INNOTECH, INC.
Form 10-Q Index
Three Months ended March 31, 1996
- --------------------------------------------------------------------------------
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Balance Sheets - March 31, 1996 and
December 31, 1995................................. 2-3
Condensed Statements of Loss - Three Months Ended
March 31, 1996 and 1995........................... 4
Condensed Statement of Stockholders' Equity - Three
Months Ended March 31, 1996....................... 5
Condensed Statements of Cash Flows - Three Months
Ended March 31, 1996 and 1995..................... 6-7
Condensed Notes to Condensed Financial Statements... 8-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION................ 12-15
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES............................... 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................... 17
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INNOTECH, INC.
Condensed Balance Sheets
March 31, 1996 and December 31, 1995
- ------------------------------------------------------------------------------------------------------------------
March 31, December 31,
1996 1995
---- ----
(Unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents $ 26,466,198 $ 4,921,700
Accounts receivable, net
Trade, net of allowance for doubtful accounts
of $88,368 and $92,367 at March 31,
1996 and December 31, 1995, respectively 2,564,664 2,135,568
Other 25,478 28,709
--------------- ---------------
Total accounts receivable, net 2,590,142 2,164,277
--------------- ---------------
Inventories:
Raw materials 1,200,082 891,306
Work-in-process 621,995 274,794
Finished goods 2,138,806 1,454,667
--------------- ---------------
Total inventories 3,960,883 2,620,767
--------------- ---------------
Prepaid expenses and other current assets 438,349 241,950
--------------- ---------------
Total current assets 33,455,572 9,948,694
--------------- ---------------
Property and equipment, net 2,340,204 1,790,075
Deferred public offering charges - 333,430
Other assets, net of accumulated amortization:
Organization costs 16,859 18,882
Patents and technology rights 1,379,958 1,337,387
Debt issuance costs 67,087 72,677
Deferred loss on sale/leaseback 23,362 25,958
--------------- ---------------
Total other assets 1,487,266 1,454,904
--------------- ---------------
Total assets $ 37,283,042 $ 13,527,103
=============== ===============
--------------- ---------------
See accompanying condensed notes to condensed financial statements.
2
- -------------------------------------------------------------------------------------------------------------------
March 31, December 31,
1996 1995
---- ----
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current installments of long-term debt $ 53,332 $ 63,332
Current installments of obligations under capital leases 179,703 182,804
Accounts payable 2,622,097 2,034,560
Accrued expenses and other current liabilities 822,376 772,510
Customer deposits 67,980 149,439
Liability to financing companies 15,439 61,076
Option payment - 1,500,000
--------------- ---------------
Total current liabilities 3,760,927 4,763,721
Long-term debt, net of unamortized discount of $277,238 at
March 31, 1996 and $300,341 at December 31, 1995,
excluding current installments 2,426,930 2,416,327
Obligations under capital leases, excluding current installments 315,470 364,903
--------------- ---------------
Total liabilities 6,503,327 7,544,951
--------------- ---------------
Stockholders' equity:
Series A convertible, redeemable preferred stock, $.001 par
value. Authorized 850,000 shares; issued and outstanding
none at March 31, 1996 and 700,000 shares at December 31,
1995 (liquidation value $10 per share plus accrued dividends) - 8,080,207
Series B convertible, redeemable preferred stock, $.001 par
value. Authorized 152,500 shares; issued and outstanding
none at March 31, 1996 and 152,500 shares at December 31,
1995 (liquidation value $10 per share plus accrued dividends) - 1,510,260
Series D convertible, redeemable preferred stock, $.001 par value.
Authorized 2,150,000 shares; issued and outstanding none at
March 31, 1996 and 1,999,999 shares at December 31, 1995
(liquidation value $10 per share plus accrued dividends) - 13,011,157
Common stock, $.001 par value. Authorized 70,000,000 shares;
issued and outstanding 7,823,756 and 772,991 shares at
March 31, 1996 and December 31, 1995, respectively 7,824 773
Preferred stock warrants, 23,415 common stock warrants
(following conversion) issued and outstanding at March 31,
1996 and 38,462 issued and outstanding at December 31, 1995 - -
Common stock warrants, 1,199,090 issued and outstanding at
March 31, 1996 and 1,207,052 issued and outstanding at
December 31, 1995 7,821,395 7,878,377
Additional paid-in capital 57,000,003 5,844,007
Deferred compensation (1,827,150) (1,937,453)
Accumulated deficit (32,222,357) (28,405,176)
--------------- ---------------
Total stockholders' equity 30,779,715 5,982,152
Commitments and contingencies
--------------- ---------------
Total liabilities and stockholders' equity $ 37,283,042 $ 13,527,103
=============== ===============
3
INNOTECH, INC.
