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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1996 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 0-19707
INNERDYNE, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 87-0431168
(State or other (I.R.S. Employer
jurisdiction of Identification
incorporation) No.)
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1244 REAMWOOD AVENUE, SUNNYVALE, CA 94089
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 745-6010
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 / /
The number of shares of Registrant's Common Stock issued and outstanding as
of March 31, 1996 was 18,566,111.
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TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Balance Sheets........................................................................ 3
Condensed Statements of Operations.............................................................. 4
Condensed Statements of Cash Flows.............................................................. 5
Notes to Condensed Financial Statements......................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 7
PART II. OTHER INFORMATION................................................................................ 16
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INNERDYNE, INC.
CONDENSED BALANCE SHEETS
ASSETS
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MARCH 31, DECEMBER 31,
1996 1995
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(UNAUDITED) (*SEE NOTE)
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Current assets:
Cash and cash equivalents.................................................... $ 1,820,049 $ 1,720,814
Marketable investment securities............................................. -- 997,604
Accounts receivable.......................................................... 891,635 735,911
Interest and other receivables............................................... 40,893 195,646
Inventory.................................................................... 714,064 585,123
Prepaid expenses and other................................................... 245,024 78,959
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Total current assets....................................................... 3,711,665 4,314,057
Equipment and leasehold improvements, net...................................... 905,450 948,295
Other assets................................................................... 107,986 107,251
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$ 4,725,101 $ 5,369,603
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt....................................... $ 102,286 $ 85,058
Current obligations under capital leases..................................... 18,040 29,683
Notes payable................................................................ 71,007 --
Accounts payable............................................................. 311,917 206,320
Accrued liabilities.......................................................... 896,911 852,035
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Total current liabilities.................................................. 1,400,161 1,173,096
Long-term debt, excluding current installments................................. 230,249 186,689
Obligations under capital leases, excluding current installments............... -- --
Stockholders' equity
Common stock................................................................. 185,661 183,155
Additional paid-in-capital................................................... 51,108,768 50,442,159
Accumulated deficit.......................................................... (48,199,738) (46,615,496)
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Net stockholders' equity................................................... 3,094,691 4,009,818
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$ 4,725,101 $ 5,369,603
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*Condensed from audited financial statements.
See accompanying notes to condensed financial statements
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INNERDYNE, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
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THREE-MONTH PERIODS ENDED
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MARCH 31, 1996 MARCH 31, 1995
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Product, contract and licensing revenue.......................................... $ 1,582,400 $ 1,235,136
Cost of product sales.......................................................... 896,305 680,488
Research, development, regulatory and clinical................................. 579,611 582,101
Sales and marketing............................................................ 1,182,453 993,519
General and administrative..................................................... 525,336 517,766
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Total costs and expenses..................................................... 3,183,705 2,773,874
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Operating loss............................................................... (1,601,305) (1,538,738)
Interest/other income, net....................................................... 17,063 69,860
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Net loss..................................................................... $ (1,584,242) $ (1,468,878)
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Net loss per share............................................................... $ (0.09) $ (0.09)
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Weighted average shares outstanding.............................................. 18,336,852 16,632,708
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See accompanying notes to condensed financial statements
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INNERDYNE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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THREE-MONTH PERIODS ENDED
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MARCH 31, 1996 MARCH 31, 1995
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Cash flows from operating activities:
Net loss........................................................................ $ (1,584,242) $ (1,468,878)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of equipment and leasehold improvements......... 131,999 166,070
Amortization of intangible assets............................................. -- --
Decrease (increase) in receivables............................................ (971) (458,057)
Decrease (increase) in inventories............................................ (128,941) (199,893)
Decrease (increase) in prepaid expenses, and other assets..................... (166,800) (212,812)
Increase (decrease) in accounts payable....................................... 105,597 (63,360)
Increase (decrease) in accrued expenses....................................... 44,876 80,633
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Net cash used in operating activities....................................... (1,598,482) (2,156,297)
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Cash flows from investing activities:
Maturity of (investment in) cash investments.................................... 997,604 1,250,000
Capital expenditures............................................................ (89,153) (120,936)
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Net cash provided by (used in) investing activities......................... 908,451 1,129,064
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Cash flows from financing activities:
Proceeds from issuance of common stock, net..................................... 669,115 9,553
Proceeds from issuance of long-term debt........................................ 85,533 --
Proceeds from short-term borrowings............................................. 89,603 108,680
Principal payments on long-term debt............................................ (24,745) (35,571)
Principal payments under capital leases......................................... (11,643) (13,063)
Principal payments on short-term debt........................................... (18,597) (10,660)
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Net cash provided by financing activities................................... 789,266 58,939
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Net increase (decrease) in cash and cash equivalents.............................. 99,235 (968,294)
Cash and cash equivalents at beginning of period.................................. 1,720,814 3,981,060
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Cash and cash equivalents at end of period........................................ $ 1,820,049 $ 3,012,766
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Supplemental disclosure of cash flow information:
Cash paid for interest.......................................................... $ 8,744 $ 5,839
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See accompanying notes to condensed financial statements
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INNERDYNE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying interim condensed financial statements and notes are
unaudited, but in the opinion of management reflect all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of the results
of such periods. The results of operations for any interim period are not
necessarily indicative of results for the respective full year. These condensed
financial statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) for the three month period ended
March 31, 1996 should be read in conjunction with the audited financial
statements and notes thereto and MD&A included in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1995.
