<PAGE>
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 Quarterly Period Ended September 30, 1999
____ 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: 0-23247
FOCAL, INC.
(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 02421
-----------------------------------
(Address of principal executive offices
including zip code)
(781) 280-7800
-----------------------------
(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 October 31, 1999, the Registrant had 13,445,421 shares of Common Stock
outstanding.
<PAGE>
FOCAL, INC.
Form 10-Q for the Quarter Ended September 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C>
INDEX 2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Condensed Balance Sheets at December 31, 1998
and September 30, 1999 3
Condensed Statements of Operations for the Three
Months and Nine Months Ended September 30, 1998 and 1999 4
Condensed Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1999 5
Notes to Condensed Financial Statements 6
ITEM 2 - Management's Discussion & Analysis of Financial 8
Condition and Results of Operations
ITEM 3 - Qualitative and Quantitative Disclosures About 16
Market Risk
PART II - OTHER INFORMATION
ITEMS 1 - 6 17
SIGNATURES 18
EXHIBIT INDEX 19
</TABLE>
2
<PAGE>
FOCAL, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
----------------- -------------------
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $8,516,936 $9,739,031
Marketable securities 16,829,291 2,001,947
Inventories 937,017 1,481,582
Accounts receivable and prepaid expenses 1,199,377 480,801
----------------- -------------------
Total current assets 27,482,621 13,703,361
Notes receivable from related parties 282,442 290,772
Property, plant & equipment, net 2,682,398 2,919,816
Other assets 13,368 13,787
----------------- -------------------
Total assets $30,460,829 $16,927,736
================= ===================
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $3,857,944 $3,366,703
Deferred revenue 550,000 -
Current portion of capital lease obligations 886,517 927,021
----------------- -------------------
Total current liabilities 5,294,461 4,293,724
Capital lease obligations 1,390,821 1,295,058
Stockholders' equity:
Common stock 133,678 134,419
Additional paid-in capital 84,884,786 85,210,553
Notes receivable from related parties (1,443,133) (965,303)
Deferred compensation (464,206) (262,899)
Accumulated other comprehensive income (8,218) (1,394)
Accumulated deficit (59,327,360) (72,776,422)
----------------- -------------------
Total stockholders' equity 23,775,547 11,338,954
----------------- -------------------
Total liabilities and stockholders' equity $30,460,829 $16,927,736
================= ===================
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
FOCAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
------------------------------------------- ---------------------------------------
1998 1999 1998 1999
<S> <C> <C> <C> <C>
Revenues:
Collaborative R&D revenues $1,521,226 $18,236 $3,560,019 $720,635
Product revenues 866,150 12,986 2,337,787 1,410,085
--------------------- -------------------- -------------- ------------------
Total revenues 2,387,376 31,222 5,897,806 2,130,720
Costs and Expenses:
Cost of product revenues 1,196,145 201,311 2,748,508 2,072,691
Research & development 3,867,498 3,410,460 11,901,285 11,221,694
General & administrative 968,295 925,083 2,874,078 2,870,390
--------------------- -------------------- -------------- ------------------
Total costs and expenses 6,031,938 4,536,854 17,523,871 16,164,775
Interest income (net) 370,652 138,859 1,217,198 584,994
--------------------- -------------------- -------------- ------------------
NET LOSS ($3,273,910) ($4,366,773) ($10,408,867) ($13,449,061)
===================== ==================== ============== ==================
Basic and diluted net income (loss)
per share ($0.25) ($0.32) ($0.78) ($1.00)
===================== ==================== ============== ==================
Shares used in computing net income (loss)
per share 13,333,059 13,441,931 13,267,971 13,413,666
===================== ==================== ============== ==================
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
FOCAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------
1998 1999
------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ($10,408,867) ($13,449,061)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization 844,715 827,029
Amortization of deferred
compensation 228,494 237,557
Interest accrued on notes receivable (84,415) (49,424)
Loss on disposal of equipment, furniture and fixtures 828
Increase (decrease) in cash arising
from changes of operating assets
and liabilities:
Inventories (575,484) (544,565)
Accounts receivable and prepaid expenses 1,320,843 718,576
Accounts payable and accrued liabilities (88,957) (491,241)
Deferred revenue 750,000 (550,000)
Other assets (509) (419)
Notes receivable 164,318 41,094
------------------------------------------------
Net cash used in operating activities (7,849,862) (13,259,626)
INVESTING ACTIVITIES
Purchase of marketable securities (24,277,676) (3,087,226)
Sale of marketable securities 11,792,755 17,921,393
Purchase of property and equipment (872,778) (1,065,275)
------------------------------------------------
Net cash provided by (used in) investing activities (13,357,699) 13,768,892
FINANCING ACTIVITIES
Proceeds from equity financings,
net of issuance costs 3,549,500 -
Proceeds from exercise of
stock options 84,994 175,274
Proceeds from issuance of common stock
under the employee stock purchase plan 285,124 125,868
Principal payments on notes receivable 104,317 466,946
Proceeds from lease financing 739,446 753,772
Principal payments on capital lease
obligations (821,192) (809,031)
------------------------------------------------
Net cash provided by financing
activities 3,942,189 712,829
Net decrease in cash and cash
equivalents (17,265,372) 1,222,095
Cash and cash equivalents at
beginning of the period 26,810,777 8,516,936
------------------------------------------------
Cash and cash equivalents at
end of the period $9,545,405 $9,739,031
================================================
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
FOCAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(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 to seal air and
fluid leaks resulting from lung, neurological, cardiovascular and
gastrointestinal 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 and nine months ended September
30, 1999 are not necessarily indicative of the results that may be expected for
the entire fiscal year ended December 31, 1999.
These financial statements should be reviewed in conjunction with the audited
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1998.
NOTE 2. NET LOSS PER SHARE
Basic and diluted net loss per share is computed using the weighted average
number of shares of common stock outstanding during the period. The effect of
stock options and warrants are excluded in the diluted calculation, as their
effect is antidilutive.
NOTE 3. 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 and nine month periods ended
September 30, 1998 and 1999 were attributable to sales of surgical sealant
products to Ethicon Inc., a Johnson & Johnson company.
6
<PAGE>
NOTE 4. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. At December 31, 1998 and September 30, 1999, inventories consisted of
the following:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
---------------------------------------
<S> <C> <C>
Raw materials $219,298 $ 190,704
Work in process 672,928 1,132,807
Finished goods 44,791 158,071
---------------------------------------
$937,017 $ 1,481,582
---------------------------------------
---------------------------------------
</TABLE>
NOTE 5. COMPREHENSIVE LOSS
The components of comprehensive loss for the three month and nine month periods
ended September 30, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
Three months ended September 30,
1998 1999
--------------------------------
<S> <C> <C>
Net loss $(3,273,910) $(4,366,773)
Other comprehensive income:
Change in unrealized loss
on marketable securities $23,976 $ 9,881
------------------------------
Comprehensive loss $(3,249,934) $(4,356,892)
------------------------------
------------------------------
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30,
1998 1999
-------------------------------
<S> <C> <C>
Net loss $(10,408,867) $(13,449,061)
Other comprehensive income:
Change in unrealized loss
on marketable securities $ 20,569 $ 6,824
------------------------------
Comprehensive loss $(10,388,298) $(13,442,237)
------------------------------
------------------------------
</TABLE>
NOTE 6. SUBSEQUENT EVENT
In October 1999, Focal entered into a marketing and distribution agreement
with the Genzyme Surgical Products division of Genzyme Corporation
("Genzyme"). Under the terms of this agreement, Genzyme will serve as Focal's
exclusive distributor of surgical sealant products for pulmonary,
cardiovascular and gastrointestinal surgery in North America following FDA
approval. Focal will receive a price per unit equal to Focal's manufacturing
costs plus a percentage of the gross profits generated by sales of these
products.