Condensed Statements of Loss
Three Months Ended March 31, 1996 and 1995
- ------------------------------------------------------------------------------------------
Three Months Ended March 31,
-----------------------------------
1996 1995
---- ----
(Unaudited)
Net sales $ 2,011,145 $ 963,662
Cost of sales 1,550,611 885,128
-------------- -------------
Gross profit 460,534 78,534
Selling, general and administrative expenses 2,731,213 1,584,884
Research and development costs 491,656 402,010
-------------- -------------
Operating loss (2,762,335) (1,908,360)
Other income (deductions):
Interest expense (133,158) (434,313)
Interest income 51,831 362
Other, net (767) (2,589)
-------------- -------------
Other income (deductions), net (82,094) (436,540)
-------------- -------------
Net loss $ (2,844,429) $ (2,344,900)
============== =============
Net loss per common share (pro forma for 1995) $ (0.55) $ (0.38)
============== =============
Weighted average number of common shares
outstanding (pro forma for 1995) 5,200,706 6,223,932
============== =============
See accompanying condensed notes to condensed financial statements.
4
INNOTECH, INC.
Condensed Statement of Stockholders' Equity
Three Months Ended March 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------
Series A Series B Series D
Convertible, Redeemable Convertible, Redeemable Convertible, Redeemable
Preferred Stock Preferred Stock Preferred Stock
--------------------------- --------------------------- -----------------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
Balance, December 31, 1995 700,000 $ 8,080,207 152,500 $ 1,510,260 1,999,999 $ 13,011,157
Issuance of Series D Convertible,
Redeemable Preferred Stock in
satisfaction of option payment
liability - - - - 150,000 1,500,000
Exchange of Series A Convertible,
Redeemable Preferred Stock for
common stock (cash paid in lieu of
16.8 fractional shares of common
stock at $10 per share) (700,000) (8,242,069) - - - -
Exchange of Series B Convertible,
Redeemable Preferred Stock for
common stock (cash paid in lieu of
10.4 fractional shares of common
stock at $10 per share) - - (152,500) (1,547,141) - -
Exchange of Series D Convertible,
Redeemable Preferred Stock for
common stock (cash paid in lieu of
43.6 fractional shares of common
stock at $10 per share) - - - - (2,149,999) (15,285,166)
Issuance of common stock for cash
($10 per share, less issuance costs of
$3,979,019; cash paid in lieu of 52.6
fractional shares of common stock at
$10 per share) - - - - - -
Exercise of common stock options
(12,204 shares at $.0079 per share,
13,697 shares at $.079 per share and
1,620 shares at $6.556 per share) - - - - - -
Exercise of common stock warrants
(6,831 shares at $.0079 per share
and 1,131 shares at $.079 per share - - - - - -
Accretion on convertible, redeemable
preferred stock - 21,844 - 6,377 - 374,092
Undeclared dividends on convertible,
redeemable preferred stock - 140,018 - 30,504 - 399,917
Amortization of deferred compensation - - - - - -
Net loss - - - - - -
---------- -------------- ---------- -------------- ------------- ---------------
Balance, March 31, 1996 - $ - - $ - - $ -
========== ============== ========== ============== ============= ===============
---------- -------------- ---------- -------------- ------------- ---------------
See accompanying condensed notes to condensed financial statements.
