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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Quarter Ended Sept. 30, 1998
[ ] 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: 0-27596
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CONCEPTUS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 94-3170244
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1021 Howard Avenue
San Carlos, CA 94070
(Address of principal executive offices)
Registrant's telephone number, including area code: (650) 802-7240
-------------------
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 at least the past 90 days.
Yes X No
----- -----
As of September 30, 1998, 9,613,937 shares of the Registrant's Common
Stock were outstanding.
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<PAGE>
CONCEPTUS, INC.
FORM 10-Q For the Quarter Ended September 30, 1998
INDEX
Page
Facing sheet 1
Index 2
Part I. Financial Information
Item 1. a) Consolidated balance sheets at September 30,
1998 and December 31, 1997 3
c) Consolidated statements of operations for the
three and nine month periods ended September
30, 1998 and September 30, 1997 4
c) Consolidated statements of cash flows for the
nine month periods ended Sept. 30, 1998 and
Sept. 30, 1997 5
d) Notes to consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 11
Part II. Other Information 11
Signature 12
Index to Exhibits 13
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
Conceptus, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
<CAPTION>
September 30, December 31,
1998 1997
-------- --------
Assets (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 13,801 $ 9,250
Short-term investments 4,504 17,808
Accounts receivable, net 90 540
Note receivable 256 --
Inventories -- 355
Other current assets 200 290
-------- --------
Total current assets 18,851 28,243
Property and equipment, net 1,505 1,090
Other assets 115 147
-------- --------
$ 20,471 $ 29,480
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 213 $ 699
Accrued compensation 809 670
Other accrued liabilities 83 135
Current portion of deferred revenue 97 97
Current portion of debt and capital lease obligations 4 34
-------- --------
Total current liabilities 1,206 1,635
Long-term portion of debt and capital lease obligations -- 1
Long-term portion of deferred revenue 267 340
Commitments
Stockholders' equity:
Common stock, $0.003 par value, 30,000,000 shares authorized, 63,561 63,505
9,613,937 and 9,495,053 shares issued and outstanding at
September 30, 1998 and December 31, 1997, respectively
Stockholder notes receivable (54) (54)
Deferred compensation (129) (216)
Accumulated deficit (44,380) (35,731)
-------- --------
Total stockholders' equity 18,998 27,504
-------- --------
$ 20,471 $ 29,480
======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
Conceptus, Inc.
Consolidated Statements of Operations
(unaudited)
(In thousands, except per share amounts)
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
-------------------------------------------------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $ 86 $ 310 $ 338 $ 1,011
Cost of sales 75 562 1,587 1,756
------- ------- ------- -------
Gross profit (loss) 11 (252) (1,249) (745)
Operating expenses:
Research and development 898 1,151 3,847 4,120
Selling, general and administrative 731 1,605 4,550 4,653
------- ------- ------- -------
Total operating expenses 1,629 2,756 8,397 8,773
------- ------- ------- -------
Operating loss (1,618) (3,008) (9,646) (9,518)
Interest and investment income, net 287 503 997 1,439
------- ------- ------- -------
Net loss $(1,331) $(2,505) $(8,649) $(8,079)
======= ======= ======= =======
Basic and diluted net loss per share $ (0.14) $ (0.26) $ (0.91) $ (0.86)
======= ======= ======= =======
Shares used in computing basic
and diluted net loss per share 9,611 9,466 9,543 9,347
======= ======= ======= =======
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
Conceptus, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
Nine Months Ended
Sept. 30,
-------------------
1998 1997
-------- --------
Cash flows used in operating activities
Net loss $ (8,649) $ (8,079)
Adjustments to reconcile net loss to net cash
from (used in) operating activities:
Depreciation and amortization 430 347
Amortization of deferred compensation 72 451
Recognition of deferred revenue (73) (24)
Changes in operating assets and liabilities:
Accounts receivable 450 (304)
Note receivable (256) --
Inventory 355 (56)
Other current assets 89 (51)
Accounts payable (486) 195
Accrued compensation 139 134
Other accrued liabilities (52) 184
-------- --------
Net cash from (used in) operating activities (7,981) (7,203)
-------- --------
Cash flows from (used in) investing activities
Purchase of investments (19,034) (32,052)
Maturities of investments 32,339 33,852
Capital expenditures (826) (799)
Change in other assets 13 (910)
-------- --------
Net cash from (used in) investing activities 12,492 91
-------- --------
Cash flows from (used in) financing activities
Proceeds from issuance of common stock 71 646
Principal payments on debt and capital obligations (31) (99)
-------- --------
Net cash from (used in) financing activities 40 547
-------- --------
Net change in cash and cash equivalents 4,551 (6,565)
Cash and cash equivalents at beginning of period 9,250 16,939
-------- --------
Cash and cash equivalents at end of period $ 13,801 $ 10,374
======== ========
Supplemental disclosure of cash flow information
Cash paid for interest $ 5 $ 11
======== --------
Supplemental disclosure of non cash financing information
Issuance of common stock to Microgyn shareholders $ -- $ 1,000
======== ========
See notes to consolidated financial statements.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
Note 1. Summary of Significant Accounting Policies
Method of Preparation
The accompanying consolidated balance sheet as of September 30, 1998
and the consolidated statements of operations and cash flows for the three and
nine month periods ended September 30, 1998 and 1997 have been prepared by
Conceptus, Inc. ("Conceptus" or the "Company"), without audit. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position, results of operations, and
cash flows at September 30, 1998, and for all periods presented, have been made.
