<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[_] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________. TO ____________.
COMMISSION FILE NO. 000-31519
CURON MEDICAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0470324
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
735 Palomar Avenue
Sunnyvale, CA 94085
(Address of principal executive offices, including zip code)
(408) 773-9910
(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. Yes X No ___
---
As of November 7, 2000 18,682,374 shares of the Registrant's Common Stock were
outstanding.
<PAGE>
CURON MEDICAL, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
------------------------------ ----
<S> <C>
Item 1. Financial Statements (unaudited)
Balance Sheets as of
September 30, 2000 and December 31, 1999....................................... 3
Statements of Operations for the
Three and nine month periods ended September 30, 2000 and 1999 and
the cumulative period from inception through September 30, 2000................ 4
Statements of Cash Flows for the
Nine month periods ended September 30, 2000 and 1999 and the
cumulative period from inception through September 30, 2000.................... 5
Notes to Financial Statements.................................................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................. 10
Item 3. Quantitative and Qualitative Disclosures of
Market Risk.................................................................... 23
PART II. OTHER INFORMATION
---------------------------
Item 2. Changes in Securities and Use of Proceeds...................................... 23
Item 6. Exhibits and Reports on Form 8-K............................................... 23
Signatures................................................................................ 24
</TABLE>
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<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
CURON MEDICAL, INC.
Balance Sheets
(Unaudited, in thousands except share data)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 43,059 $ 7,988
Marketable securities 8,024 1,510
Accounts receivable 502 -
Related party notes receivable 250 -
Prepaid expenses and other current assets 254 88
Inventories 662 321
-------------- -------------
Total current assets 52,751 9,907
Related party note receivable 77 250
Property and equipment, net 1,462 1,458
Intangible assets, net 698 -
Other assets 84 71
-------------- -------------
Total assets $ 55,072 $ 11,686
============== =============
Liabilities, Convertible Preferred Stock and Warrants and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 186 $ 586
Accrued liabilities 1,434 922
Current portion of long-term debt - 223
-------------- -------------
Total current liabilities 1,620 1,731
Long-term debt, net of current portion 227
Other liabilities 50 19
-------------- -------------
Total liabilities 1,670 1,977
-------------- -------------
Convertible preferred stock: $.001 par value;
Authorized: 5,000,000 shares and 10,500,000 shares at
September 30, 2000 and December 31, 1999, respectively
Issued and outstanding: none and 9,597,000 at
September 30, 2000 and December 31, 1999,
respectively - 21,688
Preferred stock warrants - 120
-------------- -------------
Total preferred stock and warrants - 21,808
-------------- -------------
Stockholders' equity (deficit):
Common stock, $.001 par value;
Authorized 50,000,000 shares and 30,000,000 shares at
September 30, 2000 and December 31, 1999, respectively
Issued and outstanding: 18,681,000 and 2,819,000 at
September 30, 2000 and December 31, 1999, respectively 19 3
Additional paid-in capital 86,468 8,644
Deferred stock compensation (3,327) (3,663)
Deficit accumulated during the development stage (29,758) (17,083)
-------------- -------------
Total stockholders' equity (deficit) 53,402 (12,099)
Total liabilities, convertible preferred stock
-------------- -------------
and warrants and stockholders' equity (deficit) $ 55,072 $ 11,686
============== =============
</TABLE>
See accompanying notes to the financial statements
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<PAGE>
CURON MEDICAL, INC.
Statements of Operations
(Unaudited, in thousands except per share data)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended May 1, 1997
-------------------------- ------------------------- (Inception), to
Sept. 30, Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999 2000
--------- --------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues $ 686 $ - $ 856 $ - $ 856
Cost of goods sold 860 1,141 1,141
--------- --------- --------- --------- ----------
Gross profit (174) - (285) - (285)
--------- --------- --------- --------- ----------
Operating expenses:
Research and development 881 1,682 3,972 4,025 14,542
Clinical and regulatory 428 445 1,340 1,235 3,687
Sales and marketing 910 238 2,005 648 2,945
General and administrative 1,033 475 3,112 1,259 6,429
--------- --------- --------- --------- ----------
Total operating expenses 3,252 2,840 10,429 7,167 27,603
--------- --------- --------- --------- ----------
Operating loss (3,426) (2,840) (10,714) (7,167) (27,888)
Interest income 273 50 533 106 799
Interest expense (3,038) (29) (4,090) (63) (4,265)
--------- --------- --------- --------- ----------
Net loss before extraordinary item (6,191) (2,819) (14,271) (7,124) (31,354)
Extraordinary gain - early extinguishment of
debt 1,596 - 1,596 - 1,596
--------- --------- --------- --------- ----------
Net loss $ (4,595) $ (2,819) $ (12,675) $ (7,124) $ (29,758)
========= ========= ========= ========= ==========
Net loss per common share, basic and diluted:
Net loss before extraordinary item $ (1.38) $ (1.41) $ (4.53) $ (3.49)
Extraordinary gain - early
extinguishment of debt $ 0.36 $ - $ 0.51 $ -
--------- --------- --------- ---------
Net loss per share, basic and diluted $ (1.02) $ (1.41) $ (4.02) $ (3.49)
========= ========= ========= =========
Shares used in computing net loss per share,
basic and diluted 4,483 1,999 3,149 2,039
========= ========= ========= =========
</TABLE>
See accompanying notes to the financial statements
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CURON MEDICAL, INC.
