<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
/ X / Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarter ended June 30, 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 0-24540
INCONTROL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 91-1501619
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
6675 - 185TH AVENUE N.E.
REDMOND, WA 98052-6734
(206) 861-9800
(Address and telephone number of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
None Not applicable
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
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 shorter periods that the registrant has been
required to file such reports), and (2) has been subject to 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 July 23, 1996
(Common stock, $0.01 par value) 16,916,824
Page 1 of 10 sequentially numbered pages
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INCONTROL, INC.
(A DEVELOPMENT STAGE COMPANY)
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) ............................ 3
Consolidated Balance Sheets -
June 30, 1996 and December 31, 1995........................ 3
Consolidated Statements of Operations -
three and six months ended June 30, 1996 and 1995
and period from November 13, 1990 to June 30, 1996......... 4
Consolidated Statements of Cash Flows -
six months ended June 30, 1996 and 1995
and period from November 13, 1990 to June 30, 1996......... 5
Notes to Consolidated Financial Statements.................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 7
PART II
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................. 9
Signature ............................................10
Page 2 of 10 sequentially numbered pages
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PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
INCONTROL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
1996 DECEMBER 31,
(UNAUDITED) 1995
----------- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,103,335 $ 2,048,600
Securities available for sale 33,494,883 17,165,307
Inventories 2,184,434 1,365,849
Current portion of notes receivable from employees 753,792 66,417
Prepaid expenses and other current assets 853,989 1,122,931
------------- -------------
Total current assets 54,390,433 21,769,104
Property and equipment, net 5,092,786 4,856,352
Notes receivable from employees 11,250 728,542
Other assets 288,811 115,579
------------- -------------
Total assets $ 59,783,280 $ 27,469,577
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 384,394 $ 1,005,071
Accrued expenses 1,499,036 1,018,264
Current portion of long-term obligations 1,024,695 990,773
------------- -------------
Total current liabilities 2,908,125 3,014,108
Long-term obligations, less current portion 2,052,597 2,263,767
Commitments -- --
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares--10,000,000;
Issued and outstanding shares--none -- --
Common stock, $.01 par value:
Authorized shares--40,000,000;
Issued and outstanding shares--
16,901,730 at June 30,1996 and 13,808,432 at
December 31, 1995 129,197,181 82,934,507
Deficit accumulated during development stage (73,701,756) (59,440,456)
Notes receivable from stockholders (660,000) (1,238,516)
Cumulative translation adjustment (12,867) (63,833)
------------- -------------
Total stockholders' equity 54,822,558 22,191,702
------------- -------------
Total liabilities and stockholders' equity $ 59,783,280 $ 27,469,577
============= =============
</TABLE>
See accompanying notes.
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INCONTROL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
NOV. 13, 1990 (DATE
OF INCORPORATION)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, THROUGH JUNE 30,
1995 1996 1995 1996 1995 1996
- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues from clinical trials $ 108,348 $ -- $ 108,348 $ -- $ 133,836
Expenses:
Research and development 6,000,872 4,706,004 11,328,536 9,355,262 62,422,187
Marketing and general and
administrative 2,162,313 1,158,428 3,733,738 2,036,285 13,987,332
------------ ------------ ------------ ------------ ------------
8,163,185 5,864,432 15,062,274 11,391,547 76,409,519
Interest expense 121,424 123,330 235,162 258,545 1,741,375
Interest income (659,658) (337,142) (893,572) (751,752) (4,315,302)
------------ ------------ ------------ ------------ ------------
Net loss $ 7,516,603 $ 5,650,620 $ 14,295,516 $ 10,898,340 $ 73,701,756
============ ============ ============ ============ ============
Net loss per share $ 0.47 $ 0.46 $ 0.95 $ .89
============ ============ ============ ============
Shares used in computation of
net loss per share: 16,131,927 12,177,868 14,985,820 12,181,352
</TABLE>
See accompanying notes.