The balance sheet as of December 31, 1997 has been derived from audited
financial statements as of that date.
Although the Company believes that the disclosures in these
consolidated financial statements are adequate to make the information presented
not misleading, certain information and footnote disclosures required by
Generally Accepted Accounting Principles for complete financial statements have
been omitted pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). This financial data should be reviewed in
conjunction with the audited financial statements and notes thereto included in
the Company's Form 10-K for the year ended December 31, 1997. The results of
operations for the three and nine months ended September 30, 1998 may not
necessarily be indicative of the operating results for the full 1998 fiscal
year.
Computation of Net Loss Per Share
Basic earnings per share is computed using net income and the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is computed using net income and the weighted average number of common
and dilutive common equivalent shares outstanding during each period. Under the
requirements for calculating basic earnings per share, the effect of potentially
dilutive securities such as stock options is excluded. Basic and diluted net
loss is computed using the weighted average number of shares of common stock
outstanding. The computation of the weighted average number of shares
outstanding were (in thousands) 9,611 and 9,466 for the three months ended
September 30, 1998 and 1997, respectively, and 9,543 and 9,347 for the nine
months ended September 30, 1998 and 1997, respectively.
Recent Accounting Pronouncements
Effective January 1, 1998, the Company adopted Financial Accounting
Standards Board's Statement of Financial Accounting Standard No. 130 ("Statement
130"), Reporting Comprehensive Income. Statement 130 establishes new rules for
the reporting and display of comprehensive income (loss) and its components;
however, the adoption of Statement 130 had no impact on the Company's net income
(loss) or stockholders' equity. Statement 130 requires unrealized gains or
losses on the Company's available-for-sale securities, which prior to adoption
were reported separately in stockholders' equity, to be included in other
comprehensive income (loss). Prior year financial statements have been
reclassified to conform to the requirements of Statement 130. During the three
quarters of 1998 and 1997, total comprehensive income (loss) was the same as net
income (loss) as unrealized gains and losses were immaterial.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the
unaudited financial statements and notes thereto included in Part I-Item 1 of
this Quarterly Report. In addition, except for the historical statements
contained therein, the following discussion contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. The Company wishes to alert readers that the risk factors set forth in
the Company's Annual Report on Form 10-K for the year ended December 31, 1997,
as well as other factors, including those set forth in the following discussion
could in the future affect, and in the past have affected, the Company's actual
results and could cause the Company's results for future periods to differ
materially from those expressed in any forward-looking statements made by or on
behalf of the Company.
Overview
Since its inception on September 18, 1992, Conceptus has been primarily
engaged in the design, development and marketing of innovative interventional
medical devices for use in reproductive medicine. The Company's initial focus
was on the development of systems to improve the diagnosis and treatment of
fallopian tube disorders, a primary cause of infertility, and on technology
designed to improve the safety and ease-of-use of therapeutic hysteroscopy, a
growing, less-invasive alternative to hysterectomy. The Company's current focus
is on providing a non-surgical approach to fallopian tube sterilization, the
most commonly performed contraceptive procedure worldwide. The Company has a
limited history of operations and has experienced significant operating losses
since inception. Operating losses are expected to continue for at least the next
several years as the Company continues to expend substantial resources to fund
clinical trials in support of regulatory and reimbursement approvals and to
conduct research and product development.
