<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 0-23247
------------------------
FOCAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-3142791
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
</TABLE>
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, 2000, the Registrant had 14,903,597 shares of Common Stock
outstanding.
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<PAGE>
FOCAL, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
------------
<S> <C>
INDEX....................................................... 2
PART I--FINANCIAL INFORMATION
ITEM 1--Financial Statements
Condensed Balance Sheets at December 31, 1999 and
September 30, 2000...................................... 3
Condensed Statements of Operations for the Three Months
and Nine Months Ended September 30, 1999 and 2000....... 4
Condensed Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 2000....................... 5
Notes to Condensed Financial Statements................... 6
ITEM 2--Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 8
ITEM 3--Qualitative and Quantitative Disclosures About
Market Risk............................................... 12
PART II--OTHER INFORMATION
ITEMS 1 through 6........................................... 13
SIGNATURES.................................................. 14
EXHIBIT INDEX............................................... 15
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
FOCAL, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER SEPTEMBER
1999 2000
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................ 8,746,897 6,895,616
Marketable securities............................ 4,715,842 201,320
Inventories...................................... 1,573,934 2,716,634
Accounts receivable and prepaid expenses......... 557,461 1,228,917
----------- -----------
Total current assets............................... 15,594,134 11,042,487
Notes receivable from related parties.............. 271,753 290,909
Property, plant & equipment, net................... 2,871,034 2,315,206
Other assets....................................... 14,025 14,660
----------- -----------
Total assets....................................... $18,750,946 $13,663,262
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities......... 3,343,409 3,386,142
Current portion of capital lease obligations..... 926,041 734,114
----------- -----------
Total current liabilities.......................... 4,269,450 4,120,256
Capital lease obligations.......................... 1,333,090 810,705
Total stockholders' equity......................... 13,148,406 8,732,301
----------- -----------
Total liabilities and stockholders' equity......... $18,750,946 $13,663,262
=========== ===========
</TABLE>
See accompanying notes.
3
<PAGE>
FOCAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
1999 2000 1999 2000
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues:
Collaborative R&D revenues.............. $ 18,236 $ 33,083 $ 720,635 $ 50,295
Product revenues........................ 12,986 486,872 1,410,085 1,121,311
----------- ----------- ------------ -----------
Total revenues........................ 31,222 519,955 2,130,720 1,171,606
Costs and Expenses:
Cost of product revenues................ 201,311 632,291 2,072,691 1,384,874
Research & development.................. 3,410,460 1,462,246 11,221,694 6,249,816
Sales, general & administrative......... 925,083 1,590,414 2,870,390 4,352,862
----------- ----------- ------------ -----------
Total costs and expenses................ 4,536,854 3,684,951 16,164,775 11,987,552
Insurance recovery........................ 475,408
Interest income (net)..................... 138,859 112,394 584,994 383,808
----------- ----------- ------------ -----------
Net Loss.................................. ($4,366,773) ($3,052,602) ($13,449,061) ($9,956,730)
=========== =========== ============ ===========
Basic and diluted net loss per share...... $ (0.32) $ (0.20) $ (0.99) $ (0.68)
=========== =========== ============ ===========
Shares used in computing net loss per
share................................... 13,441,931 14,900,436 13,551,856 14,640,424
=========== =========== ============ ===========
</TABLE>
4
<PAGE>
FOCAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1999 2000
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(13,449,061) $(9,956,730)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 827,029 793,247
Amortization of deferred compensation..................... 237,557 175,487
Interest income accrued on notes receivable from related
parties................................................. (49,424) (28,478)
Gain on disposal of equipment, furniture and fixtures..... 828 (14,946)
Increase (decrease) in cash arising from changes of
operating assets and liabilities:
Accounts receivable and prepaid expenses................ 718,576 (671,456)
Inventories............................................. (544,565) (1,142,700)
Accounts payable and accrued liabilities................ (1,041,241) (17,149)
Other assets............................................ (419) (635)
Notes receivable--from related parties.................. 41,094 9,323
------------ -----------
Net cash used in operating activities....................... (13,259,626) (10,854,036)
INVESTING ACTIVITIES
Sale of marketable securities............................... 17,921,393 9,135,606
Purchase of marketable securities........................... (3,087,226) (4,628,102)
Purchase of property and equipment.......................... (1,065,275) (222,472)
------------ -----------
Net cash provided by (used in) investing activities......... 13,768,892 4,285,032
FINANCING ACTIVITIES
Proceeds from equity financing, net of issuance costs....... 5,000,000
Proceeds from exercise of stock options..................... 175,274 152,181
Proceeds from issuance of common stock under the employee
stock purchase plan....................................... 125,868 59,882
Principal payments on notes receivable...................... 466,946 219,972
Proceeds from lease financing............................... 753,772 79,085
Principal payments on capital lease obligations............. (809,031) (793,397)
------------ -----------
Net cash provided by financing activities................... 712,829 4,717,723
Net decrease in cash and cash equivalents................... 1,222,095 (1,851,281)
Cash and cash equivalents at beginning of the period........ $ 8,516,936 $ 8,746,897
------------ -----------
Cash and cash equivalents at end of the period.............. $ 9,739,031 $ 6,895,616
============ ===========
</TABLE>
See accompanying notes.
