations to promote sales of
the MicroLap system.
In October 1995, the Company entered into a distribution agreement with
United States Surgical Corporation ("USSC") pursuant to which USSC was granted
exclusive international marketing rights for the MicroLap system in all
international markets (excluding China and India). USSC was also granted, on a
co-exclusive basis with the Company, marketing rights to the MicroLap system in
the United States. As a result of the agreement with USSC, the Company has
initiated the termination of all of its international distributors for the
MicroLap system and, in connection with these terminations, the Company made
certain payments to these distributors. USSC commenced the sales and marketing
of the Company's Microlap products in early 1996.
In September, 1996, the Company received 510(k) clearance from the FDA to
market its single use MicroSpan Hysteroscope Sheath in the United States. The
Company anticipates commencement of the marketing of its MicroSpan
microhysteroscopy system in the United States in the fourth quarter of 1996.
8
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
NET SALES. Net sales for the three months ended September 30, 1996
increased to $2.7 million from $678,000 for the three months ended September 30,
1995. The increase was primarily the result of MicroLap system sales to USSC.
There were no sales to USSC during the three months ended September 30, 1995.
For the three months ended September 30, 1996, 4% of the Company's sales were to
international customers; for the three months ended September 30, 1995, 84% of
the Company's sales were to international customers. The decrease in the
percentage of the Company's sales to international customers is primarily the
result of the increase in United States sales and the termination of the
Company's international distributors for the MicroLap system. The Company
records all sales to USSC as domestic sales; however, sales of the Company's
products by USSC are expected to include sales to international customers made
through Autosuture, Inc., a subsidiary of USSC.
COST OF SALES. Cost of sales for the three months ended September 30, 1996
increased to $1.8 million from $419,000 for the three months ended September 30,
1995. The increase in cost of sales was attributable to the increase in the
level of sales for the period.
SALES AND MARKETING. Sales and marketing expenses for the three months
ended September 30, 1996 increased to $1.3 million from $677,000 for the three
months ended September 30, 1995. The increase was primarily associated with a
increase in promotional expenditures and the recruitment of direct sales
personnel.
RESEARCH AND DEVELOPMENT. Research and development expenses for the three
months ended September 30, 1996 increased to $594,000 from $504,000 for the
three months ended September 30, 1995. This increase was attributable to
increased expenditures for product development and enhancements.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
three months ended September 30, 1996 increased to $587,000 from $321,000 for
the three months ended September 30, 1995. The increase was primarily associated
with the hiring of additional personnel and the amortization of non-cash
deferred compensation charges associated with grants of stock options to
employees.
INTEREST INCOME (EXPENSE), NET. Net interest income for the three months
ended September 30, 1996 increased to $658,000 from net interest expense of
$147,000 for the three months ended September 30, 1995. This increase was
attributable to interest earned on higher cash balances held by the Company
during the three months ended September 30, 1996 and the retirement of bridge
financing notes.
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
NET SALES. Net sales for the nine months ended September 30, 1996 increased
to $6.7 million from $1.4 million for the nine months ended September 30, 1995.
The increase was primarily the result of MicroLap system sales to USSC. There
were no sales to USSC during the nine months ended September 30, 1995. For the
nine months ended September 30, 1996, 6% of the Company's sales were to
international customers; for the nine months ended September 30, 1995, 85% of
the Company's sales were to international customers. The decrease in the
percentage of the Company's sales to international customers is primarily the
result of the increase in United States sales and the termination of the
Company's international distributors for the MicroLap system. The Company
records all sales to USSC as domestic sales; however, sales of the Company's
products by USSC are expected to include sales to international customers made
through Autosuture, Inc., a subsidiary of USSC.
COST OF SALES. Cost of sales for the nine months ended September 30, 1996
increased to $4.6 million from $968,000 for the nine months ended September
30,1995. The increase was attributable to the increase in sales as well as costs
associated with increased manufacturing support expenditures. Cost of sales
during
9
<PAGE>
the nine months ended September 30,1996 also included nonrecurring production
costs and inefficiencies associated with the rapid increase and expansion of
production operations at the Company's current manufacturing facilities.
