<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998.
OR
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______TO _______.
COMMISSION FILE NO.
SYMPHONIX DEVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0376250
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2331 Zanker Road
SAN JOSE, CALIFORNIA 95131-1107
(Address of principal executive offices, including zip code)
(408) 232-0710
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- ---
As of October 31, 1998, 11,214,031 shares of the Registrant's Common Stock
were outstanding.
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SYMPHONIX DEVICES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997..................... 1
Condensed Consolidated Statements of Operations for the three months and nine months
ended September 30, 1998 and 1997........................................................................ 2
Condensed Consolidated Statements of Comprehensive Loss for the three months and nine
months ended September 30, 1998 and 1997................................................................. 3
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and 1997.... 4
Notes to Condensed Consolidated Financial Statements..................................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................................... 22
Item 2. Changes in Securities and Use of Proceeds............................................................... 22
Item 3. Defaults Upon Senior Securities......................................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders..................................................... 22
Item 5. Other Information....................................................................................... 23
Item 6. Exhibits................................................................................................ 23
</TABLE>
- i -
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SYMPHONIX DEVICES INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
CONDENSED CONSOLIDATED BALANCE SHEETS
(THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------------ ------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,293 $ 4,908
Short-term investments 18,363 6,549
Accounts receivable 214 -
Inventories 430 -
Prepaid expenses and other current assets 245 451
------- -------
Total current assets 30,545 11,908
Property and equipment, net 2,049 1,157
Other assets 78 76
------- -------
Total assets $ 32,672 $ 13,141
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 728 $ 366
Accrued compensation 964 888
Other accrued liabilities 471 778
Current portion of bank borrowings 375 -
Current portion of capital lease obligations 270 322
------- -------
Total current liabilities 2,808 2,354
Capital lease obligations, less current portion 135 325
Bank borrowings, less current portion 1,625 2,000
------- -------
Total liabilities 4,568 4,679
------- -------
Stockholders' equity:
Convertible preferred stock - 9
Common stock 12 3
Notes receivable from stockholders (484) (499)
Deferred compensation (1,656) (2,073)
Additional paid-in capital 57,959 29,526
Accumulated other comprehensive loss (8) -
Deficit accumulated during the development stage (27,719) (18,504)
Total stockholders' equity 28,104 8,462
------- -------
Total liabilities and stockholders' equity $ 32,672 $ 13,141
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
1
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SYMPHONIX DEVICES INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative period
from May 17, 1994
Three months ended Nine months ended (date of inception)
September 30, September 30, to September 30,
------------------------ ------------------------ ----------------------
1998 1997 1998 1997 1998
---------- ---------- ---------- ---------- ----------------------
<S> <C> <C> <C> <C> <C>
Revenue $ 242 $ - $ 327 $ - $ 327
Costs and expenses:
Cost of goods sold 709 - 1,076 - 1,076
Research and development 1,990 1,533 5,528 4,643 21,342
Selling, general and administrative 1,493 463 3,987 1,330 7,865
------ ------ ------ ------ -------
4,192 1,996 10,591 5,973 30,283
------ ------ ------ ------ -------
Operating loss (3,950) (1,996) (10,264) (5,973) (29,956)
Interest income 421 177 1,151 429 2,592
Interest expense (41) (25) (102) (80) (355)
Net loss $(3,570) $(1,844) $ (9,215) $(5,624) $(27,719)
====== ====== ======= ====== =======
Basic and diluted net loss per common $ (0.29) $ (0.68) $ (0.87) $ (2.21) $ (7.56)
share ====== ====== ======= ====== =======
Shares used in computing basic and
diluted net loss per common share 12,170 2,726 10,582 2,546 3,666
====== ====== ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
2
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SYMPHONIX DEVICES INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
----------------------------------- ----------------------------------
1998 1997 1998 1997
--------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net loss $(3,570) $(1,844) $(9,215) $(5,624)
Unrealized gains on short-term investments 7 - 6 -
Translation adjustments (4) - (14) -
------ ------ ------ ------
Comprehensive loss $(3,567) $(1,844) $(9,223) $(5,624)
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
3
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SYMPHONIX DEVICES INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
period from
May 17, 1994
(date of
Nine months ended inception) to
September 30, September 30,
------------------------------- ---------------
1998 1997 1998
-------------- ------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(9,215) $(5,624) $ (27,719)
Adjustments to reconcile net loss to cash used in
operating activities:
Amortization of deferred compensation 417 21 608
Depreciation and amortization 486 364 1,621
Preferred and common stock issued for services - - 93
Changes in operating assets and liabilities:
Accounts receivable (214) - (214)
Inventories (430) - (430)
Prepaid expenses and other current assets 206 (237) (245)
Accounts payable 362 162 728
Accrued compensation 76 (72) 964
Other accrued liabilities (307) 256 469
-------- ------- --------
Net cash used in operating activities (8,619) (5,130) (24,125)
-------- ------- --------
Cash flows from investing activities
Purchases of short-term investments (28,056) (8,002) (79,176)
Sales of short-term investments 16,248 6,026 60,819
Purchases of property and equipment (1,378) (301) (3,670)
Change in other assets (2) (13) (78)
-------- ------- --------
Net cash used in investing activities (13,188) (2,290) (22,105)
-------- ------- --------
Cash flows from financing activities
Proceeds from capital leases - 63 1,269
Payments on capital lease obligations (242) (220) (864)
Proceeds from bank borrowings 6,000 - 8,000
Payments on bank borrowings (6,000) - (6,000)
Payments received on notes receivable
from stockholders 15 - 30
Proceeds from issuance of preferred stock, net - 5,990 26,552
Proceeds from issuance of common stock, net 28,433 28 28,549
-------- ------- --------
Net cash provided by financing activities 28,206 5,861 57,536
-------- ------- --------
Net increase (decrease) in cash and cash equivalents 6,399 (1,559) 11,306
Effect of exchange rates on cash and cash equivalents (14) - (13)
Cash and cash equivalents, beginning of period 4,908 6,539 -
-------- ------- --------
Cash and cash equivalents, end of period $ 11,293 $ 4,980 $ 11,293
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
4
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SYMPHONIX DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements as
of September 30, 1998 of Symphonix Devices, Inc. and subsidiaries (the
"Company") have been prepared in accordance with generally accepted accounting
principles for interim financial information and pursuant to the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, considered necessary
for a fair presentation have been included. Operating results for the three
month and nine month periods ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the fiscal year ending
December 31, 1998, or any future interim period.
