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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, 1996.
[_] 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
0-20819
THERMATRIX INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2958515
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
101 METRO DRIVE, SUITE 248
SAN JOSE, CALIFORNIA 95110
(Address of principal executive offices)
(408) 453-0490
(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 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 [_]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Class Outstanding at September 30, 1996
----- ---------------------------------
Common stock, $.001 par value 7,451,389
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THERMATRIX INC.
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Certain Business Considerations" in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in, or incorporated by reference into, this report.
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements................................................... 3
Condensed Consolidated Balance Sheets.................................. 3
Condensed Consolidated Statements of Operations........................ 4
Condensed Consolidated Statements of Cash Flows........................ 5
Notes to Condensed Consolidated Financial Statements................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................... 15
Item 2. Changes in Securities.................................................. 15
Item 3. Defaults Upon Senior Securities........................................ 15
Item 4. Submission of Matters to a Vote of Security Holders.................... 15
Item 5. Other Information...................................................... 15
Item 6. Exhibits and Reports on Form 8-K....................................... 16
SIGNATURE.............................................................. 17
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THERMATRIX INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
SEPTEMBER 30, DECEMBER 31,
1996 1995
----------- -----------
ASSETS (Unaudited)
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CURRENT ASSETS
Cash & cash equivalents $ 7,325 $ 981
Short-term investments 11,844 -
Accounts receivable, net 4,771 2,140
Costs of uncompleted contracts 688 85
Prepaid expenses and other current assets 335 181
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Total current assets 24,963 3,387
PROPERTY AND EQUIPMENT
Machinery and equipment 666 529
Demonstration equipment 159 165
Furniture and fixtures 136 134
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961 828
Less - Accumulated depreciation and amortization (372) (233)
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Net property and equipment 589 595
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PATENTS AND OTHER ASSETS, net 666 246
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$ 26,218 $ 4,228
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,489 $ 1,487
Accrued liabilities 712 425
Billings on uncompleted contracts in excess of costs 100 340
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Total current liabilities 3,301 2,252
REDEEMABLE CONVERTIBLE PREFERRED STOCK - 11,321
STOCKHOLDERS' EQUITY (DEFICIT):
Convertible preferred stock - 9,304
Common stock, $0.001 par value 8 -
Additional paid-in capital 48,424 3,538
Accumulated deficit (25,515) (22,187)
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Total stockholders' equity (deficit) 22,917 (9,345)
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$ 26,218 $ 4,228
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THERMATRIX INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
1996 1995 1996 1995
--------- --------- --------- ---------
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REVENUES $ 4,402 $ 2,034 $10,543 $ 3,922
COST OF REVENUES 3,585 1,822 9,056 3,697
--------- --------- --------- ---------
Gross Margin 817 212 1,487 225
--------- --------- --------- ---------
OPERATING EXPENSES
Research and development 179 222 506 915
Selling, general and administrative 1,729 1,236 4,543 3,378
--------- --------- --------- ---------
Total operating expenses 1,908 1,458 5,049 4,293
--------- --------- --------- ---------
Loss from operations (1,091) (1,246) (3,562) (4,068)
INTEREST INCOME, NET 268 26 262 216
--------- --------- --------- ---------
Net loss before income taxes (823) (1,220) (3,300) (3,852)
PROVISION FOR INCOME TAXES (13) (7) (28) (23)
--------- --------- --------- ---------
Net loss $ (836) $(1,227) $(3,328) $(3,875)
========= ========= ========= =========
NET LOSS PER SHARE $ (0.11) $ (0.21) $ (0.52) $ (0.68)
========= ========= ========= =========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES 7,435 5,727 6,399 5,711
========= ========= ========= =========
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THERMATRIX INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------ ------------
(Unaudited)
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,328) $ (3,875)
Adjustments to reconcile net loss to
net cash used in operating activities -
Depreciation and amortization 211 101
Provision for doubtful accounts 175 -
Changes in assets and liabilities -
Accounts receivable (2,806) (770)
Costs of uncompleted contracts (603) 178
Prepaid expenses and other (154) (105)
Accounts payable 1,001 (582)
Accrued liabilities 287 213
Billings in excess of costs (240) 133
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Net cash used in operating activities (5,457) (4,707)
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CASH FLOWS FROM INVESTING ACTIVITIES
Sale (Purchase) of short-term investments (11,844) 2,795
Purchases of property and equipment (133) (221)
Increase in patents and other assets (492) (100)
-------- --------
Net cash (used in) provided by investing
activities (12,469) 2,474
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CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under line of credit 1,000 -
Repayment of line of credit borrowings (1,000) -
Net proceeds from sale of preferred stock 2,084 (4)
Net proceeds from sale of common stock 22,186 31
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Net cash provided by financing activities 24,270 27
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INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 6,344 (2,206)
CASH & CASH EQUIVALENTS BEGINNING OF PERIOD 981 3,129
-------- --------
CASH & CASH EQUIVALENTS END OF PERIOD $ 7,325 $ 923
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest 40 -
Cash paid for income taxes 13 15
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THERMATRIX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary. The condensed
consolidated financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and the notes thereto
included in the Company's financial statements included in its Registration
Statement on Form S-1 (Registration No. 333-4370) for the year ended December
31, 1995.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments) which
are, in the opinion of management, necessary to state fairly the results for the
three months and nine months ended September 30, 1996 and 1995. The results for
the nine-months ended September 30, 1996 are not necessarily indicative of the
results expected for the full fiscal year.