7
<PAGE>
In addition, Focal and Genzyme entered into a stock purchase agreement
whereby Genzyme has committed to purchase up to $20 million of Focal's common
stock over an eighteen month period, upon satisfaction of certain conditions
in each of four $5 million investments. The initial $5 million investment was
made on November 8, 1999 and 810,372 shares of common stock were purchased by
Genzyme at $6.17 per share, representing a 25% premium to the average closing
price over the preceding 10 trading days. At Focal's option, up to three
additional $5 million investments will be made by Genzyme. The first of these
investments will be priced at a 25% premium to the then current share price,
or at the market price if the price is at or above $8 per share. The
remaining two investments of $5 million each will be priced at market value
and are subject to the receipt of regulatory approval of
FocalSeal-Registration Mark- L surgical sealant in the United States.
ITEM 2.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS:
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. For this purpose, any statements contained herein that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "believes," "anticipates," "plans,"
"expects," "intends," and similar expressions are intended to identify
forward-looking statements. There are a number of important factors that could
cause the Company's actual results to differ materially from those indicated in
such forward-looking statements, including those factors set forth under the
captions "Business -Patents and Proprietary Rights," "-Government Regulation,"
"-Sales and Marketing," "-Manufacturing," "-Competition and Technological
Change," "-Third Party Reimbursement" and "Factors Affecting Operating Results"
in the Company's Annual Report on Form 10-K for the year ended December 31,
1998, which captioned discussion is expressly incorporated herein by reference.
OVERVIEW
The Company was founded in 1991, and is focused on the development, manufacture
and commercialization of synthetic, absorbable, liquid surgical sealants, tissue
coatings and local drug delivery products, 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, 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 $27.4 million through September 30, 1999, in
conjunction with these alliances. In October 1999, the company entered into a
marketing and distribution agreement
8
<PAGE>
with Genzyme and received a commitment from Genzyme for the purchase of up to
$20 million in each of four $5 million investments shares of Focal's common
stock over the next eighteen months, subject to certain conditions in each of
four $5 million investments. The first investment of $5.0 million dollars was
made in November 1999.
The Company has incurred net losses in each year since its inception,
including a net loss of approximately $4.4 million for the three months ended
September 30, 1999, and a net loss of approximately $13.5 million for the
nine months ended September 30, 1999. At September 30, 1999, the Company had
an accumulated deficit of $72.8 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 2001 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 the remaining commitments of up to
$15 million dollars in equity financing from Genzyme, each of which is
subject to the satisfaction of certain conditions. If the Company does not
continue to receive funding from Genzyme, or is unable to otherwise obtain
third party funding, net losses could 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. In addition, if the Company achieves profitability, there
can be no assurance that such profitability would be sustained.
The Company introduced its first commercial product, FocalSeal-L surgical
sealant for lung surgery indications, in Europe in March 1998 through its
strategic marketing and distribution alliance with Ethicon Inc., a Johnson &
Johnson company ("Ethicon"). Since the introduction of this product, the
Company has recorded approximately $4.5 million in product revenues based on
its sales to Ethicon. In July 1999, the Company announced that it had
received notification from Ethicon that Ethicon's product inventory levels
will be sufficient to support its anticipated sales for the second half of
1999. As a result of the excess inventory, sales to Ethicon of FocalSeal
surgical sealant were minimal in the three months ended September 30, 1999
and are expected to remain so for at least the remainder of 1999. In October
1999, Focal entered into a marketing and distribution agreement with the
Genzyme Surgical Products Division of Genzyme Corporation. Under the terms of
this agreement, Genzyme will market the Company's surgical sealant products
for pulmonary, cardiovascular, and gastrointestinal surgery throughout North
America.
9
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Revenues for the three months ended September 30, 1999, (the "1999 Quarterly
Period") decreased to $31,000 from $2.4 million for the three months ended
September 30, 1998 (the "1998 Quarterly Period"). Included in the 1999 Quarterly
period were product revenues of $13,000 and collaborative revenues of $18,000
compared with $866,000 of product revenues and $1,521,000 of collaborative
revenues during the 1998 Quarterly Period. The decrease in product revenue was
the result of Ethicon notifying the company that it had sufficient inventory to
support its anticipated sales for the second half of 1999. The decrease in
collaborative revenue in the 1999 Quarterly Period was primarily due to the fact
that the quarterly funding under the alliance with Ethicon relating to the
pulmonary and neurological sealants ceased after the fourth quarter of 1998, per
the original contractual terms of the agreement with Ethicon. Collaborative
revenue in the 1999 Quarterly period included funding for the pass through of
certain marketing and training costs to Ethicon.
Cost of product revenues for the 1999 Quarterly period of $201,000 were recorded
relating to the commercial sales of the Company's FocalSeal-L surgical sealant
product versus cost of product revenues of $1,196,000 for the 1998 Quarterly
Period. Gross margins remained negative due to the startup phase of the
Company's manufacturing operations and the resulting lack of economies of scale.
Additionally, costs related to fixed overhead, and inefficiencies surrounding
sterile fill and finish processes further burdened cost of product revenues for
the 1999 Quarterly Period.
Research and development expenses decreased to $3,410,000 for the 1999 Quarterly
Period, from $3,867,000 for the 1998 Quarterly Period. This decrease was
primarily due to reduced staffing levels and lower clinical trial costs in the
1999 Quarterly Period, compared with the same period in 1998. During the 1998
Quarterly Period, the Company was engaged in a European clinical trial of
FocalSeal S surgical sealant for neuro surgery indications. There were no
ongoing clinical trials during the 1999 Quarterly Period.
General and administrative expenses remained relatively flat at $925,000 for the
1999 Quarterly Period, compared with $968,000 for the same period in 1998.
Interest income, net of interest expense, decreased to $139,000 for the 1999
Quarterly Period, from $371,000 for the 1998 Quarterly Period, as a result of
lower average cash balances available for investment.
The Company recorded a net loss of $(4,367,000) for the 1999 Quarterly Period.
During the 1998 Quarterly Period, the Company recorded a net loss of
$(3,274,000). The increase in net loss is primarily attributed to decreasing
collaborative revenues, and decreased interest income in the 1999 Quarterly
Period, when compared to the 1998 Quarterly Period. The Company expects that it
will incur net operating losses through at least 2001.
10
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
For the nine month period ended September 30, 1999 (the "1999 Nine Month
Period") revenues decreased to $2,131,000 from $5.9 million for the nine
month period ended September 30, 1998 (the "1998 Nine Month Period"). The
decline in revenues was primarily due to the fact that the quarterly funding
under the alliance with Ethicon relating to the pulmonary and neurological
sealants ceased after the fourth quarter of 1998, per the original
contractual terms of the agreement with Ethicon. Collaborative revenue in the
1999 Nine Month Period included funding for the development of a
cardiovascular sealant and the pass through of certain marketing and training
costs to Ethicon, a small amount of funding for an NIH grant, and funding
from Genentech for a drug compatibility and release study. Product revenues
in the 1999 Nine Month Period declined to $1,410,000 from $2,338,000 in the
1998 Nine Month Period due to the announcement by the Company in the second
quarter that it had received notification from Ethicon that Ethicon's product
inventory levels would be sufficient to support its anticipated sales for the
second half of 1999.
Cost of product revenues for the 1999 Nine Month Period of $2,073,000 were
recorded relating to the commercial sales of the Company's FocalSeal-L surgical
sealant product versus cost of product revenues of $2,749,000 for the 1998 Nine
Month Period. Gross margins remained negative in the 1999 Nine Month Period due
to the startup phase of the Company's manufacturing operations and the resulting
lack of economies of scale. Additionally, costs related to fixed overhead and
inefficiencies surrounding sterile fill and finish processes further burdened
cost of product revenues for the 1999 Nine Month Period.
Research and development expenses for the 1999 Nine Month Period decreased to
$11,222,000 from $11,901,000 for the 1998 Nine Month Period. This decrease
resulted from lower staffing levels and lower clinical trial costs in the 1999
Nine Month Period, compared with the 1998 Nine Month Period. During the 1998
Nine Month Period, the Company was engaged in a pivotal U.S. 180 patient
clinical trial of FocalSeal L surgical sealant for lung surgery indications and
a European trial of FocalSeal S for neuro surgery indications. The clinical
trial for FocalSeal L was completed in the third quarter of 1998. There were no
ongoing clinical trials during the first nine months of 1999.
