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 JUNE 30, 1999.
OR
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______TO _______.
COMMISSION FILE NO.
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 July 31, 1999, 12,291,131 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 June 30, 1999 and
December 31, 1998.................................................. 1
Condensed Consolidated Statements of Operations for the three
months and six months ended June 30, 1999 and 1998................. 2
Condensed Consolidated Statements of Comprehensive Loss for
the six months ended June 30, 1999 and 1998........................ 3
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 1999 and 1998................................ 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......... 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 27
Item 2. Changes in Securities and Use of Proceeds.......................... 27
Item 3. Defaults Upon Senior Securities.................................... 27
Item 4. Submission of Matters to a Vote of Security Holders................ 27
Item 5. Other Information.................................................. 28
Item 6. Exhibits........................................................... 28
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SYMPHONIX DEVICES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
June 30, December 31,
1999 1998
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 9,444 $ 3,401
Short-term investments 8,058 21,916
Accounts receivable, net 47 228
Inventories 694 761
Prepaid expenses and other current assets 253 211
-------- --------
Total current assets 18,496 26,517
Property and equipment, net 1,843 2,100
Other assets 76 78
-------- --------
Total assets $ 20,415 $ 28,695
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 436 $ 684
Accrued compensation 899 1,060
Other accrued liabilities 935 751
Current portion of bank borrowings 250 -
Current portion of capital lease obligations 150 227
-------- --------
Total current liabilities 2,670 2,722
Capital lease obligations, less current portion 38 98
Bank borrowings, less current portion 1,750 2,000
-------- --------
Total liabilities 4,458 4,820
-------- --------
Stockholders' equity:
Common stock 12 12
Notes receivable from stockholders (754) (484)
Deferred compensation (1,239) (1,517)
Additional paid-in capital 58,133 58,040
Accumulated other comprehensive loss (55) (26)
Accumulated deficit (40,140) (32,150)
-------- --------
Total stockholders' equity 15,957 23,875
-------- --------
Total liabilities and stockholders' equity $ 20,415 $ 28,695
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements
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SYMPHONIX DEVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three months ended June 30, Six months ended June30,
--------------------------- ------------------------
1999 1998 1999 1998
---- ---- ---- ----
Revenue $ 35 $ 85 $ 150 $ 85
Costs and expenses:
Cost of goods sold 927 366 1,878 366
Research and development 1,867 1,743 3,729 3,540
Selling, general and administrative 1,480 1,378 2,972 2,494
--------- -------- -------- --------
Operating loss (4,239) (3,402) (8,429) (6,315)
Interest income 214 476 483 730
Interest expense (25) (30) (44) (61)
Net loss $ (4,050) $ (2,956) $ (7,990) $ (5,646)
========= ======== ======== ========
Basic and diluted net loss per common share $ (0.33) $ (0.24) $ (0.65) $ (0.58)
========= ======== ======== ========
Shares used in computing basic and diluted
net loss per common share 12,248 12,126 12,226 9,788
========= ======== ======== ========
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 June 30, Six months ended June 30,
------------------------------ ----------------------------
1999 1998 1999 1998
-------------- -------------- ------------- -------------
Net loss $(4,050) $(2,956) $(7,990) $(5,646)
Unrealized gains(losses) on short-term investments (7) (27) (30) (1)
Translation adjustments (10) (2) 1 (12)
------------- ------------- ------------ ------------
Comprehensive loss $(4,067) $(2,985) $(8,019) $(5,659)
============= ============= ============ ============
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SYMPHONIX DEVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six months ended June 30,
---------------------------
1999 1998
---------- ---------
Cash flows from operating activities:
Net loss $(7,990) $ (5,646)
Adjustments to reconcile net loss to cash used in
operating activities:
Amortization of deferred compensation 278 278
Depreciation and amortization 390 301
Changes in operating assets and liabilities:
Accounts receivable 181 (91)
Inventories 67 (233)
Prepaid expenses and other current assets (42) (205)
Accounts payable (248) 228
Accrued compensation (161) (152)
Other accrued liabilities 184 (268)
------- --------
Net cash used in operating activities (7,341) (5,788)
------- --------
Cash flows from investing activities
Purchases of short-term investments (800) (21,618)
Maturities of short-term investments 14,658 9,872
Purchases of property and equipment (133) (1,172)
Change in other assets 2 (2)
------- --------
Net cash provided by (used in) investing activities 13,727 (12,920)
------- --------
Cash flows from financing activities
Payments on capital lease obligations (137) (160)
Proceeds from bank borrowings 4,000 4,000
Payments on bank borrowings (4,000) (4,000)
Payments received on notes receivable
From stockholders - 15
Proceeds from issuance of common stock, net (177) 28,693
------- --------
Net cash provided by (used in) financing activities (314) 28,548
------- --------
Net increase in cash and cash equivalents 6,072 9,840
Effect of exchange rates on cash and cash equivalents (29) (12)
Cash and cash equivalents, beginning of period 3,401 4,908
------- --------
Cash and cash equivalents, end of period $ 9,444 $ 14,736
------- --------
The accompanying notes are an integral part of these condensed consolidated
financial statements
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SYMPHONIX DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements as of
June 30, 1999 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. In the opinion of management, all adjustments, consisting
of normal recurring adjustments, considered necessary for a fair presentation
have been included. Operating results for the six month period ended June 30,
1999 are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 1999, 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, 1998 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 and diluted net loss per common share are computed using the weighted
average number of shares of common stock outstanding. Common equivalent shares
from stock options, warrants, and preferred stock are excluded from the
computation of diluted net loss per common share, as their effect is
antidilutive.
Stock options and warrants to purchase 744,099 and 587,612 shares of common
stock at prices ranging from $0.14 to $5.50 per share were outstanding at June
30, 1999 and 1998, respectively, but were not included in the computation of
diluted net loss per common share because they were antidilutive. The
aforementioned stock options and warrants could potentially dilute earnings per
share in the future.
3. Inventories:
Inventories Comprise (in thousands):
June 30, 1999 December 31, 1998
------------- -----------------
Raw materials $ 281 $ 418
Work in Progress 234 182
Finished goods 179 161
--------- -----------
$ 694 $ 761
========= ===========
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4. Recent Accounting Pronouncement:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which establishes accounting and reporting standards
for derivative instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The Company, to
date, has not engaged in derivative and hedging activities. The Company will
adopt SFAS No. 133 as required for its first quarterly filing of the year 2001.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and footnotes thereto, and with the
Company's audited financial statements for the year ended December 31, 1998 and
the footnotes thereto. The information set forth below contains forward-looking
statements and the Company's actual results could differ materially from those
anticipated in these forward looking statements as a result of certain factors,
including those set forth below under "Factors That May Affect Future Results."
Overview
Symphonix Devices, Inc. ("Symphonix" or the "Company") is a developer of
proprietary semi-implantable and implantable products, or soundbridges, for the
management of moderate to severe hearing impairment. In 1994, mild to severe
hearing impairment affected approximately 26 million people in the United
States, or 10% of the population, of whom approximately 17 million people were
classified as moderately or severely hearing impaired. The Company believes that
its family of Vibrant soundbridges, designed to overcome the inherent
limitations of traditional hearing devices, represent a novel approach in the
management of hearing impairment. The Company's initial products, the Vibrant P,
Vibrant HF and Vibrant D soundbridges, are semi-implantable devices which
mechanically drive the three small bones of the middle ear to overcome the
user's hearing impairment. The Vibrant P soundbridge is a second generation
product that is similar to the first generation Vibrant soundbridge but is
designed to permit a greater degree of customization to address the specific
needs of a particular user's hearing loss and expand the types of hearing loss
that can be managed by the Company's products. The Vibrant HF soundbridge is
designed for people with a noise-induced high frequency hearing loss and the
Vibrant D soundbridge incorporates digital signal processing.
