<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(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 2000.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______.
Commission file number 0-6523
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
of incorporation or organization) Identification Number)
2 Goodyear, Irvine, California 92618
(Address of principal executive offices)
(949) 837-3700
(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 4, 2000
----- -----------------------------
<S> <C>
Common Stock, $.001 par value 9,952,718
</TABLE>
Transitional small business disclosure format: Yes X No
----- -----
Page 1 of 24 Pages
Exhibit Index on Page 24
1
<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
Consolidated Balance Sheet as of June 30, 2000 (unaudited).................3
Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 1999 and 2000 (unaudited).....................................4
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1999 and 2000 (unaudited).....................................5
Notes to Unaudited Consolidated Financial Statements.....................6-8
Item 2. Management's Discussion and Analysis or Plan of Operation.................9-21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...........................................................22
Item 6. Exhibits and Reports on Form 8-K............................................22
SIGNATURES..................................................................................23
</TABLE>
2
<PAGE> 3
MICRO THERAPEUTICS, INC.
CONSOLIDATED BALANCE SHEET
June 30, 2000
(Unaudited)
A S S E T S:
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents $ 15,670,326
Accounts receivable, net of allowance for doubtful accounts of $9,794 1,403,559
Inventories, net of allowance for obsolescence of $100,661 1,434,911
Prepaid expenses and other current assets 555,588
------------
Total current assets 19,064,384
Property and equipment, net of accumulated depreciation of $1,639,518 2,010,108
Patents and licenses, net of accumulated amortization of $230,852 1,550,410
Other assets 60,543
------------
Total assets $ 22,685,445
============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 200,171
Accrued salaries and benefits 536,557
Accrued liabilities 476,810
Deferred revenue 780,095
Equipment line of credit 40,900
------------
Total current liabilities 2,034,533
Deferred revenue 812,500
Notes payable, net of unamortized discounts of $1,210,876 10,789,124
------------
Total liabilities 13,636,157
------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized;
no shares issued or outstanding
Common stock, $0.001 par value, 20,000,000 shares authorized;
9,951,946 shares issued and outstanding 9,952
Additional paid-in capital 55,654,793
Stockholder notes receivable (567,245)
Accumulated deficit (46,048,212)
------------
Total stockholders' equity 9,049,288
------------
Total liabilities and stockholders' equity $ 22,685,445
============
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE> 4
MICRO THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 2000
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
------------------------------ ------------------------------
June 30, 1999 June 30, 2000 June 30, 1999 June 30, 2000
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 1,080,506 $ 1,210,001 $ 1,893,259 $ 2,340,600
Cost of sales 858,228 784,895 1,507,590 1,510,539
----------- ----------- ----------- -----------
Gross margin 222,278 425,106 385,669 830,061
----------- ----------- ----------- -----------
Costs and expenses:
Research and development 1,917,997 1,726,956 3,610,060 3,384,976
Selling, general and administrative 1,040,048 1,364,677 2,736,209 2,552,435
----------- ----------- ----------- -----------
Total costs and expenses 2,958,045 3,091,633 6,346,269 5,937,411
----------- ----------- ----------- -----------
Loss from operations (2,735,767) (2,666,527) (5,960,600) (5,107,350)
----------- ----------- ----------- -----------
Other income (expense):
Interest income 126,121 253,215 295,802 391,283
Interest expense (1,964,553) (257,662) (2,364,208) (514,202)
Other expense, net (1,345) -- (24,008) --
----------- ----------- ----------- -----------
(1,839,777) (4,447) (2,092,414) (122,919)
----------- ----------- ----------- -----------
Loss before provision for income taxes (4,575,544) (2,670,974) (8,053,014) (5,230,269)
Provision for income taxes 800 800
----------- ----------- ----------- -----------
Net loss $(4,575,544) $(2,670,974) $(8,053,814) $(5,231,069)
=========== =========== =========== ===========
Per share data:
Net loss per share (basic and diluted) $ (0.64) $ (0.27) $ (1.16) $ (0.56)
=========== =========== =========== ===========
Weighted average shares outstanding 7,162,000 9,924,304 6,945,000 9,298,558
=========== =========== =========== ===========
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE> 5
MICRO THERAPEUTICS, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000
(UNAUDITED)
<TABLE>
<CAPTION>
1999 2000
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (8,053,814) $ (5,231,069)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 329,374 426,960
Amortization of note payable discounts 238,307 181,506
Common stock grant and compensation related to
stock options 22,756 92,034
Loss on sale of equipment 21,260
Provision for doubtful accounts (2,621)
Provision for inventory obsolescence 60,921 (20,905)
Debt conversion charge 1,651,585
Change in operating assets and liabilities:
Accounts receivable (573,291) (718,541)
Inventories (445,390) (214,484)
Prepaid expenses and other assets (156,129) (173,042)
Accounts payable (577,744) (225,015)
Accrued salaries and benefits 405,826 146,280
Accrued liabilities 26,475 94,043
Deferred revenue (114,995) 475,364
------------ ------------
Net cash used in operating activities (7,167,480) (5,166,869)
------------ ------------
Cash flows from investing activities:
Purchase of short-term investments (4,999,277)
Maturity of short-term investments 2,499,016
Additions to property and equipment (809,674) (200,608)
Sale of equipment 10,600
Additions to patents and licenses (265,867) (150,091)
Decrease in other assets 36,090
------------ ------------
Net cash used in investing activities (3,529,112) (350,699)
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options 62,165 527,131
Proceeds from issuance of common stock under
Employee Stock Purchase Plan 88,759 79,559
Proceeds from issuance of common stock in private placement 11,192,091
Stockholder notes receivable (244,655)
Repayments on equipment line of credit (35,363) (32,398)
------------ ------------
Net cash provided by financing activities 115,561 11,521,728
------------ ------------
Net increase (decrease) in cash and cash equivalents (10,581,031) 6,004,160
Cash and cash equivalents at beginning of year 15,219,880 9,666,166
------------ ------------
Cash and cash equivalents at end of period $ 4,638,849 $ 15,670,326
============ ============
Supplemental schedule of noncash activities:
Conversion of debt $ 8,245,892 --
============ ============
Unearned compensation related to terminated employees $ 22,756 --
============ ============
</TABLE>
See notes to unaudited consolidated financial statements.
5
<PAGE> 6
MICRO THERAPEUTICS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. Description of the Company
Micro Therapeutics, Inc. was incorporated on June 11, 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
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Micro Therapeutics, Inc. and its wholly-owned subsidiary, Micro Therapeutics
International, Inc. (collectively, the "Company"), which was incorporated on
June 30, 2000 for the purpose of carrying out the Company's international
activities other than sales of product through distributors. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Unaudited Interim Financial Information:
The consolidated 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 1999 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.
