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 MARCH 31, 2001.
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 NO. 000-23767
SYMPHONIX DEVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0376250
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2331 Zanker Road
SAN JOSE, CALIFORNIA 95131-1107
(Address of principal executive offices, including zip code)
(408) 232-0710
(Registrant's telephone number, including area code)
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 March 31, 2001; 21,079,000 shares of the Registrant's Common Stock were
outstanding.
SYMPHONIX DEVICES, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2001 and
December 31, 2000....................................................1
Condensed Consolidated Statements of Operations for the three months
ended March 31, 2001 and 2000........................................2
Condensed Consolidated Statements of Comprehensive Loss for the three
months ended March 31, 2001 and 2000.................................3
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2001 and 2000........................................4
Notes to Condensed Consolidated Financial Statements.................5
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................6
Item 3 Quantitative and Qualitative Disclosures About Market Risk..........18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................18
Item 2. Changes in Securities and Use of Proceeds...........................18
Item 3. Defaults Upon Senior Securities.....................................18
Item 4. Submission of Matters to a Vote of Security Holders.................18
Item 5. Other Information...................................................18
Item 6. Exhibits and Reports on Form 8-K....................................18
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SYMPHONIX DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
March 31, December 31,
2001 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 2,963 $ 29,535
Short-term investments 20,263 -
Accounts receivable, net 305 356
Inventories 1,882 2,034
Prepaid expenses and other current assets 1,276 634
-------- --------
Total current assets 26,689 32,559
Property and equipment, net 1,528 1,396
Restricted cash 271 -
Other assets 73 75
-------- --------
Total assets $ 28,561 $ 34,030
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,190 $ 834
Accrued compensation 796 1,304
Other accrued liabilities 3,246 3,772
Current portion of bank borrowings 500 500
-------- --------
Total current liabilities 5,732 6,410
Deferred revenue 1,006 1,101
Bank borrowings, less current portion 875 1,000
-------- --------
Total liabilities 7,613 8,511
-------- --------
Stockholders' equity:
Common stock 21 21
Notes receivable from stockholders (421) (421)
Deferred compensation - (34)
Additional paid-in capital 92,063 91,885
Accumulated other comprehensive income 124 54
Accumulated deficit (70,839) (65,986)
-------- --------
Total stockholders' equity 20,948 25,519
-------- --------
Total liabilities and stockholders' equity $ 28,561 $ 34,030
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
-1-
SYMPHONIX DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three months ended March 31,
----------------------------
2001 2000
---- ----
Revenue $ 576 $ 218
-------- -------
Costs and expenses:
Cost of goods sold 1,188 1,023
Research and development 1,651 1,937
Selling, general and administrative 2,843 1,635
------- -------
Total costs and expenses 5,682 4,595
------- -------
Operating loss (5,106) (4,377)
Interest income 287 131
Interest expense (34) (51)
------- -------
Net loss $(4,853) $(4,297)
======= =======
Basic and diluted net loss per common share $ (0.23) $ (0.32)
======= =======
Shares used in computing basic and diluted
net loss per common share 20,974 13,357
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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SYMPHONIX DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
Three months ended March 31,
-----------------------------
2001 2000
------- -------
Net loss $(4,853) $(4,297)
Change in unrealized gain on short-term investments 63 47
Translation adjustments 7 2
------- -------
Comprehensive loss $(4,783) $(4,248)
======= =======
The accompanying notes are an integral part of these condensed consolidated financial statements.
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SYMPHONIX DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three months ended March 31,
----------------------------
2001 2000
-------- -------
Cash flows from operating activities:
Net loss $ (4,853) $(4,297)
Adjustments to reconcile net loss to cash used in
operating activities:
Amortization of deferred compensation 34 81
Stock based compensation - 16
Depreciation and amortization 183 199
Amortization of premium on short-term investments 24 -
Changes in operating assets and liabilities:
Accounts receivable 51 (59)
Inventories 152 106
Prepaid expenses and other current assets (642) 29
Accounts payable 356 (271)
Accrued compensation (508) (376)
Deferred revenue (95) (91)
Other accrued liabilities (526) 3
-------- -------
Net cash used in operating activities (5,824) (4,660)
-------- -------
Cash flows from investing activities
Purchases of short-term investments (22,236) (2,200)
Maturities of short-term & long-term investments 2,012 6,713
Purchases of property and equipment (315) (154)
Increase in restricted cash (271) -
Change in other assets 2 4
-------- -------
Net cash provided by (used in) investing activities (20,808) 4,363
-------- -------
Cash flows from financing activities
Payments on capital lease obligations - (34)
Payments on bank borrowings (125) (125)
Proceeds from issuance of common stock 178 16
Issuance of notes receivable to stockholder - (60)
-------- -------
Net cash provided by (used in) financing activities 53 (203)
-------- -------
Net decrease in cash and cash equivalents (26,579) (500)
Effect of exchange rates on cash and cash equivalents 7 2
Cash and cash equivalents, beginning of period 29,535 7,998
-------- -------
Cash and cash equivalents, end of period $ 2,963 $ 7,500
======== =======
Supplemental disclosure of non-cash financing activities
Reversal of unrealized deferred compensation $ - $ 214
======== =======
The accompanying notes are an integral part of these condensed consolidated financial statements.