(2) INVENTORIES
Inventories consist of the following:
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MARCH 31, DECEMBER 31,
1996 1995
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Raw materials and supplies........................................ $ 527,863 $ 404,800
Finished goods.................................................... 186,201 180,323
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$ 714,064 $ 585,123
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS, IN ADDITION TO HISTORICAL
INFORMATION, FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES.
THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED
IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE
INCLUDE THOSE DISCUSSED BELOW (SEE "ADDITIONAL FACTORS THAT MAY AFFECT FUTURE
RESULTS"), AS WELL AS THOSE SET FORTH IN THE COMPANY'S ANNUAL REPORT ON FORM
10-KSB, AS AMENDED, FOR THE YEAR ENDED DECEMBER 31, 1995 AND IN THE COMPANY'S
REGISTRATION STATEMENT ON FORM S-1 (FILE NO. 333-3196), AS AMENDED, AND ANY
PROSPECTUS INCLUDED THEREIN. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY
RELEASE THE RESULT OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS WHICH
MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO
REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
INTRODUCTION
InnerDyne, Inc. (the "Company" or "InnerDyne") designs, develops,
manufactures and commercializes minimally invasive surgical (M.I.S.) access
products incorporating its proprietary radial dilation technology. The Company
also has proprietary technology in the areas of thermal ablation and
biocompatible coatings, which it intends to continue developing either
internally or through strategic alliances.
RESULTS OF OPERATIONS
Total revenues for the three-month period ended March 31, 1996 were
$1,582,400, compared to $1,235,136 for the corresponding period in 1995. Product
sales increased to $1,519,880 for the three month period ended March 31, 1996
from $954,466 for the corresponding period in 1995, reflecting increased sales
of the Company's STEP device. Licensing, contract and grant revenues for the
three month period ended March 31, 1996 were $62,520, compared to $280,670 for
the corresponding period in 1995. These revenues related to agreements with
third parties covering the development of the Company's proprietary thermal
ablation technology, the development of non-competing applications for the
Company's radial dilation technology and the licensing of the Company's
proprietary biocompatible coatings technology. The licensing, contract and grant
revenues for the three-month period ended March 31, 1995 included a one-time
payment from a single licensor. Licensing, contract and grant revenues fluctuate
from quarter to quarter, based upon the number of agreements in effect and the
amount and timing of the payments to be made to InnerDyne pursuant to such
agreements.
Cost of product sales was $896,305 for the three-month period ended March
31, 1996, compared to $680,488 for the same period in 1995. The increase in cost
of product sales for the three month period ended March 31, 1996 is attributable
to the increase in production and sales volume compared to the same period in
1995. In addition, cost of product sales for the three months ended March 31,
1995 included significant start-up manufacturing costs. Although the Company
anticipates that cost of product sales will continue to increase in absolute
dollars in future periods, cost of product sales as a percentage of revenue is
expected to decrease in 1996 if sales and production volumes increase.
Research, development, regulatory and clinical expenses for the three-month
period ended March 31, 1996 were $579,611, relatively unchanged compared to
$582,101 for the corresponding period in 1995. The Company expects that
research, development, regulatory and clinical expenditures will increase in
absolute dollars in future periods.
Sales and marketing expenses were $1,182,453 for the three-month period
ended March 31, 1996, compared to $993,519 for the three-month period ended
March 31, 1995, reflecting the growth of the Company's sales and marketing
functions to support commercialization of its M.I.S. products. InnerDyne expects
that sales and marketing expenses will continue to increase in absolute dollars.
