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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 September 30, 1999 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)
DELAWARE 87-0431168
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1244 REAMWOOD AVENUE, SUNNYVALE, CA 94089
(Address, including zip code, 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 November 1, 1999 was 22,045,199.
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TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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.................................................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................... 24
PART II. OTHER INFORMATION............................................................ 25
Item 1. Legal Proceedings............................................................. 25
Item 2. Changes in Securities and Use of Proceeds..................................... 25
Item 3. Defaults upon Senior Securities............................................... 25
Item 4. Submission of Matters to a Vote of Security Holders........................... 25
Item 5. Other Information............................................................. 25
Item 6. Exhibits and Reports on Form 8-K.............................................. 25
Signature Page................................................................ 26
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PART I- FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
INNERDYNE, INC.
CONDENSED BALANCE SHEETS
ASSETS
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SEPTEMBER 30, DECEMBER 31,
1999 1998
(UNAUDITED) (*SEE NOTE)
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Current assets:
Cash and cash equivalents ...................... $ 6,604,184 $ 5,757,538
Accounts receivable ............................ 3,039,868 2,670,811
Interest and other receivables ................. 269,318 383,726
Inventory ...................................... 1,387,994 1,202,982
Prepaid expenses and other ..................... 245,608 213,831
------------ ------------
Total current assets ......................... 11,546,972 10,228,888
Equipment and leasehold improvements, net ......... 781,714 814,120
Other assets ...................................... 44,967 45,695
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Total assets ................................. $ 12,373,653 $ 11,088,703
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LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Line of credit ................................. $ 639,989 $ 300,000
Current installments of long-term debt ......... 284,892 391,040
Accounts payable ............................... 186,774 260,132
Accrued liabilities ............................ 1,153,356 1,120,044
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Total current liabilities ................... 2,265,011 2,071,216
Long-term debt, excluding current installments .... 303,947 348,723
Stockholders' equity:
Common stock ................................... 220,452 218,914
Additional paid-in-capital ..................... 60,423,974 60,206,865
Accumulated deficit ............................ (50,839,731) (51,757,015)
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Net stockholders' equity .................... 9,804,695 8,668,764
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Total liabilities and stockholders' equity ........ $ 12,373,653 $ 11,088,703
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</TABLE>
* 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 MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
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Product, licensing and contract revenue ............... $ 5,310,622 $ 4,483,730 $14,807,403 $13,062,138
Costs and expenses:
Cost of sales ...................................... 1,475,822 1,301,893 4,238,872 4,030,218
Research, development, regulatory and clinical ..... 737,987 748,006 2,126,799 2,275,209
Sales and marketing ................................ 2,211,616 1,719,070 5,995,226 5,203,930
General and administrative ......................... 559,490 472,275 1,635,053 1,521,613
----------- ----------- ----------- -----------
Total costs and expenses ......................... 4,984,915 4,241,244 13,995,950 13,030,970
----------- ----------- ----------- -----------
Operating income ...................................... 325,707 242,486 811,453 31,168
Interest/other income, net ............................ 37,587 23,762 120,180 109,559
----------- ----------- ----------- -----------
Income before income taxes ....................... 363,294 266,248 931,633 140,727
Income tax expense .................................... 4,349 -- 14,349 --
----------- ----------- ----------- -----------
Net income ....................................... $ 358,945 $ 266,248 $ 917,284 $ 140,727
=========== =========== =========== ===========
Basic net income per share ............................ $ 0.02 $ 0.01 $ 0.04 $ 0.01
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Diluted net income per share .......................... $ 0.02 $ 0.01 $ 0.04 $ 0.01
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Weighted average basic shares outstanding ............. 21,981,153 21,840,155 21,932,527 21,803,651
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Weighted average diluted shares outstanding ........... 23,279,748 22,038,548 23,138,315 22,210,017
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</TABLE>
See accompanying notes to condensed financial statements.
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INNERDYNE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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NINE MONTHS ENDED
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SEPTEMBER 30, SEPTEMBER 30,
1999 1998
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Cash flows from operating activities:
Net income .......................................................... $ 917,284 $ 140,727
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ............................... 417,510 404,807
Amortization of deferred compensation on options ............ 8,477 --
Gain on sale of fixed assets ................................ (3,500) (1,185)
Decrease (increase) in inventories .......................... (185,012) 159,601
Increase in prepaid expenses and other assets ............... (31,049) (15,035)
Decrease in accounts payable ................................ (73,358) (425,895)
Increase in accrued expenses ................................ 33,312 211,691
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Net cash provided by operating activities ........................... 829,015 284,625
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Cash flows from investing activities:
Capital expenditures ........................................ (385,104) (233,907)
Proceeds from sale of fixed assets .......................... 3,500 1,500
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Net cash used in investing activities: .............................. (381,604) (232,407)
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Cash flows from financing activities:
Proceeds from issuance of common stock, net ................. 210,170 143,962
Proceeds from issuance of long-term debt .................... 518,634 58,467
Principal payments on long-term debt ........................ (329,569) (221,249)
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Net cash provided by (used in) financing activities ................. 399,235 (18,820)
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Net increase in cash and cash equivalents ........................... 846,646 33,398
Cash and cash equivalents at beginning of period .................... 5,757,538 6,091,497
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Cash and cash equivalents at end of period .......................... $ 6,604,184 $ 6,124,895
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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 adjustments) 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 nine-month period
ended September 30, 1999 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-K for the year ended December 31, 1998.
(2) INVENTORIES
Inventories consist of the following:
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(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1999 1998
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Raw materials and supplies ............... $ 1,086,639 $ 936,191
Finished goods ........................... 622,605 551,791
Reserve for obsolescence ................. (321,250) (285,000)
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Net inventory ............................ $ 1,387,994 $ 1,202,982
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(3) COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standard No.130
("SFAS 130"), Reporting Comprehensive Income, effective January 1, 1998. SFAS
130 establishes standards for reporting and display of comprehensive income and
its components in financial statements. For the periods ended September 30, 1999
and September 30, 1998 comprehensive income was equal to the net income as
presented in the accompanying Statements of Operations.
(4) NET INCOME PER COMMON SHARE
Net income per common share is computed based on the weighted-average
number of common shares and, if appropriate, dilutive common stock equivalents
outstanding during the period. Stock options are considered to be common stock
equivalents.
Basic earnings per common share is the amount of earnings for the period
available to each share of common stock outstanding during the reporting period.
Diluted earnings per common share is the amount of earnings for the period
available to each share of common stock outstanding during the reporting period
and to each share that would have been outstanding assuming the issuance of
common shares for all dilutive potential common shares outstanding during the
period.
