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UNITED STATES
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 March 31, 1997
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 of (I.R.S. Employer
incorporation or organization) Identification Number)
6675 - 185TH AVENUE N.E.
REDMOND, WA 98052-6734
(425) 861-9800
(Address and telephone number of registrant's principal executive offices)
---------------------
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 ( )
As of April 30, 1997, there were 17,108,364 shares of the registrant's $.01 par
value Common Stock outstanding.
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INCONTROL, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
PAGE NO.
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PART I FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements (unaudited) ........................................3
Consolidated Balance Sheets -
March 31, 1997 and December 31, 1996...................................3
Consolidated Statements of Operations -
three months ended March 31, 1997 and 1996.............................4
Consolidated Statements of Cash Flows -
three months ended March 31, 1997 and 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
</TABLE>
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
INCONTROL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
1997 DECEMBER 31,
(UNAUDITED) 1996
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,253,094 $ 4,287,617
Securities available for sale 25,366,580 32,714,022
Inventories 1,977,485 2,314,841
Prepaid expenses and other current assets 1,059,273 727,526
------------- ------------
Total current assets 32,656,432 40,044,006
Property and equipment, net 5,656,118 4,861,566
Notes receivable from employees 761,042 746,042
Other assets 159,591 265,273
------------- ------------
Total assets $ 39,233,183 $ 45,916,887
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 374,232 $ 313,888
Accrued expenses 1,849,991 1,960,642
Current portion of long-term obligations 1,173,773 1,197,614
------------- ------------
Total current liabilities 3,397,996 3,472,144
Long-term obligations, less current portion 1,969,575 1,418,701
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--
17,019,666 at March 31,1997 and 16,960,700 at
December 31, 1996 129,282,628 129,237,938
Deficit accumulated during development stage (94,734,635) (87,614,031)
Notes receivable from stockholders (624,000) (660,000)
Cumulative translation adjustment (58,381) 62,135
-------------- ------------
Total stockholders' equity 33,865,612 41,026,042
------------- ------------
Total liabilities and stockholders' equity $ 39,233,183 $ 45,916,887
============= ============
</TABLE>
See accompanying notes.
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INCONTROL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Revenues $ 310,748 $ --
Cost of revenues 225,889 --
------------- -------------
Gross profit 84,859 --
Expenses:
Research and development 5,501,995 5,327,665
Sales and marketing 1,050,539 548,973
General and administrative 1,270,540 1,022,451
------------- -------------
7,823,074 6,899,089
Interest income 511,543 233,914
Interest expense (104,468) (113,738)
------------- -------------
Net loss $ (7,331,140) $ (6,778,913)
============= =============
Net loss per share (Note 1) $ (0.43) $ (0.49)
============= ============
Shares used in computation of
net loss per share: 16,985,322 13,839,713
</TABLE>
See accompanying notes.
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INCONTROL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (7,331,140) $ (6,778,913)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 654,595 547,581
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses
and other current assets (369,559) 209,864
(Increase) decrease in inventories 335,581 (802,744)
Increase (decrease) in accounts payable, accrued
expenses, and sales tax payable (10,128) 185,438
--------------- ---------------
Net cash used in operating activities (6,720,651) (6,638,774)
INVESTING ACTIVITIES:
Purchases of property and equipment (1,370,220) (309,525)
Loans to employees (15,000) (15,000)
Proceeds from collection of employee loans -- 12,000
Proceeds from maturity of securities 7,470,000 5,550,000
Proceeds from sale of securities -- 1,067,793
--------------- ---------------
Net cash provided by (used in) investing activities 6,084,780 6,305,268
FINANCING ACTIVITIES:
Proceeds from lease financing 793,000 97,182
Payments on lease financing (243,758) (215,574)
Proceeds from collection of stockholders' loans 36,000 --
Proceeds from exercise of stock options 44,690 30,304
--------------- ---------------
Net cash provided by financing activities 629,932 (88,088)
Effect of exchange rate changes on cash (28,584) (15,238)
--------------- ---------------
Net increase (decrease) in cash and cash equivalents (34,523) (436,832)
Cash and cash equivalents at beginning of period 4,287,617 2,048,600
--------------- ---------------
Cash and cash equivalents at end of period $ 4,253,094 $ 1,611,768
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH PAID:
Interest $ 91,385 $ 109,467
=============== ===============
</TABLE>
See accompanying notes.
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INCONTROL, INC.