In September 1996, the Company initiated clinical trials of the first
generation Vibrant soundbridge in both the United States and Europe. The
Company initiated clinical trials of the Vibrant P soundbridge in Europe in July
1997 and in the United States in March 1998. In November 1998, the Company
initiated clinical trials of the Vibrant HF soundbridge in both Europe and the
United States. The Company has received permission to affix the CE mark in the
European Union to the Vibrant P, Vibrant D and Vibrant HF soundbridges. Selling
activities were commenced for the Vibrant P soundbridge in March 1998 and for
the Vibrant D soundbridge in June 1999. The Company plans to commence selling
activities for the Vibrant HF soundbridge in Europe after it has
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gathered clinical data on a limited number of patients. As of June 30, 1999,
approximately 220 patients have been implanted with the Company's soundbridges.
Results of Operations
Revenue. Revenue was $35,000 in the three months ended June 30, 1999
compared to $85,000 in the three months ended June 30, 1998. Revenue was
$150,000 for the six months ended June 30, 1999 compared to $85,000 for the six
months ended June 30, 1998. Revenue in these periods was the result of initial
selling activities in Europe.
Cost of goods sold. Cost of goods sold increased from $366,000 for the
three months ended June 30, 1998 to $927,000 for the three months ended June 30,
1999 and increased from $366,000 for the six months ended June 30, 1998 to $1.9
million for the six months ended June 30, 1999. Cost of goods sold represents
the direct cost of the products sold as well as manufacturing variances and
unabsorbed manufacturing overhead.
Research and Development Expenses. Research and development expenses were
$1.9 million in the three months ended June 30, 1999 compared to $1.7 million in
the three months ended June 30, 1998. Expenses were $3.7 million for the six
months ended June 30, 1999 compared to $3.5 million for the six months ended
June 30, 1998. Research and development expenses consist primarily of
personnel costs, professional services, materials, supplies and equipment in
support of product development, clinical trials, regulatory submissions,
preparation and filing of patent applications.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $1.5 million in the three months ended June 30,
1999 compared to $1.4 million in the three months ended June 30, 1998 and were
$3.0 million in the six months ended June 30 , 1999 compared to $2.5 million for
the six months ended June 30, 1998. Selling, general and administrative
expenses consist primarily of personnel costs, promotional costs, legal and
consulting costs. These costs increased primarily due to costs associated with
the increased scope of the Company operations, including its European sales and
marketing organization. Commencing in late 1999, and continuing through 2000,
the Company expects to incur substantial expenses in developing a U.S. sales and
marketing organization.
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 of $139,000 attributed to such options was
amortized during the quarter ended June 30, 1999. The remaining deferred
compensation will be amortized over the vesting period of the options (generally
four years).
Interest Income (Expense). Interest income, net of expense, decreased to
$189,000 in the three months ended June 30, 1999 from $446,000 in the three
months ended June 30, 1998 and decreased to $439,000 for the six months ended
June 30, 1999 from $669,000 for the six months ended June 30, 1998. These
reductions in interest income were due to the reduction in the Company's cash
and short term investment balances. Interest earned in the future will depend
on the Company's funding cycles and prevailing interest rates.
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Income Taxes. As a result of the net losses incurred, the Company has not
incurred any income tax obligations. At December 31, 1998, the Company had net
operating loss carryforwards of $25 million for federal and $19 million for
state income tax purposes, which will expire at various dates through 2013 and
through 2003, 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. United States 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 shares
occur. Such events could limit the future utilization 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 $26.5 million, from equipment lease financing totaling $1.3 million and
from bank borrowings totaling, net, $2.0 million. At June 30, 1999, the Company
had $15.8 million in working capital, and its primary source of liquidity was
$17.5 million in cash, cash equivalents and short-term investments.
Symphonix used $7.3 million in cash for operations in the six months ended
June 30, 1999, compared to $5.8 million in the six months ended June 30, 1998.
Capital expenditures, primarily related to the Company's research and
development and manufacturing activities, were $15,000 and $268,000 in the three
months ended June 30, 1999 and 1998, respectively and were $133,000 and
$1,172,000 in the six months ended June 30, 1999 and 1998, respectively. At
June 30, 1999, the Company did not have any material commitments for capital
expenditures.
In October 1997 the Company entered into a five-year lease for a new
facility that commenced in January 1998. During the quarter ended March 31,
1998, the Company occupied the new facility and relocated its research and
development and administrative activities to the new facility. The relocation of
manufacturing activities to the new facility was completed in April 1998.
Through December 31, 1998, the Company had incurred approximately $1.6 million
in capital expenditures on leasehold improvements and furniture and fixtures
related to the new facility.
The Company has a loan agreement with a bank providing for borrowings of up
to $2.0 million and for the issuance of letters of credit up to $250,000. At
June 30, 1999, the Company had borrowings of $2.0 million and an outstanding
letter of credit in the amount of $195,000 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
-8-
efforts and preclinical and clinical activities, competing technological and
market developments, the time and costs of obtaining regulatory approvals, the
time and costs involved in filing, prosecuting and enforcing patent claims, the
progress and cost of commercialization of products currently under development,
market acceptance and demand for the Company's products if approved for
marketing and other factors not within the Company's control. The Company
believes that its existing capital will be sufficient to fund its operations and
its capital investments through 1999. Commencing in late 1999 and continuing
through 2000, the Company expects to incur substantial expenses in developing a
U.S. sales and marketing organization. To fully develop such a capability and to
effectively launch its products commercially in the United States, if approved
by the U.S. Food and Drug Administration ("FDA"), the Company expects that it
will have to raise additional financing. There can be no assurance that such
additional financing will be available on a timely basis on terms acceptable to
the Company, or at all, or that such financing will not 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.
Year 2000 Compliance
The Company has initiated planning for issues related to the upcoming new
millennium. These issues derive from the use of software and hardware with
embedded chips or processors that use two digits to refer to a year and do not
properly recognize a year that begins with "20" instead of the familiar "19".
The use of such software and hardware occurs at many internal and external
points in the Company's development, supply, manufacturing and distribution
chain - both within the Company's internal operations as well as at important
external partners, such as vendors and customers.
The Company has developed a plan to address these issues and to enhance the
Company's readiness for Year 2000. The Company's plan (the "Year 2000 Readiness
Program") focuses on five areas: (1) network and facility infrastructure, (2)
business applications software, (3) process control systems, (4) external
partners, and (5) the Company's products. Within each area, the Year 2000
Readiness Program will involve (a) the identification of systems that may be
susceptible to Year 2000 issues (the "identification phase"), (b) the assessment
of the degree of readiness of those systems for the Year 2000 and an assessment
of the risks that may be posed to the Company's business (the "assessment
phase"), (c) the remediation of problems that are identified (the "remediation
phase"), and (d) contingency planning.
Network and facility infrastructure: Included in this category are the
computer networks in the Company's San Jose, California headquarters and Basel,
Switzerland European headquarters (including servers, computers, other network
equipment and computer and network operating systems), together with general
facility systems such as telephone and security systems. The Company has
completed the identification and assessment phases and has initiated remediation
of identified issues. The cost of such remediation efforts is not expected to
be material. Upon completion of the remediation process, contingency plans will
be developed if necessary.