3. Net Loss Per Share
Net loss per share is calculated under the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings per Share," by dividing
net loss by the weighted average number of common shares issued and
outstanding during the period. Potential common shares, represented by
options 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.
4. Segment Information
During the three and six months ended June 30, 1999, products related to the
Company's Onyx(TM) Liquid Embolic System ("LES"(TM)), including related
micro catheter, access and delivery products, were in various phases of
research, development, clinical and regulatory processes. Substantive
amounts of sales of such products did not commence until the third quarter
of 1999. Accordingly, the majority of the Company's net sales for the three
and six months ended June 30, 1999 was derived from its peripheral blood
clot therapy products. Additional information with respect to net sales for
the three and six months ended June 30, 1999 and 2000 is as follows:
6
<PAGE> 7
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
-------------------------- --------------------------
1999 2000 1999 2000
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Peripheral blood clot therapy
United States $ 796,301 $ 364,414 $1,580,021 $ 797,376
International 95,286 53,194 116,697 86,198
---------- ---------- ---------- ----------
Total peripheral blood clot
therapy revenues 891,587 417,608 1,696,718 883,574
---------- ---------- ---------- ----------
Onyx
United States 480 900 11,930 2,050
International 5,460 216,643 5,460 404,444
---------- ---------- ---------- ----------
Total Onyx revenues 5,940 217,543 17,390 406,494
---------- ---------- ---------- ----------
Micro catheter, access and delivery
United States 54,600 66,450 72,925 152,225
International 39,760 397,251 57,470 766,507
---------- ---------- ---------- ----------
Total micro catheter, access and
delivery revenues 94,360 463,701 130,395 918,732
---------- ---------- ---------- ----------
Other
United States 87,439 111,054 47,576 131,657
International 1,180 95 1,180 143
---------- ---------- ---------- ----------
Total other revenues 88,619 111,149 48,756 131,800
---------- ---------- ---------- ----------
Total revenues $1,080,506 $1,210,001 $1,893,259 $2,340,600
========== ========== ========== ==========
</TABLE>
For the three and six months ended June 30, 1999, Abbott Laboratories
("Abbott"), the exclusive distributor of the Company's peripheral blood clot
therapy product line in the United States and Canada, accounted for 79% and
83%, respectively, of the Company's revenues. No other customer accounted
for 10% or more of the Company's revenues during either the three or six
month periods ended June 30, 1999.
For the three and six months ended June 30, 2000, Abbott and Guidant
Corporation ("Guidant"), the exclusive distributor of the Company's Onyx and
micro catheter, access and delivery products in the European Union, each
accounted for 10% or more of the Company's revenues. Additional information
with respect to revenues from these customers for the three and six months
ended June 30, 2000 is as follows:
<TABLE>
<CAPTION>
PERCENT OF TOTAL NET SALES BY SEGMENT
FOR THE THREE MONTHS ENDED JUNE 30, 2000
---------------------------------------------------------------------------
PERIPHERAL MICRO CATHETER,
BLOOD CLOT ACCESS AND
CUSTOMER THERAPY ONYX DELIVERY OTHER TOTAL
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Abbott 87.3% -- -- -- 30.1%
Guidant -- 54.8% 45.2% -- 27.2%
</TABLE>
<TABLE>
<CAPTION>
PERCENT OF TOTAL NET SALES BY SEGMENT
FOR THE SIX MONTHS ENDED JUNE 30, 2000
---------------------------------------------------------------------------
PERIPHERAL MICRO CATHETER,
BLOOD CLOT ACCESS AND
CUSTOMER THERAPY ONYX DELIVERY OTHER TOTAL
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Abbott 90.2% -- -- -- 34.1%
Guidant -- 60.3% 37.8% -- 25.3%
</TABLE>
7
<PAGE> 8
5. Distribution Agreement with Abbott
On June 28, 2000, the Company and Abbott entered into a distribution
agreement, superceding the previously-existing distribution agreement
executed in August 1998. Under the new agreement, the Company has certain
responsibilities for marketing, promotion and presentation of sales
contracts, subject to final approval by Abbott, to customers for the
Company's peripheral blood clot therapy products in the United States and
Canada. Abbott retains responsibility for maintenance of inventory, customer
service and accounts receivable administration.
As in the prior distribution agreement, the new Agreement provides for the
Company to receive an initial purchase price payment from Abbott upon
shipment of product by the Company to Abbott and an additional purchase
price payment, based upon, and calculated as a percentage of, Abbott's net
sales, as defined in the new agreement. The Company recognizes as sales the
initial purchase price upon shipment of product to Abbott, and the
additional purchase price upon Abbott's reporting of sales to its customers.
The new agreement also provides for (a) an increase, relative to the
provisions of the prior distribution agreement, in the maximum initial
purchase price the Company may receive, effective for purchases of product
made by Abbott from the Company commencing January 1, 2000, (b) increases,
relative to the provisions of the prior distribution agreement, in the
percentage underlying the calculation of the additional purchase price,
effective as of the date of the new agreement, with additional scheduled
increases in this percentage to be effective January 1, 2001 and 2002, after
which the percentage remains constant for the remaining term of the new
agreement, (c) the non-refundable prepayment by Abbott of such additional
purchase price in 2000 in the aggregate amount of $700,000, of which
$350,000 was received by the Company in July, 2000, and $350,000 is to be
paid by Abbott on or before September 26, 2000 and (d) further increases in
the percentage underlying the calculation of the additional purchase price
in the event net sales exceed defined levels. As of the effective date of
the new agreement, the Company recorded as deferred revenue (i) increases in
the initial purchase price for product purchases made by Abbott prior to the
effective date of the new agreement, and (ii) the prepaid additional
purchase price. Such deferred revenue will be amortized into income during
the remainder of fiscal 2000 and 2001, so as to result in a constant
percentage underlying the calculation of the additional purchase price over
the term of the new agreement.
6. Private Placement of Common Stock
On March 10, 2000, the Company sold 1,600,000 shares of its common stock
under the terms of a Securities Purchase Agreement to accredited investors
in conformity with Rule 506 under Regulation D, raising gross proceeds of
$11,936,000. As of June 30, 2000, the Company had recognized related
issuance costs of approximately $744,000, which are reflected as reductions
to additional paid-in capital in the accompanying consolidated balance
sheet. The Company and the investors concurrently entered into a
Registration Rights Agreement, under which the Company undertook to register
such 1,600,000 shares under the Securities Act, which registration was
declared effective by the Securities and Exchange Commission on April 24,
2000.
