INNOTECH, INC.
Form 10-Q Index
Six Months Ended June 30, 1996
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Page
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Balance Sheets - June 30, 1996 and
December 31, 1995 2-3
Condensed Statements of Loss - Three Months and Six
Months Ended June 30, 1996 and 1995 4
Condensed Statement of Stockholders' Equity - Six
Months Ended June 30, 1996 5
Condensed Statements of Cash Flows - Six Months
Ended June 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 13-17
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INNOTECH, INC.
Condensed Balance Sheets
June 30, 1996 and December 31, 1995
- -----------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
1996 1995
---- ----
(Unaudited)
Assets
------
Current assets:
Cash and cash equivalents $22,088,994 $ 4,921,700
Accounts receivable, net
Trade, net of allowance for doubtful accounts
of $88,368 and $92,367 at June 30, 1996
and December 31, 1995, respectively 2,655,507 2,135,568
Other 183,662 28,709
----------- -----------
Total accounts receivable, net 2,839,169 2,164,277
----------- -----------
Inventories:
Raw materials 1,527,675 891,306
Work-in-process 113,322 274,794
Finished goods 2,916,633 1,454,667
----------- ----------
Total inventories 4,557,630 2,620,767
----------- ----------
Prepaid expenses and other current assets 436,354 241,950
----------- ----------
Total current assets 29,922,147 9,948,694
----------- ----------
Property and equipment, net 2,561,121 1,790,075
Deferred public offering charges - 333,430
Other assets, net of accumulated amortization:
Organization costs 14,836 18,882
Patents and technology rights 1,437,865 1,337,387
Debt issuance costs 61,496 72,677
Deferred loss on sale/leaseback 20,766 25,958
----------- -----------
Total other assets 1,534,963 1,454,904
----------- -----------
Total assets $34,018,231 $13,527,103
=========== ===========
See accompanying condensed notes to condensed financial statements.
2
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
1996 1995
---- ----
(Unaudited)
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current installments of long-term debt $ 41,667 $ 63,332
Current installments of obligations under capital leases 186,151 182,804
Accounts payable 1,817,820 2,034,560
Accrued expenses and other current liabilities 829,361 772,510
Customer deposits 71,042 149,439
Liability to financing companies 41,230 61,076
Option payment - 1,500,000
------------- ------------
Total current liabilities 2,987,271 4,763,721
Long-term debt, net of unamortized discount of $254,134 at
June 30, 1996 and $300,341 at December 31, 1995,
excluding current installments 2,445,866 2,416,327
Obligations under capital leases, excluding current installments 266,001 364,903
------------- ------------
Total liabilities 5,699,138 7,544,951
------------- ------------
Stockholders' equity:
Series A convertible, redeemable preferred stock, $.001 par
value. Authorized 850,000 shares; issued and outstanding
none at June 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 June 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
June 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 7,827,578 and 772,991 shares at
June 30, 1996 and December 31, 1995, respectively 7,828 773
Preferred stock warrants, 23,415 common stock warrants
(following conversion) issued and outstanding at June 30,
1996 and 38,462 issued and outstanding at December 31, 1995 - -
Common stock warrants, 1,199,090 issued and outstanding at
June 30, 1996 and 1,207,052 issued and outstanding at
December 31, 1995 7,821,395 7,878,377
Additional paid-in capital 57,025,053 5,844,007
Deferred compensation (1,716,853) (1,937,453)
Accumulated deficit (34,818,330) (28,405,176)
------------ -------------
Total stockholders' equity 28,319,093 5,982,152
Commitments and contingencies
------------- -------------
Total liabilities and stockholders' equity $ 34,018,231 $ 13,527,103
============= =============
3
INNOTECH, INC.
