UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission file number 0-27746
INNOTECH, INC.
(Exact name of registrant as specified in its charter)
Delaware 54-1560349
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5568 Airport Road
Roanoke, Virginia 24012
(Address of principal executive offices, including zip code)
(540) 362-2020
(Registrant's telephone number, including area code)
N/A
(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.
Yes X No
----- -------
As of September 30, 1996, 8,948,257 shares of the registrant's Common
Stock, $.001 par value, were outstanding.
INNOTECH, INC.
Form 10-Q Index
Nine Months Ended September 30, 1996
================================================================================
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets - September 30, 1996 and
December 31, 1995.........................................2-3
Condensed Statements of Loss - Three Months and Nine
Months Ended September 30, 1996 and 1995....................4
Condensed Statement of Stockholders' Equity - Nine
Months Ended September 30, 1996.............................5
Condensed Statements of Cash Flows - Nine Months
Ended September 30, 1996 and 1995.........................6-7
Condensed Notes to Condensed Financial
Statements...............................................8-12
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition......................13-18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................19
================================================================================
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INNOTECH, INC.
Condensed Balance Sheets
September 30, 1996 and December 31, 1995
- ----------------------------------------------------------------------------------------------------------
September 30, December 31,
1996 1995
---- ----
(Unaudited)
Assets
------
Current assets:
Cash and cash equivalents $ 18,179,786 $ 4,921,700
Accounts receivable, net
Trade, net of allowance for doubtful accounts
of $88,368 and $92,367 at September 30,
1996 and December 31, 1995, respectively 3,136,605 2,135,568
Other 159,482 28,709
-------------- -------------
Total accounts receivable, net 3,296,087 2,164,277
-------------- -------------
Inventories:
Raw materials 1,526,472 891,306
Work-in-process 200,543 274,794
Finished goods 3,549,526 1,454,667
-------------- -------------
Total inventories 5,276,541 2,620,767
-------------- -------------
Prepaid expenses and other current assets 413,994 241,950
-------------- -------------
Total current assets 27,166,408 9,948,694
-------------- -------------
Property and equipment, net 3,007,282 1,790,075
Deferred public offering charges - 333,430
Other assets, net of accumulated amortization:
Organization costs 12,813 18,882
Patents and technology rights 1,504,459 1,337,387
Debt issuance costs 55,906 72,677
Deferred loss on sale/leaseback 18,170 25,958
-------------- -------------
Total other assets 1,591,348 1,454,904
-------------- -------------
Total assets $ 31,765,038 $ 13,527,103
============== =============
See accompanying condensed notes to condensed financial statements.
2
- ----------------------------------------------------------------------------------------------------------
September 30, December 31,
1996 1995
---- ----
(Unaudited)
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current installments of long-term debt $ 29,167 $ 63,332
Current installments of obligations under capital leases 204,824 182,804
Accounts payable 1,714,581 2,034,560
Accrued expenses and other current liabilities 760,609 772,510
Customer deposits 263,266 149,439
Liability to financing companies 30,465 61,076
Option payment - 1,500,000
------------ ------------
Total current liabilities 3,002,912 4,763,721
Long-term debt, net of unamortized discount of $231,031 at
September 30, 1996 and $300,341 at December 31, 1995,
excluding current installments 2,468,969 2,416,327
Obligations under capital leases, excluding current installments 203,151 364,903
------------ ------------
Total liabilities 5,675,032 7,544,951
------------ ------------
Common stock subject to put/call agreement (85,000 shares) 834,063 -
------------ ------------
Stockholders' equity:
Series A convertible, redeemable preferred stock, $.001 par
value. Authorized 850,000 shares; issued and outstanding
none at September 30, 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 September 30, 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
September 30, 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 8,863,257 and 772,991 shares at
September 30, 1996 and December 31, 1995, respectively 8,863 773
Preferred stock warrants, 23,415 common stock warrants
(following conversion) issued and outstanding at September 30,
1996 and 38,462 issued and outstanding at December 31, 1995 - -
Common stock warrants, 86,263 issued and outstanding at
September 30, 1996 and 1,207,052 issued and outstanding at
December 31, 1995 128,234 7,878,377
Additional paid-in capital 64,143,435 5,844,007
Deferred compensation (1,583,031) (1,937,453)
Accumulated deficit (37,441,558) (28,405,176)
------------ ------------
Total stockholders' equity 25,255,943 5,982,152
Commitments and contingencies
------------ ------------
Total liabilities and stockholders' equity $ 31,765,038 $ 13,527,103
============ ============
3
INNOTECH, INC.