These financial statements and notes should be read in conjunction with the
Company's audited financial statements for the year ended December 31, 1997 and
footnotes thereto included in the Company's February 13, 1998 Prospectus.
2. Computation of basic and diluted net loss per common share:
The Company adopted Financial Accounting Standards Board ("SFAS") No. 128
"Earnings Per Share" and the provisions of the Securities and Exchange
Commission Staff Accounting Bulletin (SAB) No. 98, and accordingly all prior
periods have been restated. Basic and diluted net loss per common share are
computed using the weighted average number of shares of common stock
outstanding. Common equivalent shares from stock options, warrants, and
preferred stock are excluded from the computation of diluted net loss per share,
as their effect is antidilutive. The Company has determined that no incremental
shares should be included in the computation of earnings per share in accordance
with SAB No. 98.
Stock options and warrants to purchase 531,506 shares of common stock at
prices ranging from $0.14 to $10.50 per share were outstanding at September 30,
1998, but were not included in the computation of diluted net loss per share
because they were antidilutive. The aforementioned stock options and warrants
could potentially dilute earnings per share in the future.
5
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3. Inventories:
Inventories comprise ($ thousands):
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
(Unaudited)
-------------------------- ----------------------
<S> <C> <C>
Raw materials and work in progress $ 362 $ -
Finished goods 68 -
--- -------
$ 430 $ -
=== =======
</TABLE>
4. Initial public offering:
On February 17, 1998, the Company completed the sale of 2,300,000 shares of
its Common Stock at a price of $12 per share in a firm commitment underwritten
public offering. On February 27, 1998 the underwriters exercised an over-
allotment option for 345,000 shares at a price of $12 per share. Aggregate
proceeds of these sales of common stock, net of issuance costs were $28.4
million.
6
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and footnotes thereto, and with the
Company's audited financial statements for the year ended December 31, 1997 and
the footnotes thereto included in the Company's February 13, 1998 Prospectus.
The information set forth below contains forward-looking statements
(designated by an *), and the Company's actual results could differ materially
from those anticipated in these forward looking statements as a result of
certain factors, including those set forth below under "Factors That May Affect
Future Results."
OVERVIEW
Since its inception in May 1994, Symphonix has been a development stage
company. The Company is developing a family of proprietary semi-implantable and
implantable soundbridges for the management of moderate to severe hearing
impairment. The Company's family of Vibrant soundbridges is based on its
patented core FMT technology.
The Company received the authorization to affix the CE Mark to the Vibrant
and Vibrant P soundbridges in March 1998 and the Vibrant HF soundbridge in
July 1998. The Company began selling the Vibrant P soundbridge in the European
Union during the second quarter of 1998. The Company intends to conduct
additional clinical testing of the Vibrant HF soundbridge prior to commencing
selling activities.*
The Company's initial selling efforts have been targeted primarily at those
ENT surgeons specializing in otology. While the Company intends to continue to
market its products to these specialists, it also plans to focus on the
referring physicians, audiologists and the general population of ENT surgeons in
an attempt to increase the number of patients that are referred to specialist
ear surgeons.* The Company is also attempting to gather clinical and other
data which it believes will be helpful in obtaining reasonable reimbursement
levels for its products. There can be no assurance that the Company will be
successful in its efforts to increase the number of patients who become
candidates for the Company's soundbridges or in obtaining reimbursement for
its products.
In September 1996 the Company initiated clinical trials of the Vibrant
soundbridge in the United States. On December 11, 1997, the United States Food
and Drug Administration ("FDA") approved a multi-center pivotal study in 55
patients at up to 12 sites with the second generation Vibrant P soundbridge. As
of September 30, 1998 the Company had enrolled a total of 25 patients in this
pivotal study. The Company has recently been selected by the FDA to participate
in the new, streamlined Premarket Approval ("PMA") application process called
the modular PMA. Under the modular PMA process, modules reflecting the content
requirements of a traditional PMA are submitted as they are completed, allowing
them to be reviewed and approved in a sequential manner. The Company recently
submitted the first modules of its PMA for the Vibrant P soundbridge. There can
be no assurance that the Company's participation in the modular PMA program will
lead to the timely approval of the Vibrant P soundbridge, if at all.
Through September 30, 1998 the Company had not generated significant
revenue from product sales and had an accumulated deficit of $27.7 million. The
Company expects to incur
7
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substantial losses through at least 2000.* To date, the Company's principal
sources of funding have been its initial public offering, private equity
financings, an equipment lease financing and bank borrowings.
RESULTS OF OPERATIONS
Revenue. Revenue of $242,000 and $327,000 was recorded in the three and
nine months ended September 30, 1998, respectively. No revenue was recorded in
1997.
Cost of goods sold. Cost of goods sold was $709,000 and $1.1 million in
the three and nine months ended September 30, 1998, respectively, and represents
the direct cost of the products sold as well as a portion of the manufacturing
overhead.
Research and Development Expenses. Research and development expenses
increased from $1.5 million in the three months ended September 30, 1997 to $2.0
million in the three months ended September 30, 1998, and increased from $4.6
million in the nine months ended September 30, 1997 to $5.5 million in the nine
months ended September 30, 1998. Research and development expenses consist
primarily of personnel costs, professional services, materials, supplies and
equipment in support of product development, clinical trials, regulatory
submissions, preparation and filing of patent applications and the start-up of
manufacturing. Expenses increased from 1997 to 1998, due to increased facility
costs arising from the commencement in January 1998 of the lease on the new
facility, and to increases in the level of staffing and increased spending on
supplies, professional services and equipment as the Company increased its
product development efforts, and expanded its clinical trial activities,
particularly the pivotal clinical trial currently under way in the United
States. The Company expects its research and development expenses to increase
over the final quarter of 1998 and in 1999 primarily due to the further
development of the Vibrant TI soundbridge.*
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $0.5 million in the three months ended
September 30, 1997 to $1.5 million in the three months ended September 30, 1998,
and increased from $1.3 million in the nine months ended September 30, 1997 to
$4.0 million in the nine months ended September 30, 1998. Selling, general and
administrative expenses consist primarily of personnel costs, promotional costs,
legal and consulting costs. Expenses increased from 1997 to 1998, due to the
establishment of a European sales and marketing organization, the initiation of
selling and promotional activities, amortization of deferred compensation and
increases in the Company's administrative costs associated with the increased
scope of the Company's operations and to becoming a public company. In late
1997 and early 1998, the Company established a European sales and marketing
organization and as of September 30, 1998, had three marketing management and
support personnel located in its European headquarters in Switzerland and three
sales managers performing direct sales activities in Germany, France, the U.K.,
Switzerland and Austria. The Company plans to expand its European sales
and marketing organization in 1999.* In addition, the Company has hired a sales
manager for South America. Expenses associated with these activities are
expected to increase over the final quarter of 1998 and in 1999.*
Deferred compensation of $2.3 million was recorded in 1997, representing
the difference between the exercise prices of certain options granted and the
deemed fair value of the Company's
8
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Common Stock on the grant dates. Deferred compensation expense of $139,000 and
$417,000 attributed to such options was amortized during the three months and
nine months ended September 30, 1998, respectively. The remaining deferred
compensation will be amortized over the vesting period of the options (generally
four years).