In July 1998, the Company announced a restructuring to significantly
reduce spending levels. The Company has eliminated 53 positions worldwide since
January 1, 1998, through both natural attrition and employee layoffs. This
restructuring resulted in an additional charge to operating expenses of $920,000
in the second quarter of 1998, comprised of $725,000 related to the reduction in
work force and $195,000 to fully reserve all remaining inventory. Internal
sales, marketing and operations positions were eliminated and administrative
positions were significantly reduced. Research and development positions were
not affected by this restructuring.
The Company will focus on its research and development and clinical
studies of the S/TOP (Selective Tubal Occlusion Procedure) device, a
non-surgical alternative to surgical tubal ligation, the most commonly used
method of sterilization. The system utilizes a unique micro-coil designed to be
permanently implanted into the fallopian tube in order to obtain effective
sterilization. Patients who are scheduled to have a hysterectomy have
participated in trials to determine the best placement of the S/TOP microcoil.
The Company believes that the ability to properly place the device in the
fallopian tube must be demonstrated before commencing a Phase II clinical
efficacy trial.
In the third quarter 1998, the Company received approval of an
Investigational Device Exemption (IDE) from the U.S. Food and Drug
Administration (FDA) to commence Phase II clinical efficacy trials of the S/TOP
device in the United States. In addition to this first U.S. site, the Company
has an on-going Phase II site in Australia and, during the quarter, added a
second Australian investigational site. The Company plans to complete patient
enrollment in this Phase II study by year-end 1998, in an effort to demonstrate
early clinical feasibility of the S/TOP device by mid-year 1999. The Company
plans that the Phase II study will be followed by a pivotal study in a large
7
<PAGE>
number of patients, which would be conducted as part of the FDA's Pre-Market
Approval (PMA) process in order to market the device in the United States.
The Company also received in the third quarter, results from an
independent laboratory histopathological analysis of an additional 21 fallopian
tubes as part of its "proof of principle" study conducted in pre-hysterectomy
patients. Analysis of these tubes from thirteen patients in whom S/TOP devices
had been implanted six to twelve weeks prior to a scheduled hysterectomy yielded
evidence of a cellular and tissue response to the device, which is an important
component of the theorized mechanism of action of the S/TOP device. These
results are consistent with results previously reported in five patients in
February 1998.
The Company's initial commercial products, the T-TAC (Transcervical
Tubal Access Catheter) and STARRT (Selective Tubal Assessment to Refine
Reproductive Therapy) Falloposcopy systems, have generated limited sales to
date. In February 1998, the Company received 510(k) clearance of its second
generation STARRT catheter, the Stargate Catheter, a component of the Company's
STARRT Falloposcopy system, for the diagnosis of proximal tubal occlusion (PTO).
The Stargate Catheter is a modification of the VS Falloposcopy Catheter, which
was previously cleared by the FDA for marketing in the United States. The
Stargate Catheter is designed to improve visualization of the fallopian tube by
reducing the amount of light reflected off of tubal surfaces. In connection with
the Company's recent restructuring, which is discussed in more detail below, the
Company expects commercial shipments of these products to be significantly less
than historical levels.
The Company introduced the ERA and FUTURA Resectoscope Sleeve products
in the second half of 1997. These products allow the use of saline solution when
performing hysteroscopic procedures, which increases the safety of resection
procedures by eliminating the risk of dilutional hyponatremia, a complication
that can lead to serious heart, lung and brain disorders. The Company received
510(k) clearance for its FUTURA Resectoscope Sleeve for urologic applications in
the first quarter of 1997. In September 1997, the Company received 510(k)
clearance for its ERA Resectoscope Sleeve for gynecological procedures.