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In calculating net income per common share, the net income was the same for both
the basic and diluted calculation. Reconciliation between the basic and diluted
weighted-average number of common shares for the three and nine months ended
September 30, 1999 and 1998 is summarized as follows:
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(Unaudited) (Unaudited)
Three Months Ended Nine-Months Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
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Basic weighted average number of
common shares outstanding during
the period 21,981,153 21,840,115 21,932,527 21,803,651
Weighted-average number of
dilutive common stock options
outstanding during the period 1,298,595 198,393 1,205,788 406,366
---------- ---------- ---------- ----------
Diluted weighted average number
of common and common equivalent
shares outstanding during the
period 23,279,748 22,038,548 23,138,315 22,210,017
========== ========== ========== ==========
</TABLE>
Common stock equivalents of approximately 689,563 and 3,438,991, and
689,563 and 3,231,081 outstanding during the three and nine month periods ended
September 30, 1999 and 1998, respectively, that could potentially dilute basic
earnings per share in the future were not included in the computation of diluted
earnings per share because to do so would have been anti-dilutive for the
period.
(5) OPERATING SEGMENTS
The Company operates in one line of business; the development and
commercialization of access products for minimally invasive procedures. The
Company has pursued and/or is also pursuing licensing opportunities related to
its proprietary radial dilation, biocompatible coating, and thermal ablation
technologies. As such, the Company has only one reportable operating segment as
defined by the Financial Accounting Standards Board Statement No. 131,
Disclosure About Segments of an Enterprise and Related Information.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Except for the historical information contained in this Quarterly Report
on Form 10-Q, the matters discussed throughout this Quarterly Report on Form
10-Q are forward-looking statements that are subject to certain risks and
uncertainties that could cause the actual results to differ materially from
those projected. Factors that could cause actual results to differ materially
include, but are not limited to, the impact of intense competition in the
Company's market, the extent of market acceptance of the Company's StepTM family
of products, the timely development and market acceptance of new products, the
compliance of the Company's manufacturing facilities with Good Manufacturing
Practices ("GMP") regulations, the continued acceptance of minimally invasive
surgical procedures, the Company's ability to further expand into international
markets, public policy relating to healthcare reform in the United States and
other countries, approval of the Company's products by government agencies such
as the United States Food and Drug Administration (the "FDA") and the risks set
forth in greater detail below under the heading "Additional Factors that May
Affect Future Results", as well as those set forth in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998 and included from time
to time in the Company's other Securities and Exchange Commission ("SEC")
reports and press releases, copies of which are available from the Company upon
request. The Company undertakes no obligation to publicly release the result of
any revisions to these forward-looking statements that 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") is primarily focused upon
the development and commercialization of access products based on its
proprietary radial dilation technology used to perform minimally invasive
surgical ("M.I.S.") procedures. The Company also possesses biocompatible coating
technologies which may have utility in enhancing the compatibility and
performance of devices placed in contact with human body fluids and tissues, and
in delivering pharmaceuticals and radioactive isotopes to selected areas within
a human body. The Company intends to continue developing its radial dilation and
biocompatible coating technologies, internally or through strategic alliances.
INNERDYNE'S PRODUCTS AND TECHNOLOGY
Radial Dilation Technology
The primary focus of the Company is the development and commercial
application of its proprietary radial dilation technology. The key feature of
this proprietary technology is the capability to enter the body of a patient by
creating a small puncture wound which can subsequently be dilated, or increased
in size, to create a larger working channel. Employment of radial dilation
within an expandable sheath permits the dilation to be accomplished in a manner
that tends to minimize tissue trauma. Upon completion of a procedure, the
dilation sequence is reversed; resulting in a smaller residual wound than would
be experienced through the employment of similarly sized conventional access
devices. Potential benefits of radial dilation technology include reduced risk,
less patient trauma and reduced procedure time.
Step Product Line. The Company has developed a family of products
utilizing InnerDyne's proprietary radial dilation technology. The initial Step
products were introduced commercially in late 1994 and are designed to provide
access to the abdominal cavity in order to facilitate the visualization and
treatment of target areas within the cavity while minimizing the tissue trauma
associated with such access.
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Step. The Step device incorporates the Company's proprietary radial
dilation technology and was InnerDyne's first product to be launched on a
commercial basis. The Company has received 510(k) clearances from the FDA to
market this device for laparoscopic and thorascopic M.I.S. procedures. The
Company's Step access device replaces trocars, eliminating the risk of internal
organ damage from contact with the sharp surfaces of a trocar. In contrast to
conventional trocars, the Step device utilizes a standard insufflation needle
for penetration through the abdominal wall, creating only a small puncture
wound. Following removal of the needle, a sheath that surrounds the needle is
then dilated to a larger working channel through the insertion of a tapered
dilator and cannula. Following dilation, the dilator is removed, leaving a rigid
sheath that serves as a working channel with an integral insufflation valve at
the proximal end. The radial dilation of tissue to an appropriately sized
working channel holds the cannula in place and obviates the need for an
anchoring system, which may cause a larger residual wound. After completion of a
procedure, the rigid cannula is removed and the sheath retracts permitting the
opening in each of the muscular layers of the abdominal wall to recover. The
residual wound is approximately half the size of that made using a conventional
trocar of similar size. The Step product is currently utilized primarily in
minimally invasive general, gynecological and pediatric surgical procedures.
Management believes that positive attributes of the Step product could
significantly affect health care system costs and patient satisfaction with
M.I.S. procedures in which trocars have traditionally been used. The results of
a Company-sponsored retrospective comparative outcome study examining this issue
were released during late 1995. The study included 98 patients and compared an
almost equal number of procedures performed using Step devices and conventional
trocars for access. Statistically significant results of that study indicated
that Step reduced device-related complications during surgery by over 90% and
resulted in an approximate 22% saving of surgery time. Based upon published
operating room costs, this time savings would equate to dollar savings of $345
to $515 per procedure, a substantial outcome for a product that is believed to
be competitively priced with conventional trocars. Management also believes that
post-procedure complications, such as infection and incisional hernias at access
sites, may be reduced with the use of the Step device as compared to
conventional trocars. Two randomized prospective studies involving 331 patients
intended to replicate the findings of the initial outcome study were completed
during 1997. Results of both studies indicate that Step virtually eliminates
complications associated with the use of conventional trocars. These results
have been presented at major international conferences and have been submitted
for publication.