Condensed Statements of Loss
Three Months and Nine Months Ended September 30, 1996 and 1995
- -------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1996 1995 1996 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
Net sales $ 2,839,814 1,708,479 7,419,564 4,520,187
Cost of sales 2,180,873 1,320,271 5,734,275 3,737,490
---------- ----------- ---------- -----------
Gross profit 658,941 388,208 1,685,289 782,697
Selling, general and administrative expenses 2,874,020 2,330,371 8,391,679 5,459,516
Research and development costs 531,428 369,372 1,603,881 1,164,152
---------- ----------- ---------- -----------
Operating loss (2,746,507) (2,311,535) (8,310,271) (5,840,971)
---------- ----------- ---------- -----------
Other income (deductions):
Interest expense (127,942) (266,701) (391,060) (1,055,138)
Interest income 256,745 13,680 646,436 20,094
Other, net (5,524) (2,597) (8,735) (7,788)
---------- ----------- ---------- -----------
Other income (deductions), net 123,279 (255,618) 246,641 (1,042,832)
---------- ----------- ---------- -----------
Loss before extraordinary item (2,623,228) (2,567,153) (8,063,630) (6,883,803)
Extraordinary item - loss on extinguishment
of debt - (392,649) - (392,649)
---------- ----------- ---------- -----------
Net loss $ (2,623,228) (2,959,802) (8,063,630) (7,276,452)
========== =========== ========== ===========
Net loss per common share (pro forma for
1995) $ (0.33) (0.48) (1.15) (1.17)
========== =========== ========== ===========
Weighted average number of common shares
outstanding (pro forma for 1995) 8,052,609 6,223,932 7,029,884 6,223,932
========== =========== ========== ===========
See accompanying condensed notes to condensed financial statements.
4
DRAFT
FOR DISCUSSION PURPOSES ONLY
INNOTECH, INC.
Condensed Statement of Stockholders' Equity
Nine Months Ended September 30, 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
$3,744,045; 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,
19,147 shares at $.079 per share and
9,241 shares at $6.556 per share) - - - - - -
Exercise of common stock warrants
(1,040,504 shares at $.0079 per share
and 78,888 shares at $.079 per share) - - - - - -
Common stock warrants forfeited - - - - - -
Reclassification of common stock subject
to put/call agreement - - - - - -
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, September 30, 1996 - $ - - $ - - $ -
========= ========== ========= ========== ========= =========
Common
Common Stock
Stock Warrants
------------------------------ -------------------------------
Equivalent
Shares Amount Shares Amount
------ ------ ------ ------
Balance, December 31, 1995 772,991 $ 773 1,207,052 $ 7,878,377
Issuance of Series D Convertible,
Redeemable Preferred Stock in
satisfaction of option payment
liability - - - -
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) 426,136 426 - -
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) 159,042 159 - -
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) 3,430,104 3,430 - -
Issuance of common stock for cash
($10 per share, less issuance costs of
$3,744,045; cash paid in lieu of 52.6
fractional shares of common stock at
$10 per share) 3,000,000 3,000 - -
Exercise of common stock options
(12,204 shares at $.0079 per share,
19,147 shares at $.079 per share and
9,241 shares at $6.556 per share) 40,592 41 - -
Exercise of common stock warrants
(1,040,504 shares at $.0079 per share
and 78,888 shares at $.079 per share) 1,119,392 1,119 (1,119,392) (7,750,143)
Common stock warrants forfeited - - (1,397) -
Reclassification of common stock subject
to put/call agreement (85,000) (85) - -
Accretion on convertible, redeemable
preferred stock - - - -
Undeclared dividends on convertible,
redeemable preferred stock - - - -
Amortization of deferred compensation - - - -
Net loss - - - -
----------- ----------- ----------- --------------
Balance, September 30, 1996 8,863,257 $ 8,863 86,263 $ 128,234
============ =========== =========== ==============