With the recent restructuring the Company continues to seek to
outlicense or establish relationships with marketing partners to distribute its
current products, the ERA and FUTURA Resectoscope Sleeves and the STARRT
Falloposcopy system. While the Company is committed to establishing an effective
distribution channel for its products, there can be no assurance that the
Company will be successful in doing so as there is no proven distribution
channel for marketing the Company's products in the United States or
internationally. Future revenues and results of operations may fluctuate
significantly from quarter to quarter and will depend upon, among other factors,
the ability to attract marketing partners and out-source manufacturing, the rate
at which the Company establishes its domestic and international distribution
network, the timing and size of distributor purchases, actions relating to
regulatory and reimbursement matters, the extent to which the Company's products
gain market acceptance, the progress of clinical trials, and the introduction of
competitive products for diagnosis and treatment of the female reproductive
system.
In October 1998, the Company received notification from the National
Association of Securities Dealer's Inc. ("NASD") that due to the decline in the
price of the Company's Common Stock, the Company was currently not in compliance
with certain listing maintenance requirements of the Nasdaq National Market. If
these requirements are not satisfied within ninety days of notification, then
the Company's Common Stock could be delisted from the Nasdaq National Market. In
November 1998, the Company's Common Stock satisfied the applicable maintenance
requirements with a closing bid price of at least $1.00 per share for ten
consecutive trading days. While these maintenance requirements were satisifed
within the ninety-day period, there can be no
8
<PAGE>
assurance that the Company's Common Stock will stay in compliance with the
maintenance requirements. If delisting were to occur, the Company expects that
trading of its Common Stock would be conducted on the OTC Bulletin Board or in
the over-the-counter market in what is commonly referred to as the "pink
sheets".
Results of Operations - Three and Nine Months Ended Sept. 30, 1998 and 1997
Sales decreased to $86,000 and $338,000 for the three and nine months
ended September 30, 1998, respectively, from $310,000 and $1,011,000 for the
same periods in the prior year. The 72% and 67% decreases, respectively, are
primarily due to the loss of distributors such as Imagyn Medical Technologies
Inc. and Mallinckrodt Inc. and the corporate restructuring which eliminated the
sales and marketing personnel. Domestic sales comprised 87% and 81% of sales for
the three and nine month periods ended September 30, 1998, respectively,
compared with 90% and 90% in the prior year periods. The Company anticipates
that revenues will continue to decrease during the fourth quarter of 1998 as a
result of the corporate restructuring.
Cost of sales decreased to $75,000 and $1,587,000 for the three and
nine months ended September 30, 1998 from $562,000 and $1,756,000 for the same
periods in the prior year. The decrease in both these periods of 1998 is due to
significantly reduced unit shipments of the Company's T-TAC and ERA product
lines as well as elimination of manufacturing operations and personnel in
connection with the corporate restructuring.
Research and development ("R&D") expenses, which include clinical and
regulatory expenses, decreased to $898,000 and $3,847,000 for the three and nine
months ended September 30, 1998, respectively, from $1,151,000 and $4,120,000
for the same periods in the prior year. The decrease in both these periods of
1998 is primarily due to significantly reduced R&D activities on the ERA/FUTURA
and STARRT product lines as the company focuses its R&D efforts on the S/TOP
product.
Selling, general and administrative ("SG&A") expenses decreased to
$731,000 and $4,550,000 for the three and nine months ended September 30, 1998,
respectively, from $1,605,000 and $4,653,000 for the same periods in the prior
year. The 55% and 2% decreases, respectively, are due to the corporate
restructuring which eliminated ten personnel and related SG&A expenses during
the third quarter of 1998.
Net interest and investment income decreased to $287,000 and $997,000
for the three and nine months ended September 30, 1998, respectively, from
$503,000 and $1,439,000 for the same periods in the prior year. The decrease in
these periods is a result of lower average invested cash balances. Interest
expense for the three and nine months ended September 30, 1998 and the amounts
for the same respective periods in the prior year are immaterial.
As a result of the items discussed above, net loss decreased to
$1,331,000 in the third quarter of 1998 from $2,505,000 in the prior year and in
the nine months ended September 30, 1998, net loss increased to $8,649,000 from
$8,079,000 in the prior year.
The Company has a limited history of operations. Since its inception in
September 1992, the Company has been engaged primarily in research and
development of its T-TAC and STARRT Falloposcopy systems and its S/TOP device,
and since 1996, the ERA and FUTURA product lines. The Company has generated only
limited revenues and has only limited experience in manufacturing, marketing or
selling its products in commercial quantities. The Company has experienced
significant operating losses since inception and, as of September 30, 1998, had
an accumulated deficit of $44.4
9
<PAGE>
million. The Company expects its operating losses to continue for at least the
next several years as it continues to expend substantial resources in research
and product development and funding clinical trials in support of its S/TOP
device. Due to the expense and unpredictable nature of these activities, there
can be no assurance that the Company will achieve or sustain profitability in
the future.
