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 June 30, 1999 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 August
12, 1999 was 9,261,184.
INNOVASIVE DEVICES, INC.
INDEX
Page
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Part I: FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Unaudited Condensed Balance Sheet at June 30, 1999
and December 31, 1998 3
Unaudited Condensed Statement of Operations for the Three and Six Months
Ended June 30, 1999 and 1998 4
Unaudited Condensed Statement of Cash Flows for the
Six Months Ended June 30, 1999 and 1998 5
Notes to Unaudited Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submissions of Matters to a Vote of Security Holders 12
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits 13
b) Reports on Form 8-K 13
SIGNATURES 14
2
Part I - Financial Information
Item 1. Financial Statements
INNOVASIVE DEVICES, INC.
Condensed Balance Sheet
(unaudited, in thousands)
June 30, December 31,
1999 1998
-------------------- --------------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,626 $ 3,724
Marketable securities 6 1,043
Accounts receivable, net of allowance for
doubtful accounts of $157 at June 30, 1999
and $140 at December 31, 1998 2,326 2,189
Inventories 5,734 5,596
Prepaid expenses 64 175
-------------------- --------------------
Total current assets 10,756 12,727
Fixed assets, net 1,912 2,212
Other assets, net 1,055 1,120
-------------------- --------------------
$ 13,723 $ 16,059
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 386 $ 682
Accounts payable to related party 17 60
Other current liabilities 1,587 2,103
-------------------- --------------------
Total current liabilities 1,990 2,845
Stockholders' equity:
Common stock 1 1
Additional paid-in capital 54,996 54,918
Accumulated deficit (43,244) (41,655)
Deferred compensation (20) (50)
-------------------- --------------------
11,733 13,214
-------------------- --------------------
$ 13,723 $ 16,059
==================== ====================
The accompanying notes are an integral part of these condensed financial
statements.
3
INNOVASIVE DEVICES, INC.
Condensed Statement of Operations
(In thousands, except per share data; unaudited)
Three months ended Six months ended
June 30, June 30,
------------------------------------------ ---------------------------------------
1999 1998 1999 1998
----------------- ---------------- ---------------- ----------------
Net sales $ 4,295 $ 2,955 $ 8,546 $ 5,513
Cost of sales 1,270 829 2,547 1,544
----------------- ---------------- --------------- ----------------
Gross profit 3,025 2,126 5,999 3,969
Selling, general and administrative
expenses 3,058 2,749 6,080 5,471
Research and development 809 1,165 1,683 2,261
----------------- ---------------- --------------- ----------------
Loss from operations (842) (1,788) (1,764) (3,763)
Interest income, net 36 124 83 319
Other income 92 - 92 -
----------------- ---------------- --------------- ----------------
Net loss ($ 714) ($ 1,664) ($ 1,589) ($ 3,444)
================= ================ =============== ================
Basic and diluted net loss per share ($ 0.08) ($ 0.18) ($ 0.17) ($ 0.38)
=================== ================== ================= ==================
Shares used in computing basic
and diluted net loss per share 9,207 9,175 9,207 9,171
=================== ================== ================= ==================
The accompanying notes are an integral part of these condensed financial
statements.
4
INNOVASIVE DEVICES, INC.
Condensed Statement of Cash Flows
(In thousands; unaudited)
Six months ended
June 30,
---------------------------------------------
1999 1998
---- ----
Cash flows from operating activities
Net loss $(1,589) $(3,444)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 556 462
Amortization of deferred compensation 30 323
Common Stock issued for performance of services 78 -
Changes in assets and liabilities:
Accounts receivable, net (137) (264)
Inventories (138) (1,010)
Prepaid expenses 111 85
Other assets - 110
Accounts payable (296) (134)
Accounts payable to related party (43) (204)
Other current liabilities (516) 26
-------------------- --------------------
Net cash used for operating activities (1,944) (4,050)
-------------------- --------------------
Cash flows from investing activities
Purchases of fixed assets (191) (490)
Purchases of marketable securities - (5,424)
Redemption of marketable securities 1,037 12,295
-------------------- --------------------
Net cash provided by investing activities 846 6,381
-------------------- --------------------
Cash flows from financing activities
Proceeds from issuance of common stock,
net of issuance costs - 42
-------------------- --------------------
Net (decrease) increase in cash and cash equivalents (1,098) 2,373
Cash and cash equivalents at beginning of period 3,724 2,916
-------------------- --------------------
Cash and cash equivalents at end of period $ 2,626 $ 5,289
==================== ====================
The accompanying notes are an integral part of these condensed financial
statements.