5
<PAGE>
FOCAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
Focal, Inc. develops, manufactures and commercializes synthetic, absorbable,
liquid surgical sealants, based on its proprietary polymer technology. The
Company's family of surgical sealant products is being developed for use inside
the body to seal leaks resulting from lung, neurological, cardiovascular and
gastrointestinal surgery.
The accompanying unaudited, condensed financial statements have been
prepared by the Company in accordance with accounting principles generally
accepted in the United States for interim financial information and with the
instructions to Form 10-Q. Accordingly, the financial statements do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States 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, 2000 are not necessarily indicative of the results that may be
expected for the entire fiscal year ended December 31, 2000. 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, 1999.
NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 ("SAB #101"), "Revenue Recognition in Financial
Statements" which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. SAB101A was released on
March 24, 2000 and deferred the effective date to no later than the second
fiscal quarter beginning after December 15, 1999. In June 2000, the SEC issued
SAB 101B which delays the implementation date of SAB 101 until no later than the
fourth fiscal quarter of the fiscal years beginning after December 15, 1999. SAB
101 requires companies to report any changes in revenue recognition as a
cumulative change in accounting principle at the time of implementation in
accordance with Accounting Principles Board Opinion No. 20, "Accounting
Changes". The Company believes this interpretation will not have a significant
effect on its financial statements.
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation--an Interpretation of AFB Opinion No. 25." FIN 44 is
generally effective for transactions occurring after July 1, 2000 but applies to
repricings and some other transactions after December 15, 1998. The Company
believes this interpretation will not have a significant effect on its financial
statements.
NOTE 3. 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 4. REVENUE RECOGNITION FOR PRODUCT SALES
Revenues from product sales are recorded in full as product shipments are
made, as there are no contractual right of return or stock rotation privileges.
Substantially all product revenues recorded
6
<PAGE>
FOCAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED) (CONTINUED)
NOTE 4. REVENUE RECOGNITION FOR PRODUCT SALES (CONTINUED)
during the three months and nine months ended September 30, 2000 are
attributable to sales of light sources and AdvaSeal-S neurosurgery sealant to
Ethicon Inc., a Johnson & Johnson Company, and light sources and
FocalSeal-Registered Trademark---L to Genzyme Surgical Products. All product
revenues recorded during the three months and nine months ended September 30,
1999 are attributable to sales of surgical sealant products to Ethicon Inc.
NOTE 5. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. At December 31, 1999 and September 30, 2000, inventories consisted of
the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
Raw materials....................................... $ 146,906 $ 370,058
Work in process..................................... 1,265,623 2,002,319
Finished goods...................................... 161,405 344,257
---------- ----------
1,573,934 $2,716,634
========== ==========
</TABLE>
NOTE 6. COMPREHENSIVE LOSS
The components of comprehensive loss for the three month and nine months
ended September 30, 1999 and 2000 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 2000
----------- -----------
<S> <C> <C>
Net loss........................................... $(4,366,773) $(3,052,602)
Other comprehensive income:
Change in unrealized gain on marketable
securities....................................... 9,881 7,969
----------- -----------
Comprehensive loss................................. $(4,356,892) $(3,044,633)
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1999 2000
------------ -----------
<S> <C> <C>
Net loss.......................................... $(13,449,061) $(9,956,730)
Other comprehensive income:
Change in unrealized gain on marketable
securities...................................... 6,824 1,320
------------ -----------
Comprehensive loss................................ $(13,442,237) $(9,955,410)
============ ===========
</TABLE>
NOTE 7. EQUITY FINANCING
On April 18, 2000, the Company issued and sold to Genzyme Corporation
614,250 shares of common stock, $0.01 par value, at a purchase price of $8.14
per share for aggregate gross proceeds of $5.0 million. The shares were sold to
Genzyme pursuant to the terms of the Stock Purchase Agreement, which the parties
entered into in October 1999 in connection with a North American marketing and
distribution agreement.