Statement of Cash Flows
(Unaudited, in thousands)
<TABLE>
<CAPTION>
For the Nine Months Ended May 1, 1997
--------------------------- (Inception), to
Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000
----------- ---------- ---------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss $ (12,675) $ (7,124) $ (29,758)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 423 331 899
Amortization of acquired technology 205 205
Extraordinary gain - beneficial conversion of
convertible note (2,996) (2,996)
Extraordinary loss - warrants on convertible note 1,400 1,400
Note payable issued in exchange for services received 45 45
Write-off of related party receivables 73
Amortization of stock-based compensation 2,762 956 7,726
Amortization of discounts on notes payable 3,724 15 3,815
Common stock issued in exchange for services received 203 221
Preferred stock issued in exchange for intellectual
property and services received 178
Stock options issued in exchange for services rendered 40 40
Changes in current assets and liabilities:
Accounts receivable trade (502) (502)
Inventories (341) (195) (662)
Prepaid expenses and other current assets (166) (72) (254)
Other assets (13) (21) (84)
Accounts payable (400) 358 186
Accrued liabilities 512 (14) 1,434
Other long-term liabilities 33 50
----------- ---------- -----------
Net cash used in operating activities (7,746) (5,766) (17,984)
----------- ---------- -----------
Cash Flows From Investing Activities
Purchase of property and equipment (427) (934) (2,361)
Purchase of marketable securities (8,024) (9,534)
Proceeds from maturities of marketable securities 1,510 1,510
Purchase of acquired technology (72) (72)
----------- ---------- -----------
Net cash used in investing activities (7,013) (934) (10,457)
----------- ---------- -----------
Cash Flows From Financing Activities
Proceeds from issuance of notes payable 781
Proceeds from issuance of convertible notes payable 11,045 11,845
Repayment of convertible notes (11,090) (11,090)
Principal payments on notes payable (478) (139) (780)
(Payments to) proceeds from repayment of related party
notes receivable (77) 50 (400)
Proceeds from issuance of convertible preferred stock,
net of issuance costs 14,095 20,710
Proceeds from issuance of common stock, net of
issuance costs 50,154 50,156
Proceeds from exercise of stock options 278 278
----------- ---------- -----------
Net cash provided by financing activities 49,832 14,006 71,500
----------- ---------- -----------
Net increase in cash and cash equivalents 35,073 7,306 43,059
Cash and cash equivalents at beginning of period 7,988 4,502 -
----------- ---------- -----------
Cash and cash equivalents at end of period $ 43,061 $ 11,808 $ 43,059
=========== ========== ===========
Supplemental Disclosure Of Cash Flow Information
Cash paid for interest $ 290 $ 51 $ 373
Cash paid for taxes 4
Supplemental Disclosure of Non-Cash Investing and
Financing Information
Conversion of notes payable and accrued interest to
preferred stock $ 803
Deferred stock based compensation $ 2,426 $ 3,455 $ 11,053
Issuance of warrants with debt $ 2,100 $ 2,220
Issuance of common stock in exchange for intangible
assets $ 831 $ 831
Conversion of preferred stock to common stock $ 21,808 $ 21,808
</TABLE>
See accompanying notes to the financial statements
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<PAGE>
CURON MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. The Company and Summary of Significant Accounting Policies
The Company
Curon Medical, Inc., formerly Conway-Stuart Medical, Inc., (the "Company") was
incorporated in the State of Delaware on May 1, 1997. The Company develops,
manufactures and markets proprietary products for the treatment of
gastrointestinal disorders. The Company is in the development stage and since
inception has devoted substantially all of its efforts to developing its
products and raising capital.
Basis of Presentation
The accompanying unaudited financial statements have been prepared by the
Company in accordance with generally accepted accounting principles for interim
financial information that are consistent in all material respects with those
applied in the Company's financial statements contained in our Registration
Statement on Form S-1 (No. 333-37866) for the fiscal years ended December 31,
1998 and 1999 and pursuant to the instructions to Form 10-Q and Article 10 of
Regulation S-X promulgated by the Securities and Exchange Commission.
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, the accompanying unaudited financial statements
contain all adjustments (all of which are normal and recurring in nature)
necessary to present fairly the financial position, results of operations and
cash flows of the Company for the periods indicated. Interim results of
operations are not necessarily indicative of the results to be expected for the
full year or any other interim periods. These financial statements should be
read in conjunction with the financial statements and footnotes thereto for the
years ended December 31, 1998 and 1999 contained in our Registration Statement
on Form S-1.
Stock Split
In September 2000, the Company's Board of Directors effected a 0.57 for 1
reverse stock split. All share and per share amounts in the accompanying
financial statements have been restated to reflect the effect of this reverse
stock split.
Marketable Securities
Marketable securities consist primarily of highly liquid debt securities and
commercial paper purchased with a remaining maturity at the date of purchase
greater than three months. Marketable securities are classified as
available-for-sale securities and are stated at market value with any temporary
difference between an investment's amortized cost and its market value recorded
as a separate component of stockholders' equity until such gains or losses are
realized. Gains or losses on the sales of securities are determined on a
specific identification basis. At September 30, 2000, the market value
approximated the amortized cost of available-for-sale securities.
Initial Public Offering
In September 2000, the Company completed its initial public offering of
5,000,000 shares of its Common Stock at a price of $11.00 per share. The Company
received approximately $50.2 million in cash, net of discounts, commissions and
other offering costs. Simultaneously with the closing of the initial public
offering, each outstanding share of Convertible Preferred Stock was
automatically converted into one share of Common Stock, with a total of
9,597,133 shares converted.
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<PAGE>
Net Loss Per Share
Basic net loss per share is calculated based on the weighted-average number of
common shares outstanding during the period excluding those shares that are
subject to repurchase. Diluted net loss per share would give effect to the
dilutive effect of common stock equivalents consisting of stock options,
warrants, and common stock subject to repurchase (calculated using the treasury
stock method). Equity instruments that could dilute basic earnings per share in
the future that were not included in the computation of diluted earnings per
share as their effect is antidilutive are as follows:
<TABLE>
<CAPTION>
September 30, 2000 September 30, 1999
------------------ ------------------
<S> <C> <C>
Unvested common shares (shares subject to repurchase) 962,000 907,000
Shares issuable upon exercise of stock options 1,251,817 1,378,260
Conversion of convertible preferred stock 9,597,000
Shares issuable upon exercise of warrants 722,000 153,000
------------------ ------------------
Total 2,935,817 12,035,260
================== ==================
</TABLE>
Revenue Recognition
Revenue from product sales is recognized on product shipment against a valid
purchase order provided no significant obligations remain and collection of the
receivables is deemed probable for both sales of control modules and catheters.
Revenues for extended warranty contracts are recognized over the extended
warranty period. To date, post-sale customer support and training has not been
significant.
The Company may sell products under a purchase commitment, generally delivered
over a period of six months. Revenue for the control module is deferred and is
recognized ratably over the shipment of catheters under the contract.
2. Inventories
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Raw material $ 497,000 $ 209,000
Work-in-process 72,000
Finished goods 93,000 112,000
------------------ -----------------
$ 662,000 $ 321,000
================== =================
</TABLE>
3. Convertible Notes Payable
In May 2000, the Company received $11.045 million in cash and $45,000 in
services in exchange for convertible notes due and payable in May 2005 with
detachable warrants to purchase 568,917 shares of common stock. The notes, which
were convertible into 2,107,000 shares of preferred stock and bore interest at
8% per annum, had a beneficial conversion feature associated with them. The
value of the warrants and value of the notes (including the value of the
beneficial conversion feature) were adjusted using their relative fair values to
the face amount of the notes. The warrants were exercisable immediately and
through their expiration in September 2005. Accordingly, the warrants were
recorded at $2.10 million and the
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<PAGE>
beneficial conversion feature was recorded at $8.99 million, both as additional
paid-in capital and a discount on the notes. The discount associated with both
the warrants and the beneficial conversion feature were amortized to interest
expense, the warrant over the contractual life of the notes and the beneficial
conversion feature over one year, the earliest conversion date. The total amount
recorded as interest expense was $4,019,000 through September 2000.