Additional Total
Paid-in Deferred Accumulated Stockholders'
Capital Compensation Deficit Equity
------- ------------ ------- ------
Balance, December 31, 1995 $ 5,844,007 $ (1,937,453) $ (28,405,176) $ 5,982,152
Issuance of Series D Convertible,
Redeemable Preferred Stock in
satisfaction of option payment
liability - - - 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) 8,241,475 - - (168)
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) 1,546,878 - - (104)
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) 15,281,300 - - (436)
Issuance of common stock for cash
($10 per share, less issuance costs of
$3,744,045; cash paid in lieu of 52.6
fractional shares of common stock at
$10 per share) 26,252,429 - - 26,255,429
Exercise of common stock options
(12,204 shares at $.0079 per share,
19,147 shares at $.079 per share and
9,241 shares at $6.556 per share) 62,157 - - 62,198
Exercise of common stock warrants
(1,040,504 shares at $.0079 per share
and 78,888 shares at $.079 per share) 7,749,167 - - 143
Common stock warrants forfeited - - - -
Reclassification of common stock subject
to put/call agreement (833,978) - - (834,063)
Accretion on convertible, redeemable
preferred stock - - (402,313) -
Undeclared dividends on convertible,
redeemable preferred stock - - (570,439) -
Amortization of deferred compensation - 354,422 - 354,422
Net loss - - (8,063,630) (8,063,630)
------------- -------------- --------------- -------------
Balance, September 30, 1996 $ 64,143,435 $ (1,583,031) $ (37,441,558) $ 25,255,943
============= ============== =============== =============
See accompanying condensed notes to condensed financial statements.
5
INNOTECH, INC.
Condensed Statements of Cash Flows
Nine Months Ended September 30, 1996 and 1995
================================================================================
Nine Months Ended
September 30,
---------------------------------
1996 1995
---- ----
(Unaudited)
Cash flows from operating activities:
Net loss $ (8,063,630) $ (7,276,452)
Adjustments to reconcile net loss to net cash
used in operating activities:
Extraordinary item - loss on extinguishment of debt - 392,649
Depreciation and amortization of property and equipment 278,197 301,673
Amortization of other assets 102,440 164,428
Amortization of discounts on borrowings under line of
credit and long-term debt 69,310 295,689
Amortization of deferred compensation 354,422 444,251
Loss on sale of equipment 2,337 7,787
Loss on litigation settlement - 111,892
Net increase in current assets (3,959,628) (942,695)
Net decrease in current liabilities, exclusive of changes
shown separately and noncash transactions (248,664) (577,899)
------------ -----------
Net cash used in operating activities (11,465,216) (7,078,677)
------------ -----------
Cash flows from investing activities:
Purchases of property and equipment (1,510,041) (256,947)
Proceeds from sale of equipment 12,300 500,000
Additions to other assets (238,884) (225,178)
------------ -----------
Net cash provided by (used in) investing activities (1,736,625) 17,875
------------ -----------
Cash flows from financing activities:
Net decrease in borrowings under line of credit - (575,000)
Proceeds from issuance of long-term debt - 900,000
Payments on long-term debt and capital leases (190,565) (239,485)
Proceeds from issuance of common stock, net of issuance costs 26,318,296 478
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 - 10,255,522
Proceeds from option payment - 1,500,000
Cash paid in lieu of fractional shares of common stock (1,234) -
------------ -----------
Net cash provided by financing activities 26,459,927 11,841,515
------------ -----------
Net increase in cash and cash equivalents 13,258,086 4,780,713
Cash and cash equivalents, beginning of period 4,921,700 119,468
------------ -----------
Cash and cash equivalents, end of period $ 18,179,786 $ 4,900,181
============ ===========
(Continued)
6
INNOTECH, INC.