7. Stockholder Notes Receivable
In April 2000, the Company made loans to certain officers and an employee of
the Company in exchange for full-recourse notes in the aggregate amount of
$244,655. The notes are collateralized by shares of the Company's common
stock owned by the individuals, are due April 12, 2003 and bear an interest
rate of 6.49% per annum.
8. Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"). "Revenue Recognition," which
outlines the basic criteria that must be met to recognize revenue and
provides guidance for presentation of revenue and for disclosure related to
revenue recognition policies in financial statements filed with the SEC.
Management believes that adopting SAB 101 will not have a material impact on
the Company's financial position or results of operations.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions
Involving Stock Compensation," which is an interpretation of Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees." FIN 44 clarifies:
o the definition of employee for purposes of applying APB 25;
o the criteria for determining whether a plan qualifies as a
noncompensatory plan;
o the accounting consequence of various modifications of the terms of a
previously fixed stock option or award; and
o the accounting for an exchange of stock compensation awards in a business
combination.
8
<PAGE> 9
FIN 44 is effective July 1, 2000, but certain conclusions in this
interpretation cover specific events that occur after either December 15,
1998, or January 12, 2000. The effects, if any, of applying FIN 44 are to be
recognized on a prospective basis from July 1, 2000. Management believes
that the adoption of FIN 44 will not have a material impact on the Company's
financial statements.
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 Our Business and Future
Results."
OVERVIEW
Since its inception in June 1993, the Company 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 at least into fiscal 2002 as the Company expends
substantial resources to fund research and development, clinical trials,
regulatory approvals, and 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.
Through the third quarter of 1999, the majority of the Company's revenues were
derived from sales of its initial infusion catheters and related accessories,
the Cragg Thrombolytic Brush, and the Castaneda Over The Wire Brush. In August
1998, and as revised in June 2000, the Company entered into a distribution
agreement with Abbott, which provides for distribution of such products by
Abbott in the United States and Canada. The Company expects sales, under the
distribution agreement with Abbott, of the products mentioned above, and similar
products, to continue to provide a significant portion of the Company's
revenues. The Company currently sells such products outside the United States
and Canada through a limited number of distributors, however, revenues under
these arrangements have not been significant to date.
In November 1997, the Company signed an agreement with 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. Until September 1999, no significant revenues had been
received under the Guidant arrangement. Revenues under the Guidant arrangement
are dependent upon the receipt by the Company of CE Mark certification for
applications of the Company's Onyx(TM) Liquid Embolic System ("LES" (TM))
(formerly marketed as the EMBOLYX(TM) Liquid Embolic System), market training
and product launch activities. In July 1999, the Company received CE Mark
approval for the treatment of arteriovenous malformations ("AVMs") in the brain
using the Onyx LES and, accordingly, the Company initiated market training
activities in July 1999, which activities are currently underway. Product launch
activities with respect to the brain AVM application commenced in September
1999. In April 1999 and March 2000, the Company obtained CE Mark approval for
the peripheral embolization and brain tumor applications, respectively, of the
Onyx LES, and the Company is in the process of accumulating additional clinical
data with respect to these applications before commencing market training
activities. Additional CE Mark certifications with respect to the Onyx LES are
subject to the successful completion of clinical trials.
In September 1998, the Company entered into a distribution agreement with
Century Medical, Inc. ("Century"), which provides for distribution of all the
Company's products by Century in Japan. Significant revenues are not expected to
be derived from sales in Japan until the Company's products receive regulatory
approval in Japan, and market training and product launch activities are
substantially underway. The Company's peripheral blood clot therapy products
received regulatory approval in May 1999, as did certain of the Company's micro
catheter, access and delivery products in September 1999. Market training and
product launch activities have not yet commenced for all of these products,
however. Accordingly, the Company has not realized significant revenues to date
from sales in Japan.
The Company's products are currently manufactured by the Company at its facility
in Irvine, California. Certain accessories are manufactured and processes are
performed by contract manufacturers.
9
<PAGE> 10
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 certain 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
Comparison of The Three and Six Months Ended June 30, 1999 and 2000
Following is information with respect to net sales for the three and six months
ended June 30, 1999 and 2000:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
-------------------------- --------------------------
1999 2000 1999 2000
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Peripheral blood clot therapy
United States $ 796,301 $ 364,414 $1,580,021 $ 797,376
International 95,286 53,194 116,697 86,198
---------- ---------- ---------- ----------
Total peripheral blood clot
therapy revenues 891,587 417,608 1,696,718 883,574
---------- ---------- ---------- ----------
Onyx
United States 480 900 11,930 2,050
International 5,460 216,643 5,460 404,444
---------- ---------- ---------- ----------
Total Onyx revenues 5,940 217,543 17,390 406,494
---------- ---------- ---------- ----------
Micro catheter, access and delivery
United States 54,600 66,450 72,925 152,225
International 39,760 397,251 57,470 766,507
---------- ---------- ---------- ----------
Total micro catheter, access and
delivery revenues 94,360 463,701 130,395 918,732
---------- ---------- ---------- ----------
Other
United States 87,439 111,054 47,576 131,657
International 1,180 95 1,180 143
---------- ---------- ---------- ----------
Total other revenues 88,619 111,149 48,756 131,800
---------- ---------- ---------- ----------
Total revenues $1,080,506 $1,210,001 $1,893,259 $2,340,600
========== ========== ========== ==========
</TABLE>
10
<PAGE> 11
On August 12, 1998, the Company entered into a ten-year distribution agreement
with Abbott that provided Abbott with exclusive rights to distribute the
Company's peripheral blood clot therapy products in the U.S. and Canada. Upon
shipment of product by the Company to Abbott, the Company received an initial
purchase price payment from Abbott, as provided in the agreement. Abbott
provided additional purchase price payments to the Company based upon, and
calculated as a percentage of, Abbott's net sales, as defined in the agreement.
The Company recognized as sales the initial purchase price upon shipment of
product to Abbott. The Company recognized the additional purchase price upon
Abbott's reporting of sales to its customers. Sales to Abbott constituted 30%
and 34% of the Company's total sales for the three and six months ended June 30,
2000, respectively, as compared to 79% and 83% of the Company's total sales for
the corresponding respective periods in 1999. Sales subsequent to the second
quarter of 1999 have been adversely affected by manufacturing issues, being
addressed by Abbott, related to its thrombolytic drug, Abbokinase(R) (urokinase
for injection). The issues surrounding Abbott's ability to supply Abbokinase to
the blood clot therapy market correspondingly affected sales of the Company's
blood clot therapy products.
