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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 March 31, 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
CONCEPTUS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 97-3170244
(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 April 30, 1998, 9,506,928 shares of the Registrant's Common Stock
were outstanding.
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<PAGE>
CONCEPTUS, INC.
FORM 10-Q For the Quarter Ended March 31, 1998
INDEX
Page
----
Facing sheet 1
Index 2
Part I. Financial Information
Item 1. a) Consolidated balance sheets at March 31, 1998 and
December 31, 1997 3
b) Consolidated statements of operations for the
three-month periods ended March 31, 1998 and
March 31, 1997 4
c) Consolidated statements of cash flows for the
three-month periods ended March 31, 1998 and
March 31, 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 12
Signature 13
Index to Exhibits 14
2
<PAGE>
<TABLE>
PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements
Conceptus, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
Assets (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11,761 $ 9,250
Short-term investments 11,479 17,808
Accounts receivable, net 499 540
Inventories 327 355
Other current assets 318 290
-------- --------
Total current assets 24,384 28,243
Property and equipment, net 1,430 1,090
Other assets 129 147
-------- --------
$ 25,943 $ 29,480
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 680 $ 699
Accrued compensation 668 670
Other accrued liabilities 91 135
Current portion of deferred revenue 97 97
Current portion of debt and capital lease obligations 15 34
-------- --------
Total current liabilities 1,551 1,635
Long-term portion of debt and capital lease obligations 1 1
Long-term portion of deferred revenue 315 340
Commitments
Stockholders' equity:
Common stock, $0.003 par value, 30,000,000 shares authorized, 63,516 63,505
9,506,928 and 9,495,053 shares issued and outstanding at
March 31, 1998 and December 31, 1997, respectively
Stockholder notes receivable (54) (54)
Deferred compensation (199) (216)
Accumulated deficit (39,187) (35,731)
-------- --------
Total stockholders' equity 24,076 27,504
-------- --------
$ 25,943 $ 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
March 31,
----------------------------
1998 1997
------- -------
<S> <C> <C>
Net sales $ 167 $ 277
Cost of sales 836 442
------- -------
Gross profit (loss) (669) (165)
Operating expenses:
Research and development 1,386 1,431
Selling, general and administrative 1,777 1,692
------- -------
Total operating expenses 3,163 3,123
------- -------
Operating loss (3,832) (3,288)
Interest and investment income, net 376 492
------- -------
Net loss $(3,456) $(2,796)
======= =======
Basic and diluted net loss per share $ (0.36) $ (0.30)
======= =======
Shares used in computing basic and diluted net loss per share 9,503 9,226
======= =======
<FN>
Certain amounts have been reclassified to conform with the current presentation.
See notes to consolidated financial statements.
</FN>
</TABLE>
-4-
<PAGE>
<TABLE>
Conceptus, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<CAPTION>
Three Months Ended
March 31,
------------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (3,456) $ (2,796)
Adjustments to reconcile net loss to net cash
from (used in) operating activities:
Depreciation and amortization 163 90
Amortization of deferred compensation 17 164
Recognition of deferred revenue (24)
Changes in operating assets and liabilities:
Accounts receivable 41 (70)
Inventory 28 (194)
Other current assets (29) (772)
Accounts payable (19) 219
Accrued compensation (2) 12
Other accrued liabilities (44) 299
-------- --------
Net cash from (used in) operating activities (3,325) (3,048)
-------- --------
Cash flows from investing activities
Purchase of investments (8,450) (13,991)
Maturities of investments 14,779 14,183
Capital expenditures (497) (153)
Change in other assets 13 --
-------- --------
Net cash from investing activities 5,845 39
-------- --------
Cash flows from (used in) financing activities
Proceeds from issuance of common stock 9 62
Principal payments on debt and capital obligations (18) (43)
-------- --------
Net cash from (used in) financing activities (9) 19
-------- --------
Net change in cash and cash equivalents 2,511 (2,990)
Cash and cash equivalents at beginning of period 9,250 16,939
-------- --------
Cash and cash equivalents at end of period $ 11,761 $ 13,949
======== ========
Supplemental disclosure of cash flow information
Cash paid for interest $ 1 $ 4
======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
-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 March 31, 1998 and
the consolidated statements of operations and cash flows for the quarters ended
March 31, 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 March 31, 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 quarter ended March 31, 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 for the three month periods ended March 31, 1998 and 1997 were (in
thousands) 9,503 and 9,226, 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 and its components; however,
the adoption of this Statement had no impact on the Company's net income or
shareholders' equity. Statement 130 requires unrealized gains or losses on the
Company's available-for-sale securities, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform to the
requirements of Statement 130. During the first quarter of 1998 and 1997, total
comprehensive income was the same as net income 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 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 minimally invasive devices
for reproductive medical applications. The Company's current focus is on
improving the safety of resectoscopic procedures, developing products for
improved diagnosis of infertility and 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, to conduct research and development, and
to expand marketing and sales activities.