5
- ---------------------------------------------------------------------------------------------------------------------
Common Additional Total
Common Stock Paid-in Deferred Accumulated Stockholders'
Stock Warrants Capital Compensation Deficit Equity
- ----------------------- --------------------------- ------- ------------ ------- ------
Equivalent
Shares Amount Shares Amount
------ ------ ------ ------
772,991 $ 773 1,207,052 $ 7,878,377 $ 5,844,007 $ (1,937,453) $(28,405,176) $ 5,982,152
- - - - - - - 1,500,000
426,136 426 - - 8,241,475 - - (168)
159,042 159 - - 1,546,878 - - (104)
3,430,104 3,430 - - 15,281,300 - - (436)
3,000,000 3,000 - - 26,017,455 - - 26,020,455
27,521 28 - - 11,771 - - 11,799
7,962 8 (7,962) (56,982) 57,117 - - 143
- - - - - - (402,313) -
- - - - - - (570,439) -
- - - - - 110,303 - 110,303
- - - - - - (2,844,429) (2,844,429)
- ------------ -------- ------------ ------------ ------------- -------------- -------------- --------------
7,823,756 $ 7,824 1,199,090 $ 7,821,395 $57,000,003 $ (1,827,150) $(32,222,357) $ 30,779,715
============ ======== ============ ============ ============= ============== ============== ==============
5a
INNOTECH, INC.
Condensed Statements of Cash Flows
Three Months Ended March 31, 1996 and 1995
- ---------------------------------------------------------------------------------------------
Three Months Ended March 31,
------------------------------------
1996 1995
(Unaudited)
Cash flows from operating activities:
Net loss $ (2,844,429) $ (2,344,900)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization of property
and equipment 78,472 83,013
Amortization of other assets 32,595 80,499
Amortization of discounts on borrowings
under line of credit and long-term debt 23,103 165,422
Amortization of deferred compensation 110,303 4,535
Loss (gain) on sale of equipment (1,779) 2,596
Loss on litigation settlement - 111,892
Net (increase) decrease in current assets (1,962,380) 65,655
Net increase (decrease) in current liabilities,
exclusive of changes shown separately
and noncash transactions 510,307 (630,963)
-------------- -------------
Net cash used in operating activities (4,053,808) (2,462,251)
-------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (637,322) (47,855)
Proceeds from sale of equipment 10,500 500,000
Additions to other assets (64,957) (40,700)
-------------- -------------
Net cash provided by (used in) investing
activities (691,779) 411,445
-------------- -------------
Cash flows from financing activities:
Net increase in borrowings under line of credit - 50,000
Proceeds from issuance of long-term debt - 500,000
Payments on long-term debt and capital leases (75,034) (36,647)
Proceeds from issuance of common stock, net of
issuance costs 26,032,923 -
Deferred public offering charges offset against public
offering proceeds 333,430 -
Proceeds from issuance of preferred stock and common
stock warrants, net of issuance costs - 1,457,550
Cash paid in lieu of fractional shares of common stock (1,234) -
-------------- -------------
Net cash provided by financing activities 26,290,085 1,970,903
-------------- -------------
Net increase (decrease) in cash and cash equivalents 21,544,498 (79,903)
Cash and cash equivalents, beginning of period 4,921,700 119,468
-------------- -------------
Cash and cash equivalents, end of period $ 26,466,198 $ 39,565
============== =============
(Continued)
6
INNOTECH, INC.
Condensed Statements of Cash Flows - (Continued)
- --------------------------------------------------------------------------------------------
Three Months Ended March 31,
-----------------------------------
1996 1995
(Unaudited)
Suppplemental disclosures of cash flows information:
Cash paid for interest $ 105,050 $ 156,683
============= =============
Noncash transactions:
A capital lease obligation of $560,125 was incurred in
1995 when the Company entered into a sale/leaseback
agreement. The deferred loss of $36,340 was recorded
as an other noncurrent asset.
55,725 shares of common stock and a note payable for
$240,000 were issued in 1995 to satisfy accrued
litigation costs.
Long-term debt of $400,000, with related accrued interest
payable of $5,289, was converted into a combination
of 40,529 shares of Series C Convertible, Redeemable
Preferred Stock and 362,885 Class I warrants in 1995.
See accompanying condensed notes to condensed financial statements.
7
INNOTECH, INC.
Condensed Notes to Condensed Financial Statements
Three Months Ended March 31, 1996 and 1995
- --------------------------------------------------------------------------------
(1) General
-------
The accompanying unaudited condensed financial statements of
Innotech, Inc. (the Company) have been prepared in accordance with
generally accepted accounting principles for interim financial
reporting information and the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and notes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all material adjustments (consisting only of
normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three
months ended March 31, 1996 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1996.
The unaudited condensed financial statements and condensed notes are
presented as permitted by Form 10-Q and do not contain certain
information included in the Company's annual financial statements
and notes to financial statements.
