<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, 1998.
[ ] 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)
(949) 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.
Class Outstanding at August 7, 1998
----------------------------- -----------------------------
Common Stock, $.001 par value 6,704,081
Page 1 of 24 Pages
Exhibit Index on Page 20
<PAGE> 2
MICRO THERAPEUTICS, INC.
INDEX TO FORM 10-QSB
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet as of June 30, 1998 (unaudited).............................................. 3
Statements of Operations (unaudited) for the Three and Six Months Ended
June 30, 1997 and 1998................................................................ 4
Statements of Cash Flows (unaudited) for the Six Months Ended
June 30, 1997 and 1998................................................................ 5
Notes to Financial Statements.............................................................. 6-7
Item 2. Management's Discussion and Analysis or Plan of Operation...................................... 8-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................. 18
Item 4. Submission of Matters to a Vote of Security Holders............................................ 18
Item 6. Exhibits and Reports on Form 8-K............................................................... 18
SIGNATURES....................................................................................................... 19
</TABLE>
2
<PAGE> 3
MICRO THERAPEUTICS, INC.
BALANCE SHEET
June 30, 1998
(Unaudited)
ASSETS:
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents $ 9,565,647
Accounts receivable, net of allowance for doubtful accounts of $734 478,498
Inventories, net of reserve for obsolescence of $81,500 714,558
Prepaid expenses and other current assets 221,881
------------
Total current assets 10,980,584
Property and equipment, net of accumulated depreciation of $681,220 701,140
Patents and licenses, net of accumulated amortization of $74,322 936,038
Other assets 70,380
------------
Total assets $ 12,688,142
============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of equipment line of credit $ 68,308
Accounts payable 389,463
Accrued liabilities 473,149
------------
Total current liabilities 930,920
Equipment line of credit 111,254
Notes payable, net of discount of $874,507 6,125,493
------------
Total liabilities 7,167,667
------------
Commitments and contingencies
Stockholders' equity:
Preferred stock $.001 par value, 5,000,000 shares authorized,
no shares issued and outstanding --
Common stock, $.001 par value, 20,000,000 shares authorized,
6,679,392 shares issued and outstanding 6,679
Additional paid-in capital 26,886,912
Unearned compensation (66,046)
Accumulated deficit (21,307,070)
------------
Total stockholders' equity 5,520,475
------------
Total liabilities and stockholders' equity $ 12,688,142
============
</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, 1997 June 30, 1998 June 30, 1997 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 639,329 $ 1,038,648 $ 1,149,368 $ 1,944,377
Cost of sales 554,608 481,496 1,044,925 908,129
----------- ----------- ----------- -----------
Gross profit 84,721 557,152 104,443 1,036,248
Costs and expenses:
Research and development 1,057,939 1,291,714 2,079,336 2,450,868
Selling, general and administrative 1,030,467 1,475,912 2,068,571 2,829,309
----------- ----------- ----------- -----------
Total costs and expenses 2,088,406 2,767,626 4,147,907 5,280,177
----------- ----------- ----------- -----------
Loss from operations (2,003,685) (2,210,474) (4,043,464) (4,243,929)
Other income (expense):
Interest income 132,965 117,561 205,578 253,821
Interest expense (7,658) (122,259) (15,100) (229,878)
Other income (expense), net (2,525) (4,304) 162,734 (5,630)
----------- ----------- ----------- -----------
122,782 (9,002) 353,212 18,313
----------- ----------- ----------- -----------
Loss before provision for income
taxes (1,880,903) (2,219,476) (3,690,252) (4,225,616)
Provision for income taxes -- -- 800 800
----------- ----------- ----------- -----------
Net loss $(1,880,903) $(2,219,476) $(3,691,052) $(4,226,416)
=========== =========== =========== ===========
Per share data:
Net loss per share (basic and diluted) $ (0.29) $ (0.34) $ (0.75) $ (0.64)
=========== =========== =========== ===========
Weighted average shares outstanding 6,408,000 6,622,000 4,930,000 6,580,000
=========== =========== =========== ===========
Pro forma:
Net loss per share (basic and diluted) $ (0.29) * $ (0.63) *
=========== ===========
Weighted average shares outstanding 6,408,000 * 5,888,000 *
=========== ===========
</TABLE>
- ----------
* Not applicable
See notes to unaudited financial statements.
4
<PAGE> 5
MICRO THERAPEUTICS, INC.
STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1997 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,691,052) $ (4,226,416)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 178,942 185,597
Amortization of note payable discount -- 77,238
Compensation related to stock options vesting 55,054 29,381
Gain on sale of investment (167,456) --
Loss on sale of fixed assets -- 2,864
Provision for doubtful accounts -- 734
Provision for inventory obsolescence -- 50,500
Change in operating assets and liabilities:
Accounts receivable (26,163) (79,411)
Inventories (169,226) (146,387)
Prepaid expenses and other assets 32,675 (88,638)
Accounts payable 11,962 98,713
Accrued liabilities 39,892 1,327
------------ ------------
Net cash used in operating activities (3,735,372) (4,094,498)
------------ ------------
Cash flows from investing activities:
Purchase of short-term investments (15,000,301) (8,895,569)
Maturity of short-term investments 7,500,000 15,200,000
Additions to property and equipment (168,908) (261,352)
Additions to patents and licenses (133,697) (255,370)
Decrease in other assets -- 202
------------ ------------
Net cash (used in) provided by investing activities (7,802,906) 5,787,911
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 10,340,586 574,560
Costs of equity issuances (529,535) --
Proceeds from exercise of stock options 35,601 152,682
Borrowings on equipment line of credit 25,341 --
Borrowings on note payable -- 2,000,000
Repayments on equipment line of credit (25,213) (30,695)
------------ ------------
Net cash provided by financing activities 9,846,780 2,696,547
------------ ------------
Net increase (decrease) in cash and cash equivalents (1,691,498) 4,389,960
Cash and cash equivalents at the beginning of the period 4,157,147 5,175,687
------------ ------------
Cash and cash equivalents at the end of the period $ 2,465,649 $ 9,565,647
============ ============
Supplemental schedule of non-cash activities:
Unearned compensation related to terminated employees $ 18,751 $ 79,542
</TABLE>
See notes to unaudited financial statements.
5
<PAGE> 6
MICRO THERAPEUTICS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. Description of The Company:
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.
2. Summary of Significant Accounting Policies:
Unaudited Interim Financial Information:
The financial statements included in this Form 10-QSB have been prepared
pursuant to the rules of the Securities and Exchange Commission for
quarterly reports on Form 10-QSB, are unaudited and do not contain all of
the information required by generally accepted accounting principles to be
included in a full set of financial statements. The financial statements in
the Company's 1997 annual report on Form 10-KSB include a summary of
significant accounting policies of the Company and should be read in
conjunction with this Form 10-QSB. In the opinion of management, all
material adjustments necessary to present fairly the results of operations
for such periods have been included. All such adjustments are of a normal
and recurring nature. The results of operations for any interim period are
not necessarily indicative of the results of operations for the entire
year.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosure about Segments
of an Enterprise and Related Information", which establishes standards for
public business enterprises to report financial and descriptive information
about operating segments in annual financial statements on the basis that
is used internally for evaluating segment performance and deciding how to
allocate resources to segments. SFAS No. 131 also establishes the standards
for related disclosures about products and services, geographic areas and
major customers. This statement is effective for fiscal years beginning
after December 15, 1997. Management is currently evaluating the
requirements of SFAS No. 131.
Reclassification
Certain amounts in the 1997 Statement of Cash Flows have been reclassified
to conform to the 1998 presentation.
3. Genyx Medical, Inc.
On March 12, 1998, Genyx Medical, Inc. ("Genyx"), entered into a $3 million
equity financing agreement. As a result of this financing, the Company's
ownership in Genyx was reduced from 85% to 27%. Because the Company's
carrying value of its investment in Genyx is $0, the Company, in conformity
with generally accepted accounting principles, is currently not required to
recognize its equity share of Genyx losses for the period from March 12,
1998 through June 30, 1998. Expenditures related to Genyx for the period
from January 1, 1998 to March 12, 1998 had been recorded by the Company as
research and development expenses, and amounted to $38,139.
4. Net Loss Per Share:
Net loss per share for all periods presented is calculated under the
provisions of Statement of Financial Accounting Standards No. 128,
"Earnings per Share", (which the Company adopted in the fourth quarter of
1997) by dividing net loss by the weighted average number of common shares
issued and outstanding during the period. For the 1997 pro forma
calculation, such weighted average includes common shares that were issued
upon conversion of all outstanding shares of the Company's Preferred Stock,
in connection with the Company's Initial Public Offering of its Common
Stock in February 1997, as if such conversion had taken place at the
beginning of 1997. Potential common shares, represented by options,
warrants and convertible debt, have been excluded from the calculations due
to their anti-dilutive effect. Basic and diluted loss per share are the
same for the periods presented.
6
<PAGE> 7
Such calculations also conform to the requirements set forth in Staff
Accounting Bulletin ("SAB") Topic 98, issued by the Securities and Exchange
Commission in February 1998. SAB 98 provides that stock options and
warrants granted during the twelve months prior to the date of the filing
of a company's initial public offering at prices less than the per share
initial public offering price be excluded from loss per share calculations.