On June 28, 2000, the Company and Abbott entered into a new distribution
agreement, superceding the previously-existing distribution agreement described
above. Under the new agreement, the Company has certain responsibilities for
marketing, promotion and presentation of sales contracts, subject to final
approval by Abbott, to customers for the Company's peripheral blood clot therapy
products in the United States and Canada. Abbott retains responsibility for
maintenance of inventory, customer service and accounts receivable
administration.
As in the prior distribution agreement, the new agreement provides for the
Company to receive the initial purchase price upon shipment of product by the
Company to Abbott, and the additional purchase price based upon, and calculated
as a percentage of, Abbott's net sales, as defined in the new agreement. The
Company recognizes as sales the initial purchase price upon shipment of product
to Abbott, and the additional purchase price upon Abbott's reporting of sales to
its customers.
The new agreement also provides for (a) an increase, relative to the provisions
of the prior agreement, in the maximum initial purchase price the Company may
receive, effective for purchases of product made by Abbott from the Company
commencing January 1, 2000, (b) increases, relative to the provisions of the
prior agreement, in the percentage underlying the calculation of the additional
purchase price, effective as of the date of the new agreement, with additional
scheduled increases in this percentage to be effective January 1, 2001 and 2002,
after which the percentage remains constant for the remaining term of the new
agreement, (c) the non-refundable prepayment by Abbott of such additional
purchase price in 2000 in the aggregate amount of $700,000, of which $350,000
was paid by Abbott in July, 2000 and $350,000 is to be paid by Abbott on or
before September 26, 2000 and (d) further increases in the percentage underlying
the calculation of the additional purchase price in the event net sales exceed
defined levels. As of the effective date of the new agreement, the Company
recorded as deferred revenue (i) increases in the initial purchase price for
product purchases made by Abbott prior to the effective date of the new
agreement, and (ii) the prepaid additional purchase price. Such deferred revenue
will be amortized into income during the remainder of fiscal 2000 and 2001, so
as to result in a constant percentage underlying the calculation of the
additional purchase price over the term of the new agreement.
In the third quarter of 1999, the Company obtained CE Mark approval to market
the Onyx LES for the treatment of brain AVMs in the European Union. Accordingly,
sales of Onyx substantively commenced in the fourth quarter of 1999.
The increases in sales of micro catheter, access and delivery products during
the three and six months ended June 30, 2000, relative to the corresponding
periods in 1999, are due primarily to additional products that received
regulatory marketing clearances worldwide during 1999 and to the sale of such
products in connection with sales of the Onyx LES, as discussed above.
Other revenues in 1999 and 2000 were derived from manufacturing services
performed by the Company for third parties.
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<PAGE> 12
Cost of sales decreased to $784,895 for the three months ended June 30, 2000
from $858,228 for the corresponding period in 1999, and decreased, as a
percentage of sales, from 79% in 1999 to 65% in 2000. These decreases resulted
primarily from a shift in the mix of product shipments during 2000 toward the
Onyx and micro catheter, access and delivery product lines, which bear higher
percentage margins relative to the Company's peripheral blood clot therapy
product line, which comprised nearly all the Company's sales in the first half
of 1999. Cost of sales for the six months ended June 30, 2000 was $1,510,539,
compared to $1,507,590 for the corresponding period in 1999. As a percentage of
sales, cost of sales decreased to 65% for the six months ended June 30, 2000,
from 80% for the corresponding period in 1999. The slight dollar increase in
cost of sales, in the context of increasing sales from the six months ended June
30, 1999 to the corresponding period in 2000, as previously discussed, and the
decrease in cost of sales as a percentage of sales for these comparative periods
is also due to the shift in the mix of product shipments as discussed above.
Research and development expenses, including regulatory and clinical expenses,
decreased 10% from $1,917,997 for the second quarter of 1999 to $1,726,956 for
the corresponding period in 2000, and decreased 6% from $3,610,060 for the six
months ended June 30, 1999 to $3,384,976 for the corresponding period in 2000.
The decreases resulted from the effects of strategic cash management initiatives
implemented by the Company in the second half of 1999. Such expenses relate
primarily to the Company's continued efforts in the development of the Onyx LES,
associated clinical trials, market training and development of access and
delivery products. The Company expects that such costs will increase in future
periods.
Selling, general and administrative expenses increased 31% from $1,040,048 for
the second quarter of 1999 to $1,364,677 for the corresponding period in 2000.
This increase was due primarily to the benefit recognized in 1999 of a $500,000
non-refundable cash payment from Abbott to finance the cost of dedicating the
Company's sales force to the transition of distribution under its then-existing
distribution agreement with Abbott. Without this benefit in 1999, selling,
general and administrative expenses in the second quarter of 2000 would have
been 11% lower than in the corresponding period in 1999, due to the effects of
the strategic cash management initiatives discussed above, net of an increase in
the second quarter of 2000 related to the expansion of the Company's marketing
and sales capabilities. Selling, general and administrative expenses decreased
7% from $2,736,209 for the six months ended June 30, 1999 to $2,552,435 for the
corresponding period in 2000. This decrease was primarily attributable to the
effects of the aforementioned strategic cash management initiatives, and would
have amounted to a 21% decrease from 1999 to 2000 without the recognition in
1999 of the $500,000 benefit previously discussed.
Net interest and other expense decreased from $1,839,777 and $2,092,414 for the
three and six month periods ended June 30, 1999, respectively, to $4,447 and
$122,919 for the corresponding respective periods of 2000. Such decreases were
due primarily to the non-cash, non-recurring charge, amounting to $1,651,585,
incurred in May 1999 related to the early conversion of two $5 million notes
held by Abbott. Also contributing to the decreases were the lower average debt
balance in 2000 resulting from the aforementioned conversion of debt by Abbott,
and interest income from higher average cash balances in 2000 resulting from the
Company's receipt of approximately $11.2 million in net proceeds from the
completion of a private placement of 1.6 million shares of the Company's common
stock in March 2000.
As a result of the items discussed above, the Company incurred a net loss of
$2,670,974 and $5,231,069 for the three and six months ended June 30, 2000,
respectively, compared to $4,575,544 and $8,053,814 for the corresponding
respective periods in 1999.