Condensed Statements of Loss
Three Months and Six Months Ended June 30, 1996 and 1995
- ----------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
1996 1995 1996 1995
(Unaudited) (Unaudited)
Net sales $ 2,568,605 1,848,046 $4,579,750 2,811,708
Cost of sales 2,002,791 1,532,091 3,553,402 2,417,219
----------- ----------- ----------- -----------
Gross profit 565,814 315,955 1,026,348 394,489
Selling, general and administrative
expenses 2,786,446 1,544,261 5,517,659 3,129,145
Research and development costs 580,797 392,770 1,072,453 794,780
----------- ----------- ----------- -----------
Operating loss (2,801,429) (1,621,076) (5,563,764) (3,529,436)
Other income (deductions):
Interest expense (129,960) (354,124) (263,118) (788,437)
Interest income 337,860 6,052 389,691 6,414
Other, net (2,444) (2,602) (3,211) (5,191)
----------- ----------- ----------- -----------
Other income (deductions), net 205,456 (350,674) 123,362 (787,214)
----------- ----------- ----------- -----------
Net loss $(2,595,973) (1,971,750) $(5,440,402) (4,316,650)
=========== =========== =========== ===========
Net loss per common share
(pro forma for 1995) $ (0.33) (0.31) $ (0.84) (0.69)
=========== =========== =========== ===========
Weighted average number of common
shares outstanding (pro forma
for 1995) 7,825,101 6,223,932 6,512,919 6,223,932
=========== =========== =========== ===========
See accompanying condensed notes to condensed financial statements.
4
INNOTECH, INC.
Condensed Statement of Stockholders' Equity
Six Months Ended June 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
$3,979,019; 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
5,442 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, June 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
$3,979,019; 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,
13,697 shares at $.079 per share and
5,442 shares at $6.556 per share) 31,343 32 - -
Exercise of common stock warrants
(6,831 shares at $.0079 per share
and 1,131 shares at $.079 per share 7,962 8 (7,962) (56,982)
Accretion on convertible, redeemable
preferred stock - - - -
Undeclared dividends on convertible,
redeemable preferred stock - - - -
Amortization of deferred compensation - - - -
Net loss - - - -
----------- -------- ------------ ------------
Balance, June 30, 1996 7,827,578 $ 7,828 1,199,090 $ 7,821,395
=========== ========== ============ ==============
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
$3,979,019; cash paid in lieu of 52.6
fractional shares of common stock at
$10 per share) 26,017,455 - - 26,020,455
Exercise of common stock options
(12,204 shares at $.0079 per share,
13,697 shares at $.079 per share and
5,442 shares at $6.556 per share) 36,821 - - 36,853
Exercise of common stock warrants
(6,831 shares at $.0079 per share
and 1,131 shares at $.079 per share 57,117 - - 143
Accretion on convertible, redeemable
preferred stock - - (402,313) -
Undeclared dividends on convertible,
redeemable preferred stock - - (570,439) -
Amortization of deferred compensation - 220,600 - 220,600
Net loss - - (5,440,402) (5,440,402)
------------ -------------- ---------------- -----------
Balance, June 30, 1996 $ 57,025,053 $ (1,716,853) $ (34,818,330) $ 28,319,093
============ ============== ================ ===========
See accompanying condensed notes to condensed financial statements.
5
INNOTECH, INC.
Condensed Statements of Cash Flows
Six Months Ended June, 1996 and 1995
- ----------------------------------------------------------------------------------------------------
Six Months Ended
June 30,
----------------------------------
1996 1995
---- ----
(Unaudited)
Cash flows from operating activities:
Net loss $ (5,440,402) $ (4,316,650)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization of property
and equipment 171,950 175,364
Amortization of other assets 67,411 125,168
Amortization of discounts on borrowings
under line of credit and long-term debt 46,207 260,453
Amortization of deferred compensation 220,600 15,149
Loss (gain) on sale of equipment (1,779) 5,181
Loss on litigation settlement - 111,892
Net increase in current assets (2,806,159) (569,378)
Net increase (decrease) in current liabilities,
exclusive of changes shown separately
and noncash transactions (258,132) 169,456
------------- -----------
Net cash used in operating activities (8,000,304) (4,023,365)
------------- -----------
Cash flows from investing activities:
Purchases of property and equipment (951,717) (28,915)
Proceeds from sale of equipment 10,500 500,000
Additions to other assets (147,470) (153,787)
------------- -----------
Net cash provided by (used in)
investing activities (1,088,687) 317,298
------------- -----------
Cash flows from financing activities:
Net increase in borrowings under line of credit - 214,370
Proceeds from issuance of long-term debt - 500,000
Payments on long-term debt and capital leases (133,888) (137,941)
Proceeds from issuance of common stock, net of
issuance costs 26,057,977 -
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 - 3,375,654
Cash paid in lieu of fractional shares of common stock (1,234) -
------------- -----------
Net cash provided by financing
activitities 26,256,285 3,952,083
------------- -----------
Net increase in cash and cash equivalents 17,167,294 246,016
Cash and cash equivalents, beginning of period 4,921,700 119,468
------------- -----------
Cash and cash equivalents, end of period $ 22,088,994 $ 365,484
============= ===========
(Continued)
6
INNOTECH, INC.
