<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .
-------- ------
Commission file number 0-6523
MICRO THERAPEUTICS, INC.
(exact name of small business issuer as specified in its charter)
Delaware 33-0569235
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
1062 Calle Negocio #F, San Clemente, California 92673
(Address of principal executive offices)
(714) 361-0616
(Issuer's telephone number)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) of the Exchange Act during the past 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
----- -----
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at August 13, 1997
----- ------------------------------
<S> <C>
Common Stock, $.001 par value 6,443,678
</TABLE>
Page 1 of 21 Pages
Exhibit Index on Page 20
<PAGE> 2
MICRO THERAPEUTICS, INC.
INDEX TO FORM 10-QSB
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page Number
<S> <C>
Item 1.Financial Statements
Balance Sheet as of June 30, 1997 (unaudited).................................3
Statements of Operations (unaudited) for the three and six
months ended June 30, 1997 and 1996...........................................4
Statements of Cash Flows (unaudited) for the six months ended
June 30, 1997 and 1996........................................................5
Notes to Financial Statements (unaudited).....................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................7-18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................18
Item 6. Exhibits and Reports on Form 8-K......................................18
SIGNATURES..................................................................................19
</TABLE>
2
<PAGE> 3
MICRO THERAPEUTICS, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
June 30,
1997
(Unaudited)
------------
ASSETS:
<S> <C>
Current assets:
Cash and cash equivalents $ 2,465,649
Short term investments 7,500,301
Accounts receivable 269,999
Inventories 600,848
Prepaid expenses and other current assets 228,730
------------
Total current assets 11,065,527
Property and equipment, net of accumulated depreciation 718,752
of $454,054
Patents and licenses, net of accumulated amortization 447,452
of $34,387
Other assets 42,290
------------
Total assets $ 12,274,021
============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of equipment line of credit $ 59,296
Accounts payable 227,484
Accrued liabilities 383,400
------------
Total current liabilities 670,180
Equipment line of credit 179,562
------------
Total liabilities 849,742
------------
Commitments and contingencies
Stockholders' equity:
Preferred stock $.001 par value, 5,000,000 shares -
authorized, no shares issued and outstanding at June 30, 1997
Common stock, $.001 par value, 20,000,000 shares
authorized, 6,440,429 shares issued and outstanding at 6,440
June 30, 1997
Additional paid-in-capital 25,248,844
Unearned compensation (302,413)
Accumulated deficit (13,528,592)
------------
Total stockholders' equity 11,424,279
------------
Total liabilities and stockholders' equity $ 12,274,021
============
</TABLE>
See notes to unaudited financial statements.
3
<PAGE> 4
MICRO THERAPEUTICS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
-----------
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 639,329 $ 324,541 $ 1,149,368 $ 557,454
Cost of sales 554,608 335,396 1,044,925 672,346
----------- ----------- ----------- -----------
Gross profit (loss) 84,721 (10,855) 104,443 (114,892)
Costs and expenses:
Research and development 1,057,939 452,333 2,079,336 880,114
Selling, general & administrative 1,030,467 669,493 2,068,571 1,391,665
----------- ----------- ----------- -----------
Total costs and expenses 2,088,406 1,121,826 4,147,907 2,271,779
----------- ----------- ----------- -----------
Loss from operations (2,003,685) (1,132,681) (4,043,464) (2,386,671)
Other income (expense), net 122,782 29,585 353,212 43,985
----------- ----------- ----------- -----------
Loss before provision for
income taxes (1,880,903) (1,103,096) (3,690,252) (2,342,686)
----------- ----------- ----------- -----------
Provision for income taxes - 800 800 800
----------- ----------- ----------- -----------
Net loss ($1,880,903) ($1,103,896) ($3,691,052) ($2,343,486)
=========== =========== =========== ===========
Net loss per common share and common
share equivalent ($ 0.29) ($ 0.26) ($ 0.61) ($ 0.62)
=========== =========== =========== ===========
Weighted average common shares and
common share equivalents outstanding 6,520,000 4,222,000 6,009,000 3,792,000
=========== =========== =========== ===========
</TABLE>
See notes to unaudited financial statements.
4
<PAGE> 5
MICRO THERAPEUTICS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
-----------
<TABLE>
<CAPTION>
For the Six Months Ended
June 30, June 30,
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($ 3,691,052) ($ 2,343,486)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization 178,942 84,136
Compensation related to stock options 55,054
vesting
Gain on sale of investment (167,456)
Change in operating assets and
liabilities:
Accounts receivable (26,163) (91,799)
Inventories (169,226) (179,067)
Prepaid expenses and other assets 32,675 (90,305)
Accounts payable 11,962 (32,520)
Accrued liabilities 39,892 90,741
------------ ------------
Net cash used in operating activities (3,735,372) (2,562,300)
Cash flows from investing activities:
Purchase of short-term investments (8,973,883) (1,954,756)
Sale of short-term investments 1,473,582
Additions to property and equipment (168,908) (154,060)
Additions to patents and licenses (133,697) (32,026)
------------ ------------
Net cash used in investing activities (7,802,906) (2,140,842)
Cash flows from financing activities:
Proceeds from issuance of common stock 10,340,586
Proceeds from issuance of preferred stock 8,121,540
Costs of equity issuances (529,535) (49,458)
Proceeds from exercise of stock options 35,601 1,875
Borrowings on equipment line of credit 25,341 112,123
Repayments on equipment line of credit (25,213) (5,625)
------------ ------------
Net cash provided by financing 9,846,780 8,180,455
activities
Net increase (decrease) in cash and (1,691,498) 3,477,313
cash equivalents
Cash and cash equivalents at the beginning 4,157,147 2,417,644
of the period
------------ ------------
Cash and cash equivalents at the end of the $ 2,465,649 $ 5,894,957
period
============ ============
Supplemental cash flow disclosures:
Cash paid during the period for interest $ 15,100 $ 3,444
============ ============
Cash paid during the period for income $ 800 $ 800
taxes
============ ============
Supplemental schedule of non-cash activities:
Conversion of preferred stock to common $ 15,034,497
stock
============
</TABLE>
See notes to unaudited financial statements.