Liquidity and Capital Resources
At September 30, 1998, Conceptus had cash, cash equivalents and
investments of $18.3 million, compared with $27.1 million at December 31, 1997.
The decrease is primarily due to $8.8 million used in operating and investing
activities. Capital expenditures of $826,000 for the nine months ended September
30, 1998 increased 3% from the same period in the prior year primarily as a
result of spending on leasehold improvements and furniture and equipment for a
new facility. As of October 15, 1998, the Company has successfully sub-leased
this entire facility for the entire lease term at amounts sufficient to recover
nearly all of its leasehold improvements and furniture and equipment. The
Company expects that cash outflows in the fourth quarter of 1998, exclusive of
the payment of severance charges to be paid out over the fourth quarter, will be
substantially lower than that experienced in each of the first three quarters of
1998.
Conceptus believes that its existing capital resources will be
sufficient to fund its operations at least through 1999, as a result of the
restructuring. However, the Company's future liquidity and capital requirements
will depend upon numerous factors, including the 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
devoted to developing the Company's S/TOP product. Accordingly, there can be no
assurance that the Company will not require additional financing within this
time frame and, therefore, may in the future seek to raise additional funds
through bank facilities, debt or equity offerings or other sources of capital.
Furthermore, any additional equity financing may be dilutive to stockholders,
and debt financing, if available, may involve restrictive convenants. Additional
funding may not be available when needed or on terms acceptable to the Company,
which would have a material adverse effect on the Company's business, financial
condition and results of operations.
The "Year 2000 issue" arises because most computer systems and programs
were designed to handle only a two-digit year, not a four-digit year. These
computer systems and programs may interpret "00" as the year 1900 and could
either stop processing date-related computations or could process them
incorrectly in the year 2000. The Company was informed by appropriate vendors
that the Company's information systems are able to process the year 2000
accurately and the Company has completed testing of such systems. Accordingly,
the Company does not anticipate any Year 2000 issues from its own information
systems, databases or programs. The costs associated with this assessment were
not material. As a result of the Company's recent restructuring, the Company has
determined that its level of reliance on major distributors, suppliers, vendors,
and customers has been significantly reduced such that Year 2000 issues faced by
these third parties should not have a material effect on the Company's
operations or financial condition. With respect to various financial services
institutions that the Company relies on to conduct its financial transactions,
the Company has determined that all its major financial service institutions are
actively engaged in bringing their information systems into compliance with Year
2000 issues. However, there can be no assurance that such plans will be able to
address fully, or at all, the impact of the Year 2000 issue on the Company,
which could have a material adverse effect upon the Company's financial
condition.
10
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Part II. Other Information
Item 1. Legal Proceedings
There are no material pending or threatened legal proceedings against
the Company. The Company from time to time is involved in routine legal matters
incident to its business. While management currently believes the amount of
ultimate liability, if any, with respect to these actions will not materially
affect the financial position, results of operations, or liquidity of the
Company, the ultimate outcome of any litigation is uncertain.
Item 2. Changes in Securities
None.
Item 3. Defaults in Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27
Exhibit 27 Financial Data Schedule
(a) Reports on Form 8-K.
None.
11
<PAGE>
SIGNATURES
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.
CONCEPTUS, INC.
By: /s/ KATHRYN TUNSTALL
----------------------------------------
Kathryn Tunstall
President and Chief Executive Officer
By: /s/ OLIVER BROUSE
----------------------------------------
Oliver Brouse
Principal Accounting Director
Date: November 12, 1998
12
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
27 Financial Data Schedule
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 13,801
<SECURITIES> 4,504
<RECEIVABLES> 90
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 18,851
<PP&E> 2,887
<DEPRECIATION> (1,382)
<TOTAL-ASSETS> 20,471
<CURRENT-LIABILITIES> 1,206
<BONDS> 0
0
0
<COMMON> 63,561
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 20,471
<SALES> 86
<TOTAL-REVENUES> 86
<CGS> 75
<TOTAL-COSTS> 75
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,331)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,331)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,331)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