(2) Stockholders' Equity
--------------------
Common Stock:
The Company effected a 1-for-7.89789 reverse stock split of common stock on
December 21, 1995. All share and per share data, as well as all preferred
stock conversion ratios, stock options and warrants, have been adjusted
retroactively to reflect the aforementioned stock split.
Preferred Stock:
The Company has authorized a total of 5,000,000 shares of preferred stock, of
which 850,000 shares were authorized for Series A Convertible, Redeemable
Preferred Stock (Series A Stock), 152,500 shares were authorized for Series B
Convertible, Redeemable Preferred Stock (Series B Stock) and 2,150,000 shares
were authorized for Series D Convertible, Redeemable Preferred Stock (Series
D Stock) (collectively Preferred Stock) until March 20, 1996. On March 20,
1996, upon the consummation of the Company's initial public offering of
common stock (see note 6), all outstanding shares of Preferred Stock and
accrued dividends thereon, as defined, were converted into common stock. In
addition, the Company filed an amendment to its Amended and Restated
Certificate of Incorporation which deleted the provisions regarding the
rights, preferences and privileges of the Preferred Stock, and replaced them
with a provision that enables the Board of Directors of the Company to issue
up to the authorized 5,000,000 shares of preferred stock at its discretion.
The Company was obligated to offer to redeem on June 30, 2000 at the
liquidation value of $10 per share, plus any accrued and unpaid dividends,
any outstanding shares of the Preferred Stock not previously converted into
common stock. The Preferred Stock was recorded at fair value on the date of
issuance less issuance costs. The excess of the liquidation value over the
carrying value was being accreted by periodic charges to accumulated deficit
over the life of the issue.
(Continued)
8
INNOTECH, INC.
Condensed Notes to Condensed Financial Statements - (Continued)
- --------------------------------------------------------------------------------
(2) Stockholders' Equity (Continued)
--------------------
The holders of the Preferred Stock were entitled to receive cumulative
dividends at the rate of 9 percent per annum accruing from the date of
issuance. In the event of a liquidation and with respect to the payment
of dividends, the Series D Stock was senior in rank to the common stock,
the Series A Stock and the Series B Stock. All accrued dividends were to
be paid only upon a merger, sale of control, consolidation (and certain
similar events) or liquidation of the Company. In the event of a
liquidation of the Company, the holders of the Series D Stock were
entitled to receive, prior and in preference to any distributions to all
other Company equity holders, a per share liquidation preference equal to
$10.00 plus accrued and unpaid dividends through the date of the
liquidation for each share of Series D Stock (the Liquidation
Preference). Thereafter, any remaining payments were to be paid to
holders of shares of the Series A Stock and the Series B Stock up to
their respective Liquidation Preferences, and the holders of common stock
and the holders of the Series D Stock (on a common stock equivalent
basis) will share in any remaining payments, pro rata based upon their
respective stockholdings.
(3) Stock Options and Warrants
--------------------------
Stock Options:
Pursuant to various stock option agreements, the Company has granted
options to acquire the Company's common stock to certain officers,
directors, employees and consultants of the Company.
The aggregate number of shares under option pursuant to these agreements
was as follows:
Number Option Price
of Shares Per Share
---------- --------------
Options outstanding at December 31, 1995 1,363,269 $.0079-16.4260
Exercised (27,521) $ .0079-6.56
Expired (456) $ 6.56
---------
Options outstanding at March 31, 1996 1,335,292 $.0079-16.4260
=========
Generally, options vest within one to five years of the grant date. Options
exercisable at March 31, 1996 and December 31, 1995 approximated 995,074
and 418,772, respectively.
The Company has recorded deferred compensation on certain options granted to
officers at exercise prices which were less than the estimated fair value
of the common stock at the date of the grant of the options. Deferred
compensation is recorded as a reduction of stockholders' equity, with a
corresponding increase in additional paid-in capital, and is being
amortized as compensation expense over the vesting periods of the related
options.
(Continued)
9
INNOTECH, INC.