5
<PAGE> 6
MICRO THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Description Of The Company and Basis of Presentation:
Micro Therapeutics, Inc. ("MTI" or the "Company") was incorporated in June
1993 in California and was reincorporated in Delaware in November 1996 to
develop, manufacture and market minimally invasive medical devices for
diagnosis and treatment of neuro and peripheral vascular diseases.
The unaudited financial statements of the Company presented herein have
been prepared pursuant to the rules of the Securities and Exchange
Commission for quarterly reports on Form 10-QSB and do not include all of
the information and footnote disclosures required by generally accepted
accounting principles. These statements should be read in conjunction with
the audited financial statements and notes thereto included in the Company's
Form 10-KSB for the year ended December 31, 1996.
Certain expense reclassifications have been made to the prior period
statements of operations to conform to the current period presentation.
2. Summary Of Significant Accounting Policies:
Unaudited Interim Financial Information:
The financial information at June 30, 1997 and for the three and six month
periods ended June 30, 1997 and 1996 is unaudited but includes 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 such
periods. Results of the quarter ended June 30, 1997 are not necessarily
indicative of the results for the entire year.
Short-Term Investments:
The Company's short-term investments at June 30, 1997 consist primarily of
funds invested in money market instruments and commercial paper and which
have maximum maturities of six months. The carrying amount of these
investments is at cost plus accrued interest which approximates market
value. All short-term investments are held in the Company's name and
custodied with one financial institution.
Statements of Financial Accounting Standards Not Yet Adopted:
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." SFAS No. 128 requires companies to adopt its provisions for fiscal
years beginning after December 15, 1997 and requires restatement of all
prior period earnings per share (EPS) data presented. Earlier application is
not permitted. SFAS No. 128 specifies the computation, presentation and
disclosure requirements for EPS. The implementation of SFAS No. 128 is not
expected to have a material effect on the EPS data presented by the Company.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130, which is effective for fiscal years beginning after
December 15, 1997 and requires restatement of earlier periods presented,
establishes standards for the reporting and display of comprehensive income
and its components in a full set of general purpose financial statements.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from nonowner sources. The implementation of SFAS No. 130 is
not expected to have a material effect on the Company's results of
operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information". SFAS No. 131, which is effective for
fiscal years beginning after December 15, 1997 and requires restatement of
earlier periods presented, establishes standards for the way that a public
enterprise reports information about key revenue-producing segments in the
annual financial statements and selected information in interim financial
reports. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The
implementation of SFAS No. 131 is not expected to have a material effect on
the Company's current reporting and disclosures.
3. Sale of Common Stock:
In February 1997, the Company completed its initial public offering of its
common stock, in which 1,840,000 shares of common stock was sold, generating
net proceeds of approximately $10 million. In connection with the offering,
all 3,612,664 outstanding shares of preferred stock were converted into
equal shares of common stock.
6
<PAGE> 7
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 Financial
Statements and the related Notes thereto included elsewhere in this Quarterly
Report on Form 10-QSB. This Quarterly Report on Form 10-QSB contains
forward-looking statements which involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed under "Certain Factors That May Affect
the Company's Business and Future Results."
OVERVIEW
Since its inception in June, 1993, MTI has been primarily engaged in the
design, development and marketing of minimally invasive devices for treatment of
vascular disease. The Company has a limited history of operations and has
experienced significant operating losses since inception. Operating losses are
expected to continue as the Company expends substantial resources to fund
research and development, clinical trials, and regulatory approvals and
increased marketing and sales activities.
The Company commenced U.S. commercial shipments of its first
thrombolytic infusion catheters in November 1994, but did not generate
significant revenues until it established a direct domestic sales force in the
second half of 1995. The Company currently sells its products in selected
international markets through a limited number of distributors. During September
1996, four of the Company's seven sales representatives left the Company to join
three other companies. In the fourth quarter of 1996 the Company hired four new
sales representatives to replace those who left plus one representative to cover
an additional territory. The temporary reduction of the sales force had the
effect of reducing the rate of growth of sales during the fourth quarter of
1996. During the months of June and July 1997, two sales representatives left
the Company and two other sales representatives were terminated. The Company
expects to hire two new representatives during the third quarter. In mid-July
1997, a Vice President of Sales and Marketing (a new position) was hired to
direct the worldwide marketing efforts for the Company.