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<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's cash expenditures have significantly exceeded its
sales, resulting in an accumulated deficit of approximately $46 million at June
30, 2000. 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. In April 1998, the Company achieved a milestone set forth in the
agreement with Guidant, and elected, under the terms of the agreement, to have
Guidant loan the Company $2 million and purchase from it $500,000 of the
Company's common stock at approximately $10.50 per share, the proceeds from
which were received in May 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 provided 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, subject to
certain restrictions, into shares of the Company's Common Stock at a conversion
rate of $15.00 per share. In October 1998, the Company elected to borrow the
entire $5 million under this facility, the proceeds of which were received in
November 1998. Both notes had a stated interest rate of 5% per annum. For
financial statement reporting purposes, this rate was adjusted to reflect an
imputed market rate of interest as of the date of each of the notes.
In April 1999, Abbott and the Company agreed to a modification, and, in May
1999, the parties consummated such modification, of the agreements described
above. Under the terms of the modification, Abbott converted $4 million face
value of the notes into shares of the Company's Common Stock at a conversion
rate equal to 125% of the average closing price of such stock for the five days
ended April 30, 1999 (amounting to a conversion rate of $8.65 per share), and
converted the remaining $6 million face value of such notes into shares of the
Company's common stock at a rate of $12 per share.
Concurrently in April 1999, Abbott and the Company entered into an agreement
that provided the Company an option to require Abbott to purchase up to $3
million of the Company's common stock at a price of $12 per share. In October
1999, the Company exercised such option for the entire $3 million of proceeds
and, accordingly, issued 250,000 shares of its common stock to Abbott upon the
Company's receipt of the proceeds in November 1999.
In October 1998, under the terms of the then-existing distribution agreement,
Abbott furnished the Company with a non-refundable $1 million marketing payment
upon Abbott's first commercial sale of product. For financial statement
purposes, this payment is being amortized into income on a straight-line basis
over the initial term of the agreement which continues through 2008.
The distribution agreement required the Company to commit the resources of its
sales representatives in the United States and Canada for the first six months
of the agreement to the transition of the distribution function to Abbott. This
six-month period terminated on March 31, 1999. In April 1999 and August 1999,
Abbott agreed to make additional quarterly $500,000 payments to the Company
solely as consideration for the continued resource commitment of the Company's
sales representatives to the transition of distribution to Abbott during each of
the quarters ended June 30, 1999 and September 30, 1999. These additional
payments were received by the Company in July 1999 and November 1999.
Under the terms of the distribution agreement executed in August 1998, and a new
distribution agreement entered into in June 2000 which superceded the
previously-existing agreement, the Company receives an initial purchase price
payment from Abbott upon shipment of product from the Company to Abbott. The
Company receives additional purchase price payments based upon Abbott's net
sales, as defined in the agreement.
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<PAGE> 14
Concurrent with the execution of the distribution agreement with Century in
September 1998, the Company and Century entered into convertible subordinated
note and credit agreements, under which Century provided the Company with (a) $3
million, in exchange for a five-year subordinated note, convertible at the
Company's option, subject to certain restrictions, into shares of the Company's
common stock at a conversion rate of $15.00 per share, and (b) a $2 million
credit facility. The availability of the credit facility commenced in April
1999, upon the Company obtaining its first CE Mark in Europe for an Onyx-related
application. In September 1999 the Company borrowed the entire $2 million
available under the credit facility in exchange for a note which is repayable
five years from the date of the agreement and is convertible over the five-year
life of the note at the Company's option, subject to certain restrictions, into
shares of the Company's Common Stock at a conversion rate of approximately
$16.35. Both notes have a stated interest rate of 5% per annum. This rate, for
financial statement reporting purposes, has been adjusted to reflect an imputed
market rate of interest as of the dates of the notes.
Under the terms of the distribution agreement with Century, the Company received
from Century a $500,000 advance payment on September 30, 1998, which amount is
being applied against Century's purchase orders for the Company's products. The
Company recorded this payment as deferred revenue and recognizes sales revenue
from such amount as the Company makes shipments to Century under such purchase
orders. Upon achievement of the first regulatory approval in Japan for an
application of the Onyx LES, Century, under the terms of the distribution
agreement, is required to make a $1 million advance payment to the Company,
which amount is to be applied against Century's first future purchase orders for
Onyx-related product.
On March 10, 2000, the Company sold 1,600,000 shares of its Common Stock under
the terms of a Securities Purchase Agreement to accredited investors in
conformity with Rule 506 under Regulation D. The Company and the investors
concurrently entered into a Registration Rights Agreement, under which the
Company undertook to register such 1,600,000 shares under the Securities Act,
which registration was declared effective by the Securities and Exchange
Commission on April 24, 2000. Such shares were sold to the investors at a price
of $7.46 per share, resulting in net proceeds, after payment of offering and
registration expenses, of approximately $11.2 million.
As of June 30, 2000, the Company had cash and cash equivalents of approximately
$15.7 million. Cash used in the Company's operations for the six months ended
June 30, 2000 was approximately $5.2 million, reflecting the loss from
operations, increases in inventories, receivables, prepaid expenses, other
assets and deferred revenue, net of a slight net decrease in the aggregate of
accounts payable, accrued liabilities, and accrued salaries and benefits. Cash
used by investing activities for the six months ended June 30, 2000 was
approximately $351,000 and primarily reflected expenditures for property and
equipment and intellectual property. While continued investments will be made
for property and equipment and for intellectual property, the Company has no
significant capital commitments as of June 30, 2000. Cash provided by financing
activities for the six months ended June 30, 2000 was approximately $11.5
million, consisting of net proceeds received by the Company from its sale of
1,600,000 shares of its common stock under the terms of a Securities Purchase
Agreement and from the exercise by employees, directors and consultants of stock
options, net of amounts loaned by the Company to certain officers and an
employee in exchange for full-recourse notes, collateralized by shares of the
Company's common stock owned by such individuals, and repayments by the Company
on its equipment line of credit.
The Company plans to finance its capital and operational needs principally from
its existing capital resources at June 30, 2000.
The Company believes current resources will be sufficient to fund its operations
through 2001. However, the Company's future liquidity and capital requirements
will depend upon numerous factors, including results under the distribution
agreements with Guidant, Abbott and Century, 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.
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CERTAIN FACTORS THAT MAY AFFECT OUR BUSINESS AND FUTURE RESULTS
Some of the information included herein contains forward-looking statements.
These statements can be identified by the use of forward-looking terms such as
"may," "will," "expect," "anticipate," "estimate," "continue," or other similar
words. These statements discuss future expectations, projections or results of
operations or of financial condition or state other "forward-looking"
information. When considering these forward-looking statements, you should keep
in mind the risk factors and other cautionary statements we make. These risk
factors could cause our actual results to differ materially from those contained
in any forward-looking statement. If any of the following risks actually occur,
our business could be harmed and the trading price of our common stock could
decline.