On January 13, 1999, InnerDyne reported the acceptance by the FDA of the
Company's 510(k) premarket notification based on the demonstrated safety and
clinical performance of the Step line of minimally invasive surgical access
devices based on InnerDyne's proprietary radial dilation technology. The product
safety premarket notification resulted from the submission of substantial
information related to the comparative safety of the Step radially expanding
dilation technology for surgical access versus standard cutting trocars. The FDA
clearance acknowledged that the Step radially expanding surgical access
technology had been shown in independent clinical comparative studies versus
conventional cutting trocars to provide safety benefits including, but not
limited to: (1) a lower prevalence of abdominal wall bleeding; (2) a lower
prevalence of bowel and bladder injuries; (3) a lower incidence of post
operative incisional hernias; and (4) a lower prevalence of major vascular
injury. In addition, the FDA clearance noted that a substantial number of
patients reported reduced pain from Step access sites when compared to
conventional trocar sites.
Short Step. The Short Step is a conventional Step device that has been
reduced in length to be particularly suitable for M.I.S. procedures involving
smaller individuals, especially children and thin females. The Short Step was
commercially introduced in 1995. In January 1996, the Company announced that its
Short Step device had been awarded the Seal of Acceptance by the Alliance of
Children's Hospitals, Inc. ("Alliance"). The Alliance is a wholly owned
subsidiary of Child Health Corporation of America, which is comprised of 35
freestanding children's hospitals across the United States. The Alliance
selected the Step system, after extensive research and review, based upon its
ability to reduce both the trauma and operative complications associated with
pediatric laparoscopic surgical procedures. In exchange for an ongoing royalty
payment, the Company is entitled to use this seal in connection with the
marketing and sale of its Step line of products. The Company hopes that the Seal
of Acceptance will help the Company expand awareness and sales of its Step
product line for use in the pediatric environment.
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Reposable Step. Launched in 1996, the Reposable Step incorporates the
radial dilation features of disposable Step devices in a partially reusable
access device. A substantial market for reusable trocars exists, and management
expects a trend toward a somewhat more frequent usage of reusable devices. The
Reposable Step includes a number of reusable components consisting of a
combination of metal and plastic parts that may be cleaned and sterilized by
most conventional methods. The dilator, cannula and needle are reusable, while
the sheath and valve are single use components designed to be disposed of
following surgery.
Mini Step. The Mini Step is a small-diameter radially dilating access
device designed for use in tubal ligation, pediatric procedures, and
micro-laparoscopic surgeries utilizing small instruments. The working diameter
of the Mini Step ranges from a nominal 2mm to 8mm. Like the Step device, Mini
Step is expected to offer clinicians the potential to reduce device-related
surgical complications and surgery time. The Mini Step devices were commercially
introduced in 1997.
One-Step. The One-Step is a device with a universally adjustable valve
and seal system designed to eliminate the need for a reducer. The device is
intended to maintain insufflation while accommodating most conventional surgical
instruments. The One-Step device was commercially introduced in 1998.
Open Step. The Open-Step is a device designed to establish access into
the abdominal cavity using a technique known as open laparoscopy. The Open-Step
device was commercially introduced in 1998.
Distribution of Step Products. The Step family of products is
distributed to health care professionals in both domestic and international
markets. In the United States, the Company's M.I.S. access product line is
generally sold directly to health care professionals by a network of sales
representatives, a limited number of whom are employees of the Company.
InnerDyne management employees manage these sales representatives on a regional
basis. In order to enhance the effectiveness of these domestic sales activities,
agreements with buying groups that represent multiple provider institutions have
been pursued. InnerDyne signed two buying group agreements in 1997. These
agreements cover approximately 1,350 hospitals across the United States.
Additional buying group agreements have been approved in 1999, adding
approximately 1,900 hospitals to those covered by agreements. In selected
foreign countries, local distributors purchase products from the Company for
subsequent resale to their respective countries' health care systems.
Distributors in selected foreign markets can and have been changed when the
Company has deemed the performance of individual distributor organizations to be
unsatisfactory.
Other Applications & Technology. During the second quarter of 1997,
InnerDyne established a business unit to better define the value that radial
dilation technology can bring to interventional cardiology and radiology
procedures and to develop access products based on this assessment. The Company
proceeded with animal studies and device refinements in the third and fourth
quarters of 1997 and continued testing the product concept in conjunction with
cardiology advisors in early 1998. The study results were positive and human use
trials to demonstrate the clinical benefits were initiated in Europe during the
second quarter of 1998. In September 1998, InnerDyne announced that it had
received clearance from the FDA of a 510(k) application for its radially
dilatable access device for use in gaining percutaneous access for the
performance of vascular procedures, and limited domestic use evaluations have
been ongoing throughout 1999. An additional related 510(k) application was filed
with the FDA in August 1999, primarily to update labeling involving the most
current version of the radially expanding vascular access device (REVAS)
product. If clinical benefits are confirmed in continuing usage, the Company
will explore alternative methods of effective distribution in the interventional
vascular marketplace and may launch a radial dilation vascular access device in
the United States in late 1999, or in subsequent years.
Management believes that the positive attributes of the Step product
line may also enable minimally invasive access to organs within the abdominal
cavity. The only current alternative for this type of access involves the
insertion of a long flexible channel and scope through a natural body orifice
such as the mouth or the rectum, and only limited procedures are possible due to
the restricted size of the channel and the tortuous path that must be navigated.
The Step product line has been shown to enable laparoscopic access through the
abdominal wall and across the peritoneal space
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into the stomach for the treatment of benign tumors. InnerDyne believes that the
use of Step products could substantially reduce recovery times for these types
of procedures. The Company expects that the enhanced capabilities of radially
expanding dilation may enable additional surgical procedures to be performed
through minimally invasive techniques.
The Company is exploring the potential use of its proprietary radial
dilation technology in other applications such as access for urologic, thoracic
and tracheal procedures, and plans to increase resources associated with the
pursuit of percutaneous kidney and bladder access in the ensuing quarters. The
Company filed 510(k) applications for urologic and-intra-organ access in 1999
and, in May 1999, received clearance from the FDA for its radially dilatable
urologic access device. In August 1999, the Company received notice from the FDA
that its application for intra-organ access had been cleared. The Company
anticipates that market evaluation and testing of these product concepts in
conjunction with surgical advisors will be concluded in late 1999 or early 2000.
If the trial results are positive and subsequent human use demonstrates clinical
benefits, the Company may begin distribution in the marketplace and may launch
urologic and intra-organ access devices during 2000 or in subsequent years.
