FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended September 30, 1998 Commission file number 0-28492
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INNOVASIVE DEVICES, INC.
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(Exact name of registrant as specified in its charter)
Massachusetts 04-3132641
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
734 Forest Street, Marlborough MA 01752
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(Address of principal executive offices)
Registrant's telephone number, including area code 508/460-8229
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N/A
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Former name, former address and former fiscal year, if changed since last
report.
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.
(1) YES X NO
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(2) YES NO X
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The number of shares outstanding of the registrant's common stock as of November
14, 1998 was 9,188,017.
INNOVASIVE DEVICES, INC.
INDEX
Page
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Part I: Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheet at September 30, 1998
(unaudited) and December 31, 1997 3
Condensed Consolidated Statement of Operations (unaudited)
for the Three and Nine Months Ended September 30, 1998 and 1997 4
Condensed Consolidated Statement of Cash Flows (unaudited)
for the Nine Months Ended September 30, 1998 and 1997 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II. Other Information 12
Signatures 13
2
Part I - Financial Information
Item 1. Financial Statements
INNOVASIVE DEVICES, INC.
Condensed Consolidated Balance Sheet
(in thousands)
September 30, December 31,
1998 1997
-------------------- --------------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 5,328 $ 2,916
Marketable securities 1,289 10,604
Accounts receivable, net of allowance for
doubtful accounts of $ 148 and $ 121 at
September 30, 1998 and December 31, 1997,
respectively 1,845 1,625
Inventories 4,920 2,947
Prepaid expenses 185 116
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Total current assets 13,567 18,208
Fixed assets, net 2,015 1,960
Other assets, net 1,152 1,352
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$ 16,734 $ 21,520
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 591 $ 809
Accounts payable to related party 216 392
Other current liabilities 1,324 1,122
-------------------- --------------------
Total current liabilities 2,131 2,323
Stockholders' equity:
Common stock 1 1
Additional paid-in capital 54,863 54,702
Accumulated deficit (40,196) (35,156)
Deferred compensation (65) (350)
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14,603 19,197
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$ 16,734 $ 21,520
==================== ====================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
INNOVASIVE DEVICES, INC.
Condensed Consolidated Statement of Operations
(In thousands, except per share data; unaudited)
Three months ended Nine months ended
September 30, September 30,
----------------------------------------- ------------------------------------------
1998 1997 1998 1997
------------------ ----------------- ----------------- ----------------
Net sales $ 2,748 $ 1,985 $ 8,261 $ 5,399
Cost of sales 769 556 2,313 1,576
----------------- ------------------ ------------------ ------------------
Gross profit 1,979 1,429 5,948 3,823
Selling, general and administrative
expenses 2,708 2,282 8,179 5,633
Research and development 971 1,052 3,232 2,809
Purchased in-process research and
development - - - 13,370
----------------- ------------------ ------------------ ------------------
Loss from operations (1,700) (1,905) ( 5,463) (17,989)
Interest income, net 104 260 423 844
----------------- ------------------ ------------------ ------------------
Net loss ($ 1,596) ($ 1,645) ($ 5,040) ($ 17,145)
================= ================== ================== ==================
Basic and diluted
net loss per share ($ 0.17) ($ 0.18) ($ 0.55) ($ 2.17)
================= ================== ================== ==================
Shares used in computing basic
and diluted net loss
per share 9,188 9,154 9,176 7,914
================= ================== ================== ==================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
INNOVASIVE DEVICES, INC.
Condensed Consolidated Statement of Cash Flows
(In thousands; unaudited)
Nine months ended
September 30,
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1998 1997
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Cash flows from operating activities
Net loss $(5,040) $(17,145)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 723 331
Amortization of deferred compensation 339 74
Purchased in-process research and development - 13,370
Changes in assets and liabilities:
Accounts receivable, net (220) (773)
Inventories (1,973) (1,191)
Prepaid expenses (69) (37)
Other assets 110 -
Accounts payable (218) (159)
Accounts payable to related party (176) 245
Other current liabilities 202 129
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Net cash used for operating activities (6,322) (5,156)
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Cash flows from investing activities
Purchases of fixed assets (688) (647)
Purchases of marketable securities (6,874) (10,181)
Redemption of marketable securities 16,189 6,422
Acquisition of business, net of cash acquired - (544)
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Net cash provided by (used for) investing activities 8,627 (4,950)
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Cash flows from financing activities
Repayment of note payable - (602)
Proceeds from issuance of common stock,
net of issuance costs 107 44
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Net cash provided by (used for) financing activities 107 (558)
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Net increase (decrease) in cash and cash equivalents 2,412 (10,664)
Cash and cash equivalents at beginning of period 2,916 12,825
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Cash and cash equivalents at end of period $ 5,328 $ 2,161
==================== ====================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
INNOVASIVE DEVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Innovasive Devices, Inc. (the "Company") include, in the opinion of management,
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation of the Company's financial position as of
September 30, 1998 and the results of operations for the three and nine month
periods ended September 30, 1998 and 1997. Results of operations for interim
periods are not necessarily indicative of those to be achieved for the full
year.