In September 2000, the notes were repaid and an early extinguishment of debt
loss of $1,400,000, associated with the remaining unamortized balance of the
warrant discount was recorded. Additionally, the original amount recorded as
beneficial conversion feature was reversed, resulting in an early extinguishment
of debt gain of $2,996,000. The net extraordinary gain associated with the early
extinguishments of the debt was $1,596,000.
4. Employee Stock Purchase and Stock Plans
2000 Employee Stock Purchase Plan
Effective September 21, 2000, the Company adopted the 2000 Employee Stock
Purchase Plan ("ESPP"). An initial 400,000 shares of common stock have been
reserved for issuance under the ESPP. In addition, subject to the Board of
Directors' discretion, on January 1, 2001 and on each anniversary thereafter,
the aggregate number of shares reserved for issuances under the ESPP will be
increased automatically by the lesser of: 500,000 shares, 1.5% of the
outstanding sharers of the Company's Common Stock, or a lesser amount determined
by the Board of Directors.
Under the ESPP, eligible employees may have up to 15% of their earnings
withheld, subject to certain limitations, to be used to purchase shares of the
Company's common stock. Unless the Board of Directors shall determine otherwise,
each offering period provides for consecutive 24-month periods commencing on
each May 1 and November 1, except that the first offering period commenced on
September 21, 2000 and will end on May 1, 2002. Each offering period is
comprised of four 6-month purchase periods, except for the first purchase
period, which will be from September 21, 2000 to May 1, 2001. The price at which
common stock may be purchased under the ESPP is equal to 85% of the lower of the
fair market value of common stock on the commencement date of each offering
period or the specified date. No shares have been purchased under the ESPP as of
September 30, 2000.
2000 Stock Plan
The 2000 Stock Plan (the "2000 Plan") was adopted by the Board of Directors on
May 24, 2000 and became effective on September 21, 2000. Options granted under
the 2000 Plan may be either incentive stock options ("ISO's") or nonqualified
stock options ("NSO's"). ISO's may be granted only to Company employees
(including officers, and directors who are also employees). NSO's may be granted
to Company employees, officers, directors, consultants, independent contractors
and advisors of the Company. Option terms under the 2000 Plan are generally the
same as those issued under the 1997 Stock Plan (the "1997 Plan"). A total of
2,000,000 shares of common stock have been reserved for issuance under the 2000
Plan, and the remaining 26,408 shares available for issuance under the 1997 Plan
will added to the 2000 Plan.
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<PAGE>
5. Deferred Stock Compensation
Stock-based compensation included in the Statements of Operations is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- ------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
--------- ---------- ----------- ---------
<S> <C> <C> <C>
Cost of product sold $ 60,000 $ - $ 81,000 $ -
Research and development 227,000 290,000 1,094,000 648,000
Clinical and regulatory 52,000 14,000 144,000 38,000
Sales and marketing 126,000 23,000 296,000 64,000
General and administrative 358,000 68,000 1,147,000 206,000
--------- ---------- ----------- ---------
$ 823,000 $ 395,000 $ 2,762,000 $ 956,000
========= ========== =========== =========
</TABLE>
6. Subsequent Event
In October 2000, the underwriters partially exercised their over-allotment
option and purchased 475,000 additional shares of Common Stock at a price of
$11.00 per share. The Company received a total of $4.86 million, net of
underwriting commissions and discounts. The Company deregistered 275,000
remaining shares of common stock not sold to the underwriters.
-9-
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the attached
financial statements and notes thereto, and with our audited financial
statements and notes thereto for the fiscal year ended December 31, 1999
included in our September 2000 initial public offering prospectus.
The information set forth below contains forward-looking statements
(designated by an *), and our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth below under "Factors That May Affect Future Results."
Overview
We were incorporated in May 1997. Business activities before
January 1998 were negligible. In 1998, our primary activity was developing the
Curon Control Module and Stretta Catheter for the treatment of Gastroesophageal
Reflux Disease, commonly referred to as GERD. We are still in the development
stage and since our inception, have devoted substantially all of our efforts to
developing our products, raising capital and have recently commenced marketing
efforts.
In early 1999, we began a multi-center clinical trial of the Stretta
System in the United States. We also developed our manufacturing capability to
support the production of Stretta Catheters and Curon Control Modules for the
clinical trial. Based on the data acquired in the trial, we submitted a 510(k)
notification to the FDA in January 2000 for clearance to market the Stretta
System for treatment of GERD. We received 510(k) clearance in April 2000. In May
2000, we launched the Stretta System commercially at Digestive Disease Week, a
large gastroenterology professional conference. Also, in May 2000, we initiated
a randomized controlled trial of the Stretta System, which we anticipate will be
completed in the second half of 2001.*
In April 1999, we began developing the Secca System for the treatment
of fecal incontinence. In November 1999, we conducted a 10-patient human
clinical pilot study outside the United States and, in July 2000, we began a
U.S. multi-center clinical trial of the Secca System under an Investigational
Device Exemption. Assuming successful results of this trial, in mid-2001 we
intend to submit a 510(k) to the FDA supported by these results or, if required
by the FDA, a PMA supported by these results.*
We recognize revenue upon shipment of products to customers. To date,
we have generated limited revenues. Our revenues will be derived from the sale
of radiofrequency generators and our disposable devices, such as the Stretta
Catheter*. We intend that disposables will form the basis of a recurring revenue
stream and have priced the disposables, at greater margins than the generators*.
Additionally, as we produce higher volumes, certain of our fixed and other costs
will be reduced on a per-unit basis, increasing our margins. We expect the
percentage of revenue from disposables to increase over time as our installed
base of generators grows*.
We will focus our sales efforts in the United States through a direct
sales force.* We do not expect to generate international sales before 2001.* In
international markets, we expect to rely primarily on third-party distributors.*
Our gross margins on sales through international third-party distributors will
be lower than our gross margins on U.S. sales as a result of distributor
discounts.*
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<PAGE>
Our costs of revenues represent the cost of producing generators and
disposable devices. We also license a technology used in the generators that we
sell. In addition to the up-front payment to license the technology, we are
required to pay licensing fees based on the sales price of the units. There are
no additional expected costs to be incurred as part of the licensing agreement.