Developmental expenditures for new applications for the Company's
proprietary radial dilation technology may reduce the Company's level of
profitability. There can be no assurance that these new applications will
demonstrate clinical benefits or that the Company can develop a product that
will be commercially accepted.
The Company entered into an agreement covering the development of a less
traumatic means of placing enteral feeding tubes with Sherwood-Davis & Geck
("SDG") in 1997. The Company announced that it had received the single
regulatory milestone payment associated with the SDG agreement during the second
quarter of 1997. In the first quarter of 1998, InnerDyne and SDG terminated the
development agreement when SDG was acquired. In the future, the Company may
continue to develop a feeding tube placement system.
InnerDyne also committed resources to an investigation of the potential
market opportunity in arthroscopic procedures during 1997 and early 1998.
Limited clinical usage of the initial design accompanied by substantial exposure
and feedback from arthroscopic surgeons was completed during the last half of
1997. InnerDyne completed the arthroscopic market opportunity assessment in the
second quarter of 1998. Development efforts relating to a radially dilatable
access device for arthroscopic procedures have been terminated, and the Company
has no current plans to bring an arthroscopic access device to market.
In September 1999, the Company licensed to William Cook Europe A/S
(Cook) a Rotatably Actuated Constricting Catheter Valve on a non-exclusive basis
for use in the treatment of aortic aneurysms. The agreement requires that Cook
pay InnerDyne a licensing fee in two installments and annual minimum royalty
payments.
Thermal Ablation Technology
The Company has developed proprietary technology that is intended to
thermally ablate the lining of a body organ. The Company's EnAbl (TM) Thermal
Ablation System (the "EnAbl System") is based on this proprietary technology and
is designed to treat menorrhagia, or excessive uterine bleeding, by thermally
ablating the endometrial lining of the uterus through the controlled
introduction and heating of a normal saline solution in situ.
In December 1996, InnerDyne announced that it had signed an agreement
which granted U.S. Surgical Corporation ("U.S. Surgical") exclusive worldwide
sales and marketing rights for the EnAbl System. Under the terms of the
agreement, in exchange for initial license fees, milestone payments, and
royalties based upon future sales, U.S. Surgical gained the rights to complete
development of the EnAbl system and to manufacture and market the technology on
a worldwide basis. In July 1997, the Company announced that U.S. Surgical had
made the first milestone payment due under the terms of the agreement. In August
1998, InnerDyne announced it had received notification from U. S. Surgical
indicating they would not pursue development or commercialization of the
Company's EnAbl System. The Company does not presently intend to proceed with
commercial development of this product without a corporate partner.
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Biocompatible Coating Technologies
The Company possesses certain proprietary technologies in the area of
biocompatible coatings. The technologies that comprise the Company's
thromboresistant coating ("TRC") capability are believed to have application
when foreign objects remain in contact with various areas of the body,
particularly within the blood stream, for sustained periods of time. These
technologies include the ability to deposit an extremely thin layer
(approximately one micron) of siloxane on a surface and the ability to graft a
bioactive substance, such as the drug heparin, to that siloxane layer. The
Company's TRC utilizes a "tether" molecule to attach heparin, other bioactive
molecules or radioisotopes to the previously applied siloxane subsurface. One
end of the tether molecule is covalently bonded to the siloxane coating and the
other end of the tether molecule is covalently bonded to the bioactive molecule
or radioisotope. Because both points of attachment utilize covalent bonds, the
Company believes that its coating process may result in a stronger bond to the
surface of a device than many other methods presently in use, which it believes
generally use a weaker ionic bond in at least one of the attachment points. TRC
coatings, employed with the siloxane layer alone or in combination with
bioactive substances, can extend the life of blood-gas exchange devices or
provide the capability to extend the duration of contact of a coated device with
blood or other body fluids while minimizing the physiological impacts of such
contact. InnerDyne is developing a proprietary technology that coats materials
with a surface layer to which rhenium-188 or another radioisotope can be
attached to reduce restenosis in patients who have had interventional vascular
procedures.
The Company has begun a research program aimed at developing absorbable
brachytherapy products for the treatment of focal or site-specific cancers such
as breast, prostate, cervical, and neurological cancers. The program's goal is
to develop biocompatible and bio-absorbable brachytherapy sources for use in
radiotherapy or simultaneous radiotherapy and chemotherapy drug delivery. These
novel combined brachytherapy/chemotherapeutic drug sources are being designed
for use in the local-regional treatment of primary cancer, including treatment
of the tumor bed after removal of a tumor. The final product could fundamentally
differ from both current brachytherapy sources and drug-delivery sources and
could provide a highly efficient mechanism to control cancer growth and limit
cancer reccurrence. The advantage of localized radiotherapy over other therapies
is that local radiotherapy can act upon cancerous cells while sparing normal
cells. Other therapies, such as systemic chemotherapy and external beam
radiation, affect both cancerous and non-cancerous cells and can result in
greater pain, longer recovery times, and higher treatment costs. In contrast,
local radiotherapy can lower the cost of the therapeutic procedure, reduce
hospital stays, and reduce the pain and suffering experienced by the patient.
In December 1997, InnerDyne and Oak Ridge National Laboratory ("ORNL")
announced that the Department of Energy had awarded ORNL and Brookhaven National
Laboratories ("BNL") a cooperative research and development agreement ("CRADA")
for the development of InnerDyne's proprietary method of labeling or attaching
radioactivity to implantable devices. Initially, the ORNL researchers helped to
optimize chemical methods required to efficiently attach a radioactive source to
stents. Generators from ORNL and the new technology were provided to
investigators at BNL who, in conjunction with the Interventional Cardiology
Group at the State University of New York at Stonybrook, prepared radioactive
stents and implanted them into the arteries of swine and rabbits to evaluate the
effectiveness of this unique and potentially powerful new approach to inhibit
restenosis. Initial testing confirmed the Company's ability to attach
radionuclides to metal stents and other substrates. Additional testing to
demonstrate the efficacy in animals of InnerDyne's technology for the treatment
of restenosis continues at the Washington Heart Center (WHC) and BNL.
In October 1998, the CRADA's scope of work was modified to include the
development of absorbable brachytherapy devices for the treatment of focal
cancers because of the rapid strides made under the radiation coated stent
development program.
Management believes that the combination of InnerDyne and Oak Ridge
National Laboratory technologies, if successful, may positively impact the
overall costs associated with stenting procedures by providing a method of
attaching a radioisotope just prior to implantation to inhibit restenosis.
Additionally, management believes that an absorbable brachytherapy device which
can deliver both radiation and a drug or chemotherapy agent concurrently could
positively
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impact the treatment outcomes of focal cancers by lowering the cost of the
therapeutic procedure, reducing hospital stays, and reducing the pain and
suffering experienced by the patient.