Pursuant to accounting requirements of the Securities and Exchange Commission
(the "SEC") applicable to quarterly reports on Form 10-Q, the accompanying
unaudited condensed consolidated financial statements and these notes do not
include all disclosures required by generally accepted accounting principles for
complete financial statements. Accordingly, these statements should be read in
conjunction with the financial statements and accompanying notes contained in
the Company's Annual Report on Form 10-K for the year ended December 31, 1997
filed with the SEC on March 31, 1998.
2. Inventories
Inventories consist of the following:
September 30, December 31,
1998 1997
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(unaudited)
Raw materials $1,961 $1,360
Work-in-process 598 329
Finished goods 2,361 1,258
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Totals $4,920 $2,947
==================== ====================
3. Net loss per share (unaudited)
Basic earnings per share is computed by dividing the income available to common
stockholders by the weighted average number of common shares outstanding for the
period. For purposes of calculating diluted earnings per share, the denominator
includes both the weighted average number of common shares outstanding and
potential dilutive common shares outstanding for the period. For each of the
periods presented, basic and diluted earnings per share are the same due to the
antidilutive effect of potential common shares outstanding.
6
INNOVASIVE DEVICES, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Innovasive Devices, Inc. (the "Company") is primarily engaged in the
development, manufacture and marketing of proprietary devices and
instrumentation which facilitate the reattachment of soft tissue structures,
such as ligaments and tendons, to bones and other tissues. The Company has a
limited operating history and has expended significant resources to fund
research and development, the establishment of its manufacturing capabilities
and the expansion of its marketing and sales organization. The Company plans to
continue investing aggressively in these areas. Although the Company's sales
have been principally derived from the sale of its family of shoulder related
products, the Company now markets five product platforms: suture anchors, suture
systems, cartilage repair products, anterior cruciate ligament ("ACL")
reconstruction products and its newly introduced meniscal repair products. On
October 13, 1998, the Company announced the commercial release of its
Clearfix(TM) Meniscal Screw, a bioabsorbable device used to repair traumatic
tears within the meniscus of the knee through a minimally invasive arthroscopic
approach. The Company estimates there are approximately 700,000 meniscal tears
annually in the United States. While the vast majority of patients have the
damaged tissue removed, approximately 100,000 of these injuries are currently
being repaired with conventional suturing or tacking techniques. This represents
an estimated $40 million existing U.S. market opportunity. In June of 1997 the
Company broadened its product portfolio with the acquisition of MedicineLodge,
Inc. ("MLI"), a company which designs develops and manufactures orthopaedic
medical devices - particularly implants and related instrumentation used in
minimally invasive arthroscopic procedures to repair injuries to the knee.
The following information should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto included in this
Quarterly Report and with the Financial Statements and Management's Discussion
and Analysis of Financial Condition and Results of Operations contained in the
Company's Annual Report on Form 10-K filed with the SEC on March 31, 1998.
Any statements in this report expressing the beliefs and expectations of
management regarding the Company's future results and performance are forward-
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements are based on current
expectations that involve a number of risks and uncertainties. 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. Such forward looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. These risks include the receipt of regulatory
approvals, progress of product development programs, clinical efficacy of and
market demand for the products. Certain of such risks and uncertainties are
described in Exhibit 99 of the Company's Annual Report on Form 10-K filed with
the Securities and Exchange Commission on March 31, 1998.
7
Results of Operations
Three Months Ended September 30, 1998 compared to the Three Months Ended
September 30, 1997
Net sales for the third quarter of 1998 of $2,748,000 increased $ 763,000 from
$1,985,000 for the same period in the prior year. The increase resulted
primarily from a higher level of sales of ACL reconstruction products, ROC
suture anchors, and suture systems. Two products contributed to the increase in
ACL products over the third quarter of 1997: the Linx HT, which provides femoral
fixation of hamstring tendon grafts, and the GeoFit Screw and Washer system used
for tibial fixation of soft tissue. Contributing to the increase in ROC suture
anchor sales was the BioROC, a bioabsorbable suture anchor introduced in the
first quarter of 1998. The Company also experienced increased sales of its ROC
EZ and ROC XS suture anchors. Suture system sales also increased over the same
quarter in 1997 as a result of increased sales of the Y-Knot, Suture Grasper and
Cuff Link product lines. Sales of the Company's COR system, used for articular
cartilage repair in the knee, were consistent with the same period in 1997.