2. NET LOSS PER SHARE
Net loss per share for the three months ended September 30, 1996 is computed
using the weighted average number of common and common equivalent shares
outstanding during the period. Common equivalent shares have been excluded from
the computation as their effect is antidilutive.
Net loss per share for the three months ended September 30, 1995 and for the
nine months ended September 30, 1995 and 1996 is computed on a pro forma basis.
Pro forma net loss per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares consist of redeemable convertible preferred stock and
convertible preferred stock (using the "if converted" method) and stock options
and warrants (using the treasury stock method). As the Company has incurred
losses since inception, common equivalent shares have been excluded from the
computation as their effect is antidilutive; however, pursuant to Securities and
Exchange Commission Staff Accounting Bulletin No. 83, such computations include
all common and common equivalent shares issued within the 12 months preceding
the filing date of the Registration Statement on Form S-1 as if they were
outstanding for all periods presented using the treasury stock method.
Redeemable convertible preferred stock and convertible preferred stock
outstanding during the period are included (using the "if converted" method) in
the computation as common equivalent shares even though the effect is
antidilutive.
3. COMMON STOCK
In April 1996, the Company's stockholders approved the reincorporation of the
Company in Delaware and approved a one-for-three reverse split of the Company's
preferred and common stock, which has been effected. All share and per share
amounts in the accompanying financial statements have been adjusted
retroactively to give effect to this reverse stock split.
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In June 1996, the Company completed the initial public offering of 2,000,000
shares of its common stock. Concurrent with the closing of the initial public
offering all redeemable convertible preferred stock and all convertible
preferred stock were converted into shares of common stock.
4. SHORT-TERM INVESTMENTS
In accordance with the Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", the Company
has classified all marketable debt securities as held-to-maturity and has
accounted for these investments at amortized cost. Short-term investments are
marketable securities with original maturities greater than three months and
less than one year. As of September 30, 1996, short-term investments consist
principally of corporate bonds and notes, certificates of deposit, banker
acceptances and commercial paper.
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THERMATRIX INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve risks
and uncertainties. Actual results could differ materially from those indicated
in the forward-looking statements as a result of certain factors, including
those set forth under "Certain Business Considerations."
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and the notes thereto included in
Item 1. of this Quarterly Report and the audited consolidated financial
statements and notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations for the year ended December 31,
1995, contained in the Company's Registration Statement on Form S-1
(Registration No. 333-4370).
GENERAL
- -------
Thermatrix Inc. is an environmental technology company engaged in the
development, manufacture and sale of innovative, proprietary industrial process
equipment for the destruction of volatile organic compounds and hazardous air
pollutants (collectively "VOCs"). The core component of the Company's
technology is its proprietary flameless thermal oxidizer ("FTO").
The Company derives its revenues primarily from contracts to develop and
manufacture FTO systems for the treatment of VOCs. The Company pursues new
market applications to control VOC emissions by collaborating with a strategic
customer in the particular market area. Under these collaborative arrangements,
the customer's engineers and other technical personnel work closely with the
Company to design and develop an industry- and application-specific system. The
Company prices these initial installations at or near the Company's estimated
cost. Such applications development projects generate little or no gross
margins. This allows the Company to recover the costs of its application
development efforts while establishing the acceptance of the Company's
technology with market leader customers. The Company believes these
collaborative efforts will continue to be important to its success, and the
Company intends to continue to develop applications for its technology utilizing
these collaborative relationships in the future. Systems for established
applications are priced higher, can generally be produced at lower cost and have
higher gross margins. The Company principally uses the percentage-of-completion
method of accounting to recognize contract revenues. Losses on contracts are
charged to cost of revenues as soon as such losses become known.