Condensed Statements of Cash Flows - (Continued)
- ------------------------------------------------------------------------------------------------------
Six Months Ended
June 30,
---------------------------
1996 1995
(Unaudited)
Supplemental disclosures of cash flows information:
Cash paid for interest $ 202,161 $ 320,684
========= =========
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
Six Months Ended June 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 six months ended June 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
--------------------
Put/Call Agreement:
Effective July 19, 1996, the Company and its president entered into a
Put/Call Agreement (Agreement). This Agreement provides for the sale by the
Company's president and his permitted assigns to the Company and for the
purchase by the Company from the Company's president of an aggregate of
85,000 shares of common stock. The exercise price for the put and call will
be the average of the closing sales prices of the common stock for the ten
days preceding the date on which the Company's president gives notice with
respect to the exercise price. Such notice must be given prior to
September 1, 1996. The put and call options of the Company's president and
the Company pursuant to such Agreement become exercisable on September 11,
1996 and terminate on September 10, 1997.
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 (31,343) $ .0079-6.556
Expired (519) $ 6.556
---------
Options outstanding at June 30, 1996 1,331,407 $.0079-16.4260
=========
Generally, options vest within one to five years of the grant date. Options
exercisable at June 30, 1996 and December 31, 1995 approximated 993,646 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 June 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
C Common Stock 48,592 $ 0.079 March 31, 1999
D Common Stock 63,308 $ 6.556 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
===========
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.
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 June 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 $26,020,000.
12
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.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1996 and 1995
Net sales. Total net sales increased by $721,000, or 39%, to $2,569,000 for the
quarter ended June 30, 1996 from $1,848,000 for the quarter ended June 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 June 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 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.
A substantial portion of the Company's sales for the quarter ended June 30, 1996
were derived from one customer. The loss of sales from such customer 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 second quarter of 1996.
Net sales of consumables increased $699,000, or 102%, to $1,382,000 for the
quarter ended June 30, 1996 from $683,000 for the quarter ended June 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 cumulative number of installed Excalibur Systems
(excluding the single large optical retailer) and the introduction of new
consumables products, most of which were higher-priced premium products.
Net sales of Excalibur Systems increased $22,000, or 2%, to $1,187,000 for the
quarter ended June 30, 1996 from $1,165,000 for the quarter ended June 30, 1995.
Although there was a 27% increase in the number of Excalibur Systems sold by the
Company, this was offset by price decreases for Excalibur Systems initiated in
July 1994 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 June 30, 1996 versus the corresponding
period in 1995 was largely due to fulfilling orders from a single large optical
retailer.
A significant portion of the Company's 1996 second quarter sales were derived
from international customers. Conducting business outside of the United States
is typically subject to certain additional risks, including currency exchange
fluctuations and their (possibly adverse) effect on demand.
13
Gross profit. Gross profit for the quarter ended June 30, 1996 of $566,000 was
$250,000, or 79%, greater than the quarter ended June 30, 1995. Gross profit
margin increased 29% to 22% for the quarter ended June 30, 1996 from 17% for
the corresponding quarter 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 and sales of other higher-priced products, offset in part by the start-up
of lens casting at the Petersburg Power Plate manufacturing facility. The gross
profit margin on Excalibur Systems improved during the second quarter of 1996
over the second quarter of 1995 due also to the in-house assembly of the
chamber, which during the second quarter of 1995 was still being assembled
outside of the Company. Despite a 27% increase in the number of Excalibur
Systems sold by the Company, total Excalibur System costs decreased $32,000, or
4%, for the quarter ended June 30, 1996 as compared to the quarter ended June
30, 1995. 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 $1,242,000, or 80%, to $2,786,000 for the
quarter ended June 30, 1996 from $1,544,000 for the quarter ended June 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 31, or 70%, to 75 for the quarter ended
June 30, 1996 from 44 for the quarter ended June 30, 1995. This increase was
attributable to the sales force build-up in the first quarter of 1996 necessary
to accommodate the current and future sales volumes of Excalibur Systems and
consumables.
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.
Research and development costs. Research and development costs increased
$188,000, or 48%, to $581,000 for the quarter ended June 30, 1996 from $393,000
for the quarter ended June 30, 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 increased
$556,000 to $205,000 for the quarter ended June 30, 1996 from $(351,000) for the
quarter ended June 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 June 30, 1996 and 1995 was inclusive of noncash
interest expense of $23,000 and $95,000, 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 $624,000, or 32%, to $2,596,000 for
the quarter ended June 30, 1996 from $1,972,000 for the quarter ended June 30,
1995 due to the factors discussed above.