5
INNOVASIVE DEVICES, INC.
Notes to Unaudited Condensed Financial Statements
(In thousands, except share and per share data)
1. Basis of Presentation
The accompanying unaudited condensed 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 June 30, 1999 and the
results of its operations for the three and six month periods ended June 30,
1999 and 1998. 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 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, 1998
filed with the SEC on March 31, 1999.
2. Inventories
Inventories consist of the following:
June 30, December 31,
1999 1998
----------------- -----------------
(unaudited)
Raw materials $1,138 $1,880
Work-in-process 435 640
Finished goods 4,161 3,076
----------------- -----------------
Totals $5,734 $5,596
================= =================
3. Net loss per share
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. Antidilutive
potential common shares excluded from the 1999 and 1998 computation include
1,912,823 and 1,645,407 common shares, respectively issuable upon the exercise
of stock options.
6
INNOVASIVE DEVICES, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Since its inception in 1990, the Company has been 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 as of June 30, 1999 had an accumulated deficit of
$43.2 million. These losses have resulted principally from expenditures to fund
research and development, the establishment of its manufacturing capabilities
and the expansion of its marketing and sales organization. Although the
Company's sales were principally derived from the sale of its family of shoulder
related products, the Company now markets five product platforms: suture anchors
and suturing systems used primarily in shoulder repair procedures, cartilage
repair products, anterior cruciate ligament ("ACL") reconstruction products and
its newly introduced meniscal repair products used primarily in knee repair
procedures. The Company's strategy is to continue to develop innovative products
for the sports medicine/arthroscopy market and to leverage its core proprietary
technology in other markets. The Company markets its products to surgeons in the
United States through a network of clinically proficient employee sales
representatives and independent sales agents and internationally through
established distributors of orthopaedic medical devices.
The following information should be read in conjunction with the unaudited
condensed 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 1998 Annual Report on Form 10-K filed with the SEC on March 31, 1999.
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 1998 Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 31, 1999.
7
Results of Operations
Three Months Ended June 30, 1999 compared to the Three Months Ended June 30,
1998
Net sales for the second quarter of 1999 of $4,295,000 represents an increase of
$1,340,000 or 45% from $2,955,000 for the same period in the prior year. The
increase resulted primarily from a higher level of sales of Clearfix Meniscal
repair products, ACL reconstruction products, COR System cartilage repair
products and suture systems. Sales of the Company's family of Clearfix Meniscal
repair products were fully incremental as compared to the same period last year.
In the fourth quarter of 1998, the Company commenced commercial shipments of its
Clearfix Meniscal Screw, a bioabsorbable device used to repair traumatic tears
within the meniscus of the knee through a minimally invasive arthroscopic
approach. Additionally, in the first quarter of 1999, the Company commenced
commercial shipments of its Clearfix Meniscal Dart, a bioabsorbable device also
used to repair traumatic tears within the meniscus. Sales of the Company's ACL
reconstruction products COR systems and suture systems all experienced growth
over the same quarter in 1998. Sales of the Company's family of ROC suture
anchors were consistent with the same period last year partially due to a
decrease in volume related to a significant initial stocking order of suture
anchors to the Company's distributor in Japan in the second quarter of 1998.
Gross profit increased to $3,025,000 in the second quarter of 1999 from
$2,126,000 in the second quarter of 1998. As a percentage of sales, gross profit
was 70.4% in the second quarter of 1999 as compared to 72.0% in the second
quarter of 1998. Gross profits were impacted by a higher percentage of sales to
international distributors versus the same period in the prior year. The average
selling price of products to international distributors are typically below that
of domestic average selling prices. Gross margins were also affected by the
higher mix of meniscal repair products and ACL reconstruction products versus
the same period last year. Sales of these product families in the second quarter
included a higher percentage of procedural instruments which are primarily sold
at margins below that of product implants.
Selling, general and administrative expenses increased to $3,058,000 in the
second quarter of 1999 from $2,749,000 in the second quarter of 1998. The
increase resulted primarily from higher selling commissions and royalties
resulting from the higher sales volume, increased legal costs resulting from the
Company's defense of a patent infringement claim, and increased salary and
travel costs related to the expansion of the domestic and international direct
sales force.
