<PAGE>
UNITED STATES
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1998
Commission File Number: 0-23247
FOCAL, INC.
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(Exact name of registrant as specified in its charter)
Delaware 94-3142791
------------------------------- ---------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization identification no.)
4 Maguire Road, Lexington, MA 02173
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(Address of principal executive offices
including zip code)
(781) 280-7800
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(Registrant's telephone number
including area code)
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 of time 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 March 31, 1998, the Registrant had 13,247,570 shares of Common Stock
outstanding.
<PAGE>
FOCAL, INC.
Form 10-Q for the Quarter Ended March 31, 1998
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C>
INDEX 2
PART 1-FINANCIAL INFORMATION
ITEM 1-FINANCIAL STATEMENTS
Condensed Balance Sheets at December 31, 1997
and March 31,1998 3
Condensed Statements of Operations for the Three
Months Ended March 31,1997 and 1998 4
Condensed Statements of Cash Flows for the Three
Months Ended March 31, 1997 and 1998 5
Notes to Condensed Financial Statements 6
ITEM 2-Management's Discussion & Analysis of Financial
Condition and Results of Operations 8
PART II-OTHER INFORMATION
ITEMS 1-6 12
SIGNATURES 13
</TABLE>
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Focal, Inc.
Condensed Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
---------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $26,810,777 $21,426,934
Marketable securities 6,428,374 12,283,213
Inventories 566,989 1,394,452
Accountants receivable and prepaid expenses 2,733,584 1,517,556
---------------- ---------------
Total current assets 36,539,724 36,622,155
Notes receivable from related parties 343,480 371,822
Property, plant & equipment, net 2,710,513 2,794,381
Other assets 12,696 12,855
---------------- ---------------
Total assets $39,606,413 $39,801,213
---------------- ---------------
---------------- ---------------
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable & accrued liabilities $4,031,807 $3,860,216
Deferred revenue 750,000 750,000
Current portion of capital lease obligations 890,451 891,278
---------------- ---------------
Total current liabilities 5,672,258 5,501,494
Capital lease obligations 1,421,983 1,390,062
Stockholders' equity:
Common stock 128,686 132,475
Additional paid-in capital 80,777,780 84,330,292
Notes receivable from related parties (1,688,057) (1,688,057)
Deferred compensation (768,865) (692,700)
Accumulated other comprehensive income (17,358) (23,367)
Accumulated deficit (45,920,014) (49,148,986)
---------------- ---------------
Total stockholder's equity 32,512,172 32,909,657
---------------- ---------------
Total liabilities and stockholders' equity $39,606,413 $39,801,213
---------------- ---------------
---------------- ---------------
</TABLE>
See accompanying notes.
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<PAGE>
<TABLE>
<CAPTION>
FOCAL, INC.
Condensed Statements of Operations
(Unaudited)
Three months ended March 31,
1997 1998
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<S> <C> <C>
REVENUES:
Collaborative R&D revenues $8,904,229 $ 1,228,607
Product revenues - 712,220
------------------ ---------------
Total revenues 8,904,229 1,940,827
COSTS AND EXPENSES:
Cost of product revenues - 729,990
Research and development 3,240,633 3,957,765
General and administrative 782,221 934,903
------------------ ---------------
Total costs and expenses 4,022,854 5,622,658
Interest income (net) 216,570 452,859
------------------ ---------------
NET INCOME (LOSS) $5,097,945 $(3,228,972)
------------------ ---------------
------------------ ---------------
Basic and diluted net income (loss)
per share (proforma in 1997) $0.51 ($0.24)
------------------ ---------------
------------------ ---------------
Shares used in computing basic and diluted net
income (loss) per share (proforma in 1997) 10,020,932 13,216,817
------------------ ---------------
------------------ ---------------
</TABLE>
See accompanying notes.
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<PAGE>
<TABLE>
<CAPTION>
Focal, Inc
Condensed Statements of Cash Flows
(Unaudited)
Three months ended March 31,
1997 1998
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<S> <C> <C>
Operating Activities
Net income (loss) $ 5,097,945 $ (3,228,972)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 263,325 260,071
Amortization of deferred 67,165 76,165
compensation
Interest accrued on notes receivable (3,294) (28,342)
Increase (decrease) in cash arising
from changes of operating assets
and liabilities:
Inventories - (827,463)
Accounts receivable and prepaid expenses (149,134) 1,216,028
Accounts payable and accrued liabilities 56,474 (171,591)
Deferred revenue 1,295,000 -
------------ -------------
Net cash provided by (used in) operating activities 6,627,481 (2,704,104)
Investing activities
Purchase of marketable securities (8,074,222) (10,314,298)
Sale of marketable securities 2,294,424 4,453,450
Purchase of property and equipment (296,725) (343,939)
Other assets (153) (159)
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Net cash used in investing activities (6,076,676) (6,204,946)
Financing activities
Proceeds from equity financings,
net of issuance costs - 3,549,500
Proceeds from exercise of
stock options 1,353 6,801
Proceeds from lease financing - 241,525
Principal payments on capital lease
obligations (260,998) (272,619)
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Net cash provided by (used in) financing
activities (259,645) 3,525,207
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Net increase (decrease) in cash and cash
equivalents 291,160 (5,383,843)
Cash and cash equivalents at beginning
of the period 5,465,471 26,810,777
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Cash and cash equivalents at end of
the period $ 5,756,631 $ 21,426,934
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Supplemental disclosure of cash flow
information:
Property acquired under capital
lease obligations $350,373 $ -
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Interest paid $19,489 $54,115
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See accompanying notes.