-9-
Business applications software: Included in this category are various
applications used in design, manufacturing, distribution and finance. The
Company's primary business application is a company-wide system used for
manufacturing planning, accounting, inventory management and sales transactions.
The Company has completed the identification and assessment phases. Regarding
the Company's primary business application, the Company has evaluated the
software developer's representation, has installed the version of the software
represented as being year 2000-compliant and has completed extensive testing to
verify proper functioning of the software. This testing yielded satisfactory
results and the remediation is considered complete. For many other software
applications, the Company has, in the assessment phase, relied on the software
developer's representations regarding Year 2000 compliance of their software.
Remediation is in process for these applications. There can be no assurance,
however, that software applications represented by developers as being Year 2000
compliant will be free from Year 2000 errors and defects. The Company intends
to monitor the operation of its business applications to identify as quickly as
possible any Year 2000 errors that may arise.
Process control systems: Included in this category are instrumentation and
systems used in design and manufacturing processes. The Company expects that
the identification and assessment phases will be completed during the third
quarter of 1999 at which time remediation and contingency planning will be
initiated as appropriate.
External partners: The Company intends to assess the possible effects on
its operations of the Year 2000 compliance of certain relevant third parties,
such as customers and service providers by using questionnaires and interviews
to solicit information from these parties. In the event the Company identifies a
problem with respect to a particular vendor, then the Company may be forced to
identify alternative sources of supply. However, the Company's ability to seek
alternative sources of supply is subject to FDA restrictions and may involve
extensive validation processes. The failure to timely identify and validate an
alternative supplier could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company has
completed the identification phase and has initiated the assessment phase.
Contingency planning, including the timing of procurement and production
activities, will be assessed during the second half of 1999.
Symphonix products: The Company's products are regulated by the FDA and the
FDA has advised manufacturers of medical devices to address readiness of their
products for year 2000 issues. The Company has completed a preliminary
assessment and has informed the FDA that the Company does not believe that any
of its existing products are susceptible to Year 2000 issues.
The Company does not expect to incur costs in its Year 2000 Readiness
Program that will be material to its business, financial condition or results of
operations. However, until the Company completes all phases of its program, the
full extent of the remediation costs will not be known and there can be no
assurance that such costs will not be material. The Company will utilize both
internal and external resources, such as consultants and professional advisors,
in implementing the Year 2000 Readiness Program and the Company currently
estimates that the external resources required during the identification and
assessment phases of the Year 2000 Readiness Program will cost approximately
$50,000. Because the Year 2000 Readiness Program is an ongoing process, all
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cost estimates are subject to change. Specific contingency plans will be
developed upon completion of the assessment phases and may include additional
procurement of inventory to assure continued supply from vendors.
Although the Company intends to complete all phases of its Year 2000
Readiness Program by December 31, 1999, there can be no assurance, even if this
program is successfully completed on schedule, that disruptions in the Company's
business will be avoided. The Year 2000 issues are pervasive in nature and
involve highly technical issues, not all of which are under the Company's
control. Possible consequences of Year 2000 issues that the Company is unable to
adequately identify, assess or remediate include but are not limited to: delays
in supplies from vendors, delays in shipment to customers, errors in processing
transactions, deficiencies in management of inventory, delays in collection of
funds from customers, and diversion of management time and effort to addressing
difficulties that emerge. The goal of the Company's Year 2000 Readiness Program
is to plan for and reduce the risk of such difficulties. There can be no
assurance that the Year 2000 Readiness Program will be completed in a timely
manner or will be successful.
Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which establishes accounting and reporting standards
for derivative instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The Company, to
date, has not engaged in derivative and hedging activities. The Company will
adopt SFAS No. 133 as required for its first quarterly filing of the year 2001.
-11-
Factors That May Affect Future Results
History of Losses and Expectation of Future Losses. At June 30, 1999, the
Company had an accumulated deficit of $40.1 million. Since the Company's
inception in 1994, substantially all of the Company's resources have been
dedicated to research and development, establishment of a European sales and
marketing organization and the initiation of sales and marketing activities in
Europe. In March 1998, the Company received the authorization to affix the CE
Mark to the Vibrant and Vibrant P soundbridges, permitting the initiation of
commercial sales in the European Union ("EU"). Although the Company has
commenced selling the Vibrant P soundbridge in Europe, through June 30,1999 the
Company has not generated significant revenues from these sales. The Company
received CE Mark approval for the Vibrant HF soundbridge in July 1998 and plans
to commence selling the Vibrant HF soundbridge after it has gathered clinical
data on a limited number of patients. The Company has received CE Mark approval
for the Vibrant D soundbridge and selling activities have commenced. In the
United States, the Company has completed the pivotal clinical trial and expects
to submit its PMA to the FDA in respect of the Vibrant P and Vibrant D
soundbridges in the third quarter of 1999. The Vibrant HF soundbridge will
require additional clinical testing prior to the submission of a regulatory
application for commercial use. All of the Company's other products will
require additional development, and preclinical and clinical testing prior to
the submission of a regulatory application for commercial use internationally
and domestically. Since the Vibrant P soundbridge only recently became available
for sale in the EU and is not currently available for sale in the United States,
significant product revenues will not be realized for at least several years, if
ever. The Company expects its operating losses to continue at least through the
year 2000 as it continues to expend substantial funds for clinical trials in
support of regulatory approvals, expansion of research and development
activities and establishment of commercial-scale manufacturing and sales and
marketing capabilities. There can be no assurance that any of the Company's
soundbridges will be successfully commercialized internationally or in the
United States or that the Company will achieve significant revenues from product
sales. In addition, there can be no assurance that the Company will achieve or
sustain profitability in the future. The Company's results of operations may
fluctuate from quarter to quarter or year to year and will depend upon numerous
factors, including action relating to regulatory matters, progress of clinical
trials, the timing and scope of research and development efforts, the extent to
which the Company's products gain market acceptance or achieve reasonable
reimbursement levels, the timing of scale-up of manufacturing capabilities, the
timing of expansion of sales and marketing activities and competition.
Limited Clinical Testing Experience. In the United States, the Company
has received approval of an IDE and IDE supplements to conduct clinical trials
of the Vibrant, Vibrant P, Vibrant HF and Vibrant D soundbridges. While the
trials of the Vibrant P and Vibrant D soundbridges have been completed the data
has not yet been submitted to the FDA. In Europe, the Vibrant P and Vibrant D
soundbridges have been the subject of limited clinical testing. The Company
intends to conduct clinical testing of the external components of the Vibrant HF
soundbridge. The implanted components of the Vibrant HF and Vibrant D
soundbridges are the same as the implanted components of the Vibrant P
soundbridge which was tested in clinical trials previously conducted by the
Company in Europe. None of the Company's other soundbridges under development
have been tested in human clinical trials and these soundbridges will require
additional development, clinical trials and regulatory approval prior to
commercialization. The results from preclinical studies and early clinical
trials may not be indicative of results obtained in later clinical trials, and
there can be
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no assurance that clinical trials conducted by the Company will demonstrate
sufficient safety and efficacy to obtain requisite approvals.
The rate of completion of the Company's clinical trials may be delayed by
many factors, including slower than anticipated patient enrollment or adverse
events occurring during clinical trials. Completion of preclinical and clinical
activities may take several years, and the length of time for completion of the
required studies is unpredictable. In addition, data obtained from preclinical
and clinical activities are susceptible to varying interpretations, which could
delay, limit or prevent regulatory approval. No assurance can be given that any
of the Company's clinical trials will be successfully completed on a timely
basis, or at all, that additional clinical trials will be allowed by the FDA or
other regulatory authorities or that such clinical trials will commence as
planned. Any delays in the Company's clinical trials would have a material
adverse effect on the Company's business, financial condition and results of
operations. Success in preclinical studies or early stage clinical trials does
not assure success in later stage clinical trials.