Research and development expenses decreased to $809,000 in the second quarter of
1999 from $1,165,000 in the second quarter of 1998. The decrease was primarily
attributable to a non-cash compensation charge recognized in the second quarter
of 1998 resulting from the vesting of options granted to non-employee
consultants. The Company also experienced a decrease in salary related costs
versus the same period last year as a result of lower employment levels.
Interest income decreased to $36,000 in the second quarter of 1999 from $124,000
in the second quarter of 1998 primarily as a result of investment returns earned
on lower average cash balances maintained during the second quarter of 1999 as
compared to the prior year.
Other income in the second quarter includes cash received from a termination
agreement in which the Company waived its exclusive right to manufacture product
for a third party. This manufacturing right was originally established from
technology developed by the Company and subsequently licensed to the third
party.
As a result of the foregoing, the net loss decreased to $714,000 in the second
quarter of 1999 from a loss of $1,664,000 in the second quarter of 1998.
8
Six Months Ended June 30, 1999 compared to Six Months Ended June 30, 1998
Net sales for the first six months of 1999 of $8,546,000 increased $3,033,000 or
55% from $5,513,000 for the same period in the prior year. The increase resulted
primarily from a higher level of sales of all five of its core product families
including: Clearfix Meniscal repair products, ACL reconstruction products, ROC
suture anchors, suture systems and COR System cartilage repair products. Sales
of the Company's family of Clearfix Meniscal repair products were fully
incremental as compared to the same period last year. In the fourth quarter of
1998, the Company commenced commercial shipments of its Clearfix Meniscal Screw,
a bioabsorbable device used to repair traumatic tears within the meniscus of the
knee through a minimally invasive arthroscopic approach. Additionally, in the
first quarter of 1999, the Company commenced commercial shipments of its
Clearfix Meniscal Dart, a bioabsorbable device also used to repair traumatic
tears within the meniscus.
Gross profit increased to $5,999,000 for the first six months of 1999 from
$3,969,000 for the first six months of 1998. As a percentage of sales, gross
profit decreased to 70.2% for the first six months of 1999 from 72.0% for the
first six months of 1998. Gross profits were impacted by a higher percentage of
sales to international distributors versus the same period in the prior year.
The average selling price of products to international distributors are
typically below that of domestic average selling prices. Gross margins were also
affected by the higher mix of meniscal repair products and ACL reconstruction
products versus the same period last year. Sales of these product families in
the first half of 1999 included a higher percentage of procedural instruments
which are primarily sold at margins below that of product implants.
Selling, general and administrative expenses increased to $6,080,000 for the
first six months of 1999 from $5,471,000 for the first six months of 1998. The
increase resulted primarily from higher selling commissions and royalties
resulting from the higher sales volume, increased legal costs resulting from the
Company's defense of a patent infringement claim, and increased salary and
travel costs related to the expansion of the domestic and international direct
sales force.
Research and development expenses decreased to $1,683,000 in the first half of
1999 from $2,261,000 in the first half of 1998. The decrease was primarily
attributable to a non-cash compensation charge recognized in the second quarter
of 1998 resulting from the vesting of options granted to non-employee
consultants. The Company also experienced a decrease in salary costs versus the
same period last year as a result of lower employment levels.
Interest income decreased to $83,000 in the first half of 1999 from $319,000 in
the first half of 1998 primarily as a result of investment returns earned on
lower average cash balances maintained during the first half of 1998 compared to
the prior year.
Other income in the second quarter includes cash received from a termination
agreement in which the Company waived its exclusive right to manufacture product
for a third party. This manufacturing right was originally established from
technology developed by the Company and subsequently licensed to the third
party.
As a result of the foregoing, the net loss decreased to $1,589,000 in the first
half of 1999 from a loss of $3,444,000 in the first half of 1998.
9
Liquidity and Capital Resources
At June 30, 1999, the Company had cash, cash equivalents and marketable
securities of $2.6 million as compared to a balance of $4.8 million at December
31, 1998. Working capital decreased to $8.8 million at June 30, 1999 from $9.9
million at December 31, 1998.
Cash used in the Company's operations amounted to $1.9 million for the six
months ended June 30, 1999 primarily resulting from the net loss of $1.6
million. Cash used for working capital requirements of $1.0 million was
partially offset by depreciation and amortization of $586,000.
Cash provided by investing activities totaled $846,000 for the six months ended
June 30, 1999 resulting from net redemptions of marketable securities of $1.0
million offset by capital expenditures of $191,000.