Previously existing rules set forth by SAB Topic 4-D had required that such
options and warrants be included in loss per share calculations.
Accordingly, the historical net loss per share amount for 1997 shown in the
accompanying statement of operations is different from the $.61 net loss
per share for the six months ended June 30, 1997, as reported previously.
Reconciliation of net loss and shares used in the calculations of net loss
per share for the six months ended June 30, 1997 is as follows
(calculations for all other periods may be derived directly from statement
of operations data):
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1997
------------------------------------------------
Net Loss Shares Net Loss
(Numerator) (Denominator) Per Share
----------- ------------- ---------
<S> <C> <C> <C>
Loss available to common stockholders $(3,691,052)
Pro forma weighted average shares outstanding,
giving effect to the conversion of
Preferred Stock as of the 5,888,000
beginning of the period ----------- -----------
Pro forma net loss per share (basic and diluted) (3,691,052) 5,888,000 $(0.63)
Reduction of weighted average shares outstanding,
to give effect to the conversion of Preferred
Stock as of the effective date of the IPO (958,000) (0.12)
----------- ----------- ------
Net loss per share (basic and diluted) $(3,691,052) 4,930,000 $(0.75)
=========== =========== ======
</TABLE>
5. Note Payable and Sale of Common Stock
In April 1998, the Company achieved one of the two milestones set forth in
its existing Convertible Subordinated Note Agreement (the "Agreement").
Under the terms of the Agreement, achievement of the milestone entitled the
Company to receive an additional $2.5 million from the note holder, in the
form of either non-convertible debt or a purchase of common stock. The
Company elected to receive $2 million under a note payable, which bears
interest at 8% per annum payable quarterly. The entire principal balance of
the note is due on October 31, 2002. The remaining $500,000 was received
through the sale of 47,637 shares of the Company's common stock to the note
holder.
6. Employee Stock Purchase Plan
On June 30, 1998, the Company sold 13,495 shares of common stock to
employees of the Company under the Company's Employee Stock Purchase Plan
for proceeds of $74,560.
7. Subsequent Events
On July 31, 1998, the Company entered into a five-year lease for a 43,538
square foot facility located in Irvine, California. Monthly payments of
$38,313 plus common area costs will commence on October 1, 1998, and the
lease provides for annual escalation based on a cost-of-living index.
Additionally, the lease provides for the landlord to share, up to $150,000,
in the cost of certain tenant improvements. The Company anticipates
maintaining the lease on its existing San Clemente, California facility
through its expiration in April 1999.
On August 12, 1998, the Company entered into a ten-year distribution
agreement with Abbott Laboratories ("Abbott") that provides Abbott with
exclusive rights to distribute the Company's peripheral blood clot therapy
products in the U.S. and Canada. Under the terms of the agreement, Abbott
will furnish the Company with a non-refundable $1 million marketing
payment, as defined in the agreement, upon Abbott's first commercial sale
of product, and will provide commissions to the Company based upon Abbott's
annual net sales levels, as defined in the agreement.
Concurrently, the Company and Abbott entered into convertible subordinated
note, credit and security agreements, under which Abbott will provide the
Company with (a) $5 million, in exchange for a five-year subordinated note,
convertible at Abbott's option into shares of the Company's common stock at
a conversion rate of $13.00 per share, and (b) a $5 million credit
facility, available for one year from the date of the agreement and
repayable five years from the date of the agreement, with amounts borrowed
under the facility convertible over the five-year life of the underlying
note at the Company's option into shares of the Company's common stock at a
conversion rate of $15.00 per share. Borrowed amounts will be
collateralized by the Company's trademarks, patents and other intellectual
property related to the Company's peripheral blood clot infusion products
in the Territory, as defined in the aforementioned agreements. Both notes
have a stated interest rate of 5% per annum, which, for financial statement
reporting purposes, will be adjusted to reflect an imputed market rate of
interest as of the date of notes.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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, 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. To date, the majority of the Company's revenues have been
derived from sales of its initial infusion catheters and related accessories,
the Cragg Thrombolytic Brush(TM), which received FDA approval in August 1997 and
the Castaneda Over-The-Wire Brush(TM), which received FDA approval in February
1998. In August 1998, the Company entered into a distribution agreement with
Abbott, which provides for Abbott to distribute the Company's peripheral
vascular products mentioned above in the United States and Canada. The Company
expects sales of such peripheral vascular products, and extensions thereof, to
provide the majority of the Company's revenues at least through 1998.