Condensed Statements of Cash Flows - (Continued)
- --------------------------------------------------------------------------------
Nine Months Ended
September 30,
---------------------------
1996 1995
---- ----
(Unaudited)
Supplemental disclosures of cash flows information:
Cash paid for interest $ 305,564 $ 632,564
=========== ===========
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 $2,521,732, with related accrued interest payable
of $31,536, was converted into a combination of 40,000 shares
and 215,327 shares of Series C Convertible, Redeemable Preferred
Stock and Series D Convertible, Redeemable Preferred Stock,
respectively, in 1995.
397,955 shares of Series C Convertible, Redeemable Preferred Stock,
with accrued dividends thereon of $205,694, were exchanged for
418,525 shares of Series D Convertible, Redeemable Preferred
Stock in 1995.
See accompanying condensed notes to condensed financial statements.
7
DRAFT
FOR DISCUSSION PURPOSES ONLY
INNOTECH, INC.
Condensed Notes to Condensed Financial Statements
Nine Months Ended September 30, 1996 and 1995
(Unaudited)
================================================================================
(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 nine
months ended September 30, 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 Subject to Put/Call Agreement:
Effective July 19, 1996, the Company and its Chairman and Chief Executive
Officer (CEO) entered into a Put/Call Agreement (Agreement). This
Agreement provides for the sale by the Company's CEO and his permitted
assigns to the Company and for the purchase by the Company from the
Company's CEO of an aggregate of 85,000 shares of common stock. The
exercise price for the put and call is $9.8125 per share. The put and call
options of the Company's CEO and the Company pursuant to such Agreement
became exercisable on September 11, 1996 and expire on September 10, 1997.
The aggregate exercise price of $834,063 has been removed from
stockholders' equity and reflected as common stock subject to put/call
agreement on the September 30, 1996 balance sheet.
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 had 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
(Continued)
8
INNOTECH, INC.
Condensed Notes to Condensed Financial Statements - (Continued)
(Unaudited)
================================================================================
(2) Stockholders' Equity - (continued)
--------------------
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.
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) were to 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.
(Continued)
9
INNOTECH, INC.
Condensed Notes to Condensed Financial Statements - (Continued)
(Unaudited)
(3) Stock Options and Warrants - (continued)
--------------------------
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 (40,592) $ .0079-6.556
Expired (10,103) $ 6.556
---------
Options outstanding at September 30, 1996 1,312,574 $ .0079-16.4260
=========
Generally, options vest within one to five years of the grant date.
Options exercisable at September 30, 1996 and December 31, 1995 were
982,897 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.
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
=========
(Continued)
10
INNOTECH, INC.
Condensed Notes to Condensed Financial Statements - (Continued)
(Unaudited)
================================================================================
(3) Stock Options and Warrants - (continued)
--------------------------
Warrants:
A summary of detachable warrants outstanding at September 30, 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
D Common Stock 63,308 $ 6.556 March 31, 2004
G Common Stock 1,175 $0.0079 September 23, 2004
H Common Stock 679 $ 0.079 December 1, 1996
I Common Stock 16,881 $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
==========
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 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) resulted in an additional Section 382 ownership
change. This further limits 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.
11
INNOTECH, INC.
Condensed Notes to Condensed Financial Statements - (Continued)
(Unaudited)
================================================================================
(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 September 30, 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 $26,255,000.
(7) Subsequent Event
----------------
On October 15, 1996, the Company consummated the purchase of a warrant
(the Warrant) to acquire 150,000 units of Prism Opthalmics, L.L.C. (Prism)
and the purchase of an option (the Option) to acquire all of the
outstanding equity interests of Prism. The Company paid to Prism a
purchase price of $1,165,000 for the Warrant, which is exercisable at any
time on or before December 31, 2001, at the exercise price of $.001 per
unit. The purchase price for the Option was $400,000 and, if exercised,
will require an additional payment of $5,000,000 for the acquisition by
the Company of all of the outstanding equity interest of Prism.