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 "Commission").
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.
The results of operations for the three-month period ended March 31, 1997, are
not necessarily indicative of results to be expected for the entire year ending
December 31, 1997 or for any other fiscal period.
INVENTORIES
Inventories are valued at the lower of cost (first in, first out method) or
market. Allowances are made for obsolete, unsalable, or unusable inventories.
The components of inventories are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Raw materials $ 975,434 $ 888,639
Work In Process 778,089 727,284
Finished Products 223,963 698,918
------------ ------------
$ 1,977,486 $ 2,314,841
============ ============
</TABLE>
The Company purchases components and certain related peripheral equipment for
its products from outside vendors, including components from sole source
vendors. The establishment of additional or replacement sources of supply would
require the Company to certify the new vendors, which in the case of certain
components would cause a delay in the Company's ability to manufacture the
products.
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.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share" ("Statement 128"), which the Company will be required
to adopt on December 31, 1997. At that time, the Company will change the method
currently used to compute net loss per share and restate all prior periods. The
impact of Statement 128 on the calculation of net loss per share is not expected
to be material.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
This discussion contains forward-looking statements that are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those projected. The words "believe", "expect", "anticipate" and similar
expressions identify forward-looking statements. Factors that could affect the
Company's financial results are described in the following paragraphs 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 as 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.
OVERVIEW
InControl is engaged in the design, development and manufacture of implantable
atrial defibrillators and related products including transvenous defibrillation
leads, temporary defibrillation catheters, and temporary heartwires designed for
post-operative atrial defibrillation. The majority of the Company's resources
have been and continue to be devoted to research and development activities
related to the METRIX System, a proprietary system designed to treat atrial
fibrillation. The METRIX System is comprised of an active implantable
defribillator, transvenous leads to connect the defribillator to the heart, a
system analyzer, and a system programmer. The Company has entered into
agreements where the Company distributes catheters and related products in
certain geographic markets. The design and development of an active implantable
medical device has required the Company to make significant investments in
research and development activities, and as such, the Company has accumulated a
deficit of $94.7 million as of March 31, 1997. The Company expects to incur
substantial additional losses in the near future as any moderate increase in
revenues from expanding clinical trials and expected limited commercial release
of the Company's products should be more than offset by increases in the
Company's expenses. Increases in expenses will be due primarily to the
InControl's continuing investment in research and development efforts, the
additional expenses of the increases in clinical trial activities, the expansion
of European and domestic marketing and sales capabilities and increasing
domestic manufacturing activity. The amount and timing of the Company's future
revenues and, as a result, the amount and timing of the Company's future losses
will be affected by, among other things, the recruitment of suitable clinics and
patients, the progress of clinical trials, the timing of regulatory approvals,
the rate of market acceptance of the Company's products, 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.
RESULTS OF OPERATIONS
REVENUES
Net revenues were $311,000 for the quarter ended March 31, 1997. The Company had
recorded no revenues in the first quarter of 1996. Revenues result from the sale
of METRIX devices, leads, and accessories associated with world wide clinical
investigations, and to a lessor degree distribution activities in Europe.
Revenues in future quarters will be primarily dependent on the success and
timing of the Company's efforts to expand clinical trial activities and the
timing of regulatory approvals for commercial release of its products in Europe
and the North America.
GROSS PROFITS
Gross profits totaled $85,000 or 27.3% of net revenues. The Company recorded no
net revenues or associated gross profits in the first quarter of 1996. The
Company's products are at an early stage in their product life cycles, and as
such, current period cost of revenues and gross profits may not be indicative of
future cost of revenues or gross profits. The Company has limited experience in
manufacturing and is currently operating at volumes well below expected facility
capacity. While certain capacity and experience-related costs are considered
manufacturing development and are therefore charged to research and development
expense, cost of revenues and gross profits will
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continue to be influenced by these factors into the foreseeable future. In
addition, gross profits will be influenced by sales discounts granted during the
remainder of the various clinical trials and discounts or allowances, if any,
that accompany the initial commercial release of the Company's products. Cost of
revenues and gross profits may also be affected by the success and therefor
timing of regulatory approvals and market acceptance of the Company's products,
which would affect the mix of products sold.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expense was $5.5 million for the quarter ended March
31, 1997, an increase of 3.8% from the comparable period last year. Primary
components of research and development expense are: the investment in primary
research and development costs associated with the next generation of atrial
defribillation products, the continued funding of pre-clinical and clinical
trials of the Company's products in Europe and North America, and certain
expenses associated with manufacturing development.
