<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal quarter ended: December 31, 1996 or
____ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________________ to ________________
Commission file number: 0-19806
CYBERONICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0236465
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
17448 Highway 3, Suite 100
Webster, Texas 77598-4135
(address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (713) 332-1375
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X
No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT FEBRUARY 7, 1997
Common Stock - $0.01 par value 11,770,363
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CYBERONICS, INC.
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets
December 31, 1996 (unaudited) and June 30, 1996 3
Consolidated Statements of Operations (unaudited)
three and six months ended December 31, 1996 and 1995 4
Consolidated Statements of Cash Flows (unaudited)
six months ended December 31, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 13
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CYBERONICS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,351,096 $ 2,121,930
Securities held to maturity 4,295,210 --
Accounts receivable 515,653 473,038
Inventories 974,394 671,836
Prepaid expenses 143,193 258,585
----------- -----------
Total current assets 9,279,546 3,525,389
Securities held to maturity 29,490 80,032
Property and equipment, net 352,978 332,881
Other assets, net 81,931 9,741
----------- -----------
$ 9,743,945 $ 3,948,043
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 348,349 $ 924,059
Accrued liabilities 1,152,601 1,558,934
----------- -----------
Total current liabilities 1,500,950 2,482,993
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 2,500,000 shares authorized; no
shares issued or outstanding -- --
Common stock, $.01 par value, 25,000,000 shares authorized;
11,770,363 and 9,577,115 shares issued and outstanding at
December 31, 1996
and June 30, 1996, respectively 117,704 95,771
Additional paid-in capital 50,446,455 39,261,602
Deferred compensation -- (4,460)
Accumulated deficit (42,410,918) (37,922,171)
----------- -----------
Cumulative translation adjustments 89,754 34,308
----------- -----------
Total stockholders' equity 8,242,995 1,465,050
----------- -----------
$ 9,743,945 $ 3,948,043
=========== ===========
</TABLE>
See accompanying notes to financial statements.
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CYBERONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------- -----------------------
1996 1995 1996 1995
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales $ 437,818 $ 400,236 $ 722,761 $ 592,546
Cost of goods sold 158,381 100,259 227,672 156,319
----------- ---------- ----------- ----------
Gross profit 279,437 299,977 495,089 436,227
Operating expenses:
Research and development 1,943,930 2,126,587 3,370,915 4,036,163
Selling, general and
administrative 1,033,924 765,440 1,844,174 1,270,509
----------- ---------- ----------- ----------
Total operating expenses 2,977,854 2,892,027 5,215,089 5,306,672
----------- ---------- ----------- ----------
Loss from operations (2,698,417) (2,592,050) (4,720,000) (4,870,445)
Interest income, net 107,208 116,969 254,535 269,987
Other income (expense) (105,017) -- (23,282) (4,187)
----------- ---------- ----------- ----------
Net loss $(2,696,226) $(2,475,081) $(4,488,747) $(4,604,645)
============ ============ ============ ===========
Net loss per share $ (0.23) $ (0.26) $ (0.39) $ (0.48)
============ ============ ============ ===========
Shares used in computing
net loss per share 11,765,178 9,503,971 11,490,707 9,502,090
========== ========= ========== =========
</TABLE>
See accompanying notes to financial statements.
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CYBERONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
DECEMBER 31,
------------------------------
1996 1995
----------- ----------
<S> <C> <C>
Cash Flow From Operating Activities:
Net loss $(4,488,747) $(4,604,645)
Non-cash items included in net loss:
Depreciation and amortization 91,591 111,705
Compensation expense related to certain stock options and
common stock issuances 4,460 45,600
Change in operating assets and liabilities:
Accounts receivable (42,615) (192,397)
Inventories (302,558) (19,631)
Prepaid expenses 115,392 16,232
Accounts payable and accrued liabilities (982,043) 745,120
----------- ----------
Net Cash Used In Operating Activities (5,604,520) (3,898,016)
Cash Flow From Investing Activities:
Purchases of property and equipment (111,688) (27,947)
Purchases of investments (5,834,668) (2,393,740)
Maturities of investments 1,590,000 4,058,064
----------- ----------
Net Cash (Used In) Provided By Investing Activities (4,356,356) 1,636,377
Cash Flow From Financing Activities:
Proceeds from issuance of Common Stock, net 11,206,786 32,311
Payments of capital lease obligations -- (45,912)
Other (72,190) 194
----------- ----------
Net Cash Provided By (Used In) Financing Activities 11,134,596 (13,407)
Effect of exchange rate changes on cash and cash equivalents 55,446 20,250
----------- ----------
Net increase (decrease) in cash and cash equivalents 1,229,166 (2,254,796)
Cash and cash equivalents, at beginning of period 2,121,930 8,862,993
----------- ----------
Cash and cash equivalents, at end of period $ 3,351,096 $6,608,197
=========== ==========
</TABLE>
See accompanying notes to financial statements.