Interest Income (Expense). Interest income, net increased from $152,000
in the three months ended September 30, 1997 to $380,000 in the three months
ended September 30, 1998, and increased from $349,000 in the nine months ended
September 30, 1997 to $1.0 million in the nine months ended September 30, 1998.
The increase in net interest income was due to the Company's higher cash, cash
equivalents and short-term investment balances as a result of the Company's
initial public offering completed in February 1998.
Income Taxes. As a result of the net losses incurred, the Company has not
incurred any income tax obligations. At December 31, 1997, the Company had net
operating loss carryforwards of $13 million for federal and $13 million for
state income tax purposes, which will expire at various dates through 2012 and
2002, respectively, if not utilized. The principal differences between losses
for financial and tax reporting purposes are the result of the capitalization of
research and development and start-up expenses for tax purposes. United States
and state tax laws contain provisions that may limit the net operating loss
carryforwards that can be used in any given year, should certain changes in the
beneficial ownership of the Company's shares occur. Such events could limit the
future utilization of the Company's net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has funded its operations and its capital
investments from the net proceeds from its initial public offering completed in
February 1998 of $28.4 million, from the private sale of equity securities,
totaling $26.5 million, from an equipment lease financing totaling $1.3 million
and from bank borrowings totaling $2.0 million, net of repayments. At September
30, 1998, the Company had $27.7 million in working capital, and its primary
source of liquidity was $29.7 million in cash, cash equivalents and short-term
investments.
Capital expenditures, primarily related to the Company's research and
development and manufacturing activities, were $1.4 million in the nine months
ended September 30, 1998 and $301,000 in the nine months ended September 30,
1997, respectively. The increased capital expenditures relate to the Company's
new facility as described below. At September 30, 1998, the Company did not
have any material commitments for capital expenditures.
In October 1997 the Company entered into a lease agreement for a new
facility for a five year term commencing January 1998. During the quarter ended
March 31, 1998, the Company relocated its research and development and
administrative activities to the new facility. The relocation of manufacturing
activities to the new facility was completed in April 1998. Through September
30, 1998, the Company had incurred approximately $1.4 million in capital
expenditures, primarily on leasehold improvements and furniture and fixtures
related to the new facility, substantially all of which was paid as of September
30, 1998.
9
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The Company has a loan agreement with a bank providing for borrowings of up
to $2.0 million and for the issuance of letters of credit up to $250,000. At
September 30, 1998, the Company had borrowings of $2.0 million and an
outstanding letter of credit in the amount of $243,680 under the loan agreement.
Borrowings under the loan agreement are repayable over four years commencing in
January 1999.
Cash used in operating activities was $8.6 million and $5.1 million in the
nine months ended September 30, 1998 and 1997, respectively. The increase in
cash used in operating activities is primarily attributable to the increase in
net losses incurred. Net losses increased primarily as a result of higher
selling, general and administrative expenses.
The Company will expend substantial funds in the future for research and
development, preclinical and clinical testing, capital expenditures and the
manufacturing, marketing and sale of its products. The timing and amount of
spending of such capital resources cannot be accurately predicted and will
depend on several factors, including the progress of its research and
development efforts and preclinical and clinical activities, competing
technological and market developments, the time and costs of obtaining
regulatory approvals, the progress in obtaining third party reimbursement, the
time and costs involved in filing, prosecuting and enforcing patent claims, the
progress and cost of commercialization of products currently under development,
market acceptance and demand for the Company's products if approved for
marketing and other factors not within the Company's control. While the Company
believes that its existing capital will be sufficient to fund its operations and
its capital investments through 1999, there can be no assurance that the Company
will not require additional financing prior to that time. In addition, there
can be no assurance that such additional financing will be available on a timely
basis on terms acceptable to the Company, or at all, or that such financing will
not be dilutive to stockholders. If adequate funds are not available, the
Company could be required to delay development or commercialization of certain
of its products, license to third parties the rights to commercialize certain
products or technologies that the Company would otherwise seek to commercialize
for itself, or reduce the marketing, customer support or other resources devoted
to certain of its products, any of which could have a material adverse effect on
the Company's business, financial condition and results of operations.
YEAR 2000 COMPLIANCE
The Company has initiated planning for issues related to the upcoming new
millennium. These issues derive from the use of software and hardware with
embedded chips or processors that use two digits to refer to a year and do not
properly recognize a year that begins with 20 instead of the familiar 19. The
use of such software and hardware occurs at many internal and external points in
the Company's development, supply, manufacturing and distribution chain - both
within the Company's internal operations as well as at the facilities of the
Company's external partners, such as vendors and customers.
The Company has begun the development of a plan to address these issues and
to enhance the Company's readiness for Year 2000. The Company's plan (the "Year
2000 Readiness Program") will focus on five areas: (1) network and facility
infrastructure, (2) business applications software, (3) process control systems,
(4) external partners, and (5) the Company's products.* Within each area, the
Year 2000 Readiness Program will involve (a) the identification of systems that
may be
10
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susceptible to Year 2000 issues (the "identification phase"), (b) the assessment
of the degree of readiness of those systems for the Year 2000 and an assessment
of the risks that may be posed to the Company's business (the "assessment
phase"), (c) the remediation of problems that are identified (the "remediation
phase"), and (d) contingency planning. *
Network and facility infrastructure: Included in this category are the
computer networks in the Company's San Jose, California headquarters and Basel,
Switzerland European headquarters (including servers, computers, other network
equipment and computer and network operating systems), together with general
facility systems such as telephone and security systems. The Company expects
that the identification and assessment phases will be completed during the first
quarter of 1999, at which time remediation and contingency planning will be
initiated as appropriate.*
Business applications software: Included in this category are various
applications used in design, manufacturing, distribution and finance. The
Company's primary business application is a company-wide system used for
manufacturing planning, accounting, inventory management and sales transactions.