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INCONTROL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM NOV. 13, 1990
(DATE OF INCORPORATION)
SIX MONTHS ENDED JUNE 30, THROUGH JUNE 30,
1996 1995 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (14,295,516) $ (10,898,340) $ (73,701,756)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,162,283 987,016 5,831,642
Employee's compensation used to retire
stockholders' loans 552,516 -- 552,516
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses
and other current assets (212,316) 221,211 (821,872)
(Increase) in inventories (818,585) (207,892) (2,184,434)
Increase in accounts payable,
accrued expenses, and sales tax payable (139,905) (36,670) 1,968,013
------------- ------------- -------------
Net cash used in operating activities (13,751,523) (9,934,675) (68,355,891)
INVESTING ACTIVITIES:
Purchases of property and equipment (1,286,018) (936,261) (10,576,136)
Loans to employees (30,000) (30,500) (1,102,323)
Proceeds from collection of employee loans 12,000 -- 24,000
Purchases of securities (28,353,507) (1,591,872) (99,956,355)
Proceeds from maturity of securities 10,715,000 11,260,000 55,545,933
Proceeds from sale of securities 1,618,182 912,033 10,527,301
Other -- -- (83,653)
------------- ------------- -------------
Net cash provided by (used in) investing activities (17,324,343) 9,613,400 (45,621,233)
FINANCING ACTIVITIES:
Net proceeds from sales of convertible preferred -- -- 38,134,502
stock
Proceeds from note payable -- -- 589,774
Repayment of note payable -- (20,498) (589,774)
Proceeds from lease financing 244,551 433,158 5,843,602
Payments on lease financing (421,799) (490,210) (2,772,053)
Loans to stockholders -- (686,000) (686,000)
Proceeds from collection of stockholders' loans 26,000 -- 26,000
Proceeds from exercise of stock options 95,444 12,701 675,767
Net proceeds from sale of common stock 46,167,230 -- 89,839,466
------------- ------------- -------------
Net cash provided by financing activities 46,111,426 (750,849) 131,061,284
Effect of exchange rate changes on cash 19,175 -- 19,175
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 15,054,735 (1,072,124) 17,103,335
Cash and cash equivalents at beginning of period 2,048,600 2,746,460 --
------------- ------------- -------------
Cash and cash equivalents at end of period $ 17,103,335 $ 1,674,336 $ 17,103,335
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH PAID:
Interest $ 235,162 $ 255,640 $ 1,758,449
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES:
Deferred sales tax $ 7,002 $ 7,004 $ 119,400
============= ============= =============
Notes receivable related to exercise of stock options $ (552,516) $ (22,884) $ --
============= ============= =============
Conversion of preferred to common stock $ -- $ -- $ 38,134,502
============= ============= =============
</TABLE>
See accompanying notes.
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INCONTROL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
INTERIM FINANCIAL INFORMATION
The consolidated financial statements included herein have been prepared by
InControl, Inc. (the "Company") without audit, according to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations. The financial statements
reflect, in the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial position
and results of operations as of and for the periods indicated.
Certain reclassification of previously reported amounts have been made to
conform with the current year presentation.
The results of operations for the six-month period ended June 30, 1996, are not
necessarily indicative of results to be expected for the entire year ending
December 31, 1996 or for any other fiscal period.
NET LOSS PER SHARE
Net loss per share is computed based on the weighted average number of shares of
Common Stock outstanding. Common equivalent shares are not included in the
per-share calculation as the effect of their inclusion would be antidilutive.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Since the commencement of operations in November 1990, InControl, a development
stage company, has been engaged in designing and developing the METRIX System.
The METRIX System, a proprietary system designed to treat atrial fibrillation,
is comprised of an active implantable defibrillator, transvenous leads to
connect the defibrillator to the heart, a system analyzer, and a system
programmer. Since inception, the majority of the Company's resources have been
devoted to research and development activities. Through June 30, 1996 the
Company had accumulated a deficit of $73.7 million. The Company expects to incur
substantial additional losses in the future due primarily to the Company's
clinical trial activities, the expansion of marketing and sales capabilities,
the expansion of manufacturing capabilities in the United States, and research
and development of the next generation of atrial defibrillation devices. The
amount and timing of the Company's future revenues and losses will be affected
by, among other things, the recruitment of suitable patients, the progress of
clinical trials, the timing of regulatory approvals, the rate of market
acceptance of the METRIX System, and the availability of third-party
reimbursement for the Company's products. The Company believes that it will
incur losses at least until the METRIX System is approved for marketing in the
United States.
This document contains forward-looking statements, which are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those projected. Factors which could affect the Company's financial results
are described in the preceding paragraph and in the Company's latest Annual
Report on Form 10-K filed with the SEC. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only of the date of
this report. InControl undertakes no obligation to publicly release the results
of any revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date of this report or to reflect the
occurrence of unanticipated events.
RESULTS OF OPERATIONS
REVENUES
In the second quarter of 1996, the Company recorded revenue of $108,000 from the
sale of eight METRIX Systems, four of which were part of United States clinical
trials and four of which were part of European clinical trials. The Company
recognizes revenue from clinical investigations and trials following the implant
of a METRIX device and acknowledgment by the clinic or hospital of its financial
obligation to the Company.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three and six months ended June 30,
1996 were $6.0 million and $11.3 million, up from $4.7 million and $9.4 million
in the comparable periods in 1995. The increases are primarily attributable to
increases in personnel (130 at June 30, 1996 from 113 at June 30, 1995) and
personnel-related costs, funding of preclinical and clinical research studies,
depreciation of equipment, expansion of United States manufacturing
capabilities, and expenditures on clinical engineering, quality assurance,
engineering documentation and regulatory review. This infrastructure is required
to support the clinical trials in both Europe and the United States. Included in
personnel related costs in the second quarter is a $340,000 one-time
compensation expense resulting from bonus payments to individuals who
participated in an employee stock ownership plan. The participating employees
elected to receive payment of the bonus by offsetting principal and accrued
interest of certain loans owed to the Company.
