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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended March 31, 1999 Commission file number 0-28492
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INNOVASIVE DEVICES, INC.
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(Exact name of registrant as specified in its charter)
Massachusetts 04-3132641
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
734 Forest Street, Marlborough MA 01752
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(Address of principal executive offices)
Registrant's telephone number, including area code 508/460-8229
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N/A
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
(1) YES X NO_____
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(2) YES _____ NO X
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The number of shares outstanding of the registrant's common stock as of May 14,
1999 was 9,207,249.
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INNOVASIVE DEVICES, INC.
INDEX
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<CAPTION>
Page
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Part I: Financial Information
Item 1. Condensed Financial Statements
Condensed Balance Sheet at March 31, 1999
(unaudited) and December 31, 1998 3
Condensed Statement of Operations (unaudited) for the Three Months Ended March 31,
1999 and 1998 4
Condensed Statement of Cash Flows (unaudited) for the
Three Months Ended March 31, 1999 and 1998 5
Notes to Unaudited Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II. Other Information 10
Signatures 11
</TABLE>
2
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Part I - Financial Information
Item 1. Financial Statements
INNOVASIVE DEVICES, INC.
Condensed Balance Sheet
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
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(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,603 $ 3,724
Marketable securities 501 1,043
Accounts receivable, net of allowance for
doubtful accounts of $149 at March 31, 1999
and $140 at December 31, 1998 2,580 2,189
Inventories 5,600 5,596
Prepaid expenses 144 175
------------------- --------------------
Total current assets 11,428 12,727
Fixed assets, net 2,108 2,212
Other assets, net 1,088 1,120
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$ 14,624 $ 16,059
=================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 405 $ 682
Accounts payable to related party 59 60
Other current liabilities 1,803 2,103
------------------- --------------------
Total current liabilities 2,267 2,845
Stockholders' equity:
Common stock 1 1
Additional paid-in capital 54,918 54,918
Accumulated deficit (42,527) (41,655)
Deferred compensation (35) (50)
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12,357 13,214
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$ 14,624 $ 16,059
=================== ====================
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
3
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INNOVASIVE DEVICES, INC.
Condensed Statement of Operations
(In thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------------------------
1999 1998
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<S> <C> <C>
Net sales $ 4,251 $ 2,558
Cost of sales 1,277 715
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Gross profit 2,974 1,843
Selling, general and administrative
expenses 3,019 2,722
Research and development 874 1,096
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Loss from operations (919) (1,975)
Interest income 47 195
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Net loss $ (872) $ (1,780)
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Basic and diluted net loss per share $ (0.09) $ (0.19)
=========== ===========
Shares used in computing basic and
diluted net loss per share 9,207 9,167
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
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INNOVASIVE DEVICES, INC.
Condensed Statement of Cash Flows
(In thousands; unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------------
1999 1998
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<S> <C> <C>
Cash flows from operating activities
Net loss $ (872) $ (1,780)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 294 322
Changes in assets and liabilities:
Accounts receivable, net (391) (245)
Inventories (4) (413)
Prepaid expenses 31 16
Other assets - 110
Accounts payable (277) 45
Accounts payable to related party (1) (232)
Other current liabilities (300) 58
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Net cash used for operating activities (1,520) (2,119)
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Cash flows from investing activities
Purchases of fixed assets (143) (225)
Purchases of marketable securities - (4,919)
Redemption of marketable securities 542 11,474
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Net cash provided by investing activities 399 6,330
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Cash flows from financing activities
Proceeds from issuance of common stock,
net of issuance costs - 21
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Net increase (decrease) in cash and cash equivalents (1,121) 4,232
Cash and cash equivalents at beginning of period 3,724 2,916
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Cash and cash equivalents at end of period $ 2,603 $ 7,148
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
5
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INNOVASIVE DEVICES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of Innovasive Devices,
Inc. (the "Company") include, in the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation of the Company's financial position as of March 31, 1999 and the
results of its operations for the three month period ended March 31, 1999 and
1998. Results of operations for interim periods are not necessarily indicative
of those to be achieved for the full year.