SALES AND MARKETING. Sales and marketing expenses for the nine months ended
September 30, 1996 increased to $2.7 million from $1.9 million for the nine
months ended September 30, 1995. The increase was primarily associated with the
increase in the number of the Company's marketing and sales personnel and
promotional expenditures.
RESEARCH AND DEVELOPMENT. Research and development expenses for the nine
months ended September 30, 1996 increased to $2.0 million from $1.3 million for
the nine months ended September 30, 1995. This increase was attributable to
increased expenditures for product development and enhancements and costs
associated with clinical trials of the Ovation falloposcopy system in the United
States.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
nine months ended September 30, 1996 increased to $1.5 million from $889,000 for
the nine months ended September 30, 1995. The increase was primarily associated
with the hiring of additional personnel and the amortization of non-cash
deferred compensation charges associated with grants of stock options to
employees.
INTEREST INCOME (EXPENSE), NET. Net interest income for the nine months
ended September 30, 1996 increased to $998,000 from net interest expense of
$336,000 for the nine months ended September 30, 1995. This increase was
attributable primarily to interest earned on higher cash balances held by the
Company during the nine months ended September 30, 1996 and to a lesser extent
to the retirement of bridge financing notes in September, 1995.
INCOME TAXES
The Company has not generated any taxable income to date and therefore has
not paid any federal income taxes since its inception. The Company accounts for
income taxes under Statement of Financial Accounting Standards No. 109 ("FAS
109"). Realization of deferred tax assets is dependent on future earnings, if
any, the timing and amount of which are uncertain. Accordingly, valuation
allowances, in amounts equal to the net deferred tax assets as of December 31,
1995 have been established to reflect these uncertainties.
At December 31, 1995, the Company had federal and state net operating loss
carryforwards of $12.4 million and $5.9 million, respectively, and federal and
state research and experimentation credit carryforwards of $560,000 and
$220,000, respectively, that will expire at various dates beginning in 1997
through 2010, if not utilized. Utilization of net operating loss and tax credit
carryforwards will be subject to a substantial annual limitation due to the
ownership change limitations of the Internal Revenue Code of 1986, as amended,
and similar state provisions. The annual limitation is likely to result in the
expiration of most of the Company's net operating loss and tax credit
carryforwards before full utilization as a result of the September 1995
recapitalization.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's expenses have significantly exceeded its net
sales, resulting in an accumulated deficit of $23.6 million as of September 30,
1996. The Company has funded its operations since incorporation primarily
through the private placement of equity securities, the net proceeds of the
June, 1996 initial public offering and other operating income. Through September
30, 1996, the Company had raised $30.3 million from the private placement of
equity securities. Through September 30, 1996, the Company had received $5.6
million in fees relating to two distribution agreements. In June, 1996, the
Company completed an initial public offering of 3,162,500 shares of Common Stock
raising net proceeds of approximately $43 million.
10
<PAGE>
At September 30, 1996, the Company's principal source of liquidity consisted
of cash, cash equivalents and short-term investments of $44.7 million. Cash used
in the Company's operations was $4.0 million for the nine months ended September
30, 1996 and $4.0 million for the nine months ended September 30, 1995. The
Company's capital expenditures during the year ended December 31, 1995 and the
nine months ended September 30, 1996 were $163,000 and $1.1 million,
respectively. The Company anticipates that capital expenditures will increase in
future periods due to expansion of manufacturing operations and facilities. The
Company intends to finance its capital needs principally its existing capital
resources. The Company has not sought to obtain any credit facilities to provide
additional working capital.
Imagyn believes that existing capital resources will be sufficient to fund
its operations through 1997. However, the Company's future liquidity and capital
requirements will depend on numerous factors, including the extent to which the
Company's products gain market acceptance, actions relating to regulatory and
reimbursement matters, progress of clinical trials, introduction of alternative
means for microlaparoscopy, microhysteroscopy and fallopian tube visualization
by competitors of the Company, pricing of competitive products, the cost and
effect of promotional discounts and marketing programs in which the Company may
be required to engage and the resources that the Company devotes to marketing,
manufacturing and developing its products. The Company's capital requirements
will also depend on, among other things, the resources required to hire and
develop a direct sales force in the United States and the resources required to
expand manufacturing capacity and facilities requirements. Accordingly, there
can be no assurance that the Company will not require additional financing
within this time frame. There can be no assurance that additional funding, if
needed, will be available on terms satisfactory to the Company, or at all. Any
additional equity financing may be dilutive to stockholders, and debt financing,
if available, may involve restrictive covenants. Failure to raise capital when
needed could have a material adverse effect on the business, financial condition
and results of operations of the Company.