Reliance on FMT Technology. The Company has concentrated its efforts
primarily on the development, implementation and acceptance of the FMT, the
patented core direct drive technology upon which all of the Company's
soundbridges are based. The Company's soundbridges employ a direct drive
approach to the management of hearing impairment, which is a novel development.
There can be no assurance that the Company's soundbridges, based on the
Company's FMT technology, will prove to be safe and effective, or that if proven
safe and effective, can be manufactured at a reasonable cost or successfully
commercialized.
Government Regulation. The Company's medical products, such as the Vibrant
soundbridge, are regulated as medical devices. Accordingly, clinical trials,
product development, labeling, manufacturing processes and promotional
activities are subject to extensive review and rigorous regulation by government
agencies in most countries in which the Company will seek to commercialize its
products.
United States
In the United States, the Company's products are subject to applicable
provisions of the United States Federal Food, Drug, and Cosmetic Act ("FDC
Act"), and other federal statutes and regulations governing, among other things,
the design, manufacture, testing, safety, labeling, storage, record keeping,
reporting, approval, advertising and promotion of medical devices. Noncompliance
with applicable requirements can result in warning letters, fines, recalls or
seizure of products, civil penalties, injunctions, total or partial suspension
of production, withdrawal of approval or refusal to approve new marketing
applications and criminal prosecution. Changes in existing requirements or
adoption of new requirements could have a material adverse effect on the
Company's business, financial condition and results of operations.
Pursuant to the FDC Act, the FDA regulates the design, manufacture,
distribution, preclinical and clinical study and approval of medical devices in
the United States. Medical devices are classified in one of three classes (Class
I, Class II or Class III) on the basis of the controls necessary to reasonably
assure their safety and effectiveness. Safety and effectiveness is considered to
be reasonably assured for Class I devices through general controls (e.g.,
labeling, premarket notification
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and adherence to current QS regulations) and for Class II devices through the
use of additional special controls (e.g., performance standards, post-market
surveillance, patient registries and FDA guidelines).
Generally, Class III devices are those which must receive premarket
approval by the FDA to reasonably assure their safety and effectiveness (e.g.,
life-sustaining, life-supporting and implantable devices, or new devices which
have been found not to be substantially equivalent to legally marketed devices,
or devices whose safety and effectiveness cannot be reasonably assured through
general controls, even if supplemented by additional special controls). Active
implantable devices, such as the Company's implantable hearing devices, are
considered Class III devices.
Before a new device can be introduced to the market, the manufacturer
generally must obtain FDA clearance through a 510(k) Premarket Notification or
FDA approval through a PMA application. While the Company has no products for
which it expects to seek 510(k) clearance, it may file 510(k) submissions with
respect to future products. A 510(k) clearance will generally only be granted if
the information submitted to the FDA establishes that the device is
"substantially equivalent" to a legally marketed predicate medical device.
Frequently, the FDA will require clinical data in support of a 510(k)
submission, and the 510(k) process can become time-consuming and expensive.
Significant modifications of the labeling, manufacturing and design of any
product that has been cleared through the 510(k) process will require a new
510(k) Premarket Notification, if those modifications could significantly affect
the safety, effectiveness or intended use of the device.
A PMA must be submitted if the device cannot be cleared through the 510(k)
process. A PMA must be supported by extensive data, including, but not limited
to, technical, preclinical, clinical trials, manufacturing, and labeling to
demonstrate the safety and effectiveness of the device. The Company believes
that all versions of the Vibrant soundbridge currently under development are
Class III devices and will require a PMA, as will future configurations of
implantable hearing devices. The FDA has recently implemented a new streamlined
PMA process called the modular PMA. Under the modular PMA process, modules
reflecting the content requirements of a traditional PMA can be submitted as
they are completed, allowing them to be reviewed and approved in a sequential
manner.
Before the Company's products can be commercialized in the United States,
the Company must submit, in a PMA, extensive data on preclinical studies and
clinical trials, device design, manufacturing, labeling, promotion and
advertising, as well as other aspects of the product. In addition, the Company
must submit clinical data gathered in trials conducted under an IDE
demonstrating to the satisfaction of the FDA that the product is safe and
effective for its labeling claims, and obtain marketing approval from the FDA.
Phase I of the IDE study has been completed. Phase I was limited to two sites
and five subjects and was intended to test the safety and provide preliminary
evidence of the effectiveness of the device and the surgical procedure used to
implant the device. In November 1997, the Company filed an IDE supplement
summarizing the Phase I results, finalizing the study protocol and proposed
labeling claims, providing technical information regarding the Vibrant P
soundbridge, and requested permission to proceed to the pivotal study. In
December 1997, the FDA approved the multi-center pivotal study in 55 subjects at
up to 12 sites with the second generation Vibrant P soundbridge. In November
1998, the Company received FDA
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approval of an IDE supplement to include the Vibrant HF soundbridge in this
study. The Company has enrolled 55 subjects in the study. However, because the
IDE supplement allowing the inclusion of the Vibrant HF soundbridge was approved
when enrollment was almost complete, only one of the 55 subjects is to be fitted
with a Vibrant HF soundbridge. To facilitate enrollment of a greater number of
subjects who receive the Vibrant HF soundbridge, on December 22, 1998, the
Company requested FDA approval of an IDE supplement to allow an additional 15
subjects. This IDE supplement was approved by the FDA on January 19, 1999 and
the Company is in the process of enrolling these additional subjects. In March,
1999 the FDA approved an IDE supplement permitting the evaluation of the Vibrant
D soundbridge. Patients who have completed the clinical trial protocol for the
Vibrant P soundbridge were eligible for enrollment in the evaluation of the
Vibrant D soundbridge. The Company has completed its clinical trial of the
Vibrant P and Vibrant D soundbridges but has not yet submitted the data to the
FDA. There can be no assurance that the Company's clinical trial effort will
progress as expected, will not be delayed or that such effort will lead to the
successful development of any product. No assurance can be given that any of the
Company's clinical trials will continue to be allowed by the FDA or other
regulatory agencies or that clinical trials will commence as planned.
Any delays in the Company's clinical trials would have a material adverse
effect on the Company's business, financial condition and results of operations.
Success in preclinical studies or early stage clinical trials does not assure
success in later stage clinical trials. Data obtained from preclinical and
clinical activities are susceptible to varying interpretations which could
delay, limit or prevent regulatory approval. Further, there can be no assurance
that if such testing of products under development is completed, any such
devices will be accepted for formal review by the FDA, or approved by the FDA
for marketing in the United States.
After a PMA is filed, the FDA begins its review of the submitted
information, which generally takes between one and two years, but may take
significantly longer. During this review period, the FDA may request additional
information or clarification of information already provided. Also during the
review period, an advisory panel of experts from outside the FDA will be
convened to review and evaluate the application and provide recommendations to
the FDA as to the approvability of the device. In addition, the FDA will conduct
a preapproval inspection of the manufacturing facility to ensure compliance with
Quality System ("QS") regulation requirements. There can be no assurance that
the Company will be able to meet the FDA's requirements or that any necessary
approval will be granted in a reasonable time frame, or at all.
New PMAs or PMA supplements are required for significant modifications to
the manufacture, labeling and design of a device that is approved through the
PMA process. Supplements to a PMA often require submission of the same type of
information as a PMA, except that the supplement is limited to information
needed to support any changes from the device covered by the original PMA and
may not require as extensive clinical data or the convening of an advisory
panel.