The Company expects that the identification and assessment phases will be
completed during the second quarter of 1999, at which time remediation and
contingency planning will be initiated as appropriate.* For many software
applications, the Company will, in the assessment phase, rely on the software
developer's representations regarding Year 2000 compliance of its software.
There can be no assurance, however, that the software represented by developers
as being Year 2000 compliant will be free from Year 2000 errors and defects.
Process control systems: Included in this category are instrumentation and
systems used in design and manufacturing processes. The Company expects that
the identification and assessment phases will be completed during the second
quarter of 1999, at which time remediation and contingency planning will be
initiated as appropriate.*
External partners: The Company intends to assess the possible effects on
its operations of the Year 2000 compliance of important external partners, such
as vendors and customers, through the use of questionnaires and, in limited
cases, site visits and interviews to solicit information from these parties.*
In the event the Company identifies a problem with respect to a particular
vendor, then the Company may be forced to identify alternative sources of
supply. However, the Company's ability to seek alternative sources of supply is
subject to FDA restrictions and may involve an extensive validation processes.
The failure to timely identify and validate an alternative supplier could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company expects to complete the identification phase
and initiate the assessment phase by the first quarter of 1999.*
Symphonix products: The Company's products are regulated by the FDA and
the FDA has advised manufacturers of medical devices to address the readiness of
their products for Year 2000 issues. The Company has completed a preliminary
assessment and has informed the FDA that the Company does not believe that any
of its existing products are susceptible to Year 2000 issues.
11
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The Company does not expect to incur costs in its Year 2000 Readiness
Program that will be material to its business, financial condition or results of
operations. * However, until the Company completes the identification and
assessment phases of its program, the full extent of the costs will not be known
and there can be no assurance that such costs will not be material. The Company
will utilize both internal and external resources in implementing the Year 2000
Readiness Program and the Company currently estimates that the external
resources required during the identification and assessment phases of the
program will cost approximately $50,000.* Because the Year 2000 Readiness
Program is an ongoing process, all cost estimates are subject to change.
Although the Company intends to complete all phases of its Year 2000
Readiness Program by December 31, 1999, there can be no assurance, even if this
program is successfully completed on schedule, that disruptions in the Company's
business will be avoided. The Year 2000 issues are pervasive in nature and
involve highly technical issues, not all of which are under the Company's
control. Possible consequences of Year 2000 issues that the Company may be
unable to adequately identify, assess or remediate include but are not limited
to: delays in supplies from vendors, delays in shipment to customers, errors in
processing transactions, deficiencies in management of inventory, delays in
collection of funds from customers, and diversion of management time and effort
to addressing difficulties that emerge. The goal of the Company's Year 2000
Readiness Program is to plan for and reduce the risk of such difficulties.
There can be no assurance that the Year 2000 Readiness Program will be completed
in a timely manner or will be successful.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Development Stage Company; History of Losses and Expectation of Future
Losses. The Company is a development stage company and, at September 30, 1998,
had an accumulated deficit of $27.7 million. Since the Company's inception in
1994, substantially all of the Company's resources have been dedicated to
research and development, establishment of a European sales and marketing
organization and the initiation of sales and marketing activities. In March
1998, the Company received the authorization to affix the CE Mark to the Vibrant
and Vibrant P soundbridges, permitting the initiation of commercial sales in the
European Union ("EU"). Although selling activities have commenced in Europe and
sales of the Vibrant P have been made, through September 30, 1998 the Company
has not generated significant revenues from product sales. The Company only
recently received CE Mark approval for the Vibrant HF soundbridge and intends to
conduct additional clinical testing before commencing selling activities. In the
United States, the Company's Vibrant P and Vibrant HF soundbridges will require
additional clinical testing prior to the submission of a regulatory application
for commercial use. All of the Company's other products, including the Vibrant
TI, will require additional development, and preclinical and clinical testing
prior to the submission of a regulatory application for commercial use
internationally and domestically. Since the Vibrant P soundbridge only recently
became available for sale in the EU and is not currently available for sale in
the United States, significant product revenues will not be realized for at
least several years, if ever. The Company expects its operating losses to
continue at least through 2000 as it continues to expend substantial funds for
clinical trials in support of regulatory approvals, expansion of research and
development activities and establishment of commercial-scale manufacturing and
sales and marketing capabilities. There can be no assurance that any of the
Company's soundbridges will be successfully commercialized internationally or in
the United States or that the Company will achieve significant revenues from
product sales. In addition, there can be
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<PAGE>
no assurance that the Company will achieve or sustain profitability in the
future. The Company's results of operations may fluctuate from quarter to
quarter or year to year and will depend upon numerous factors, including action
relating to regulatory matters, progress of clinical trials, the timing and
scope of research and development efforts, the extent to which the Company's
products gain market acceptance or achieve reasonable reimbursement levels, the
timing of scale-up of manufacturing capabilities, the timing of expansion of
sales and marketing activities and competition.
Limited Clinical Testing Experience. In the United States, the Company has
conducted only limited clinical trials of the Vibrant and Vibrant P
soundbridges. The Company received approval of an investigational device
exemption ("IDE") to conduct a clinical trial of the Vibrant and Vibrant P
soundbridges. In Europe, the Vibrant and Vibrant P were the subject of limited
clinical testing. The Company intends to conduct clinical testing of the
external components of the Vibrant HF soundbridge.* The implanted components of
the Vibrant HF are the same as the implanted components of the Vibrant P
soundbridge which was tested in clinical trials previously conducted by the
Company in Europe. None of the Company's other soundbridges under development
have been tested in clinical trials and will require additional development,
clinical trials and regulatory approval prior to commercialization. The results
from preclinical studies and early clinical trials may not be indicative of
results obtained in later clinical trials, and there can be no assurance that
clinical trials conducted by the Company will demonstrate sufficient safety and
efficacy to obtain requisite approvals.
The rate of completion of the Company's clinical trials may be delayed by
many factors, including slower than anticipated patient enrollment or adverse
events occurring during clinical trials. Completion of preclinical and clinical
activities may take several years, and the length of time for completion of the
required studies is unpredictable. In addition, data obtained from preclinical
and clinical activities are susceptible to varying interpretations, which could
delay, limit or prevent regulatory approval. No assurance can be given that any
of the Company's clinical trials will be successfully completed on a timely
basis, or at all, that additional clinical trials will be allowed by the FDA or
other regulatory authorities or that such clinical trials will commence as
planned. Any delays in the Company's clinical trials would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Reliance on FMT Technology. The Company has concentrated its efforts
primarily on the development, implementation and acceptance of the floating mass
transducer ("FMT"), the patented core direct drive technology upon which all of
the Company's soundbridges are based. The Company's soundbridges employ a
direct drive approach to the management of hearing impairment, which is a novel
development. There can be no assurance that the Company's soundbridges, based on
the Company's FMT technology, will prove to be safe and effective, or that if
proven safe and effective, can be manufactured at a reasonable cost or
successfully commercialized.