The Company's quarterly revenues and operating results have varied significantly
in the past and may fluctuate significantly in the future as a result of a
variety of factors, many of which are outside the Company's control. Such
factors include general economic and industry conditions, the size and timing of
individual orders, the introduction of new products or services by the Company
or its competitors or the introduction of the Company's products to new markets,
changes in the levels of operating expenses, including development costs, and
the amount and timing of other costs relating to the expansion of the Company's
operations.
Furthermore, the purchase of the Company's products, particularly for major
projects, may involve a significant commitment of capital, with the attendant
delays frequently associated with large capital expenditures and authorization
procedures within its customers' organization. For these and other reasons, the
sales cycle for the Company's products can be lengthy (up to two years) and
subject to a number of significant risks over which the Company has little or no
control, including customer budgetary constraints. The Company historically has
operated with little backlog because most customer orders are placed with
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relatively short lead times, usually from four to twenty-four weeks. Variations
in the timing of recognition of specific revenues due to changes in project
scope and timing may adversely and disproportionately affect the Company's
operating results for a quarter because the Company establishes its expenditure
levels on the basis of expected future revenues, and a significant portion of
the Company's expenses do not vary with current revenues.
Although the Company is expanding the number of its customers and installations,
the average size and dollar volume of each installation is increasing. As a
result, the Company's results of operations are likely to continue to be
dependent on major projects. Such a reliance on major orders is likely to lead
to fluctuations in, and to reduce the predictability of, quarterly results.
Larger projects also pose other challenges. The sales cycle for larger projects
tends to be longer than for smaller projects, and, when orders are received,
projects may be delayed by factors outside the Company's control, including
customer budget decisions, design changes and delays in obtaining permits.
Also, because the dollar volumes are larger, the costs of providing warranty
services could increase. The Company's business, results of operations and
financial condition could be materially adversely affected if the Company were
to fail to obtain major project orders, if such orders were delayed, if
installations of such systems were delayed, or if such installations encountered
operating, warranty or other problems.
RESULTS OF OPERATIONS
- ---------------------
Revenues were $4.4 million and $10.5 million for the three months and nine
months ended September 30, 1996, respectively, representing a 116% and 169%
increase from $2.0 million and $3.9 million for the three months and nine months
ended September 30, 1995, respectively. The increase in revenues is primarily
attributable to an increased acceptance of the Company's technology which
included contracts for installations in chemical/petrochemical and petroleum
industry applications, orders for systems used in remediation projects, and the
first unit for use in medical sterilization. Significant customers accounted
for 17%, 14%, 12%, and 10%, respectively, of revenues in the nine month period
ended September 30, 1996. For the nine months ended September 30, 1995, two
different customers accounted for revenues of 52% and 15%, respectively.
Revenues from international customers for the nine months ended September 30,
1996, were 13%. This represents a significant increase over the 4% of revenues
for the nine months ended September 30, 1995.
Gross margins have increased to 19% of revenues in the three months ended
September 30, 1996, compared to 10% in the same period in 1995. Gross margins
for the nine months ended September 30, 1996 have increased to 14% compared to
6% for the same period in 1995. The increase in gross margins is attributable
in part to an increase in follow-on sales for existing applications, which
require less applications development, increased pricing as the Company begins
to value price its systems, and to a lesser extent, reductions in costs from
repeat sales of systems for established applications.
Research and development expenses decreased from $222,000 in the three months
ended September 30, 1995 to $179,000 in the three months ended September 30,
1996. Research and development expenses decreased from $915,000 in the nine
months ended September 30, 1995 to $506,000 in the nine months ended September
30, 1996. The Company's research and development expenses in 1995 were
primarily attributable to significant independent investment by the Company in
the prototype design of a system to handle sulfonated compounds. The reduction
in research and development expenses from 1995 reflects the Company's success in
developing collaborative efforts with its industrial customers thereby reducing
its own independent expenditures for applications development.