7
<PAGE>
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," "should," "would," "will," "could," or "may," 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, 1999, of which the captioned
discussion is expressly incorporated herein by reference.
OVERVIEW
Focal, Inc. was founded in 1991, and is focused on the development,
manufacture and commercialization of synthetic, absorbable surgical sealants
based on the Company's proprietary polymer technology. Since inception, Focal
has funded its operations primarily through the private placement of equity
securities and through an initial public offering of common stock. In addition,
Focal has entered into strategic alliances with corporate partners and has
recorded revenues totaling $29.2 million through September 30, 2000, in
connection with these alliances.
Focal has incurred net losses in each year since its inception, including
net losses of approximately $16.8 million during 1999. At September 30, 2000,
Focal had an accumulated deficit of $86.1 million. Focal's operating losses have
resulted primarily from expenses incurred in connection with its research and
development activities, including preclinical and clinical trials, development
of manufacturing processes and general and administrative expenses.
Focal expects to incur net losses at least through 2004 and may incur net
losses in subsequent periods although the amount of future net losses and the
time required by Focal to reach profitability are highly uncertain. The
Company's ability to achieve and sustain profitability will be dependent upon
successfully commercializing its FocalSeal-Registered Trademark- surgical
sealants in North America. The Company has exclusive marketing and distribution
partners for the majority of its products throughout the world, including
Genzyme Surgical Products, a division of Genzyme Corporation, in North America
and Ethicon, a Johnson & Johnson company, in Europe and other international
markets. The Company's ability to achieve and sustain profitability is dependent
in large part on the ability of its marketing partners to effectively market and
distribute the Company's sealant products. There can be no assurance that Focal
will successfully develop, manufacture, commercialize and market products or
that Focal will ever achieve profitability.
Focal introduced its first commercial product,
FocalSeal-Registered Trademark--L surgical sealant for lung surgery indications,
in Europe in 1998 through its strategic marketing alliance with Ethicon. Focal
launched its FocalSeal-Registered Trademark--L surgical sealant in North America
through its marketing partner, Genzyme Surgical Products, in July 2000. Focal
anticipates that revenues derived from the sales of
FocalSeal-Registered Trademark--L surgical sealant for lung surgery will account
for nearly all of the Company's near term product revenues.
The Company has been working to expedite its current clinical trial for use
of its FocalSeal-Registered Trademark--S neuro surgical sealant by revising the
trial to include a broader study population and a less complicated study
protocol. The Company has suspended enrollment of patients under the current
protocol until a more efficient trial format can be agreed upon with the FDA.
Company officials and several of its
8
<PAGE>
neurosurgeon advisors met with the FDA in September 2000 to review the proposed
changes. Although the Company believes that some progress was made, there was no
final resolution of the request during the meeting. The Company is continuing to
work with the FDA and its advisors toward developing an acceptable revised trial
protocol. FocalSeal-Registered Trademark--S neuro surgical sealant has been
approved for sale in Europe since November 1999 and is currently distributed
under the trade name AdvaSeal-Registered Trademark--S by Ethicon.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
Total revenues for the three months ended September 30, 2000 (the "2000
Quarterly Period"), increased to $520,000 from $31,000 for the three months
ended September 30, 1999 (the "1999 Quarterly Period"). Product revenues
increased to $487,000 for the 2000 Quarterly Period from product revenues of
$13,000 in the 1999 Quarterly Period. The increase in product revenues primarily
resulted from U.S. sales of the Company's FocalSeal-Registered Trademark--L lung
sealant system, which was launched in July 2000. Sales outside of the U.S. for
the third quarter 2000 were $24,000.
Collaborative research and development revenues increased to $33,000 in the
2000 Quarterly Period from $18,000 of collaborative research and development
revenues in the 1999 Quarterly Period. The increase in collaborative research
and development revenues was primarily related to income from Genzyme for a
local drug delivery project.
Cost of product revenues for the 2000 Quarterly period of $632,000 were
recorded relating to the commercial sales of the Company's
FocalSeal-Registered Trademark-L surgical sealant and light sources compared to
cost of product revenues for the 1999 Quarterly Period of $201,000. The increase
in cost of product revenue is primarily related to commercialization expenses
and high fixed costs due to low volume production. Although the cost of product
revenues continues to exceed product revenue, when compared to the 1999
Quarterly Period, unit costs have been decreasing--a reflection of improving
manufacturing efficiencies and cost control.
