<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED Commission File Number
JUNE 30, 1997 0-20963
- ------------- -------
UROQUEST MEDICAL CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 59-3176454
(state or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
173 CONSTITUTION DRIVE, MENLO PARK, CALIFORNIA 94025
(Address of principal executive offices) (Zip Code)
(415) 463-5180
(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 the past 90 days.
Yes [x] No [ ]
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the last practicable date.
Class Outstanding at July 18, 1997
- ----------------------------- ----------------------------
Common Stock, $.001 par value 11,844,602
<PAGE> 2
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Consolidated Statements of Operations for the Three Months and the
Six Months Ended June 30, 1997 (unaudited) and June 30, 1996
(unaudited)
Consolidated Balance Sheets as of June 30, 1997 (unaudited) and
December 31, 1996
Consolidated Statements of Cash Flows for the Six Months Ended June
30, 1997 (unaudited) and June 30, 1996 (unaudited)
Notes to Consolidated Financial Statements (unaudited)
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Item 2 - Changes in Securities
Item 3 - Default upon Senior Securities
Item 4 - Submission of Matters to a Vote of Security Holders
Item 5 - Other information
Item 6 - Exhibit and Report on Form 8-K
Signature Page
<PAGE> 3
UROQUEST MEDICAL CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS June 30, December 31,
1997 1996
------------ ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash .................................... $ 12,040,637 $ 12,694,047
Accounts receivable, net of
allowance for doubtful accounts ...... 2,496,119 2,161,849
Inventories (note 3) .................... 2,814,423 2,622,812
Prepaid expenses and other current assets 267,205 226,040
Income tax receivable ................... - 145,808
Deferred income taxes ................... 132,000 124,000
------------ ------------
Total current assets .................. 17,738,119 17,974,556
------------ ------------
Property and equipment, net ................. 4,449,460 4,542,950
Intangibles, at cost, less accumulated
amortization ............................. 12,106,851 12,522,011
------------ ------------
Total assets .......................... $ 34,306,695 $ 35,039,517
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable under line of credit ...... $ - $ 150,000
Current portion of long-term debt ....... 462,559 442,364
Accounts payable ........................ 788,692 721,984
Accrued compensation .................... - 146,460
Accrued selling and distribution expenses 137,500 137,500
Other accrued expenses .................. 536,306 384,958
Severance accrual ....................... 1,572,180 -
------------ ------------
Total current liabilities ............. 3,497,237 1,983,266
------------ ------------
Long-term liabilities:
Long-term debt .......................... 1,549,426 1,787,437
Deferred income taxes ................... 819,500 782,500
------------ ------------
Total long-term liabilities ........... 2,368,926 2,569,937
------------ ------------
Shareholders' equity:
Voting common stock, $.001 par value;
31,000,000 shares authorized;
11,844,602 shares issued and
outstanding as of March 31, 1997
and December 31, 1996 ................ 11,845 11,845
Additional paid-in capital .............. 36,203,903 36,203,483
Deferred compensation ................... (51,666) (62,706)
Accumulated deficit ..................... (7,723,550) (5,666,308)
------------ ------------
Total stockholders' equity ............ 28,440,532 30,486,314
------------ ------------
Total liabilities and stockholders'
equity .............................. $ 34,306,695 $ 35,039,517
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
UROQUEST MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
------------------------------- -------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales .................. $ 3,985,780 $ - $ 7,660,378 $ -
Cost of sales .............. 2,195,524 - 4,062,087 -
------------ ------------ ------------ ------------
Gross profit ............. 1,790,256 - 3,598,291 -
------------ ------------ ------------ ------------
Operating expenses:
Research and development . 711,977 261,361 1,295,296 539,183
General and administrative 936,932 104,178 1,717,062 225,016
Sales and marketing ...... 420,288 (1,785) 799,802 45,787
Severance costs .......... 1,600,000 - 1,600,000 -
Amortization of goodwill . 157,356 - 328,637 -
------------ ------------ ------------ ------------
Total operating expenses 3,826,553 363,754 5,740,797 809,986
------------ ------------ ------------ ------------
Operating loss ............. (2,036,297) (363,754) (2,142,506) (809,986)
Other income (expense):
Interest expense ......... (47,391) (11,700) (98,408) (23,400)
Interest income .......... 152,807 5,413 294,213 16,552
------------ ------------ ------------ ------------
105,416 (6,287) 195,805 (6,848)
Loss before taxes .......... (1,930,881) (370,041) (1,946,701) (816,834)
Provision for income taxes . 35,000 - 82,000 -
------------ ------------ ------------ ------------
Net loss .............. $ (1,965,881) $ (370,041) $ (2,028,701) $ (816,834)
============ ============ ============ ============
Net loss per share ......... $ (0.17) $ (0.08) $ (0.17) $ (0.18)
============ ============ ============ ============
Shares used in computing
net loss per share ......... 11,844,602 4,538,234 11,844,602 4,524,939
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 5