In January 1999, InnerDyne announced that it had been awarded a
California Cancer Research Program (CRP) Cycle I grant, a Community Initiated
Research Collaboration Award (CIRCA), to examine the clinical benefits and the
development of absorbable brachytherapy devices. The commercial objective of
this project is to develop bio-absorbable brachytherapy sources for use in
radiotherapy or simultaneous radiotherapy and chemotherapy drug delivery. These
novel combined brachytherapy/chemotherapeutic drug sources will be designed
utilizing a proprietary InnerDyne technology for potential use in the treatment
of site-specific prostate, breast, and neurological cancers.
In June 1999, the Company announced that the National Institutes of
Health awarded the Company a Small Business Innovation Research (SBIR) phase 1
research grant to support development of a new form of cancer treatment. The
InnerDyne technology allows for the concurrent delivery of drugs and radiation
through the use of implantable devices that are absorbed by the body after
delivering their therapeutic payloads. The absorbable devices will differ from
both current brachytherapy and drug-delivery sources, and could potentially
provide a highly efficient and flexible treatment mechanism for the handling of
focal cancers.
In 1994, the Company signed a license agreement with SENKO Medical
Manufacturing Co., Ltd. ("SENKO"), a Japan-based manufacturer and marketer of
membrane oxygenators used in open-heart surgery, pursuant to which the Company
licensed one of its TRC technologies to SENKO. In connection with this
agreement, the Company transferred its siloxane coating technology to SENKO for
the coating of microporous hollow fibers used in production of oxygenators. The
initial technology transfer was completed during the first quarter of 1995, at
which time the Company received the balance of an initial payment from SENKO,
and the royalty payment period commenced. In 1996, InnerDyne received an order
from SENKO to build a second fiber coating system which was delivered during the
first half of 1997. In April 1998, SENKO licensed InnerDyne's less complex
method for coating devices with heparin on a non-exclusive basis. The addition
of this new means of attaching the drug heparin to prevent the formation of
blood clots on a surface is expected to further enhance SENKO's oxygenator
product offering.
In April 1996, the Company announced the signing of an agreement with
Boston Scientific Corporation ("Boston Scientific") covering the potential
application and use of InnerDyne's proprietary biocompatible coating
technologies with Boston Scientific's stents, grafts, vena cava filters and
other implantable medical devices. The agreement involved an equity investment
by Boston Scientific in InnerDyne, initial research support and future license
fees and royalty payments. Boston Scientific Corporation notified InnerDyne in
August 1998 that it had decided to proceed with the transfer of technology for
the potential application and use of InnerDyne's proprietary biocompatible
coating technology with Boston Scientific's stents, grafts, vena cava filters,
and other implantable medical devices. The transfer of the technology has been
completed during 1999, though the Company may continue to conduct related
research if requested by Boston Scientific.
In June 1998, InnerDyne announced the signing of an agreement with U.S.
Surgical covering the licensing of InnerDyne's proprietary siloxane coating
technology to enhance the performance of selected products used in minimally
invasive surgical procedures. Under the terms of the agreement, InnerDyne will
construct a custom coating system and provide coated product samples for testing
by U.S. Surgical in exchange for payment of initial license fees and capital
equipment costs. Assuming the testing confirms that coated samples meet U.S.
Surgical's requirements and U.S. Surgical wants to use the technology, InnerDyne
will receive a final license fee payment and will assist in the transfer of the
system to a location designated by U.S. Surgical. Coincident with transfer and
system startup, a royalty payment period would begin.
Because of the strength of the covalent bonds used in the Company's TRC
technology and other properties noted above, the Company believes that its
technology may have advantages over presently available bioactive coating
technologies. Potential applications include the treatment of restenosis and
specific focal cancers when vascular stents, grafts, vena cava filters and other
implantable devices are coated using InnerDyne's proprietary technology with
drugs
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<PAGE> 14
and/or isotopes. The Company has undertaken a number of discussions with
potential licensees of the Company's coating technologies, and samples of coated
products have been provided to several companies. These discussions have been
with parties interested in the use of the technologies to enhance drug delivery
or gas exchange, as well as third parties interested in the possible coating of
in-dwelling devices for various applications.
There can be no assurances that the discussions, or research programs
outlined above, will lead to commercial products or relationships on acceptable
terms.
RESULTS OF OPERATIONS
Total revenue for the three and nine-month periods ended September 30,
1999 was $5,310,622 and $14,807,403, respectively, compared to $4,483,730 and
$13,062,138 for the corresponding periods in 1998. Total revenue is comprised of
revenue from product sales, licensing, and contract revenue. Revenue from
product sales increased to $5,217,427 and $14,480,866 for the three and
nine-month periods ended September 30, 1999, respectively, from $4,129,633 and
$11,879,606 for the corresponding periods in 1998, reflecting increased sales of
the Company's Step devices. Licensing and contract revenue fell to $93,195 and
$326,537 for the three and nine-month periods ended September 30, 1999,
respectively, compared to $354,097 and $1,182,532 for the corresponding periods
in 1998. Licensing and contract revenue for the periods related to agreements
with third parties covering the development of the Company's proprietary thermal
ablation technology, and the licensing and development of the Company's
proprietary biocompatible coating technology. Licensing and contract revenue
fluctuates from quarter to quarter based upon the number of agreements in effect
and the amount and timing of the payments to be made to the Company pursuant to
such agreements.
Costs of sales were $1,475,822 and $4,238,872, respectively, for the
three and nine-month periods ended September 30, 1999, compared to $1,301,893
and $4,030,218 for the same periods in 1998. The increase in cost of sales for
the three and nine-month periods ended September 30, 1999 is mainly attributable
to the increase in production and sales volumes compared to the same periods in
1998. Gross margins improved for the three and nine-month periods ended
September 30, 1999 as compared to the same periods during 1998 due to
operational improvements and manufacturing efficiencies gained by allocating
fixed costs over a larger sales base.
Research, development, regulatory and clinical expenses ("R&D") for the
three and nine-month periods ended September 30, 1999 were $737,987 and
$2,126,799, respectively, compared to $748,006 and $2,275,209 for the
corresponding periods in 1998. In the 1998 periods, a portion of the R&D
expenses were reimbursed by development partners, thereby generating off-setting
licensing and contract revenue. The reduction in three and nine month
comparative R&D expenditures is primarily the result of a transfer of the EnAbl
(TM) thermal ablation program to US Surgical in the first quarter of 1998 and
R&D cost containment implemented during the third quarter. The Company expects
that research, development, regulatory and clinical expenditures will increase
in absolute dollars in future periods, though it is possible that expenses
associated with one or more research programs could be funded from outside the
Company, thereby reducing expected costs.