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.
The Company currently sells its products to international markets through a
limited number of distributors who resell to physicians and hospitals. Sales to
distributors are made on open credit terms and may include purchase discounts.
In 1996 and 1995, the Company made adjustments to the profile of its
distributors, resulting in replacement and addition of new distributors in
domestic and international markets. In 1997, the Company added an additional
domestic distributor. Although the Company began marketing components of its
T-TAC system in April 1995, general marketing of the system commenced upon the
receipt of a 510(k) clearance from the FDA for diagnosis of proximal tubal
occlusion ("PTO") in August 1995. Sales in 1996 were through a small direct
sales force and two new significant distributors on open credit terms and
consisted primarily of commercial shipments of T-TAC products. Sales in 1997
were through a small direct sales force and existing distributors, as well as a
new distributor, on open credit terms and consisted of commercial shipments of
T-TAC and FUTURA products.
In the fourth quarter of 1996 the Company presented results from the
International Multicenter Study of Falloposcopy of its STARRT Falloposcopy
system. Study data showed that use of the STARRT Falloposcopy system altered
infertility diagnosis in the majority of cases versus conventional infertility
diagnosis. 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 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.
7
<PAGE>
On November 26, 1996, the Company completed the acquisition of
Microgyn, Inc. ("Microgyn") a privately held medical device company developing
products designed to improve the safety and performance of resectoscope
procedures, including therapeutic hysteroscopy. The Company acquired all of the
outstanding common stock of Microgyn in exchange for $3.0 million in cash on the
acquisition date and $1.0 million in the Company's Common Stock paid six months
after the acquisition date, plus $752,000 due to assumption of certain
liabilities and related acquisition expenses. In May 1997, the Company satisfied
the $1.0 million accrued acquisition cost by issuing 104,708 shares of Common
Stock. Additional contingent consideration in cash or stock, at the option of
Conceptus, is payable to the former shareholders of Microgyn based upon meeting
certain future milestones. The acquisition was accounted for using the purchase
method. The Company is continuing product development of the Microgyn product
portfolio and is developing a marketing and distribution strategy for both
international and domestic customers.
In the second half of 1997 the Company introduced the ERA and FUTURA
Resectoscope Sleeve products from the Microgyn technology portfolio. 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. Also in September 1997, the
Company entered into a marketing and distribution agreement with Imagyn Medical
Technologies, Inc. ("Imagyn"), formerly UroHealth, Inc., granting Imagyn an
exclusive, worldwide license to distribute products for urologic applications of
the resectoscope sleeve. Shipments to Imagyn in the first quarter of 1998 were
approximately $40,000. On April 5, 1998, the distributor agreement was
terminated because Imagyn had not made payment on purchases of FUTURA products.
The Company intends to sell the ERA Resectoscope Sleeve for gynecologic
applications in the United States and internationally through a combination of a
direct sales force and distributors in certain markets and regions.