To date, virtually all the Company's revenues have been derived from
sales of its initial infusion catheters and related accessories. The Company
expects sales of these and similar products to provide the majority of the
Company's revenues at least through 1997. Approval of the Company's 510(k)
market clearance application for the Cragg Thrombolytic Brush was received from
the U.S. Food and Drug Administration ("FDA") on August 11, 1997, and U.S.
market introduction is currently underway. However, there can be no assurance
that the Company will be successful in generating sales of this or other future
products. The Company received CE Mark certification for its existing products
in May 1997. However, the Company is still in the process of formulating its
sales and marketing strategy for the European Community ("EC") and,
consequently, sales in EC member countries in the second quarter were minimal.
During the second quarter of 1997 an investigational device exemption, sponsored
by the University of California, Los Angeles, for study of the Company's
EMBOLYX(TM) liquid embolic system for the endovascular treatment of
arteriovenous malformations (AVMs) in the brain, received conditional approval
from the FDA. This study is expected to commence in the third quarter of 1997.
7
<PAGE> 8
The Company's thrombolytic infusion catheters and sidehole infusion wire are
currently manufactured by the Company at its facility in San Clemente,
California. An endhole infusion wire and certain accessories are manufactured by
contract manufacturers. During 1996 the Company expanded its manufacturing
facilities in order to provide sufficient capacity for future products, and to
better control product costs and quality. Future revenues and results of
operations may fluctuate significantly from quarter to quarter and will depend
upon, among other factors, actions relating to regulatory and reimbursement
matters, the extent to which the Company's products gain market acceptance, the
rate at which the Company establishes its international sales and distribution
network, the progress of clinical trials, and the introduction of competitive
products for diagnosis and treatment of neuro and peripheral vascular disease.
The Company's limited operating history makes accurate prediction of future
operating results difficult or impossible. Although the Company has experienced
sales growth in recent periods, there can be no assurance that, in the future,
the Company will sustain sales growth or gain profitability on a quarterly or
annual basis or that its growth will be consistent with predictions made by
securities analysts.
The Company currently manufactures product for stock and ships product
shortly after the receipt of orders, and anticipates that it will do so in the
future. Accordingly, the Company has not developed a significant backlog and
does not anticipate that it will develop a material backlog in the future.
RESULTS OF OPERATIONS
Net sales in the second quarter ended June 30, 1997 increased 97% to
$639,000 as compared to $325,000 in the second quarter 1996. The increase is the
result of the growth in sales of infusion products. International sales
represented 5% of total sales for the second quarter ended June 30, 1997 and 3%
in the second quarter of June 30, 1996. Net sales for the six month period ended
June 30, 1997 increased 106% to $1,149,000 as compared to $557,000 in the first
half of 1996. International sales represented 4% and 6% of total sales for the
six month periods ended June 30, 1997 and June 30, 1996, respectively. In 1996,
sales were based on six product lines whereas in 1997, sales include eight lines
(45 individual products).
Cost of sales increased to $555,000 for the quarter ended June 30, 1997
from $335,000 in the second quarter 1996. Cost of sales increased to $1,045,000
for the six months ended June 30, 1997 from $672,000 in the same period of 1996.
These increases were attributable to the increase in sales as well as
inefficiencies associated with the increase and expansion of production
operations, and the expansion of the Company's manufacturing facilities in July
1996. In the second quarter of 1997 the Company continued to achieve positive
gross margins. However, the Company continues to incur high manufacturing
overhead costs relative to sales, and there can be no assurance that positive
gross margin will be maintained or improved.
Research and development expenses, which include regulatory and clinical
expenses, increased 134% from $452,000 in the second quarter of 1996 to
$1,058,000 in the second quarter of 1997, and 136% from $880,000 in the first
six months of 1996 to $2,079,000 in the first six months of 1997. These
increases are primarily attributable to increases in the number of employees and
increased expenditures related to development of EMBOLYX(TM) and its initial
lines of neuro micro catheters. The Company expects to continue to significantly
increase research and development costs during the remainder of 1997,
particularly for human clinical trials of EMBOLYX(TM) and continued development
of its neuro micro catheters.
8
<PAGE> 9
Selling, general and administrative expenses increased 54% from
$669,000 in the second quarter of 1996 to $1,030,000 in the second quarter of
1997, and 49% from $1,392,000 in the first six months of 1996 to $2,069,000 in
the first six months 1997. These increases were primarily attributable to the
expansion of the direct sales force in the United States, establishment of a
European office, development of marketing programs and materials in support of
new product introductions, and addition of administrative personnel.
Net interest and other income and expense increased from $30,000 in the
second quarter 1996 to $123,000 in the second quarter 1997, and from $44,000 in
the first six months of 1996 to $353,000 in the first six months of 1997.
Included in other income for the first six months of 1997 was non-recurring
income of $167,000 from the sale of common stock received in a 1996 sale of a
privately held company in which MTI had held a minority interest. Net interest
income increased for both periods in 1997, reflecting higher average cash
balances in 1997 as a result of proceeds from the Company's initial public
offering in February 1997.
As a result of the items discussed above, the Company had a net loss of
$1.9 million for the second quarter of 1997 compared to $1.1 million for the
second quarter of 1996 and a net loss of $3.7 million for the first six months
of 1997 compared to $2.3 million for the same period in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's cash expenditures have significantly
exceeded its sales, resulting in an accumulated deficit of $13.5 million at June
30, 1997. The Company has funded its operations from incorporation through June
30, 1997 primarily through the private placement of equity securities and the
net proceeds from its February 1997 initial public offering. Through June 30,
1997, the Company had raised approximately $15.3 million from the private
placement of equity securities. In February 1997 the Company completed an
initial public offering of 1,840,000 shares of Common Stock, raising net
proceeds of approximately $10 million.