Research and development expenses decreased to $1,462,000 for the 2000
Quarterly Period, from $3,410,000 for the 1999 Quarterly Period. This decrease
was primarily due to the transition from research and development to
commercialization. Additionally, research and development expenses decreased in
the 2000 Quarterly Period due to suspension of the Company's current US
neurosurgical clinical trial.
Sales, General and administrative expenses increased to $1,590,000 for the
2000 Quarterly Period, compared with $925,000 for the 1999 Quarterly Period.
This increase is due to the sales and marketing expenses relating to the U.S.
product launch of FocalSeal-Registered Trademark-L Surgical Sealant, which
commenced in July 2000. We expect selling, general, and administrative expenses
to increase as we continue to augment our direct sales staff and seek to broaden
our North American market penetration.
Interest income, net of interest expense, decreased to $112,000 for the 2000
Quarterly Period, from $139,000 for the 1999 Quarterly Period, as a result of
lower average cash balances available for investment. We expect interest income
to decrease during the remainder of 2000 due to lower average cash balances for
investment.
The Company recorded a net loss of $(3,053,000), or $(0.20) per share, for
the 2000 Quarterly Period compared to a net loss of $(4,367,000), or $(0.32) per
share, in the 1999 Quarterly Period. The decrease in net loss is primarily due
to Focal's cost cutting efforts and an increased revenue stream. The Company
expects that it will incur net operating losses through at least 2004.
9
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
For the nine month period ended September 30, 2000 (the "2000 Nine Month
Period") total revenues decreased to $1,172,000 from $2,131,000 for the nine
month period ended September 30, 1999 (the "1999 Nine Month Period"). Product
revenues for the 2000 Nine Month Period related primarily to the U.S. product
launch of FocalSeal-Registered Trademark-L, while product revenues for 1999 were
related entirely to sales outside of the U.S. Sales outside the U.S. for the
first nine months of 2000 were $350,000. Ethicon, a Johnson & Johnson Company,
Focal's distributor outside of North America, continues to sell product from
previously purchased inventory. However, Focal expects modest shipments of
FocalSeal-Registered Trademark--L lung surgery sealant to Ethicon beginning in
the fourth quarter since the excess European inventory has been worked off over
the past 12 months and inventory is now more in line with actual quarterly
customer demand.
Cost of product revenues for the 2000 Nine Month Period of $1,385,000 were
recorded relating to the commercial sales of the Company's
FocalSeal-Registered Trademark--L surgical sealant product and light sources,
versus cost of product revenues of $2,073,000 for the 1999 Nine Month Period.
The decrease in cost of product revenue is primarily attributable to decreased
product revenues in the 2000 Nine Month Period. As mentioned above, the cost of
product revenues continues to exceed product revenue. When compared to the 1999
Nine Month Period, unit costs have been decreasing--a reflection of improving
manufacturing efficiencies and cost control.
Research and development expenses for the 2000 Nine Month Period decreased
to $6,250,000 from $11,222,000 for the 1999 Nine Month Period. This decrease
resulted from lower clinical trial costs as a result of the Company's shift to
product commercialization in the 2000 Nine Month Period, compared with the 1999
Nine Month Period.
Sales, General and administrative expenses increased to $4,353,000 in the
2000 Nine Month Period compared with $2,870,000 for the 1999 Nine Month Period.
This increase is due to increased commercialization expenses relating to the
Company's products and, in particular, expenses relating to the US product
launch of FocalSeal-Registered Trademark--L, which commenced in July 2000. As a
result of surgical sealant product approvals in Canada, Europe and the US, Focal
anticipates increased marketing and sales headcount and expenses to continue
throughout the remainder of the year.
Insurance recovery income of $475,000 for the 2000 Nine Month Period relates
to a payment for damage to inventory stored offsite.
Interest income, net of interest expense, decreased to $384,000 for the 2000
Nine Month Period, from $585,000 for the 1999 Nine Month Period, as a result of
lower average cash balances available for investment.
The Company recorded a net loss of $(9,957,000), or $(0.68) per share, for
the 2000 Nine Month Period compared to a net loss of $(13,449,000), or $(0.99)
per share, for the 1999 Nine Month Period. The decrease in net loss primarily
reflects the transition of Focal from a research and development company to one
with an expanding product line and initial market penetration. Additionally, the
Company has reduced expenses related to a slower than anticipated patient
enrollment, and subsequent deferral, of its current US neuro surgical clinical
trail in the 2000 Nine Month Period when compared to the 1999 Nine Month Period.