The PMA process can be expensive, uncertain and can frequently require
several years. Even when a PMA is approved, the FDA may impose restrictions on
the indications for which the device can be marketed. There can be no assurance
that the Company will be able to obtain necessary
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approvals on a timely basis, or at all, and delays in obtaining or failure to
obtain such approvals, the loss of previously obtained approvals, or failure to
comply with existing or future regulatory requirements could have an adverse
effect on the Company's business, financial condition and results of operations.
Subsequent to the receipt of an FDA approval, the Company will continue to
be regulated by the FDA with regard to the reporting of adverse events related
to its products, and ongoing compliance with QS regulation. The Company's
manufacturing facility must be registered with the FDA and the California
Department of Health Services ("CDHS") and will be subject to periodic
inspections by the FDA and by the CDHS. A Device Manufacturing License has been
issued by the State of California and this license must be renewed annually for
the Company to continue manufacture of medical devices in California.
Europe
The primary regulatory environment in Europe is that of the EU which
consists of 15 countries encompassing most of the major countries in Europe. The
EU has adopted numerous directives and standards regulating the design,
manufacture, clinical trial, labeling, and adverse event reporting for medical
devices. The principal directives prescribing the laws and regulations
pertaining to medical devices in the EU are the MDD and the AIMDD. In the EU,
the Company's soundbridges will be regulated as active implantables and
therefore be governed by the AIMDD. For products, such as those of the Company,
that have not previously been commercialized in the EU, CE marking is required
prior to initiation of sales in the EU. Certain other countries, such as
Switzerland, have voluntarily adopted laws and regulations that mirror those of
the EU with respect to medical devices.
Devices that comply with the requirements of a relevant directive will be
entitled to bear CE conformity marking, indicating that the device conforms with
the essential requirements of the applicable directive, and accordingly, can be
commercially distributed throughout the EU. The method of assessing conformity
varies depending on the class of the product, but normally involves a
combination of self-assessment by the manufacturer and a third-party assessment
by a Notified Body. This third party assessment may consist of an audit of the
manufacturer's quality system and specific testing of the manufacturer's
product. An assessment by a Notified Body in one country within the EU is
required in order for a manufacturer to commercially distribute the product
throughout the EU.
For purposes of determining the necessary steps for assessing conformity,
devices are classified under the Directives as Class I, Class IIa, Class IIb,
Class III, or Active Implantable Medical Devices. Devices having a higher
classification are considered to have a higher risk and, accordingly, are
subject to more controls in order to bear CE marking. The Vibrant soundbridge is
designated as an Active Implantable Medical Device. Essential requirements under
the AIMDD include substantiating that the device meets the manufacturer's
performance claims and that safety issues, if any, constitute an acceptable risk
when weighed against the intended benefits of the device. The two principal
aspects of assessing conformity for Active Implantable Medical Devices are
determinations from the Notified Body that the processes employed in the design
and manufacture of a device qualify as a full quality system in compliance with
applicable standards (e.g., EN ISO 9001,
-16-
EN 46001 and 90/385/EEC), and that the technical, preclinical, and clinical data
gathered on the device are adequate to support CE marking.
The Company has undergone an inspection by its Notified Body and its
quality system has been certified by the Notified Body as being in compliance
with the required standards. The Company has received approval to affix the CE
mark to the Vibrant P, Vibrant D and Vibrant HF soundbridges. The Company must
continue to pass annual EN ISO 9001, EN 46001 and AIMDD 2.3 quality system
audits in order to retain the authorization to affix the CE mark to its
products.
Once a manufacturer has satisfactorily completed the regulatory compliance
tasks required by the directives and received favorable determinations by the
Notified Body, it is eligible to place the CE mark on its products.
Manufacturers are subject to ongoing regulation under the AIMDD. The quality
system will be subject to periodic audit and recertification, and serious
adverse events must be reported to the authorities in the country where the
incident takes place. If such incidents occur, the manufacturer may have to take
remedial action, including withdrawal of the product from the EU market.
While no additional premarket approvals in individual EU countries are
required, prior to the marketing of a device bearing the CE mark, practical
complications with respect to market introduction may occur. For example,
differences among countries have arisen with regard to labeling requirements.
Also, as the directives do not cover reimbursement and distribution practices,
differences may occur in these and other areas.
No Assurance of Market Acceptance. The market acceptance of the Company's
soundbridges will depend upon their acceptance by the medical community and
patients as clinically useful, reliable and cost-effective compared to other
devices. Clinical acceptance will depend on numerous factors, including the
establishment of the safety and the effectiveness of the soundbridge's ability
to drive the ossicles directly and improve hearing over currently available
hearing aids. Clinical acceptance will also depend on the receipt of regulatory
approvals in the United States and the Company's ability to adequately train ear
surgeons on the techniques for implanting the Company's soundbridges. There can
be no assurance that the Company's soundbridges will be preferable alternatives
to existing devices, some of which, such as the acoustic hearing aid, do not
require surgery, or that the Company's soundbridges will not be rendered
obsolete or noncompetitive by products under development by other companies.
Patient acceptance of the Company's soundbridges 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 the Company's soundbridge, a patient may speak with a number
of medical professionals, including the patient's primary care physician, an
audiologist, an ENT specialist, as well as surgeons who specialize in ear
surgery. The failure by any of these medical professionals to favorably
recommend the Company's 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 the Company's soundbridges. Even if the
Company's soundbridges are adopted by the medical community, a significant
market may not develop for the Company's products unless acceptable
reimbursement from health care payors is available. There can be no assurance
that the Company's soundbridges will be accepted by the medical community or
consumers, that acceptable reimbursement from third-party payors will be
-17-
available or that market demand for such products will be sufficient to allow
the Company to achieve profitable operations. Failure of the Company's
soundbridges, for whatever reason, to achieve significant adoption by the
medical community or consumers or failure of the Company's products to achieve
any significant market acceptance would have a material adverse effect on the
Company's business, financial condition and results of operations.
Highly Competitive Market; Risk of Competing Hearing Devices. The medical
device industry is subject to intense competition in the United States and
abroad. The Company believes its products will compete primarily with the
traditional approaches to managing hearing impairment, principally hearing aids.
Principal manufacturers of acoustic hearing aids include Siemens Hearing
Instruments, Inc., Philips Medical Systems North America Co., Starkey
Laboratories Inc., Beltone Electronics Corp., Dahlberg Inc., ReSound Corp.,
Oticon, Inc., Widex Hearing Aid Co., Inc. and Phonak Inc. There can be no
assurance that the Company's soundbridges will be able to successfully compete
with established hearing aid products. Although, to the Company's knowledge,
none of these acoustic hearing aid manufacturers are currently developing direct
drive devices, there can be no assurance that these potential competitors will
not succeed in developing technologies and products in the future that are more
effective, less expensive than those being developed by the Company or that do
not require surgery. The Company is aware of several university research groups
and development-stage companies that have active research or development
programs related to direct drive sensorineural hearing devices. Research of this
type has been conducted at various sites for over 20 years. In addition, some
large medical device companies, some of which are currently marketing
implantable medical devices, may develop programs in hearing management. Certain
of these companies have substantially greater financial, technical,
manufacturing, marketing and other resources than the Company. In addition,
there can be no assurance that certain of the Company's competitors will not
develop technologies and products that may be more effective in managing hearing
impairment than the Company's products or that render the Company's products
obsolete.
