________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 1997
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[ ] 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: 0-28420
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Integ Incorporated
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Minnesota 41-1670176
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(State of Incorporation) (I.R.S. Employer Identification No.)
2800 Patton Road, St. Paul, MN 55113
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(Address of principal executive offices) (Zip Code)
Telephone Number: (612) 639-8816
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days. Yes X No ___
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As of August 5, 1997, the registrant had 9,314,869 shares of $.01 par value
common stock issued and outstanding.
________________________________________________________________________________
INTEG INCORPORATED
INDEX
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PART I. FINANCIAL INFORMATION Page
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Item 1. Financial Statements
Balance Sheets as of June 30, 1997 and December 31, 1996 3
Statements of Operations for the three and six months
ended June 30, 1997 and 1996 and for the period from
April 3, 1990 (inception) through June 30, 1997 4
Statements of Cash Flows for the three and six months
ended June 30, 1997 and 1996 and for the period from
April 3, 1990 (inception) through June 30, 1997 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION 10
Item 1-3. None
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. None
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 11
2
INTEG INCORPORATED
(A Development Stage Company)
BALANCE SHEETS
JUNE 30 December 31
1997 1996
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(UNAUDITED)
ASSETS
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Current assets:
Cash and cash equivalents $ 27,767,449 $ 33,879,608
Receivables 30,957 113,254
Prepaid expenses 128,468 157,933
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Total current assets 27,926,874 34,150,795
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Furniture and equipment 6,719,000 3,701,648
Less accumulated depreciation (1,162,235) (821,476)
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5,556,765 2,880,172
Other assets 550,620 684,933
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TOTAL ASSETS $ 34,034,259 $ 37,715,900
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LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 884,473 $ 1,236,348
Current portion of long-term debt and
capital lease obligations 657,343 337,277
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Total current liabilities 1,541,816 1,573,625
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Long-term debt and capital lease
obligations, less current portion 2,464,717 1,298,484
Shareholders' equity:
Common stock 93,016 92,757
Additional paid-in capital 54,290,386 54,269,333
Deficit accumulated during the
development stage (23,859,187) (18,873,957)
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30,524,215 35,488,133
Deferred compensation (496,489) (644,342)
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Total shareholders' equity 30,027,726 34,843,791
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TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 34,034,259 $ 37,715,900
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3
INTEG INCORPORATED
(A Development Stage Company)
STATEMENT OF OPERATIONS
(UNAUDITED)
Period from
April 3, 1990
Three Months Ended Six Months Ended (Inception) to
June 30 June 30 June 30
------------------------------ ------------------------------
1997 1996 1997 1996 1997
--------------- ------------- ------------- -------------- -------------
OPERATING EXPENSES:
Research and development $ 1,154,369 $ 1,212,760 $ 2,296,072 $ 2,114,091 $12,895,001
Manufacturing development 585,703 349,324 1,138,941 700,806 3,622,906
Clinical and regulatory 304,944 163,017 575,770 309,005 1,757,926
General and administrative 520,306 363,380 1,052,094 657,617 5,370,664
Sales and marketing 225,001 217,950 448,519 415,425 1,855,987
--------------- ------------- ------------- -------------- -------------
OPERATING LOSS (2,790,323) (2,306,431) (5,511,396) (4,196,944) (25,502,484)
--------------- ------------- ------------- -------------- -------------
OTHER INCOME (EXPENSE):
Interest income 416,099 165,903 839,093 347,752 2,813,781
Interest expense (149,469) (58,135) (312,927) (80,341) (1,170,484)
--------------- ------------- ------------- -------------- -------------
266,630 107,768 526,166 267,411 1,643,297
--------------- ------------- ------------- -------------- -------------
NET LOSS FOR THE PERIOD AND DEFICIT
ACCUMULATED DURING THE DEVELOPMENT
STAGE $(2,523,693) $(2,198,663) $(4,985,230) $(3,929,533) $(23,859,187)
=============== ============= ============= ============== =============
NET LOSS PER SHARE:
Primary ($0.27) ($5.07) ($0.54) ($3.12) ($8.20)
Fully-diluted* ($0.27) ($0.35) ($0.54) ($0.55) ($5.09)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Primary 9,293,020 433,333 9,287,725 1,258,387 2,908,063
Fully-diluted* 9,293,020 6,269,038 9,287,725 7,094,092 4,687,148
Assumes conversion of all previously outstanding convertible preferred stock
into common stock during each reporting period prior to July 1, 1996, the
closing date of the company's initial public offering, at which time all
convertible preferred stock was automatically converted into common stock.