On December 31, 1998, the Company entered into a working capital line of credit
with a bank that provides the Company with a maximum borrowing availability of
$2.5 million, limited by certain receivable and inventory balances. Borrowings
under this agreement bear interest at the prime rate of 8.00%. The line of
credit expires and all outstanding amounts thereunder are due December 31, 1999.
Under the line of credit, the Company is obligated to comply with certain
financial covenants. Borrowings available based on certain receivable and
inventory balances at June 30, 1999 amounted to $1.6 million. In addition, at
June 30, 1999 the Company was in compliance with all financial covenants under
the terms of the agreement. There were no borrowings outstanding under the line
of credit at June 30, 1999.
The Company expects that its balance of cash, cash equivalents and marketable
securities will be adequate to fund the next twelve months cash requirements for
operations, working capital and fixed assets. The Company's long term liquidity
and capital requirements will depend upon the progress of research and
development programs, regulatory matters and the expansion of its manufacturing
capabilities to satisfy increasing volume requirements. In addition, the
Company's capital requirements will depend upon, among other factors, the timing
of the establishment of effective sales channels in the United States and abroad
and the extent to which the Company's products gain market acceptance resulting
in increased sales sufficient to generate a profit from operations. 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 funds would be available at all or on terms
acceptable to the Company.
10
Impact of 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 are Y2K compliant based on its internal evaluations and testing of these
systems. The Company does not rely materially on 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 is currently
communicating with third party vendors through the issuance questionnaires that
address Y2K compliance. The Company anticipates that its assessment of third
party vendors will be completed by the third 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.
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 Y2K 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 Y2K 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 Y2K issues. If significant Y2K issues arise, the Company
may not be able to timely develop and implement a contingency plan and the
Company's operations could be adversely affected.
The disclosure in this Section is a Y2K Readiness Disclosure under the Year 2000
Information and Readiness Disclosure Act of 1998.
11
INNOVASIVE DEVICES, INC.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
On July 13, 1999, the Company was sued for patent infringement by Arthrex, Inc.
in the United States District Court for the Middle District of Florida, Orlando
Division. Arthrex alleges that elements of two of the Companies knee systems
related to cartilage and ACL repair infringes recently issued Arthrex patents.
The Company has several issued patents and patents pending protecting these
products and is currently evaluating its position relative to this new
intellectual property.
Item 2. Changes in Securities
----------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company's Annual and Special Meeting of Stockholders was held on June 9,
1999 at the Company's headquarters in Marlborough, Massachusetts. All matters
submitted to a vote of the Company's stockholders were described in the
Company's Proxy Statement dated May 11, 1999. At the meeting, the shareholders:
(1) elected the following directors for terms expiring in 2002:
Term Total Vote For Total Vote Withheld
Expires Each Director From Each Director
------- -------------- -------------------
Richard D. Randall 2002 7,382,298 11,770
Howard D. Palefsky 2002 7,345,071 48,997
(2) ratified the Board of Directors' selection of PricewaterhouseCoopers LLP as
the Company's independent accountants for the fiscal year ending December
31, 1999.
For 7,391,198
Against 2,200
Abstain 670
12
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits
Exhibit
10.1 Income Continuation Agreement between the Registrant and Richard D.
Randall, CEO
10.2 Income Continuation Agreement between the Registrant and James V.
Barrile, CFO
10.3 Income Continuation Agreement between the Registrant and Alan
Chervitz, COO
10.4 Income Continuation Agreement between the Registrant and Ricardo J.
Simmons, Vice President - Global Sales and Marketing
10.5 Income Continuation Agreement between the Registrant and Eric L.
Bannon, Vice President Quality Assurance and Regulatory Affairs
10.6 Income Continuation Agreement between the Registrant and T. Wade
Fallin, Vice President and General Manager
10.7 Employment Agreement, dated June 27, 1997, between Registrant and Alan
Chervitz
10.8 Amendment to Employment Agreement dated June 27, 1997 between
Registrant and Alan Chervitz
10.9 Employment Agreement, dated June 27, 1997, between Registrant and T.
Wade Fallin
10.10 Amendment to Employment Agreement dated June 27, 1997 between
Registrant and T. Wade Fallin
27 Financial Data Schedule
b) Reports on Form 8-K
None.
13
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: August 13, 1999 By:/s/ Richard D. Randall
---------------------------
Richard D. Randall
President, Chief Executive Officer
and Director
(Principal Executive Officer)
Date: August 13, 1999 By:/s/ James V. Barrile
------------------------
James V. Barrile
Executive Vice President of Finance,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
14