Selling, general and administrative expenses increased from $1.2 million in the
three months ended September 30, 1995 to $1.7 million in the three months ended
September 30, 1996. For the nine months
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ended September 30, 1996, selling, general and administrative expenses increased
from $3.4 million to $4.5 million. The increase in selling, general and
administrative expenses is primarily a result of higher sales commissions,
proposal activity, liability insurance and other costs related to the increased
level of sales.
Interest income of $26,000 and $216,000 for the three months and nine months
ended September 30, 1995, respectively, was earned on an equity private
placement in November 1994. Interest income of $268,000 and $262,000 in the
three months and nine months ended September 30, 1996, primarily results from
the investment of the net proceeds from the Company's initial public offering
completed in June 1996.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Total cash and short-term investments were $19.2 million at September 30, 1996,
an increase of $18.2 million from December 31, 1995. This increase was
primarily from the private placement of equity securities in February 1996 ($2.1
million) and completion of the Company's initial public offering in June 1996
($22.2 million, net), less cash used in operations of $5.5 million.
Net cash used in operating activities increased to $5.5 million in the nine
months ended September 30, 1996 from $4.7 million in the nine months ended
September 30, 1995. This increase is primarily a result of the net change in
operating assets and liabilities. The Company spent $600,000 for capital
equipment, patent activity, and the purchase of the PADRE technology during the
nine months ended September 30, 1996 versus $300,000 for capital equipment and
patent activity for the same period in 1995.
The Company has a $3.0 million revolving receivable bank line of credit which
expires December 15, 1996. The line of credit allows the Company to borrow at
the bank's prime rate of interest plus .75%, contains various restrictions and
requires the Company to maintain certain financial covenants. At September 30,
1996, the Company was in compliance with the covenants of the line of credit and
there were no outstanding borrowings.
The Company believes that its current cash and cash equivalents, together with
the availability of its line of credit, will be sufficient to finance its
working capital and other capital requirements through 1997.
CERTAIN BUSINESS CONSIDERATIONS
- -------------------------------
The Company's business is subject to the following risks and uncertainties, in
addition to those described elsewhere.
Limited Operating History. The Company was formed in 1985 as In-Process
- -------------------------
Technology, Inc. and from 1985 to 1991 concentrated on developing its FTO
systems and ascertaining the most commercially appropriate applications for its
technology. In 1992, the Company focused its market strategy on applications
involving the destruction of VOCs. To date, the Company has manufactured and
sold only a limited number of its FTO systems for commercial use. Thus, the
Company has a limited operating history in the VOC emissions market. There can
be no assurance that the Company will be successful in implementing this
strategy.
Operating Losses and Accumulated Deficit; Uncertainty of Future Profitability.
- -----------------------------------------------------------------------------
The Company had a net loss of approximately $5.2 million in 1995 and $3.3
million for the nine months ended September 30, 1996, and had an accumulated
deficit of approximately $25.5 million at September 30, 1996. The Company does
not expect to be profitable unless and until sales of its FTO systems generate
sufficient revenues to fund its operations. There can be no assurance that the
Company will achieve such revenues.
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Uncertainty of Market Acceptance. There can be no assurance that the Company's
- --------------------------------
FTO technology will receive broad market acceptance as an economically and
environmentally acceptable means of destroying VOCs. Broad market acceptance of
the Company's products will depend upon the Company's ability to persuade
potential customers to adopt its FTO technology in place of certain, more
established, competing technologies, including flame-based destruction and
carbon adsorption systems. The failure of the Company to persuade potential
customers to adopt its FTO technology would have a material adverse effect on
the Company's business, results of operations and financial condition.