General and administrative expenses for the 1999 Nine Month Period were
$2,870,000 compared with $2,874,000 for the 1998 Nine Month Period.
Interest income, net of interest expense, decreased to $585,000 for the 1999
Nine Month Period, from $1,217,000 for the 1998 Nine Month Period, as a result
of lower average cash balances available for investment.
The Company recorded a net loss of $(13,449,000) for the 1999 Nine Month Period.
During the 1998 Nine Month Period, the Company recorded a net loss of
$(10,409,000). The increase in net loss is primarily attributed to decreasing
11
<PAGE>
collaborative revenues and decreased interest income in the 1999 Nine Month
Period offset by lower staffing levels when compared to the 1998 Nine Month
Period. The Company expects that it will incur net operating losses through
at least 2001.
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 September 30, 1999, the Company has raised
approximately $83.5 million from equity financings, net of offering costs and
has received $7.7 million in equipment lease financing. In addition, the Company
has received funding from Ethicon and other corporate partners totaling
approximately $27.4 million through September 30, 1999. At September 30, 1999,
the Company had cash, cash equivalents and marketable securities of $11.7
million. In October 1999, Focal entered into a stock purchase agreement for up
to $20 million in equity financing from Genzyme.
Under the terms of the stock purchase agreement entered into with Genzyme, a
commitment was received from Genzyme for up to four investments of $5 million
each, subject to certain conditions. The initial $5 million investment was made
on November 8, 1999 and 810,372 shares of common stock were purchased by Genzyme
at $6.17 per share, representing a 25% premium to the average closing price over
the preceding 10 trading days. At Focal's option, up to three additional $5
million investments will be made by Genzyme. The first of these investments will
be priced at a 25% premium to the then current share price, or at the market
price if the price is at or above $8 per share. The remaining two investments of
$5 million each will be priced at market value and are subject to the receipt of
regulatory approval of FocalSeal L surgical sealant in the United States and
certain other conditions
Cash used in operations totaled $13.3 million for the Nine Months ended
September 30, 1999 compared with cash used in operations of $7.8 million for the
same period in 1998. The change in cash used in operations was due to the
increased net losses generated in the nine months ended September 30, 1999. Cash
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 September 30, 1999 totaled $8.2
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 nine months ended September 30, 1999
totaled $1,065,000. As of September 30, 1999, the Company did not have any
material commitments for future capital expenditures. The Company has
commitments from lenders in the form of lease lines totaling $1.5 million to
provide for its expected capital needs during 1999,
12
<PAGE>
and expects to secure additional lease lines to provide for its needs in 2000
and beyond.
The Company believes that its existing capital resources, the remaining
committed equity financings of $15 million from Genzyme, if received,
interest income and future payments due under strategic alliances, will be
sufficient to satisfy its current and projected funding requirements for at
least eighteen months. The remaining commitments from Genzyme are contingent
upon the satisfaction of certain conditions, including in the case of the
last two commitments, the receipt of regulatory approval for FocalSeal-L
surgical sealant in the United States. Under the Company's surgical sealant
collaboration with Ethicon, Focal may receive additional funding 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. A milestone
payment of $1.0 million is currently due to Focal based upon the receipt in
November 1999 of CE mark approval of FocalSeal-S surgical sealant for
neurological indications. A future milestone payment will be due upon CE mark
submission of FocalSeal surgical sealant for cardiovascular indications.
There are currently no commitments for additional research and development
funding from Ethicon. Under certain agreements 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 $33,000 at September 30, 1999.
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 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 expects to
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
13
<PAGE>
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.
Year 2000 Readiness Disclosure
The Company is preparing for the impact of the arrival of the Year 2000 on its
business, as well as on the businesses of its customers, suppliers and business
partners. The "Year 2000 Issue" is a term used to describe the problems created
by systems that are unable to accurately interpret dates after December 31,
1999. These problems are derived predominantly from the fact that many software
programs have historically categorized the year in a two-digit format. The Year
2000 Issue creates potential risks for the Company, including the Information
Technology ("IT") and non-IT systems that the Company uses in its business
operations. The Company may also be exposed to risks from third parties with
which the Company interacts who fail to adequately address their own Year 2000
Issues.
The Company's plan for IT systems consists of four phases: (1)
inventory-identifying all IT systems; (2) assessment - identifying IT systems
that use date functions and assessing them for Year 2000 functionality; (3)
remediation -reprogramming, or replacing where necessary, inventoried items to
ensure they are Year 2000 ready; and (4) testing and certification - testing the
code modifications and new inventory with other associated systems, including
extensive date testing and performing quality assurance testing to ensure
successful operation in the post-1999 environment. The Company has assessed its
products and non-IT systems and has determined that there are no material
exposures in these areas.
The Company completed the inventory and assessment phases for substantially all
of its IT systems by year-end 1998. The Company's IT systems are currently in
the remediation, testing and certification phases. The Company expects to
complete the remediation, testing and certification of all of its IT systems on
or before November 30, 1999. Activities to be completed are limited to the
installation of various equipment in the company's analytical chemistry area.
The Company also faces the risk that one or more of its material suppliers or
customers ("external relationships") will not be able to interact with the
Company due to the third party's inability to resolve its own Year 2000 issues,
including those associated with such third party's own external relationships.
The Company has initiated a formal process designed to determine the overall
Year 2000 readiness of its external relationships and has received responses
from the majority of these parties by September 30, 1999. In the case of
important suppliers and customers, the Company is engaged in discussions with
such parties and is attempting to obtain detailed information as to such
parties' Year 2000 plans and state of readiness. The Company, however, does
not have sufficient information at the current time to predict whether its
external relationships will be Year 2000 ready.
14
<PAGE>
Focal's reliance on its key suppliers, and therefore on the proper functioning
of their information systems and software, is increasing, and there can be no
assurance that a vendor's failure to address year 2000 issues would not have an
adverse effect on Focal.
Total Year 2000 project costs are currently estimated to be $300,000 to $400,000
in 1999. A large majority of these costs are expected to be incremental expenses
that will not recur in the Year 2000 or thereafter. The Company's current
estimates primarily reflect increased remediation and testing efforts, increased
use of outside resources, and certain software and hardware expenditures related
to remediation. Focal is currently implementing a fully integrated enterprise
resource planning system ("ERP system") and expects to complete the installation
of the system during early 2000. A key requirement of this ERP system is year
2000 compliance. Also, affecting the cost estimates are expenses related to
upgrading much of the Company's Analytical Chemistry equipment to full year 2000
compliance. During 1998, the Company upgraded many of the personal computers
used by employees, and the Company now believes that the majority of the
computers currently in use are year 2000 ready. The costs incurred in 1998
related to these upgrades and other year 2000 activities were approximately
$200,000.
The Company believes that its reasonably likely worst case Year 2000 scenario
would be that a material single-source supplier would, as a result of its own
Year 2000 difficulties, fail to deliver to us a key component of our products.
Any such failure could result in delays in our ability to produce and distribute
our products to customers, which could have material adverse effect on our
business, financial condition and results of operations. To date, the Company
has not formulated contingency plans relating to its or a third party's Year
2000 remediation efforts. However, as discussed above, the Company is engaged in
ongoing Year 2000 assessment, remediation and testing activities. These results
and the responses received from external relationships will be taken into
account in determining the nature and extent of any contingency plans if
necessary.
Any material unresolved Year 2000 issues at the Company or its external
relationships could have a material adverse effect on the Company's results of
operations, liquidity or financial condition. In addition, the Company's
expectations about the future costs and timely and successful completion of its
Year 2000 program are subject to uncertainties that could cause actual results
to differ materially from what has been discussed above under "Year 2000".
Factors that could influence the amount of future costs and the completion dates
and effectiveness of remediation, testing and certification and contingency
planning efforts include the Company's success in identifying IT systems and
embedded systems that contain two-digit year codes, the nature and amount of
required reprogramming, testing and certification, the rate and magnitude of
related labor and consulting costs, the availability of qualified personnel and
the success of the Company's external relationships in addressing their own Year
2000 issues.