MARKETING AND GENERAL AND ADMINISTRATIVE EXPENSES
Marketing and general and administrative expenses for the three and six months
ended June 30, 1996 were $2.2 million and $3.7 million, up from $1.2 million and
$2.0 million in the comparable periods in 1995. The increases are primarily
attributable to the increase in personnel (35 at June 30, 1996 from 20 at June
30, 1995), and
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personnel-related costs and supplies and facilities costs. Included in personnel
related costs is a $240,000 one-time compensation expense resulting from bonus
payments to individuals who participated in an employee stock ownership plan.
The participating employees elected to receive payment of the bonus by
offsetting principal and accrued interest of certain loans owed to the Company.
INTEREST INCOME AND INTEREST EXPENSE
For the three and six month periods ended June 30, 1996 the Company generated
$660,000 and $894,000 of interest income as compared to $337,000 and $752,000
for similar periods ended June 30, 1995. Increases in interest income from prior
year periods, and from the first quarter of 1996, resulted from increased
average balances of cash, cash equivalents and securities available for sale in
the second quarter of 1996. The increase in average investment balances in the
second quarter resulted from a public offering of common stock completed April
23, 1996.
For the three and six month periods ended June 30, 1996, the Company incurred
$121,000 and $235,000 of interest expense as compared to $123,000 and $259,000
for similar periods ended June 30, 1995. Changes in interest expense, which were
not material, relate to the extent of the Company's reliance on capital lease
financing.
LIQUIDITY AND CAPITAL RESOURCES
InControl has financed its operations since inception through the sale of common
and preferred stock, interest income on the proceeds of such sales, and the use
of equipment lease financing. In April 1996 the Company completed a public
offering of three million shares of common stock at a price of $16.50 a share.
After issuance costs of approximately $3.3 million the Company realized net
proceeds of $46.2 million. Through June 1996, the Company has raised net
proceeds totaling $128.0 million through the sale of common and preferred stock,
and has generated $4.3 million of interest income on the invested proceeds of
such offerings. Since its inception, the Company has invested $10.6 million in
equipment and leasehold improvements and has financed $5.8 million of these
investments through capital leases.
At June 30, 1996, the Company had cash, cash equivalents, and securities
available for sale totaling $50.6 million, compared to a balance of $19.2
million at December 31, 1995. The increase was primarily due to the net proceeds
of $46.2 million from the sale of common stock offset by: $13.8 million in
operating expenditures, $1.0 million in purchases of property and equipment not
financed through capital leases, and $422,000 on payments of capital leases.
The Company anticipates that its existing capital and the interest thereon will
enable it to sustain operations into mid-1998. The Company will require
substantial capital resources to support clinical trial activities, the
expansion of marketing and sales capabilities, the expansion of manufacturing
capabilities in the United States, and research and development of the next
generation of atrial defibrillation devices. The Company's future capital
requirements will depend on many factors, including the recruitment of suitable
patients, the progress of clinical trials, the timing of regulatory approvals,
the rate of market acceptance of the METRIX System, and the availability of
third-party reimbursement for the Company's products. The Company may need to
seek additional funding, through either public or private sources, to meet its
future operational requirements. There can be no assurance such funds will be
available as needed or on terms that are acceptable to the Company. Insufficient
funding may require the Company to delay, reduce, or eliminate certain of its
research and development activities, planned clinical trials, and manufacturing
and administrative programs.
Page 8 of 10 sequentially numbered pages
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PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a) Reports on Form 8-K
No reports on form 8-K were filed during the quarter ended June 30, 1996.
Page 9 of 10 sequentially numbered pages
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INCONTROL, INC.
(Registrant)
Dated: By:
---------------------------- -----------------------------------
Donald F. Seaton III
Vice President, Finance, Chief
Financial Officer and Secretary
(Authorized Officer and Principal
Financial Officer)
Page 10 of 10 sequentially numbered pages
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INCONTROL
INC.'S 2ND QUARTER 10-Q BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH INCONTROL INC'S 2ND QUARTER 10-Q
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 17,103
<SECURITIES> 33,495
<RECEIVABLES> 754
<ALLOWANCES> 0
<INVENTORY> 2,184
<CURRENT-ASSETS> 54,390
<PP&E> 10,440
<DEPRECIATION> 5,347
<TOTAL-ASSETS> 59,783
<CURRENT-LIABILITIES> 2,908
<BONDS> 2,053
0
0
<COMMON> 129,197
<OTHER-SE> (74,375)
<TOTAL-LIABILITY-AND-EQUITY> 54,822
<SALES> 108
<TOTAL-REVENUES> 108
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 15,062
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 235
<INCOME-PRETAX> (14,296)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,296)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,296)
<EPS-PRIMARY> (.95)
<EPS-DILUTED> (.95)
</TABLE>