As of June 30, 1997, the Company had cash, cash equivalents and short
term investments of $9,966,000. Cash used in the Company's operations was $3.7
million and $2.6 million for the six months ended June 30, 1997 and 1996,
respectively. These increases relate to costs associated with increased levels
of research and development activities, clinical trials, initial marketing of
new products in the United States, establishment of initial direct marketing
activities in Europe and additional general and administrative expenses required
to support increased operations. The Company's capital expenditures were
$169,000 and $154,000 for the six months ended 1997 and 1996, respectively.
These expenditures include equipment acquired under a lease-line of credit
entered into in 1996. The agreement under the lease-line of credit provides
financing on qualified equipment purchases through June 15, 1997 up to a maximum
of $900,000. A replacement lease-line is currently being negotiated. Cash
provided under the capital financing agreement was $25,000 for the six months
ended June 30, 1997 and $112,000 for the six months ended 1996. The Company
plans to finance its capital and operational needs principally from its existing
capital resources at June 30, 1997, and, to the extent available, from bank and
lease financing.
MTI believes current resources will be sufficient to fund its operations
through 1997. However, the Company's future liquidity and capital requirements
will depend upon numerous factors, including the progress of the Company's
clinical research and product development programs, the receipt of and the time
required to obtain regulatory clearances and approvals, and the resources the
Company devotes to developing, manufacturing and marketing its products. The
Company's capital requirements will also depend on the demands created by its
operational and development programs, including requirements for domestic and
international sales and marketing
9
<PAGE> 10
growth. The Company is currently negotiating a lease-line of credit to replace
its former lease-line which expired June 15, 1997. There can be no assurance
that the Company will be successful in replacing its lease-line. The Company
does not have any commitments for any future expansion of its manufacturing
faculties nor is additional capacity anticipated for 1997. However, there can be
no assurance that the Company will not require additional financing within this
time frame and, therefore, may in the future seek to raise additional funds
through bank facilities, debt or equity offerings or other sources of capital.
Additional funding may not be available when needed or on acceptable terms,
which would have a material adverse effect on the Company's business, financial
condition and results of operations.
CERTAIN FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS AND FUTURE RESULTS
THIS QUARTERLY REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THAT INVOLVE
RISKS AND UNCERTAINTIES. IN ADDITION, THE COMPANY MAY FROM TIME TO TIME MAKE
ORAL FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS OF THE COMPANY'S BUSINESS,
OPERATING RESULTS AND FINANCIAL CONDITION ARE UNCERTAIN AND MAY BE IMPACTED BY
THE FOLLOWING FACTORS, AMONG OTHERS, WHICH MAY CAUSE THE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENT. BECAUSE
OF THESE AND OTHER FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS, OPERATING
RESULTS AND FINANCIAL CONDITION, THE COMPANY'S PAST PERFORMANCE SHOULD NOT BE
CONSIDERED AN INDICATOR OF FUTURE PERFORMANCE AND INVESTORS SHOULD NOT USE
HISTORICAL RESULTS TO ANTICIPATE RESULTS OR TRENDS IN FUTURE PERIODS.
Early Stage of Development. The Company has only recently commercially
introduced a number of products. Several of its key products are in the early
stage of development. EMBOLYX(TM) has not yet entered clinical trials in the
United States and the FDA has only recently approved the Company's 510(k) market
clearance application covering the Cragg Thrombolytic Brush. Commercialization
of the Company's products will depend on a number of factors, including the
Company's ability to demonstrate the safety and efficacy of such products in the
clinical setting. There can be no assurance that the Company's products will be
safe and effective in clinical trials or will ultimately be cleared for
marketing by U.S. or foreign regulatory authorities. Failure to develop safe and
effective products, which are approved for sale on a timely basis, would have a
material adverse effect on the Company's business, operating results and
financial condition.
Uncertainty of Market Acceptance. Even if the Company is successful in
developing safe and effective products that have received marketing clearance,
there can be no assurance that the Company's products will gain market
acceptance. Acceptance of the Company's EMBOLYX(TM) and the Cragg Thrombolytic
Brush will require the Company to satisfactorily address the needs of potential
customers. The target customers for the Company's products are interventional
radiologists and interventional neuroradiologists. However, there can be no
assurance that acceptance of the Company's products by interventional
radiologists and interventional neuroradiologists will translate into sales. In
addition, no assurance can be given that the
10
<PAGE> 11
Company's market share for its existing products will grow or that its products
which have yet to be introduced will be accepted in the market. If the Company
is unable to gain market acceptance of its current and future products, the
Company's business, operating results and financial condition would be
materially adversely affected.
Rapid Technological Change; New Product Development. The markets for the
Company's products are characterized by rapidly changing technologies and new
product introductions and enhancements. In addition to the risks associated with
market acceptance of the Company's products, the Company's success will depend
to a significant extent upon its ability to enhance and expand the utility of
its products and to develop and introduce innovative new products that gain
market acceptance. Moreover, the Company may encounter technical problems in
connection with its product development that could delay introduction of new
products or product enhancements. There can be no assurance that new
technologies, products or drug therapies developed by others will not reduce the
demand for the Company's products. The Company maintains research and
development programs to continually improve its product offerings, including
adding new interventional devices. There can be no assurance however that such
efforts will be successful or that other companies will not develop and
commercialize products based on new technologies that are superior in either
performance or cost-effectiveness to the Company's products.