15
<PAGE>
ITEM 3.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company maintains an investment portfolio in accordance with its Investment
Policy. The primary objectives of the Company's Investment Policy are to
preserve principal, maintain proper liquidity to meet operating needs and
maximize yields. The Company's Investment Policy specifies credit quality
standards for the Company's investments and limits the amount of credit exposure
to any single issue, issuer or type of investment.
The Company's investments consist of securities of various types and maturities.
The Company accounts for its investments in accordance with Statement of
Accounting Standards No. 115, "Accounting for certain investments in Debt and
Equity Securities" (SFAS 115). All of the Company's cash equivalents and
marketable securities are treated as available-for-sale under SFAS 115.
The securities held in the company's investment portfolio are subject to
interest rate risk. Changes in interest rates affect the fair market value of
the available-for-sale securities. After a review of the Company's marketable
securities as of September 30, 1999, the Company has determined that in the
event of a hypothetical ten percent increase in interest rates, the resulting
decrease in fair market value of the Company's marketable investment securities
would be insignificant to the financial statements as a whole.
16
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. None
Item 2. Changes in Securities and use of Proceeds.
There have been no material changes in the use of proceeds from the sale of
securities under the Company's Registration Statement on Form S-1 (333-38379),
which was declared effective on December 11, 1997, from that set forth in the
Company's report on Form 10-K for the year ended December 31, 1998.
Item 3. Defaults upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders. None.
Item 5. Other Matters. None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The exhibits listed in the Exhibit Index are included this report.
(b) Reports on Form 8-K
None.
17
<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.
Date: November 15, 1999 FOCAL, INC.
By: /s/ W. Bradford Smith
---------------------------
W. Bradford Smith
Vice President and Chief
Financial Officer
18
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as part of this Quarterly Report on form 10-Q:
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27 Financial Data Schedule
99.1 Pages 12 through 25 of the Company's Annual Report on Form
10-K for the year ended December 31, 1998, as filed with the
Securities and Exchange Commission (which pages are deemed
filed hereunder except to the extent that portions are not
expressly incorporated by reference herein)
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JAN-01-1999 JUL-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 9,739,031 9,739,031
<SECURITIES> 2,001,947 2,001,947
<RECEIVABLES> 480,801 480,801
<ALLOWANCES> 0 0
<INVENTORY> 1,481,582 1,481,582
<CURRENT-ASSETS> 13,703,361 13,703,361
<PP&E> 8,163,273 8,163,273
<DEPRECIATION> 5,243,458 5,243,458
<TOTAL-ASSETS> 16,927,736 16,927,736
<CURRENT-LIABILITIES> 4,293,724 4,293,724
<BONDS> 0 0
0 0
0 0
<COMMON> 134,419 134,419
<OTHER-SE> 11,204,535 11,204,535
<TOTAL-LIABILITY-AND-EQUITY> 16,927,736 16,927,736
<SALES> 0 0
<TOTAL-REVENUES> 2,130,720 31,222
<CGS> 0 0
<TOTAL-COSTS> 2,072,691 201,311
<OTHER-EXPENSES> 14,092,084 4,335,543
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (150,246) (50,547)
<INCOME-PRETAX> (13,449,061) (4,336,773)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (13,449,061) (4,366,773)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (13,449,061) (4,366,773)
<EPS-BASIC> (1.00) (0.32)
<EPS-DILUTED> (1.00) (0.32)
</TABLE>
<PAGE>
PATENTS AND PROPRIETARY RIGHTS
The Company believes that patents and other proprietary rights are important
to its business. The Company's policy is to file patent applications to protect
technology, inventions and improvements to its inventions that are considered
important to its business and that provide a competitive advantage. Focal also
relies on trade secrets, general know-how, in-licensing opportunities and
continuing technological innovation.
The Company has received, licensed or believes it has the option or right to
license 36 issued United States patents and 18 foreign patents corresponding to
certain of the issued United States patents, has eight additional United States
patent applications that have been allowed and has 26 patent applications
pending in the United States, as well as foreign counterparts of certain of
these applications. The issued United States patents have expiration dates
ranging from 2010 to 2016. These patents and patent applications cover certain
aspects of the Company's photopolymerizable polymer formulations, surgical
sealant compositions and methods, and designs for delivery devices.
The Company has licensed from the University of Texas and Endoluminal
Therapeutics, Inc. (a company controlled by one of the Company's founding
scientists) worldwide rights to certain technologies which are the subject of
issued patents and pending patent applications based upon technologies developed
by two of the Company's founders. These licenses are terminable in the event of
failure by the Company to pay scheduled royalties, failure to commercialize
products in the fields covered by these licenses and under certain other
conditions.
Because of the substantial length of time and expense associated with
bringing new products through the development and regulatory approval processes
in order to reach the marketplace, the medical products industry places
considerable importance on obtaining patent and trade secret protection for new
technologies, products and processes. Accordingly, the Company intends to seek
patent protection for its proprietary technology, products and processes.
The Company's success will depend in part on its ability to obtain patent
protection for its products, preserve its trade secrets, prevent third parties
from infringing upon its proprietary rights, and operate without infringing upon
the proprietary rights of others, both in the United States and internationally.
There can be no assurance that the Company's pending or future patent
applications will issue, or that the claims of the Company's issued patents, or
any patents that may issue in the future will provide any competitive advantages
for the Company's products or that they will not be successfully challenged,
narrowed, invalidated or circumvented in the future. Moreover, litigation and
interference or opposition proceedings associated with enforcing or defending
patents or trade secrets is expensive and can divert the efforts of technical
and management personnel.
The Company has filed patent applications in certain foreign countries
corresponding to certain patent applications that it filed in the United States
and may file additional patent applications inside and outside the United
States. The Company believes that the protection afforded by foreign patents or
any other foreign intellectual property protection, if obtained, may be more
limited than that provided domestically. In addition, there can be no assurance
that competitors will not seek to apply for and obtain patents that will
prevent, limit or interfere with the Company's ability to make, use, import and
sell its products.
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<PAGE>
The Company is aware that certain medical device, pharmaceutical and other
companies, universities and research institutions have filed patent applications
or have issued patents relating to the compositions and methods for wound
closure and adhesion prevention. In addition, the medical device and
pharmaceutical industry has been characterized by extensive litigation regarding
patents and other intellectual property rights, and many companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that litigation will not be
brought against the Company by third parties in the future challenging the
Company's patent rights or claiming infringement by the Company of patents held
by the third parties. Because patent applications in the United States are
confidential until the patents issue, and publication of discoveries in the
scientific and patent literature tends to lag behind actual discoveries by
several months, the Company cannot be certain that Company inventors or
licensors were the first to conceive of inventions covered by pending patent
applications or that Company was the first to file patent applications for such
inventions.
The Company may be required or find it desirable to obtain licenses to
patents or proprietary rights of others. No assurance can be given that any
licenses required under any patents or proprietary rights of third parties would
be made available on terms acceptable to the Company, or at all. If the Company
does not obtain such licenses, it could encounter delays in product
introductions while it attempts to design around such patents, or could find
that the development, manufacture or sale of products requiring such licenses is
foreclosed. Litigation may be necessary to defend against or assert claims of
patent infringement or invalidity, to enforce or defend patents issued to the
Company, to protect trade secrets or know-how owned by the Company, or to
determine the scope and validity of the proprietary rights of others. In
addition, interference proceedings declared by the United States Patent and
Trademark Office, or opposition proceedings in a foreign patent office, may be
necessary to determine the priority of inventions with respect to patent
applications of the Company or its licensors. Litigation, interference or
opposition proceedings could result in substantial costs to and diversion of
effort by the Company, and adverse determinations in any such proceedings could
have a material adverse effect on the business, financial condition or results
of operations of the Company.
The Company also relies upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with its commercial partners, collaborators,
employees and consultants. The Company also has invention or patent assignment
agreements with its employees and certain, but not all, commercial partners and
consultants. There can be no assurance that relevant inventions will not be
developed by a person not bound by an invention assignment agreement. There can
be no assurance that binding agreements will not be breached, that the Company
would have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known or be independently discovered by competitors.