Domestic net sales increased during the third quarter of 1998 over the third
quarter of 1997 as a result of an increase in sales of the Company's ACL
reconstruction products, ROC suture anchors, and suture systems. In addition,
the Company has increased its domestic direct sales force, clinical support and
agent distribution network over the same quarter in the prior year.
International net sales increased during the third quarter of 1998 from the
third quarter of 1997 primarily as a result of an increase in ACL reconstruction
systems and ROC suture anchors.
Gross profit increased to $1,979,000 in the third quarter of 1998 from
$1,429,000 in the third quarter of 1997. As a percentage of sales, gross profit
remained consistent at 72% as compared with the same quarter last year.
Selling, general and administrative expenses increased to $2,708,000 in the
third quarter of 1998 from $2,282,000 in the third quarter of 1997. The increase
resulted primarily from increased salary and travel costs related to the
expansion of the domestic direct sales force, higher selling commissions
resulting from higher sales volume and increased advertising costs relating to
new product introductions.
Research and development expenses decreased to $971,000 in the third quarter of
1998 from $1,052,000 in the third quarter of 1997. The decrease was primarily
attributable to lower expenditures related to a product development project
cosponsored between the Company and Cohesion Technologies, Inc. (as assigned
from Collagen Corporation). The Company also experienced a decrease in
compensation costs related to the grant of stock options to its Scientific
Advisory Board.
Interest income decreased to $104,000 in the third quarter of 1998 from $260,000
in the third quarter of 1997 primarily as a result of investment returns earned
on lower average cash balances maintained during the third quarter of 1998 as
compared to the prior year.
As a result of the foregoing, the net loss decreased to $1,596,000 in the third
quarter of 1998 from a loss of $1,645,000 in the third quarter of 1997.
8
Nine Months Ended September 30, 1998 compared to Nine Months Ended September 30,
1997
Net sales for the first nine months of 1998 of $8,261,000 increased $2,862,000
from $5,399,000 for the same period in 1997. The increase resulted primarily
from a higher sales level of ACL reconstruction products, ROC suture anchors,
and suture systems. Two products contributed to the increase in ACL products
over the same period last year: the Linx HT, a device which provides femoral
fixation of hamstring tendon grafts, and the GeoFit Screw and Washer system used
for tibial fixation of soft tissue. Both products were commercially released in
the third quarter of 1997. The Company also experienced modest increases in
sales of Interference Screw and Transverse Fixation Systems. Contributing to the
increase in ROC suture anchor sales was the ROC EZ, which replaced the Company's
original ROC anchor in the second quarter of 1997, the BioROC, a bioabsorbable
suture anchor introduced in the first quarter of 1998 and the ROC XS, a suture
anchor used in soft bone applications. Suture system sales also increased over
the first nine months of 1997 partially as a result of increased sales of the
CuffLink, introduced in the second quarter of 1997, and the Y-Knot, introduced
in the second quarter of 1998. The CuffLink is used to augment tunnels made in
the bone for rotator cuff repair procedures. The Y-Knot is a device used in
place of traditional knot configurations when securing soft tissue to bone. The
Company's line of Suture Graspers, used in arthroscopic knot tying, also
contributed to the increase over the prior year. The Company's COR system, used
for articular cartilage repair in the knee, also experienced increased sales
over the same period in 1997.
Domestic net sales increased during the first nine months of 1998 over the same
period in 1997 as a result of an increase in sales of the Company's ROC suture
anchors, ACL reconstruction products and suture systems. In addition, the
Company has increased its domestic direct sales force, clinical support and
agent distribution network over the same period in the prior year.
International net sales also increased during the first nine months of 1998 over
the same period in 1997 primarily as a result of an increase in ACL
reconstruction products, ROC suture anchors, and suture systems.
Gross profit increased to $5,948,000 for the first nine months of 1998 from
$3,823,000 for the same period in 1997. As a percentage of sales, gross profit
increased to 72.0% for the first nine months of 1998 from 70.8% for the same
period in 1997. The increase in gross profit was due primarily to an improved
product sales mix in the period and higher sales volumes that resulted in
improved manufacturing efficiencies.
Selling, general and administrative expenses increased to $8,179,000 for the
first nine months of 1998 from $5,633,000 for the same period in 1997. The
increase resulted primarily from the expansion of the domestic direct sales
force and clinical support resulting in increased salary and travel costs,
higher selling commissions resulting from the increased sales volume, increased
advertising costs relating to new product introductions and incremental
administrative costs related to the operations of MLI, acquired in the second
quarter of 1997.
Research and development expenses increased to $3,232,000 in the first nine
months of 1998 from $2,809,000 in the same period in 1997. The increase was
primarily attributable to incremental research and development costs associated
with the operations of MLI, acquired in the second quarter of 1997, and
compensation related to the grant of stock options to the Company's Scientific
Advisory Board.