-4-
SYMPHONIX DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements as of
March 31, 2001 of Symphonix Devices, Inc. (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The unaudited interim financial statements have been
prepared on the same basis as the annual financial statements and, in the
opinion of management, reflect all adjustments, consisting of normal recurring
adjustments, considered necessary for a fair presentation. Operating results
for the three month period ended March 31, 2001 are not necessarily indicative
of the results that may be expected for the fiscal year ending December 31,
2001, or any future interim period.
These financial statements and notes should be read in conjunction with the
Company's audited financial statements for the year ended December 31, 2000 and
footnotes thereto, included in the Company's Annual Report on Form 10-K.
2. Computation of Basic and Diluted Net Loss per Common Share:
Basic earnings per share ("EPS") is computed by dividing net loss by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur from common shares issuable
through stock options, warrants and other convertible securities, if dilutive.
The following table is a reconciliation of the numerator (net loss) and the
denominator (number of shares) used in the basic and diluted EPS calculations
and sets forth potential shares of common stock that are not included in the
diluted net loss per share calculation as their effect is antidilutive (in
thousands except per share data):
Three months ended March 31,
----------------------------
2001 2000
---- ----
Numerator - Basic and Diluted
Net loss $(4,853) $(4,297)
------- -------
Denominator - Basic and Diluted
Weighted average common shares outstanding 21,038 13,446
Weighted average unvested common shares
subject to repurchase (64) (89)
------- -------
Total 20,974 13,357
======= =======
Basic and diluted net loss per common share $(0.23) $(0.32)
======= =======
Antidilutive Securities:
Options to purchase common stock 2,613 1,994
Common stock subject to repurchase 60 85
Warrants 7 34
------- -------
2,680 2,113
======= =======
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3. Inventories:
Inventories comprise (in thousands):
March 31, 2001 December 31, 2000
-------------- -----------------
Raw materials $ 574 $ 253
Work in Progress 854 1,097
Finished goods 454 684
------ ------
$1,882 $2,034
====== ======
4. Nonrecurring Charges
In November 2000, the Company approved plans to restructure its operations in
order to accelerate the Marketing and Distribution Agreement signed with Siemens
in December 1999. The following table sets forth certain details associated with
the net reorganization charges as of March 31, 2001 (in thousands of dollars):
Accrual at Accrual at
December 31, Cash March 31,
2000 Payments Adjustments 2001
---- -------- ----------- ----
Severance & benefits $ 262 $(110) $(50) $ 102
Facility charges 111 (37) (32) 42
Other 136 (110) - 26
----- ----- ---- -----
$ 509 $(257) $(82) $ 170
===== ===== ==== =====
Severance and benefits represent the reduction of 10 sales and marketing
employees in Europe. Facility charges include early termination costs associated
with the closing of the international sales office and write-off of certain
assets. In the first quarter of 2001, cash payments relating to these accruals
totaled $257,000. The Company reversed $82,000 of excess reorganization charges
related to severance and facilities charges included in selling, general and
administrative expenses in the statement of operations.
5. Reclassification:
Certain prior year financial statement items have been reclassified to
conform to the current year's presentation.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the condensed
consolidated financial statements and footnotes thereto, and with the Company's
audited financial statements for the year ended December 31, 2000 and the
footnotes thereto.
-6-
Overview
Statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations which express that the company "believes",
"anticipates" or "plans to.........." as well as other statements which are not
historical fact, are forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Actual events or results may
differ materially as a result of the risks and uncertainties described herein
and elsewhere including, in particular, those factors described under
"Business" and "Factors That Might Affect Future Results."
Symphonix has developed a family of proprietary implantable Soundbridges
for the management of mild to severe hearing impairment. The Company's family of
Vibrant Soundbridges is based on its patented core FMT technology. Late in 2000,
the Company received approval from the Food and Drug Administration ("FDA") to
commercially market the product in the United States. Subsequent to FDA
approval, the product was successfully launched to the otology community.