4
INTEG INCORPORATED
(A Development Stage Company)
STATEMENT OF CASH FLOWS
(unaudited)
Period from
Three Months Ended Six Months Ended April 3, 1990
June 30 June 30 (Inception) to
-------------------------- --------------------------- June 30
1997 1996 1997 1996 1997
-------------------------- --------------------------- ----------------
Operating activities:
Net loss $ (2,523,693) $ (2,285,868) $ (4,985,230) $ (3,842,327) $ (23,859,187)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation 185,813 102,039 340,759 190,334 1,196,627
Deferred compensation amortization 73,926 224,791 147,853 145,113 850,898
Amortization of loan committment fee - - 77,463 - 250,074
Amortization of options and warrants related to debt
financing, lease guarantee, extension of options
and consulting services 5,751 8,886 11,501 15,735 266,303
Loss on sale of equipment and deposit write-off - - - - 68,209
Changes in operating assets and liabilities:
Receivables 46,085 (13,960) 82,297 (14,747) (30,957)
Prepaid expenses and other assets (54,970) (166,096) 2,290 (194,466) (220,504)
Accounts payable and accrued expenses 11,602 152,998 (351,875) 19,890 884,473
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Net cash used in operating activities (2,255,486) (1,977,210) (4,674,942) (3,680,468) (20,594,064)
Investing activities:
Purchase of furniture and equipment (1,770,109) (147,967) (3,006,170) (537,014) (6,044,642)
Proceeds from sale of furniture and equipment - - - - 43,079
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Net cash used in investing activities (1,770,109) (147,967) (3,006,170) (537,014) (6,001,563)
Financing activities:
Proceeds from sale of Convertible Preferred Stock - - - - 22,789,732
Proceeds from bridge loan debt - - - - 2,900,000
Payments on long-term debt and capital lease obligations (64,283) (34,419) (201,953) (71,638) (585,003)
Proceeds from sale of Common Stock 13,062 - 21,312 - 26,156,479
Proceeds from borrowings under equipment loan - - 1,749,594 926,418 3,101,868
-------------------------- --------------------------- ----------------
Net cash provided by financing activities (51,221) (34,419) 1,568,953 854,780 54,363,076
-------------------------- --------------------------- ----------------
Increase (decrease) in cash and cash equivalents (4,076,816) (2,159,596) (6,112,159) (3,362,702) 27,767,449
Cash and cash equivalents - beginning of period 31,844,265 14,561,032 33,879,608 15,764,138 -
-------------------------- --------------------------- ----------------
Cash and cash equivalents - end of period $27,767,449 $12,401,436 $27,767,449 $12,401,436 $27,767,449
========================== =========================== ================
Supplemental disclosure of cash flow information
Fixed assets capitalized under capital lease and loan
agreements $ - $ - $ 11,182 $ - $ 763,052
The company converted $2,900,000 of debt into
Series E Convertible Preferred Stock $ - $ - $ - $ - $ 2,900,000
5
INTEG INCORPORATED
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying financial statements, which are unaudited except for the
balance sheet as of December 31, 1996, have been prepared in accordance with
instructions to Form 10-Q and do not include all the information and notes
required by Generally Accepted Accounting Principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. These financial statements should be read in conjunction with the
financial statements and accompanying notes from the Company's Annual Report on
Form 10-K/A for the year ended December 31, 1996 filed with the Securities and
Exchange Commission.
(2) NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of common
shares outstanding during the periods presented. Pursuant to Securities and
Exchange Staff Accounting Bulletin No. 83 (SAB No. 83), shares convertible into
common stock issued by the Company at prices less than the initial public
offering price ($9.50 per share) during the 12 months immediately preceding the
initial public offering, plus stock options and warrants granted at exercise
prices less than the initial public offering price during the same period, have
been included in the determination of shares used in calculating the net loss
per share, using the treasury stock method, as if they were outstanding for all
periods presented prior to the initial public offering.
Fully-diluted net loss per share computed in accordance with Accounting
Principles Board Opinion No. 15 and SAB No. 83 gives effect to the conversion of
all series of convertible preferred stock into common stock during the entirety
of each respective reporting period. The primary net loss per share assumes
conversion of all previously outstanding convertible preferred stock as of July
1, 1996, when such automatic conversion actually took place.