Intense Competition. The medical technology industry is characterized by
intense competition. The Company's products will compete with other medical
devices, surgical procedures and pharmaceutical products. A number of the
companies in the medical technology industry, including manufacturers of neuro
vascular and peripheral vascular products, have substantially greater capital
resources, larger customer bases, broader product lines, greater marketing and
management resources, larger research and development staffs and larger
facilities than the Company. Such entities have developed, or may develop,
additional products competitive with the Company's products. There can be no
assurance that the Company's competitors will not succeed in developing or
marketing technologies and products that are more readily accepted than those
developed or marketed by the Company or that such competing products would not
render the Company's technology and products obsolete or noncompetitive.
Although the Company believes that its products may offer certain advantages
over its competitors' currently-marketed products, earlier entrants in the
market often obtain and maintain significant market share relative to later
entrants. While the Company has designed its products to be cost effective and
more efficient than competing technologies, there can be no assurance that
competitors will not provide better methods or products at comparable or lower
costs. The Company may experience competitive pricing pressures that may
adversely affect unit prices and sales levels and, consequently, materially
adversely affect the Company's business, operating results and financial
condition.
The Company also competes with other manufacturers of medical devices
for clinical sites to conduct human trials. The Company's ability to locate such
clinical sites on a timely basis could have a material adverse effect on the
Company's ability to conduct trials of its products which may be necessary to
obtain required FDA clearance or approval of such products. Such delays could
have a material adverse effect on the Company's business, operating results and
financial condition.
Limited Operating History; Absence of Profitability. The Company was
incorporated in 1993. To date, the Company's business has generated limited
product sales. From its inception
11
<PAGE> 12
through June 30, 1997, the Company incurred cumulative losses of approximately
$13.5 million. The Company expects to incur additional losses as it expands its
research and development, manufacturing and marketing efforts. No assurance can
be given that the Company will achieve significant sales of its products or that
such sales will lead to profitability. There can be no assurance that the
Company will not encounter substantial delays and unexpected expenses related to
the introduction of its current and future products, or the Company's research
and development, manufacturing and marketing efforts. Such delays or expenses
could have a material adverse effect on the Company's business, operating
results and financial condition.
Need for Additional Funds; Uncertainty of Additional Financing. The
Company's operations to date have consumed substantial amounts of cash, and the
Company expects its capital and operating expenditures to increase. The Company
believes that its existing capital resources and anticipated cash flow from
planned operations should be adequate to satisfy its capital requirements
through 1997. There can be no assurance, however, that the Company will not need
additional capital before such time. The Company's need for additional financing
will depend upon numerous factors, including the extent and duration of the
Company's future operating losses, the level and timing of future revenues and
expenditures, market acceptance of new products, the results and scope of
ongoing research and development projects, competing technologies, and market
and regulatory developments. The Company currently has no committed external
sources of funds. To the extent that existing resources are insufficient to fund
the Company's activities, the Company may seek to raise additional funds through
public or private financing. There can be no assurance that additional financing
will be available or, if available, that it will be available on acceptable
terms. If additional funds are raised by issuing equity securities, further
dilution to then-existing stockholders may result. If adequate funds are not
available, the Company's business, operating results and financial condition may
be materially adversely affected.
Dependence on Patents and Proprietary Technology. The success of the
Company will depend, in part, on its ability to obtain and maintain patent
protection for its products, to preserve its trade secrets and to operate
without infringing the proprietary rights of others. The patent position of a
medical device company may involve complex legal and factual issues. As of June
30, 1997, the Company held twelve issued U.S. patents, one issued foreign patent
and has nineteen U.S. and eighteen foreign patent applications pending. The
Company's issued U.S. patents cover technology underlying the Cragg MicroValve,
infusion wire, Cragg Thrombolytic Brush, EMBOLYX(TM) and carotid and
intra-cerebral stent products. The expiration dates of these patents range from
2008 to 2014. The pending claims cover various aspects of its infusion catheter,
infusion wire, thrombolytic brush, micro catheter, EMBOLYX(TM), and carotid and
intra-cerebral stent technologies. Each product area the Company is pursuing is
covered by at least one issued and pending patent. One of the patents used by
the Company is currently licensed by the Company from Andrew Cragg, M.D. There
can be no assurance that issued patents will provide significant proprietary
protection, that pending patents will be issued, or that products incorporating
the technology in issued patents or pending applications will be free of
challenge from competitors. There also can be no assurance that patents
belonging to competitors will not require the Company to alter its technology
and products, pay licensing fees or cease to market or develop its current or
future technology and products. The Company also relies on trade secrets to
protect its proprietary technology, and no assurance can be given that others
will not independently develop or otherwise acquire equivalent technology or
that the Company can maintain such technology as trade secrets. In addition, the
laws of some foreign countries do not protect the Company's proprietary rights
to the same extent as the laws of the
12
<PAGE> 13
United States. The failure of the Company to protect its intellectual property
rights could have a material adverse effect on its business, operating results
and financial condition.
The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights. There can
be no assurance that infringement, invalidity, right to use or ownership claims
by third parties will not be asserted against the Company in the future.