General and administrative expenses were $525,336 for the three months ended
March 31, 1996, relatively unchanged from $517,766 for the three months ended
March 31, 1995. The Company anticipates that general and administrative expenses
will increase in absolute dollars to support expanding operations.
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Interest/other income, net decreased to $17,063 for the three-month period
ended March 31, 1996, compared to $69,860 for the same period in 1995, primarily
as a result of lower interest income in the 1996 period due to lower cash, cash
equivalents and marketable investment securities balances.
The Company incurred a net loss of $1,584,242, or $0.09 per share, for the
three-month period ended March 31, 1996, compared to a net loss of $1,468,878,
or $0.09 per share, for the same period in 1995. Management believes that the
Company is likely to incur operating losses at least through 1996.
LIQUIDITY AND CAPITAL RESOURCES
For the period from its inception to March 31, 1996, the Company has
incurred a cumulative net loss of approximately $48.2 million. Since inception,
the Company's cash expenditures have exceeded its revenues. Prior to 1992, the
Company was funded primarily through private placements of equity securities. In
1992, the Company completed an initial public offering of 2,875,000 shares of
its Common Stock at $11 per share, which raised approximately $28.8 million (net
of underwriter's discounts and offering expenses). In June 1995, the Company
closed a private placement of 1,435,599 shares of the Company's Common Stock and
warrants to purchase 287,200 additional shares of Common Stock, with gross
proceeds to the Company of approximately $3.2 million. The 1994 acquisition of
InnerDyne Medical, Inc. was accomplished through issuance of additional Common
Stock of the Company.
At March 31, 1996, cash and cash equivalents totaled $1,820,049, compared to
a total cash, cash equivalents and marketable investment securities balance of
$2,718,418 at December 31, 1995. The Company had $89,153 and $542,658 in capital
expenditures in the quarter ended March 31, 1996 and the year ended December 31,
1995, respectively. Working capital totaled $2,311,504 at March 31, 1996, and
the Company had long-term debt, excluding current installments, totaling
$230,249 relating to financing of equipment.
In February 1996, the Company renewed its credit facility with Silicon
Valley Bank. Subject to certain covenants and conditions, the Company may borrow
up to $2,000,000 on a revolving credit basis at prime plus 1 1/4% and $750,000
as a 42-month term loan at prime plus 1 3/4%. The revolving credit portion of
the facility is available based on the existence and magnitude of eligible
receivables, and the term loan portion of the facility is available based on
eligible equipment purchases. As of March 31, 1996, the Company had borrowed
$326,245 under the term loan provision of the credit facility for the financing
of capital expenditures.
In March and April of 1996, holders of warrants to purchase an aggregate of
242,952 shares of Common Stock exercised such warrants, resulting in total
proceeds to the Company of $704,561.
In the future, the Company expects to incur substantial additional operating
losses and cash outflow requirements as a result of expenditures related to
expansion of sales and marketing capability, expansion of manufacturing
capacity, research and development activities, compliance with regulatory
requirements, and possible investment in or acquisition of additional
complementary products, technologies or businesses. The timing and amounts of
these expenditures will depend upon many factors, such as the availability of
capital, progress of the Company's research and development, and factors which
may be beyond the Company's control, such as the results of product trials, the
requirements for and the time required to obtain regulatory approval for
existing products and any other products that may be developed or acquired, and
market acceptance of the Company's products.
The Company's capital requirements will depend on numerous factors,
including market acceptance and demand for its products; the resources the
Company devotes to the development, manufacture and marketing of its products;
the progress of the Company's clinical research and product development
programs; the receipt of, and the time required to obtain, regulatory clearances
and approvals; the resources required to protect the Company's intellectual
property; and other factors. The timing and amount of such capital requirements
cannot be accurately predicted. Funds may also be used for the acquisition of
businesses, products and technologies that are complementary to those of the
Company. Consequently, although the Company believes that the proceeds of its
planned public
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offering of shares of its Common Stock, if completed, together with revenues,
credit facilities and other sources of liquidity, will provide adequate funding
for its capital requirements through at least 1997, the Company may be required
to raise additional funds through public or private financings, collaborative
relationships or other arrangements. There can be no assurance that the Company
will not require additional funding or that such additional funding, if needed,
will be available on terms attractive to the Company, or at all. Any additional
equity financings may be dilutive to stockholders, and debt financing, if
available, may involve restrictive covenants.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
HISTORY OF LOSSES; PROFITABILITY UNCERTAIN. InnerDyne has experienced
operating losses since its inception in December 1985. InnerDyne reported net
losses of $1.6 million on revenues of $1.6 million, $5.6 million on revenues of
$5.3 million, $9.9 million on revenues of $878,909 and $10.4 million on revenues
of $42,821 for the three months ended March 31, 1996 and the fiscal years ended
December 31, 1995, 1994 and 1993, respectively. As of March 31, 1996, InnerDyne
had an accumulated deficit of approximately $48.2 million.