Otologists are ear surgeons within the ear, nose and throat ("ENT") group of
doctors. The Company is working with more than 40 otologists to establish
implanting centers across the United States.
The Company has established a United States sales and marketing
organization which, as of March 31, 2001, is comprised of seventeen sales,
marketing and clinical support personnel. Going forward, while the Company will
continue to increase the number of otologists it works with, the Company plans
to initiate marketing efforts focused on audiologists--the health professionals
who assess hearing problems and recommend hearing devices--and directly to those
suffering hearing loss.
The Company received the authorization to affix the CE Mark to the first
generation Vibrant Soundbridge and the second generation Vibrant P Soundbridge
in March 1998. Authorization to affix the CE Mark to the Vibrant HF Soundbridge
and the Vibrant D Soundbridge was received in July 1998 and in May 1999,
respectively. The Company began selling activities for the Vibrant P
Soundbridge and for the Vibrant D Soundbridge in the European Union in March
1998 and in June 1999, respectively. In August 2000, the Company received FDA
approval for its premarket approval application (PMA) for the Vibrant P and
Vibrant D Soundbridges. In October 2000, Symphonix received its device license
for the Vibrant Soundbridge from Health Canada.
In December 1999, the Company established a distribution partnership with
Siemens Audiologische Technik GmbH ("Siemens") covering most of the markets in
Europe. As of January 1, 2001, Siemens was granted full distributorship of the
European market. The Company believes this partnership will significantly
enhance its presence, especially within the audiology community.
The Company's initial selling efforts in Europe have been targeted
primarily at those ENT surgeons specializing in otology. The Company intends to
continue to market its products to these specialists; however, with the Siemens
agreement, it also plans to focus on referring physicians, audiologists, the
general population of ENT physicians and potential patients in an attempt to
increase the patient flow to the otology centers. There can be no assurance that
the Company will be successful in its efforts to increase the number of patients
who become candidates for the Company's Soundbridge or in obtaining
reimbursement for its products.
-7-
On August 31, 2000, the FDA approved the Vibrant Soundbridge for commercial
distribution in the United States for adults with a moderate to severe hearing
loss. The Company has recently completed a clinical trial for adults with a mild
hearing loss. The Company plans on a submission of this PMA supplement to occur
in the second quarter 2001.
Symphonix has a limited operating history. Through March 31, 2001 the
Company had not generated significant revenue from product sales. The Company
expects to incur substantial losses through at least 2001. To date, the
Company's principal sources of funding have been net proceeds from its initial
public offering completed in February 1998, private equity financings, an
equipment lease financing and bank borrowings.
Results of Operations
Revenue. Revenue was $0.6 million in the three months ended March 31, 2001
compared to $0.2 million in the three months ended March 31, 2000. Revenue in
these periods was the result of selling activities to distributors and direct
sales in Europe and direct sales in the United States. Revenue in the three
months ended March 31, 2001 and 2000 included $94,000 and $91,000, respectively,
representing the amortization of the difference between the purchase price and
fair value of the Company's common stock purchased by Siemens in connection with
a Marketing and Distribution Agreement. The remaining deferred income will be
amortized over the life of the agreement.
Cost of Goods Sold. Cost of goods sold increased to $1.2 million for the
three months ended March 31, 2001 from $1.0 million for the three months ended
March 31, 2000 primarily due to increased volumes. Cost of goods sold
represents the direct cost of the products sold as well as manufacturing
variances and provisions for warranty.
Research and Development Expenses. Research and development expenses were
$1.7 million in the three months ended March 31, 2001 compared to $1.9 million
in the three months ended March 31, 2000. The $0.2 million decrease during this
period was due to lower clinical trial activity for the Company's Vibrant
Soundbridge during the three months ended March 31, 2001 compared to the same
period ended March 31, 2000. Research and development expenses consist
primarily of personnel costs, professional services, materials, supplies and
equipment in support of product development, clinical trials, regulatory
submissions, and the preparation and filing of patent applications. The Company
expects to continue to invest in research and development in the remainder of
2001 primarily in the development of the totally implantable version of the
Soundbridge.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $2.8 million in the three months ended March 31,
2001 compared to $1.6 million in the three months ended March 31, 2000.
Selling, general and administrative expenses consist primarily of personnel
costs, promotional costs, legal and consulting costs. The $1.2 million increase
for the three months ended March 31, 2001 was primarily due to increased
marketing activity for the Company's Vibrant Soundbridge. The Company expects
to incur substantial increases in expenses
-8-
in developing a U.S. sales and marketing organization and associated programs in
the remainder of 2001.