UROQUEST MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................... $ (2,028,701) $ (816,834)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ............... 738,460 115,994
Changes in operating assets and liabilities:
Accounts Receivable ..................... (334,270) -
Inventories ............................. (191,611) (2,072)
Prepaid expenses and other current assets (15,269) (315,943)
Accounts payable ........................ 66,708 148,262
Accrued expenses ........................ (4,888) 30,227
Severance accrual ....................... 1,572,180 -
Deferred income taxes ................... 29,000 -
Income taxes ............................ 113,410 -
------------ ------------
Net cash used in operating
activities .................... (54,981) (840,366)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ..... (230,613) (49,037)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock ......... - 37,954
Repayment of notes ...................... (367,816) -
------------ ------------
Net cash provided from (used
in) financing activities ....... (367,816) 37,954
------------ ------------
Net decrease in cash ............................ (653,410) (851,449)
Cash at beginning of period ..................... 12,694,047 1,113,594
------------ ------------
Cash at end of period ........................... $ 12,040,637 $ 262,145
============ ============
Supplemental disclosures of cash
flow information:
Cash paid for interest .................... $ 98,408 $ 11,700
Cash paid for income taxes ................ 80,000 -
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 6
UROQUEST MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the assets and liabilities
of UroQuest's wholly owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation.
In the opinion of management, the accompanying consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the Company's consolidated financial
position as of June 30, 1997, and the results of operations and cash flows for
the three months and the six months ending June 30, 1997 and 1996. The results
of operations for any interim period are not necessarily indicative of results
to be expected for the full fiscal year.
The accompanying consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and the notes
thereto included in the Company's Form 10-K (File. No. 0-20963) filed with the
Securities and Exchange Commission.
NOTE 2 - NET LOSS PER SHARE
1996 net loss per share amounts are based on the weighted average number
of common shares and common share equivalents (if dilutive) resulting from
options and warrants outstanding during the periods, after giving retroactive
effect to the 1996 common stock reverse stock split and the conversion of
preferred shares into common shares at their respective issuance dates.
NOTE 3 - INVENTORIES
Inventories at June 30, 1997 and December 31, 1996 consist of the
following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Finished goods ........... $ 735,819 $ 748,268
Work-in-process .......... 1,078,078 1,100,104
Raw materials and supplies 1,000,526 774,440
---------- ----------
$2,814,423 $2,622,812
========== ==========
</TABLE>
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes certain "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. All statements, other than statements of historical fact,
included in this report, including, without limitation, statements under this
item Two regarding the Company's financial position, business strategy and plans
and objectives of management of the Company for future operations, are
forward-looking statements that involve various risks and uncertainties. All
forward-looking statements are made as of the date of this report, and the
Company assumes no obligation to update any forward-looking statement. There can
be no assurance that such statements will prove to be accurate, and actual
results and future events could differ materially from those anticipated in such
statements. Important factors that could cause actual results to differ
materially from the Company's expectations are disclosed under "Risk Factors" in
the Company's Annual Report on Form 10-K and Registration Statement on Form S-1
(Reg. No. 333-07277) filed with the Securities and Exchange Commission and
elsewhere in this report. All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by this section.
ACQUISITION OF BMT
On October 30, 1996, the Company acquired BMT, pursuant to which BMT
became a wholly owned subsidiary of the Company. BMT develops, manufactures and
markets a line of proprietary silicone medical device products as well as
provides engineering design, development and manufacturing services for silicone
products on an OEM basis for other medical device companies. BMT is one of a
limited number of specialty manufacturers of silicone catheters in the United
States. The acquisition of BMT constitutes the Company's first acquisition of
another business. BMT's operations are significantly different in many respects
from the Company's current operations, and the acquisition may result in a
number of unforeseen difficulties and problems that could have a material
adverse effect on the Company's business, financial condition and results of
operations.
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1997 COMPARED TO QUARTER ENDED JUNE 30, 1996:
Net sales and cost of sales. Sales of $3,985,780 for the quarter ended
June 30, 1997 related to BMT sales of proprietary airway management products and
other medical devices products to OEM customers. Cost of sales of $2,195,524
related to the BMT sales. The Company had no sales for the quarter ended June
30, 1996.