In the future, the Company expects to incur substantial additional operating
losses and have cash outflow requirements as a result of expenditures related to
expansion of sales and marketing capability, expansion of manufacturing
capacity, research and development activities, compliance with regulatory
requirements, and possible investment in or acquisition of additional
complementary products, technologies or businesses. The timing and amounts of
these expenditures will depend upon many factors, such as the progress of the
Company's research and development, and will include factors that may be beyond
the Company's control, such as the results of product trials, the requirements
for and the time required to obtain regulatory approval for existing products
and any other products that may be developed or acquired, and the market
acceptance of the Company's products. The Company believes that it is likely to
incur operating losses at least through 1996. The cash needs of the Company have
changed significantly as a result of the merger completed during 1994 and the
support requirements of the added business focus areas. There can be no
assurance that the Company will not continue to incur losses, that the Company
will be able to raise cash as necessary to fund operations or that the Company
will ever achieve profitability. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
INTENSE COMPETITION. The primary industry in which the Company competes,
minimally invasive surgery, is dominated by two large, well-positioned entities
that are intensely competitive and frequently offer substantial discounts as a
competitive tactic. The United States Surgical Corporation ("U.S. Surgical") is
primarily engaged in developing, manufacturing and marketing surgical wound
management products, and has historically been the firm most responsible for
providing products that have led to the growth of the industry. U.S. Surgical
supplies a broad line of products to the M.I.S. industry, including products
which facilitate access, assessment and treatment. Ethicon Endo-Surgery
("Ethicon"), a Johnson & Johnson company, has made a major investment in the
M.I.S. field in recent years and is one of the leading suppliers of hospital
products in the world. Furthermore, U.S. Surgical and Ethicon each utilize
purchasing contracts that link discounts on the purchase of one product to
purchases of other products in their broad product lines. Substantially all of
the hospitals in the United States have purchasing contracts with one or both of
these entities. Accordingly, customers may be dissuaded from purchasing access
products from the Company rather than U.S. Surgical or Ethicon to the extent it
would cause them to lose discounts on products that they regularly purchase from
U.S. Surgical or Ethicon.
The Company faces a formidable task in successfully gaining significant
revenues within the M.I.S. access market. In order to succeed, management
believes that the Company will need to objectively demonstrate substantial
product benefits, and its sales effort must be able to effectively present such
benefits to both clinicians and health care administrators. The M.I.S. access
market is
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dominated by U.S. Surgical and Ethicon. Both entities introduced new access
devices, trocars with added features, during the past two years. A number of
other entities participate in various segments of the M.I.S. access market.
There can be no assurance that the Company will be able to successfully
compete in the M.I.S. access market, and failure to do so would have a material
adverse effect on the Company's business, financial condition and results of
operations.
In the thermal ablation market, the Company considers its primary
competition to be current therapies for the treatment of excessive menstrual
bleeding, including drug therapy, dilatation and curettage, surgical endometrial
ablation and hysterectomy. The Company will also compete against other
techniques under development for the treatment of excessive menstrual bleeding,
including endometrial ablation techniques that employ radio frequency ("RF")
energy or freezing techniques ("cryoablation") and the uterine balloon therapy
system being clinically tested by Gynecare, Inc.
There are many large companies with significantly greater financial,
manufacturing, marketing, distribution and technical resources and clinical
experience than the Company that are developing and marketing devices for
surgical removal of the uterus, uterine fibroids, the endometrial lining of the
uterus and other uterine tissues or are developing non-surgical methods for
treating these conditions. Additionally, there are smaller companies developing
alternative methods of uterine tissue ablation that compete with the Company.
There can be no assurance that these companies will not succeed in developing
technologies and products that are more effective than any which have been or
are being developed by the Company or that would render the Company's
technologies or products obsolete or not competitive. Such competition could
have a material and adverse effect on the Company's business, financial
condition and results of operations. As a result of the entry of large and small
companies into the market, the Company expects competition for devices and
systems used to treat excessive menstrual bleeding to increase.
CONTINUED DEPENDENCE ON Step PRODUCTS. To date, substantially all of the
Company's revenues from product sales are attributable to STEP products and
InnerDyne currently anticipates that sales of STEP products will represent
substantially all of the Company's revenues in the immediate future.