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CYBERONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1996
NOTE 1 - BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information, and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six months ended December 31, 1996 are
not necessarily indicative of the results that may be expected for the full year
ended June 30, 1997. The financial information presented herein should be read
in conjunction with the audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
June 30, 1996.
NOTE 2 - CASH, CASH EQUIVALENTS AND INVESTMENTS:
At December 31, 1996 and June 30, 1996, the Company's entire investment
portfolios consisted of securities held to maturity. Securities held to maturity
are primarily various types of corporate bonds and asset-backed investments with
various maturity dates over the next 18 months and have a fair market value of
$4,278,113 and a gross unrealized holding loss of $46,587 at December 31, 1996.
NOTE 3 - REVENUE RECOGNITION:
Revenue from product sales is generally recognized upon shipment to the
customer. Domestic sales have depended entirely upon the Company conducting
clinical trial activities under arrangements with certain investigational
centers, some of which receive research funding from the Company. Arrangements
with certain investigational centers employ risk-sharing provisions. Domestic
sales made under risk-sharing arrangements are deferred until the Company
receives payment from the centers and the centers in turn receive third-party
reimbursement or satisfy other terms set forth in their respective arrangements.
Sales, net of risk-sharing provisions, for the six months ended December 31,
1996 consisted of $ 698,309 from international markets and $24,452 from domestic
risk-sharing arrangements.
NOTE 4 - INVENTORIES:
Inventories consist of the following:
DECEMBER 31, 1996 JUNE 30,1996
----------------- ------------
(UNAUDITED)
Raw materials and components ........... $403,176 $307,707
Work-in-process ........................ 263,992 227,821
Finished goods ......................... 307,226 136,308
-------- --------
$974,394 $671,836
======== ========
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NOTE 5 - ACCRUED LIABILITIES:
Accrued liabilities are as follows:
DECEMBER 31, 1996 JUNE 30,1996
----------------- ------------
(UNAUDITED)
Clinical costs ......................... $ 451,822 $ 618,885
Payroll and other compensation ......... 220,495 257,468
Professional services .................. 209,425 209,540
Customer deposits ...................... 24,464 48,916
Warranties ............................. 197,306 167,778
Marketing activities ................... -- 155,526
Other .................................. 49,089 100,821
---------- ----------
$1,152,601 $1,558,934
========== ==========
NOTE 6 - STOCKHOLDERS' EQUITY:
Pursuant to an Agreement and Plan of Merger (the "Merger Agreement")
and a related Common Stock Purchase Agreement (the "Stock Purchase Agreement")
between Cyberonics and St. Jude Medical, Inc. ("St. Jude"), on July 23, 1996,
Cyberonics sold to St. Jude 2,181,818 newly-issued shares of Cyberonics Common
Stock at $5.50 per share, netting cash proceeds to Cyberonics of approximately
$11,200,000 after offering costs.
On October 18, 1996, St. Jude's right under the terms of the Merger
Agreement to acquire all remaining outstanding shares of Cyberonics for
$72,090,669 expired unexercised.
NOTE 7 - DIVIDEND DISTRIBUTION OF PREFERRED SHARE PURCHASE RIGHTS
In January 1997, the Company's Board of Directors declared a dividend
distribution of one Preferred Shares Purchase Right on each outstanding share of
the Company's Common Stock to stockholders of record on March 10, 1997.
Each Right will entitle stockholders to buy 1/1000th of a share of the
Company's Series A Participating Preferred Stock at an exercise price of $30.
The Rights will become exercisable following the tenth day after a person or
group announces an acquisition of 20% or more of the Company's Common Stock or
announces commencement of a tender offer the consummation of which would result
in ownership by the persons or group of 20% or more of the Common Stock. The
Company will be entitled to redeem the Rights at $.01 per Right at any time on
or before the tenth day following acquisition by a person or group of 20% or
more of the Company's Common Stock.