Management of Growth. The Company's revenues increased from $3.9 million in the
- --------------------
nine months ended September 30, 1995 to $10.5 in the nine months ended September
30, 1996. The Company's recent growth has placed, and is expected to continue
to place, a significant strain on its managerial, operational and financial
resources. Although it relies on subcontractors to fabricate subassemblies and
to assemble and install completed systems, the Company uses its own employees to
design, test and commission systems. The Company seeks to maintain engineering
and design staffing levels adequate for current and near-term demand. During
periods of rapid growth, such as that experienced by the Company during the last
year, the Company's engineering and design personnel generally operate at full
capacity. As a result, future growth, if any, is limited by the Company's
ability to recruit and train additional engineering, design and project
management personnel and by the ability of individual employees to manage more
and larger projects. Furthermore, any failure to maintain quality or to meet
customer installation schedules could damage relationships with important
customers, damage the Company's reputation generally and result in contractual
liabilities. The pressures of meeting increased demand may lead, and on
occasions have led, to errors in manufacturing or assembly, which in turn
increase manufacturing costs and decrease gross margins due to the cost of
rework. The Company seeks to enforce rigorous adherence to internal operating
procedures and controls, including testing of components. However, the failure
of the Company to prevent such errors could have an adverse effect on the
Company's ability to increase its operating margins which could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Risks Associated with Commercialization of Technology. The Company's first
- -----------------------------------------------------
commercial unit was installed in 1992, and therefore, there is limited operating
history available on installed units. Furthermore, as the Company's technology
has become more accepted, the Company has been selling increasingly larger
systems. Larger systems are generally distinguished by the size and weight of
the system and the characteristics of the waste stream flow. The operating
history of the larger units is shorter, and the larger systems are generally
more complex than the initial systems installed by the Company. Consequently,
there can be no assurance that the performance of the Company's units will not
deteriorate as the units age or that unanticipated problems will not be
encountered with the larger, more complex systems. Any deterioration of the
Company's units or unanticipated problems with its systems could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Dependence on Key Personnel. The Company's success depends to a significant
- ---------------------------
extent upon its executive officers, particularly its Chairman, President and
Chief Executive Officer, John T. Schofield, and key engineering, sales,
marketing, financial and technical personnel. Employees may voluntarily
terminate their employment with the Company at any time, and none of the
Company's employees is subject to any term employment contract with the Company.
Because the Company is still at an early stage of growth, the Company has
limited personnel resources available to address the different activities in its
business. The loss of the services of one or more of the Company's key
employees could have a material adverse effect on the Company's business,
results of operations and financial condition. The Company maintains key
employee life insurance on the life of John T. Schofield in the amount of
$2,000,000. There can be no assurance that such amount will be sufficient to
compensate the Company for the loss of the services of such individual.
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The Company also believes that its future success will depend in large part upon
its ability to attract and retain additional highly skilled personnel,
particularly design and process engineers. Because of the technical
sophistication of the Company's systems and the sophisticated engineering
software utilized by the Company, design and process engineers who join the
Company generally are required to have advanced technical knowledge and
significant training to perform efficiently and productively. The availability
of such personnel is limited, and the Company has at times experienced
difficulty in locating new employees with the requisite level of expertise and
experience. There can be no assurance that the Company will be successful in
retaining its existing key personnel or in attracting and retaining the
personnel it requires in the future.
Risks Associated with Development Programs. In addition to its core industrial
- ------------------------------------------
VOC emissions control business, the Company has embarked on a strategy of
working with strategic partners to evaluate the feasibility of applying the
Company's FTO technology for other uses. In collaboration with strategic
partners, the Company will begin tests in 1996 involving chemical weapons
destruction, radioactive mixed waste treatment and diesel emission control. The
engineering challenges involved in treating chemical warfare agents, radioactive
mixed wastes and diesel emissions are different in a number of respects from the
conditions in which the Thermatrix system has been used in the past, and there
can be no assurance that the Thermatrix technology will prove successful in any
of these new applications. Moreover, the Company's extensive database of test
results which it uses to design systems for individual installations may not be
relevant to these new applications. If early tests of any of these new
applications are positive, the Company may need to engage in extensive and
costly applications development and engineering in order to commercialize its
system for such use, and there can be no assurance as to the success of any such
effort.
Dependence on the Reliability and Performance of Subcontractors. The Company
- ---------------------------------------------------------------
relies on subcontractors to build system components and to assemble and install
systems. The Company's ability to deliver high quality systems on time will
depend upon the reliability and performance of its subcontractors. The failure
of a subcontractor to meet delivery schedules could cause the Company to default
on its obligations to its customers, which could materially adversely affect the
Company's reputation, business, results of operations and financial condition.
In addition, the Company's reliance on subcontractors for manufacturing,
assembly and installation places a significant part of the Company's quality
control responsibilities on these subcontractors. There can be no assurance
that the Company will be able to continue to contract for the level of quality
control required by the Company's customers. The failure to provide such
quality control could result in manufacturing and installation delays which
could have a material adverse effect on the Company's business, results of
operations and financial condition.
Possible Product Liability. The Company's FTO systems are designed to destroy
- --------------------------
VOCs, which are highly toxic and flammable. If the Company's systems are
improperly designed or operated outside of design parameters and operating
instructions provided by the Company, there is a risk of system failure or
release of VOCs, which could require the Company to defend itself against a
product liability or personal injury claim. Although the Company has product
liability and commercial general liability insurance in scope and amount which
it believes to be sufficient for the conduct of its business, there can be no
assurance that such insurance will cover or be adequate to cover such claims.