In the fourth quarter of 1997, the Company acquired the exclusive
manufacturing rights from Medical Scientific, Inc. ("MSI"), the supplier of the
Company's ERA and FUTURA Resectoscope Sleeves. The manufacturing know-how
related to the ERA and FUTURA Resectoscope Sleeves has been transferred to the
Company's facility in San Carlos. The acquisition and transfer of these
manufacturing rights resulted in additional cost of sales expenditures
approximating $1.1 million in 1997 and $300,000 in 1998.
Certain of the Company's products are currently manufactured by certain
original equipment manufacturers while others are manufactured by Conceptus at
its location in San Carlos, California. The Company expects to increase its
direct manufacturing operations in order to better control product costs and to
increase gross margin as the volume of T-TAC, STARRT, ERA and FUTURA products
increases. Future revenues and results of operations may fluctuate significantly
from quarter to quarter and will depend upon, among other factors, actions
relating to regulatory and reimbursement matters, the extent to which the
Company's products gain market acceptance, the rate at which the Company
establishes its domestic and international distribution network, the timing and
size of distributor purchases, the progress of clinical trials, and the
introduction of competitive products for diagnosis and treatment of the female
reproductive system.
The Company continues to devote significant resources to the research
and development program for the S/TOP 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
8
<PAGE>
into the fallopian tube in order to obtain effective sterilization. Peri- and
pre-hysterectomy patients have participated in trials to determine the best
placement position and the tissue response to the implanted microcoil. In the
second half of 1997, the Company commenced a small Phase II efficacy study of
the S/TOP system in Australia. The Phase II study involves device placement in
fertile women who desire permanent sterilization. Study patients will be
monitored for a minimum of two years.
Results of Operations
Sales decreased $110,000 to $167,000 for the three months ended March
31, 1998 from $277,000 for the same period in the prior year. The 40% decrease
is primarily due to a cessation in shipments of the Company's T-TAC products to
a domestic distributor, Mallinckrodt Group Inc., and was compounded by the
failure of Imagyn to order its contracted first quarter minimums of $250,000 of
FUTURA products. The distribution agreement with Imagyn was terminated in April
1998. Domestic sales comprised 68% of total sales for the three months ended
March 31, 1998, compared with 91% in the same period in the prior year.
Cost of sales increased $394,000 to $836,000 for the three months ended
March 31, 1998 from $442,000 for the same period in the prior year. This 89%
increase is primarily due to $300,000 associated with the completion of the
acquisition of exclusive manufacturing rights of the Company's ERA and FUTURA
products from MSI, as well as additional reserves for excess inventory resulting
from Imagyn's failure to meet its first quarter minimums orders.
Research and development ("R&D") expenses, which include clinical and
regulatory expenses, decreased $171,000 to $1,386,000 for the three months ended
March 31, 1998 from $1,557,000 for the same period in the prior year. This 11%
decrease is due to increased R&D expenditures in the first quarter of 1997 as a
result of the R&D efforts required to complete development of the ERA and FUTURA
products at MSI. Subsequently the R&D efforts have been transferred to the
Company which are now running at a reduced level of spending. The Company
believes that its investment in product development is an essential element of
its efforts to establish its competitive position and continue the development
of future products.
Selling, general and administrative ("SG&A") expenses increased
$212,000 to $1,777,000 for the three months ended March 31, 1998 from $1,565,000
for the same period in the prior year. This 14% increase is primarily due to
growth of the Company's direct sales force in the U.S., as well as an increase
in expenses associated with the termination of the Company's exclusive
relationship with a distributor.
Management intends to decrease the level of operating expenses to
reduce operating losses, during the remainder of 1998, primarily through a
reduction in headcount, as well as a decrease in related discretionary spending.
Pursuant to this policy, the Company has eliminated approximately 20 positions
since December 31, 1997. This reduction is not intended to impact research and
development.