Although patent and intellectual property disputes in the medical device
industry have often been settled through licensing or similar arrangements,
costs associated with such arrangements may be substantial and there can be no
assurance that necessary licenses would be available to the Company on
satisfactory terms or at all. Accordingly, an adverse determination 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 addition, should the Company decide to
litigate such claims, such litigation could be expensive and time consuming,
could divert management's attention from other matters and could have a material
adverse effect on the Company's business, operating results and financial
condition, regardless of the outcome of the litigation.
Limited Marketing Experience; Lack of Distribution. The Company's sales
force consists of five people in the United States and one person in Europe, all
of whom have been with the Company for a limited time. The Company believes it
will have to increase the number of sales personnel to fully cover its target
markets. Recently, there has been an increase in competition for sales personnel
experienced in interventional medical device sales and, as a result, the Company
has experienced significant turnover in its sales force. There can be no
assurance that the Company will be able to successfully respond to this
competition and attract, motivate and retain qualified sales personnel. The
Company intends to market and sell its products outside the United States
principally through distributors and believes that it will need to significantly
expand its distributor network or develop its own sales force. The Company's
ability to market its products in certain areas may depend on strategic
alliances with marketing partners. There can be no assurance that the Company
will be able to enter into distribution agreements on acceptable terms or at
all, that such agreements will be successful in developing the Company's
marketing capabilities or that the Company will be able to successfully develop
a direct sales force. Such failure could have a material adverse effect on the
Company's business, operating results and financial condition.
Limited Manufacturing Experience. The Company's experience in
manufacturing its products is limited. The Company anticipates that it will be
necessary to expand its manufacturing capacity in connection with the continued
commercialization of its products. Such commercialization may require the
additional commitment of capital resources for facilities, tooling and equipment
and for leasehold improvements. The Company expects that the expansion of its
manufacturing capacity within the next fifteen months will be achieved from
improved efficiencies, automation and the acquisition of additional tooling and
equipment. The Company does not expect to require any expansion of its
manufacturing facilities during the next fifteen months. Any delay or inability
in expanding its manufacturing capacity or in obtaining the commitment of such
resources could materially adversely affect the Company's manufacturing ability,
business, operating results and financial condition.
Government Regulation. The development, testing, manufacturing and
marketing of MTI's products in the United States are regulated by the U.S. Food
and Drug Administration
13
<PAGE> 14
("FDA") as well as various state agencies. The FDA requires governmental
clearance of such products before they are marketed. The process of obtaining
FDA and other required regulatory clearances is lengthy, expensive and
uncertain. Moreover, regulatory clearance, if granted, may include significant
limitations on the indicated uses for which a product may be marketed. Failure
to comply with applicable regulatory requirements can result in, among other
things, warning letters, fines, suspensions of approvals, product seizures,
injunctions, recalls of products, operating restrictions and criminal
prosecutions. The restriction, suspension or revocation of regulatory approvals
or any other failure to comply with regulatory approvals or requirements would
have a material adverse effect on the Company's business, financial condition
and results of operations. The offer and sale of the Company's current products
required the submission of information to the FDA in the form of a 510(k)
pre-market notification to substantiate label claims and to demonstrate
"substantial equivalence" to a legally marketed Class I or II medical device or
a Class III medical device for which the FDA has not called for premarket
approvals ("PMAs"). Although the Company has received FDA clearance for many of
these products, there can be no assurance that the Company will be able to
obtain the necessary regulatory clearance for the manufacture and marketing of
enhancements to its existing products or future products either in the United
States or in foreign markets on a timely basis or at all. The Company has made
modifications which affect 17 of its products covered under three 510(k)
clearances, which modifications, the Company believes, do not affect the safety
or efficacy of the products and thus, under FDA guidelines, do not require the
submission of new 510(k) notices. There can be no assurance, however, that the
FDA would agree with any of the Company's determinations not to submit a new
510(k) notice for any of these changes or would not require the Company to
submit a new 510(k) notice for any of the changes made to a device. If the FDA
requires the Company to submit a new 510(k) notice for any device modification,
the Company may be prohibited from marketing the modified device until the
510(k) notice is cleared by the FDA. Utilization of the Company's EMBOLYX(TM)
may require submission of a PMA application to the FDA, which generally involves
a substantially longer and less certain review process than that of a 510(k)
pre-market notification. In either event, such approvals or clearances may
require human clinical testing prior to any action on such products by the FDA.
Based on the information presented by the Company regarding the material
composition of EMBOLYX(TM), the Company believes EMBOLYX(TM) would be regulated
as a device. There can be no assurance, however, that upon more detailed review
of EMBOLYX(TM), the FDA will not at a later date determine that it should be
regulated as a drug. Such a change could significantly delay the commercial
availability of EMBOLYX(TM) and have a material adverse effect on the Company's
business, operating results and financial condition. Delays in receipt of, or
failure to receive, regulatory approvals or clearances to market such products,
or loss of previously received approvals or clearances, would materially
adversely affect the marketing of such products and the Company's business,
operating results and financial condition.
In May 1997, the Company received CE Mark Certification, enabling the
Company to sell its entire line of products in the 17 countries of the European
Union. There can be no assurance, however, that the Company will be able to
obtain such certifications for future products in a timely manner, if at all. In
addition, federal, state, local and international government regulations
regarding the manufacture and sale of health care products and diagnostic
devices are subject to future change and additional regulations may be adopted
which may materially adversely affect the Company's business, operating results
and financial condition.
14
<PAGE> 15
Commercial distribution and clinical trials in most foreign countries
also are subject to varying government regulations which may delay or restrict
marketing of the Company's products. Any inability or delay in obtaining
approvals would materially adversely affect the Company's business, operating
results and financial condition.