Many of our products are in developmental stages and may not successfully come
to market. We have only recently introduced a number of products commercially.
Several of our key products, particularly those relating to the Onyx Liquid
Embolic System, are in the early stage of development. In some cases, these
products either have not entered full clinical trials or have only recently done
so. Our ability to market these products will depend upon a number of factors,
including our ability to demonstrate the safety and efficacy of our products in
the clinical setting. Our products may not be found to be safe and effective in
clinical trials and may not ultimately be cleared for marketing by U.S. or
foreign regulatory authorities. Our failure to develop safe and effective
products which are approved for sale on a timely basis would have a negative
impact on our business.
Our products may not be accepted by the market. Even if we are successful in
developing additional safe and effective products that have received marketing
clearance, our new products may not gain market acceptance. In order for our
Onyx Liquid Embolic System to be accepted, we must address the needs of
potential customers. The target customers for our products are interventional
radiologists and interventional neuroradiologists. However, even if our products
are accepted by these targeted customers, this acceptance may not translate into
sales. Additionally, our market share for our existing products may not grow,
and our products which have yet to be introduced may not be accepted in the
market.
New products and technologies in the market could create additional competition.
The markets in which we compete involve rapidly changing technologies and new
product introductions and enhancements. We must enhance and expand the utility
of our products, and develop and introduce innovative new products that gain
market acceptance. New technologies, products or drug therapies developed by
others could reduce the demand for our products. We may encounter technical
problems in connection with our own product development that could delay
introduction of new products or product enhancements. While we maintain research
and development programs to continually improve our product offerings, including
adding interventional devices, our efforts may not be successful, and other
companies could develop and commercialize products based on new technologies
that are superior to our products either in performance or cost-effectiveness.
We face intense competition from many large companies. The medical technology
industry is intensely competitive. Our products 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 ours. These competitors have developed and may continue to
develop products that are competitive with ours. They may develop and market
technologies and products that are more readily accepted than ours. Their
products could make our technology and products obsolete or noncompetitive.
Although we believe that our products may offer certain advantages over our
competitors' currently-marketed products, companies entering the market early
often obtain and maintain significant market share relative to those entering
the market later. While we have designed our products to be cost effective and
more efficient than competing technologies, we might not be able to provide
better methods or products at comparable or lower costs.
We also compete with other manufacturers of medical devices for clinical sites
to conduct human trials. If we are not able to locate such clinical sites on a
timely basis, it could hamper our ability to conduct trials of our products,
which may be necessary to obtain required regulatory clearance or approval.
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We have a short operating history, during which time we have not been
profitable. We were incorporated in 1993. To date, our business has generated
limited product sales. From our inception through June 30, 2000, we incurred
cumulative losses of approximately $46 million. We expect additional losses as
we expand our research and development, clinical, regulatory, manufacturing and
marketing efforts. We may not achieve significant sales of our products or
become profitable. We could encounter substantial delays and unexpected expenses
related to the introduction of our current and future products, or our research
and development, clinical, regulatory, manufacturing and marketing efforts. Such
delays or expenses could reduce revenues and have a negative effect on our
business.
We may need additional financing to continue operations. Our operations to date
have consumed substantial amounts of cash, and we expect that this condition
will continue at least into 2002. We believe that our anticipated cash flow from
planned operations and existing capital resources, comprising primarily the net
proceeds from the following should be adequate to satisfy our capital
requirements through 2001:
- financings preceding and including the initial public offering of our common
stock in February 1997;
- a convertible subordinated note agreement with Guidant entered into in
November 1997, including $2.5 million we received from Guidant in exchange
for debt and common stock upon the achievement of a milestone defined in the
agreement with Guidant;
- a convertible subordinated note agreement, credit agreement and distribution
agreement with Abbott entered into in August 1998 and amended at various
dates thereafter;
- a convertible subordinated note agreement, credit agreement and distribution
agreement with Century entered into in September 1998;
- an option agreement with Abbott, which option was exercised by us in
November 1999;
- the sale, in March 2000, by us of 1,600,000 shares of our common stock; and
- the interest earned on cash, cash equivalent and short-term investment
balances.
However, it is possible that we will need additional capital before the end of
2001. Our need for additional financing will depend upon many factors, including
the extent and duration of our 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.
We currently have no other committed external sources of funds. If our existing
resources are insufficient to fund our activities, we will seek to raise
additional funds through public or private financing. However, such additional
financing may not be available on acceptable terms or at all. If we raise
additional funds by issuing equity securities, further dilution to our existing
stockholders may result. If adequate funds are not available to us, our business
may be negatively impacted.
We depend on patents and proprietary technology. Our success will depend in part
on our ability to:
- obtain and maintain patent protection for our products;
- preserve our trade secrets; and
- 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 July 31, 2000, we held 35 issued U.S. patents and one
issued foreign patent, and have 41 U.S. and 35 foreign patent applications
pending. Our issued U.S. patents cover technology underlying the Onyx Liquid
Embolic System (including both liquid embolic implantables as well as micro
catheters, access and delivery devices), carotid and intra-cerebral stents,
coatings, the Cragg MicroValve, infusion wires, and the Thrombolytic Brush. The
expiration dates of these patents range from 2009 to 2018. The pending claims
cover additional aspects of liquid embolic material, micro catheters, access and
delivery devices, carotid and intra-cerebral stent technologies, non-vascular
liquid embolic products, infusion catheters, infusion wires, and the
Thrombolytic Brush. Each product area we are pursuing is covered by at least two
issued patents and, in most instances, three pending patents. One of the patents
we use is currently licensed by us from Andrew Cragg, M.D.
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<PAGE> 17
There is no guarantee that issued patents will provide us 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. It is possible that patents belonging to
competitors will require us to alter our technology and products, pay licensing
fees or cease to market or develop our current or future technology and
products. We also rely on trade secrets to protect our proprietary technology,
it is possible that others will independently develop or otherwise acquire
equivalent technology or that we will be unable to maintain our technology as
trade secrets. In addition, the laws of some foreign countries do not protect
our proprietary rights to the same extent as the laws of the United States. If
we fail to protect our intellectual property rights, there could be a negative
impact on our business.
There has been extensive litigation in the medical device industry regarding
patents and other intellectual property rights. It is possible that
infringement, invalidity, right to use or ownership claims could be asserted
against us in the future. Although patent and intellectual property disputes in
the medical device industry have often been settled through licensing or similar
arrangements, these arrangements can be costly and there can be no assurance
that necessary licenses would be available to us on satisfactory terms or at all
under such circumstances. Accordingly, an adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
us from manufacturing and selling our products, which would have a material
adverse effect on our business. In addition, if we decide to litigate such
claims, it would be expensive and time consuming and could divert our
management's attention from other matters and could negatively impact our
business regardless of the outcome of the litigation.