Accordingly, the success of the Company is largely dependent upon increased
market acceptance of its STEP product line by the medical community as a
reliable, safe and cost-effective access product for minimally invasive surgery.
InnerDyne commenced commercial sales of its STEP product in the fourth quarter
of 1994, and to date sales have been made to a relatively limited number of
physicians and hospitals. Recommendations and endorsements by influential
members of the medical community are important for the increased market
acceptance of the Company's STEP products, and there can be no assurance that
existing recommendations or endorsements will be maintained or that new ones
will be obtained. Failure to increase market acceptance of the Company's STEP
products would have a material adverse effect upon the Company's business,
financial condition and results of operations.
RELIANCE ON FUTURE PRODUCTS AND NEW APPLICATIONS; UNCERTAINTY OF TECHNOLOGY
CHANGES. The medical device industry is characterized by innovation and
technological change. The Company has made significant investments in
researching and developing its proprietary technologies, including radial
dilation, thermal ablation and biocompatible coatings. During 1996, the Company
expects to commercially introduce on a limited basis the Reposable STEP and the
MiniSTEP, each of which is a further enhancement of its STEP product line. The
future success of the Company will depend in part on the timely commercial
introduction and market acceptance of these products. There can be no assurance
that these products will be timely introduced in commercial quantities, if at
all, or that such products will achieve market acceptance. A failure by the
Company to timely introduce such products or a failure of such products to
achieve market acceptance could have a material adverse effect on the Company's
business, financial condition and results of operations. The future success of
the Company will also depend upon, among other factors, its ability to develop
and gain regulatory clearance for new and enhanced versions of products in a
timely fashion, including, but not limited to, the ENABL Thermal Ablation
System. There can be no assurance that the Company will be able to successfully
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develop new products or technologies, manufacture new products in commercial
volumes, obtain regulatory approvals on a timely basis or gain market acceptance
of such products. Delays in development, manufacturing, regulatory approval or
market acceptance of new or enhanced products could have a material adverse
impact on the Company's business, financial condition and results of operations.
LIMITED MANUFACTURING EXPERIENCE; COMPLIANCE WITH GOOD MANUFACTURING
PRACTICES. The Company initiated manufacture of commercial quantities of its
STEP access device in its Salt Lake City, Utah facility during late 1994.
Accordingly, the Company has limited experience in manufacturing M.I.S. access
products or other products in commercial quantities at acceptable costs. The
Company's success will depend in part on its ability to manufacture its products
in compliance with the Good Manufacturing Practices ("GMP") regulations of the
United States Food and Drug Administration (the "FDA") and other regulatory
requirements in sufficient quantities and on a timely basis, while maintaining
product quality and acceptable manufacturing costs. Manufacturers often
encounter difficulties in scaling up production of new products, including
problems involving production yields, quality control and assurance, component
supply and shortages of qualified personnel. Failure to maintain production
volumes or increase production volumes in a timely or cost-effective manner
would have a material adverse effect on the Company's business, financial
condition and results of operations. The Company was recently inspected by the
FDA and cited for certain GMP deficiencies. See "-- Government Regulation."
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. The Company's quarterly
operating results have in the past fluctuated and will continue to fluctuate
significantly in the future depending on the timing and shipment of product
orders, new product introductions and changes in pricing policies by the Company
or its competitors, the timing and market acceptance of the Company's new
products and product enhancements, the continued market acceptance of
InnerDyne's STEP product line by the medical community, the Company's product
mix, the mix of distribution channels through which the Company's products are
sold, the extent to which the Company recognizes licensing revenues during a
quarter, and the Company's ability to obtain sufficient supplies of sole or
limited source components for its products. In particular, fluctuations in
production volumes affect gross margins from quarter to quarter. Furthermore,
gross margins can fluctuate from quarter to quarter to the extent the Company
recognizes license revenue during a quarter because the Company derives higher
gross margins from license revenue than from product sales. In response to
competitive pressures or new product introductions, the Company may take certain
pricing or other actions that could materially and adversely affect the
Company's operating results. In addition, new product introductions by the
Company could contribute to quarterly fluctuations in operating results as
orders for new products commence and orders for existing products decline.
The Company's expense levels are based, in part, on its expectations of
future revenues. Because a substantial portion of the Company's revenue in each
quarter normally results from orders booked and shipped in the final weeks of
that quarter, revenue levels are extremely difficult to predict. If revenue
levels are below expectations, net income will be disproportionately affected
because only a small portion of the Company's expenses varies with its revenue
during any particular quarter. In addition, the Company typically does not
operate with any material backlog as of any particular date.