The Company currently sells its peripheral vascular products in
international markets through a limited number of distributors. In November
1997, the Company signed an agreement with Guidant Corporation ("Guidant") to
distribute the Company's neuro products in Europe, and in August 1998, that
agreement was expanded to include distribution in Europe of the Company's
peripheral embolization products. To date, no revenues have been received under
the Guidant arrangement and no significant such revenues are expected until the
Company's EMBOLYX(TM) Liquid Embolic System receives CE Mark certification.
The Company's products are currently manufactured by the Company at its
facility in San Clemente, California. Certain accessories are manufactured and
processes are performed by contract manufacturers.
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, and
third-party distributors, as applicable, establish their domestic and
international sales and distribution networks, 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 significant backlog in the near term.
RESULTS OF OPERATIONS
Net sales for the quarter ended June 30, 1998 increased 62% to
$1,039,000 as compared to $639,000 for the corresponding quarter of 1997. While
revenues in 1998 were higher than 1997 for almost all product lines, 82% of the
revenue increase was attributable to sales of the Cragg Thrombolytic Brush and
Castaneda Over-The-Wire Brush which were introduced in August 1997 and March
1998, respectively, and 9% of the revenue increase was attributable to higher
sales of peripheral infusion products. Revenues were also higher as a result of
a 5% price increase which was implemented February 1, 1998 for certain of the
Company's products. International sales represented 2% of the total sales for
the quarter ended June 30, 1998 and 5% for the corresponding quarter of 1997.
8
<PAGE> 9
Net sales for the six month period ended June 30, 1998 increased 69% to
$1,944,000 as compared to $1,149,000 for the first half of 1997. Sales of the
Cragg Thrombolytic Brush and Castaneda Over-The-Wire Brush accounted for
approximately 71% of the increase between the two years with peripheral infusion
devices accounting for 18% of the increase. International sales represented 2%
and 4% of total sales for the six month periods ended June 30, 1998 and June 30,
1997, respectively.
The Company expects unit volume and revenues related to its U.S.
peripheral vascular products to continue to increase under the distribution
agreement with Abbott entered into in August 1998, however, there can be no
assurance as to such increases occurring. Moreover, the Company may experience a
decrease in product revenues for a period following the inception of the
distribution agreement due to (a) transition issues that may occur in
transferring the distribution function to Abbott, (b) lower unit prices the
Company will receive from Abbott under the agreement, relative to the unit
prices the Company has been obtaining from end-user customers, and (c) a lag in
the timing of revenue recognition with respect to the commissions to be received
from Abbott under the terms of the distribution agreement, relative to the time
at which product was originally shipped by the Company to Abbott. This decrease
may exist until such time as the expected increase in unit volume, should it
occur, combined with the aforementioned commissions, offset the effect of the
factors discussed above. Revenues will be favorably impacted by the
non-refundable $1 million marketing payment to be received by the Company from
Abbott upon Abbott's first commercial sale under the distribution agreement.
Cost of sales decreased to $481,000 for the quarter ended June 30, 1998
from $555,000 for the corresponding quarter of 1997. This decrease was
attributable to increased efficiencies achieved in manufacturing, which allowed
the Company to redeploy certain individuals to research and development
functions starting primarily in the fourth quarter of 1997. Cost of sales as a
percentage of sales decreased from 87% for the quarter ended June 30, 1997 to
46% for the corresponding quarter of 1998 due to the increase in sales volume
and the aforementioned efficiencies and redeployment. Cost of sales decreased to
$908,000, or 47% of sales, for the six months ended June 30, 1998 from
$1,045,000, or 91% of sales, for the corresponding period of 1997 due to the
same factors discussed above. Should unit volume and revenues increase in line
with the Company's expectations, as discussed above, cost of sales would not be
expected to continue to decrease in absolute dollars. Moreover, the Company may
experience an increase in cost of sales as a percentage of sales for a period
following the inception of the distribution agreement with Abbott, due to the
lower unit prices the Company will receive and the lag in the timing of revenue
recognition with respect to the commissions to be received from Abbott, both as
discussed above. This condition would be expected to continue until such time as
the expected increase in unit volume, should such an increase occur, combined
with the commissions to be received by the Company from Abbott, offset the
aforementioned effects of the lower unit prices and lag in timing of revenue
recognition with respect to the commissions.
Research and development expenses, including regulatory and clinical
expenses, increased 22% from $1,058,000 for the second quarter of 1997 to
$1,292,000 for the second quarter of 1998, and increased 18% from $2,079,000 for
the first six months of 1997 to $2,451,000 for the first six months of 1998.