Manufacturers of medical devices for marketing in the United States are
required to adhere to applicable regulations setting forth detailed Good
Manufacturing Practices requirements, which include testing, control and
documentation requirements. The Company's manufacturing processes also are
subject to stringent federal, state and local regulations governing the use,
generation, manufacture, storage, handling and disposal of certain materials and
wastes. Although the Company believes that it has complied in all material
respects with such laws and regulations, the Company is subject to periodic
inspection to ensure its compliance with such laws and regulations. There can be
no assurance that the Company will not be required to incur significant costs in
the future in complying with manufacturing and environmental regulations, or
that the Company will not be required to cease operations in the event of its
continued failure to effect compliance.
Risk of Product Liability Claims. The nature of the Company's business
exposes it to risk from product liability claims. The risk of such claims has
increased in light of a U.S. Supreme Court decision in 1996 concluding that the
FDA regulatory framework does not necessarily preempt personal injury actions
against medical device manufacturers. The Company currently maintains product
liability insurance for its products, with limits of $2 million per occurrence
and an annual aggregate maximum of $2 million. However, such coverage is
becoming increasingly expensive and there can be no assurance that the Company's
insurance will be adequate to cover future product liability claims, or that the
Company will be successful in maintaining adequate product liability insurance
at acceptable rates. Any losses that the Company may suffer from any liability
claims, and the effect that any product liability litigation may have upon the
reputation and marketability of the Company's products, may divert management's
attention from other matters and may have a material adverse effect on the
Company's business, operating results and financial condition.
Dependence on Single Source Suppliers; Independent Contract
Manufacturers. The Company purchases certain components used in its products and
receives certain services with respect to its products from third parties. The
Company's dependence on third-party suppliers involves several risks, including
limited control over pricing, availability, quality and delivery schedules. Any
delays in delivery of such components or provision of such services or shortages
of such components could cause delays in the shipment of the Company's products,
which could cause the Company's business, operating results and financial
condition to be adversely affected. The Company's single-source components are
generally acquired pursuant to purchase orders placed in the ordinary course of
business, and the Company has no guaranteed supply arrangements with any of its
single-source suppliers. Because of the Company's reliance on these vendors, the
Company may also be subject to increases in component costs which could have a
material adverse effect on its business, operating results and financial
condition. There can be no assurance that the Company will not experience
quality control problems, supply shortages or price increases with respect to
one or more of these components in the future. The establishment of additional
or replacement suppliers for certain of these components may delay accessibility
of such components as the Company qualifies such suppliers. Any quality control
problems, interruptions in supply or component price increases with respect to
one or more
15
<PAGE> 16
components could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company relies on independent contract manufacturers for the
manufacture and assembly of certain of its products and components. Reliance on
independent contract manufacturers involves several risks, including the
potential inadequacy of capacity, the unavailability of or interruptions in
access to certain process technologies and reduced control over product quality,
delivery schedules, manufacturing yields and costs. Such manufacturers have
possession of and at times title to molds for certain manufactured components of
the Company's products. Shortages of raw materials, production capacity
constraints or delays by the Company's contract manufacturers could negatively
affect the Company's ability to meet its production obligations and result in
increased prices for affected parts. Any such reduction, constraint or delay may
result in delays in shipments of the Company's products or increases in the
prices of components, either of which could have a material adverse effect on
the Company's business, operating results and financial condition. The Company
has no supply agreements with its current contract manufacturers and utilizes
purchase orders which are subject to supplier acceptance. The unanticipated loss
of any of the Company's contract manufacturers could cause delays in the
Company's ability to deliver product while the Company identifies and qualifies
a replacement manufacturer. There can be no assurance that current or future
independent contract manufacturers will be able to meet the Company's
requirements for manufactured products. Such an event would have a material
adverse effect on the Company's business, operating results and financial
condition.
Dependence Upon Key Personnel. The Company is dependent to a significant
extent upon the contributions, experience and expertise of its founders, certain
members of its management team and key consultants. The Company maintains a
key-man life insurance policy in the amount of $1 million on the life of George
Wallace, the Company's President and Chief Executive Officer; however, there can
be no assurance that the Company's insurance is adequate. In addition, the
Company's success will depend upon its ability to attract and retain additional
highly qualified management, sales, technical, clinical and consulting
personnel, particularly as the Company increases its manufacturing capability.
The loss of the services of any of such key personnel or the inability to
attract and retain such personnel could have a material adverse effect on the
Company's business, financial condition and results of operations.
Third-Party Reimbursement. In the United States, health care providers
such as hospitals and physicians that purchase medical devices generally rely on
third-party payors, principally federal Medicare, state Medicaid and private
health insurance plans, to reimburse all or part of the cost of therapeutic and
diagnostic procedures. With the implementation of Medicare's Prospective Payment
System for hospital inpatient care (Diagnosis Related Groups or "DRGs") in the
1980s, public and private payors began to reimburse providers on a fixed payment
schedule for patients depending on the nature and severity of the illness. Many
tests and procedures that would have been performed under cost-plus
reimbursement formulas are subject to scrutiny and must be justified in terms of
their impact on patient outcomes. As a result, the incentives are now to conduct
only those tests that will optimize cost-effective care.