Condensed Notes to Condensed Financial Statements - (Continued)
- --------------------------------------------------------------------------------
(3) Stock Options and Warrants (continued)
--------------------------
Deferred compensation at December 31, 1995 will be amortized as
compensation expense, based on vesting provisions, as follows:
Years ending December 31,
1996 $ 441,195
1997 427,043
1998 398,738
1999 398,738
2000 271,739
---------- ---------
Total $1,937,453
=========
Warrants:
A summary of detachable warrants outstanding at March 31, 1996 is
presented below:
Warrant Equivalent Exercise Price Expiration
Class Type Shares per Share Date
- ---------- ------------ -------------- ------------ ----------------
B Common Stock 23,415 $ 21.35 January 30, 1999
C Common Stock 48,592 $ 0.079 March 31, 1999
D Common Stock 63,308 $ 6.56 March 31, 2004
E Common Stock 17,403 $ 0.079 September 30, 1999
G Common Stock 58,915 $0.0079 September 23, 2004
H Common Stock 13,009 $ 0.079 December 1, 1996
I Common Stock 993,643 $0.0079 March 29, 2005
J Common Stock 4,220 $ 9.64 September 30, 2004
(4) Income Taxes
------------
At December 31, 1995, the Company had net operating loss carryforwards
(NOLs) for income tax purposes available to offset future taxable income as
follows:
Net Operating Loss Expiration
Carryforwards Dates
- -------------------- ------------------
$ 2,099 September 30, 2006
495,945 September 30, 2007
1,849,550 September 30, 2008
6,609,798 September 30, 2009
2,613,567 December 31, 2009
9,701,478 December 31, 2010
- ------------
$ 21,272,437
============
(Continued)
10
INNOTECH, INC.
Condensed Notes to Condensed Financial Statements - (Continued)
- --------------------------------------------------------------------------------
(4) Income Taxes (Continued)
------------
Previous securities transactions have resulted in an "ownership change"
within the meaning of Section 382 of the Internal Revenue Code of 1986, as
amended. The Company's ability to use its NOLs existing at the time of such
an ownership change to offset its taxable income, if any, generated in
future taxable periods is subject to an annual limitation. The public
offering (see note 6) will likely result in an additional Section 382
ownership change. This could further limit the ability of the Company to
use its NOLs to offset any future taxable income. The change in ownership
provisions of Section 382 do not have any impact on the expiration dates of
the NOLs.
(5) Commitments and Contingencies
-----------------------------
The Company and certain of its stockholders, optionholders and
warrantholders entered into an option agreement with another party
(Optionholder), under which the Optionholder acquired an option to purchase
ultimately all of the outstanding shares of capital stock of the Company at
a net aggregate exercise price of approximately $85,000,000. In
consideration of the grant of the option, the Company received $1,500,000,
which was reflected as an option payment liability in the accompanying
December 31, 1995 condensed balance sheet. Pursuant to the terms of the
option agreement, the option has terminated and the Optionholder received
150,000 shares of Series D Stock (which converted into 228,824 shares of
common stock upon the consummation of the initial public offering of the
Company's common stock) in satisfaction of the option payment liability on
the effective date of the registration statement for the initial public
offering of the Company's common stock (see note 6).
The Company is subject to environmental laws and regulations at both the
federal and state levels. At March 31, 1996, the Company is not aware of
any material violations or areas of noncompliance with respect to federal
and state laws and regulations covering environmental matters. In the
opinion of management, any costs incurred resulting from existing
environmental matters will not have a material adverse effect on the
Company's financial position or results of operations.
(6) Public Offering
---------------
In December 1995, the Company's Board of Directors authorized the filing of
a registration statement for a public offering of the Company's common
stock. On March 20, 1996, the Company consummated a public offering of
3,000,000 shares of the Company's common stock and received net proceeds of
approximately $26,020,000.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This Management's Discussion and Analysis of Results of Operations and Financial
Condition contains forward-looking statements including those concerning
management's expectations regarding future financial performance and future
events. These forward-looking statements involve risks and uncertainties.
Actual results may differ materially from those anticipated by such forward-
looking statements.