We have limited marketing and distribution experience. Our experience in working
with third-party distributors is limited. In November 1997, we executed a
distribution agreement with Guidant to provide for the distribution of our neuro
vascular product in Europe, and, in August 1998, Guidant agreed to expand this
distribution agreement with us to provide for the distribution of our peripheral
embolization applications of the Onyx Liquid Embolic System. We did not enjoy
meaningful revenues under this arrangement until the third quarter of 1999,
following the initial regulatory clearance in the European Union to market the
Onyx Liquid Embolic System for the treatment of brain arteriovenous
malformations or "AVMs." In August 1998, we executed a distribution agreement
with Abbott to provide for distribution of our peripheral vascular blood clot
therapy products in the United States and Canada, and we entered into a new
agreement with Abbott in June 2000. In September 1998, we executed a
distribution agreement with Century to provide for distribution of all our
products in Japan. We did not enjoy meaningful revenues under the agreement with
Century until the second quarter of 1999, following initial marketing clearance
for certain of our products. There is no guarantee that either Guidant, Abbott
or Century will be able to successfully market our products. Further, there is
no guarantee that Century will be successful in assisting us in obtaining
necessary regulatory approvals in Japan to commence marketing all of our
products.
Our sales force in the United States consists of eight individuals, six of whom
joined the Company in July and August 2000. There is competition for sales
personnel experienced in interventional medical device sales, and there can be
no assurance that we will be able to successfully respond to this competition
and attract, motivate and retain qualified sales personnel. We intend to market
and sell our products outside the United States principally through
distributors. We believe that we will need to continue to expand our distributor
network or develop our own sales force. Our ability to market our products in
certain areas may depend on strategic alliances with marketing partners such as
Guidant, Abbott and Century. There is no guarantee that we will be able to enter
into distribution agreements other than the agreements with Guidant, Abbott and
Century on acceptable terms or at all. Also, there can be no assurance that such
agreements will be successful in developing our marketing capabilities or that
we will be able to successfully develop a direct sales force.
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<PAGE> 18
We have limited manufacturing experience. Our experience in manufacturing our
products is relatively limited. We have found it necessary to expand our
manufacturing capacity in connection with our continued development and
commercialization of our products We may find it necessary to further expand our
manufacturing capacity in the future. Development and commercialization requires
additional money for facilities, tooling and equipment and for leasehold
improvements. We expect that such expansion would be achieved utilizing the
increased space in our current leased facility, improved efficiencies,
automation and acquisition of additional tooling and equipment. However, we may
not be able to obtain the required funds for expansion of our manufacturing
capacity. Improved efficiencies might not result from such an expansion. Any
delay or inability to expand our manufacturing capacity, including obtaining the
commitment of necessary capital resources could materially adversely affect our
manufacturing ability.
Obtaining approval from governmental agencies is a barrier to the sale of our
products. The development, testing, manufacturing and marketing of our products
in the United States are regulated by the U.S. Food and Drug Administration as
well as various state agencies. The Food and Drug Administration requires
governmental clearance of such products before they are marketed. The process of
obtaining Food and Drug Administration and other required regulatory clearances
is lengthy, expensive and uncertain. Additionally, if regulatory clearance is
granted, it 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 negative impact on our
business.
Before we could offer and sell our current products, we were required to submit
information to the Food and Drug Administration in the form of a 510(k)
pre-market notification in order to substantiate label claims and to demonstrate
"substantial equivalence" of our products to a legally marketed Class I or II
medical device or a pre-amendments Class III medical device for which the Food
and Drug Administration had not called for premarket approvals. Although we
received Food and Drug Administration clearance for many of these products, we
may not be able to obtain the necessary regulatory clearance for the manufacture
and marketing of enhancements to our existing products or future products either
in the United States or in foreign markets. We have made modifications which
affect substantially all of our products covered under 510(k) clearances. We
believe that these modifications do not affect the safety or efficacy of the
products and thus, under Food and Drug Administration guidelines, do not require
the submission of new 510(k) notices. However, the Food and Drug Administration
may not agree with any of our determinations that a new 510(k) notice was not
required for such changes and could require us to submit a new 510(k) notice for
any of the changes made to a device. If the Food and Drug Administration
requires us to submit a new 510(k) notice for any device modification, we may be
prohibited from marketing the modified device until the 510(k) notice is cleared
by the Food and Drug Administration.
Before we can commercially market our Onyx Liquid Embolic System, we may be
required to submit one or more premarket approval applications to the Food and
Drug Administration. This 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 by the Food and Drug Administration. Based on the information
regarding the material composition of Onyx, we believe the Onyx Liquid Embolic
System would be regulated as a device. However, the Food and Drug Administration
could at a later date determine that the Onyx Liquid Embolic System should be
regulated as a drug. Such a change could significantly delay the commercial
availability of the Onyx Liquid Embolic System and have a material adverse
effect our business. Delays in receipt of, failure to receive, or loss of
regulatory approvals or clearances to market our products would negatively
impact our ability to market these products.
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<PAGE> 19
In the European Union, we will be required to maintain the certifications we
have obtained which are necessary to affix the CE Mark to our applicable
products. We will have to obtain additional certifications with respect to
affixing the CE Mark to our new products, in order to sell them in member
countries of the European Union. We have received CE Mark certifications with
respect to our currently marketed peripheral blood clot therapy products, micro
catheters, guidewires, balloon systems, and the peripheral vascular, brain AVM,
and brain tumor embolization applications of the Onyx Liquid Embolic System. We
anticipate obtaining certifications with respect to certain additional
applications of the Onyx Liquid Embolic System. However, such certifications may
be dependent upon successful completion of clinical studies. These clinical
studies may not be successfully completed and we may not be able to obtain the
required certifications. Additionally, we may not be able to maintain our
existing certifications. 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.
Commercial distribution and clinical trials in most foreign countries also are
subject to varying government regulations which may delay or restrict marketing
of our products.
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. Our 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 we believe that
we have complied in all material respects with such laws and regulations, there
are periodic inspections to ensure our compliance. It is possible that we could
be required to incur significant costs in the future in complying with
manufacturing and environmental regulations, or that we could be required to
cease operations in the event of any continued failure to comply.