No Assurance of Product Approval; Government Regulation. The research,
preclinical and clinical activities, manufacturing, labeling, distribution,
sale, marketing, advertising and promotion of the Company's products are subject
to extensive and rigorous government regulation in the United States and certain
other countries. In the United States and certain other countries, the process
of
13
<PAGE>
obtaining and maintaining required regulatory clearances or approvals is
lengthy, expensive and uncertain. Noncompliance with applicable FDA
requirements can result in administrative sanctions or judicially imposed
sanctions such as civil penalties, criminal prosecution, injunctions, product
seizure or detention, product recalls, or total or partial suspension of
production. In addition, noncompliance may result in the FDA's refusal to
approve pending applications for marketing approval or clearance or supplements
to approved marketing approvals, or in the withdrawal of marketing approval.
Before any of the Company's products can be commercialized in the United
States, the Company must submit in a PMA application extensive data on
preclinical studies and clinical trials, device design, manufacturing, labeling,
promotion and advertising, as well as other aspects of the product. In addition,
the Company must submit clinical data gathered in trials conducted under an IDE
demonstrating to the satisfaction of the FDA that a product is safe and
effective for its labeling claims, and obtain marketing approval from the FDA.
Phase I of the IDE study for the Vibrant soundbridge has been completed. Phase I
was limited to two sites and five subjects and was intended to test the safety
and provide preliminary evidence of the effectiveness of the device and the
surgical procedure used to implant the device. On November 14, 1997, the Company
filed an IDE supplement summarizing the Phase I results, finalizing the study
protocol and labeling claims, providing technical information regarding the
second generation Vibrant P soundbridge, and requested permission to proceed to
the pivotal study. On December 11, 1997, the FDA approved the multi-center
pivotal study in 55 subjects at up to 12 sites with the Vibrant P soundbridge.
As of September 30, 1998, the Company had enrolled a total of 25 patients in
this pivitol study. The Company has recently been selected to participate in the
modular PMA process whereby modules reflecting the content requirements of a
traditional PMA are submitted as they are completed, allowing them to be
reviewed and approved in a sequential manner. The Company has submitted the
first modules of its PMA for the Vibrant P soundbridge. There can be no
assurance that the Company's clinical trial effort will progress as expected,
will not be delayed or that such effort will lead to the successful development
of any product. No assurance can be given that any of the Company's clinical
trials will continue to be allowed by the FDA or other regulatory agencies. In
addition, there can be no assurance that the Company's participation in the
modular PMA program will lead to the timely approval of the Vibrant P
soundbridge, if at all.
Subsequent to the receipt of an FDA approval, the Company will continue to
be regulated by the FDA with regard to the reporting of adverse events related
to its products, and ongoing Quality System regulation compliance (which
includes elaborate testing, control, documentation and other quality assurance
procedures). The Company's manufacturing facility must be registered with the
FDA and the California Food and Drug Branch and will be subject to periodic
inspections by the FDA and by the California Food and Drug Branch. The timing
and requirements of obtaining approval for sale in foreign countries may differ
from that required for FDA approval. In addition, there may be foreign
regulatory barriers other than pre-market approval.
The EU consists of 15 countries encompassing most of the major countries in
Europe. The EU has adopted numerous directives and standards regulating the
design, manufacture, clinical trial, labeling, and adverse event reporting for
medical devices. The principal directives prescribing the laws and regulations
pertaining to medical devices in the EU are the Medical Devices Directive,
93/42/EEC ("MDD") and the Active Implantable Medical Devices Directive,
90/385/EEC ("AIMDD"). In the EU, the Company's Vibrant P and Vibrant HF
soundbridges are regulated as active implantables and are governed by the AIMDD.
Certain other countries, such as Switzerland, have voluntarily adopted laws and
regulations that mirror those of the EU with respect to medical devices.
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<PAGE>
The Company's facilities have been inspected by the Notified Body and its
quality system has been certified by the Notified Body as being in compliance
with the required standards. In March 1998, the Company obtained the
certification necessary to enable the CE mark to be affixed to the Company's
Vibrant and Vibrant P soundbridges for commercial sales in member countries of
the EU. In April 1998 the Company transferred its manufacturing activities to a
new facility, and this facility has been certified by the Company's Notified
Body. The Company is subject to ongoing regulation under the AIMDD. As a result,
the quality system will be subject to periodic audit and recertification, and
serious adverse events must be reported to the authorities in the country where
the incident takes place. If such incidents occur, the Company may have to take
remedial action, including withdrawal of the product from the EU market. In July
1998, the Company received CE Mark approval for its Vibrant HF soundbridge.
No Assurance of Market Acceptance. The market acceptance of the Company's
soundbridges will depend upon their acceptance by the medical community and
patients as clinically useful, reliable and cost-effective compared to other
devices. Clinical acceptance will depend on numerous factors, including the
establishment of the safety and the effectiveness of the soundbridge's ability
to drive the ossicles directly and improve hearing over currently available
hearing aids. Clinical acceptance will also depend on the receipt of regulatory
approvals in the United States and the Company's ability to adequately train ear
surgeons on the techniques for implanting the Company's soundbridges. There can
be no assurance that the Company's soundbridges will be preferable alternatives
to existing devices, some of which, such as the acoustic hearing aid, do not
require surgery, or that the Company's soundbridges will not be rendered
obsolete or noncompetitive by products under development by other companies.
Patient acceptance of the Company's soundbridges will depend in part upon
physician, audiologist and surgeon recommendations as well as other factors,
including the effectiveness, safety, reliability and invasiveness of the
procedure as compared to established approaches. Prior to undergoing surgery for
the implantation of the Company's soundbridge, a patient may speak with a number
of medical professionals, including the patients primary care physician, an
audiologist, an ENT specialist, as well as surgeons who specialize in ear
surgery. The failure by any of these medical professionals to favorably
recommend the Company's products and the surgery required to implant the
soundbridge could limit the number of potential patients who are introduced to
an ear surgeon as candidates for the Company's soundbridges. Even if the
Company's soundbridges are adopted by the medical community, a significant
market may not develop for the products unless acceptable reimbursement from
health care payors is available. There can be no assurance that the Company's
soundbridges will be accepted by the medical community or consumers, that
acceptable reimbursement from third-party payors will be available or that
market demand for such products will be sufficient to allow the Company to
achieve profitable operations. Failure of the Company's soundbridges, for
whatever reason, to achieve significant adoption by the medical community or
consumers or failure of the Company's products to achieve any significant market
acceptance would have a material adverse effect on the Company's business,
financial condition and results of operations.