OVERVIEW
Innotech, Inc. (the Company or Innotech) develops, manufactures and sells lens
casting fabrication systems that enable optometrists, opticians,
ophthalmologists and other optical retailers to custom fabricate high-quality
multifocal and single vision plastic eyeglass lenses at the point of sale. The
Company's fabrication system (the Excalibur System), which is based upon its
patented SurfaceCasting technology, is capable of fabricating lenses of various
styles, materials and prescriptions. The Company also sells single vision
optics (Power Plates) and polymerizable resins (Power Plates and resins are
collectively referred to as consumables) for use in the Excalibur System. The
consumables create a recurring revenue stream for the Company as customers
replenish the consumables used in the Excalibur System. Historically, sales of
Excalibur Systems have accounted for a majority of the Company's net sales. As
the cumulative number of installed Excalibur Systems grows, it is expected that
usage and sales of the consumables also will increase and eventually account for
the majority of the Company's total net sales. In 1994, Innotech revised its
marketing strategy and reduced the price of the Excalibur System to increase
market penetration and thereby increase and accelerate demand for consumables.
Since the implementation of this strategy, the Company has experienced
significant increases in sales of Excalibur Systems and consumables, together
with an increase in total gross profit.
The Company's business strategy is to increase sales and achieve profitability
through the continued development and commercialization of its patented
SurfaceCasting technology and related patented and proprietary Power Plates and
resins. The Company intends to pursue this strategy by (i) increasing sales of
Excalibur Systems, (ii) increasing sales of consumables and (iii) further
commercializing the Company's new products developed through its research and
development efforts. As consumables revenue increases, the Company expects that
its profitability will be enhanced. The Company believes it will require
additional Excalibur System sales and, therefore, time before the Company can
realize the overall benefits of its strategy. Any future profitability of the
Company will also be significantly impacted by its success in reducing
manufacturing costs of the Power Plates and, to a lesser extent, the Excalibur
Systems and resins.
The Company was formed in October 1990 and, until June 1993, devoted
substantially all of its resources to the development and testing of
SurfaceCasting technology and a product which could be commercialized. In May
1993, the Company shipped the first commercial Excalibur System, and has sold
approximately 625 Excalibur Systems through March 31, 1996. As a result of its
present growth and in anticipation of future growth, the Company has
significantly expanded its administrative, selling, service, and research and
development capabilities, and the related expenses have increased. Further
expansion will continue to result in increases in such expenses. In the first
half of 1995, the Company began the internal assembly of the curing chambers and
mold storage cabinets from outside suppliers. Innotech is also purchasing the
equipment and tooling necessary to manufacture certain new consumables products
on a commercial scale to reduce its cost of goods and to augment its current
sources of supply.
12
In connection with common stock options granted to executive officers having
exercise prices below the estimated fair value of the common stock, the Company
expects to incur compensation expense of approximately $100,000 in each fiscal
quarter, beginning with the first quarter of 1996, until the third quarter of
fiscal year 2000 as the options vest. Such expense would increase during a
particular quarter if the vesting of stock options were to accelerate during
that period upon the occurrence of certain events.
RESULTS OF OPERATIONS
Quarters Ended March 31, 1996 and 1995
Net sales. Total net sales increased by $1,047,000, or 109%, to $2,011,000 for
the quarter ended March 31, 1996 from $964,000 for the quarter ended March 31,
1995. This increase was due to a significant volume increase in sales of
consumables as well as an increase in the number of Excalibur Systems sold by
the Company. Net sales for the quarter ended March 31, 1995 were adversely
affected by the Company's weakened liquidity condition, which impaired its
ability to maintain desired levels of inventory and limited spending on sales
and marketing efforts. With the completion of 1995 third and fourth quarter
financing closings and the initial public offering in March 1996, the Company's
liquidity position has significantly improved, allowing the Company to acquire
inventory to fulfill order backlogs, resume selling and marketing programs and
expand the number of sales personnel. The Company anticipates that these
actions should have a positive impact upon sales in the near future, although
there can be no assurance regarding such impact.
Net sales of consumables increased $510,000, or 110%, to $973,000 for the
quarter ended March 31, 1996 from $463,000 for the quarter ended March 31, 1995.
This increase in net sales of consumables was primarily attributable to
increased demand resulting from an increase in the cumulative number of
installed Excalibur Systems and the introduction of new consumables products,
most of which were higher-priced premium products.
Net sales of Excalibur Systems increased $537,000, or 107%, to $1,038,000 for
the quarter ended March 31, 1996 from $501,000 for the quarter ended March 31,
1995. This sales growth was due to a 165% increase in the number of Excalibur
Systems sold by the Company, offset in part by price decreases for Excalibur
Systems initiated in July 1994 in connection with the Company's revised
marketing strategy. Growth in Excalibur System unit sales during the quarter
ended March 31, 1996 versus the corresponding period in 1995 was due in part to
fulfilling a large order for Excalibur Systems from a single large optical
retailer coupled with a 120% increase in Excalibur System unit sales to
independent practitioners.