These increases were primarily attributable to increases in the number of
employees resulting from the aforementioned redeployment of personnel, the
hiring of additional personnel in connection with Company's increased research
and development activities, related relocation and recruiting expenses,
increased expenditures related to development of neuro vascular products and a
research grant. The Company expects to continue to significantly increase
research and development costs during the remainder of 1998 particularly for
human clinical trials of EMBOLYX(TM) and other applications in the neuro and
peripheral areas.
Selling, general and administrative expenses increased 43% from
$1,030,000 for the second quarter of 1997 to $1,476,000 for the second quarter
of 1998, and increased 37% from $2,069,000 for the first six months of 1997 to
$2,829,000 for the first six months of 1998. These increases were primarily
attributable to sales incentives related to increased revenues, the mid-1997
addition of an Executive Vice President of Marketing and Sales, marketing
studies commissioned by the Company, expenses related to the Company's public
reporting responsibilities, costs related to a contemplated transaction that was
not pursued to finalization, and additional employees and related relocation and
recruiting expenses commensurate with the increased activity level of the
Company. The closure of the Company's European office in the fourth quarter of
1997 resulted in a $275,000 decrease in expenses for the six months ended June
30, 1998 as compared to the corresponding six month period in 1997. The Company
expects selling expenses to remain relatively consistent with current
expenditure levels, and, accordingly, to decrease as a percentage of sales at
such time as the Company experiences the aforementioned expected increase in
product revenues, should such an increase occur. The Company expects to continue
to experience an increase in general and administrative expenses, commensurate
with its increasing activity levels.
Other income declined from $123,000 for the second quarter of 1997 to a
net expense of $9,000 for the second quarter of 1998, due primarily to the
interest expense related to the notes payable that originated in the fourth
quarter of 1997 and the second quarter of 1998. Other income declined from
$353,000 for the first six months of 1997 to $18,000 for the first six months of
1998 due to the aforementioned notes payable and to the inclusion in other
income for the first quarter of 1997 of non-recurring income of $167,000 from
the sale of common stock of a privately held company in which the Company had
held a minority interest. It is expected that cash received under the terms of
the convertible subordinated note and credit agreements entered into with Abbott
in August 1998 will result in increases in both interest income and interest
expense. Interest expense, net of interest income, is expected to increase as
cash and short term investment balances are utilized in operations.
As a result of the items discussed above, the Company incurred a net
loss of $2.2 million for the second quarter of 1998 compared to $1.9 million for
the second quarter of 1997, and a net loss of $4.2 million for the first six
months of 1998 compared to $3.7 million for the same period in 1997.
9
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's cash expenditures have significantly
exceeded its sales, resulting in an accumulated deficit of $21.3 million at June
30, 1998. To fund its operations, the Company raised approximately $15.3 million
from the private placement of equity securities, and completed an initial public
offering in February 1997 of 1,840,000 shares of Common Stock, raising net
proceeds of approximately $10 million. Additionally, in November 1997, the
Company received $5 million from Guidant under terms of a convertible note
agreement. Achievement of certain milestones, before December 31, 1998, as
defined in the note agreement, provides the Company with the option to require
Guidant to purchase up to an additional $3 million of the Company's stock and
loan the Company up to an additional $2 million. In April 1998, the Company
achieved one of the two milestones. The Company elected to have Guidant loan it
$2 million and purchase from the Company $500,000 of common stock at
approximately $10.50 per share, the proceeds from which were received in May
1998. There can be no assurance, however, that the Company will be able to
achieve the second of such milestones before December 31, 1998. Concurrent with
the execution of the distribution agreement with Abbott in August 1998, the
Company and Abbott entered into convertible subordinated note, credit and
security agreements, under which Abbott will provide the Company with (a) $5
million, in exchange for a five-year subordinated note, convertible at Abbott's
option into shares of the Company's common stock at a conversion rate of $13.00
per share, and (b) a $5 million credit facility, available for one year from the
date of the agreement and repayable five years from the date of the agreement,
with amounts borrowed under the facility convertible over the five-year life of
the underlying note at the Company's option into shares of the Company's common
stock at a conversion rate of $15.00 per share. Both notes have a stated
interest rate of 5% per annum, which, for financial statement reporting
purposes, will be adjusted to reflect an imputed market rate of interest as of
the date of notes.