The Company expects that it will incur net operating losses through at least
2002.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily from
the sale of capital stock in private placements as well as the Company's 1997
initial public offering. In addition, Focal has received $10 million in equity
investments from Genzyme Surgical Products, in connection with the agreement
described below. Through September 30, 2000, the Company has raised
approximately $93.5 million from equity financings and has received
$7.1 million in equipment lease financing. In addition, the Company has received
collaborative funding, exclusive of equity investments, from Ethicon, Genzyme,
and other corporate partners totaling approximately $28.6 million through
September 30, 2000. At September 30, 2000, the Company had cash, cash
equivalents and marketable securities of $7,097,000 compared to $13,463,000 at
December 1999.
Cash used in operations totaled $10.9 million for the nine months ended
September 30, 2000, as compared to cash used in operations of $13.3 million for
the same period in 1999. The decrease in cash used in operations was due to
lower research and development expenditures and lower net losses incurred in
2000, compared to 1999, as well as lower investments in working capital. Cash
used in operations is equal to the net 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, 2000 totaled
$8.9 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. As of September 30, 2000, the Company did not have any material
commitments for future capital expenditures.
In October 1999, in connection with entering into a Marketing and
Distribution Agreement with Genzyme Surgical Products, Focal and Genzyme
Surgical Products entered into a Stock Purchase Agreement, with up to
$20.0 million in purchases of the Company's common stock committed by Genzyme
Surgical over an eighteen month period. The first $5.0 million purchase was made
by Genzyme Surgical in November 1999, with Genzyme purchasing approximately
810,000 shares at a 25% premium to the ten day average trading price of the
Company's common stock prior to the investment. Genzyme made the second
investment, $5.0 million, on April 14, 2000, with Genzyme purchasing
approximately 614,000 shares at a 25% premium to the twenty day average closing
price of the Company's common stock prior to the investment. At Focal's option,
up to two additional $5.0 million investments will be made by Genzyme Surgical
Products. The final two investments of $5.0 million each may be called by Focal
in December 2000 and June 2001, respectively. These final two investments will
be priced based upon the twenty day trading average of the Company's common
stock.
The Company believes that its existing capital resources, in conjunction
with additional equity financing from Genzyme Corporation, will be sufficient to
satisfy its current and projected funding requirements for at least 13 months.
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 the sale of up to an additional $10.0 million of the
Company's common stock to Genzyme Corporation, as described above, subject to
the satisfaction of specified closing conditions. There can be no assurance,
however, that additional equity or debt financing will be available on
reasonable terms, if at all. Any additional equity financing would be dilutive
to the Company's stockholders. If adequate funds are not available, the Company
may be required to curtail significantly one or more of its research and
development programs and/or obtain funds through arrangements with corporate
partners or others that may require the Company to relinquish rights to certain
of its technologies or product candidates.
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
11
<PAGE>
commitments under these agreements totaled approximately $322,000 at
September 30, 2000. 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, the success of the sales and
distribution efforts of its marketing partners, 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 will be adequate to
satisfy its capital and operating requirements.
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, 2000, 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.
12
<PAGE>
PART II. OTHER INFORMATION
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<S> <C> <C>
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, 1999.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The exhibits listed in the Exhibit Index are included in
this report.
(b) Reports on Form 8-K
None.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 9, 2000
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<S> <C> <C>
FOCAL, INC.
By: /s/ ROBERT J. DEPASQUA
-----------------------------------------
Robert J. DePasqua
President and C.E.O.
(Principal Executive
Officer)
By: /s/ HARRY R. TROUT III
-----------------------------------------
Harry R. Trout III
Chief Financial Officer
(Principal Financial
and Accounting Officer)
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14
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as part of this Quarterly Report on
form 10-Q:
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<S> <C>
EXHIBIT NO. DESCRIPTION
10.1 Separation Agreement--Tom Bromander
10.2 Separation Agreement--Peter Jarrett
10.3 Separation Agreement--Ronald Rodowsky
10.4 Separation Agreement--Harry Trout III
27 Financial Data Schedule
99.1 Risk Factors--Pages 12 through 24 of the Company's Annual
Report on form 10-K for the year ended December 31, 1999, as
filed with the Securities and Exchange Commission (which
pages are deemed filed under except to the extent that
portions are not expressly incorporated by reference).
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