Pursuant to accounting requirements of the Securities and Exchange Commission
(the "SEC") applicable to quarterly reports on Form 10-Q, the accompanying
unaudited condensed financial statements and these notes do not include all
disclosures required by generally accepted accounting principles for complete
financial statements. Accordingly, these statements should be read in
conjunction with the financial statements and accompanying notes contained in
the Company's Annual Report on Form 10-K for the year ended December 31, 1998
filed with the SEC on March 31, 1999.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
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(unaudited)
<S> <C> <C>
Raw materials $ 1,293 $ 1,880
Work-in-process 362 640
Finished goods 3,945 3,076
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Totals $ 5,600 $ 5,596
=========== ===========
</TABLE>
3. NET LOSS PER SHARE (UNAUDITED)
Basic earnings per share is computed by dividing the income available to common
stockholders by the weighted average number of common shares outstanding for the
period. For purposes of calculating diluted earnings per share, the denominator
includes both the weighted average number of common shares outstanding and
potential dilutive common shares outstanding for the period. For each of the
periods presented, basic and diluted earnings per share are the same due to the
antidilutive effect of potential common shares outstanding.
6
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INNOVASIVE DEVICES, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
Since its inception in 1990, the Company has been primarily engaged in the
development, manufacture and marketing of proprietary devices and
instrumentation which facilitate the reattachment of soft tissue structures,
such as ligaments and tendons, to bones and other tissues. The Company has a
limited operating history and as of March 31, 1999 had an accumulated deficit of
$42.5 million. These losses have resulted principally from expenses associated
to fund research and development, the establishment of its manufacturing
capabilities and the expansion of its marketing and sales organization. Although
the Company's sales were principally derived from the sale of its family of
shoulder related products, the Company now markets five product platforms:
suture anchors, suturing systems, cartilage repair products, anterior cruciate
ligament ("ACL") reconstruction products and its newly introduced meniscal
repair products. The Company's strategy is to continue to develop innovative
products for the sports medicine/arthroscopy market and to leverage its core
proprietary technology in other markets. The Company markets its products to
surgeons in the United States through a network of clinical employee sales
representatives and independent sales agents and internationally through
established distributors of orthopaedic medical devices.
The following information should be read in conjunction with the unaudited
condensed financial statements and notes thereto included in this Quarterly
Report and with the Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in the
Company's Annual Report on Form 10-K filed with the SEC on March 31, 1999.
Any statements in this report expressing the beliefs and expectations of
management regarding the Company's future results and performance are forward-
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements are based on current
expectations that involve a number of risks and uncertainties. The Company
wishes to caution readers not to place undue reliance on any such forward-
looking statements, which speak only as of the date made. Such forward looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. These risks include the receipt of regulatory
approvals, progress of product development programs, clinical efficacy of and
market demand for the products. Certain of such risks and uncertainties are
described in Exhibit 99 of the Company's Annual Report on Form 10-K filed with
the Securities and Exchange Commission on March 31, 1999.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1998
Net sales for the first quarter of 1999 of $4,251,000 represents an increase of
$1,693,000 from $2,558,000 for the same period in the prior year. The increase
resulted primarily from a higher level of sales of ACL reconstruction products,
Meniscal repair products, cartilage repair products, ROC suture anchors and
suture systems. Products contributing to the increase in ACL reconstruction
product sales over the first quarter of 1998 included: the Linx HT and Slingshot
Cross Pin ACL Fixation systems which each provide femoral fixation of hamstring
tendon grafts, and the GeoFit Screw and Washer system used for tibial fixation
of soft tissue. The Company's newly introduced Meniscal repair products also
contributed to the sales growth over the same period in the prior year. In the
fourth quarter of 1998, the Company commenced commercial shipments of its
Clearfix Meniscal Screw, a bioabsorbable device used to repair traumatic tears
within the meniscus of the
7
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knee through a minimally invasive arthroscopic approach. In the first quarter of
1999, the Company commenced commercial shipments of its Clearfix Meniscal Dart,
a bioabsorbable device also used to repair traumatic tears within the meniscus.