As of June 30, 1998, the Company had cash and cash equivalents of $9.6
million. Cash used in the Company's operations for the six months ended June 30,
1998 was approximately $4.1 million, reflecting the loss from operations, as
well as increases in accounts receivable, inventories, prepaid expenses and
other assets, and increases in accounts payable and accrued liabilities. Cash
provided by investing activities for the six months ended June 30, 1998 was $5.8
million, primarily reflecting the maturity of short-term investments, net of
expenditures for property and equipment of $261,000, and patents and licenses of
$255,000. Beginning in the second quarter of 1998, the Company made a modest
expansion of its existing manufacturing facilities to accommodate its increased
activity level. Additionally, in July 1998 the Company entered into a five year
lease agreement for a facility approximately twice the size of its current
facility to enable the Company to expand its manufacturing and research and
development capacity. It is expected that such expansion will also result in
expenditures for tenant improvements to the new facility, and additional tooling
and equipment. The Company plans to finance its capital and operational needs
principally from its existing capital resources at June 30, 1998, and the
proceeds from the convertible subordinated note and the credit facility with
Abbott.
MTI believes current resources will be sufficient to fund its
operations into 2000. However, the Company's future liquidity and capital
requirements will depend upon numerous factors, including results under the
distribution agreement with Abbott and similar future agreements, should any be
entered into, 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 sales and marketing growth.
10
<PAGE> 11
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 STATEMENTS.
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 and the Liquid Embolic System ("LES") has not yet entered
full clinical trials. 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 LES and Thrombolytic Brush products 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 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 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.
11
<PAGE> 12
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. No assurance can be given that the
Company will be able to locate such clinical sites on a timely basis, a delay in
which could have a material adverse effect on the Company's ability to conduct
trials of its products which may be necessary to obtain required regulatory
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 through June 30, 1998, the Company incurred
cumulative losses of approximately $21.3 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.
Possible 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, together with the net proceeds
from its initial public offering, under the terms of (a) a convertible
subordinated note agreement with Guidant entered into in November 1997, and (b)
a convertible subordinated note agreement and a credit agreement with Abbott
entered into in August 1998, and the interest earned thereon, should be adequate
to satisfy its capital requirements into 2000. 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. In April 1998,
the Company achieved the first of two milestones as defined in the agreement
with Guidant, thereby allowing the Company to receive $2.5 million in exchange
for debt and common stock. There is no assurance, however, that the Company will
achieve the second of these milestones before December 31, 1998, or, should the
Company achieve this milestone, that the resulting proceeds under the agreement
with Guidant would satisfy the Company's then-current working capital
requirements. Other than under the terms of the agreements mentioned above, the
Company currently has no other committed external sources of funds. Should
existing resources be insufficient to fund the Company's activities, the Company
will 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, 1998, the Company held sixteen issued U.S. patents, one issued foreign
patent and has thirty-three U.S. and twenty one foreign patent applications
pending.
12
<PAGE> 13
The Company's issued U.S. patents cover technology underlying the Cragg
MicroValve, infusion wire, Cragg Thrombolytic Brush, Liquid Embolic System and
carotid and intra-cerebral stent products. The expiration dates of these patents
range from February 2009 to June 2017. The pending claims cover various aspects
of its infusion catheter, infusion wire, Thrombolytic Brush, micro catheter,
Liquid Embolic System, carotid and intra-cerebral stent technologies, coatings
and non-vascular liquid embolic products. 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 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, operating
results and financial condition. 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
experience in working with third-party distributors is limited. In August 1998,
the Company executed a distribution agreement with Abbott to provide for
distribution of the Company's peripheral vascular products in the United States
and Canada. There can be no assurance, however, that the Company will be able to
successfully transition marketing and sales responsibilities to Abbott, or that
Abbott will be successful in marketing the Company's products. The Company's
sales force consists of ten people in the United States, all of whom have been
with the Company for a limited time. There is 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 such as Guidant and Abbott. Other than the
agreements with Guidant and Abbott, there can be no assurance that the Company
will be able to enter into distribution agreements on acceptable terms or at
all. Also, there can be no assurance 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 relatively limited. The Company has found it
necessary to expand its manufacturing capacity in connection with the continued
commercialization of its products. Such commercialization requires 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 will be achieved from the increased floor space of its
new leased facility, improved efficiencies, automation and acquisition of
additional tooling and equipment. 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.
13
<PAGE> 14
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 ("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 substantially all of its products
covered under four 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 LES 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 the LES, the Company believes the LES would be
regulated as a device. There can be no assurance, however, that upon more
detailed review of the LES, the FDA will not at a later date determine that the
LES should be regulated as a drug. Such a change could significantly delay the
commercial availability of the LES 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 the European Union, the Company will be required to maintain the
certifications necessary to affix the CE Mark to its products other than LES,
and to obtain the certifications with respect to LES, in order to sell its
products in member countries of the European Union after mid-1998. The Company
received its CE Mark certification in March 1997 with respect to products other
than the LES, however, there can be no assurance that the Company will be able
to maintain such certification, or, with respect to LES, obtain such
certification, in the future. 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.
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 Quality
System Requirements, which include development, 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.