GOVERNMENT REGULATION
UNITED STATES
The Company's proposed products and its research and development activities
are subject to regulation by numerous governmental authorities, principally, the
FDA and corresponding state and foreign regulatory agencies. The Federal Food,
Drug, and Cosmetic Act (the "FDC Act"), as amended, the regulations promulgated
thereunder, and other federal and state statutes and regulations, govern, among
other things, the preclinical and clinical testing, manufacture, safety,
efficacy, labeling, storage, record keeping, advertising and promotion of
medical devices and drugs, including the products currently under development by
the Company. Product development and approval within this regulatory framework
take a number of years and involves the expenditure of substantial resources.
In the United States, medical devices are classified into three different
classes, class I, II and III, on the basis of controls deemed necessary to
reasonably ensure the safety and effectiveness of the device.
15
<PAGE>
Class I devices are subject to general controls (e.g., labeling and adherence to
FDA's good manufacturing practice requirements ("GMPs")) and class II devices
are subject to general and special controls (e.g., performance standards,
postmarket surveillance, patient registries, and FDA guidelines). Generally,
class III devices are those which must receive premarket approval by the FDA to
ensure their safety and effectiveness (e.g., life-sustaining, life-supporting
and implantable devices, or new devices which have been found not to be
substantially equivalent to legally marketed Class I or II devices).
Unless it is exempt, a new medical device can be marketed only with
marketing clearance obtained through a premarket notification under Section
510(k) of the FDC Act or a premarket approval ("PMA") application under Section
515 of the FDC Act. A 510(k) clearance will typically be granted by the FDA if
it can be established that the device is substantially equivalent to a
"predicate device," which is a legally marketed class I or II device or a
preamendment class III device (i.e. one that has been marketed since a date
prior to May 28, 1976) for which the FDA has not called for PMAs. The FDA has
been requiring an increasingly rigorous demonstration of substantial equivalence
and this may include a requirement to submit human clinical trial data. It
generally takes four to twelve months from the date of a 510(k) submission to
obtain clearance, but it may take longer.
The FDA may determine that a medical device is not substantially equivalent
to a predicate device, or that additional information is needed before a
substantial equivalence determination can be made. A "not substantially
equivalent" determination, or a request for additional information, could
prevent or delay the market introduction of new products that fall into this
category. For any devices that are cleared through the 510(k) process,
modifications or enhancements that could significantly affect the safety or
effectiveness, or that constitute a major change in the intended use of the
device, will require new 510(k) submissions.
A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed class I or class II device, or if it is a
preamendment class III device for which the FDA has called for PMAs. A PMA
application must be supported by valid scientific evidence to demonstrate the
safety and effectiveness of the device, typically including the results of
clinical trials, bench tests, and laboratory and animal studies. The PMA must
also contain a complete description of the device and its components, and a
detailed description of the methods, facilities and controls used to manufacture
the device. In addition, the submission must include the proposed labeling,
advertising literature, and any training materials. The PMA process can be
expensive, uncertain and lengthy, and a number of devices for which FDA approval
has been sought by other companies have never been approved for marketing.
Upon receipt of a PMA application, the FDA makes a threshold determination
as to whether the application is sufficiently complete to permit a substantive
review. If the FDA determines that the PMA application is sufficiently complete
to permit a substantive review, the FDA will accept the application for filing.
Once the submission is accepted for filing, the FDA begins an in-depth review of
the PMA. The FDA review of a PMA application generally takes one to three years
from the date the PMA is accepted for filing, but may take significantly longer.
The review time is often significantly extended by the FDA asking for more
information or clarification of information already provided in the submission.
During the review period, an advisory committee, typically a panel of
clinicians, may be convened to review and evaluate the application and provide a
recommendation to the FDA as to whether the device should be approved. The FDA
accords substantial weight to the recommendation but is not bound by it. Toward
the end of the PMA review process, the FDA generally will conduct an inspection
of the manufacturer's facilities to ensure compliance with applicable GMP
requirements, which include elaborate testing, control documentation and other
quality assurance procedures. The Company has not yet undergone an FDA GMP
inspection but anticipates that it will undergo such an inspection in connection
with the modular PMA application that it is currently in the process of
submitting for FOCALSEAL-L surgical sealant for lung surgery.
16
<PAGE>
If FDA's evaluations of both the PMA application and the manufacturing
facilities are favorable, the FDA may issue either an approval letter or an
approvable letter, which usually contains a number of conditions that must be
met in order to secure final approval of the PMA. When and if those conditions
have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA
approval letter, authorizing marketing of the device for certain indications. If
the FDA's evaluation of the PMA application or manufacturing facilities is not
favorable, the FDA will deny approval of the PMA application or issue a
"non-approvable" letter. The FDA may determine that additional clinical trials
are necessary, in which case the PMA may be delayed for one or more years while
additional clinical trials are conducted and submitted in an amendment to the
PMA. Modifications to a device that is the subject of an approved PMA, its
labeling or manufacturing process may require approval by the FDA of PMA
supplements or new PMAs. Supplements to a PMA often require the submission of
the same type of information required for an initial PMA, except that the
supplement is generally limited to that information needed to support the
proposed change from the product covered by the original PMA.
If human clinical trials of a device are required, either for a 510(k)
submission or a PMA application, and the device presents a "significant risk,"
the sponsor of the trial (usually the manufacturer or the distributor of the
device) must file an investigational device exemption ("IDE") application prior
to commencing human clinical trials. The IDE application must be supported by
data, typically including the results of animal and laboratory testing. If the
IDE application is approved by the FDA and one or more appropriate Institutional
Review Boards ("IRBs"), human clinical trials may begin at a specific number of
investigational sites with a specific number of patients, as approved by the
FDA. If the device presents a "nonsignificant risk" to the patient, a sponsor
may begin the clinical trial after obtaining approval for the study by one or
more appropriate IRBs without the need for FDA approval. Submission of an IDE
does not give assurance that FDA will approve the IDE and, if it is approved,
there can be no assurance that FDA will determine that the data derived from the
studies support the safety and efficacy of the device or warrant the
continuation of clinical studies. Sponsors of clinical trials are permitted to
sell investigational devices distributed in the course of the study provided
such compensation does not exceed recovery of the costs of manufacture,
research, development and handling. An IDE supplement must be submitted to and
approved by the FDA before a sponsor or investigator may make a change to the
investigational plan that may affect its scientific soundness or the rights,
safety or welfare of human subjects.
The Company's FOCALSEAL surgical sealant products will be regulated as a
class III medical device and will require a separate PMA approval for each
indication to be marketed in the United States. Although the Company is
submitting a modular PMA application for FOCALSEAL-L surgical sealant for lung
surgery in the United States, there can be no assurance that the Company will
receive FDA approval of this product. In addition, the Company will be required
to obtain IDEs for additional applications of FOCALSEAL surgical sealant and for
other products that the Company develops that are regulated by the FDA as
medical devices. There is no assurance that data, typically the results of
animal and laboratory testing, that may be provided by the Company in support of
future IDE applications will be deemed adequate for the purpose of obtaining IDE
approval, that the Company will obtain approval to conduct clinical studies of
any such future product, or that such clinical studies, if completed, will
generate data adequate to support PMA approval. There can be no assurance that
PMA approval can be obtained for any product in a timely fashion, or at all.
If clearance or approval is obtained, any device manufactured or distributed
by the Company will be subject to pervasive and continuing regulation by the
FDA. The Company will be subject to inspection by the FDA and will have to
comply with the host of regulatory requirements that usually apply to medical
devices marketed in the United States, including labeling regulations, GMP
requirements, the Medical Device Reporting ("MDR") regulation (which requires a
manufacturer to report to the FDA certain types of adverse events involving its
products), and the FDA's prohibitions against promoting products for unapproved
or "off-label" uses. The Company's failure to comply with applicable regulatory
requirements
17
<PAGE>
could result in enforcement action by the FDA, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Other products that may be developed by the Company, including products for
local drug delivery, may be regulated as drugs requiring FDA approval of a new
drug application ("NDA") prior to commercialization in the United States. The
NDA approval process is generally considered more onerous, costly and lengthy
than the PMA process, often requiring more extensive preclinical and clinical
testing, and many products for which NDAs have been submitted by other companies
have never been approved for marketing.