14
Six Months Ended June 30, 1996 and 1995
Net sales. Total net sales increased by $1,768,000, or 63%, to $4,580,000 for
the six months ended June 30, 1996 from $2,812,000 for the six months ended June
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 six months ended June 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 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.
A substantial portion of the Company's 1996 year-to-date sales were derived from
one customer. The loss of sales from such customer 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 half of 1996.
Net sales of consumables increased $1,209,000, or 105%, to $2,355,000 for the
six months ended June 30, 1996 from $1,146,000 for the six months ended June 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 cumulative number of installed Excalibur Systems
(excluding the single large optical retailer) and the introduction of new
consumables products, most of which were higher-priced premium products.
Net sales of Excalibur Systems increased $559,000, or 34%, to $2,225,000 for the
six months ended June 30, 1996 from $1,666,000 for the six months ended June 30,
1995. This sales growth was due to a 66% 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 marketing
strategy. Growth in Excalibur System unit sales during the six months ended
June 30, 1996 versus the corresponding period in 1995 was largely due to
fulfilling orders from a single large optical retailer.
A significant portion of the Company's 1996 year-to-date sales were derived from
international customers. Conducting business outside of the United States is
typically subject to certain additional risks, including currency exchange
fluctuations and their (possibly adverse) effect on demand.
Gross profit. Gross profit for the six months ended June 30, 1996 of $1,026,000
was $632,000, or 160%, greater than the six months ended June 30, 1995. Gross
profit margin increased 57% to 22% for the first half of 1996 from 14% 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-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 and sales of other higher-priced products, offset in part by the start-up
of lens casting at the Petersburg Power Plate manufacturing facility. The gross
profit margin on Excalibur Systems improved during the first six months of 1996
over the first six 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
15
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 $2,389,000, or 76%, to $5,518,000 for the six
months ended June 30, 1996 from $3,129,000 for the six months ended June 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 31, or 70%, to 75 for the six
months ended June 30, 1996 from 44 for the six months ended June 30, 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.
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.
Research and development costs. Research and development costs increased
$277,000, or 35%, to $1,072,000 for the six months ended June 30, 1996 from
$795,000 for the six months ended June 30, 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 increased
$910,000 to $123,000 for the six months ended June 30, 1996 from $(787,000) for
the six months ended June 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 six months ended June 30, 1996 and 1995 was inclusive of noncash
interest expense of $46,000 and $260,000, 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 $1,123,000, or 26%, to $5,440,000
for the six months ended June 30, 1996 from $4,317,000 for the six months ended
June 30, 1995 due to the factors discussed above.
Liquidity and Capital Resources. As of June 30, 1996, the Company had cash and
cash equivalents and working capital of approximately $22,089,000 and
$26,935,000, respectively. During the quarter ended March 31, 1996, the Company
completed an initial public offering with net proceeds received of approximately
$26,020,000. In conjunction with the Company's plan, capital expenditures and
inventory build-up for the six months ended June 30, 1996 were $952,000 and
$1,937,000, respectively. Cash usage for the period consisted of $8,000,000 to
fund operating activities, $1,089,000 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
16
expenditures for the remainder of 1996 will total approximately $1,400,000,
primarily in connection with the establishment and operation of its consumables
manufacturing facilities.
Effective July 19, 1996, the Company and Dr. Blum, the Company's president,
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 will be the average of the closing sales
prices of the Common Stock for the ten days preceding the date on which Dr. Blum
gives notice with respect to the exercise price. Such notice must be given
prior to September 1, 1996. The options of Dr. Blum and the Company pursuant to
such Agreement become exercisable on September 11, 1996 and terminate on
September 10, 1997. The Company does not believe that the exercise of these
options will have a material effect on its liquidity.
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. 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.
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 six months ended June 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 is currently evaluating the
requirements of SFAS 123.
17
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 June 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: August 12, 1996 /s/Ronald D. Blum
-----------------
Ronald D. Blum
Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date: August 12, 1996 /s/Steven A. Bennington
-----------------------
Steven A. Bennington
Chief Operating Officer and Vice President
(principal financial and accounting officer)
18
INDEX TO EXHIBITS
-----------------
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
11 Computation of Net Loss and Pro Forma Net Loss
Per Common Share
27 Financial Data Schedule