We believe that there are alternative technologies that we could utilize should
we choose to do so.* Research and development expenses consist primarily of
amortization of stock-based compensation, personnel costs, professional
services, patent application costs, materials, supplies and equipment. Clinical
and regulatory expenses consist primarily of expenses associated with the costs
of clinical trials, clinical support personnel, the collection and analysis of
the results of these trials, and the costs of submission of the results to the
FDA. Sales and marketing expenses consist primarily of personnel costs,
advertising, public relations and attendance at selected medical conferences.
General and administrative expenses consist primarily of amortization of
stock-based compensation, the cost of corporate operations and personnel, legal,
accounting and other general operating expenses of our company. Through
September 30, 2000, we recorded limited product sales while incurring cumulative
net losses of $29.8 million. We intend to use $2.0 million of the net proceeds
of our initial public offering to increase spending on sales and marketing
initiatives to support commercial sales and market penetration of the Stretta
System, which was launched in May 2000.* We will also increase spending on
administrative infrastructure as sales increase.* In addition to increasing
expenditures related to market launch of the Stretta System, we anticipate that
our expenses will increase as we continue to develop new products, conduct
clinical trials, commercialize our products and acquire additional technologies
as the opportunities arise.* As a result, we expect our operating expenses and
net losses to increase.*
We grant stock options to hire, motivate and retain employees and
non-employee consultants. With respect to these stock options, we may record
deferred stock compensation. For stock options granted to employees, the
difference between the exercise price of the stock options and the fair value of
our stock at the date of grant is recorded as deferred compensation on the date
of grant. For stock options granted to non-employees, the fair value of the
options, estimated using the Black-Scholes valuation model is initially recorded
on the date of grant. As the non-employee options become exercisable, we revalue
the remaining unvested options, with the change in fair value from period to
period represented as change in the deferred compensation charge.
We are amortizing these amounts in accordance with Financial Accounting
Standards Board (FASB) Interpretation No. 28, "Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans" (FIN 28). As a result of
stock options granted through September 30, 2000, we recorded $11.1 million in
deferred stock compensation, including $3.1 million related to the modification
of stock repurchase rights resulting from a mutual agreement to terminate our
employment relationship with our former president and CEO extending the
repurchase right 18 months to April 2001. Unamortized stock based compensation
of approximately $3.3 million remained as of September 30, 2000.
RESULTS OF OPERATIONS
Periods of three and nine months ended September 30, 1999 and 2000
Revenue
Sales were $686,000 in the quarter ended September 30, 2000, and
$856,000 for the nine months ended on that date. Commercial shipments began in
June 2000.
Cost of goods sold
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<PAGE>
Cost of goods sold was $860,000 for the quarter ended September 30,
2000 and $1,1 million for the nine months ended that date. Cost of goods sold
was significant in relation to revenues as we continued to develop our
commercial manufacturing operations. Pilot manufacturing prior to June 2000, was
charged to research and development expense.
Research and development expenses
Research and development expenses were $881,000 in the quarter ended
September 30, 2000, compared to $1.7 million for the same period in 1999. The
decrease reflects the transfer of manufacturing expense from the research and
development function after the completion of pilot operations in May 2000.
Research and development expenses for the nine months ended September 30, 2000,
were $4.0 million compared to $4.0 million in the nine months ended September
30, 1999. The decrease in expense produced by the completion of pilot
manufacturing was offset by increased amortization of stock-based compensation
costs and increased development activity for the Secca Handpiece.
Clinical and regulatory expenses
Clinical and regulatory expenses were $428,000 for the quarter ended
September 30, 2000 compared to $445,000 for the same quarter in the prior year.
For the nine months ended September 30, 2000 these expenses were $1.3 million
compared to $1.2 million in the nine months ended September 30, 1999. Decreases
in clinical trial costs in 2000 were offset by the costs involved in preparation
for filing the Stretta System 510(k) submission with the FDA in January 2000.
Sales and marketing expenses
Sales and marketing expenses were $910,000 in the quarter ended
September 30, 2000, compared to $238,000 in the same quarter in 1999 reflecting
the building of a field sales force commencing in May 2000. Sales and marketing
expenses were $2.0 million in the nine months ended September 30, 2000, compared
to $648,000 in the same period for the prior year. This increase reflects the
establishment of a domestic field sales force and the marketing costs of
launching our first commercial product.
General and administrative expenses
General and administrative expenses were $1.0 million in the quarter
ended September 30, 2000, compared to $475,000 in the same period last year
reflecting increased staffing and amortization of stock-based compensation.
General and administrative expenses for the nine months ended September 30, 2000
were $3.1 million compared to $1.3 million for the same period last year
reflecting increased finance and accounting staffing and amortization of
stock-based compensation.
Interest Income and Expense
During the quarter ended September 30, 2000 compared to the same period
in 1999, interest income increased by $223,000 primarily as a result of
increased earnings on interest bearing marketable securities. For the nine
months ended September 30, 2000, interest income was $533,000 compared to
$106,000 in the same period last year during most of which period we had no
funds to invest.
Interest expense for the nine months ended September 30, 2000 compared
to the same period in 1999 increased by $4.0 million due to increased average
interest bearing debt
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<PAGE>
outstanding, $700,000 of amortization of the discount associated with the
warrants, $3.0 million of amortization of the discount associated with the
beneficial conversion feature and $323,000 of interest paid on the convertible
notes. For the quarter ended September 30, 2000, interest expense increased by
$3.0 million compared to the same period in 1999. The increase was due to
increased average interest bearing debt outstanding, $525,000 of amortization of
the discount associated with the warrants, $2,247,000 of amortization of the
discount associated with the beneficial conversion feature and $221,000 of
interest paid on the notes (see Note 3 of the notes to the interim financial
statements).
Extraordinary gain
As a result of repaying our Convertible Debt in September 2000, an
amount equal to the amortization of the associated beneficial conversion feature
was recorded as an extraordinary gain of $3.0 million. The remaining discount on
the warrants was also expensed in conjunction with the early extinguishments,
resulting in an extraordinary loss of $1.4 million. The net result of this
transaction, including the interest expense amortized net of the extraordinary
items, was to record an expense of $2.1 million in the nine months ended
September 30, 2000, related to the Stock Warrants accompanying the Convertible
Debt issue.
Income taxes
As a result of our net losses, we did not incur any income tax
obligations in either the nine months ended September 30, 1999 or the nine
months ended September 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operations and capital investments
from proceeds from our initial public offering completed in October 2000, which
netted us approximately $55.1 million, from the private sale of equity
securities totaling $23.2 million, the issuance of convertible notes totaling
$11.8 million and from bank equipment line financing totaling $781,000. In the
three months ended September 30, 2000, we repaid the convertible notes and the
bank equipment line financing. At September 30, 2000, we had $51.1 million in
working capital and our primary source of liquidity was $51.1 million in cash
and cash equivalents and marketable securities.