Sales of the Company's COR system, used for articular cartilage repair in the
knee, also experienced growth over the same period last year. Contributing to
the increase in ROC suture anchor sales was the BioROC, a bioabsorbable suture
anchor introduced in the latter part of the first quarter of 1998. The Company
also experienced increased sales of its ROC EZ and ROC XS suture anchors. Suture
system sales also increased over the same quarter in 1998 as a result of
increased sales of the Y-Knot and Suture Grasper product lines.
Gross profit increased to $2,974,000 in the first quarter of 1999 from
$1,843,000 in the first quarter of 1998. As a percentage of sales, gross profit
was 70.0% in the first quarter of 1999 as compared to 72.0% in the first quarter
of 1998. Gross profits were impacted by
a higher percentage of sales to international distributors versus the same
period in the prior year. The average selling price of products to international
distributors are typically below that of domestic average selling prices.
Selling, general and administrative expenses increased to $3,019,000 in the
first quarter of 1999 from $2,722,000 in the first quarter of 1998. The increase
resulted primarily from higher selling commissions resulting from higher sales
volume, increased legal costs, and increased salary and travel costs related to
the expansion of the domestic and international direct sales force.
Research and development expenses decreased to $874,000 in the first quarter of
1999 from $1,096,000 in the first quarter of 1998. The decrease was primarily
attributable to lower patent filing costs and a decrease in project costs
related to a collaborative product development agreement with Cohesion
Technologies, Inc. as this project transitions from the development to the
clinical phase.
Interest income decreased to $47,000 in the first quarter of 1999 from $195,000
in the first quarter of 1998 primarily as a result of investment returns earned
on lower average cash balances maintained during the first quarter of 1999 as
compared to the prior year.
As a result of the foregoing, the net loss decreased to $872,000 in the first
quarter of 1999 from a loss of $1,780,000 in the first quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had cash, cash equivalents and marketable
securities of $3.1 million as compared to a balance of $4.8 million on December
31, 1998. Working capital decreased to $11.4 million as of March 31, 1999 from
$12.7 million at December 31, 1998.
Cash used in the Company's operations amounted to $1.5 million for the three
months ended March 31, 1999 primarily resulting from the net loss of $872,000
and an increase in accounts receivable of $391,000 resulting from the increased
sales volume over the prior quarter.
Cash provided by investing activities totaled $399,000 for the three months
ended March 31, 1999 resulting from net redemptions of marketable securities of
$542,000 offset by capital expenditures of $143,000.
On December 31, 1998, the Company entered into a working capital line of credit
with a bank that provides the Company with a maximum borrowing availability of
$2.5 million, limited by certain receivable and inventory balances. Borrowings
under this agreement bear interest at the prime rate of 7.75%. The line of
credit expires and all outstanding amounts thereunder are due December 31, 1999.
Under the line of credit, the Company is obligated to comply with certain
financial covenants. There were no borrowings outstanding under the line of
credit at March 31, 1999.
8
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The Company's future liquidity and capital requirements will depend upon the
progress of research and development programs, regulatory matters and the
expansion of its manufacturing capabilities to satisfy increasing volume
requirements. In addition, the Company's capital requirements will depend upon,
among other factors, the timing of the establishment of effective sales channels
in the United States and abroad and the extent to which the Company's products
gain market acceptance resulting in increased sales sufficient to generate a
profit from operations. Therefore the Company cannot provide assurances that it
will not require additional financing in the future. If additional financing is
necessary, the Company would seek to raise these funds through bank facilities
or debt or equity offerings. There can be no assurance that such funds would be
available at all or on terms acceptable to the Company.