Sales and marketing expenses were $2,211,616 and $5,995,226,
respectively, for the three and nine-month periods ended September 30, 1999,
compared to $1,719,070 and $5,203,930 for the corresponding periods in 1998,
reflecting the growth of the Company's sales and marketing functions to support
commercialization of its M.I.S. products and increased expenditures to leverage
the expanded 510(k) labeling claims granted by the FDA in January 1999.
InnerDyne expects that sales and marketing expenses will generally continue to
increase in absolute dollars in future periods.
General and administrative expenses were $559,490 and $1,635,053,
respectively, for the three and nine-month periods ended September 30, 1999,
compared to $472,275 and $1,521,613 for the corresponding periods in 1998. The
increase in general and administrative expenses for the three and nine-month
periods was primarily the result of increased expenditures in the area of
outside services. The Company anticipates that general and administrative
expenses will generally increase in absolute dollars in future periods to
support expanding operations.
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Interest/other income, net, was $37,587 and $120,180,respectively,
for the three and nine-month periods ended September 30, 1999,compared to
$23,762 and $109,559 for the same periods in 1998. The increase is
attributable to interest earned on increased cash and cash equivalents balances.
Income tax expense for the three and nine-month periods ended September 30, 1999
was $4,349 and $14,349, respectively.
LIQUIDITY AND CAPITAL RESOURCES
From its inception to September 30, 1999, the Company incurred a
cumulative net loss of approximately $51 million. 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 $11.00 per share, which raised approximately $28.8 million (net of
underwriter's commissions and offering expenses). The 1994 acquisition of
InnerDyne Medical, Inc. was accomplished through the issuance of additional
common stock of the Company. 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. 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 gross proceeds to the Company of $704,561. The
Company concluded a public offering on May 20, 1996, with the sale of 2,650,000
shares of common stock at $3.50 per share, which raised $8,015,268 (net of
underwriter's commissions and offering expenses).
At September 30, 1999, cash and cash equivalents totaled $6,604,184
compared to total cash and cash equivalents balance of $6,115,701 at June 30,
1999. The Company had $385,104 and $233,907 in capital expenditures in the nine
months ended September 30, 1999 and September 30, 1998, respectively. Working
capital totaled $9,281,961 at September 30, 1999. In addition, the Company had
long-term debt, excluding current installments, totaling $303,946 relating to
financing of equipment.
In April 1999, 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 through April 23, 2000 on a revolving credit basis at prime
plus .25% based on eligible receivables. The Company also has an equipment
advance line of credit, which allows the Company to borrow up to $750,000 per
year based on eligible equipment purchases. Amounts outstanding on this
equipment advance line of credit are periodically converted to 36-month term
loans bearing interest at prime plus .25%. As of September 30, 1999, the Company
had drawn $639,989 for financing of working capital needs on the revolving line
of credit, secured by certain accounts receivable, and had borrowed $265,388
under the equipment advance line with Silicon Valley Bank for the financing of
capital expenditures.
In the future, the Company may incur 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'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 the
public offering of shares of its common stock completed in May 1996, together
with current revenues, credit facilities and other sources of liquidity, will
provide
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<PAGE> 16
adequate funding for its capital requirements through at least the second
quarter in 2000, 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
Operating History; Profitability Uncertain. The Company experienced
operating losses from 1985 until mid 1998 totaling $52.3 million. The Company
reported net income of $917,284 on revenues of $14.8 million, net income of
$425,030 on revenues of $17.6 million for the nine months ended September 30,
1999 and the fiscal year ended December 31, 1998. As of September 30, 1999, the
Company had an accumulated deficit of approximately $51 million.
In the future, the Company may incur 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 availability of capital, progress of the
Company's research and development, and 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. There can be no assurance that the Company will not incur
future losses, that the Company will be able to raise cash as necessary to fund
operations or that the Company will maintain profitability.
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. U.S. Surgical, a unit of TYCO International, Inc., 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 Endosurgery, a unit
of Johnson & Johnson, Inc., has made a major investment in the M.I.S. field in
recent years, and the parent 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 dominated by U.S. Surgical and Ethicon. Both entities introduced new
access devices during the past three years. A number of other entities
participate in various segments of the M.I.S. market, including access.
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.
There can be no assurance that competitors 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 adverse effect on the
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<PAGE> 17
Company's business, financial condition and results of operations. As a result
of the possible entry of new companies into the M.I.S. market, competition in
M.I.S. devices may 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 the
majority of the Company's revenues for the immediate future. Accordingly, the
success of the Company is largely dependent upon continued 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 and biocompatible coatings. During 2000 or subsequent years, the
Company expects to commercially introduce urological and intra-organ access
products, and possibly the REVAS vascular access product, each of which is a
further enhancement of its radial dilation technology. The future success of the
Company will depend in part on the timely commercial introduction and market
acceptance of these and other possible 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. Failure by the Company to
timely introduce such products or 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, the ability to develop and gain
regulatory clearance for new and enhanced versions of products in a timely
fashion. There can be no assurance that the Company will be able to successfully
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 FDA's GMP regulations 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. In connection with its ISO 9001 certification,
InnerDyne now undergoes scheduled periodic audits by a European regulatory body.
The Company believes that regulatory changes recently introduced by the FDA will
result in a system of United States regulatory requirements for manufacturers of
medical devices which more closely resembles the ISO 9000 series of quality
systems standards adopted by most European countries. Failure to maintain
satisfactory regulatory system compliance could have a significant impact on the
Company's ability to continue to manufacture and distribute its products and, in
the most serious cases, result in the seizure or recall of products. 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.
Potential Fluctuations in Operating Results. The Company's quarterly
operating results have in the past fluctuated and may continue to fluctuate
significantly in the future depending on the timing and shipment of product
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<PAGE> 18
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 non-product 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 and net income or loss can fluctuate from quarter to quarter to
the extent the Company recognizes non-product revenue during a quarter because
the Company typically derives higher margins from non-product 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.