Periods of three and nine months ended September 30, 1999 and 2000
Cash used in operating activities was $7.7 million in the nine months
ended September 30, 2000 and $5.8 million in the nine months ended September 30,
1990. The increase in cash used reflects the increased net loss incurred
primarily as a result of higher sales and marketing expenses of $1.1 million and
higher corporate and administrative costs of $912,000, excluding charges related
to stock-based compensation.
Cash used in investing activities was $7.0 million in the nine months
ended September 30, 2000 primarily due to the purchase of marketable securities.
As of September 30, 2000, we had no material commitments for capital
expenditures. Cash used in investing activities amounting to $934,000 in the
nine months ended September 30, 1999 related to the purchase of property and
equipment.
Cash provided from financing activities was $49.8 million in the nine
months ended September 30, 2000, of which $50.2 million was received from our
public offering net of issuance costs, $278,000 was received from the exercise
of stock options and $478,000 was
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paid in reduction of principal on notes payable. Cash provided from financing
activities was $14.0 million in the nine months ended September 30, 1999.
Our primary source of liquidity at September 30, 2000 consisted of
$51.1 million of cash, cash equivalents and marketable securities. Our capital
requirements depend on numerous factors including our research and development
expenditures, clinical trial expenses, expenses related to selling and marketing
and working capital to support business growth. Although it is difficult for us
to predict future liquidity requirements with certainty, we believe that the
cash on hand at September 30, 2000, after completing our initial public offering
earlier in the month, will satisfy our cash requirements for at least the next
two years.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS No.
133") which establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 as amended by
SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities-
Deferral of the Effective Date of FASB Statement No. 133, an amendment of FASB
Statement No. 133" is effective for fiscal years beginning after June 15, 2000.
The Company is evaluating the impact, if any, that SFAS No. 133 may have on its
financial statements. The Company, to date, has not engaged in derivative and
hedging activities.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") 101, Revenue Recognition, which provides
guidance on the recognition, presentation and disclosure on revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that must be
met to recognize revenue and provides guidance for disclosure related to revenue
recognition policies. The Company believes that its current revenue recognition
policy is in compliance with SAB 101.
Factors That May Affect Future Results
We may never achieve or maintain profitability.
We have only a limited operating history upon which you can evaluate
our business. We have incurred losses every year since we began operations. In
particular, we incurred net losses of $3.0 million in 1998 and $14.1 million in
1999 and $12.7 million for the nine months ended September 30, 2000. As of
September 30, 2000, we had an accumulated deficit of approximately $29.8
million. We have generated limited revenues from the sale of our products, and
it is possible that we will never generate significant revenues from product
sales in the future. Even if we do achieve significant revenues from our product
sales, we expect to incur significant net losses over the next several years and
these losses may increase.* It is possible that we will never achieve profitable
operations.
The Stretta System is our only marketed product. If physicians do not adopt our
Stretta System, we will not achieve future sales growth.
We commercially introduced our Stretta System, which consists of a
radiofrequency generator and a disposable handheld device, in May 2000. We are
highly dependent on Stretta System sales because we anticipate that the Stretta
System will account for substantially all our revenue through at least 2001.* To
achieve increasing sales, our product must gain recognition and adoption by
physicians who treat gastrointestinal disorders. The Stretta System represents a
significant departure from conventional GERD treatment methods. We believe that
physicians will not use our Stretta System unless they determine, based on
published peer-reviewed
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journal articles, long-term clinical data and their professional experience,
that the Stretta System provides an effective and attractive alternative to
conventional means of treatment for GERD. Currently, there are only limited
peer-reviewed clinical reports and short-term clinical follow-up data on our
Stretta System. Physicians are traditionally slow to adopt new products and
treatment practices, partly because of perceived liability risks and uncertainty
of third-party reimbursement. If physicians do not adopt our Stretta System, we
may never achieve significant revenues or profitability.
If the effectiveness and safety of our products are not supported by long-term
data, our sales could decline and we could be subject to liability.
If we do not produce clinical data supported by the independent efforts
of clinicians, our products may never be accepted. We received clearance from
the FDA for the use of the Stretta System to treat GERD based upon the study of
47 patients. Safety and efficacy data presented to the FDA for the Stretta
System was based on six-month follow-up studies on 44 of these patients. We may
find that data from longer-term patient follow-up studies is inconsistent with
those indicated by our relatively short-term data. If longer-term patient
studies or clinical experience indicate that treatment with the Stretta System
does not provide patients with sustained benefits or that treatment with our
product is less effective or less safe than our current data suggests, our sales
could decline and we could be subject to significant liability. Further, we may
find that our data is not substantiated in studies involving more patients, in
which case we may never achieve significant revenues or profitability.
Our clinical studies of the Secca System are in the early stages. The
Secca System has undergone a 10-patient pilot study and the FDA approved our
application to conduct a U.S. multi-center clinical study, which we began in
July 2000. You should not draw any conclusion about the safety or efficacy of
the Secca System based upon data from the pilot study because this study
involved only a small patient group. If patient studies or clinical experience
do not meet our expectations regarding the benefits of the Secca System, we may
not obtain regulatory clearance or approval to sell the product and our expected
revenues from this product may never materialize.
Any failure in our physician education efforts could significantly reduce
product sales.
It is important to the success of our sales efforts to educate
physicians in the techniques of using the Stretta System. We rely on physicians
to spend their time and money to attend our pre-sale educational sessions.
Positive results using the Stretta System are highly dependent upon proper
physician technique. If physicians use the Stretta System improperly, they may
have unsatisfactory patient outcomes or cause patient injury, which may give
rise to negative publicity or lawsuits against us, any of which could have a
material adverse effect on our sales and profitability.
If health care providers are not adequately reimbursed for the procedures which
use our products, or for the products themselves, we may never achieve
significant revenues.
Physicians, hospitals and other health care providers are unlikely to
purchase our products if they are not adequately reimbursed for the Stretta
procedure or the products. To date, only a limited number of private third-party
payors have agreed to reimburse for the cost of the Stretta procedure or
products. Until a sufficient amount of positive peer-reviewed clinical data has
been published, insurance companies and other payors may refuse to provide
reimbursement for the cost of the Stretta procedure or may reimburse at levels
that are not acceptable to providers. Some payors may refuse adequate
reimbursement even upon publication of peer-reviewed data. The advent of
contracted rates per procedure has also made it difficult to receive
reimbursement for disposable products, even if the use of these products
improves clinical outcomes. If users of our products cannot obtain sufficient
reimbursement from
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health care payors for the Stretta procedure or the Stretta System disposables,
then it is unlikely that our product will ever achieve significant market
acceptance.