Deferred compensation of $2.3 million was recorded in 1997, representing
the difference between the exercise prices of certain options granted and the
deemed fair value of the Company's common stock on the options' grant dates.
Deferred compensation expense, net of terminated employees, attributed to such
options was $34,000 during the three months ended March 31, 2001 compared to
$81,000 during the three months ended March 31, 2000.
Interest Income (Expense). Interest income, net of expense, increased to
$0.3 million in the three months ended March 31, 2001 from $0.1 million in the
three months ended March 31, 2000. The increase in net interest income was due
to the increase in the Company's cash and short-term investment balances
pursuant to the Company's private equity financings in September and November
2000 of $25.9 million. Interest earned in the future will depend on the
Company's funding cycles and prevailing interest rates.
Income Taxes. To date, the Company has not incurred any U.S. income tax
obligations. At December 31, 2000, the Company had net operating loss
carryforwards of approximately $58.0 million for federal and $28.4 million for
state income tax purposes, which will expire at various dates through 2020 and
2010, respectively, if not utilized. The principal differences between losses
for financial and tax reporting purposes are the result of the capitalization of
research and development and start-up expenses for tax purposes. Federal and
state tax laws contain provisions that may limit the net operating loss
carryforwards that can be used in any given year, should certain changes in the
beneficial ownership of the Company's outstanding common stock occur. Such
events could limit the future of the Company's net operating loss carryforwards.
Liquidity and Capital Resources
Since inception, the Company has funded its operations and its capital
investments from proceeds from its initial public offering completed in February
1998 totaling $28.4 million, from the private sale of equity securities totaling
approximately $62.5 million, from equipment lease financing totaling $1.3
million and from bank borrowings totaling, net, $2.0 million. At March 31, 2001,
the Company had $20.9 million in working capital, and its primary source of
liquidity was $23.2 million in cash and cash equivalents and short-term
investments. Additionally, the Company had $271,000 of restricted cash held in
certificates of deposit as collateral for letters of credit.
Symphonix used $5.8 million in cash for operations in the three months
ended March 31, 2001, compared to $4.7 million in the three months ended March
31, 2000 primarily in funding its operating losses.
Capital expenditures, primarily related to the Company's research and
development and manufacturing activities, were $315,000 and $154,000 in the
three months ended March 31, 2001
-9-
and 2000, repectively. At March 31, 2001, the Company did not have any material
commitments for capital expenditures.
The Company has a loan agreement with a bank that provides for borrowings
of up to $2.0 million and for the issuance of letters of credit up to $250,000.
At March 31, 2001, the Company had borrowings of $1.4 million and an outstanding
letter of credit in the amount of $146,000 under the loan agreement. Borrowings
under the loan agreement are repayable over four years commencing in January
2000.
The Company will expend substantial funds in the future for research and
development, preclinical and clinical testing, capital expenditures and the
manufacturing, marketing and sale of its products. The timing and amount of
spending of such capital resources cannot be accurately predicted and will
depend on several factors, including the progress of its research and
development efforts and preclinical and clinical activities, the time and costs
of obtaining regulatory approvals, the progress and cost of commercialization of
products currently under development, market acceptance and demand for the
Company's products and other factors not within the Company's control. While the
Company believes that its existing capital will be sufficient to fund its
operations and its capital investments through 2001, the Company may require
additional financing beyond that time. Such additional financing may not be
available on a timely basis on terms acceptable to the Company, or at all. Or,
if available, such financing may be dilutive to stockholders. If adequate funds
are not available, the Company could be required to delay development or
commercialization of certain of its products, license to third parties the
rights to commercialize certain products or technologies that the Company would
otherwise seek to commercialize for itself, or reduce the marketing, customer
support or other resources devoted to certain of its products, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Factors That May Affect Future Results
We have a history of losses and negative cash flows, and we may never be
profitable.
We have incurred losses every year since we began operations in 1994. At
March 31, 2001, we had an accumulated deficit of $71 million. This deficit
resulted primarily from expenses we incurred from dedicating substantially all
of our resources to research and development, clinical trials, establishment of
European and United States sales and marketing organizations and the initiation
of sales and marketing activities in Europe and the United States. Even though
Vibrant P and Vibrant D Soundbridges became available for sale in the European
Union in 1998 and in the United States and Canada in 2000, we have not generated
significant revenues from product sales to date. We may never realize
significant product revenues.
Even if we do achieve significant product revenues, we may never be
profitable. We expect our operating losses to continue at least through the
year 2001 as we continue to, among other things:
-10-
. attempt to establish sales and marketing capabilities;
. expand research and development activities;
. conduct clinical trials in support of regulatory approvals; and
. establish commercial-scale manufacturing capabilities.