Research and development. Research and development expenses include
product development, clinical testing and regulatory expenses. For the quarter
ended June 30, 1997 research and development expenses increased to $711,977 from
$261,361 for the quarter ended June 30, 1996. Included in the 1997 expenses were
research and development expenses related to BMT totaling $346,800. The overall
increase was attributable primarily to increased research and development
personnel for various products, including the On-Command Catheter. Research and
development expenses are expected to continue to increase for the foreseeable
future.
General and administrative. General and administrative expenses increased
to $936,932 for the quarter ended June 30, 1997 from $104,178 for the quarter
ended June 30, 1996. Included in the 1997
<PAGE> 8
expenses were general and administrative expenses related to BMT totaling
$757,677. In addition, public company expenses were incurred in 1997 which were
not incurred in 1996. General and administrative expenses are expected to
increase as the Company hires additional personnel to support anticipated
expansion of the Company's business.
Sales and marketing. Sales and marketing expenses increased to $420,288
for the quarter ended June 30, 1997 from $(1,785) for the quarter ended June 30,
1996. This increase was primarily attributable to the inclusion of sales and
marketing expenses related to BMT totaling $412,769.
Severance costs. Severance costs amounted to $1,600,000 for the quarter
ended June 30, 1997. No severance costs were incurred for the quarter ended June
30, 1996. The severance costs related to the employment termination of certain
members of senior management. Of this amount, approximately $713,000 is related
to non-cash compensation expense from stock options.
Amortization of goodwill. Amortization of goodwill of $157,356 for the
quarter ended June 30, 1997 related to the amortization of recognized goodwill
concurrent with the acquisition of BMT in October 1996. The Company had no
goodwill or related amortization for the quarter ended June 30, 1996.
Other income (expense). Other income (expense) increased to net interest
income of $105,416 for the quarter ended June 30, 1997 from a net interest
expense of $6,287 for the quarter ended June 30, 1996. The increase is
attributable to higher net average cash balances, obtained primarily from the
Company's initial public offering (IPO), for the quarter ended June 30, 1997 in
comparison to the quarter ended June 30, 1996.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996:
Net sales and cost of sales. Sales of $7,660,378 for the six months ended
June 30, 1997 related to BMT sales of proprietary airway management products and
other medical devices products to OEM customers. Cost of sales of $4,062,087
related to the BMT sales. The Company had no sales for the six months ended June
30, 1996.
Research and development. Research and development expenses include
product development, clinical testing and regulatory expenses. For the six
months ended June 30, 1997 research and development expenses increased to
$1,295,296 from $539,183 for the six months ended June 30, 1996. Included in the
1997 expenses were research and development expenses related to BMT totaling
$665,513. The overall increase was attributable primarily to increased research
and development personnel for various products, including the On-Command
Catheter. Research and development expenses are expected to continue to increase
for the foreseeable future.
General and administrative. General and administrative expenses increased
to $1,717,062 for the six months ended June 30, 1997 from $225,016 for the six
months ended June 30, 1996. Included in 1997 the expenses were general and
administrative expenses related to BMT totaling $1,137,893. In addition, public
company expenses were incurred in 1997 which were not incurred in 1996. General
and administrative expenses are expected to increase as the Company hires
additional personnel to support anticipated expansion of the Company's business.
Sales and marketing. Sales and marketing expenses increased to $799,802
for the six months ended June 30, 1997 from $45,787 for the six months ended
June 30, 1996. This increase was primarily attributable to the inclusion of
sales and marketing expenses related to BMT totaling $778,637.
Severance costs. Severance costs amounted to $1,600,000 for the six months
ended June 30, 1997. No severance costs were incurred for the six months ended
June 30, 1996. The severance costs related to the employment termination of
certain members of senior management. Of this amount, approximately $713,000 is
related to non-cash compensation expense from stock options.
<PAGE> 9
Amortization of goodwill. Amortization of goodwill of $328,637 for the six
months ended June 30, 1997 related to the amortization of recognized goodwill
concurrent with the acquisition of BMT in October 1996. The Company had no
goodwill or related amortization for the six months ended June 30, 1996.
Other income (expense). Other income (expense) increased to net interest
income of $195,805 for the six months ended June 30, 1997 from a net interest
expense of $6,848 for the six months ended June 30, 1996. The increase is
attributable to higher net average cash balances, obtained primarily from the
Company's initial public offering ("IPO"), for the six months ended June 30,
1997 in comparison to the six months ended June 30, 1996.
INCOME TAXES
The Company has not generated any taxable income to date and, therefore,
has not paid any federal income taxes since its inception. The Company accounts
for income taxes under Statement of Financial Accounting Standards No. 109.