FACTORS AFFECTING OPERATING RESULTS
This report on Form 10-Q contains forward-looking statements within the
meaning of the Securities Act of 1933, as amended and the Securities Exchange
Act of 1934, as amended. The Company's future results of operations could vary
significantly from the results anticipated by such forward looking statements as
a result of various factors, including the following.
Imagyn is substantially dependent upon the success and market acceptance of
its MicroLap microlaparoscopy system, MicroSpan microhysteroscopy system and
Ovation systems. The Company's MicroLap and Ovation systems have generated
limited revenue to date and the MicroSpan system has not been commercially
introduced. There can be no assurance that any of the Company's existing or
future products will gain any significant degree of market acceptance among
physicians, patients and health care payors, even if necessary international and
United States regulatory approvals and reimbursement are obtained. The Company
believes that market acceptance of the MicroLap system will depend on the
Company's and USSC's ability to provide evidence to the medical community of the
effectiveness of micro-invasive laparoscopic procedures. Market acceptance will
also be dependent upon the durability and performance of the MicroLap. The
Company believes that market acceptance of its MicroSpan system will depend on
the Company's ability to demonstrate the utility of diagnostic and operative
hysteroscopy. In particular, market acceptance of diagnostic microhysteroscopy
may be limited because some physicians and payors view hysterectomy, the
surgical removal of the uterus, as the appropriate therapy for a variety of
uterine disorders as a hysterectomy precludes the recurrence of the uterine
disorders. Such physicians or payors may be reluctant to perform or pay for
diagnostic microhysteroscopy to visualize the uterus if the ultimate treatment
outcome is likely to be a hysterectomy. In addition, several less-invasive
alternatives to operative hysteroscopy are either under development, in clinical
trials or have recently been introduced. Market acceptance of diagnostic use of
the MicroSpan system may also therefore be dependent upon acceptance of these
less invasive alternatives to hysterectomy. Market acceptance of the MicroLap
and MicroSpan systems will also be dependent upon willingness of physicians to
perform laparoscopic and hysteroscopic
11
<PAGE>
procedures, which have traditionally been performed in the hospital under
general anesthesia, in an office or clinic, and the ability of MicroLap
laparoscopes and MicroSpan microhysteroscope to be used with a broad variety to
sterilization methods preferred by users of the Company's products in non
hospital settings. In particular, physician acceptance of microlaparoscopy and
microhysteroscopy may be affected by the unwillingness of physicians to perform
these procedures under conscious sedation rather than under general anesthesia,
availability in the physician's office of necessary ancillary capital equipment
such as cameras and light sources, and availability of a sufficiently large
patient base to support an office-based microsurgery practice. The Company
believes that market acceptance of the Ovation systems will depend on the
Company's ability to demonstrate the utility of falloposcopy and recanalization
in diagnosing and managing infertility sufficiently to create an interest on the
part of physicians to be trained to perform such procedures using the Company's
Ovation systems. Market acceptance will also be dependent upon the availability
of third-party reimbursement for procedures performed using the Company's
products. Failure of the Company's products to achieve significant market
acceptance or to expand the number of applications for the Company's product
systems and technologies would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company has a limited history of operations and has sustained
substantial operating losses since inception, and there can be no assurance that
the Company will achieve or sustain profitability. To date, the Company has
generated only limited revenues, primarily from sales of its Ovation systems in
international markets and sales of its MicroLap system in both the United States
and international markets. The Company does not have experience in
manufacturing, marketing or selling its products in the quantities that will be
necessary for the Company to achieve significant commercial revenues or
profitability. There can be no assurance that the any of the Company's products
will be successfully commercialized or that the Company will achieve significant
revenues. Whether the Company can successfully manage the transition to a
larger-scale commercial enterprise will depend upon a number of factors,
including the Company's ability to increase its commercial manufacturing
capability and establish marketing and sales capabilities and its ability to
develop additional distribution relationships in targeted international markets.