If our Soundbridge products do not achieve market acceptance, our business may
fail.
We have sold the semi-implantable Vibrant Soundbridge in Europe since 1998
and in the United States since late 2000. This product has not yet achieved
market acceptance and may never achieve market acceptance. Market acceptance of
our current and future Soundbridge products will depend upon their acceptance by
the medical community and patients as safe, effective, and cost-effective
compared to other devices. Our Soundbridge products may not be preferable
alternatives to existing or future products, some of which, such as the acoustic
hearing aid, do not require surgery. Patient acceptance of our Soundbridge
products will depend in part upon physician, audiologist and surgeon
recommendations as well as other factors, including the effectiveness, safety,
reliability and invasiveness of the procedure as compared to established
approaches. Prior to undergoing surgery for the implantation of our Soundbridge,
a patient may speak with a number of medical professionals, including the
patient's primary care physician, an audiologist, an ear, nose and throat
specialist, as well as surgeons who specialize in ear surgery. The failure by
any of these medical professionals to favorably recommend our products and the
surgery required to implant the Soundbridge could limit the number of potential
patients who are introduced to an ear surgeon as candidates for our Soundbridge
products. If our Soundbridge products do not achieve market acceptance, our
business may fail.
If we fail to successfully develop and commercialize our next generation of
Vibrant Soundbridge products, we may not achieve profitability.
Although we have offered the semi-implantable Vibrant Soundbridge for sale
in Europe since 1998 and in the United States since late 2000, we have not
realized significant sales revenues to date. Our success depends on our ability
to successfully commercialize an improved semi-implantable Soundbridge as well
as a totally implantable Soundbridge. Our Vibrant HF and totally-implantable
Soundbridge, currently under development, will require additional development,
clinical trials and regulatory approval prior to commercialization. Successful
completion of clinical trials for the Vibrant HF and totally-implantable
Soundbridge products may never occur. Completion of clinical trials my be
delayed by many factors, including research and development difficulties, slower
than anticipated patient enrollment or adverse events occurring during clinical
trials. Any delays in our clinical trials or any failure to obtain regulatory
approval for these next generation Soundbridge products would impair our ability
to achieve profitability. We may not be able to secure additional funding to
support our substantial future capital requirements.
We will expend substantial funds in the future for research and
development, preclinical and clinical testing, capital expenditures and the
manufacturing, marketing and sale of our products. The
-11-
timing and amount of spending of such capital resources cannot be accurately
predicted and will depend upon several factors not within our control,
including:
. market acceptance and demand for our products in the United States and
internationally;
. the progress of our research and development efforts and preclinical and
clinical activities;
. competing technological and market developments;
. the time and costs involved in obtaining regulatory approvals;
. the time and costs involved in filing, prosecuting and enforcing patent
claims; and
. the progress and cost of commercialization of products currently under
development.
We believe that the net proceeds of approximately $31.0 million from the
recent private placements of securities to Siemens Audiologische Technik GmbH
and other investors, together with our previously existing capital resources and
projected interest income, will be sufficient to fund our operations and capital
investments through 2001. However, we may require additional financing after
that time. Such additional financing, if required, may not be available on a
timely basis on terms acceptable to us, or at all. If adequate funds are not
available, we could be required to delay development or commercialization of
some of our products, to license to third parties the rights to commercialize
some products or technologies that we would otherwise seek to commercialize for
ourselves, or to reduce the marketing, customer support or other resources
devoted to some of our products, any of which could have a material adverse
effect on our business, financial condition and results of operations.
If we do not receive and maintain regulatory approvals for new products, we will
not be able to manufacture or market new products.
Approval from the FDA is necessary to manufacture and market medical
devices in the United States. Other countries have similar requirements. Since
we have not realized significant revenues from sales of our current products, we
must receive and maintain regulatory approval for new products in order to grow
our business significantly.
The process that medical devices must undergo to receive necessary approval
is extensive, time-consuming and costly, and there is no guarantee that
regulatory authorities will approve any of our product candidates. FDA approval
can be delayed, limited or not granted for many reasons, including:
. a product candidate may not be safe or effective;
. even if we believe data from preclinical testing and clinical trials should
justify approval, FDA officials may disagree;
-12-
. the FDA might not approve our manufacturing processes or facilities or the
processes or facilities of our contract manufacturers or raw material
suppliers;
. the FDA may change its approval policies or adopt new regulation; and
. the FDA may approve a product candidate for indications that are narrow,
which may limit our sales and marketing activities.