Net interest and investment income decreased $116,000 to $376,000 for
the three months ended March 31, 1998 from $492,000 for the same period in the
prior year. The 24% decrease is a result of lower average cash balances due to
the utilization of cash for operations. Interest expense for the three months
ended March 31, 1998 and the amount for the same period in the prior year was
insignificant.
As a result of the items discussed above, net loss increased to
$3,456,000 for the three months ended March 31, 1998 from $2,796,000 for the
three months ended March 31, 1997.
9
<PAGE>
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, STARRT Falloposcopy and S/TOP systems 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 March 31, 1998, had an accumulated
deficit of $39.2 million. The Company expects its operating losses to continue
for the next several years as it continues to expend substantial resources in
funding clinical trials in support of regulatory and reimbursement approvals,
expansion of manufacturing, marketing and sales activities and research and
product development or acquisition. 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. Whether the Company can successfully manage
the transition to a large-scale commercial enterprise will depend upon a number
of factors, including obtaining selected regulatory and reimbursements approvals
for its existing or potential products, establishing its commercial
manufacturing capability, developing its U.S. marketing and selling capabilities
and establishing an international network. Failure to make such a transition
successfully, as well as the inability to attract new significant distributors
or the loss of one or more of the Company's distributors could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Liquidity and Capital Resources
At March 31, 1998, Conceptus had cash, cash equivalents and investments
of $23.2 million compared with $27.1 million at December 31, 1997. The decrease
is due to approximately $3.3 million used in operating activities. Capital
expenditures in the first quarter of 1998 increased to $497,000 from $153,000 in
the prior year period primarily due to expenditures for leasehold improvements,
as well as furniture and equipment for a new leased facility.
Conceptus believes that its existing capital resources will be
sufficient to fund its operations through 1999. 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, manufacturing and
marketing the Company's products. The Company's capital requirements will also
depend on, among other things, the resources required to hire and develop a
direct sales force in the United States, the resources required to expand
manufacturing capacity and facilities requirements and the extent to which the
Company's products generate market acceptance and demand. 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 computers may interpret "00" as the year 1900 and could either stop
processing date-related computations or could process them incorrectly. The
Company has been informed by its information system vendors that such systems
are able to process the
10
<PAGE>
Year 2000 accurately and accordingly does not anticipate any Year 2000 issues
from its own information systems, databases or programs. However, the Company
could be adversely impacted by Year 2000 issues faced by major distributors,
suppliers, customers, vendors and financial service organizations with which the
Company interacts. The Company is in the process of developing a plan to
determine the impact that third parties which are not Year 2000 compliant may
have on the operations of the Company. There can be no assurance that such plan
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
business, financial condition and results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
11
<PAGE>
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
No matters were submitted to a vote of stockholders of the Company
during the first quarter of the fiscal year ended December 31, 1998.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
12
<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/ SANFORD FITCH
-----------------------------------------
Sanford Fitch
Senior Vice President
and Chief Financial Officer
(Duly Authorized and Principal Financial and
Accounting Officer)
Date: May 15, 1998
13
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
27 Financial Data Schedule
14
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 896778
<NAME> Conceptus, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 11,761
<SECURITIES> 11,479
<RECEIVABLES> 749
<ALLOWANCES> 250
<INVENTORY> 327
<CURRENT-ASSETS> 24,384
<PP&E> 2,557
<DEPRECIATION> 1,127
<TOTAL-ASSETS> 25,943
<CURRENT-LIABILITIES> 1,551
<BONDS> 0
0
0
<COMMON> 63,516
<OTHER-SE> (39,440)
<TOTAL-LIABILITY-AND-EQUITY> 25,943
<SALES> 167
<TOTAL-REVENUES> 167
<CGS> 836
<TOTAL-COSTS> 836
<OTHER-EXPENSES> 3,163
<LOSS-PROVISION> 173
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> (3,456)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,456)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,456)
<EPS-PRIMARY> (0.36)
<EPS-DILUTED> (0.36)
</TABLE>