Highly Competitive Market; Risk of Competing Hearing Devices. The medical
device industry is subject to intense competition in the United States and
abroad. The Company believes its products will compete primarily with the
traditional approaches to managing hearing impairment, principally hearing
aids. * Principal manufacturers of acoustic hearing aids include Siemens Hearing
Instruments, Inc., Philips Medical Systems North America Co., Starkey
Laboratories Inc., Beltone
15
<PAGE>
Electronics Corp., Dahlberg Inc., ReSound Corp., Oticon, Inc., Widex Hearing Aid
Co., Inc. and Phonak Inc. There can be no assurance that the Company's
soundbridges will be able to successfully compete with established hearing aid
products. In addition, there can be no assurance that these potential
competitors will not succeed in developing technologies and products in the
future that are more effective, less expensive than those being developed by the
Company or that do not require surgery. The Company is aware of several
university research groups and development-stage companies that have active
research or development programs related to direct drive sensorineural hearing
devices. In addition, some large medical device companies, some of which are
currently marketing implantable medical devices, may develop programs in hearing
management. Certain of these companies have substantially greater financial,
technical, manufacturing, marketing and other resources than the Company. In
addition, there can be no assurance that certain of the Company's competitors
will not develop technologies and products that may be more effective in
managing hearing impairment than the Company's products or that render the
Company's products obsolete.
Limited Manufacturing Experience; Scale-Up Risk; Dependence on Key
Suppliers. The Company only has limited experience in manufacturing the Vibrant
P soundbridge. The Company currently manufactures the Vibrant P soundbridge in
limited quantities for laboratory testing, its United States clinical trials and
in connection with its commercial activities in the EU. The manufacture of the
Company's soundbridges is a complex operation involving a number of separate
processes, components and assemblies. Each device is assembled and individually
tested by the Company. The manufacturing process consists primarily of assembly
of internally manufactured and purchased components and subassemblies, and
certain processes are performed in an environmentally controlled area. After
completion of the manufacturing and testing processes, implantable devices are
sterilized by a sub-contracted supplier. In the first half of 1998 the Company
relocated its manufacturing activities to a new facility. Although this new
facility has the capacity to handle large-scale commercial manufacturing
activities, the Company has no experience manufacturing its products in the
volumes or with the yields that will be necessary for the Company to achieve
significant commercial sales. There can be no assurance that the Company can
establish high-volume manufacturing capacity or, if established, that the
Company will be able to manufacture its products in high volumes with
commercially acceptable yields. The Company will need to expend significant
capital resources and develop manufacturing expertise to establish large-scale
manufacturing capabilities. Prior to approval of a PMA, the Company's
facilities, procedures and practices will be subject to a pre-approval
inspection by the FDA. The Company's inability to successfully manufacture its
products in a timely manner or at a reasonable cost could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Raw materials, components and subassemblies for the Company's soundbridges
are purchased from various qualified suppliers. A number of components and
subassemblies, such as silicone, control electronics and implant packaging are
provided by single source suppliers. One component, the signal processing
microcircuit, is provided by a sole source supplier, Gennum Corporation. None
of the Company's vendors is contractually obligated to continue to supply the
Company nor is the Company contractually obligated to buy from a particular
vendor. For certain of these components and subassemblies, there are relatively
few alternative sources of supply, and establishing additional or replacement
suppliers for such components and subassemblies could not be accomplished
quickly. In addition, if the Company wishes to significantly modify its
manufacturing processes or change the supplier of a critical component,
additional approvals will be
16
<PAGE>
required from the FDA before the change can be implemented. Because of the long
lead time for some components and subassemblies that are currently available
from a single source, a supplier's inability or failure to supply such
components or subassemblies in a timely manner or the Company's decision to
change its suppliers could have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence upon Patents and Proprietary Technology. In the United States,
the Company holds five issued patents and 12 pending patent applications.
Additionally, outside of the U.S., the Company holds one issued patent and 17
pending patent applications. These patents and patent applications generally
cover the invention and application of the FMT as well as the specific
application of the FMT and other concepts in the field of hearing impairment.
In addition, the Company has licensed, on a royalty-free basis, a United States
patent covering the magnetic attachment of an external audio processor to an
implanted receiver. The Company's success will depend in part on its ability to
obtain patent protection for its products and processes, to preserve its trade
secrets and to operate without infringing or violating the proprietary rights of
others. The patent positions and trade secret provisions of medical device
companies, including those of the Company, are uncertain and involve complex and
evolving legal and factual questions. The coverage sought in a patent
application either can be denied or significantly reduced before or after the
patent is issued. Consequently, there can be no assurance that any patents from
pending applications or from any future patent application will be issued, that
the scope of the patent protection will exclude competitors or provide
competitive advantages to the Company, that any of the Company's patents will be
held valid if subsequently challenged or that others will not claim rights in or
ownership of the patents and other proprietary rights held by the Company.
Since patent applications are secret until patents are issued in the United
States or corresponding applications are published in other countries, and since
publication of discoveries in the scientific or patent literature often lags
behind actual discoveries, the Company cannot be certain that it was the first
to file patent applications for such inventions.
In addition, there can be no assurance that competitors, many of which have
substantial resources, will not seek to apply for and obtain patents that will
prevent, limit or interfere with the Company's ability to make, use or sell its
products either in the United States or in international markets. Although the
Company has conducted searches of patents issued to other companies, research or
academic institutions or others, there can be no assurance that such patents do
not exist, have not been filed or could not be filed or issued, which contain
claims relating to the Company's technology, products or processes. Patents
issued and patent applications filed in the United States or internationally
relating to medical devices are numerous and there can be no assurance that
current and potential competitors and other third parties have not filed or in
the future will not file applications for, or have not received or in the future
will not receive, patents or obtain additional proprietary rights relating to
products or processes used or proposed to be used by the Company. In addition,
patent applications in foreign countries are maintained in secrecy for a period
after filing. Publication of discoveries in the scientific or patent literature
tends to lag behind actual discoveries and the filing of related patent
applications. There may be pending applications, which if issued with claims in
their present form, might provide proprietary rights to third parties relating
to products or processes used or proposed to be used by the Company. The
Company may be required to obtain licenses to patents or proprietary rights of
others. Further, the laws of certain foreign countries do not protect the
Company's intellectual property rights to the same extent as do the laws
17
<PAGE>
of the United States. Litigation or regulatory proceedings, which could result
in substantial cost and uncertainty to the Company, may also be necessary to
enforce patent or other intellectual property rights of the Company or to
determine the scope and validity of other parties' proprietary rights. There can
be no assurance that the Company will have the financial resources to defend its
patents from infringement or claims of invalidity.