The process of obtaining approvals in foreign countries is subject to delay
and failure for the same reasons.
We face intense competition in our current and potential markets and if we
cannot demonstrate the superiority of our products, we may fail to achieve
profitability.
The medical device industry and the acoustic hearing aid market are subject
to intense competition in the United States and abroad. We believe our products
will compete primarily with hearing aids. Principal manufacturers of acoustic
hearing aids include Siemens Hearing Instruments, Inc., Starkey Laboratories,
Inc., Dahlberg, Inc., GN ReSound, Inc., Oticon, Inc., Widex Hearing Aid Co.,
Inc., Sonic Innovations, Inc. and Phonak, Inc. Our products may not be as
reliable or effective as established hearing aid products. If our products are
not perceived as high quality, reliable and effective alternatives to
conventional hearing aids, we may not successfully compete with established
hearing aid products. Our competitors may also develop technologies and products
in the future that are more reliable and effective and less expensive than those
being developed by us or that do not require surgery.
Several university research groups and development-stage companies have
active research or development programs related to direct drive devices for
sensorineural hearing loss. One such company, IMPLEX AG Hearing Technology, was
authorized by its European reviewing body on November 15, 1999 to affix the CE
Mark on its totally integrated cochlear amplifier. IMPLEX has reported its
intent to pursue a clinical investigation in the United States to support FDA
regulatory requirements. Otologics, LLC has developed a semi-implantable direct
drive device for sensorineural hearing loss called the middle ear transducer.
This device has begun the FDA regulatory process and the European regulatory
process and initiated multicenter clinical trials. The Company believes St.
Croix Medical, Inc. has begun clinical trials in Europe and has recently
received an IDE approval to begin clinical studies on its fully implantable pizo
electric device for sensorineural hearing loss. Soundtec, Inc. is doing
clinical trials in the United States on a hybrid implantable/ear canal based
hearing aid. In addition, some large medical device companies, some of which are
currently marketing implantable medical devices, may develop programs in hearing
management. Many of these companies have substantially greater financial,
technical, manufacturing, marketing and other resources than we have. If we fail
to compete effectively with any or all of these companies and products, we will
not achieve profitability.
Our lack of sales, marketing and distribution experience could delay and
increase the costs of introducing our Soundbridge products into those markets
where we have received regulatory approvals.
-13-
In the United States, a direct sales force is concentrating our product
marketing efforts on approximately 400 specialists in ear surgery and a targeted
group of professional audiologists. In Europe, our sales and marketing effort is
conducted through a distribution partnership with Siemens. In other
international markets, including Japan, we intend to establish either a network
of distributors or a strategic partner.
We may fail to build a direct sales force or marketing organization that is
cost effective or successful in one or more countries. In addition, we have
entered into distribution agreements with only a limited number of international
distributors. There can be no assurance that we will be able to enter into
similar agreements with other qualified distributors on a timely basis on terms
acceptable to us, or at all, or that such distributors will develop adequate
resources to selling our products. If we fail to establish an adequate direct
sales force domestically and in select international markets, and to enter into
successful distribution relationships, we will have difficulty selling our
products and our business may fail.
Since third-party reimbursement is not currently available for procedures using
our Soundbridge products, our products may not achieve market acceptance.
In the United States and abroad, patients generally rely on third-party
payors, principally Medicare, Medicaid, private health insurance plans, health
maintenance organizations and other sources of reimbursement, to pay health care
expenses, including reimbursement of all or part of the cost of the procedure in
which our medical device is being used. These third-party payors are
increasingly attempting to limit both the coverage and the level of
reimbursement of procedures involving new devices. Currently, no third party-
payors will pay for procedures using our products, and patients must bear the
total cost of the procedures themselves. If third-party payors do not establish
adequate levels of reimbursement for procedures using our products, we may not
achieve market acceptance.
We have limited manufacturing experience, and may be unable to expand our
manufacturing capabilities sufficiently, which could limit our ability to
develop and deliver sufficient quantities of products in a timely manner.
We currently manufacture our products in small quantities for laboratory
testing, for clinical trials and for limited commercial sales. The manufacture
of our Soundbridge products is a complex operation involving a number of
separate processes, components and assemblies. We have no experience
manufacturing our products in the volumes or with the yields that will be
necessary for us to achieve significant commercial sales, and there can be no
assurance that we can establish high volume manufacturing capacity or, if
established, that we will be able to manufacture our products in high volumes
with commercially acceptable yields. We will need to expend significant capital
resources and develop manufacturing expertise to establish commercial-scale
manufacturing capabilities. Our inability to successfully manufacture or
commercialize our Soundbridge products in a timely manner may harm our
competitive position and market success.