The Company believes that the primary competitive factors in the hearing
management market will be the quality of the hearing enhancement, safety,
whether surgery is required, reliability, endorsement by the surgeon and
audiology communities, patient comfort, cosmetic result and price. The Company
believes that it will be competitive with respect to these factors. Nonetheless,
because the Company's products are either under development or in the very early
stages of commercialization, the relative competitive position of the Company in
the future is difficult to predict.
The medical device industry is characterized by rapid and significant
technological change. Accordingly, the Company's success will depend in part on
its ability to respond quickly to medical and technological change and user
preference through the development and introduction of new products that are of
high quality and that address patient and surgeon requirements.
Limited Manufacturing Experience; Scale-Up Risk; Dependence on Key
Suppliers. The Company currently manufactures its products in limited quantities
for laboratory testing, for its clinical trials and for initial commercial
sales. The manufacture of the Company's soundbridges is a complex operation
involving a number of separate processes, components and assemblies. Each
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device is assembled and individually tested by the Company. The manufacturing
process consists primarily of assembly of internally manufactured and purchased
components and subassemblies, and certain processes are performed in an
environmentally controlled area. After completion of the manufacturing and
testing processes, implantable devices are sterilized by a sub-contracted
supplier. The Company has no experience manufacturing its products in the
volumes or with the yields that will be necessary for the Company to achieve
significant commercial sales, and there can be no assurance that the Company can
establish high volume manufacturing capacity or, if established, that the
Company will be able to manufacture its products in high volumes with
commercially acceptable yields. The Company will need to expend significant
capital resources and develop manufacturing expertise to establish commercial-
scale manufacturing capabilities. Furthermore, prior to approval of a PMA, the
Company's facilities, procedures and practices will be subject to a pre-approval
inspection by the FDA. The Company's inability to successfully manufacture or
commercialize its soundbridges in a timely matter could have a material adverse
effect on the Company's business, financial condition and results of operations.
Raw materials, components and subassemblies for the Company's soundbridges
are purchased from various qualified suppliers and are subject to stringent
quality specifications and inspections. The Company conducts quality audits of
its key suppliers, several of whom are experienced in the supply of components
to manufacturers of implantable medical devices, such as pacemakers,
defibrillators and drug delivery pumps. A number of components and
subassemblies, such as silicone, signal processing electronics and implant
packaging are provided by single source suppliers. Certain components of the
Vibrant P, Vibrant HF and Vibrant D soundbridges, the analog and digital signal
processing microcircuits, are provided by sole source suppliers. None of the
Company's suppliers is contractually obligated to continue to supply the Company
nor is the Company contractually obligated to buy from a particular supplier.
For certain of these components and subassemblies, there are relatively few
alternative sources of supply, and establishing additional or replacement
suppliers for such components and subassemblies could not be accomplished
quickly. In addition, if the Company wishes to significantly modify its
manufacturing processes or change the supplier of a critical component,
additional approvals will be required from the FDA before the change can be
implemented. 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 the
Company's decision to change suppliers could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company's manufacturing facilities are subject to periodic inspection
by regulatory authorities, and its operations must undergo QS regulation
compliance inspections conducted by the FDA and corresponding state agencies.
Additionally, prior to approval of a PMA, the Company's and its third-party
manufacturers' facilities, procedures and practices will be subject to pre-
approval QS regulation inspections. The Company has been inspected by the Food
and Drug Branch of the CDHS and a Device Manufacturing License has been issued
to the Company. The Company will be required to comply with the QS regulation
requirements in order to produce products for sale in the United States and with
applicable quality system standards and directives in order to produce products
for sale in the EU. Any failure of the Company to comply with the QS regulation
or applicable standards and directives may result in the Company being required
to take corrective actions, such as modification of its policies and procedures.
Pending such corrective actions, the
-19-
Company could be unable to manufacture or ship any products, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence upon Patents and Proprietary Technology. In the United States,
the Company holds 10 issued patents and 13 pending patent applications, of which
2 have been allowed but not yet issued. Additionally, the Company has 1 issued
and 17 pending foreign patent applications. These patents and patent
applications generally cover the invention and application of the FMT as well as
the specific application of the FMT and other concepts in the field of hearing
impairment. In addition, the Company has licensed, on a royalty-free basis, a
United States patent covering the magnetic attachment of an external audio
processor to an implanted receiver. The Company's success will depend in part on
its ability to obtain patent protection for its products and processes, to
preserve its trade secrets, and to operate without infringing or violating the
proprietary rights of others.
The patent positions and trade secret provisions of medical device
companies, including those of the Company, are uncertain and involve complex and
evolving legal and factual questions. The coverage sought in a patent
application either can be denied or significantly reduced before or after the
patent is issued. Consequently, there can be no assurance that any patents from
pending applications or from any future patent application will be issued, that
the scope of the patent protection will exclude competitors or provide
competitive advantages to the Company, that any of the Company's patents will be
held valid if subsequently challenged or that others will not claim rights in or
ownership of the patents and other proprietary rights held by the Company. Since
patent applications are secret until patents are issued in the United States or
corresponding applications are published in other countries, and since
publication of discoveries in the scientific or patent literature often lags
behind actual discoveries, the Company cannot be certain that it was the first
to file patent applications for such inventions.
In addition, there can be no assurance that competitors, many of which have
substantial resources, will not seek to apply for and obtain patents that will
prevent, limit or interfere with he Company's ability to make, use or sell its
products either in the United States or in international markets. Although the
Company has conducted searches of patents issued to other companies, research or
academic institutions or others, there can be no assurance that such patents do
not exist, have not been filed or could not be filed or issued, which contain
claims relating to the Company's technology, products or processes. Patents
issued and patent applications filed in the United States or internationally
relating to medical devices are numerous and there can be no assurance that
current and potential competitors and other third parties have not filed, or in
the future, will not file, applications for, or have not received or in the
future will not receive, patents or obtain additional proprietary rights
relating to products or processes used or proposed to be used by the Company. In
addition, patent applications in foreign countries are maintained in secrecy for
a period after filing. Publication of discoveries in the scientific or patent
literature tends to lag behind actual discoveries and the filing of related
patent applications. There may be pending applications, which if issued with
claims in their present form, might provide proprietary rights to third parties
relating to products or processes used or proposed to be used by the Company.
The Company may be required to obtain licenses to patents or proprietary rights
of others. Further, the laws of certain foreign countries do not protect the
Company's intellectual property rights to the same extent as do the laws of the
United
-20-
States. Litigation or regulatory proceedings, which could result in substantial
cost and uncertainty to the Company, may also be necessary to enforce patent or
other intellectual property rights of the Company or to determine the scope and
validity of other parties' proprietary rights. There can be no assurance that
the Company will have the financial resources to defend its patents from
infringement or claims of invalidity.
The Company also relies upon trade secrets and other unpatented proprietary
technology, and no assurance can be given that others will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to or disclose the Company's proprietary technology or
that the Company can meaningfully protect its rights in such unpatented
proprietary technology. The Company's policy is to require each of its
employees, consultants, investigators and advisors to execute a confidentiality
agreement upon the commencement of an employment or consulting relationship with
the Company. These agreements generally provide that all inventions conceived by
the individual during the term of the relationship shall be the exclusive
property of the Company and shall be kept confidential and not be disclosed to
third parties except in specified circumstances. There can be no assurance,
however, that these agreements will provide meaningful protection for the
Company's proprietary information in the event of unauthorized use or disclosure
of such information.
Recently Public Law 104-208 was signed into law in the United States and
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, who 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 the Company's ability
to enforce any of its proprietary methods or procedures deemed to be surgical or
medical procedures on a body. In certain other countries outside 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 FMT or to narrower aspects of the FMT.