If the FDA believes that a company is not in compliance with law, it can
institute proceedings to detain or seize products, issue a recall, enjoin future
violations and assess civil and criminal penalties against the Company, its
officers and its employees. Failure to comply with the regulatory requirements
could have material adverse effect on the Company's business, financial
condition and results of operations. In addition, regulations regarding the
manufacture and sale of the Company's products are subject to change. The
Company cannot predict the effect, if any, that such changes might have on its
business, financial condition or results of operations.
INTERNATIONAL
In order for the Company and its strategic partners to market its products
in Europe and other foreign countries, the Company and/or its partners must
obtain required regulatory approvals and comply with extensive regulations
governing safety, quality and manufacturing processes. These regulations vary
significantly from country to country. The time required to obtain approval to
market the Company's products may be longer or shorter than that required in the
United States. In order to market FOCALSEAL surgical sealants and other products
being developed by the Company in the member countries of the European Union,
the Company will be required to obtain CE mark certification. CE mark
certification is an international symbol of adherence to quality assurance
standards and compliance with applicable European medical device directives. In
December 1997, the Company received a CE mark for its FOCALSEAL-L surgical
sealant for lung surgery and obtained ISO 9001 status. In September 1998, Focal
successfully completed the annual CE Mark and ISO 9001 audit. Although the CE
mark and ISO 9001 standards audit have been successfully completed, there can be
no assurance that the Company will be successful in maintaining its CE mark
certification and ISO 9001 status or that additional CE Mark approvals will be
received for other clinical indications.
18
<PAGE>
SALES AND MARKETING
Focal intends to market and sell its surgical sealants internationally
through Ethicon and to develop its own direct sales and marketing force or enter
into a marketing and distribution arrangement for these products in North
America. Ethicon is one of the leading manufacturers of sutures and staples
worldwide and has a significant sales and marketing presence in Europe, Latin
America and the Pacific Rim.
If and when the Company receives marketing approval in the United States,
the Company intends to build a direct sales force or enter into a marketing and
distribution arrangement for marketing its surgical sealant products in North
America. Focal anticipates that, if it markets and sells FOCALSEAL-L surgical
sealant for lung surgeries in the U.S., it will be required to hire up to
approximately 40 sales representatives to focus on the 250 key thoracic surgery
centers that account for 75-80% of the lung surgeries in the U.S.
The Company's sales and marketing strategy for other products may include
using a combination of the Company's own direct sales force, strategic marketing
partners and distributors. The sales and marketing plans for these products will
be dependent on the Company's success in entering into strategic marketing
relationships, its ability to leverage its own internal sales force to market
additional products beyond the surgical sealant products and its ability to hire
and retain additional specialized sales personnel. There can be no assurance
that the Company will be able to secure any additional strategic marketing
partners or international distributors on terms that are acceptable to the
Company, or at all, or that the Company will be successful in building a direct
sales force in the United States.
MANUFACTURING
The Company has only limited experience in manufacturing its FOCALSEAL
surgical sealants. The Company has recently added manufacturing capacity at its
Lexington, Massachusetts facility in order to meet anticipated supply
requirements for European sales of its FOCALSEAL-L surgical sealant and for the
anticipated launch of FOCALSEAL-L surgical sealant in the United States.
The Company performs certain steps in the FOCALSEAL surgical sealant
manufacturing process internally and relies on outside contractors for others.
Certain proprietary processes, including polymer synthesis, are performed by
Focal. The Company uses outside contractors for nonproprietary, high volume
processes including sterilization and fill and finish. The Company also
contracts with third parties for the manufacture of syringes, applicators, light
sources and light wands.
There can be no assurance that the Company will be able to attract, train
and retain the required personnel or will be able to increase its manufacturing
capability to manufacture commercial quantities of surgical sealants in a timely
manner, or at all. Manufacturers often encounter difficulties in scaling up
production of their products, including problems involving production yields,
quality control and assurance, component supply and shortages of qualified
personnel. The Company anticipates that it will need to increase significantly
its current manufacturing capacity to meet commercial needs over the next
several years and that it may need to establish off-site manufacturing capacity
to meet these anticipated needs. In addition, the Company expects that it will
need to identify and qualify additional sources for materials and outsourced
manufacturing processes. There can be no assurance that the Company's
manufacturing scale-up efforts will be successful or that reliable, high-volume
manufacturing can be established or maintained at commercially reasonable costs
on a timely basis, or at all. Furthermore, the Company may be required to
establish an off-site manufacturing facility and qualify such facility under
GMP, ISO 9001 and other applicable regulatory and quality standards.
The Company would experience supply interruptions in the event it is unable
to establish or maintain commercial levels of polymer synthesis, as the
Company's polymer formulations are proprietary and are not available from third
parties. In addition, there can be no assurance that the Company will not
encounter unanticipated problems and delays in connection with its contract
manufacturers and suppliers.
19
<PAGE>
For example, in August 1998, the Company undertook a voluntary recall relating
to the packaging of its FOCALSEAL-L surgical sealant product in Europe after the
Company discovered that a small percentage of the packages containing the primer
component of the sealant may have had compromised package seals. The Company
determined that one of its vendors supplied an incorrect packaging material.
Delays associated with or difficulties encountered in establishing commercial
manufacturing, the establishment of new manufacturing facilities, or problems
encountered with contract manufacturers and suppliers, would result in
disruptions of product supply to the Company's marketing partners and for use in
clinical trials. In such event Ethicon could, under its agreement with the
Company, commence manufacturing of surgical sealants for sales in all
territories outside North America. Any of the foregoing would have a material
adverse affect on the Company's business, financial condition and results of
operations.
The Company purchases raw materials used in its products from various
suppliers. Certain materials and components are currently purchased by the
Company from single sources. These materials have generally been readily
available in the marketplace and have not been the subject of shortages. There
can, however, be no assurance that the Company or its suppliers or contract
manufacturers will not experience material shortages in the future. Any such
future shortages of materials or components could have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company is also required to register as a medical device manufacturer
with the FDA and to list its products with the FDA. As such, the Company is
subject to inspections by the FDA for compliance with applicable GMP
requirements, which include elaborate testing, control documentation and other
quality assurance procedures. Further, the Company and the third party
manufacturers of its products are required to comply with various FDA
requirements for design, safety, advertising and labeling. The Company has not
yet undergone an FDA GMP inspection and anticipates that it will undergo such an
inspection in connection with the submission of its PMA for FOCALSEAL-L surgical
sealant for lung surgery.
Complex medical devices, such as the Company's products, can experience
performance problems in the field that require review and possible corrective
action by the manufacturer. There can be no assurance that component failures,
manufacturing errors or design defects that could result in an unsafe condition
or injury to the patient will not occur. If any such failures or defects were
deemed serious, the Company could be required to withdraw or recall products,
which could result in significant costs to the Company. There can be no
assurance that market withdrawals or product recalls will not occur in the
future. Any future product problems could result in market withdrawals or
recalls of products, which could have a material adverse affect on the Company's
business, financial condition or results of operations.
COMPETITION AND TECHNOLOGICAL CHANGE
The Company competes with many domestic and foreign medical device,
pharmaceutical and biopharmaceutical companies. In the surgical sealant area,
the Company will compete with existing methodologies for sealing air and fluid
leaks resulting from surgery, including some traditional wound closure products
such as sutures and staples, marketed by companies such as Johnson & Johnson,
and United States Surgical Corporation (Tyco). Other products currently being
marketed include fibrin glue, sold in Europe and the Pacific Rim countries by
Immuno AG, Cention and Fujisawa and in the U.S. by Baxter Healthcare Corporation
and others. Additional products are under development at Bristol-Myers Squibb
Company and Vitex. Other potential competitors in the surgical sealant market
include Closure Medical Corporation, B. Braun GmBH, Cryolife and Cohesion and
others. Competitive products may also be under development by other large
medical device, pharmaceutical and biopharmaceutical companies. The other areas
in which Focal is developing products, such as synthetic coatings for vascular
grafts, local drug delivery and neurological adhesion prevention, are intensely
competitive markets and the Company will encounter competition from major
medical device, pharmaceutical and biopharmaceutical companies in such markets.