If Siemens does not perform its duties under our agreements, our ability to
commercialize our products may be impaired.
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We have entered into a collaboration with Siemens Audiologische Technik
GmbH. As a result of our agreements, we depend on Siemens to market and
distribute our products in Europe. We also depend on Siemens to provide
integrated circuits and software for use in our Soundbridge products. Any breach
or termination by Siemens of our agreements could delay or stop the
international commercialization of our products.
We rely on several sole source or limited source suppliers, and our production
will be seriously harmed if these suppliers are not able to meet our demand and
alternative sources are not available.
A number of components and sub-assemblies, such as silicone, signal
processing electronics implant packaging, as well as sterilization services are
provided by single source suppliers. Furthermore, the key analog and digital
signal processing microcircuits of the Vibrant P, Vibrant D and Vibrant HF
Soundbridges are provided by sole source suppliers. None of our suppliers is
contractually obligated to continue to supply us nor are we contractually
obligated to buy from a particular supplier. For some of these components and
sub-assemblies, there are relatively few alternative sources of supply, and we
cannot quickly establish additional or replacement suppliers for such components
and sub-assemblies. In addition, additional approvals will be required from the
FDA before we can significantly modify our manufacturing processes or change the
supplier of a critical component. Because of the long lead time for some
components and subassemblies that are currently available from a single source,
a supplier's inability or failure to supply such components or subassemblies in
a timely manner or our decision to change suppliers could have a material
adverse effect on our business, financial condition and results of operation.
If we are unable to protect our intellectual property, our competitors could
develop and market products with similar features that may reduce demand for our
products.
Our success depends in part on our ability to protect our issued and
pending patents, trade secrets and other intellectual property. The strength of
this protection is uncertain. Our competitors could challenge, invalidate or
circumvent our issued patents as well as any future patents. Even if upheld, our
issued patents may not exclude competitors or otherwise provide competitive
advantages to us.
In addition, a competitor may obtain patents that will interfere with our
ability to make, use or sell our products either in the United States or in
international markets. There may be pending applications, which if issued, might
provide proprietary rights to third parties relating to products or processes
used or proposed to be used by us. We may be required to obtain licenses to
patents or proprietary rights of others. Further, the laws of some foreign
countries do not protect our intellectual property rights to the same extent as
do the laws of the United States. Litigation or regulatory proceedings, which
could result in substantial cost and uncertainty to us, may also be necessary to
enforce our patent or other intellectual property rights or to determine the
scope and validity of other parties' proprietary rights. We may not have the
financial resources to defend our patents from infringement or claims of
invalidity.
We also rely upon trade secrets and other unpatented proprietary
technology. Our competitors may independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to or disclose
our proprietary technology. Our policy is to
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require each of our employees, consultants, investigators and advisors to
execute a confidentiality agreement upon commencement of an employment or
consulting relationship with us. However, these agreements may not provide
meaningful protection for our proprietary information in the event of
unauthorized use or disclosure of such information.
Title 35, Section 287 of the United States Code limits the enforcement of
patents relating to the performance of surgical or medical procedures on a body.
This law precludes medical practitioners and health care entities, which
practice these procedures, from being sued for patent infringement. Therefore,
depending upon how these limitations are interpreted by the courts, they could
have a material adverse effect on our ability to enforce any of our proprietary
methods or procedures deemed to be surgical or medical procedures on a body. In
some countries other than the United States, patent coverage relating to the
performance of surgical or medical procedures is not available. Therefore,
patent coverage in such countries will be limited to the Floating Mass
Transducer, the patented core direct drive technology upon which all of our
Soundbridge products are based, or to narrower aspects of the Floating Mass
Transducer.
The medical device industry in general has been characterized by
substantial litigation. Litigation regarding patent and other intellectual
property rights, whether with our without merit, could be time-consuming and
expensive to respond to and could distract our technical and management
personnel. We may become involved in litigation to defend against claims of
infringement, to enforce patents issued to us or to protect our trade secrets.
If any relevant claims of third-party patents are held as infringed and not
invalid in any litigation or administrative proceeding, we could be prevented
from practicing the subject matter claimed in such patents, or would be required
to obtain licenses from the patent owners of each such patent, or to redesign
our products or processes to avoid infringement. In addition, in the event of
any possible infringement, there can be no assurance that we would be successful
in any attempt to redesign our products or processes to avoid such infringement
or in obtaining licenses on terms acceptable to us, if at all. Accordingly, an
adverse determination in a judicial or administrative proceeding or failure by
us to redesign our products or processes or to obtain necessary licenses could
prevent us from manufacturing and selling our products, which would have a
material adverse effect on our business, financial condition and results of
operations. Although we have not been involved in any litigation to date, in the
future, costly and time-consuming litigation brought by us may be necessary to
enforce patents issued to us, to protect our trade secrets or know-how, or to
determine the enforceability, scope and validity of the proprietary rights of
others.