Reimbursement from third-party health care payors is uncertain due to factors
beyond our control.
Even if third-party payors provide adequate reimbursement for the
Stretta procedure, adverse changes in third-party payors' policies generally
toward reimbursement could preclude market acceptance for our products and have
a material adverse effect on our sales and revenue growth. We are unable to
predict what changes will be made in the reimbursement methods used by third-
party health care payors.
For example, some health care payors are moving toward a managed care
system in which providers contract to provide comprehensive health care for a
fixed cost per person. We cannot assure you that in a prospective payment
system, which is used in many managed care systems, the cost of our products
will be incorporated into the overall payment for the procedure or that there
will be adequate reimbursement for our products separate from reimbursement for
the procedure.
Internationally, market acceptance of our products will be dependent
upon the availability of adequate reimbursement within prevailing health care
payment systems. Reimbursement and health care payment systems in international
markets vary significantly by country and include both government-sponsored
health care and private insurance. Although we intend to seek international
reimbursement approvals, we cannot assure you that any such approvals will be
obtained in a timely manner or at all. If foreign third-party payors do not
adequately reimburse providers for the Stretta procedure and the products used
with it, then our sales and revenue growth may be limited.
We face competition from more established treatments and from competitors with
greater resources, which will make it difficult for us to achieve significant
market penetration.
The market for the treatment of GERD is dominated by companies that
have well-established products, reputations and resources. We primarily compete
with large pharmaceutical companies such as AstraZeneca, Takeda Abbott
Pharmaceuticals and Merck, which collectively generate over $6 billion in annual
U.S. revenues from sales of medication for the treatment of GERD symptoms. We
also compete with large medical device companies such as Johnson &
Johnson/Ethicon, which makes instrumentation for fundoplication surgery, and
C.R. Bard, which has recently received FDA clearance for an endoscopic suturing
device for the treatment of GERD.
These larger companies enjoy several competitive advantages over us,
including:
. existing widely-adopted medications and procedures for the
treatment of GERD;
. established reputations within the medical community;
. established distribution networks that permit these companies to
introduce new products and have such products accepted by the
medical community promptly;
. established relationships with health care providers and payors
that can be used to facilitate reimbursement for new treatments;
and
. greater resources for product development and sales and
marketing.
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At any time, these competitors or other companies may develop new
competitive products that are more effective or less expensive than ours. For
example, AstraZeneca's patent for Prilosec, the leading prescription medication
for the treatment of GERD, expires in 2001, after which time companies may
manufacture less expensive generic versions of the drug. If we cannot compete
effectively in this highly competitive market, we may not be able to achieve our
expected revenue growth.
We have limited sales and marketing experience, and our failure to build and
manage our sales force or to market and distribute our products effectively will
hurt our revenues and profits.
We have limited sales and marketing experience. As of October 1, 2000,
we relied on six seven direct sales employees to sell our Stretta System in the
United States. We must expand this sales team over the next 24 months to achieve
our market share and revenue growth goals.* Since we have only recently launched
the Stretta System, our sales force has little experience marketing the product,
and we cannot predict how successful they will be in selling the product. There
are significant risks involved in building and managing our sales force and
marketing our products, including our:
. Inability to hire a sufficient number of qualified sales people
with the skills and understanding to sell the Stretta System
effectively;
. Failure to adequately train our sales force in the use and
benefits of our products, making them less effective promoters;
and
. Failure to accurately price our products as attractive
alternatives to conventional treatments.
Internationally, we intend to use third-party distributors to sell our
products, and we cannot assure you that these distributors will commit the
necessary resources to effectively market and sell our products or that they
will be successful in selling our products.
If we fail to adequately build and manage our domestic and foreign
sales force, or to effectively market and distribute our products domestically
and internationally, then our revenues and our profitability will be materially
and negatively impacted.
We have no experience manufacturing our products in commercial quantities, which
could adversely impact the rate at which we grow.
We may encounter difficulties manufacturing our products for the
following reasons:
. We do not have experience manufacturing our products in
commercial quantities;
. We do not have extensive experience manufacturing our products in
compliance with the FDA's Quality System Regulation;
. To increase our manufacturing output significantly, we will have
to attract and retain qualified employees, who are in short
supply, for the assembly and testing operations; and
. Some of the components and materials necessary for manufacturing
our products are currently provided by a single supplier.
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In addition, although we believe that our current manufacturing
facility will be adequate to support our commercial manufacturing activities for
the foreseeable future, we may be required to expand our manufacturing
facilities to begin large-scale manufacturing.* If we are unable to provide
customers with high-quality products in a timely manner, we may not be able to
achieve market acceptance for our Stretta System. Our inability to successfully
manufacture or commercialize our devices could have a material adverse effect on
our product sales.
If we lose our relationship with any individual suppliers of product components,
we will face regulatory requirements with regard to replacement suppliers that
could delay the manufacture of our products.
Third-party suppliers provide materials and components used in our
products. If these suppliers become unwilling or unable to supply us with our
requirements, replacement or alternative sources might not be readily obtainable
due to regulatory requirements applicable to our manufacturing operations.
Obtaining components from a new supplier may require a new or supplemental
filing with applicable regulatory authorities and clearance or approval of the
filing before we could resume product sales. This process may take a substantial
period of time, and we cannot assure you that we would be able to obtain the
necessary regulatory clearance or approval. This could create supply disruptions
that would reduce our product sales and revenue.
If we or our suppliers fail to comply with the FDA quality system regulation,
manufacturing operations could be delayed and our business could be harmed.
Our manufacturing processes are required to comply with the quality
system regulation, or QSR, which covers the methods and documentation of the
design, testing, production, control, quality assurance, labeling, packaging and
shipping of our products. The United States Food and Drug Administration
enforces the QSR through inspections. We have never been through a QSR
inspection, and we cannot assure you that we would pass. If we failed a QSR
inspection, our operations could be disrupted and our manufacturing delayed.
Failure to take corrective action in response to a QSR inspection could force a
shut-down of our manufacturing operations and a recall of our products, which
would have a material adverse effect on our product sales, revenues, and
expected revenues and profitability. Furthermore, we cannot assure you that our
key component suppliers are or will continue to be in compliance with applicable
regulatory requirements, will not encounter any manufacturing difficulties, or
will be able to maintain compliance with regulatory requirements. Any such event
could have a material adverse effect on our available inventory and product
sales.
Our failure to obtain or maintain necessary FDA clearances or approvals could
hurt our ability to commercially distribute and market our products in the
United States.