The Company also relies upon trade secrets and other unpatented proprietary
technology, and no assurance can be given that others will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to or disclose the Company's proprietary technology or
that the Company can meaningfully protect its rights in such unpatented
proprietary technology. The Company's policy is to require each of its
employees, consultants, investigators and advisors to execute a confidentiality
agreement upon the commencement of an employment or consulting relationship with
the Company. These agreements generally provide that all inventions conceived
by the individual during the term of the relationship shall be the exclusive
property of the Company and shall be kept confidential and not be disclosed to
third parties except in specified circumstances. There can be no assurance,
however, that these agreements will provide meaningful protection for the
Company's proprietary information in the event of unauthorized use or disclosure
of such information.
Recently Public Law 104-208 was signed into law in the United States and
limits the enforcement of patents relating to the performance of surgical or
medical procedures on a body. This law precludes medical practitioners and
health care entities that practice these procedures from being sued for patent
infringement. Therefore, depending upon how these limitations are interpreted
by the courts, they could have a material adverse effect on the Company's
ability to enforce any of its proprietary methods or procedures deemed to be
surgical or medical procedures. In certain other countries outside the United
States, patent coverage relating to the performance of surgical or medical
procedures is not available. Therefore, patent coverage in such countries will
be limited to the FMT or to narrower aspects of the FMT.
The medical device industry in general has been characterized by
substantial litigation. Litigation regarding patent and other intellectual
property rights, whether with or without merit, could be time-consuming and
expensive to respond to and could distract the Company's technical and
management personnel. The Company may become involved in litigation to defend
against claims of infringement by the Company, to enforce patents issued to the
Company or to protect trade secrets of the Company. If any relevant claims of
third-party patents are held as infringed and not invalid in any litigation or
administrative proceeding, the Company could be prevented from practicing the
subject matter claimed in such patents, or would be required to obtain licenses
from the patent owners of each such patent, or to redesign its products or
processes to avoid infringement. In addition, in the event of any possible
infringement, there can be no assurance that the Company would be successful in
any attempt to redesign its products or processes to avoid such infringement or
in obtaining licenses on terms acceptable to the Company, if at all.
Accordingly, an adverse determination in a judicial or administrative proceeding
or failure by the Company to redesign its products or processes or to obtain
necessary licenses could prevent the Company from manufacturing and selling its
products, which would have a material adverse effect on the Company's business,
financial condition and results of operations. Although the Company has not been
involved in any litigation to date, in the future, costly and time-consuming
litigation brought by
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<PAGE>
the Company may be necessary to enforce patents issued to the Company, to
protect trade secrets or know-how owned by the Company or to determine the
enforceability, scope and validity of the proprietary rights of others.
Future Capital Requirements; Uncertainty of Additional Funding. The
Company will expend substantial funds in the future for research and
development, preclinical and clinical testing, capital expenditures and the
manufacturing, marketing and sale of its products. * The timing and amount of
spending of such capital resources cannot be accurately predicted and will
depend upon several factors, including the progress of its research and
development efforts and preclinical and clinical activities, competing
technological and market developments, the time and costs of obtaining
regulatory approvals, the time and costs involved in filing, prosecuting and
enforcing patent claims, the progress and cost of commercialization of products
currently under development, market acceptance and demand for the Company's
products domestically, if approved for marketing, and internationally and other
factors not within the Company's control. On February 17, 1998, the Company
completed an initial public offering of 2,300,000 Common Shares. On February
27, 1998, the Company completed the sale of an additional 345,000 Common Shares
pursuant to the exercise by the underwriters of an over allotment option. Net
proceeds to the Company totaled approximately $28.4 million. While the Company
believes that the net proceeds of the offering, together with its previously
existing capital resources and projected interest income, will be sufficient to
fund its operations and its capital investments through 1999, there can be no
assurance that the Company will not require additional financing prior to that
time. In addition, there can be no assurance that such additional financing
will be available on a timely basis on terms acceptable to the Company, or at
all, or that such financing will not be dilutive to stockholders. If adequate
funds are not available, the Company could be required to delay development or
commercialization of certain of its products, to license to third parties the
rights to commercialize certain products or technologies that the Company would
otherwise seek to commercialize for itself, or to reduce the marketing, customer
support or other resources devoted to certain of its products, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Lack of Sales, Marketing and Distribution Experience. The Company has
established a European sales and marketing organization and has an office in
Basel, Switzerland, where the Company's Director of European Sales and Marketing
and European Clinical Manager are based. In addition, the Company has employed
three sales personnel to provide direct sales coverage in Germany, France,
Switzerland, Austria and the United Kingdom. The Company plans to expand its
European sales and marketing organization in 1999.* The Company has established
distributors in Sweden, Denmark, Italy, Spain, Portugal, Belgium, The
Netherlands and Luxembourg as well as certain countries in the middle east and
North Africa. In other international markets, including Japan, the Company will
seek to establish a network of distributors.* The Company has recently hired a
sales manager to oversee the efforts of Med El Latino American SRL, who will
market the Company's products in South America. There can be no assurance that
the Company will be able to build an adequate direct sales force or marketing
organization in any country, that establishing a direct sales force or marketing
organization will be cost-effective or that the Company's sales and marketing
efforts will be successful. In addition, the Company has entered into
distribution agreements with only a limited number of international
distributors. There can be no assurance that the Company will be able to enter
into similar agreements with other qualified distributors on a timely basis on
terms acceptable to the Company, or at all, or that such distributors will
devote adequate resources to
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<PAGE>
selling the Company's products. Failure to establish an adequate direct sales
force domestically and in select international markets, and to enter into
successful distribution relationships, could have a material adverse effect on
the Company's business, financial condition and results of operations.