Gross profit. Gross profit for the quarter ended March 31, 1996 of $461,000 was
$382,000, or 486%, greater than the quarter ended March 31, 1995. Gross profit
margin increased 187% to 23% in 1996 from 8% in 1995. The increase in gross
profit was due to the increase in sales of consumables, which included an
increase in the sale of higher-priced consumables, as well as the increased
sales of Excalibur Systems. The increase in gross profit margin was primarily
due to reduced overhead costs per unit and manufacturing efficiencies achieved
in the production of Power Plates, which resulted principally from volume
increases, and an increase in the sales of higher-priced consumables. The gross
margin on Excalibur Systems improved during the first quarter of 1996 over the
first quarter of 1995 due also to the in-house assembly of the chamber, which
during the first quarter of 1995 was still being assembled outside of the
Company. The margin was further enhanced by the additional sales of mold
products which are higher margin sales. However, the gross profit and gross
profit margin have been in the past and will be in the future adversely affected
by the reduction of the sales price of the Excalibur System started in July 1994
in connection with the implementation of the Company's revised marketing
strategy.
13
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1,146,000, or 72%, to $2,731,000 for the
quarter ended March 31, 1996 from $1,585,000 for the quarter ended March 31,
1995. The increase was primarily attributable to planned growth in the
Company's sales and marketing departments. The number of employees related to
this function increased by 33, or 77%, to 76 for the quarter ended March 31,
1996 from 43 for the quarter ended March 31, 1995. This increase was
attributable to the sales force build-up necessary to accommodate the current
and future sales volumes of Excalibur Systems and consumables. With this
increase in employees, the Company now has in place the planned 13-person sales
force whose focus is on selling consumables to users of Excalibur Systems.
Research and development costs. Research and development costs increased
$90,000, or 22%, to $492,000 for the quarter ended March 31, 1996 from $402,000
for the quarter ended March 31, 1995. This increase was primarily attributable
to increased development and testing of new consumables products planned for
release in 1996 and enhancements of the Excalibur System.
Other income (deductions), net. Other income (deductions), net decreased
$355,000 to $(82,000) for the quarter ended March 31, 1996 from $(437,000) for
the quarter ended March 31, 1995. The decrease was primarily a result of a
reduction of interest expense due to lower levels of debt outstanding in 1996 as
compared to 1995, as well as an increase in interest income as a result of the
investment of the proceeds from the initial public offering in March 1996.
Interest expense for the quarters ended March 31, 1996 and 1995 was inclusive of
non-cash interest expense of $23,000 and $165,000, respectively, for the
amortization of debt discounts related to the issuances of common stock warrants
with exercise prices below the common stock's estimated fair value in connection
with debt incurred during 1995 and 1994.
Net Loss. The Company's net loss increased $499,000, or 21%, to $2,844,000 for
the quarter ended March 31, 1996 from $2,345,000 for the quarter ended March 31,
1995 due to the factors discussed above.
Liquidity and Capital Resources. As of March 31, 1996, the Company had cash and
cash equivalents and working capital of approximately $26,466,000 and
$29,695,000, respectively. During the quarter ended March 31, 1996, the Company
completed an initial public offering with net proceeds received of approximately
$26,020,000. Capital expenditures for the quarter ended March 31, 1996 were
approximately $637,000. Cash usage for the period consisted of $4,054,000 to
fund operating activities, $692,000 for investing activities and $3,980,000 to
pay issuance costs associated with the initial public offering.
The Company expects that its capital requirements will increase in the future
depending on numerous factors, including but not limited to the market
penetration of Excalibur Systems, growth in sales of consumables, expansion of
its manufacturing capabilities, success of the Company's research and
development efforts and additional costs associated with the potential
commercialization of products under development. The Company expects that its
capital expenditures for the remainder of 1996 will total approximately
$1,800,000, primarily in connection with the establishment and operation of its
consumables manufacturing facilities.