As a result of the foregoing factors and potential fluctuations in operating
results, results of operations in any particular quarter should not be relied
upon as an indicator of future performance. In addition, in some future quarter
the Company's operating results may be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
would likely be materially and adversely affected. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
LIMITED SALES, MARKETING AND DISTRIBUTION EXPERIENCE. InnerDyne began
commercial sales of its first M.I.S. access product in the fourth quarter of
1994 and, therefore, has limited sales, marketing and
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distribution experience. The Company is marketing its M.I.S. access products
mainly to general surgeons and gynecologists. In the United States, InnerDyne
markets its products primarily through direct representatives who are employed
by the Company within selected geographical areas and a network of independent
sales representatives who typically sell other complementary M.I.S. products to
the same customer base. If the need arises, the Company may expand its sales
force, which will require recruiting and training additional personnel. There
can be no assurance that the Company will be able to recruit and train such
additional personnel in a timely fashion. Loss of a significant number of
InnerDyne's current sales personnel or independent sales representatives, or
failure to attract additional personnel, could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company expects to market its products outside of the United States
through international distributors in selected foreign countries after
regulatory approvals, if necessary, are obtained. Although InnerDyne currently
has relationships with a limited number of international distributors, there can
be no assurance that the Company will be able to build a network of
international distributors capable of effectively marketing its M.I.S. access
products or that such distributors will generate significant sales of such
products. The Company has limited experience in marketing its products, and
faces substantial competition from well-entrenched and formidable competitors.
As a result, there can be no assurance that the Company will successfully
achieve acceptable levels of product sales at prices which provide an adequate
return. Failure to do so would have a material adverse effect on the Company's
business, financial condition and results of operations.
PATENTS AND PROPRIETARY RIGHTS. The Company's success will depend in large
part on its ability to obtain patent protection for products and processes, to
preserve its trade secrets and to operate without infringing the proprietary
rights of third parties. Although InnerDyne has obtained certain patents and
applied for additional United States and foreign patents covering certain
aspects of its technology, no assurance can be given that any additional patents
will be issued or that the scope of any patent protection will exclude
competitors or provide a competitive advantage, or that any of the Company's
patents will be held valid if subsequently challenged. The validity and breadth
of claims covered in medical technology patents involves complex legal and
factual questions and therefore may be highly uncertain. InnerDyne also relies
upon unpatented trade secrets, and no assurance can be given that others will
not independently develop or otherwise acquire substantially equivalent trade
secrets. In addition, whether or not the Company's patents are issued, others
may hold or receive patents that contain claims having a scope that covers
products developed by InnerDyne.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry and companies in the
medical device industry have used litigation to gain competitive advantage.
Litigation involving the Company would result in substantial cost and diversion
of management attention from the day-to-day operation of the business, but could
be necessary to enforce patents issued to the Company, to protect trade secrets
and other specialized knowledge unknown to outside parties, to defend the
Company against claimed infringement of the rights of others or to determine the
scope and validity of the proprietary rights of others. An adverse determination
in litigation could subject the Company to significant liabilities to third
parties, could require the Company to seek licenses from third parties under
less favorable terms than might otherwise be possible and could prevent the
Company from manufacturing, selling or using its products, any of which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company has in the past, and may in the future, receive correspondence
from third parties claiming that the Company's products or technologies infringe
intellectual property rights of such third parties. The Company and its patent
counsel thoroughly review such claims and no such outstanding claims currently
exist. However, there can be no assurance that InnerDyne will not receive
additional claims that its products or technologies infringe third party rights
or that third parties will not litigate such claims. Any such occurrence could
have a material adverse effect on the Company's business, financial condition
and results of operations.
12
<PAGE>
GOVERNMENT REGULATION. Clinical testing, manufacture and sale of the
Company's products, including the STEP product line, the ENABL Thermal Ablation
System and the Company's biocompatible coatings technology, are subject to
regulation by the FDA and corresponding state and foreign regulatory agencies.
Pursuant to the Federal Food, Drug, and Cosmetic Act, and the regulations
promulgated thereunder, the FDA regulates the preclinical and clinical testing,
manufacture, labeling, distribution and promotion of medical devices.
Noncompliance with applicable requirements can result in, among other things,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, failure of the government to grant premarket
clearance or premarket approval for devices, withdrawal of marketing approvals
and criminal prosecution. The FDA also has the authority to request recall,
repair, replacement or refund of the cost of any device manufactured or
distributed by the Company.