If we cannot retain or hire key personnel, our business will suffer.
Our future success depends in significant part upon the continued service
of key scientific, technical, sales and marketing, and management personnel.
Competition for such personnel is intense. There can be no assurance that we can
retain our key scientific, technical, sales and marketing and managerial
personnel or that we can attract, assimilate or retain other highly qualified
scientific, technical, sales and marketing, and managerial personnel in the
future. The loss of key personnel, especially if without advance notice, or the
inability to hire or retain qualified personnel could impair our ability to
commercialize our Vibrant Soundbridge products and develop future products.
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Complications may result from the use of our Soundbridge products, and insurance
may be insufficient or unavailable to cover potentially significant product
liability expenses if we are sued.
Our business involves the inherent risk of product liability claims. We
maintain limited product liability insurance at coverage levels which we believe
to be commercially reasonable and adequate given our current operations.
However, this insurance may not be available in the future on commercially
reasonable terms, or at all. Even if it is available, it may not be adequate to
cover liabilities that may arise. If we are sued for an injury caused by our
products, the resulting liability could result in significant expense, which
could harm our business and financial condition.
Our international sales and operation expose us to foreign currency and
political risks.
We desire to continue to expand our operations outside of the United States
and to enter additional international markets, which will require significant
management attention and financial resources and subject us further to the risks
of operating internationally. These risks include:
. unexpected changes in regulatory requirements;
. delays resulting from difficulty in obtaining export licenses for certain
technology;
. tariffs and other barriers and restrictions;
. the burdens of complying with a variety of foreign laws and regulations; and
. difficulty in staffing and managing international operations.
We are also subject to general political and economic risks in connection
with our international operations, such as political instability, changes in
diplomatic and trade relationships and general economic fluctuations in specific
countries or markets.
We cannot predict whether quotas, duties, taxes, or other charges or
restrictions will be imposed by the United States, the European Union, Japan, or
other countries upon the import or export of our products in the future, or what
effect any such actions would have on our business, financial condition or
results of operations. There can be no assurance that regulatory, geopolitical
and other factors will not adversely affect our business in the future or
require us to modify our current business practices.
In addition, because most of our international sales are denominated in
foreign currencies, gains and losses on the conversion to U.S. dollars of
accounts receivable arising from international operations may contribute to
fluctuations in our operating results. Further, fluctuations in currency
exchange rates may negatively impact our ability to compete in terms of price
against products denominated in local currencies. To date, we have not found it
appropriate to hedge the risks associated with fluctuations in exchange rates.
However, even if we undertake such transactions in the future, they may fail.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company considered the provisions of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity Instruments". The Company
had no holdings of derivative financial or commodity instruments at March 31,
2001. The Company is exposed to financial market risks, including changes in
interest rates and foreign currency exchange rates. The fair value of the
Company's investment portfolio or related income would not be significantly
impacted by either a 100 basis point increase or decrease in interest rates due
mainly to the short-term nature of the Company's investment portfolio. The
Company's fixed rate debt obligations are subject to interest rate risk with
minimal impact. An increase in interest rates would not significantly affect the
Company's net loss. Much of the Company's revenue and all of its capital
spending is transacted in U.S. dollars. However, the Company does enter into
transactions in other currencies, primarily certain European currencies. At
March 31, 2001, the Company performed sensitivity analyses to assess the
potential effect of this risk and concluded that near-term changes in interest
rates and foreign currency exchange rates should not materially adversely affect
the Company's financial position, results of operations or cash flows.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities and Use of Proceeds.
None
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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None
(b) Symphonix filed a report on Form 8-K on January 30, 2001
announcing the resignation of PricewaterhouseCoopers, LLP as its
independent accountants. Symphonix also filed a report on Form 8-K on
February 12, 2001 announcing the engagement of KPMG, LLP as its
independent accountants.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this 10-Q report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 7, 2001 SYMPHONIX DEVICES, INC.
/s/ Kirk B. Davis
---------------------------------
Kirk B. Davis
Chairman of the Board, President
and Chief Executive Officer
/s/ Terence J. Griffin
---------------------------------
Terence J. Griffin
Vice President Finance and Chief
Financial Officer (Principal
Financial and Accounting Officer)
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