Our products are considered medical devices and are subject to
extensive regulation in the United States and in foreign countries where we
intend to do business. Unless an exemption applies, each medical device that we
wish to market in the United States must first receive either 510(k) clearance
or premarket approval from the FDA. Either process can be lengthy and expensive.
The FDA's 510(k) clearance process usually takes from four to twelve months, but
may take longer. The premarket application, or PMA, approval process is much
more costly, lengthy and uncertain. It generally takes from one to three years
or even longer. Delays in obtaining regulatory clearance or approval will
adversely affect our revenues and profitability.
Although we have obtained 510(k) clearance for the Stretta System for
use in treating GERD, our clearance can be revoked if postmarketing data
demonstrates safety issues or lack of effectiveness. Moreover, we will need to
obtain 510(k) clearance or premarket approval to market the Secca System for
fecal incontinence and for any other new products we wish to market. If the FDA
concludes that the Secca System does not meet the requirements to obtain 510(k)
clearance, then we would have to seek PMA approval. We cannot assure you that
the
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FDA will not impose the more burdensome PMA approval process upon this
technology in the future. More generally, we cannot assure you that the FDA will
ever grant 510(k) clearance or premarket approval for any product we propose to
market. If the FDA withdraws or refuses to grant approvals, we will be unable to
market such products in the United States.
If we market our products for uses that the FDA has not approved, we could be
subject to FDA enforcement action.
Our Stretta System is cleared by the FDA for the treatment of GERD. FDA
regulations prohibit us from promoting or advertising the Stretta System, or any
future cleared or approved devices, for uses not within the scope of our
clearances or approvals or making unsupported safety and effectiveness claims.
These determinations can be subjective, and the FDA may disagree with our
promotional claims. If the FDA requires us to revise our promotional claims or
takes enforcement action against us based upon our labeling and promotional
materials, our sales could be delayed, our profitability could be harmed and we
could be required to pay significant fines or penalties.
Modifications to our marketed devices may require new 510(k) clearances or PMA
approvals or require us to cease marketing or recall the modified devices until
such clearances are obtained.
Any modification to an FDA 510(k)-cleared device that could
significantly affect its safety or effectiveness, or that would constitute a
major change in its intended use, requires a new FDA 510(k) clearance or,
possibly, premarket approval, or PMA approval. The FDA requires every
manufacturer to make this determination in the first instance, but the FDA can
review any such decision. We have modified aspects of our Stretta System, but we
believe that new 510(k) clearances are not required. We may modify future
products after they have received clearance or approval, and, in appropriate
circumstances, we may determine that new clearance or approval is unnecessary.
We cannot assure you that the FDA would agree with any of our decisions not to
seek new clearance or approval. If the FDA requires us to seek 510(k) clearance
or PMA approval for any modification to a previously cleared product, we also
may be required to cease marketing or recall the modified device until we obtain
such clearance or approval. Also, in such circumstances, we may be subject to
significant regulatory fines or penalties.
Complying with FDA and other regulations is an expensive and time-consuming
process, and any failure to comply could result in substantial penalties.
Our products are medical devices that are subject to extensive
regulation. FDA regulations are wide-ranging and govern, among other things:
. product design, development, manufacture and testing;
. product labeling;
. product storage;
. premarket clearance or approval;
. advertising and promotion; and
. product sales and distribution.
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Noncompliance with applicable regulatory requirements can result in
enforcement action which may include recalling products, ceasing product
marketing, paying significant fines and penalties, and similar FDA actions which
could limit product sales, delay product shipment, and adversely affect our
profitability.
We face risks related to our international operations, including the need to
obtain necessary foreign regulatory approvals.
To date, we have not begun selling our products in international
markets and we do not anticipate doing so before 2001 at the earliest.* To
successfully market our products internationally, we must address many issues
with which we have little or no experience. We have obtained regulatory
clearance to market the Stretta System in the European Union and Australia, but
we have not obtained any other international regulatory approvals for other
markets or products. We cannot assure you that we will be able to obtain or
maintain such approvals. Furthermore, international sales may be made in
currencies other than the U.S. dollar. As a result, currency fluctuations may
impact the demand for our products in foreign countries where the U.S. dollar
has increased compared to the local currency. Engaging in international business
involves the following additional risks:
. export restrictions, tariff and trade regulations, and foreign
tax laws;
. customs duties, export quotas or other trade restrictions;
. economic or political instability;
. shipping delays; and
. longer payment cycles.
In addition, contracts may be difficult to enforce and receivables
difficult to collect through a foreign country's legal system, and the
protection of intellectual property in foreign countries may be more difficult
to enforce. Once we begin selling our products internationally, any of these
factors could cause our international sales to decline, which would impact our
expected sales and growth rates.
Product liability suits against us could result in expensive and time-consuming
litigation, payment of substantial damages and an increase in our insurance
rates.
The development, manufacture and sale of medical products involve a
significant risk of product liability claims. The use of any of our products may
expose us to liability claims, which could divert management's attention from
our core business, be expensive to defend, and result in sizable damage awards
against us. We cannot assure you that our product liability insurance would
protect us from product liability claims. Any product liability claims brought
against us, with or without merit, could increase our product liability
insurance rates or prevent us from securing any coverage in the future. Even in
the absence of a claim, our insurance rates may rise in the future to a point
where we decide not to carry any insurance.
We have limited protection for our intellectual property. If our intellectual
property does not sufficiently protect our products, third parties will be able
to compete against us more directly and more effectively.
As of September 30, 2000, we had 11 issued or allowed U.S. patents and
22 pending U.S. patent applications. We also had 12 issued U.S. patents and 21
pending U.S. patent applications licensed in from third-parties. We rely on
patent, copyright, trade secret and
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trademark laws to protect our products, including our Stretta Catheter and our
Curon Control Module, from being duplicated by competitors. However, these laws
afford only limited protection. Our patent applications and the notices of
allowance we have received may not issue as patents or, if issued, may not issue
in a form that will be advantageous to us. Patents we have obtained and may
obtain in the future may be challenged, invalidated or legally circumvented by
third parties. We may not be able to prevent the unauthorized disclosure or use
of our technical knowledge or other trade secrets by consultants, vendors,
former employees or current employees, despite the existence of nondisclosure
and confidentiality agreements and other contractual restrictions. Furthermore,
the laws of foreign countries may not protect our intellectual property rights
to the same extent as the laws of the United States. If our intellectual
property rights do not adequately protect our commercial products, our
competitors could develop new products or enhance existing products to compete
more directly and effectively with us and harm our product sales and market
position.