12
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
RESULTS OF OPERATIONS
Three Months Ended September 30, 1996 and 1995
Net sales. Total net sales increased by $1,132,000, or 66%, to $2,840,000 for
the quarter ended September 30, 1996 from $1,708,000 for the quarter ended
September 30, 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 September 30, 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 and increase selling and
marketing programs and expand the number of sales personnel. The Company
believes that these actions have had a positive impact upon sales and should
continue to have a positive impact in the future, although there can be no
assurance regarding such future impact.
A substantial portion of the Company's quarterly sales were derived from one
customer. The loss of these sales would have a material adverse effect upon the
Company's business and operating results and there can be no assurance that such
customer will continue to place orders with the Company for consumables or
Excalibur Systems in the amount or magnitude of those occurring in the third
quarter of 1996. The Company expects that sales of Excalibur Systems and, to a
lesser extent, consumables to such customer will decrease from their prior
levels as the Company has materially fulfilled existing purchase orders for the
customer. However, the Company does expect continuing orders, at reduced levels.
Net sales of consumables increased $878,000, or 117%, to $1,629,000 for the
quarter ended September 30, 1996 from $751,000 for the quarter ended
September 30, 1995. This increase in net sales of consumables was primarily
attributable to increased demand resulting from orders generated from a single
large optical retailer, an increase in the total installed base of Excalibur
Systems and the introduction of new consumables products, most of which were
higher-priced premium products, such as PhotoPlastics(TM) and enhancements of
existing products.
Net sales of Excalibur Systems increased $254,000, or 27%, to $1,211,000 for the
quarter ended September 30, 1996 from $957,000 for the quarter ended
September 30, 1995. Although there was a 43% increase in the number of Excalibur
Systems sold by the Company in the current quarter, this was offset by further
price decreases for Excalibur Systems in the current quarter, in connection with
the Company's marketing strategy of increasing market penetration by reducing
the price of the Excalibur System and thereby increasing and accelerating demand
for consumables. Growth in Excalibur System unit sales during the quarter ended
September 30, 1996 was in large part due to fulfilling orders from a single
large optical retailer.
A significant portion of the Company's 1996 third quarter sales were derived
internationally. Conducting business outside of the United States is typically
subject to certain risks, including currency exchange fluctuations and their
(possibly adverse) effect on demand.
Gross profit. Gross profit for the quarter ended September 30, 1996 of $659,000
was $271,000, or 70%, greater than the quarter ended September 30, 1995. Gross
profit margin increased 2.22% to 23.2% for the quarter ended September 30, 1996
from 22.7% for the corresponding quarter in 1995. The increase in gross profit
was due to the increase in sales of consumables, which
13
included an increase in the sale of higher-margin consumables. This increase in
gross profit was partially offset by a decrease in gross profit on 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 and increased sales of higher-margin consumable
products, offset in part by the start-up costs of lens casting operations at the
Petersburg Power Plate manufacturing facility. The gross profit margin on
Excalibur Systems declined during the third quarter of 1996 from the third
quarter of 1995 due to the lower sales price of the Excalibur System. The
reduction in the sales price of the Excalibur System is consistent with the
Company's marketing strategy. However, the gross profit and gross profit
margin have been in the past, and gross margin will be in the future, adversely
affected by the reduction of the sales price of the Excalibur System in
connection with the implementation of the Company's marketing strategy.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $544,000, or 23%, to $2,874,000 for the
quarter ended September 30, 1996 from $2,330,000 for the quarter ended September
30, 1995. The increase was primarily attributable to the implementation of
planned growth in the Company's sales and marketing departments. The number of
employees related to this function increased by 16, or 28%, to 74 for the
quarter ended September 30, 1996 from 58 for the quarter ended September 30,
1995. This increase was attributable to the sales force build-up, commenced in
the first quarter of 1996, necessary to accommodate the current and expected
future sales volumes of Excalibur Systems and consumables.