</TABLE>
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<PAGE>
Notes to Condensed Financial Statements
(Unaudited)
Note 1. Basis of Presentation
Focal, Inc. develops, manufactures and commercializes synthetic, absorbable,
liquid surgical sealants, tissue coatings and local drug delivery products,
based on its proprietary polymer technology. The Company's family of surgical
sealant products is being developed for use inside the body with or without
sutures and staples to seal leaks resulting from surgery.
The accompanying unaudited, condensed financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying
financial statements include all adjustments, including normal recurring
accruals, considered necessary for a fair presentation of the financial
position, results of operations, and cash flows for the periods presented.
The results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the entire
fiscal year ended December 31, 1998.
These financial statements should be reviewed in conjunction with the audited
financial statements and notes thereto included in the Company's Annual Report
for the year ended December 31, 1997.
Note 2. Net Income (Loss) Per Share
Basic and diluted net income (loss) per share is computed using the weighted
average number of shares of common stock and convertible preferred stock
outstanding, assuming conversion of preferred stock at date of issuance.
Common equivalent shares from stock options and warrants are excluded as
their effect is antidilutive or not material.
Note 3. Exercise of Overallotment Option from Initial Public Offering
In January 1998, the underwriters for the Company's initial public offering
exercised the overallotment option on 375,000 shares of common stock granted
to them in connection with the offering. The Company received net proceeds of
$3.5 million from the issuance of these shares.
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Note 4. Revenue Recognition for Product Sales
Revenues from product sales are recorded in full as product shipments are
made, as there are no contractual right of return or stock rotation
privileges. All product revenues recorded during the three month period ended
March 31, 1998 were attributable to sales to the Ethicon division of Johnson
& Johnson.
Note 5. Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market. At December 31, 1997 and March 31, 1998, inventories consisted of
the following:
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
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<S> <C> <C>
Purchased parts and subassemblies $566,989 $ 353,710
Work in process -- 832,407
Finished goods -- 208,335
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$566,989 $1,394,452
</TABLE>
Note 6. Adoption of Newly Issued Accounting Standards
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income". Statement No. 130 was adopted effective January 1, 1998 and there
was no material effect on the Company's financial statements. Statement No.
130 establishes standards for the reporting and display of comprehensive
income and its components. Statement No. 130 requires unrealized gains and
losses on the Company's marketable securities, which prior to adoption were
reported separately in stockholders' equity, to be included in other
comprehensive income.
The components of the comprehensive income for the three month periods ended
March 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
Three months ended March 31,
1997 1998
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<S> <C> <C>
Net Income (Loss) $ 5,097,945 $(3,228,972)
Other Comprehensive Income:
Change in Unrealized (Loss) on
Marketable Securities $ (18,061) $ (6,009)
------------- -------------
Comprehensive Income (Loss) $ 5,079,884 $(3,234,981)
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
The following discussion should be read in conjunction with the accompanying
unaudited, condensed financial statements and the related footnotes thereto,
appearing elsewhere in this report. This Management's Discussion and Analysis
contains certain forward looking statements regarding future events with
respect to the Company. Actual events and/or future results of operations may
differ materially as a result of the factors described herein and in the
Company's Report on Form 10-K for the year ended December 31, 1997. Those
factors described under "Business-Product and Product Development programs,"
"-Strategic Alliances," "-Patents and Proprietary Rights," "-Government
Regulations," "-Competition and Technological Change," "-Third Party
Reimbursement" and "Factors Affecting Operating Results" in the Report on
Form 10-K should be read in conjunction with this Management's Discussion and
Analysis.