The Company anticipates that its existing capital resources and anticipated cash
flows from planned operations, together with the interest income earned on the
investment of the proceeds from the initial public offering in March 1996, will
be adequate to satisfy its capital requirements through mid-1997. There can be
no assurance, however, that the Company will ever generate significant revenues
or achieve profitability. As of March 31, 1996, the Company had firm orders for
Excalibur Systems and consumables amounting to approximately $277,000. The
Company has no committed external sources of capital.
14
Seasonality. The Company's business is somewhat seasonal, with first quarter
and third quarter results generally stronger than the other two quarters.
New Accounting Standards. In March 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-lived Assets and for Long-lived Assets to Be
Disposed Of (SFAS 121). SFAS 121 requires companies to review long-lived
assets and certain identifiable intangibles to be held, used or disposed of,
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company adopted SFAS
121 on January 1, 1996; the adoption of SFAS 121 did not have a material
impact on the Company's financial statements for the quarter ended March 31,
1996.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS 123), which is effective for transactions entered into in fiscal years
beginning after December 15, 1995. The Company is currently evaluating the
requirements of SFAS 123.
15
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On March 20, 1996, the Company filed an amendment to its Certificate of
Incorporation with the Delaware Secretary of State (the Amendment) in connection
with the initial public offering. Prior to the Amendment, the Certificate of
Incorporation provided for three classes of preferred stock, par value $.001 per
share (Preferred Stock), with a specific number of shares designated for each
class and each with specific rights, preferences and privileges.
Upon the consummation of the Company's initial public offering, all shares of
all classes of Preferred Stock converted, pursuant to their terms, into common
stock, par value $.001 per share (Common Stock). Accordingly, the Amendment
deleted the provisions in the Certificate of Incorporation regarding the rights,
preferences and privileges of the classes of Preferred Stock and replaced them
with a provision that enables the Board of Directors (the Board) of the Company
to issue Preferred Stock at its discretion from time to time, with such voting,
dividend, liquidation and other rights, preferences and privileges as the Board
may determine prior to issuance.
In addition, prior to the Amendment, the Board and stockholders holding at least
fifty percent (50%) of the voting power of the issued and outstanding shares of
stock each had authority to request that a special meeting of the stockholders
be called. The Amendment eliminated the power of the stockholders to call such
a meeting. Also, the Amendment eliminated the power of stockholders to act by
written consent.
Prior to the consummation of the Company's initial public offering, the
Company's By-laws provided that each director was elected annually to the Board.
The Amendment and the Company's Amended and Restated By-laws, which became
effective upon the consummation of the initial public offering on March 20,
1996, provide for three classes of directors with each newly-elected director to
hold office for a term of three years commencing with the first Annual Meeting
of Stockholders after the closing of the initial public offering. This change
could discourage unsolicited takeovers and challenges to Board control.
The General Corporation Law of the State of Delaware provides that changes in
the By-laws and the Certificate of Incorporation may be made by the
stockholders. The Amendment retains this requirement, but requires that changes
in the By-laws by the stockholders of the Company be approved by the affirmative
vote of not less than sixty-six and two-thirds percent (66 2/3%) of the
outstanding shares of stock of the Company entitled to vote upon the election of
directors, and that changes to the Certificate of Incorporation regarding the
items discussed in this paragraph and the two preceding paragraphs be approved
by the affirmative vote of not less than sixty-six and two-thirds percent (66
2/3%) of the outstanding shares of stock of the Company entitled to vote on the
election of directors. Such changes will make it more difficult for the holders
of the Company's Common Stock to effect changes of corporate governance issues
relating to the Company.
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT INDEX
-------------
Exhibit
-------
3.1 Certificate of Incorporation, as amended
3.2 By-Laws, as amended
11 Computation of Net Loss and Pro Forma Net Loss
Per Common Share
27 Financial Data Schedule
(b) Reports on Form 8-K filed during the three months ended March 31,
1996.
None.
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.
INNOTECH, INC.
(Registrant)
Date: May 13, 1996 /s/ Ronald D. Blum
------------------
Ronald D. Blum
Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date: May 13, 1996 /s/ Steven A. Bennington
------------------------
Steven A. Bennington
Chief Operating Officer and Vice
President
(principal financial and accounting officer)
17
INDEX TO EXHIBITS
-----------------
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
3.1 Certificate of Incorporation, as amended
3.2 By-Laws, as amended
11 Computation of Net Loss and Pro Forma Net Loss
Per Common Share
27 Financial Data Schedule