The Company could be materially adversely affected by changes in
reimbursement policies of governmental (both domestic and international) or
private healthcare payors to the extent any such changes affect reimbursement
for therapeutic or diagnostic procedures in which the Company's products are
used. Adverse changes in governmental and private third party
16
<PAGE> 17
payors' policies toward reimbursement for such procedures would have a material
adverse effect on the Company's business, operating results and financial
condition.
Risks Associated with International Sales. To date, the Company has
derived very little revenue from international sales. The Company believes that
its future performance will be dependent in part upon its ability to increase
international sales. Although the perceived demand for certain products may be
lower outside the United States, the Company intends to continue to expand its
international operations and to enter additional international markets, which
will require significant management attention and financial resources. There can
be no assurance, however, that the Company will be able to successfully expand
its international sales. The Company's success in international markets will
depend on its ability to establish and maintain agreements with suitable
distributors, or establish a direct sales presence.
Furthermore, international sales in general are subject to inherent
risks, including unexpected changes in regulatory requirements, fluctuating
exchange rates, difficulties in staffing and managing foreign sales and support
operations, additional working capital requirements, customs, duties, tariff
regulations, export license requirements, political and economic instability,
potentially limited intellectual property protection and difficulties with
distributors. In addition, sales and distribution of the Company's products
outside the United States are subject to extensive foreign government
regulation. The Company has in the past avoided losses due to fluctuating
exchange rates associated with international sales by selling its products in
U.S. dollars; however, the Company expects to sell products in selected markets
in local currency and thus be subject to currency exchange risks in association
with such sales. There can be no assurance that any of these factors will not
have a material adverse effect on the Company's future international sales and,
consequently, on the Company's business, operating results and financial
condition.
Large-scale market acceptance of the Company's products will depend on
the availability and level of reimbursement in international markets targeted by
the Company. Reimbursement systems in international markets vary significantly
by country, and by region within some countries, and reimbursement approvals
must be obtained on a country-by-country basis. Many international markets have
government managed health care systems that govern reimbursement for new devices
and procedures. In most markets, there are private insurance systems as well as
government-managed systems. Obtaining reimbursement approvals in each country
can require 12-18 months or longer.
Anti-Takeover Provisions. The Company's Certificate of Incorporation
provides for 5,000,000 authorized shares of Preferred Stock, the rights,
preferences, qualifications, limitations and restrictions of which may be fixed
by the Board of Directors without any further vote or action by the
stockholders. In addition, the Company's stock option plans provide for the
acceleration of vesting of options granted under such plans in the event of
certain transactions which result in a change of control of the Company.
Further, Section 203 of the General Corporation Law of Delaware prohibits the
Company from engaging in certain business combinations with interested
stockholders. These provisions may have the effect of delaying or preventing a
change in control of the Company without action by the stockholders, and
therefore could materially adversely affect the price of the Company's Common
Stock.
Possible Volatility of Stock Price. The stock market has from time to
time experienced significant price and volume fluctuations that are unrelated to
the operating performance of
17
<PAGE> 18
particular companies. These broad market fluctuations may materially adversely
affect the market price of the Company's Common Stock. In addition, the market
price of the shares of Common Stock is likely to be highly volatile. Factors
such as fluctuations in the Company's results of operations, failure of such
results of operations to meet the expectations of public market analysts and
investors, timing and announcements of technological innovations or new products
by the Company or its competitors, FDA and foreign regulatory actions,
developments with respect to patents and proprietary rights, timing and
announcements of developments, including clinical trials related to the
Company's products, public concern as to the safety of technology and products
developed by the Company or others, changes in health care policy in the United
States and internationally, changes in stock market analyst recommendations
regarding the Company, the medical device industry generally and general market
conditions may have a material adverse effect on the market price of the Common
Stock. In addition, it is likely that during a future quarterly period, the
Company's results of operations will fail to meet the expectations of stock
market analysts and investors and, in such event, the Company's stock price
could be materially and adversely effected.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceeding.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
See Index to Exhibits on Page 20 of this Quarterly Report on
Form 10-QSB.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarterly
period ended June 30, 1997, and none were required.
18
<PAGE> 19
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MICRO THERAPEUTICS, INC.
Date: August 13, 1997 By: /s/ Thomas J. Berryman
--------------------------------
Thomas J. Berryman
Chief Financial Officer
19
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------- ----------- ------
<C> <S> <C>
27.1 Financial Data Schedule
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AND STATEMENTS OF OPERATIONS IN FORM 10-QSB FOR THE SECOND QUARTER ENDED
JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM
10-QSB.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,466
<SECURITIES> 7,500
<RECEIVABLES> 270
<ALLOWANCES> 0
<INVENTORY> 601
<CURRENT-ASSETS> 11,066
<PP&E> 1,173
<DEPRECIATION> 454
<TOTAL-ASSETS> 12,274
<CURRENT-LIABILITIES> 670
<BONDS> 0
0
0
<COMMON> 6
<OTHER-SE> 11,418
<TOTAL-LIABILITY-AND-EQUITY> 12,274
<SALES> 1,149
<TOTAL-REVENUES> 1,149
<CGS> 1,045
<TOTAL-COSTS> 4,148
<OTHER-EXPENSES> (368)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15
<INCOME-PRETAX> (3,690)
<INCOME-TAX> 1
<INCOME-CONTINUING> (3,691)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,691)
<EPS-PRIMARY> (.61)
<EPS-DILUTED> 0
</TABLE>