Because of our reliance on unique technology to develop and manufacture
innovative products, we depend on our ability to operate without infringing or
misappropriating the proprietary rights of others.
There is a substantial amount of litigation over patent and other
intellectual property rights in the medical device industry generally. Because
we rely on unique technology to develop and manufacture innovative products, we
are especially sensitive to the risk of infringing intellectual property rights.
While we attempt to ensure that our products do not infringe other parties'
patents and proprietary rights, our competitors may assert that our products and
the methods they employ may be covered by patents held by them or invented by
them before they were invented by us. Although we may seek to obtain a license
or other agreement under a third party's intellectual property rights to bring
an end to certain claims or actions asserted against us, we may not be able to
obtain such an agreement on reasonable terms or at all. If we were not
successful in obtaining a license or redesigning our products, our product sales
and profitability could suffer, and we could be subject to litigation and
potentially sizable damage awards.
Also, one or more of our products may now be infringing inadvertently
on existing patents. As the number of competitors in our markets grows, the
possibility of a patent infringement claim against us increases. Whether a
product infringes a patent involves complex legal and factual issues, the
determination of which is often uncertain. Infringement and other intellectual
property claims, with or without merit, can be expensive and time-consuming to
litigate and divert management's attention from our core business. If we lose in
this kind of litigation, a court could require us to pay substantial damages or
grant royalties, and prohibit us from using technologies essential to our
products. This kind of litigation is expensive to all parties and consumes large
amounts of management's time and attention. In addition, because patent
applications can take many years to issue, there may be applications now pending
of which we are unaware and which may later result in issued patents that our
products may infringe.
If we are unable to attract and retain qualified personnel, we will be unable to
expand our business.
We believe our future success will depend upon our ability to
successfully manage our growth, including attracting and retaining engineers and
other highly skilled personnel. Our employees are at-will employees and, with
the exception of certain executive officers, are not subject to employment
contracts. The loss of services of one or more key employees could materially
adversely affect our growth. In addition, hiring qualified management and
technical personnel will be difficult due to the intense competition for
qualified professionals within the medical device industry. In the past, we have
experienced difficulty in recruiting qualified
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personnel. Failure to attract and retain personnel, particularly management and
technical personnel, would materially harm our ability to grow our business
rapidly and effectively.
Our directors, executive officers and principal stockholders have significant
voting power and may take actions that may not be in the best interests of our
other stockholders.
Our officers, directors and principal stockholders holding more than 5%
of our common stock together control approximately 59.1% of our outstanding
common stock. As a result, these stockholders, if they act together, will be
able to control the management and affairs of our company and all matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. This concentration of ownership may have
the effect of delaying or preventing a change in control and might adversely
affect the market price of our common stock. This concentration of ownership may
not be in the best interest of our other stockholders.
Our certificate of incorporation and bylaws and Delaware law contain provisions
that could discourage a takeover.
Our basic corporate documents and Delaware law contain provisions that
might enable our management to resist a takeover. These provisions might
discourage, delay or prevent a change in the control of our company or a change
in our management. The existence of these provisions could adversely affect the
voting power of holders of common stock and limit the price that investors might
be willing to pay in the future for shares of our common stock.
We expect that the price of our common stock will fluctuate substantially.
The market price for the common stock may be affected by a number of
factors, including:
. the announcement of new products or product enhancements by us or
our
. competitors;
. quarterly variations in our or our competitors' results of
operations;
. changes in earnings estimates or recommendations by securities
analysts, or our failure to achieve analyst earnings estimates;
. developments in our industry; and
. general market conditions and other factors, including factors
unrelated to our operating performance or the operating
performance of our competitors.
In addition, the stock prices of many companies in the medical device
industry have experienced wide fluctuations that have often been unrelated to
the operating performance of such companies. Such factors and fluctuations may
materially and adversely affect the market price of our common stock, which, in
turn, may negatively affect our ability to raise capital and to acquire
technologies in the future.
A sale of a substantial number of shares of our common stock may cause the price
of our common stock to decline.
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If our stockholders sell substantial amounts of our common stock in the
public market, including shares issued upon the exercise of outstanding options,
the market price of our common stock could fall. Such sales also might make it
more difficult for us to sell equity or equity-related securities in the future
at a time and price that we deem reasonable or appropriate.
Item 3. Quantitative and Qualitative Disclosures of Market Risk
----------------------------------------------------------------
We invest our excess cash primarily in U.S. government securities and
marketable debt securities of financial institutions and corporations with
strong credit ratings. These instruments have maturities of eighteen months or
less when acquired with an average maturity date of less than eighteen months.
We do not utilize derivative financial instruments, derivative commodity
instruments or other market risk sensitive instruments, positions or
transactions in any material fashion. Accordingly, we believe that while the
instruments we hold are subject to changes in the financial standing of the
issuer of such securities, we are not subject to any material risks arising from
changes in interest rates, foreign currency exchange rates, commodity prices,
equity prices or other market changes that affect market risk sensitive
instruments.
PART II - OTHER INFORMATION
-----------------------------
Item 2. Changes in Securities and Use of Proceeds
On September 26, 2000, we completed the sale of 5,000,000 shares of our
common stock at a per share price of $11.00 in a firm commitment underwritten
public offering. The offering was effected pursuant to a Registration Statement
on Form S-1 (Registration No. 333-37866), which the United States Securities and
Exchange Commission declared effective on September 21, 2000. The offering was
underwritten by UBS Warburg LLC, CIBC World Markets and SG Cowen. On October 24,
2000, we completed the sale of an additional 475,000 shares of our common stock
at a per share price of $11.00 pursuant to the exercise of the over-allotment
option by the underwriters. Of the $60,225,000 in aggregate proceeds we raised
in connection with the September and October offering, we paid (i) $4,215,750 to
the underwriters in connection with underwriting discounts and commissions and
(ii) approximately $1,200,000 in connection with offering expenses, including
legal, printing and filing fees. We have used the proceeds of the offering for
the repayment of debt and accrued interest of $11.7 million. As the completion
of our offering was only four days prior to the end of the third quarter we have
not yet used the proceeds for any other purpose.
Item 6: Exhibits and Reports on Form 8-K
(a) There were no reports on Form 8-K during the quarter ended September
30, 2000.
Exhibit 27.1 - Financial Data Schedule
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<PAGE>
CURON MEDICAL, INC.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CURON MEDICAL, INC.
(Registrant)
Date: November 13, 2000 By: /s/ John W. Morgan
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John W. Morgan
President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Alistair F. McLaren
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Alistair F. McLaren
Vice President of Finance
Chief Financial Officer and
Chief Information Officer
(Principal Financial Officer)
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