If, prior to redemption of the Rights, a person or group acquires 20%
or more of the Company's Common Stock, each Right not owned by a holder of 20%
or more of the Common Stock will entitle its holder to purchase, at the Right's
then current exchange price, that number of shares of Common Stock of the
Company (or, in certain circumstances as determined by the Board, cash, other
property or other securities) having a market value at that time of twice the
Right's exercise price. If, after the tenth day following acquisition by a
person or group of 20% or more of the Company's Common Stock, the Company sells
more than 50% of its assets or earning power or is acquired in a merger or other
business combination, the acquiring person must assume the obligations under the
Rights and the Rights will become exercisable to acquire Common Stock of the
acquiring person at the discounted price. At any time after an event triggering
exercisability of the Rights at a discounted price and prior to the acquisition
by the acquiring
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person of 50% or more of the outstanding Common Stock, the Board of Directors of
the Company may exchange the Rights (other than those owned by the acquiring
person or its affiliates) for the Common Stock of the Company at an exchange
ratio of one share of Common Stock per Right.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Actual results could differ materially
from those projected in the forward-looking statements as a result of a number
of important factors. For a discussion of important factors that could affect
the Company's results, please refer to the Summary section and financial
statement line item discussions below. Readers are also encouraged to refer to
the Company's Annual Report on Form 10-K (including the Form 10-K/A filed with
respect thereto) for a further discussion of the Company's business and the
risks and opportunities attendant thereto.
SUMMARY
Cyberonics was founded in 1987 to design, develop and bring to market
medical devices which provide a novel therapy, vagus nerve stimulation, for the
treatment of epilepsy and other debilitating neurological disorders. Clinical
trials of the Company's investigational NeuroCybernetic Prosthesis ("NCP(R)
System") began with the first patient implant in November 1988 under an
Investigational Device Exemption ("IDE") from the United States Food and Drug
Administration ("FDA"). The Company has been unprofitable to date, has no
significant revenues and expects to incur operating losses through the next
several years due to continuing requirements for research and development
activities (including product and process development and clinical trials and
related regulatory activities), sales and marketing activities and manufacturing
start-up. For the period from inception through December 31, 1996, the Company
had incurred a cumulative net deficit of approximately $42.4 million.
Cyberonics is continuing the clinical testing of the NCP System under
its IDE from the FDA. In January 1994, the Company announced that its amended
Premarket Approval ("PMA") application was accepted for filing by the FDA. While
the amended PMA application has been accepted for filing, the FDA further
informed the Company that, based on its initial scientific review of the amended
PMA application, there were "significant deficiencies" in the submission and
that an amendment containing certain additional clinical and technical
information must be provided before the regulatory review process could
continue.
In response to further discussions with the FDA, the Company announced
in July 1994 that it would initiate an additional confirmatory U.S. clinical
trial for the NCP System. Based on these discussions with the FDA, this study is
an additional requirement of the FDA's regulatory approval process for the NCP
System for the treatment of epilepsy patients experiencing refractory partial
seizures.
In January 1995, the Company announced that it had received permission
to begin enrolling patients into its additional confirmatory trial, in which an
additional 199 patients were ultimately treated at 20 major investigational
centers in the United States. In August 1996, the final patient completed the
confirmatory trial. In January 1997, the Company submitted an amendment to its
PMA application with the FDA that responded to questions and comments regarding
the Company's previous submissions and included the results of the Company's
additional confirmatory trial.
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There can be no assurance that the Company will adequately address the
concerns raised by the FDA, or that additional concerns will not be raised by
the FDA in the future. The timing of the PMA approval process is unpredictable
and there can be no assurance as to when or whether the Company will receive
pre-market approval. The Company is currently clinically testing the NCP System
under an IDE from the FDA and cannot commence marketing or commercial sales of
the NCP System in the United States until it receives pre-market approval from
the FDA. The Company's business, financial condition and results of operations
are critically dependent upon receiving FDA approval of the Company's PMA
application.
Cyberonics is pursuing government and third-party reimbursement
approvals for the NCP System in the United States and in international markets.
The Company believes that such approvals will be critical to market acceptance
of the NCP System when and if regulatory approvals are obtained. There can be no
assurance that third-party reimbursement will be available to enable the Company
to successfully market the NCP System in the United States when and if the
Company's PMA is approved or, if available, that the level of reimbursement will
be sufficient to enable the Company to sell the NCP System on a profitable
basis.