The medical device industry in general has been characterized by
substantial litigation. Litigation regarding patent and other intellectual
property rights, whether with or without merit, could be time-consuming and
expensive to respond to and could distract the Company's technical and
management personnel. The Company may become involved in litigation to defend
against claims of infringement by the Company, to enforce patents issued to the
Company or to protect trade secrets of the Company. If any relevant claims of
third-party patents are held as infringed and not invalid in any litigation or
administrative proceeding, the Company 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 its products or
processes to avoid infringement. In addition, in the event of any possible
infringement, there can be no assurance that the Company would be successful in
any attempt to redesign its products or processes to avoid such infringement or
in obtaining licenses on terms acceptable to the Company, if at all.
Accordingly, an adverse determination in a judicial or administrative proceeding
or failure by the Company to redesign its products or processes or to obtain
necessary licenses could prevent the Company from manufacturing and selling its
products, which would have a material adverse effect on the Company's business,
financial condition and results of operations. Although the Company has not been
involved in any litigation to date, in the future, costly and time-consuming
litigation brought by
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the Company may be necessary to enforce patents issued to the Company, to
protect trade secrets or know-how owned by the Company, or to determine the
enforceability, scope and validity of the proprietary rights of others.
Future Capital Requirements; Uncertainty of Additional Funding. 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 upon several
factors, including the progress of its research and development efforts and
preclinical and clinical activities, competing technological and market
developments, the time and costs of obtaining regulatory approvals, the time and
costs involved in filing, prosecuting and enforcing patent claims, the progress
and cost of commercialization of products currently under development, market
acceptance and demand for the Company's products in the United States, if
approved for marketing, and internationally and other factors not within the
Company's control. On February 17, 1998, the Company completed an initial
public offering of 2,300,000 shares of common stock. On February 27, 1998, the
Company completed the sale of an additional 345,000 shares of common stock
pursuant to the exercise by the underwriters of an over allotment option. Net
proceeds to the Company totaled approximately $28.4 million. The Company
believes that the net proceeds of the offering, together with its previously
existing capital resources and projected interest income, will be sufficient to
fund its operations and its capital investments through 1999. Commencing in late
1999 and continuing through 2000, the Company expects to incur substantial
expenses in developing a U.S. sales and marketing organization. To fully
develop such a capability and to effectively launch its products commercially in
the United States, if approved by the U.S. Food and Drug Administration ("FDA"),
the Company expects that it will have to raise additional financing. There can
be no assurance that such additional financing will be available on a timely
basis on terms acceptable to the Company, or at all, or that such financing will
not 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, to license to third parties the rights to commercialize certain
products or technologies that the Company would otherwise seek to commercialize
for itself, or to 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.
Lack of Sales, Marketing and Distribution Experience. The primary market
for the Company's products in the United States is well defined and highly
concentrated. Of the approximately 8,000 ENT surgeons in the United States,
approximately 400 are specialists in otology. The Company believes that it can
address this market with a direct sales force. The Company's strategy is to
market its products initially to those specialists in otology who are currently
most active in ear surgery, and, subsequently, to the general population of ENT
surgeons. Because the surgical procedure for implementing the Company's
soundbridges utilizes many of the same techniques employed by surgeons trained
and experienced in cochlear implant surgery, the Company believes that surgeon
training will not be a significant impediment to market acceptance.
The Company intends to position its family of Vibrant soundbridges as
technologically advanced implants that address an unmet patient need and add to
the products and services that surgeons can offer. Patients who have
traditionally been candidates for a hearing aid often are first
-22-
seen by an ENT surgeon, prior to being referred to a hearing device dealer or
dispensing audiologist. Accordingly, endorsement by the surgical community will
be an important goal of the Company's marketing programs. The Company will also
seek to develop a high degree of awareness by and endorsement from audiologists.
The Company intends to promote the benefits of its products to consumers in
order to expand usage to include not only those who are currently dissatisfied
with hearing aids, but also those who have abandoned hearing aids due to either
dissatisfaction or perceived social stigma.
The Company has established a European sales and marketing organization
which, as of June 30, 1999, is comprised of 6 marketing, sales and support
personnel. These personnel are performing direct sales activities in Germany,
France, the United Kingdom, Switzerland and Austria, and are supporting
distributors in other European countries. In addition, the Company has hired a
sales manager for South America. The Company's initial selling efforts in Europe
have been targeted primarily at those ENT surgeons specializing in otology.
While the Company intends to continue to market its products to these
specialists, it also plans to focus on the referring physicians, audiologists
and the general population of ENT surgeons in an attempt to increase the number
of patients that are referred to specialist ear surgeons. The Company is also
attempting to gather clinical and other data which it believes will be helpful
in obtaining reasonable reimbursement levels for its products. The Company also
has distributors in Sweden, Denmark, Italy, Spain, Portugal, Belgium, The
Netherlands, Luxembourg, and certain countries in the middle east and North
Africa. The Company has also established a distributor for certain countries in
South America. In other international markets, including Japan, the Company will
seek to establish a network of distributors.
There can be no assurance that the Company will be able to build an
adequate direct sales force or marketing organization in any country, that
establishing a direct sales force or marketing organization will be cost-
effective or that the Company's sales and marketing efforts will be successful.
In addition, the Company has entered into distribution agreements with only a
limited number of international distributors. There can be no assurance that the
Company will be able to enter into similar agreements with other qualified
distributors on a timely basis on terms acceptable to the Company, or at all, or
that such distributors will devote adequate resources to selling the Company's
products. Failure to establish an adequate direct sales force domestically and
in select international markets, and to enter into successful distribution
relationships, could have a material adverse effect on the Company's business,
financial condition and results of operations.
Uncertain Availability of Third-Party Reimbursement. The Company believes
that its products will generally be purchased by hospitals and clinics upon the
recommendation of a surgeon. In the United States, hospitals, physicians and
other health care providers that purchase medical devices generally rely on
third-party payors, principally Medicare, Medicaid, private health insurance
plans, health maintenance organizations and other sources of reimbursement for
health care costs, to reimburse all or part of the cost of the procedure in
which the medical device is being used. Such third-party payors have become
increasingly sensitive to cost containment in recent years and place a high
degree of scrutiny on coverage and payment decisions for new technologies and
procedures.
-23-
Hearing aids, which do not involve surgery and, in certain cases, are
exempt from the requirement for 510(k) approval, are generally not reimbursed,
although a modest reimbursement is provided under certain insurance plans.
Traditionally, hearing aid users have paid for these devices directly. For
cochlear implants, however, that are technologically advanced and FDA-approved
through the PMA process for the treatment of profound hearing impairment, a
reimbursement is available for the device, the audiological testing, and the
surgery. Similarly, reimbursement is available for ossicular replacement
prostheses that are FDA-approved for the treatment of conductive hearing
impairment. The Company anticipates that, as surgically implanted devices that
require FDA PMA approval, the Company's products may also be the subject of
reimbursement in the future. During clinical trials, the Company does not
anticipate that there will be any reimbursement for the Vibrant soundbridge
implant or procedure.
The Company's strategy is to pursue reimbursement for the Company's
soundbridges, once a PMA is approved by the FDA, based on surgeon endorsement
and demonstration of improved quality of life for specific patient groups.
Quality of life issues are included in the Company's clinical trial to provide
data in support of this reimbursement strategy. There can be no assurance that
the Company will be able to demonstrate improvement in quality of life or that
reimbursement will ever be available for the Company's products.
Certain third-party payors are moving toward a managed care system in which
they contract to provide comprehensive health care for a fixed cost per person.