14
<PAGE> 15
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 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. The Company intends, after completing its move to its new facility,
to reduce the volume of outside manufacturing and processing, and to establish
on-site capabilities. There can be no assurance, however, as to the timing of
the establishment of such capabilities or whether such a transfer of function
from third parties could be successfully completed.
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.
15
<PAGE> 16
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 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.
16
<PAGE> 17
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 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 affected.
Risks Associated with Year 2000 Issue. In the next eighteen months,
many companies will face a potentially serious information systems (computer)
problem because many software applications and operational programs written in
the past may not properly recognize calendar dates beginning in the Year 2000.
This problem could force computers to either shut down or provide incorrect
information and could result in an inability to process transactions, send
invoices or engage in normal business activities. Based on a recent assessment,
which included correspondence the Company obtained from the manufacturer of the
financial system software utilized by the Company, the Company believes that
such software will not be affected by the Year 2000 issue, and the Company
believes that its existing information systems equipment, primarily composed of
personal computers, will be minimally impacted by the Year 2000 Issue, as the
Company intends to replace the majority of those systems which may be affected
by this problem by the end of 1999 due to technological obsolescence. In
addition, the Company intends, after completing its move to its new facility, to
reduce the volume of outside manufacturing and processing, and to establish
on-site capabilities. In this transition, the Company's intent is to install
computer systems, as necessary, that are Year 2000 compliant. The Company is in
the process of responding to initial customer inquiries, and intends to initiate
communications with its vendors regarding the Year 2000 Issue in the fourth
quarter of 1998. If the Company determines a particular vendor will be impacted
by this problem, the Company may attempt to identify additional or replacement
vendors, which could delay accessibility of the products and/or services
provided by such vendors. Such a delay or failure to identify an additional or
replacement vendor could have a material adverse effect on the Company's
business, operating results and financial condition.
17
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held on May 29, 1998. Of the
6,542,469 shares of the Company's common stock issued and
outstanding and entitled to vote at the meeting, there were present
at the meeting, in person or by proxy, the holders of 6,140,814
common shares, representing 93% of the total number of shares
entitled to vote at the meeting. This percentage represents a
quorum. Four proposals were presented and voted on at the
stockholders' meeting.
Proposal One: Each of the five nominees to the Board of Directors
was elected for a one-year term by the stockholders. The directors
elected and the related voting results are as follows: George
Wallace (For, 6,138,719; Withheld, 2,095), Dick Allen (For,
6,140,814; Withheld, None), H. DuBose Montgomery (For, 6,140,814;
Withheld, None), Kim Blickenstaff (For, 6,140,814; Withheld, None)
and Wende Hutton (For, 6,140,614; Withheld, 200).
Proposal Two: The stockholders approved an amendment to the
Company's Employee Stock Purchase Plan to increase the shares
subject thereto to a total 150,000 shares. The voting results were:
For, 6,001,121; Against, 19,441; Abstain, 1,923; Broker Non-Vote,
118,329.
Proposal Three: The stockholders approved an amendment to the
Company's 1996 Stock Incentive Plan to increase the shares subject
thereto to a total 1,100,000 shares. The voting results were: For,
5,968,386; Against, 30,911; Abstain, 1,923; Broker Non-Vote,
139,594.
Proposal Four: The appointment of Coopers & Lybrand L.L.P. (now,
PricewaterhouseCoopers LLP) as independent auditors of the Company
for the fiscal year ending December 31, 1998 was ratified. The
voting results were: For, 6,134,264; Against, 300; Abstain, 6,250.
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, 1998, 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 14, 1998 By: /s/ Harold A. Hurwitz
-----------------------------------
Harold A. Hurwitz
Chief Financial Officer
19
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------- ----------- ------
<S> <C> <C>
10.1 Employment Agreement effective April 6, 1998, between the Company and Earl H. Slee(1) 21
10.2 Credit Agreement dated May 12, 1998 between the Company and Guidant Corporation. (2)
27.1 Financial Data Schedule - Six Months Ended June 30, 1998. 23
27.2 Financial Data Schedule - Six Months Ended June 30, 1997 Restated for Earnings per
Share Data. 24
</TABLE>
- ----------
(1) This exhibit is identified as a management contract or compensatory plan or
arrangement of the Company pursuant to Item 6(a) of Form 10-QSB.
(2) Incorporated by reference to Exhibit 10.12 of the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1997.
20
<PAGE> 1
EXHIBIT 10.1
[MTI LETTERHEAD]
March 18, 1998
Mr. Earl H. Slee
4510 Casco Avenue
Edina, MN 33026
Dear Earl:
It gives me great pleasure to offer you employment with Micro Therapeutics, Inc.