The health-care industry in the United States is undergoing substantial
reform, and there is substantial uncertainty and turmoil surrounding the issues
of funding, reimbursement and regulatory approval. While the Company believes
that the NCP System will be favorably viewed in the context of the changing
health-care industry, there can be no assurances that the pending health-care
reforms will not adversely affect regulatory or reimbursement approvals for the
NCP System. The Company does not expect to achieve significant sales unless and
until both regulatory and reimbursement approvals are obtained for the NCP
System and even if such approvals are obtained, there can be no assurance the
Company will achieve significant sales.
In June 1994, the Company was granted regulatory approval to market the
NCP System in the original twelve-member countries of the European Union after
having obtained "CE marking," the designation of market approval now universally
accepted by all European Union member countries. The Company has obtained
government and third-party reimbursement approval in certain of the European
Union member countries and is continuing to pursue full reimbursement approval
for substantially all of the remaining European Union member countries. The
Company does not believe that significant sales volume can be generated without
full reimbursement approval. There can be no assurances as to when or whether
such reimbursement will be obtained in any of these European Union member
countries or, if obtained, whether the levels of reimbursement will be
sufficient to enable the Company to sell the NCP System on a profitable basis.
The Company believes that existing and future antiepileptic drug
compounds will be the primary competition for its NCP System, although the
Company could also face competition from other medical devices. Four new
antiepileptic drugs, felbamate, gabapentin, lamotrigine and tipiromate recently
received FDA approval. No other major antiepileptic drugs have been introduced
in the United States since 1978. In August 1994, the manufacturer of felbamate
announced that, in conjunction with recommendations from the FDA, it was
advising that patients be withdrawn from the drug based on reports of serious
complications. There can be no assurance that the NCP System will achieve market
acceptance for the treatment of epilepsy or any other indication.
The Company relies upon sole source suppliers for certain of the key
components and materials used in its products. The Company routinely experiences
discontinuation or unavailability of components and materials requiring
qualification of alternative sources or, if no such alternative sources are
identified, product design changes. Qualifying alternative sources and
redesigning products can be time consuming. In addition, such changes generally
require regulatory submissions and approvals. Specifically, the Company is aware
of future product design changes that will be required to incorporate a new
battery and microprocessor into the NCP Generators' circuitry. Although the
Company believes that these changes will be made without disruption, any
extended delays in or inability to secure
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alternate sources for these or other components and materials could result in
product supply and manufacturing interruptions which could have a material
adverse effect on the Company's ability to manufacture its products and
therefore on its business, financial condition and results of operations.
LIQUIDITY AND CAPITAL RESOURCES
From inception through February 1993 the Company financed its
operations primarily through private placements of its securities and had raised
approximately $16.5 million in net proceeds. In February 1993, the Company
completed an initial public offering of 2,000,000 shares of its Common Stock,
generating net proceeds to the Company of approximately $22 million.
Additionally, through December 31, 1996, the Company has funded approximately
$530,000 of its equipment needs with proceeds from an equipment lease agreement.
As further described below, in July 1996 the Company raised an additional $11.2
million net of offering costs in a sale of 2,181,818 shares of its Common Stock
to St. Jude Medical, Inc. The Company had no short- or long-term borrowings
outstanding at December 31, 1996, and has no credit facilities available at this
time.
The Company expects to incur substantial additional costs related to
clinical trials and regulatory activities, expansion of manufacturing
capabilities, sales and marketing activities associated with preparation for
United States market entry and international market penetration and product and
process development. In addition, if regulatory and reimbursement approvals are
obtained, the Company will incur substantial marketing and distribution
expenses. The amount and timing of anticipated expenditures will depend upon
numerous factors both within and outside of the Company's control. Factors
within the Company's control include the nature and timing of additional
clinical trials for partial seizures and for other indications, and the nature
and timing of marketing and sales activities. Factors affecting the amount and
timing of expenditures which are largely beyond the Company's control include
the clinical trial and regulatory activities associated with the Company's
effort to obtain FDA approval of its PMA application for partial seizures.
Moreover, even if the Company obtains PMA approval for the NCP System for
partial seizures, the Company's ability to generate income from operations will
be dependent upon obtaining reimbursement approval from government and
third-party payors as well as receiving market acceptance for the NCP System.
While the Company believes that its current resources will be sufficient to fund
its operations at least through its current fiscal year ending June 30, 1997,
the Company will require additional funds after that date. There can be no
assurance that funds will be available to the Company on acceptable terms or at
all. Lack of access to sufficient financing would impair the Company's ability
to fully pursue its business objectives, which could have a material adverse
effect on the Company's results of operations.