Uncertain Availability of Third-Party Reimbursement. The Company believes
that its products will generally be purchased by hospitals and clinics upon the
recommendation of a surgeon. In the United States, hospitals, physicians and
other health care providers that purchase medical devices generally rely on
third-party payors to reimburse all or part of the cost of the procedure in
which the medical device is being used. In most European markets, medical
devices are purchased primarily pursuant to government sponsored healthcare
programs. Such third-party payors have become increasingly sensitive to cost
containment in recent years and place a high degree of scrutiny on coverage and
payment decisions for new technologies and procedures.
Hearing aids, which are the subject of 510(k) clearance in the United
States and do not involve surgery, are generally not reimbursed, although a
modest reimbursement is provided under certain insurance plans. Traditionally,
hearing aid users have paid for these devices directly. The Company believes
that to obtain reimbursement on a widespread basis it will have to demonstrate
through clinical outcomes studies an improvement in the quality of life for
patients as well as the cost effectiveness of the soundbridges. There can be no
assurance that the Company will be able to demonstrate improvement in quality of
life or cost effectiveness, or that reimbursement will ever be available for the
Company's products. During clinical trials, the Company does not anticipate that
there will be any reimbursement for the soundbridge implant or procedure.
Certain third-party payors in the United States are moving toward a managed
care system in which they contract to provide comprehensive health care for a
fixed cost per person. The fixed cost per person established by these third-
party payors may be independent of the hospital's cost incurred for the specific
case and the specific devices used. Medicare and other third-party payors are
increasingly scrutinizing whether to cover new products and the level of
reimbursement for covered products.
Because none of the Company's products have received FDA clearance or
approval, uncertainty exists regarding the ultimate availability in the United
States of third-party reimbursement for procedures that would use the Company's
soundbridges. Even though the Company's Vibrant P and Vibrant HF soundbridges
are approved for commercial sales in the EU, there remains uncertainty in
international markets regarding the availability of third-party reimbursement
for procedures using the Company's soundbridges. Failure by physicians,
hospitals and other potential users of the Company's soundbridges to obtain
sufficient reimbursement from third-party payors for the procedures in which the
Company's soundbridges are intended to be used could have a material adverse
effect on the Company's business, financial condition and results of operations.
Third-party payors that do not use prospectively fixed payments
increasingly use other cost-containment processes or require various outcomes
data that may pose administrative hurdles to the use of the Company's
soundbridges. In addition, third-party payors may deny reimbursement if they
determine that the device used in a procedure is unnecessary, inappropriate,
experimental, used for a non-approved indication or is not cost-effective.
Potential purchasers must determine that the clinical
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<PAGE>
benefits of the Company's products justify the additional cost or the additional
effort required to obtain prior authorization or coverage and the uncertainty of
actually obtaining such authorization or coverage.
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 believes that in Europe, the primary source of
funding for products such as the Company's soundbridges is the various
government sponsored healthcare programs. Requirements for the granting of
reimbursement in many countries are not clearly specified and may involve the
collection of additional clinical data in support of submissions to the
appropriate health care administrations. There can be no assurance that any
required data would be available on a timely basis or that any international
reimbursement approvals will be obtained in a timely manner, if at all. Failure
to receive international reimbursement approvals could have a material adverse
effect on market acceptance of the Vibrant P and Vibrant HF soundbridges in the
EU as well as in other international markets in which such approvals are sought.
Dependence upon Key Personnel. The Company's future success depends in
significant part upon the continued service of certain key scientific, technical
and management personnel. Competition for such personnel is intense and there
can be no assurance that the Company can retain its key scientific, technical
and managerial personnel or that it can attract, assimilate or retain other
highly qualified scientific, technical and managerial personnel in the future.
The loss of key personnel, especially if without advance notice, or the
inability to hire or retain qualified personnel could have a material adverse
effect upon the Company's business, financial condition and results of
operations. The Company has not entered into employment agreements with any of
its key personnel. The Company is the beneficiary under a $1.0 million key man
insurance policy on Harry S. Robbins, its President and Chief Executive Officer.
Product Liability Risk; Possible Insufficiency of Insurance. The
manufacture, sale and implantation of the Company's products involve the risk of
product liability claims. The Company currently has limited product liability
insurance. There can be no assurance that such insurance will continue to be
available on commercially reasonable terms or that the coverage limits will be
adequate. The Company intends to evaluate its coverage on a regular basis. Such
insurance is expensive and may not be available on acceptable terms, or at all.
A successful claim brought against the Company in excess of its insurance
coverage would have a material adverse effect on the Company's business,
financial condition and results of operations.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities and Use of Proceeds.
On February 17, 1998, the Company completed the sale of 2,300,000 Common
Shares at a per share price of $12.00 in a firm commitment underwritten public
offering. The offering was effected pursuant to a Registration Statement on
Form S-1 (Registration No. 333-40339), which the United States Securities and
Exchange Commission declared effective on February 12, 1998. The offering was
underwritten by Cowen & Company and UBS Securities. On February 27, 1998 the
Company completed the sale of an additional 345,000 Common Shares at a per share
price of $12.00 pursuant to the exercise of the over-allotment option by the
underwriters. Of the $31,740,000 in aggregate proceeds raised by the Company in
connection with the February offering, (i) approximately $2,221,800 was paid to
the underwriters in connection with underwriting discounts and commissions and
(ii) approximately $1,120,000 was paid by the Company in connection with
offering expenses, including legal, printing and filing fees. The Company has
used the remaining proceeds of the offering in the following manner:
Use of Proceeds
---------------
<TABLE>
<S> <C>
Research & Development, including clinical trials $ 4,600,000
Development of sales and marketing organization $ 1,100,000
Leasehold improvements and capital expenditures $ 1,000,000
Working capital and general corporate $ 9,800,000
Temporary Investments
Short-term investments $ 11,900,000
</TABLE>
All amounts represent estimates of direct or indirect payments of amounts
to third parties. No amounts were paid directly or indirectly for the above
purposes to directors or officers of the Company, to persons owning ten percent
or more of any class of equity securities of the Company, or to affiliates of
the Company. The use of proceeds described above do not represent a material
change in the use of proceeds described in the offering prospectus.
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
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Item 5. Other Information.
None
Item 6. Exhibits.
(a) Exhibits
27.1 Financial Data Schedule
23
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this 10-Q report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 1998 SYMPHONIX DEVICES, INC.
/s/ Harry S. Robbins
-------------------------------------------
Harry S. Robbins
President and Chief Executive Officer
/s/ Alfred G. Merriweather
-------------------------------------------
Alfred G. Merriweather
Vice President Finance and Chief Financial
Officer (Principal Financial and Accounting
Officer)
24
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