OVERVIEW
The Company was founded in 1991, and is focused on the development,
manufacture and commercialization of synthetic, absorbable, liquid surgical
sealants based on the Company's proprietary polymer technology. Since
inception, the Company has funded its operations primarily through the
private placement of equity securities and most recently, in December 1997,
through an initial public offering of common stock. In addition, the Company
has entered into strategic alliances with corporate partners and has recorded
revenues totaling $22.7 million through March 31, 1998, in conjunction with
these alliances. The company has incurred net losses in each year since its
inception, including net losses of approximately $3.2 million for the three
months ended March 31, 1998. At March 31, 1998, the Company had an
accumulated deficit of $49.1 million. The Company's operating losses have
resulted primarily from expenses incurred in connection with the Company's
research and development activities, including preclinical and clinical
trials, development of manufacturing processes and general and administrative
expenses. The Company expects to incur net losses at least through 1999 and
may incur net losses in subsequent periods although the amount of future net
losses and time required by the Company to reach profitability are highly
uncertain. The Company is dependent upon corporate partners for funding of a
significant portion of research and development expenses. If the Company does
not continue to receive funding from its current corporate partners, or is
unable to otherwise obtain third party funding, net losses will continue to
increase. The Company's ability to achieve and sustain profitability will be
dependent upon obtaining regulatory approval for and successfully
commercializing its FocalSeal surgical sealants, and developing the
manufacturing capacity and sales and marketing capability for its products.
There can be no assurance that Focal will obtain the required regulatory
approvals, or successfully develop, manufacture, commercialize and market
products or that the Company will ever achieve profitability.
-8-
<PAGE>
The Company introduced its first commercial product, FocalSeal-L for lung
surgery indications, in Europe in March 1998 through its strategic marketing
alliance with Ethicon. The Company anticipates that revenues derived from
European sales of the Company's FocalSeal surgical sealants will account for
a substantial majority of the Company's near term product revenues. The
Company has obtained a CE mark to market FocalSeal surgical sealant in the
member countries of the European Union.
RESULTS OF OPERATIONS
Three months ended March 31, 1998, compared to three months
ended March 31, 1997
Revenues for the quarter ended March 31, 1998, decreased to $1.9 million from
$8.9 million for the quarter ended March 31, 1997, due to receipt of a
one-time payment of $7.0 million in connection with the strategic alliance
for surgical sealant products entered into with Ethicon in January 1997.
Additionally, the quarterly funding under this alliance has decreased from
$1.25 million per quarter in 1997 to $750,000 per quarter in 1998 pursuant to
the provisions of the Company's agreement with Ethicon. Included in revenues
for the quarter ended March 31, 1998 were $712,000 of product revenues
relating to product sales to Ethicon in connection with commercial
introduction of the FocalSeal-L product in Europe.
Cost of goods sold for the quarter ended March 31, 1998 of $730,000 were
recorded relating to the commercial release of the Company's FocalSeal-L
product. There was no cost of goods sold for the corresponding quarter in
1997 because the Company had no revenues related to product sales.
Research and development expenses increased to $3,958,000 for the quarter
ended March 31, 1998, from $3,241,000 for the quarter ended March 31, 1997.
This increase resulted from the hiring of additional research and development
personnel, increased clinical trial expenses related to the Company's
FocalSeal-L surgical sealant for lung surgery, and increased pre-clinical
activities related to the Company's FocalSeal-S surgical sealant for
neurosurgery.
General and administrative expenses increased to $935,000 for the quarter
ended March 31, 1998, from $782,000 for the quarter ended March 31, 1997.
General and administrative expenses during these periods consisted primarily
of personnel costs, which increased due to the hiring of additional personnel
in administration, human resources, and finance.
Interest income increased to $507,000 for the quarter ended March 31, 1998,
from $235,000 for the quarter ended March 31, 1997, as a result of higher
average cash balances, including the proceeds from the Company's initial
public offering of common stock.
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<PAGE>
The Company recorded a net loss of $(3,229,000) for the quarter ended March
31, 1998. During the same period in 1997, the Company recorded net income of
$5,098,000. This net income was primarily the result of receipt of a one-time
payment of $7.0 million and quarterly funding of research and development
expenses by Ethicon. The Company expects that it will incur net operating
losses through at least 1999.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed operations primarily from the
sale of preferred stock in private placements as well as the Company's
December 1997 initial public offering. Through March 31, 1998, the Company
has raised approximately $87.0 million from equity financings and has
received $6.1 million in equipment lease financing. In addition, the Company
has received funding from Ethicon and other corporate partners totaling
approximately $22.7 million through March 31, 1998. At March 31, 1998, the
Company had cash, cash equivalents and marketable securities of $33.7 million.
Cash used in operations totaled $2.8 million in the quarter ended March 31,
1998, as compared to cash provided by operations of $6.6 million for the same
period in 1997. The change in cash from operations was due to the net income
generated in the quarter ended March 31, 1997 as a result of the $7.0 million
one-time payment from Ethicon. Cash provided by (used in) operations is equal
to the net income or loss incurred for each period, plus non-cash charges
such as depreciation and amortization of property and equipment plus any
changes in working capital.