On April 8, 1996, the Company and St. Jude Medical, Inc. ("St. Jude")
entered into an Agreement and Plan of Merger (the "Merger Agreement') and a
Common Stock Purchase Agreement (the "Stock Purchase Agreement"). Pursuant to
the Stock Purchase Agreement, upon approval of the Merger Agreement by holders
of a majority of the Company's outstanding Common Stock, St. Jude agreed to
purchase 2,181,818 shares of the Company's newly-issued Common Stock at $5.50
per share, representing a cash investment in the Company of $12 million before
deducting commissions and other offering costs. On July 23, 1996, Cyberonics
shareholders approved the Merger Agreement and the Stock Purchase Agreement, the
stock purchase was completed, and St. Jude provided the Company with cash
proceeds totaling approximately $11.2 million net of commission and other
offering costs. The Company believes that the proceeds from this investment will
be sufficient to fund its operations as an independent entity through at least
June 30, 1997. The availability of financing at that time will depend upon a
number of important factors, including the state of the United States capital
markets and economy in general and the health care and medical device segments
in particular, the status of the Company's international sales activities and
the status of the Company's clinical and regulatory activities. There can be no
assurance that the Company will be able to raise such capital when needed or
that the terms upon which capital will be available will be favorable to the
Company.
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In addition to providing the Company with approximately $11.2 million
of additional capital, the Merger Agreement further gave St. Jude the right, but
not the obligation, to acquire the Company on or before October 18, 1996 in a
merger pursuant to which the holders of Company Common Stock (other than St.
Jude) would receive cash totaling approximately $72 million. On October 18,
1996, St. Jude's right to acquire the Company expired unexercised.
The Company's liquidity will continue to be reduced as amounts are
expended for continuing clinical trials and related regulatory affairs,
manufacturing start-up, product and process development, and expansion of sales
and marketing activities. While not currently anticipated, the Company's
liquidity could also be substantially reduced if significant amounts were
expended for additional facilities and equipment.
RESULTS OF OPERATIONS
Net Sales. Cyberonics has been granted regulatory approval to market
and sell the NCP System internationally in the original twelve member countries
of the European Union (the United Kingdom, Germany, The Netherlands, France,
Spain, Italy, Belgium, Denmark, Greece, Portugal, Ireland and Luxembourg) and
has permission to sell in certain other international markets including Sweden,
Norway, Finland, Switzerland, Israel, Australia, South Africa, Hong Kong and
China. Cyberonics is engaged in obtaining reimbursement approvals from the
various health care provider systems that exist in these countries and has
received partial or complete reimbursement approvals in a number of these
markets. During the year ending June 30, 1997, the Company expects that the
substantial majority of its net sales will be generated from its international
markets, the extent of which will depend, in part, on the success of future
efforts to obtain broader international reimbursement approval and additional
countries' regulatory approvals.
In the United States, the Company has permission from the FDA to sell
the NCP Systems used in clinical trials for up to $6,000 per system. Given the
experimental nature of the device, the Company believes that widespread
reimbursement from government and third party payors is unlikely in connection
with its clinical studies. Therefore, the Company has not aggressively sought to
sell the NCP Systems used in the clinical studies. The Company does not expect
to achieve significant sales unless and until both regulatory and reimbursement
approvals are obtained for the NCP System.
Net sales for the three months ended December 31, 1996 totaled $437,818
compared to $400,236 for the three months ended December 31, 1995. Net sales for
the six months ended December 31, 1996 totaled $722,761 compared to $592,546 in
the same period of the prior year. Domestic sales depend entirely upon the
Company conducting clinical trial activities under arrangements with certain
investigational centers, some of which receive research funding from the
Company. Domestic sales made in connection with such clinical studies have been
limited to date as the Company is not presently seeking reimbursement for
implants associated with its current United States clinical trial. Arrangements
with certain investigational centers employ risk-sharing provisions. Domestic
sales made under risk-sharing arrangements are deferred until Cyberonics
receives payment from the centers and the centers in turn receive third-party
reimbursement or satisfy other terms set forth in their respective arrangements.
Sales, net of deferred risk-sharing provisions, for the six months ended
December 31, 1996, consisted of $698,309 from international markets and $24,452
from domestic risk-sharing arrangements.