There can be no assurance that the Company will not experience future
difficulties related to the Company's transition to a larger-scale commercial
enterprise, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company has only limited experience in manufacturing its products in
commercial quantities and has not manufactured any of its products in the
quantities that will be necessary for achievement of significant commercial
sales or profitability. There can be no assurance that reliable, high-volume
manufacturing can be established by the Company or maintained at commercially
reasonable costs on a timely basis, or at all. Manufacturers often encounter
difficulties in scaling up production of their products, including problems
involving production yields, quality control and assurance, component supply and
shortages of qualified personnel. If the Company is unable to increase its
in-house manufacturing capacity and capability, the Company may need to obtain
alternative manufacturing facilities or establish additional contract
manufacturing for its products, and delays associated with, or inability to
establish, such additional capacity could have a material adverse affect on the
Company's business, financial condition and results of operations. The Company
currently obtains certain components of its product systems from single source
suppliers. Delays associated with any future raw materials or component
shortages could have a material adverse effect on the Company's business,
financial condition and results of operations, particularly as the Company
scales up its manufacturing activities.
A key element of the Company's strategy has been and is expected to continue
to be the establishment of strategic marketing alliances with major medical
products companies. To date, the Company has entered into two such agreements.
Product sales to Terumo and USSC in 1995 accounted for 25% and 11%,
respectively, of net sales. The percentage of net sales to USSC has increased
substantially during 1996, and the Company will continue to be dependent upon
USSC and Terumo for a significant portion of its future product sales. The
failure or loss of strategic alliances with USSC and Terumo, failure to achieve
12
<PAGE>
anticipated levels of sales to strategic marketing partners, or the Company's
inability to enter into future necessary strategic alliances, would have a
material adverse affect on the Company's business, financial condition and
results of operations.
The Company has only limited experience marketing and selling its products,
and does not have experience marketing and selling its products in commercial
quantities. There can be no assurance that the Company will be successful in
establishing marketing, sales and distribution channels in key markets in the
United States or internationally. The failure to establish and maintain
effective distribution channels for the Company's products, or to retain
qualified sales personnel to support commercial sales of the Company's products,
would have a material adverse effect on the Company's business, financial
condition and results of operations.
The manufacture and sale of medical devices, such as the Company's MicroLap
system, MicroSpan microhysteroscopy system and Ovation linear everting catheter
systems, are subject to extensive regulation by numerous government authorities,
both in the United States and internationally. In the United States, the
principal regulatory authority is the FDA. The process of obtaining and
maintaining required regulatory clearances and approvals is lengthy, expensive
and uncertain. The FDA requires companies desiring to market a new medical
device or an existing medical device for a change in intended use to obtain
either a premarket notification clearance under Section 510(k) of the Federal
Food, Drug, and Cosmetic Act ("510(k)") or a premarket approval ("PMA") prior to
the introduction of such medical device into the market. To date, the Company
has received 510(k) clearances for its MicroLap microlaparoscopy system and
510(k) clearances for its MicroSpan microhysteroscopy system. The Company does
not have United States regulatory clearance or approval for its Ovation
falloposcopy or tubal recanalization systems. The Company has filed a 510(k)
premarket notification for use of the Ovation falloposcopy system for the
diagnosis of occlusions of fallopian tubes based on data from controlled
clinical trials. The Company anticipates that it will be required to file 510(k)
premarket notifications and PMA applications for future products and for new
indications for, and changes to, existing products. There can be no assurance
that the Company will be able to obtain any such 510(k) clearances or PMA
approvals in a timely fashion or at all. Moreover, regulatory approvals and
clearances, if granted, may include significant limitations on the indicated
uses for which a product may be marketed. Delays in receipt of or failure to
receive such approvals or clearances, the loss of previously obtained approvals
or clearances, or failure to comply with existing or future regulatory
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company's ability to compete effectively will depend substantially on
its ability to develop and maintain proprietary aspects of its technology. No
assurance can be given that any patents held by or licensed to the Company or