We are exposed to product liability claims. The nature of our business exposes
us 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 Food and
Drug Administration regulatory framework does not necessarily preempt personal
injury actions against medical device manufacturers. We currently maintain
product liability insurance for our products, with limits of $10 million per
occurrence and an annual aggregate maximum of $10 million. However, our
insurance may not be adequate to cover future product liability claims.
Additionally, we may not be able to maintain adequate product liability
insurance at acceptable rates. Any losses that we may suffer from any liability
claims, and the effect that any product liability litigation may have upon the
reputation and marketability of our products may divert management's attention
from other matters and may have a negative effect on our business.
We are dependent on single-source suppliers and independent contract
manufacturers. We purchase some components and services used in connection with
our products from third parties. Our dependence on third-party suppliers
involves several risks, including limited control over pricing, availability,
quality and delivery schedules. Delays in delivery or services or component
shortages can cause delays in the shipment of our products. Our single-source
components are generally acquired through purchase orders placed in the ordinary
course of business, and we have no guaranteed supply arrangements with any of
our single-source suppliers. Because of our reliance on these vendors, we may
also be subject to increases in component costs. It is possible that we could
experience quality control problems, supply shortages or price increases with
respect to one or more of these components in the future. If we need to
establish additional or replacement suppliers for some of these components, our
access to the components might be delayed while we qualify such suppliers. Any
quality control problems, interruptions in supply or component price increases
with respect to one or more components could have a negative impact on our
business.
We rely on independent contract manufacturers to produce some of our products
and components. This involves several risks, including:
- inadequate capacity of the manufacturer's facilities;
- interruptions in access to certain process technologies; and
- reduced control over product quality, delivery schedules, manufacturing
yields and costs.
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Independent manufacturers have possession of and in some cases hold title to
molds for certain manufactured components of our products. Shortages of raw
materials, production capacity constraints or delays by our contract
manufacturers could negatively affect our ability to meet our production
obligations and result in increased prices for affected parts. Any such
reduction, constraint or delay may result in delays in shipments of our products
or increases in the prices of components, either of which could have a material
adverse effect on our business.
We do not have supply agreements with all of our current contract manufacturers
and we often utilize purchase orders which are subject to acceptance by the
supplier. An unanticipated loss of any of our contract manufacturers could cause
delays in our ability to deliver our products while we identify and qualify a
replacement manufacturer.
We depend upon key personnel. We significantly depend upon the contributions,
experience and expertise of our founders, certain members of our management team
and key consultants. We maintain a key-man life insurance policy in the amount
of $1 million on the life of George Wallace, our President and Chief Executive
Officer. This insurance may not be adequate to cover the risk involved.
Additionally, our success will depend upon our ability to attract and retain
additional highly qualified management, sales, technical, clinical and
consulting personnel.
We depend upon third-party reimbursement for some of our revenues. In the United
States, health care providers such as hospitals and physicians that purchase
medical devices generally rely on third-parties, 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,
there is an incentive to conduct only those tests that will optimize
cost-effective care.
Changes in reimbursement policies of governmental (both domestic and
international) or private healthcare payors could negatively impact our business
to the extent any such changes affect reimbursement for procedures in which our
products are used.
We may not be able to expand our international sales. In the quarter and six
months ended June 30, 2000, more than half of our revenues were derived from
international sales. We believe that our future performance will be dependent in
part upon our ability to increase international sales. Although the perceived
demand for certain products may be lower outside the United States, we intend to
continue to expand our international operations and to enter additional
international markets, which will require significant management attention and
financial resources. There is no guarantee however, that we will be able to
successfully expand our international sales. Our success in international
markets will depend on our ability to establish and maintain agreements with
suitable distributors, or establish a direct sales presence.
International sales 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 our products outside the United States are subject to extensive
foreign government regulation. We have in the past avoided losses due to
fluctuating exchange rates associated with international sales by selling our
products in U.S. dollars. However, we hope to sell products in some markets in
local currency, which would subject us to currency exchange risks.
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Large-scale market acceptance of our products will depend on the availability
and level of reimbursement in international markets that we target.
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.
Provisions in our charter documents may make an acquisition of us more
difficult. Provisions of our Amended and Restated Certificate of Incorporation,
Bylaws and Delaware law could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to stockholders.
Stock prices are particularly volatile in some market sectors. The stock market
sometimes experiences significant price and volume fluctuations that are
unrelated to the operating performance of particular companies. These broad
market fluctuations can cause a decrease in the price of our common stock. The
following factors may have a material adverse effect on the market price of our
common stock:
- fluctuations in our results of operations;
- failure of our results of operations to meet the expectations of public
market analysts and investors;
- timing and announcements of technological innovations or new products by us
or our competitors;
- Food and Drug Administration and foreign regulatory actions;
- developments with respect to patents and proprietary rights;
- timing and announcements of developments, including clinical trials related
to our products;
- public concern as to the safety of technology and products developed by us
or others;
- changes in health care policy in the United States and internationally;
- changes in stock market analyst recommendations regarding Micro
Therapeutics; and
- the medical device industry generally.
In addition, it is likely that during a future quarterly period, our results of
operations will fail to meet the expectations of stock market analysts and
investors and, in such event, our stock price could materially decrease.
In April 1999, we were notified by The Nasdaq-Amex Group that we did not meet
the requirements for our common stock to continue to be listed on the Nasdaq
National Market. We held discussions with the holders of our convertible debt,
submitted for Nasdaq's consideration a proposal and definitive plan for
compliance, and in support of such plan, in May 1999 we consummated agreements
with Abbott resulting in the conversion of $10 million of notes held by Abbott
into shares of our common stock. Additionally, the agreements provided us with
an option, which we exercised in November 1999, requiring Abbott to purchase $3
million of our common stock. Nasdaq informed us that it considered our actions
to be sufficient to support continued listing of our common stock on the Nasdaq
National Market. There is no guarantee, however, that we will be able to remain
in compliance with the Nasdaq National Market continued listing requirements.
Should Nasdaq determine in the future that our continued listing is not
supported, our stock price could materially decrease.
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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 24 of this Quarterly Report on Form
10-QSB.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed, or required to be filed, by the
Company during the quarterly period ended June 30, 2000.
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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 11, 2000 By: /s/ Harold A. Hurwitz
------------------------------------
Harold A. Hurwitz
Chief Financial Officer
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.1 Agreement dated June 28, 2000 between the Company and Abbott
Laboratories*
27.1 Financial Data Schedule - Six Months Ended June 30, 2000
-----------
* Registrant has sought confidential treatment pursuant to Rule 406 for a
portion of the referenced exhibit.
</TABLE>
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