In connection with common stock options granted to executive officers during
1995 having exercise prices below the estimated fair value of the common stock,
the Company has incurred compensation expense of approximately $134,000 in the
third quarter of 1996, and expects to incur compensation expense of
approximately $100,000 in each fiscal quarter until the third quarter of fiscal
year 2000, as such options vest. Such expense would increase during a
particular quarter if the vesting of such stock options were to accelerate
during that period upon the occurrence of certain events.
Research and development costs. Research and development costs increased
$162,000, or 44%, to $531,000 for the quarter ended September 30, 1996 from
$369,000 for the quarter ended September 30, 1995. This increase was primarily
attributable to increased development and testing of new consumables products
planned for release in future periods, and enhancements of the Excalibur System.
Other income (deductions), net. Other income (deductions), net increased
$379,000 to $123,000 for the quarter ended September 30, 1996 from $(256,000)
for the quarter ended September 30, 1995. The increase was primarily the result
of an increase in interest income resulting from investment of proceeds from the
initial public offering in March 1996 as well as a decrease in interest expense
due to lower levels of debt outstanding in 1996 as compared to 1995. Interest
expense for the quarters ended September 30, 1996 and 1995 was inclusive of
noncash interest expense of $23,000 and $35,000, 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 decreased $337,000, or 11%, to $2,623,000 for
the quarter ended September 30, 1996 from $2,960,000 for the quarter ended
September 30, 1995. The decrease in net loss is due to the factors discussed
above, but principally due to an extraordinary loss of $393,000 incurred in the
quarter ended September 30, 1995 in connection with the extinguishment of
certain debt, consisting of the write-off of unamortized discounts on such debt
and the unamortized portion of debt issuance costs.
14
Nine Months Ended September 30, 1996 and 1995
Net sales. Total net sales increased by $2,900,000, or 64%, to $7,420,000 for
the nine months ended September 30, 1996 from $4,520,000 for the nine months
ended September 30, 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 nine months ended
September 30, 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 and
increase selling and marketing programs and expand the number of sales
personnel. The Company believes that these actions have had a positive impact
upon sales and should continue to have a positive impact in the future, although
there can be no assurance regarding such future impact.
A substantial portion of the Company's year-to-date sales were derived from one
customer. The loss of these sales would have a material adverse effect upon the
Company's business and operating results and there can be no assurance that such
customer will continue to place orders with the Company for consumables or
Excalibur Systems in the amount or magnitude of those occurring in the first
three quarters of 1996. The Company expects that sales of Excalibur Systems,
and to a lesser extent, consumables to such customer will decrease from their
prior levels as the Company has materially fulfilled existing purchase orders
for the customer. However, the Company does expect continuing orders, at
reduced levels.
Net sales of consumables increased $2,087,000, or 110%, to $3,984,000 for the
nine months ended September 30, 1996 from $1,897,000 for the nine months ended
September 30, 1995. This increase in net sales of consumables was primarily
attributable to increased demand resulting from orders generated from a single
large optical retailer, an increase in the total installed base of Excalibur
Systems and the introduction of new consumables products, most of which were
higher-margin premium products, such as PhotoPlastics(TM) and enhancements of
existing products.
Net sales of Excalibur Systems increased $813,000, or 31%, to $3,436,000 for the
nine months ended September 30, 1996 from $2,623,000 for the nine months ended
September 30, 1995. This sales growth was due to a 58% increase in the number
of Excalibur Systems sold by the Company in the nine-month period, offset in
part by further price decreases for Excalibur Systems during the first three
quarters of 1996, in connection with the Company's marketing strategy of
increasing market penetration by reducing the price of the Excalibur System, and
thereby increasing and accelerating demand for consumables. Growth in Excalibur
System unit sales during the nine months ended September 30, 1996 versus the
corresponding period in 1995 was principally due to fulfilling orders from a
single large optical retailer.