(3) EQUIPMENT LOAN AGREEMENT
During 1996, the Company entered into an equipment loan agreement which provides
for borrowings up to $12.5 million to finance the purchase of equipment and
fixtures including automated manufacturing equipment and tooling. Loans are
paid back monthly over a four year period. The obligation of the lender to make
additional loans expires December 31, 1998. This agreement was amended in
August 1997 to adjust the required collateral for all future borrowings that
occur prior to a public announcement that the in-house testing of the Company's
LifeGuide System has resulted in performance which should allow the Company to
initiate clinical trials within 90 days. The Company has borrowed a total of
$3.1 million under this agreement as of June 30, 1997.
6
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. When used in
this Form 10-Q and in future filings by the Company with the Securities and
Exchange Commission, in the Company's press releases and in oral statements made
with the approval of an authorized executive officer of the Company, the word or
phrases "believes," "anticipates," "expects," "intends," "will likely result,"
"estimates," "projects" or similar expressions are intended to identify such
forward-looking statements, but are not the exclusive means of identifying such
statements. These forward-looking statements involve risks and uncertainties
that may cause the Company's actual results to differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such differences include, but are not limited to, the following: risks
associated with the development of a new technology; dependence on the LifeGuide
System; history of operating losses and expectation of future losses; limited
clinical testing experience; uncertainty of obtaining Food and Drug
Administration clearances; heightened competition; risks associated with the
lack of manufacturing capability and dependence on contract manufacturers and
suppliers; and risks associated with the company's dependence on proprietary
technology, including those related to adequacy of patent and trade secret
protection. The Company wishes to caution readers not to place undue reliance
on any such forward-looking statements, which speak only as of the date made.
The Company undertakes no obligation to revise any forward-looking statements in
order to reflect events or circumstances after the date of such statements.
Readers are urged to carefully review and consider the various disclosures made
by the Company in this report and in the Company's other reports filed with the
Securities and Exchange Commission that attempt to advise interested parties of
the risks and factors that may affect the Company's business. Such forward-
looking statements are qualified in their entirety by the cautions and risk
factors set forth under "Cautionary Statement" filed as Exhibit 99.1 to this
Form 10-Q.
GENERAL
Integ, a development stage company, was incorporated on April 3, 1990 to develop
the LifeGuide System, a next generation, hand-held glucose monitoring product
for use by people with diabetes that avoids the pain and blood associated with
conventional "finger-stick" technologies. Utilizing the Company's proprietary
interstitial fluid sampling technology, the LifeGuide System will allow people
with diabetes to frequently self-monitor their glucose levels without repeatedly
enduring the pain of lancing their fingers to obtain a blood sample.
From inception through June 30, 1997, the Company has incurred losses totaling
$23.9 million, consisting of $12.9 million of research and development expenses,
$5.4 million of general and administrative expenses and $5.6 million of other
expenses net of interest income. The Company's activities have consisted
primarily of research and product development, product design, and development
of the manufacturing processes and marketing strategies needed for the
introduction of the LifeGuide System. The Company has generated no revenue and
has sustained significant operating losses each year since inception. The
Company expects such losses to continue for the next several years.
7
The Company's future success is entirely dependent upon the successful
development, commercialization and market acceptance of the LifeGuide System,
the development of which is ongoing and the complete efficacy of which has not
yet been demonstrated. The Company is currently focused on the research and
development activities necessary to modify the current design in order for the
LifeGuide System to meet the Company's product specifications. Until such time
as the commercial prototypes of the LifeGuide System meet the Company's
performance specifications, the Company expects that further increases in non-
research and development expenses will be minimized.
RESULTS OF OPERATIONS
Comparison of Three and Six Months Ended June 30, 1997 and 1996
General: The Company's net loss totaled $2,523,693 and $4,985,230 during the
three and six months ended June 30, 1997, up from $2,198,663 and $3,929,533
during the same periods in 1996. The Company expects net losses to continue for
the next several years.
Research and development expenses: Research and development expenses decreased
5% to $1,154,369 during the three months ended June 30, 1997 from $1,212,760
during the same period in 1996. This decrease in research and development
expenses was due primarily to decreases in the usage of prototype materials and
legal costs associated with patent filings. The impact of these expense
decreases was partially offset by higher staffing costs, depreciation and
consulting fees. For the first half of 1997, research and development expenses
increased 9% to $2,296,072, up from $2,114,091 during the first half of 1996.
The year-to-date increase in research and development expenses is primarily
related to higher staffing costs and consulting fees, which were partially
offset by lower prototype expenses.