Reliance on Collaborative Relationships; Restrictions on Activities. The
Company has entered into, and intends to continue to pursue, collaborative
arrangements with corporations and research institutions with respect to the
research, development, regulatory approval and marketing of certain of its
potential products. InnerDyne's future success may depend, in part, on its
relationship with such third parties, their strategic interest in the potential
products under development and, eventually, their success in marketing or
willingness to purchase any such products. The Company's existing and
anticipated contracts with such third parties may restrict the rights of
InnerDyne to engage in certain areas of product development, manufacturing and
marketing. In addition, these third parties often have the unilateral right to
terminate any such arrangement without significant penalty. There can be no
assurance that InnerDyne will be successful in establishing or maintaining any
such collaborative arrangements or that any such arrangements will be
successful.
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 distribution experience.
The Company is marketing its M.I.S. access products mainly to general surgeons,
gynecologists and pediatric laparoscopists. 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 markets 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
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<PAGE> 19
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 to 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
technology 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 technology
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.
Government Regulation. Clinical testing, manufacture and sale of the
Company's products, including the Step product line, and the Company's
biocompatible coating 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 pre-clinical 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 pre-market clearance or
pre-market 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 PMA.
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.
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
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<PAGE> 20
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 original 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, arthroscopic, urologic and intra-organ 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 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 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 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. Failure of the Company to maintain 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, injunctions and/or
civil fines.
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 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 on 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
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<PAGE> 21
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.
Uncertainty Relating to Third Party Reimbursement. In the United States,
health care providers that purchase medical devices, such as the Company's
products, generally rely on third-party payors, principally federal Medicare,
state Medicaid and private health insurance plans, to reimburse all or part of
the cost of the procedure in which the medical device is being used. In
addition, certain health care providers are moving toward a managed care system
in which such providers contract to provide comprehensive health care for a
fixed cost per person. Managed care providers are attempting to control the cost
of health care by authorizing fewer elective surgical procedures. The Company is
unable to predict what changes will be made in the reimbursement methods
utilized by third-party health care payors. Furthermore, the Company could be
adversely affected by changes in reimbursement policies of governmental or
private health care payors, particularly to the extent any such changes affect
reimbursement for procedures in which the Company's products are used. Failure
by physicians, hospitals and other users of the Company's products to obtain
sufficient reimbursement from health care payors for procedures in which the
Company's products are used or adverse changes in governmental and private
third-party payors' policies toward reimbursement for such procedures would have
a material adverse effect on the Company's business, financial condition and
results of operations.
If the Company obtains the necessary foreign regulatory approvals,
market acceptance of the Company's products in international markets would 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 significantly by country, and include both
government-sponsored health care and private insurance. The Company intends to
seek international reimbursement approvals, although there can be no assurance
that any such approvals will be obtained in a timely manner, if at all, and
failure to receive international reimbursement approvals could have an adverse
effect on market acceptance of the Company's products in the international
markets in which such approvals are sought.
Dependence on International Sales. In the future, the Company expects to
derive an increasing portion of its revenue from international sales. To the
extent that the Company's international sales increase in future periods, a
significant portion of the Company's revenues could be subject to the risks
associated with international sales, including economic or political
instability, shipping delays, changes in applicable regulatory policies,
fluctuations in foreign currency exchange rates and various trade restrictions,
all of which could have a significant impact on the Company's ability to deliver
products on a competitive and timely basis. Future imposition of, or significant
increases in the level of, customs duties, import quotas or other trade
restrictions could have an adverse effect on the Company's business, financial
condition and results of operations. The regulation of medical devices,
particularly in the European Economic Community, continues to expand, and there
can be no assurance that new laws or regulations will not have an adverse effect
on the Company.
Dependence on Key Personnel. InnerDyne is dependent upon a limited
number of key management and technical personnel. The Company's future success
will depend in part upon its ability to attract and retain highly qualified
personnel. The Company will compete for such personnel with other companies,
academic institutions, government entities and other organizations. There can be
no assurance that the Company will be successful in hiring or retaining
qualified personnel. The loss of key personnel or the inability to hire or
retain qualified personnel could have a material adverse effect on the Company's
business, financial condition and results of operations.
Product Liability; Claims in Excess of Insurance Coverage. The
development, manufacture and sale of the Company's products entail the risk of
product liability claims, involving both potential financial exposure and
associated adverse publicity. The Company's current product liability insurance
coverage limits are $3,000,000 per occurrence and $3,000,000 in the aggregate,
and there can be no assurance that such coverage limits are adequate to protect
the Company from any liabilities it might incur in connection with the
development, manufacture and sale of its current and potential products. Product
liability insurance is expensive and may not be available in the future on
acceptable terms, or at all. In
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<PAGE> 22
addition, if such insurance is available, there can be no assurance that the
limits of coverage of such policies will be adequate. A successful product
liability claim in excess of the Company's insurance coverage could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Stock Price Volatility. The stock market in general and stocks of
medical device companies in particular, have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. These broad market fluctuations may
adversely affect the market price of the Company's common stock. In addition,
the market price of the Company's common stock has been and is likely to
continue to be highly volatile. Factors such as fluctuations in the Company's
operating results, announcements of technological innovations or new products by
the Company or its competitors, FDA and international regulatory actions,
actions with respect to reimbursement matters, developments with respect to
patents or proprietary rights, public concern as to the safety of products
developed by the Company or others, changes in health care policy in the United
States and internationally, changes in stock market analyst recommendations
regarding the Company, other medical device companies or the medical device
industry generally or general market conditions may have a significant effect on
the market price of the common stock.
Environmental Regulations. The Company is subject to a variety of local,
state and federal governmental regulations relating to the use, storage,
handling, manufacture and disposal of toxic and other hazardous substances used
to manufacture the Company's products. The Company believes that it is currently
in compliance in all material respects with applicable governmental
environmental regulations. Nevertheless, the failure by the Company to comply
with current or future environmental regulations could result in the imposition
of substantial fines on the Company, suspension of production, alteration of its
manufacturing processes or cessation of operations. Compliance with such
regulations could require the Company to acquire expensive remediation equipment
or to incur substantial expenses. Any failure by the Company to control the use,
disposal, removal or storage of, or to adequately restrict the discharge of, or
assist in the cleanup of, hazardous or toxic substances, could subject the
Company to significant liabilities, including joint and several liability under
certain statutes. The imposition of such liabilities could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
Control by Directors and Principal Stockholders. As of September 30,
1999, directors and principal stockholders of the Company, and certain of their
affiliates, beneficially owned approximately 27% of the Company's outstanding
common stock. Accordingly, these persons, as a group, may be able to control the
Company and significantly affect the direction of the Company's affairs and
business, including any determination with respect to the acquisition or
disposition of assets by the Company, future issuances of common stock or other
securities by the Company and the election of directors. Such concentration of
ownership may also have the effect of delaying, deferring or preventing a change
in control of the Company.