issued from pending or future patent applications will be issued, that the scope
of any patent protection will exclude competitors or provide competitive
advantages to the Company, that any of the Company's patents will be held valid
if subsequently challenged or that others will not claim rights in or ownership
of the patents and other proprietary rights held by the Company. Furthermore,
there can be no assurance that others have not developed or will not develop
similar products, duplicate any of the Company's products or design around the
Company's patents. In addition, others may hold or receive patents or file
patent applications which contain claims having a scope that covers products
developed by the Company.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and companies in the
industry have employed intellectual property litigation to gain a competitive
advantage. Any litigation or interference proceedings involving the Company will
result in substantial expense to the Company and significant diversion of effort
by the Company's technical and management personnel. An adverse determination in
litigation or interference proceedings to which the Company may become a party
could subject the Company to significant liabilities to third parties or require
the Company to seek licenses from third parties. Although patent and
intellectual property disputes in the medical device area have often been
settled through licensing or similar arrangements, costs
13
<PAGE>
associated with such arrangements may be substantial and could include ongoing
royalties. Furthermore, there can be no assurance that necessary licenses would
be available to the Company on satisfactory terms, if at all. Adverse
determinations in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent the Company from manufacturing and selling its
products, which would have a material adverse effect on the Company's business,
financial condition and results of operations.
In the United States, health care providers, such as hospitals and
physicians, that purchase medical devices, such as the Company's products,
generally rely on third-party payors, private health insurance plans and federal
Medicare, state Medicaid to reimburse all or part of the cost of the procedure
in which the medical device is being used. Reimbursement for traditional
laparoscopy and hysteroscopy procedures performed using devices that have
received FDA approval has generally been available in the United States.
However, there are no specific reimbursement codes for microlaparoscopy or
microhysteroscopy procedures, and current users of the Company's MicroLap system
may not able to obtain reimbursement codes for traditional laparoscopic surgical
procedures. Failure by physicians, hospitals and other users of the Company's
products to obtain sufficient reimbursement from health care payors for
procedures in which the Company's products are used or adverse changes in
governmental and private third-party payors' policies toward reimbursement for
such procedures would have a material adverse effect on the Company's business,
financial condition and results of operations.
The medical device industry and the market for treatment of gynecological
disorders and infertility, in particular, are intensely competitive and
characterized by rapidly evolving technology. The Company expects competition
for devices to diagnose and treat female reproductive disorders to increase.
There can be no assurance that the Company's competitors will not succeed in
developing technologies and products that are more effective or less costly than
any which have been or are being developed by the Company or that would render
the Company's technologies or products obsolete or not competitive, or that such
competitors will not succeed in obtaining regulatory approval for, introducing
or commercializing any such products prior to the Company. There can be no
assurance that the Company will be able to compete successfully or that
competition will not have a material adverse effect on the Company's business,
financial condition or results of operations.
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
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
14
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
(a) Exhibit Financial Data Schedule
27.1
(b) No reports on Form 8-K were filed by the Company during the quarter ended September
30, 1996
</TABLE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
IMAGYN MEDICAL, INC.
By: /s/ J. C. MACRAE
-----------------------------------
J. C. MacRae
Vice President, Chief Financial
Officer
(Principal Financial and Principal
Accounting Officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 22,902,754
<SECURITIES> 21,787,491
<RECEIVABLES> 2,254,855
<ALLOWANCES> 60,000
<INVENTORY> 1,660,138
<CURRENT-ASSETS> 49,243,364
<PP&E> 2,182,367
<DEPRECIATION> 851,059
<TOTAL-ASSETS> 53,252,838
<CURRENT-LIABILITIES> 2,139,548
<BONDS> 0
0
0
<COMMON> 7,927
<OTHER-SE> 50,105,363
<TOTAL-LIABILITY-AND-EQUITY> 53,252,838
<SALES> 6,721,526
<TOTAL-REVENUES> 6,721,526
<CGS> 4,617,705
<TOTAL-COSTS> 6,155,875
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (998,320)
<INCOME-PRETAX> (3,053,734)
<INCOME-TAX> 9,271
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,063,005)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> (0.45)
</TABLE>