A significant portion of the Company's 1996 year-to-date sales were derived
internationally. Conducting business outside of the United States is typically
subject to certain risks, including currency exchange fluctuations and their
(possibly adverse) effect on demand.
Gross profit. Gross profit for the nine months ended September 30, 1996 of
$1,685,000 was $903,000, or 115%, greater than the nine months ended September
30, 1995. Gross profit margin increased 31% to 22.7% for the nine months ended
September 30, 1996 from 17.3% for the corresponding period 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-margin consumables, as well as the
increased sales of Excalibur Systems. The increase in gross profit margin was
primarily due to
15
reduced overhead costs per unit and manufacturing efficiencies achieved in the
production of Power Plates and increased sales of higher-margin products, offset
in part by the start-up costs of lens casting operations at the Petersburg Power
Plate manufacturing facility. The gross profit margin on Excalibur Systems
improved during the first nine months of 1996 over the first nine months of 1995
due also to the in-house assembly of the chamber, which during the first six
months of 1995 was still being assembled outside of the Company. The gross
profit margin was further enhanced by the additional sales of mold products
which are higher margin products. However, the gross profit and gross profit
margin have been in the past, and gross profit margins will be in the future,
adversely affected by the reduction of the sales price of the Excalibur System
in connection with the implementation of the Company's marketing strategy.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $2,932,000, or 54%, to $8,392,000 for the nine
months ended September 30, 1996 from $5,460,000 for the nine months ended
September 30, 1995. The increase was primarily attributable to the
implementation of planned growth in the Company's sales and marketing
departments. The number of employees related to this function increased by 16,
or 28%, to 74 for the nine months ended September 30, 1996 from 58 for the nine
months ended September 30, 1995. This increase was attributable to the sales
force build-up, commenced in the first quarter of 1996, necessary to accommodate
the current and expected future sales volumes of Excalibur Systems and
consumables.
In connection with common stock options granted to executive officers during
1995 having exercise prices below the estimated fair value of the common stock,
the Company has incurred compensation expense of approximately $354,000 for the
first nine months of 1996, and expects to incur compensation expense of
approximately $100,000 in each fiscal quarter, until the third quarter of fiscal
year 2000, as such options vest. Such expense would increase during a
particular quarter if the vesting of such stock options were to accelerate
during that period upon the occurrence of certain events.
Research and development costs. Research and development costs increased
$440,000, or 38%, to $1,604,000 for the nine months ended September 30, 1996
from $1,164,000 for the nine months ended September 30, 1995. This increase was
primarily attributable to increased development and testing of new consumables
products planned for release in future periods and enhancements of the Excalibur
System.
Other income (deductions), net. Other income (deductions), net increased
$1,290,000 to $247,000 for the nine months ended September 30, 1996 from
$(1,043,000) for the nine months ended September 30, 1995. The increase was
primarily the result of a decrease in interest expense due to lower levels of
debt outstanding in 1996 as compared to 1995 as well as an increase in interest
income resulting from investment of proceeds from the initial public offering in
March 1996. Interest expense for the nine months ended September 30, 1996 and
1995 was inclusive of noncash interest expense of $69,000 and $296,000,
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 $788,000, or 11%, to $8,064,000 for
the nine months ended September 30, 1996 from $7,276,000 for the nine months
ended September 30, 1995 due to the factors discussed above, and an
extraordinary loss of $393,000 incurred in the nine months ended September 30,
1995 in connection with the extinguishment of certain debt, consisting of the
write-off of unamortized discounts on such debt and the unamortized portion of
debt issuance costs.
16
Liquidity and Capital Resources. As of September 30, 1996, the Company had cash
and cash equivalents and working capital of approximately $18,180,000 and
$24,163,000, respectively. During the quarter ended March 31, 1996, the Company
completed an initial public offering with net cash proceeds received of
approximately $26,255,000. In conjunction with the Company's plan, capital
expenditures and inventory build-up for the nine months ended September 30, 1996
were $1,510,000 and $2,656,000, respectively. Cash usage for the period
consisted of $11,465,000 to fund operating activities, $1,737,000 for investing
activities (primarily property and equipment) and $3,745,000 to pay issuance
costs associated with the initial public offering.