Capital expenditures from inception through March 31, 1998 totaled $6.7
million, representing laboratory equipment, office furniture and equipment,
computers and certain leasehold improvements. The majority of these purchases
have been financed through either direct financing leases or sale and
leaseback arrangements. Capital expenditures for the three months ended March
31, 1998 totaled $344,000. As of March 31, 1998, the Company did not have any
material commitments for future capital expenditures. In the next 12 to 18
months, the company anticipates capital expenditures of approximately $2.5
million for manufacturing facilities and related equipment. The Company has
commitments form lenders in the form of lease lines totaling $1.5 million to
provide for its expected capital needs during 1998.
Based on a review of its existing information systems, the Company does not
anticipate that it will incur significant costs in connection with bringing
its information systems into compliance with year 2000 requirements.
The company believes that its existing capital resources, interest income and
future payments due under strategic alliances, will be sufficient to satisfy
its current and projected funding requirements for at least 24 months. Under
the Company's surgical sealant collaboration agreement with Ethicon, the
Company will receive fixed quarterly research and development funding of
$750,000 per quarter through 1998.
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<PAGE>
The Company may receive additional payments under these agreements for
research and development activities and upon achievement of specified
development milestones; however, as such payments are dependent upon the
achievement of such milestones, there can be no assurance as to the receipt
or timing of any such payments. Under certain agreement with universities and
consultants, the company is obligated to make payments for sponsored research
and consulting services. The Company's research funding commitments under
these agreements totaled approximately $240,000 at March 31, 1998. Payments
under these agreements are typically made on a quarterly or monthly basis.
There can be no assurance that the Company's capital resources will be
sufficient to enable the Company to conduct its research and development
programs as planned. The Company's future capital requirements will depend on
many factors, including continued progress in its research and development
programs, progress with preclinical testing and clinical trials, the time and
costs involved in obtaining regulatory approvals, if any, the costs involved
in filing and prosecuting patent applications and enforcing patent claims,
competing technological and market developments, the establishment of
additional strategic alliances, the cost of manufacturing facilities and of
commercialization activities and arrangements, and the cost of manufacturing
facilities and of commercialization activities and arrangements, and the cost
of product in-licensing and any possible acquisitions. There can be no
assurance that the Company's cash, cash equivalents and marketable securities
and interest income earned thereon, together with funding that may be
received under the company's strategic alliances, will be adequate to satisfy
its capital and operating requirements.
The Company intends to seek additional funding through strategic alliances,
and may seek additional funding through public or private sales of the
company's securities, including equity securities. In addition, the company
has obtained equipment lease financing and other forms of debt financing and
may continue to pursue opportunities to obtain additional lease or debt
financing in the future. There can be no assurance, however, that additional
equity or debt financing will be available on reasonable terms, if at all.
Any additional equity financing would be dilutive to the Company's
stockholders. If adequate funds are not available, the company may be required
to curtail significantly one or more of its research and development programs
and/or obtain funds through arrangements with corporate partners or others
that may require the Company to relinquish rights to certain of its
technologies or product candidates.
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<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. None
Item 2. Changes in Securities. None
Item 3. Defaults upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders. None
Item 5. Exhibits and Reports on Form 8-K.
a) Exhibits:
27.1 Financial Data Schedule
b) Reports on Form 8-K: None
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this 10-Q report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 8,1998 FOCAL, INC.
By:/s/ W. Bradford Smith
----------------------------
W. Bradford Smith,
Vice President and Chief
Financial Officer
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 21,426,934 0
<SECURITIES> 12,283,213 0
<RECEIVABLES> 875,468 0
<ALLOWANCES> 0 0
<INVENTORY> 1,394,452 0
<CURRENT-ASSETS> 36,622,155 0
<PP&E> 6,782,036 0
<DEPRECIATION> 3,987,655 0
<TOTAL-ASSETS> 39,801,213 0
<CURRENT-LIABILITIES> 5,501,494 0
<BONDS> 0 0
0 0
0 0
<COMMON> 132,475 0
<OTHER-SE> 32,777,182 0
<TOTAL-LIABILITY-AND-EQUITY> 39,801,213 0
<SALES> 0 0
<TOTAL-REVENUES> 1,940,827 8,904,229
<CGS> 0 0
<TOTAL-COSTS> 729,990 0
<OTHER-EXPENSES> 4,892,668 4,022,854
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 54,115 19,489
<INCOME-PRETAX> (3,228,972) 5,097,945
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3,228,972) 5,097,945
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,228,972) 5,097,945
<EPS-PRIMARY> (.24) .51
<EPS-DILUTED> (.24) .51
</TABLE>