Anti-Takeover Effect of Certain Charter Provisions of Common Stock.
Provisions of the Company's Certificate of Incorporation that allow the Company
to issue preferred stock without any vote or further action by the stockholders,
the fact that the Company's Certificate of Incorporation does not permit
stockholders to cumulate votes in the election of directors as well as the
Company's adoption of a poison pill Preferred Share Purchase Rights plan in
September 1997 may have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from attempting to acquire, control
of the Company. Certain provisions of Delaware law applicable to the Company
could also delay or make more difficult a merger, tender offer or proxy contest
involving the Company, including Section 203, which prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years unless certain conditions are met. The
possible issuance of preferred stock, the inability of stockholders to cumulate
votes in the election of directors, the poison pill and provisions of Delaware
law could have the effect of delaying, deferring or preventing a change in
control of the Company, including without limitation, discouraging a proxy
contest or making more difficult the acquisition of a substantial block of the
Company's common stock. The possible issuance of preferred stock, the poison
pill and these provisions could also limit the price that investors might be
willing to pay in the future for shares of the Company's common stock.
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<PAGE> 23
Risks Associated With Software and Hardware and the Year 2000. InnerDyne
relies on a variety of internal computer systems and programs in the operation
of its business. The Company is currently in the process of testing and
upgrading, where necessary, the software and hardware products used in its
operations with respect to the year 2000 issue. The Company's internal systems
run on personal computers and microprocessor-based computer servers set up in a
workstation environment which the Company believes are not susceptible to
universal failures. Were system failures to occur as a result of the year 2000
issue, the Company believes that its on-site engineers and technical personnel
should be able to address and resolve such issues prior to the occurrence of any
material adverse effect on the Company's business operations.
The failure of certain of the systems upon which the Company relies,
such as payroll and banking services, could be disruptive to the Company's
business operations if such systems were unavailable for an extended period of
time. The Company is in the process of making inquiries with the providers of
such types of services to determine their year 2000 readiness. However, the
Company believes that its business operations would not be materially adversely
effected by short disruptions in such services and that the providers of such
services (who also typically service many other business customers) will take
steps to rectify any failures as soon as possible. More generally, the Company
does not believe that the power grid or general communications, building
security and similar systems expose the Company to any unique year 2000 risks as
compared to other businesses.
The Company faces year 2000 risk from third-party suppliers.
Notwithstanding written assurances from the Company's vendors regarding year
2000 compliance, there is no guarantee that the year 2000 will not cause a
disruption in the supply of critical components necessary for the Company's
products. Given the Company's reliance on suppliers of critical, sole-sourced
components, the Company is relying on these suppliers to address the year 2000
issues in their own products and operations, and the failure of such suppliers
to adequately address these issues could have a material adverse effect on the
Company's business, financial condition and results of operations. As a
contingency plan in the event that any of such suppliers do not or are unable to
address material year 2000 issues, the Company intends to stockpile an inventory
of raw materials and molded parts in order to maintain a one month backlog of
such components.
The Company has not incurred substantial costs to date to address the
year 2000 issue and estimates that the additional cost, if any, arising from
actions taken by the Company to address year 2000 problems will not be material.
Despite the Company's efforts to address the year 2000 impact on its
internal systems and business operations, the year 2000 issue may result in a
material disruption of its business or have a material adverse effect on the
Company's business, financial condition or results of operations.
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<PAGE> 24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The following discusses the Company's exposure to market risk related to
changes in interest rates, equity prices, and foreign currency exchange rates.
This discussion contains forward-looking statements that are subject to risks
and uncertainties. Actual results could vary materially as a result of a number
of factors including those set forth in Item 2 above.
Interest Rate Risk: As of September 30, 1999, the Company had short-term
investments of $5,909,075. Substantially all of these short-term investments
consist of highly liquid money market funds and commercial paper investments
with remaining maturities at the date of purchase of less than ninety days.
These investments are subject to interest rate risk and will decrease in value
if market interest rates increase. A hypothetical increase or decrease in market
interest rates by 10 percent from the September 30, 1999 rates would cause the
fair market value of these short-term investments to change by an immaterial
amount. The Company has the ability to hold these investments until maturity,
and therefore, the Company does not expect the value of these investments to be
affected to any significant degree by the effect of a sudden change in market
interest rates. Declines in interest rates over time will, however, reduce
interest income. The Company has not used derivative financial instruments.
The Company does not own any equity investments. Therefore, the Company
does not currently have any direct equity price risk. All Company revenues are
realized in U.S. dollars; therefore, the Company does not believe that it
currently has any significant direct foreign currency exchange rate risk.
Foreign Currency Risk: International revenues were less than 10% of
total revenue for the quarter ended September 30, 1999. International sales are
made mostly through international distributors with payments to the Company
typically in U.S. dollars. The Company's international business is subject to
risks typical of an international business, including, but not limited to
differing economic conditions, changes in political climate, differing tax
structures, other regulations and restrictions, and foreign exchange rate
volatility. Accordingly, the Company's future results could be materially
adversely impacted by changes in these or other factors. The effect of foreign
exchange rate fluctuations on the Company through the third quarter of 1999 was
not material.
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<PAGE> 25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not Applicable.
(b) 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 INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit number: 27.01: Financial Data Schedule
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<PAGE> 26
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.
/s/ Robert A. Stern
Robert A. Stern
Vice President and Chief
Financial Officer
(Duly Authorized Signatory,
Principal Financial and Accounting Officer)
Date: November 12, 1999
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<PAGE> 27
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit # Description
- --------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000822084
<NAME> INNERDYNE, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 6,604,184
<SECURITIES> 0
<RECEIVABLES> 3,135,472
<ALLOWANCES> 95,604
<INVENTORY> 1,387,994
<CURRENT-ASSETS> 11,546,972
<PP&E> 4,228,768
<DEPRECIATION> 3,447,054
<TOTAL-ASSETS> 12,373,653
<CURRENT-LIABILITIES> 2,265,011
<BONDS> 0
0
0
<COMMON> 220,452
<OTHER-SE> 9,584,243
<TOTAL-LIABILITY-AND-EQUITY> 12,373,653
<SALES> 14,480,866
<TOTAL-REVENUES> 14,807,403
<CGS> 4,238,872
<TOTAL-COSTS> 13,995,950
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78,615
<INCOME-PRETAX> 931,633
<INCOME-TAX> 14,349
<INCOME-CONTINUING> 917,284
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 917,284
<EPS-BASIC> 0.04
<EPS-DILUTED> 0.04
</TABLE>