Many of the Company's current and potential competitors have substantially
greater financial, technological, research and development, regulatory and
clinical, marketing and sales, and personnel resources than the Company.
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Certain of these competitors may also have greater experience in developing
products, conducting clinical trials, obtaining regulatory approvals, and
manufacturing and marketing such products. Certain of these competitors may
obtain patent protection, approval or clearance by the FDA or foreign countries
or product commercialization earlier than the Company, any of which could
materially adversely affect the Company. Furthermore, if the Company attains
significant commercial sales of its products, it will also be competing with
respect to manufacturing efficiency and marketing capabilities, areas in which
it currently has limited experience. Finally, there can be no assurance that the
Company's marketing partners will not pursue parallel development of other
technologies or products, which may result in a marketing partner developing
additional products that would compete with the Company's products.
Other recently developed technologies or procedures are, or may in the
future be, the basis of competitive products. There can be no assurance that the
Company's current competitors or other parties will not succeed in developing
alternative technologies and products that are more effective, easier to use or
more economical than those which have or are being developed by the Company or
that would render the Company's technology and products obsolete and
non-competitive in these fields. In such event, the Company's business,
financial condition and results of operations could be materially adversely
affected.
THIRD PARTY REIMBURSEMENT
Reimbursement and health care payment systems in international markets vary
significantly by country. In connection with international product
introductions, the Company and its strategic marketing partners may be required
to seek international reimbursement approvals. If required, there can be no
assurance that any such approvals will be obtained in a timely manner, or at
all, and failure to receive such international reimbursement approvals could
have an adverse effect on market acceptance of the Company's products in the
international markets in which such approvals are sought.
In the United States, health care providers, such as hospitals and
physicians, that purchase medical devices such as the Company's products,
generally rely on third-party payors, principally federal Medicare, state
Medicaid and private health insurance plans, to reimburse all or part of the
cost of surgical procedures. The Company anticipates that in a prospective
payment system, such as the DRG system utilized by Medicare, and in many managed
care systems used by private health care payors, there will be no separate,
additional reimbursement for the Company's products. Accordingly, the Company
believes that there will be no procedure-specific reimbursement codes for the
Company's products. The Company anticipates that hospital administrators and
physicians will justify the additional cost of surgical sealants by the
attendant cost savings and clinical benefits that the Company believes will be
derived from the use of its products.
There can be no assurance that reimbursement for the Company's products will
be available in the United States or in international markets under either
governmental or private reimbursement systems. Furthermore, the Company could be
adversely affected by changes in reimbursement policies of governmental or
private health care payors. Failure by physicians, hospitals and other users of
the Company's products to obtain sufficient reimbursement from health care
payors for procedures in which the Company's products are used or adverse
changes in governmental and private third party payors' policies toward
reimbursement for such procedures would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's business may be also materially adversely affected by the
continuing efforts of government and third-party payors to contain or reduce the
costs of health care through various means. For example, in certain foreign
markets, pricing or profitability of certain medical products and prescription
pharmaceuticals is subject to government control. In the United States, an
increasing emphasis on managed care has put, and will continue to put, pressure
on pharmaceutical and medical product pricing. Such initiatives and proposals,
if adopted, could decrease the price that the Company receives for any products
it may develop and sell in the future, and thereby have a material adverse
effect on the
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Company's business, financial condition and results of operations. Further, to
the extent that such proposals or initiatives have a material adverse effect on
other companies that are corporate partners or prospective corporate partners
for certain of the Company's products, the Company's ability to commercialize
its products may be materially adversely affected.
FACTORS AFFECTING OPERATING RESULTS
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT; UNCERTAINTY OF FUTURE
PROFITABILITY. The Company has incurred net losses in each year since its
inception, including a net loss of approximately $13.4 million during 1998. At
December 31, 1998, the Company had an accumulated deficit of $59.3 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
through at least the first half of 2000 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 its 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, operating losses will 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 required regulatory approvals,
or successfully develop, manufacture, commercialize and market products or that
the Company will ever record product revenues or achieve profitability.
Profitability, if achieved, may not be sustained.
UNCERTAINTIES RELATED TO EARLY STAGE OF COMMERCIALIZATION AND
DEVELOPMENT. Except for the FOCALSEAL-L and FOCALSEAL-S surgical sealants for
lung surgery and neurosurgery indications, all of the Company's products are in
early stages of development or research. To date the Company has received only
one product approval, a CE Mark approval for FOCALSEAL-L surgical sealant for
lung surgery. Focal has not received marketing approval for any products from
the FDA. In addition, FOCALSEAL-L and FOCALSEAL-S surgical sealants will
potentially require significant additional research and development efforts
before either is suitable for any indications beyond lung surgery and
neurosurgery, The development and commercialization of new bioabsorbable
synthetic polymer products are highly uncertain and subject to a number of
significant risks. Potential products that appear to be promising at early
stages of development may not reach the market for a number of reasons. Such
reasons include the possibilities that the potential products will be found
ineffective or cause harmful side effects during preclinical testing or clinical
trials, fail to receive necessary regulatory approvals, be difficult to
manufacture on a commercial scale, be uneconomical, fail to achieve market
acceptance or be precluded from commercialization by proprietary rights of third
parties. No assurance can be given that any of the Company's development
programs will be successfully completed, that clinical trials will generate
anticipated results or will commence or be completed as planned, that any PMA
application will be accepted or ultimately approved by the FDA, that required
regulatory approvals will be obtained on a timely basis, if at all, or that any
products for which approval is obtained will be commercially successful. If any
of the Company's development programs are not successfully completed, required
regulatory approvals are not obtained, or products for which approvals are
obtained are not commercially successful, the Company's business, financial
condition and results of operations would be materially adversely affected.
EARLY STAGE OF CLINICAL TESTING AND LACK OF EXTENSIVE CLINICAL DATA. A 180
patient clinical trial of the Company's FOCALSEAL-L surgical sealant product for
lung surgery was recently completed in the United States, and the company is
submitting a modular PMA application to the FDA. Although the Company believes
that the results of this trial are sufficient to obtain marketing approval in
the U.S., there are no assurances that the FDA will not require additional
clinical testing of FOCALSEAL-L surgical sealant to obtain U.S. marketing
approval. Although Focal has completed a 44 patient clinical trial of
FOCALSEAL-S surgical sealant for neurosurgery indications in Europe, Focal has
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not yet commenced United States clinical trials of FOCALSEAL-S surgical sealant.
The FDA may require the Company to pursue certain clinical endpoints that were
not the subject of the European clinical trial. In the event that the Company is
required to pursue these endpoints, it may be more difficult for the Company to
demonstrate the efficacy of FOCALSEAL-S surgical sealant in the United States
trial than in the European trial, which could result in delays or adversely
affect the success of the clinical trial.
There can be no assurance that FOCALSEAL-L or FOCALSEAL-S surgical sealants
will receive marketing approval from the FDA or that any of the Company's other
products will prove to be safe and effective in United States or international
clinical trials under applicable regulatory guidelines. In addition, clinical
trials may identify significant technical or other obstacles to be overcome
prior to obtaining necessary regulatory or international approvals. If the
FOCALSEAL-L and FOCALSEAL-S surgical sealant products and the Company's other
products under development do not prove to be safe and effective in clinical
trials or if the Company is otherwise unable to commercialize these products
successfully, the Company's business, financial condition and results of
operations will be materially and adversely affected.
DEPENDENCE UPON FOCALSEAL SURGICAL SEALANTS. The Company introduced its
first commercial product, FOCALSEAL-L surgical sealant for lung surgery
indications, in Europe in the first half of 1998 through its strategic marketing
alliance with Ethicon. The Company anticipates that revenues derived from
European sales of FOCALSEAL-L surgical sealant will account for a substantial
majority of the Company's near term product revenues. Before the Company's
second product, FOCALSEAL-S surgical sealant for neurosurgery indications, can
be sold in Europe, the Company must first obtain a CE mark for marketing in the
member countries of the European Union. Any delays or other difficulties
encountered by the Company in obtaining such CE mark for FOCALSEAL-S surgical
sealant would have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the Company's future
success will depend, in significant part, on its ability to successfully
complete additional clinical trials and to obtain regulatory approval and market
acceptance of FOCALSEAL-L and FOCALSEAL-S surgical sealant in the United States.