IMPACT OF THE YEAR 2000 ISSUE
The year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any computer programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company believes that its primary business and research and development
systems will be Y2K compliant by the second quarter of 1999 based on it's
internal evaluations and testing of these systems. The Company does not rely
materially on non-IT related technology in its manufacturing processes and
thereby does not anticipate that Y2K issues will affect its ability to
manufacture finished goods. The Company has begun the process of developing a
communication strategy for third party vendors and intends to issue
questionnaires that will address Y2K compliance. The Company anticipates that
its assessment of third party vendors will be completed by the second quarter of
1999. The Company does not anticipate incurring additional costs outside of the
scope of its current IT budget to complete future testing and compliance
activities.
The Company relies extensively on third party suppliers. Because their systems
are not directly under the Company's control, the Company is at risk that all
required external Y2K compliance efforts will not be completed on a timely
basis. In the event that the Company's significant suppliers do not successfully
and timely achieve Y2K compliance, and the Company is unable to replace them
with alternate suppliers, the Company's operations could be adversely affected.
At this time, the Company believes that the Y2K problem will not pose
significant operational problems for the Company's computer systems. Since no
significant issues have arisen, the Company does not have a contingency plan to
address any material Y2K issues. If significant Y2K issues arise, the Company
may not be able to timely develop and implement a contingency plan and the
Company's operations could be adversely affected.
The disclosure in this Section is a Y2K Readiness Disclosure under the Year 2000
Information and Readiness Disclosure Act of 1998.
9
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INNOVASIVE DEVICES, INC.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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On October 28, 1998, Bionx Implants, Inc., Bionx Implants, Oy. and Dr. Saul N.
Schreiber ("Bionx") filed suit against the Company in the United States District
Court for the District of Massachusetts alleging that the Company's Clearfix(TM)
Meniscal Dart product infringed a Bionx patent. On March 24, 1999, Judge Gertner
of that Court denied Bionx's motion for a preliminary injunction which would
have precluded Innovasive from manufacturing, using or selling the Meniscal Dart
on the grounds that Bionx was unlikely to succeed on the merits of its
infringement claim. The Bionx claim does not allege any infringement with
respect to the Company's Meniscal Screw, which was commercially launched in
October 1998. The Company believes that the Bionx claim is without merit and
intends to continue to defend itself vigorously.
ITEM 2. CHANGES IN SECURITIES
----------------------
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
---------------------------------
None
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INNOVASIVE DEVICES, INC,
DATE: MAY 14, 1999 BY: /s/ RICHARD D. RANDALL
-------------------------
Richard D. Randall
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND DIRECTOR
(PRINCIPAL EXECUTIVE OFFICER)
DATE: MAY 14, 1999 BY: /s/ JAMES V. BARRILE
------------------------
JAMES V. BARRILE
EXECUTIVE VICE PRESIDENT OF FINANCE,
CHIEF FINANCIAL OFFICER AND TREASURER
(PRINCIPAL FINANCIAL OFFICER)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 2,603
<SECURITIES> 501
<RECEIVABLES> 2,729
<ALLOWANCES> 149
<INVENTORY> 5,600
<CURRENT-ASSETS> 11,428
<PP&E> 4,354
<DEPRECIATION> 2,246
<TOTAL-ASSETS> 14,624
<CURRENT-LIABILITIES> 2,267
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 12,357
<TOTAL-LIABILITY-AND-EQUITY> 14,624
<SALES> 4,251
<TOTAL-REVENUES> 4,251
<CGS> 1,277
<TOTAL-COSTS> 1,277
<OTHER-EXPENSES> 0
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<INCOME-PRETAX> (872)
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<INCOME-CONTINUING> (872)
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<CHANGES> 0
<NET-INCOME> (872)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