Before a new device can be introduced in the market, the manufacturer must
generally obtain FDA clearance of 510(k) notification or approval of a premarket
appoval ("PMA") application. A PMA application must be filed if a proposed
device is not substantially equivalent to a legally marketed Class I or Class II
device, or if it is a Class III device for which the FDA has called for PMAs.
The PMA process can be expensive, uncertain and lengthy, and a number of devices
for which FDA approval has been sought by other companies have never been
approved for marketing. Management expects that the ENABL System will be subject
to the PMA approval process prior to marketing within the United States. There
can be no assurance that the Company will be able to obtain the necessary
regulatory approval on a timely basis, or at all, and a delay in receipt of or
failure to receive such approval would have a material adverse effect on the
Company's business, financial condition and results of operations.
A 510(k) clearance will be granted if the submitted information establishes
that the proposed device is "substantially equivalent" to a legally marketed
Class I or Class II medical device or a Class III medical device for which the
FDA has not called for PMAs. For any of the Company's devices cleared through
the 510(k) process, modifications or enhancements that could significantly
affect the safety or effectiveness of the device or that constitute a major
change to the intended use of the device will require a new 510(k) submission.
There can be no assurance that the Company will obtain 510(k) premarket
clearance within a reasonable time frame, or at all, for any of the devices or
modifications for which it may file a 510(k).
The Company has received clearance from the FDA for the marketing of its
STEP device for use in accessing the abdominal and thoracic cavities for the
performance of minimally invasive surgical procedures. The Company has also
received FDA clearance for the marketing of its Radial Expanding Dilator
("R.E.D.") product for use in the areas of gastrostomy, cystostomy,
cholecystotomy, the dilation of biliary and urethral strictures, laparoscopy and
enterostomy. The Company has also received market clearance for alternative
versions of its STEP and R.E.D. products, including products designed to employ
its radial dilation technology in vascular applications and for biliary
indications. Although the Company has been successful in preparing requests for
510(k) clearance, there can be no assurance that 510(k) clearances for future
products or product modifications can be obtained in a timely manner or at all,
or that any existing clearance can be successfully maintained. A delay in
receipt of, or failure to receive or maintain, such clearances would have a
material adverse effect on the Company's business, financial condition and
results of operations. Although the Company is strictly limited to marketing its
products for the indications for which they were cleared, physicians are not
prohibited by the FDA from using the products for indications other than those
cleared by the FDA. There can be no assurance that the Company will not become
subject to FDA action resulting from physician use of its products outside of
their approved indications.
The Company has made modifications to its cleared devices that the Company
believes do not require the submission of new 510(k) notices. There can be no
assurance, however, that the FDA would agree with any of the Company's
determinations not to submit a new 510(k) notice for any of these changes or
would not require the Company to submit a new 510(k) notice for any of the
changes
13
<PAGE>
made to the device. If the FDA requires the Company to submit a new 510(k)
notice for any device modification, the Company may be prohibited from marketing
the modified device until the 510(k) notice is cleared by the FDA.
Any devices manufactured or distributed by the Company pursuant to FDA
clearance or approval are subject to pervasive and continuing regulation by the
FDA and certain state agencies and various foreign governments. Manufacturers of
medical devices for marketing in the United States are required to adhere to
applicable regulations setting forth detailed GMP requirements, which include
testing, control and documentation requirements. Manufacturers must also comply
with Medical Device Reporting ("MDR") requirements that a firm report to the FDA
any incident in which its product may have caused or contributed to a death or
serious injury, or in which its product malfunctioned and, if the the
malfunction were to recur, it would be likely to cause or contribute to a death
or serious injury.
The Company is registered as a manufacturer of medical devices with the FDA.
The Company is subject to routine inspection by the FDA and certain state
agencies for compliance with GMP requirements, MDR requirements and other
applicable regulations. The Company's Salt Lake City, Utah manufacturing
facility was inspected by the FDA for the first time in January 1996. That
inspection resulted in the issuance by the FDA of a Form FDA 483, which detailed
specific areas where the FDA inspector observed that the Company's operations
were not in full compliance with applicable areas of the GMP regulations.