Gross Profit. In determining gross profit, cost of sales is calculated
primarily to include the acquisition cost of raw materials and components,
direct labor and allocated manufacturing overhead. Direct labor and overhead
constitute a substantial majority of cost of sales. The Company is obligated to
pay royalties ranging from 7% to 7.75% on the first $12 million in cumulative
net sales, and from 4% to 4.75% thereafter. Minimum royalty obligations under
the Company's license agreements totaled $46,000 during the year ended June 30,
1996, and will
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continue at or above this level in future years. Royalties up to the minimum
amount are presently classified as research and development expenses. Any future
amounts which may exceed this minimum will be included as a component of the
Company's cost of sales.
The Company's gross margin percentage was 63.8% for the three months
ended December 31, 1996 compared to 75.0% for the prior year period. Continued
fluctuations in gross margin percentages can be expected prior to the Company
achieving commercial levels of production volume, particularly if the Company
continues to experience period-to-period changes in unit production.
Research and Development Expenses. Research and development expenses
are comprised of both expenses related to the Company's product and process
development efforts and expenses associated with conducting clinical trials and
certain related regulatory activities. Research and development expenses totaled
$1,943,930 and $2,126,587 during the three months ended December 31, 1996 and
1995, respectively. Research and development expenses were $3,370,915 and
$4,036,163 during the six months ended December 31, 1996 and 1995, respectively.
The decreased level of research and development expenditures in the current year
period is due primarily to lower costs associated with the Company's
confirmatory clinical trial. As of August 1996, all study patients had completed
the more expensive acute phase of the study and entered the less costly
long-term follow-up phase.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses totaled $1,033,924 and $765,440 during the three months
ended December 31, 1996 and 1995, respectively. Selling, general and
administrative expenses totaled $1,844,174 and $1,270,509 during the six months
ended December 31, 1996 and 1995, respectively. The second quarter increase from
period to period was primarily due to additional expenditures for international
marketing activities. The Company expects to incur higher selling, general and
administrative expenses in developing its international market and in
anticipation of regulatory and reimbursement approvals for the NCP System, and
expects these expenses to increase significantly when and if such approvals are
obtained.
Interest Income, net. Net interest income totaled $107,208 and $116,969
during the three months ended December 31, 1996 and 1995, respectively, and
$254,535 and $269,987 for the six months ended December 31, 1996 and 1995,
respectively. The Company expects to have interest income that will partially
offset operating losses for several fiscal quarters.
Other Income (Expense), net. Other income (expense), totaled $(105,017)
and $0 during the three months ended December 31, 1996 and 1995, respectively,
and $(23,282) and $(4,187) for the six months ended December 31, 1996 and 1995,
respectively. Other income consists of net gains and losses resulting from
foreign currency transactions.
Income Taxes. Due to its net operating loss history, to date the
Company has incurred no income tax expense for financial reporting purposes.
Current federal income tax regulations with respect to changes in ownership
could limit the utilization of the Company's net operating loss carry forwards.
Effect of Inflation. The Company believes that inflation has not had a
material impact on its operating or financial ratios during the three months
ended December 31, 1996 as compared to the prior year period.
-12-
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the
quarter ended December 31, 1996.
-13-
<PAGE> 14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CYBERONICS, INC.
Registrant
BY: /s/ JOHN K. BAKEWELL
------------------------------------------
John K. Bakewell
Vice President, Finance and Administration
and Chief Financial Officer (principal
financial and accounting officer)
Dated: February 14, 1997
-14-
<PAGE> 15
EXHIBIT INDEX
Exhibit Document
No.
Exhibit 27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 3,351,096
<SECURITIES> 4,324,700
<RECEIVABLES> 515,653
<ALLOWANCES> 0
<INVENTORY> 974,394
<CURRENT-ASSETS> 9,279,546
<PP&E> 352,978
<DEPRECIATION> 1,516,074
<TOTAL-ASSETS> 9,743,945
<CURRENT-LIABILITIES> 1,500,950
<BONDS> 0
0
0
<COMMON> 117,704
<OTHER-SE> 8,125,291
<TOTAL-LIABILITY-AND-EQUITY> 9,743,945
<SALES> 722,761
<TOTAL-REVENUES> 722,761
<CGS> 227,672
<TOTAL-COSTS> 5,215,089
<OTHER-EXPENSES> 23,283
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,488,747)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,488,747)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,488,747)
<EPS-PRIMARY> (0.39)
<EPS-DILUTED> 0
</TABLE>