In addition, the Company's general liability insurance is subject to coverage
limits and excludes coverage for losses or liabilities relating to environmental
damage or pollution. Accordingly, the Company's efforts to defend itself
against such claims could have a material adverse effect on the Company's
business, results of operations and financial condition.
Dependence on Customer Information. The Company is highly dependent upon
- ----------------------------------
information provided by its customers concerning the type, volume and flow rate
of VOC emissions to be treated by the Company's systems. If the customer's
information is inaccurate, a malfunction in the Company's FTO system could
occur, resulting in damage to the customer's facilities or personal injury. In
addition, incorrect information
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could cause delays in the design, manufacture and installation of the customer's
system. Through no fault of its own, the Company could then be held liable for
damages resulting from such malfunction or delay. Any of these factors could
have a material adverse effect on the Company's business, results of operations
and financial condition.
Potential Environmental Liability. Although the Company does not believe that
- ---------------------------------
its activities would directly expose it to liabilities under local, state or
federal environmental laws and regulations, if the Company were to improperly
design, manufacture or test its systems or fail to properly train its customer's
employees in the operation of the systems, it could be exposed to possible
liability for investigation and clean-up costs under such environmental laws.
Although the Company does not currently lease its systems to customers or
operate the systems on behalf of its customers, if it were to do so in the
future, the Company could be liable under environmental laws for any releases of
hazardous substances.
The Company generally conducts performance tests on its systems at its
customers' facilities. However, in the future the Company may perform prototype
testing in its own facilities. If such testing were to involve hazardous
substances, it could subject the Company to liability under environmental laws
and regulations.
The Company could also be exposed to possible liability under environmental laws
for violations of those requirements applicable to the generation, storage,
treatment and disposal of hazardous waste. Under some environmental laws and
various theories of tort and contract law, it is also possible that the Company
could be liable for damages to its customers and third parties resulting from
the actions of its customers or arising from the failure or malfunction, or the
design, construction or operation of, the Company's FTO systems or products,
even if the Company were not at fault. The Company's general liability
insurance is subject to coverage limits and generally excludes coverage for
losses or liabilities relating to or arising out of environmental damage or
pollution. The Company's business, results of operations and financial
condition could be materially adversely affected by an uninsured or partially
insured claim.
Risks Associated with Fixed Price Contracts. A majority of the Company's
- -------------------------------------------
contracts are performed using "fixed-price" rather than "cost-plus" terms.
Under fixed-price terms, the Company quotes firm prices to its customers and
bears the full risk of cost overruns caused by estimates that differ from actual
costs incurred or manufacturing delays during the course of the contract. Some
costs, including component costs, are beyond the Company's control and may be
difficult to predict. If manufacturing or installation costs for a particular
project exceed anticipated levels, gross margins would be materially adversely
affected, and the Company could experience losses. In addition, the
manufacturing process may be subject to significant change orders. However, the
cost of these change orders may not be negotiated until after the system is
installed. The failure of the Company to recover the full cost of these change
orders could materially adversely affect gross margins and also cause the
Company to experience losses.
Risks Associated with International Operations and Sales. The Company plans to
- --------------------------------------------------------
increase its revenues, in part, through an expansion of its overseas operations.
International sales and operations may be limited or disrupted by the imposition
of government controls, export license requirements, trade restrictions, changes
in tariffs, difficulties in staffing, the transport of machinery, managing
international operations and other factors. Regulatory compliance requirements
differ among foreign countries and are also different from those established in
the United States. If the Company's customers are unable to obtain the
necessary foreign regulatory approvals on a timely basis, the Company's
international sales, and thereby its business, results of operations and
financial condition, could be materially adversely affected. Additionally, the
Company's business, results of operations and financial condition may be
materially adversely affected by fluctuations in currency exchange rates as well
as increases in duty rates, difficulties in obtaining export licenses, ability
to maintain or increase prices and competition. The Company denominates
international sales in either United States dollars or local currencies. Sales
in Europe have been primarily denominated in
13
<PAGE>
pounds sterling. Since the bulk of expenses in connection with international
contracts are often incurred in United States dollars, there can be a short-term
exchange risk created. If the Company has significant international sales in the
future denominated in foreign currencies, the Company may purchase hedging
instruments to mitigate the exchange risk on these contracts.