Manufacturing development expenses: Manufacturing development expenses totaled
$585,703 and $1,138,941 during the three and six month periods ended June 30,
1997, up from $349,324 and $700,806 during the same periods in 1996. These
increases in manufacturing development expenses were due primarily to increases
in pre-manufacturing expenses, consisting of facility costs, prototype expenses,
and compensation and benefit costs of additional staff that were hired to plan
and design the Company's automated manufacturing processes. Once production of
the LifeGuide System commences, manufacturing related costs will be allocated to
inventory and costs of goods sold.
Clinical and regulatory expenses: Clinical and regulatory expenses totaled
$304,944 and $575,770 during the three and six month periods ended June 30,
1997, up from $163,017 and $309,005 during the same periods in 1996. These
increases in clinical and regulatory expenses were due primarily to increases in
compensation and benefit costs of additional staff that were hired to plan the
clinical trials necessary to obtain the required regulatory approvals for the
LifeGuide System.
General and administrative expenses: General and administrative expenses
totaled $520,306 and $1,052,094 during the three and six month periods ended
June 30, 1997, up from $363,380 and $657,617 during the same periods in 1996.
These increases in general and administrative expenses were due to increases in
compensation and various legal, insurance and filing costs of being a publicly
traded company.
8
Sales and marketing expenses: Sales and marketing expenses increased slightly
to $225,001 and $448,519 for the three and six month periods ended June 30,
1997, compared to $217,950 and $415,425 for the comparable periods in 1996.
Interest Income: Interest income increased to $416,099 and $839,093 for the
three and six month periods ended June 30, 1997, compared to $165,903 and
$347,752 during the comparable 1996 periods. The increase was due primarily to
higher average balances of cash and cash equivalents in 1997 as a result of the
investment of net proceeds totaling approximately $26 million received in July
1996 from the Company's initial public offering.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations since inception have been funded by net proceeds from
the sale of Common and Preferred Stock totaling approximately $52 million
through June 30, 1997. The Company had cash and cash equivalents of
approximately $28 million as of June 30, 1997.
The Company believes that its current cash balances, when combined with the $9.4
million unused portion of its line of credit facility, will be sufficient to
fund its operations until sometime during the second half of 1998. The
Company's future liquidity and capital requirements will depend on numerous
factors, including when or if the performance of the LifeGuide System meets the
required performance specifications, the extent to which the Company's LifeGuide
System gains market acceptance, the timing of regulatory actions regarding the
LifeGuide System, the costs and timing of expansion of sales, marketing and
manufacturing activities, the results of clinical trials and competition. See
Exhibit 99.1 to this Form 10-Q for a more detailed description of the factors
that may affect the Company's future liquidity and capital requirements.
9
II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On June 4, 1997, the Company held a regular meeting of its shareholders, at
which the shareholders voted on the following matters:
1. To elect Mark B. Knudson, Ph.D. and Terrance G. McGuire to the Board of
Directors of the Company to serve for three year terms that will expire at
the Company's annual shareholder meeting in 2000. The vote on this
resolution was as follows:
Mark B. Knudson, Ph.D.: 8,105,876 For; 0 Against; 5,051 Abstain
Terrance G. McGuire: 8,105,876 For; 0 Against; 5,051 Abstain
2. To approve the Integ Incorporated 1997 Employee Stock Purchase Plan. The
vote on this resolution was as follows:
8,047,929 For; 31,515 Against; 14,139 Abstain; 17,344 Broker non-vote
3. To ratify the appointment of Ernst & Young LLP as the Company's independent
auditors for the year ending December 31, 1997. The vote on this resolution
was as follows:
8,091,428 For; 11,475 Against; 8,024 Abstain; 0 Broker non-vote
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits filed herewith.
10.1 Amendment dated August 7, 1997 to the loan agreement
between Venture Lending & Leasing, Inc. and the Company.
11. Statement Re: Computation of Net Loss per Common and Common
Equivalent Share.
27. Financial Data Schedule.
99.1 Cautionary Statement
(b) No reports on Form 8-K were filed during the quarter ended
June 30, 1997.
10
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.
INTEG INCORPORATED
(Registrant)
Date: August 13, 1997 By: /s/ John R. Brintnall
----------------------
John R. Brintnall
Vice President of Finance
(Principal financial and accounting officer and
duly authorized signatory on behalf of the
Registrant)
11
EXHIBIT INDEX
Exhibit Description
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10.1 Amendment dated August 7, 1997 to the loan agreement between Venture
Lending & Leasing, Inc. and the Company.
11. Statement Re: Computation of Net Loss per Common and Common
Equivalent Share.
27. Financial Data Schedule (Electronically Filed)
99.1 Cautionary Statement