Corrective action addressing all identified GMP deficiencies was initiated
immediately, and the Company responded to the FDA District Office. The FDA
District Office issued a Warning Letter stating that it appears that the
Company's response to the Form FDA 483 is adequate; however, an FDA reinspection
is required to assure that the corrections the Company has taken adequately
address the noted GMP deficiencies. The FDA also notified the Company that until
the agency determines that corrections are adequate, federal agencies will be
advised of the issuance of the Warning Letter so that they may take this
information into account when considering awards of contracts, and no pending
510(k) notifications for devices to which the observed GMP deficiencies are
reasonably related will be cleared, and no requests for Certificates For
Products For Export will be approved. The Company submitted a written response
to the Warning Letter and requested a meeting with District officials to discuss
the matter. During that meeting, District officials acknowledged that the GMP
deficiencies observed during the inspection were "borderline" with respect to
the agency's policies regarding the issuance of a Warning Letter. They
explained, however, that the Warning Letter was based on observations that the
Company was not following its own written procedures and on the fact that the
Company's internal audits had not found these deficiencies. Following the
meeting, the FDA acknowledged the Company's representation that the corrective
action plan would be completed by April 8, 1996, and stated that the agency
would initiate a reinspection within 60 days of that date. The scope of the FDA
reinspection could be more comprehensive than the initial inspection. At the
current time, the Company has no pending submissions for either clearance to
market new or modified products, or to export to new foreign markets. However,
failure to adequately address these GMP deficiencies within a reasonable time
frame would have an adverse effect on future product sales. Accordingly, the
Company has undertaken a review of the GMP compliance of its entire
manufacturing process. However, there can be no assurance that the FDA will deem
the Company's corrective action to be adequate or that additional corrective
action, in areas not addressed by the Form FDA 483, will not be required.
Failure to achieve satisfactory GMP compliance could have a significant adverse
effect on the Company's ability to continue to manufacture and distribute its
products and, in the most serious cases, could result in the seizure or recall
of products, injunction and/or civil fines. See "-- Limited Manufacturing
Experience; Compliance with Good Manufacturing Practices."
DEPENDENCE ON SOLE SOURCES. The materials utilized in the Company's M.I.S.
products consist of both standard and custom components that are purchased from
a variety of independent sources. The plastic parts used in the STEP product are
injection molded by outside vendors. The majority of these parts are produced
utilizing molds that have been specially machined for and are owned by the
14
<PAGE>
Company. Although the Company maintains significant inventories of molded parts,
any inability to utilize these molds for any reason might have a material
adverse effect upon the Company's ability to meet its customers' demand for
product. In addition to plastic parts produced from injection molds owned by the
Company, a number of other materials are available only from a limited number of
sources at the present time, including the sheath component of the Company's
STEP products. Efforts to identify and qualify additional sources of this sheath
component and other key materials and components are underway. Although
InnerDyne believes that alternative sources of these components can be obtained,
internal testing and qualification of substitute vendors could require
significant lead times and additional regulatory submissions. There can be no
assurance that such internal testing and qualification or additional regulatory
approvals will be obtained in a timely fashion, if at all. Any interruption of
supply of raw materials could have a material adverse effect on the Company's
ability to manufacture its products, and therefore on its business, financial
condition and results of operations.
15
<PAGE>
PART II. OTHER INFORMATION
<TABLE>
<S> <C> <C>
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER ITEMS
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.0 Financial Data Schedule
Not Applicable
(b) Reports on Form 8-K. The Company filed the following report on Form 8-K
during the quarter ended March 31, 1996:
Current Report on Form 8-K dated February 22, 1996 with respect to a press release
announcing the Company's financial results for the fourth quarter and year ended
December 31, 1995.
</TABLE>
16
<PAGE>
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.
INNERDYNE, INC.
BY: /s/ ROBERT A. STERN
-----------------------------------
Robert A. Stern
VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
(DULY AUTHORIZED SIGNATORY,
PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
Date: May 15, 1996
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEETS AND STATEMENTS OF OPERATIONS FOUND ON PAGES 3 AND 4 OF
THE COMPANY'S FORM 10Q FOR THE QUARTER ENDED MARCH 31, 1996, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,820,049<F1>
<SECURITIES> 0<F2>
<RECEIVABLES> 932,528
<ALLOWANCES> 0
<INVENTORY> 714,064
<CURRENT-ASSETS> 3,711,665
<PP&E> 905,450
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,725,101
<CURRENT-LIABILITIES> 1,400,161
<BONDS> 230,249
0
0
<COMMON> 185,661
<OTHER-SE> 2,909,030
<TOTAL-LIABILITY-AND-EQUITY> 4,725,101
<SALES> 1,519,880
<TOTAL-REVENUES> 1,582,400
<CGS> 896,305
<TOTAL-COSTS> 3,183,705
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,601,305)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,584,242)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
<FN>
<F1>(1-41)
<F2>(14)
</FN>
</TABLE>