Although the Company recently completed a 180-patient, pivotal, multicenter
clinical trial of FOCALSEAL-L surgical sealant for lung surgery indications in
the United States and is in the process of submitting a modular PMA application
to the FDA based on the results of the trial, there can be no assurance that the
FDA will accept the PMA for filing, that the Company will be able to demonstrate
to the FDA's satisfaction that FOCALSEAL-L surgical sealant is safe and
effective, or, if marketing approval were granted by the FDA, that the Company
will successfully commercialize FOCALSEAL-L surgical sealant in the United
States. Failure by the Company to gain marketing approval from the FDA for
FOCALSEAL-L surgical sealant or to be able to successfully commercialize
FOCALSEAL-L surgical sealant in the United States would have a material adverse
effect on the Company's business, financial condition and results of operations.
DEPENDENCE ON STRATEGIC ALLIANCE PARTNERS. The Company has established a
strategic alliance with Ethicon in the field of surgical sealants for all
territories outside of North America. Under the agreement with Ethicon, the
Company is dependent upon Ethicon for marketing and sale of surgical sealants
outside North America and for obtaining international regulatory approvals other
than the CE mark, which is the responsibility of the Company to obtain. The
failure of Ethicon to continue to collaborate with the Company for subsequent
development of products, seek required regulatory approvals or commercialize
products would have a material adverse affect on the Company's business,
financial condition and results of operations.
The Company's strategy for development and commercialization of certain of
its future products may depend upon the Company entering into additional
arrangements with research collaborators, corporate partners and others, and
upon the subsequent success of these third parties in performing their
obligations. There can be no assurance that the Company will be able to enter
into additional strategic alliances on terms favorable to the Company, or at
all. The Company's inability to enter into additional strategic alliances could
have an adverse affect on the Company's business, financial condition and
results of operations.
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The Company cannot control the amount and timing of resources which its
current or any future corporate partners devote to the Company's programs or
potential products. If any of the Company's current or future corporate partners
breach their agreements with the Company or otherwise fail to conduct their
collaborative activities in a timely manner, the clinical development and/or
commercialization of products may be delayed, and the Company may be required to
devote additional resources to product development and commercialization, or
terminate certain development programs. The termination of any current or future
strategic alliances could have a material adverse affect on the Company's
business, financial condition and results of operations.
In addition, Focal's current and any future strategic partners may develop,
either alone or with others, products that compete directly with the development
and marketing of the Company's products. Competing products, either developed by
the corporate partners or to which the corporate partners have rights, may
result in their withdrawal of support with respect to all or a portion of the
Company's technology, marketing and development efforts, which would have a
material adverse affect on the Company's business, financial condition and
results of operations. There can be no assurance that disputes will not
arise in the future with respect to the ownership of rights to any products or
technology developed with corporate partners. These and other possible
disagreements between corporate partners in the Company could lead to delays in
or termination of the collaborative research, development or commercialization
of certain products and could require or result in litigation or arbitration,
which would be time-consuming and expensive, and would have a material adverse
affect on the Company's business, financial condition and results of operations.
UNCERTAINTY OF MARKET ACCEPTANCE. The Company's FOCALSEALsurgical sealants
represent a new method of sealing air and fluid leaks that arise in connection
with surgery, and there can be no assurance that these products will gain
commercial acceptance among physicians, patients and health care payors, even if
necessary international and United States marketing approvals can be obtained.
The Company believes that recommendations and endorsements by physicians will be
essential for market acceptance of FOCALSEAL, and there can be no assurance that
any such recommendations or endorsements will be obtained. Physicians will not
use the FOCALSEAL surgical sealants unless they determine, based on clinical
data and other factors, that these systems are an effective means of sealing air
and fluid leaks and that the clinical benefits to the patient and cost savings
achieved through use of these systems outweigh their cost. Such determinations
will depend, in part, on the ability of the Company's FOCALSEAL-L surgical
sealant to reduce the time a lung surgery patient must be connected to a chest
tube and the length of hospital stays associated with lung surgery. Acceptance
among physicians may also depend upon the Company's ability to train thoracic
surgeons and other potential users of the Company's products in the application
of liquid surgical sealants, which such physicians typically have not performed,
and the willingness of such users to learn these new techniques. Failure of the
Company's products to achieve significant market acceptance would have a
material adverse effect on the Company's business, financial condition and
results of operations.
NEED FOR ADDITIONAL FUNDING; UNCERTAINTY OF ACCESS TO CAPITAL. Focal will
require substantial additional funding in order to continue its research and
product development programs, including for preclinical testing and clinical
trials of its product candidates, for operating expenses, for the pursuit of
regulatory approvals for its product candidates, and may require additional
funding for establishing manufacturing and marketing capabilities in the future.
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 15 months. However, no
assurance can be given that the Company's resources will be sufficient to
conduct its research and development programs as planned.
The Company's future capital requirements will depend on many factors,
including continued scientific progress in its research and development
programs, the magnitude of these 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 the cost of product
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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.
Focal 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
financings would be dilutive to the Company's stockholders. If adequate funds
are not available, Focal 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 Focal to relinquish rights to
certain of its technologies or product candidates.
UNCERTAINTY OF ABILITY TO ATTRACT AND RETAIN KEY MANAGEMENT, EMPLOYEES AND
CONSULTANTS. The Company is highly dependent on the principal members of its
management and scientific staff. The loss of services of any of these personnel
could impede the achievement of the Company's development objectives.
Furthermore, recruiting and retaining qualified scientific personnel to perform
research and development work in the future will also be critical to the
Company's success. There can be no assurance that the Company will be able to
attract and retain personnel on acceptable terms given the competition among
biotechnology, pharmaceutical and healthcare companies, universities and
non-profit research institutions for experienced scientists. In addition, the
Company relies on members of its Scientific Advisory Board and a significant
number of consultants to assist the Company in formulating its research and
development strategy. All of Focal's consultants and the members of the
Company's Scientific Advisory Board are employed by employers other than the
Company, and may have commitments to, or advisory or consulting agreements with,
other entities that may limit their availability to the Company.
POTENTIAL PRODUCT LIABILITY OR PRODUCT RECALL EXPOSURE; LIMITED INSURANCE
COVERAGE. The use of any of the Company's potential products in clinical trials,
and the sale of any approved products, may expose the Company to liability
claims resulting from the use of its products or to product recalls. Product
liability claims might be made directly by consumers, health care providers or
by pharmaceutical companies or others selling such products. Focal has obtained
product liability insurance coverage, subject to certain policy limits, for its
clinical trials. The Company intends to expand its insurance coverage to include
the sale of commercial products if marketing approval is obtained for products
in development. However, insurance coverage is becoming increasingly expensive,
and no assurance can be given that the Company will be able to maintain
insurance coverage at a reasonable cost or in sufficient amounts to protect the
Company against losses due to liability. There can also be no assurance that the
Company will be able to obtain commercially reasonable product liability
insurance for any products approved for marketing. A successful product
liability claim or series of claims brought against the Company or a product
recall could have a material adverse effect on its business, financial condition
and results of operations.
HAZARDOUS MATERIALS; ENVIRONMENTAL MATTERS. The Company's research and
development processes involve the controlled use of hazardous materials. The
Company is subject to federal, state and local laws and regulations governing
the use, manufacture, storage, handling and disposal of such materials and
certain waste products. Although the Company believes that its safety procedures
for handling and disposing of such materials comply with the standards
prescribed by such laws and regulations, the risk of accidental contamination or
injury from these materials cannot be completely eliminated. In the event of
such an accident, the Company could be held liable for any damages that result
and any such liability could exceed the resources of the Company. The Company
believes that it is in compliance in all material respects with applicable
environmental laws and regulations.
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