14
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company has been, or may become, involved in litigation
proceedings incidental to the conduct of its business. The Company does not
believe that any such proceedings presently pending will have a material adverse
effect on the Company's financial position or its results of operations.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
None.
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
* 3.1 Certificate of Incorporation of the Registrant.
* 3.3 Form of Restated Certificate of Incorporation.
* 3.4 Amended and Restated Bylaws of the Registrant.
* 4.1 Specimen Common Stock Certificate.
* 4.2 Amended and Restated Investor Rights Agreement.
* 10.1 Form of Indemnification Agreement between the Registrant and each
of its directors and executive officers.
* 10.2 1987 Incentive Stock Plan, as amended and related agreements.
* 10.3 1996 Stock Plan and form of Stock Option Agreement thereunder.
* 10.4 Employee Stock Purchase Plan and forms of agreement thereunder.
* 10.5 1996 Director Option Plan and form of Director Stock Option
Agreement thereunder.
* 10.6 Asset Purchase Agreement between the Registrant and Purus, Inc.
dated January 4, 1996.
* 10.7 Lease dated June 12, 1995 between the Registrant and Westmark Metro
Plaza, Inc., as amended.
* 10.8 Lease dated June 24, 1995 between the Registrant and American
General Life Insurance Company.
* 10.9 Loan and Security Agreement between the Registrant and Cupertino
National Bank and Trust, dated December 15, 1995.
11.1 Statement of computation of pro forma Common Shares and
Equivalents.
27 Financial Data Schedule.
----
* Incorporated by reference to the exhibit bearing the same number filed
with registrant's Registration Statement on Form S-1 (Registration No.
333-4370).
(b) Reports on Form 8-K
None.
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THERMATRIX INC.
Date: November 12, 1996 By: /s/ STEVEN J. GUERRETTAZ
-------------------------------------------
Steven J. Guerrettaz
Vice President - Finance & Accounting,
Chief Financial Officer
(Principal Financial and Accounting Officer)
17
<PAGE>
EXHIBIT 11.1
THERMATRIX INC.
STATEMENTS OF COMPUTATION OF
COMMON SHARES AND EQUIVALENTS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Loss $ (836) $(1,227) $(3,328) $(3,875)
====== ====== ====== ======
Weighted average common shares outstanding 7,435 93 765 77
Weighted average common equivalent shares:
Weighted average preferred stock outstanding 4,169 4,169 4,169
Adjustments to reflect requirements of the Securities and Exchange
Commission's Staff Accounting Bulletin No. 83:
Preferred Stock Issuances 284 284 284
Preferred Stock Warrants 17 17 17
Common Stock Option Grants 350 350 350
Additional preferred stock issuances on completion of
the initial public offering on June 19, 1996 814 814 814
------ ------ ------ ------
Pro forma total weighted average common shares and equivalents 7,435 5,727 6,399 5,711
====== ====== ====== ======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 SEP-30-1996
<CASH> 981 7,325
<SECURITIES> 0 11,844
<RECEIVABLES> 2,330 5,021
<ALLOWANCES> 190 250
<INVENTORY> 85 688
<CURRENT-ASSETS> 3,387 24,963
<PP&E> 828 961
<DEPRECIATION> 233 372
<TOTAL-ASSETS> 4,228 26,218
<CURRENT-LIABILITIES> 2,252 3,301
<BONDS> 0 0
11,321 0
9,304 0
<COMMON> 0 8
<OTHER-SE> (18,649) 22,909
<TOTAL-LIABILITY-AND-EQUITY> (4,228) 26,218
<SALES> 6,494 10,543
<TOTAL-REVENUES> 6,494 10,543
<CGS> 6,064 9,056
<TOTAL-COSTS> 6,064 9,056
<OTHER-EXPENSES> 5,824 5,049
<LOSS-PROVISION> 229 175
<INTEREST-EXPENSE> 231 262
<INCOME-PRETAX> (5,163) (3,300)
<INCOME-TAX> (31) (28)
<INCOME-CONTINUING> (5,194) (3,328)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,194) (3,328)
<EPS-PRIMARY> (0.91) (0.52)
<EPS-DILUTED> (0.91) (0.52)<F1>
<FN>
<F1>All per share information has been retroactively adjusted to reflect a one for
three reverse stock split that was approved in May, 1996.
</FN>
</TABLE>