Realization of deferred tax assets is dependent on future earnings, if any, the
timing and amount of which are uncertain. Accordingly, valuation allowances, in
amounts equal to the net deferred tax assets, have been established in each
period to reflect these uncertainties.
At December 31, 1996, the Company had net operating losses, for tax
purposes, of approximately $4,400,000 that can be carried forward to reduce
federal income taxes. However, utilization of net operating losses and any tax
credit carryforwards will be subject to annual limitations due to the ownership
change limitations of the Internal Revenue Code of 1986, as amended, and similar
state provisions.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through the public and
private sale of equity securities and through bank-provided working capital
financing, short-term borrowings and equipment lease financing. Since inception,
the Company has raised approximately $26.8 million in net proceeds of equity
financing.
During the six months ended June 30, 1997 net cash flows used in operating
activities amounted to $54,981. During the six months ended June 30, 1996 net
cash used in operating activities amounted to $840,366. The decrease in net cash
flows used in operating activities in 1997 from 1996 was due to cash provided by
BMT's operations and cash provided from investment income.
The Company's primary internal source of liquidity presently consists of
existing borrowings and cash generated from BMT's operations. The Company's
primary external sources of liquidity are public and private debt and equity
financings and bank-provided debt financing.
As of June 30, 1997 and December 31, 1996, the Company had cash of
$12,040,637 and $12,694,047, respectively. The decrease since December 31, 1996
was due to the net cash used in operations, purchases of fixed assets and
repayment of long-term debt. As of June 30, 1997, the Company had no significant
noncancelable commitments for capital expenditures or raw material purchases,
although the Company may enter into such commitments in the future.
The Company's capital requirements depend on numerous factors, including the
extent to which the On-Command Catheter and other products gain market
acceptance, actions relating to regulatory and reimbursement matters, progress
of clinical trials, the effect of competitive products, the cost and effect of
future marketing programs, the resources the Company devotes to manufacturing
and developing its products, the success of proprietary airway management
products and OEM sales, general economic
<PAGE> 10
conditions and various other factors. The timing and amount of such capital
requirements cannot adequately be predicted. Consequently, although the Company
believes that the net proceeds from its IPO, together with existing borrowings
and cash anticipated to be generated from BMT's operations, will provide
adequate funding for its capital requirements in the foreseeable future, there
can be no assurance that the Company will not require additional funding or that
such additional funding, if needed, will be available on terms satisfactory to
the Company, if at all. Any additional equity financing may be dilutive to
stockholders, and debt financing, if available, may involve significant
restrictive covenants. Failure to raise capital when needed could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company expects its operating losses to continue until the On-Command
Catheter achieves significant market acceptance as it continues to expend
substantial resources in funding clinical trials in support of regulatory and
reimbursement approvals, expansion of marketing and sales activities, and
research and development. In addition, the Company's results of operations may
fluctuate significantly during future quarterly periods.
<PAGE> 11
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Not applicable.
Item 2 - Changes in Securities
Not applicable.
Item 3 - Default upon Senior Securities
Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5 - Other information
Not applicable.
Item 6 - Exhibit and Reports on Form 8-K
(a) Exhibit:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<S> <C>
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during this
period.
<PAGE> 12
SIGNATURE PAGE
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.
UROQUEST MEDICAL CORPORATION
Date: July 31, 1997 /s/ Terry E. Spraker
--------------------------------------------
Terry E. Spraker, Ph.D.
President and Chief Executive Officer
Date: July 31, 1997 /s/ Jeffrey L. Kaiser
--------------------------------------------
Jeffrey L. Kaiser
Vice President, Chief Financial Officer,
Treasurer, and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF UROQUEST MEDICAL CORPORATION,
INCLUDING THE NOTES THERETO, OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE
30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 12,040,637
<SECURITIES> 0
<RECEIVABLES> 2,556,119
<ALLOWANCES> 60,000
<INVENTORY> 2,814,423
<CURRENT-ASSETS> 17,738,119
<PP&E> 6,250,083
<DEPRECIATION> 1,800,623
<TOTAL-ASSETS> 34,306,695
<CURRENT-LIABILITIES> 3,497,237
<BONDS> 0
0
0
<COMMON> 11,845
<OTHER-SE> 28,428,687
<TOTAL-LIABILITY-AND-EQUITY> 34,306,695
<SALES> 7,660,378
<TOTAL-REVENUES> 7,660,378
<CGS> 4,062,087
<TOTAL-COSTS> 5,740,797
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 98,408
<INCOME-PRETAX> (1,946,701)
<INCOME-TAX> 82,000
<INCOME-CONTINUING> (2,028,701)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,028,701)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