As a result of the Company's transaction with MLI in the second quarter of 1997,
the Company incurred a non-recurring charge to operations of $13,370,000
representing the portion of the purchase price allocated to in-process research
and development.
Interest income decreased to $423,000 in the first nine months of 1998 from
$844,000 in the same period in 1997 primarily as a result of investment returns
earned on lower average cash balances maintained during the first nine months of
1998 as compared to the prior year.
9
As a result of the foregoing, the net loss decreased to $5,040,000 in the first
nine months of 1998 from a loss of $17,145,000 in the same period of 1997.
Liquidity and Capital Resources
As of September 30, 1998, cash, cash equivalents and marketable securities
amounted to $6.6 million as compared to $13.5 million at December 31, 1997.
Cash used in the Company's operations amounted to $6.3 million for the first
nine months of 1998 compared to $5.2 in the same period of 1997. The net loss
incurred of $5.0 million and an increase in inventories of $2.0 were partially
offset by depreciation and the amortization of deferred compensation charges.
Cash provided by investing activities totaled $8.6 million for the first nine
months of 1998 resulting from net redemptions of marketable securities totaling
$9.3 million partially offset by capital equipment expenditures totaling
$689,000. The Company invests its excess cash in marketable securities with
maturities of less than two years.
Cash provided by financing activities totaled $107,000 for the first nine months
of 1998 resulting primarily from the exercise of shares from the Company's
Employee Stock Purchase Plan as well as the exercise of common stock options.
As of September 30, 1998, working capital amounted to $11.4 million as compared
to $15.9 million at December 31, 1997.
The Company expects that its balance of cash, cash equivalents and marketable
securities will be adequate to fund the near term cash requirements for
operations, working capital and fixed assets.
The Company's future liquidity and capital requirements will depend upon the
establishment of effective sales channels in the United States and abroad, the
extent to which the Company's products gain market acceptance, the progress of
research and development programs, regulatory requirements and the expansion of
its manufacturing capabilities to satisfy increasing volume requirements.
Therefore, the Company cannot provide assurances that it will not require
additional financing in the future. If additional financing is necessary, the
Company would seek to raise these funds through bank facilities or debt or
equity offerings. There can be no assurance that such financing would be
successfully completed or that such financing would be available on terms
acceptable to the Company.
The Year 2000 Issue
The year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any computer programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company believes that its primary business and research and development
systems will be year 2000 compliant by the first quarter of 1999 based on it's
internal evaluations and testing of these systems. The Company does not rely
materially on non-IT related technology in its manufacturing processes and
thereby does not anticipate that Y2K issues will affect its ability to
manufacture finished goods. The Company has begun the process of developing a
communication strategy for third party vendors and intends to issue
questionnaires that will address Y2K compliance. The Company anticipates that
its assessment of third party vendors will be completed by the second quarter of
1999. The Company does not anticipate incurring additional costs outside of the
scope of its current IT budget to complete future testing and compliance
activities.
10
The Company relies extensively on third party suppliers. Because their systems
are not directly under the Company's control, the Company is at risk that all
required external Y2K compliance efforts will not be completed on a timely
basis. In the event that the Company's significant suppliers do not
successfully and timely achieve Year 2000 compliance, and the Company is unable
to replace them with alternate suppliers, the Company's operations could be
adversely affected.
At this time, the Company believes that the year 2000 problem will not pose
significant operational problems for the Company's computer systems. Since no
significant issues have arisen, the Company does not have a contingency plan to
address any material 2000 issues. If significant year 2000 issues arise, the
Company may not be able to develop and implement a contingency plan on a timely
basis and the Company's operations could be adversely affected.
11
INNOVASIVE DEVICES, INC.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
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On October 29, 1998 the Company announced that a patent infringement
suit had been filed against the Company in the U.S. District Court for
the District of Massachusetts by Bionx Implants, Inc. The suit alleges
that the Company's Meniscal Dart, currently in the final phases of
development, infringes a Bionx patent. The lawsuit does not allege any
infringement with respect to the Company's Meniscal Screw, which was
commercially launched in October 1998. Based on a preliminary review of
the Bionx complaint, the Company believes that the suit is without
merit and intends to defend itself.
Item 2. Changes in Securities
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None
Item 3. Defaults Upon Senior Securities
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None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
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None
Item 6. Exhibits and Reports on Form 8-K
---------------------------------
None
12
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.
INNOVASIVE DEVICES, INC,
Date: November 14, 1998 By:/s/ Richard D. Randall
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Richard D. Randall
President, Chief Executive Officer
and Director
(Principal Executive Officer)
Date: November 14, 1998 By:/s/ James V. Barrile
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James V. Barrile
Executive Vice President of Finance,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
13