Effective July 19, 1996, the Company and Dr. Ronald Blum, the Company's Chairman
and Chief Executive Officer, entered into a Put/Call Agreement. This Agreement
provides for the sale by Dr. Blum and his permitted assigns to the Company and
for the purchase by the Company from Dr. Blum of an aggregate of 85,000 shares
of Common Stock. The exercise price for the put and call is $9.81 per share.
The options of Dr. Blum and the Company pursuant to such Agreement are currently
exercisable and expire on September 10, 1997. The Company does not believe that
the exercise, if any, of these options will have a material adverse effect on
its liquidity.
On October 15, 1996, the Company consummated the purchase of a warrant (the
"Warrant") to acquire 150,000 units of Prism Ophthalmics, L.L.C. ("Prism") and
the purchase of an option (the "Option") to acquire all of the outstanding
equity interests of Prism. Prism is a newly created entity which owns a U.S.
patent and has filed two patent applications for lenses which are surgically
implanted in the eye and are designed to improve central field loss, a cause of
blindness. The Company paid to Prism a purchase price of $1,165,000 for the
Warrant, which is exercisable at any time on or before December 31, 2001, at the
exercise price of $.001 per unit. The purchase price for the Option was
$400,000, and, if exercised, will require an additional payment of $5,000,000
for the acquisition by the Company of all of the outstanding equity interest of
Prism. The purchase price for the Warrant and Option is intended to be used
solely by Prism for development and commercialization of Prism's proprietary
technology. Amitava Gupta, Ph.D., the Executive Vice President, Engineering,
Research and Development and a director of the Company, and his wife are the
owners of approximately 46% of the outstanding units of Prism.
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, additional costs associated with the potential
commercialization of products under development, the exercise of the put or call
under the Put/Call Agreement and the exercising of the Option to acquire Prism.
The Company expects that its capital expenditures for the remainder of 1996 will
total approximately $850,000, 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 1997. There can be no
assurance, however, that the Company will ever generate significant revenues or
achieve profitability. If the Company exercises the Option to acquire Prism, or
if during 1997 the Company fails to generate sufficient sales and gross margin
from its operations, it is likely that the Company would require additional
external financing. At this time, the Company has no committed external sources
of capital.
Seasonality. The Company's business is somewhat seasonal, with first quarter
and third quarter results generally stronger than the other two quarters.
17
Certain statements in this Form 10-Q constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
including those concerning management's expectations with respect to future
financial performance and future events, particularly relating to sales of
consumables and Excalibur Systems, gross profit, gross profit margin, as well as
the need for future capital. Such statements involve known and unknown risks,
uncertainties and contingencies, many of which are beyond the control of the
Company, which could cause actual results and outcomes to differ materially from
those expressed herein. Factors that might affect such forward-looking
statements set forth in this Form 10-Q include, among others, potential
customers' acceptance of the Company's products, changes in the Company's
marketing strategy and business plan, development and/or acceptance of the
competitive products by others, the continued ability of the Company to develop
and market new and differentiated plastic lens products, competitive factors and
the successful and efficient manufacture of consumables at the Company's
facilities.
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 nine months ended September 30, 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 plans to retain the intrinsic
value method of APB Opinion No. 25, Accounting for Stock Issued to Employees,
for recognizing stock-based compensation in the financial statements.
Management believes the adoption of SFAS 123 will not have a material impact on
the Company's financial position or results of operations; however, the Company
is still evaluating the new disclosure requirements under SFAS 123.
18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBIT INDEX
-------------
Exhibit
-------
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 September 30,
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: November 13, 1996 /s/Ronald D. Blum
-----------------------------------------------
Ronald D. Blum
Chairman of the Board and Chief Executive
Officer
(principal executive officer)
Date: November 13, 1996 /s/Steven A. Bennington
-----------------------------------------------
Steven A. Bennington
President and Chief Operating Officer
(principal financial and accounting officer)
19