The fixed cost per person established by these third-party payors may be
independent of the hospital's cost incurred for the specific case and the
specific devices used. Medicare and other third-party payors are increasingly
scrutinizing whether to cover new products and the level of reimbursement for
covered products. Because the Company's hearing prostheses are currently under
development and have not received FDA clearance or approval, uncertainty exists
regarding the availability of third-party reimbursement for procedures that
would use the Company's soundbridges. Failure by physicians, hospitals and other
potential users of the Company's soundbridges to obtain sufficient reimbursement
from third-party payors for the procedures in which the Company's soundbridges
are intended to be used could have a material adverse effect on the Company's
business, financial condition and results of operations.
Third-party payors that do not use prospectively fixed payments
increasingly use other cost-containment processes or require various outcomes
data that may pose administrative hurdles to the use of the Company's
soundbridges. In addition, third-party payors may deny reimbursement if they
determine that the device used in a procedure is unnecessary, inappropriate,
experimental, used for a non-approved indication or is not cost-effective.
Potential purchasers must determine that the clinical benefits of the Company's
products justify the additional cost or the additional effort required to obtain
prior authorization or coverage and the uncertainty of actually obtaining such
authorization or coverage.
Even after obtaining the necessary foreign regulatory approvals, market
acceptance of the Company's products and products currently under development in
international markets will be dependent, in part, upon the availability of
reimbursement within prevailing health care payment systems. Reimbursement and
health care payment systems in international markets vary
-24-
significantly by country, and include both government sponsored health care and
private insurance. The Company believes that in Europe, the primary source of
funding for products such as the Company's soundbridges is the various
government sponsored healthcare programs. Requirements for the granting of
reimbursement in many countries are not clearly specified and may involve the
collection of additional clinical data in support of submissions to the
appropriate health care administrations. There can be no assurance that any
required data would be available on a timely basis or that any international
reimbursement approvals will be obtained in a timely manner, if at all. Failure
to receive international reimbursement approvals could have a material adverse
effect on market acceptance of the Company's products in the EU as well as in
international markets in which such approvals are sought.
The Company believes that in the future reimbursement will be subject to
increased restrictions both in the United States and in international markets.
The Company believes that the overall escalating cost of medical products and
services will continue to lead to increased pressures on the health care
industry, both foreign and domestic, to reduce the cost of products and
services, including the Company's products and products currently under
development. There can be no assurance in either United States or international
markets that third-party reimbursement and coverage will be available or
adequate, that future legislation, regulation or reimbursement policies of
third-party payors will not otherwise adversely affect the demand for the
Company's products or products currently under development or its ability to
sell its products on a profitable basis. The unavailability of third-party payor
coverage or the inadequacy of reimbursement could have a material adverse effect
on the Company's business, financial condition and results of operations.
Dependence upon Key Personnel. The Company's future success depends in
significant part upon the continued service of certain key scientific, technical
and management personnel. Competition for such personnel is intense and there
can be no assurance that the Company can retain its key scientific, technical
and managerial personnel or that it can attract, assimilate or retain other
highly qualified scientific, technical 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 have a material adverse
effect upon the Company's business, financial condition and results of
operations. The Company has not entered into employment agreements with any of
its key personnel in the United States.
Product Liability Risk; Possible Insufficiency of Insurance. The Company's
business involves the inherent risk of product liability claims. The Company
maintains limited product liability insurance at coverage levels which the
Company believes to be commercially reasonable and adequate given the Company's
current operations. However, there can be no assurance that such insurance will
continue to be available on commercially reasonable terms, or at all, or that
such insurance will be adequate to cover liabilities that may arise. Any claims
that are brought against the Company could, if successful, have an adverse
effect on the Company's business, financial condition and results of operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
-25-
The Company had no holdings of derivative financial or commodity
instruments at June 30, 1999. A review of the Company's other financial
instruments and risk exposures at that date revealed that the Company had
exposure to interest rate risk. At June 30, 1999 the Company performed
sensitivity analyses to assess the potential effect of this risk and concluded
that near-term changes in interest rates should not materially adversely affect
the Company's financial position, results of operations or cash flows.
-26-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities and Use of Proceeds.
On February 17, 1998, the Company completed the sale of 2,300,000 Common
Shares at a per share price of $12.00 in a firm commitment underwritten public
offering. The offering was effected pursuant to a Registration Statement on
Form S-1 (Registration No. 333-40339), which the United States Securities and
Exchange Commission declared effective on February 12, 1998. The offering was
underwritten by Cowen & Company and UBS Securities. On February 27, 1998 the
Company completed the sale of an additional 345,000 Common Shares at a per share
price of $12.00 pursuant to the exercise of the over-allotment option by the
underwriters. Of the $31,740,000 in aggregate proceeds raised by the Company in
connection with the February offering, (i) approximately $2,221,800 was paid to
the underwriters in connection with underwriting discounts and commissions and
(ii) approximately $1,120,000 was paid by the Company in connection with
offering expenses, including legal, printing and filing fees. The Company has
used the remaining proceeds of the offering in the following manner:
Use of Proceeds
---------------
Research & Development, including clinical trials $10,300,000
Development of sales and marketing organization $ 3,200,000
Leasehold improvements and capital expenditures $ 1,200,000
Working capital and general corporate $ 8,000,000
Temporary Investments
Short-term investments $ 5,700,000
All amounts represent estimates of direct or indirect payments of amounts
to third parties. No amounts were paid directly or indirectly for the above
purposes to directors or officers of the Company, to persons owning ten percent
or more of any class of equity securities of the Company, or to affiliates of
the Company. The use of proceeds described above do not represent a material
change in the use of proceeds described in the offering prospectus.
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Company held its Annual Meeting of Stockholders on May 6,
1999.
-27-
(b) The Company's stockholders voted upon the following matters:
(1) Election of Class I directors. All nominees were elected,
with the votes indicated below:
Authority
Name Votes For Against
James M. Corbett 9,356,970 118,580
Geoffrey R. Ball 9,245,427 230,123
(2) Appointment of PricewaterhouseCoopers LLP as the Company's
independent auditors for the 1999 fiscal year, 9,471,500 votes
were cast in favor of the appointment 1,550 votes were cast
against and there were 2,500 abstentions.
(3) Adoption of an amendment to the Company's 1994 Stock Option
Plan ("Plan") to increase the number of shares authorized to be
issued under the Plan by 1,500,000 shares. 7,653,543 votes were
cast in favor of the amendment, 511,080 votes were cast against,
there were 7,250 abstentions and 1,303, 677 broker non-votes.
(4) Adoption of an amendment of the Company's 1997 Employee
Stock Purchase Plan ("Purchase Plan") to increase the number of
shares authorized to be issued under the Purchase Plan by 200,000
shares. 8,120,729 votes were cast in favor of the amendment,
200,700 votes were cast against, there were 2,200 abstentions and
1,151,921 broker non-votes.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Loan and Security Agreement with attached Non-Recourse Secured
Promisssory Note between Symphonix Devices, Inc. and Harry S. Robbins
dated June 29, 1999.
27.1 Financial Data Schedule.
(b) No reports on Form 8-K were filed during the quarter ended June
30,1999.
-28-
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: August 13, 1999 SYMPHONIX DEVICES, INC.
/s/ Kirk Davis
------------------------------
Kirk Davis
President and Chief Executive Officer
/s/ Alfred G. Merriweather
------------------------------
Alfred G. Merriweather
Vice President Finance and Chief Financial
Officer (Principal Financial and Accounting
Officer)
-29-