(MTI) on the following terms and conditions:
1. Your title will be Vice President, Research and Development and you will
report directly to me. Your duties and responsibilities will include:
o All issues related to design control, research, development or license of
MTI technology.
o Intellectual property of the Company.
o Participation in the establishment of Company goals and strategy.
Other responsibilities may be assigned to you as the Company deems necessary.
2. Your full time employment shall begin on or before Monday, April 6, 1998.
3. You will receive a base salary of $6,041.67 per pay semi-monthly period.
Your status will be salary exempt.
4. You will be able to earn up to 25% of your annual salary in cash or stock
based on mutually acceptable Company and individual milestones.
5. You will be entitled to 12 days paid vacation each year, accruing on a
monthly basis. Per our discussion, you will be allowed to complete your
previously scheduled vacation from March 30 to April 6, 1998 and two weeks
(10 days) during the summer of 1998.
6. You will also be eligible for coverage under the Company's group
health/dental plan, and other benefits that the Company provides to
comparable employees. If necessary, MTI will pay the additional cost of
COBRA coverage for your pre-existing eye condition.
7. Reasonable costs related to your move from Minnesota to Southern California
will be covered according to the terms set forth in a separate letter.
8. I am also pleased to inform you that as part of this offer, and once
Confidential Information Agreements are signed, and following Board of
Directors approval, you will be granted an option to purchase 70,000 shares
of common stock in MTI at the fair market value. Following twelve (12)
months of employment, this option will be vested to the extent of
twenty-five percent (25%) and, from there on, at the rate of 2.083% per
month until fully vested. The option is subject to conditions outlined in
the Company's 1996 Stock Incentive Plan effective August 1, 1996.
<PAGE> 2
9. The Company will include in an employment agreement a $150,000 cash
severance payment if your employment is terminated due to a change of
control during your first year of employment. Also, upon a change of
control, all of your options will become vested.
10. Employment with Micro Therapeutics, Inc. is at the mutual consent of the
employee and the Company. Accordingly, while MTI has every hope that
employment relationships will be mutually beneficial and rewarding,
employees and the Company retain the right to terminate the employment
relationship at will, at any time, with or without cause. Please note that
no individual has the authority to make any contrary agreement or
representation. Accordingly, this constitutes a final and fully binding
integrated agreement with respect to the at-will nature of the employment
relationship.
11. You agree to abide by the Company's policies and procedures, including those
set forth in the Company's Employee Handbook. You will be required to sign
the signature page of this Employee Handbook.
12. You will be required to sign the Employee Confidential Information Agreement
that is enclosed as well as the necessary tax and benefit enrollment forms
before starting full time employment. You will also be required to provide
proof of your identity and authorization to work in the United States as
required by Federal immigration laws.
Earl, we look forward to you joining our effort and hope the opportunity will be
mutually rewarding. To confirm that you agree to the terms stated in this
letter, please sign, date and return the enclosed copy of this letter.
Congratulations.
Regards,
MICRO THERAPEUTICS, INC.
By: /s/ GEORGE WALLACE
- -------------------------
George Wallace
President and CEO
Encls: Employee Confidential Information Agreement
================================================================================
This will acknowledge my acceptance of this offer of employment.
/s/ EARL SLEE 3/19/98
- ---------------- ------------------
Earl Slee Date
<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 SIX MONTHS ENDED
JUNE 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 9,566
<SECURITIES> 0
<RECEIVABLES> 479
<ALLOWANCES> 1
<INVENTORY> 715
<CURRENT-ASSETS> 10,981
<PP&E> 1,382
<DEPRECIATION> 681
<TOTAL-ASSETS> 12,688
<CURRENT-LIABILITIES> 931
<BONDS> 6,237
0
0
<COMMON> 7
<OTHER-SE> 5,513
<TOTAL-LIABILITY-AND-EQUITY> 12,688
<SALES> 1,944
<TOTAL-REVENUES> 1,944
<CGS> 908
<TOTAL-COSTS> 5,279
<OTHER-EXPENSES> (248)
<LOSS-PROVISION> 1
<INTEREST-EXPENSE> 230
<INCOME-PRETAX> (4,225)
<INCOME-TAX> 1
<INCOME-CONTINUING> (4,226)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,226)
<EPS-PRIMARY> (.64)
<EPS-DILUTED> (.64)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AND STATEMENT OF OPERATIONS IN RESTATED FORM 10-QSB FOR THE SIX MONTHS
ENDED JUNE 30, 1997.
</LEGEND>
<RESTATED>
<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> 180
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> (.75)
<EPS-DILUTED> (.75)
</TABLE>