SALES AND MARKETING EXPENSES
Sales and marketing expense was $1.1 million for the quarter ended March 31,
1997, an increase of 91.4% from the comparable period last year. The Company has
increased sales and marketing personnel world wide, but primarily in its
European subsidiaries. This increase in personnel and subsequent personnel
related costs are intended to support the anticipated commercial release of the
METRIX system and temporary atrial defibrillation products and to support the
ongoing distribution activities in Europe. InControl believes that the intended
expansion of European and domestic sales and marketing activities and the
related increases in personnel and personnel related costs associated with the
expansion, will result in a substantial increase in sales and marketing expense
throughout 1997, as compared to prior periods.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expense was $1.3 million for the quarter ended March
31, 1997, an increase of 24.3% from the comparable period last year. Increase in
general and administrative expense from period to period are primarily
attributable to an increase in administrative personnel and facilities costs
throughout the Company and, to a lessor degree, professional service expenses.
INTEREST INCOME AND INTEREST EXPENSE
Interest income was $512,000 for the quarter ended March 31, 1997, an increase
of 118.7% from the comparable period last year. The increase period to period is
attributable to increased average balances of cash, cash equivalents, and
securities available for sale resulting from a public offering of stock
completed in April 1996. In the absence of additional funding from future
financing activities, interest income will decrease as the above mentioned
resources are used to fund operations and the related average balances of cash,
cash equivalents, and securities available for sale decline.
Interest expense was $104,000 for the quarter ended March 31, 1997, a decrease
of 8.2% from the comparable period last year. The decrease was related to the
Company's lower average balance of equipment lease financing. Interest expense
in future periods will depend on the rate of capital expenditures and the
success and timing of the Company's efforts to secure additional sources of
lease financing for those expenditures.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997 the Company had cash, cash equivalents, and securities
available for sale totaling $29.6 million, compared to a balance of $37.0
million at December 31, 1996. The decrease was used to fund $6.7 million in
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operating activities and $1.3 million in purchases of property and equipment
which was partially offset by an increase in net lease financing of $549,000.
During the comparable period in 1996 the Company funded $6.6 million in
operating activities and $310,000 in purchases of property and equipment.
InControl expects that its cash needs will increase in future periods due to the
Company's expected sustained investment in research and development efforts as
well as increases in spending on clinical trial activities and the expansion of
marketing, sales and manufacturing capabilities. The Company's future capital
requirements will depend on many factors, including the progress and costs of
preclinical studies and clinical trials, including the recruitment of suitable
patients, the timing of regulatory approvals, the availability of third-party
reimbursement for the Company's products, the rate of market acceptance and
adoption of the METRIX System, the costs associated with increases in marketing
and sales capabilities in the United States and Europe, the costs associated
with the development of manufacturing capabilities, the costs associated with
its product development efforts and the status of competing products. The
Company believes that existing cash, cash equivalents and securities available
for sale, and interest thereon, will be sufficient to meet the Company's capital
requirements through early 1998. Within this period, the Company will 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
will require the Company to delay, reduce or eliminate some or all of its
research and development activities, planned clinical trials, and manufacturing
and administrative programs.
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 March 31, 1997.
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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)
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibits
- --------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INCONTROL
INC.'S 1ST QUARTER 10-Q BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH INCONTROL INC'S 1ST QUARTER 10-Q
AND 1996 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,253
<SECURITIES> 25,367
<RECEIVABLES> 286
<ALLOWANCES> (84)
<INVENTORY> 1,977
<CURRENT-ASSETS> 32,656
<PP&E> 12,691
<DEPRECIATION> (7,035)
<TOTAL-ASSETS> 39,233
<CURRENT-LIABILITIES> 3,398
<BONDS> 0
0
0
<COMMON> 129,283
<OTHER-SE> (95,300)
<TOTAL-LIABILITY-AND-EQUITY> 39,233
<SALES> 311
<TOTAL-REVENUES> 311
<CGS> 226
<TOTAL-COSTS> 226
<OTHER-EXPENSES> 7,823
<LOSS-PROVISION> 24
<INTEREST-EXPENSE> 104
<INCOME-PRETAX> (7,331)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,331)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,331)
<EPS-PRIMARY> (.43)
<EPS-DILUTED> (.43)
</TABLE>
