<PAGE>
Total Number of Pages: 19
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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 QUARTER ENDED March 31, 1996,
OR
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO __________
Commission file number 0-26208
================================================================================
KERAVISION, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0328942
(State of Incorporation) (I.R.S. Employer
Identification No.)
48630 MILMONT DRIVE
FREMONT, CA 94538
(Address of principal executive offices)
(510) 353-3000
(Registrant's telephone number)
===============================================================================
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 May 2, 1996, there were 12,279,511 shares of Common Stock
outstanding.
* The Registrant has been subject to such filing requirements since July 27,
1995, the effective date of its Registration Statement on Form 8-A.
<PAGE>
INDEX
-----
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Balance Sheets as of March 31, 1996 and
December 31, 1995............................................ 3
Condensed Statements of Operations for the three months
ended March 31, 1996 and 1995................................ 4
Condensed Statements of Cash Flows for the three months
ended March 31, 1996 and 1995................................ 5
Notes to Condensed Financial Statements...................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 15
Item 2. Changes in Securities........................................ 15
Item 3. Defaults upon Senior Securities.............................. 15
Item 4. Submission of Matters to a Vote of Security Holders.......... 15
Item 5. Other Items.................................................. 15
Item 6. Exhibits and Reports on Form 8-K............................. 15
SIGNATURES................................................................. 16
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS:
KERAVISION, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- --------------
(Unaudited) (Note 1)
----------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 17,301 $ 44,703
Short-term investments................................................. 25,034 --
Prepaid expenses....................................................... 122 272
-------- --------
Total current assets......................................................... 42,457 44,975
Property and equipment, at cost:
Manufacturing and laboratory equipment.................................. 1,826 1,596
Office furniture and fixtures........................................... 362 362
Leasehold improvements.................................................. 214 214
-------- --------
2,402 2,172
Accumulated depreciation and amortization.................................... (1,376) (1,298)
-------- --------
Net property and equipment.............................................. 1,026 874
Other assets................................................................. 64 70
-------- --------
Total assets................................................................. $ 43,547 $ 45,919
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $ 314 $ 445
Accrued payroll and related expenses.................................... 227 124
Accrued clinical trial costs............................................ 818 779
Other accrued liabilities............................................... 190 316
Current portion of capital lease obligations............................ 106 106
-------- --------
Total current liabilities.................................................... 1,655 1,770
Capital lease obligations.................................................... 90 114
Commitments
Stockholders' equity:
Preferred stock......................................................... -- --
Common stock............................................................ 12 12
Additional paid-in capital.............................................. 75,726 75,710
Deferred compensation................................................... (440) (477)
Deficit accumulated during the development stage........................ (32,689) (30,403)
Notes receivable from stockholders...................................... (807) (807)
-------- --------
Total stockholders' equity................................................... 41,802 44,035
-------- --------
Total liabilities and total stockholders' equity..................... $ 43,547 $ 45,919
======== ========
</TABLE>
See accompanying notes.
-3-
<PAGE>
KERAVISION, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA; UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 6, 1986
(DATE OF
THREE MONTHS INCORPORATION) TO
ENDED MARCH 31, MARCH 31, 1996
-------------------- --------------------
1996 1995
-------- --------
<S> <C> <C> <C>
Operating expenses:
Research and development.......................................... $ 2,186 $ 1,242 $ 28,214
General and administrative........................................ 658 305 7,571
------- ------- -------
Loss from operations................................................... (2,844) (1,547) (35,785)
Interest income, net................................................... 547 83 3,332
Other income (expense)................................................. -- (60) (171)
------- ------- --------
Net Loss............................................................... $(2,297) $(1,524) $(32,624)
======= ======= ========
Net loss per share..................................................... $ (0.19)
=======
Shares used in calculation of net loss per share....................... 12,266
Pro forma net loss per share........................................... $ (0.18)
=======
Shares used in calculation of pro forma net loss per share............. 8,290
</TABLE>
See accompanying notes.
-4-
<PAGE>
KERAVISION, INC.
CONDENSED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 6,
THREE MONTHS THREE MONTHS 1986 (DATE OF
ENDED ENDED INCORPORATION) TO
MARCH 31, 1996 MARCH 31, 1995 MARCH 31, 1996
------------------ --------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Loss............................................................ $ (2,297) $(1,524) $(32,624)
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization................................. 84 76 1,578
Interest receivable on stockholders' notes.................... -- -- (145)
Amortization of deferred compensation......................... 37 39 577
Loss on sales of securities and other......................... -- 60 244
Prepaid expenses.............................................. 150 (4) (122)
Accounts payable.............................................. (131) (155) 314
Accrued liabilities........................................... 16 271 1,235
-------- ------- --------
Total adjustments.......................................... 156 287 3,681
-------- ------- --------
Net cash used in operating activities...................... (2,141) (1,237) (28,943)
-------- ------- --------
Cash flows from investing activities:
Purchases of short-term investments................................. (25,023) (1,980) (35,877)
Sales of short-term investments..................................... -- 1,427 6,690
Maturities of short-term investments................................ -- 1,000 3,990
Capital expenditures................................................ (230) (18) (2,179)
Other assets........................................................ -- (1) (224)
-------- ------- --------
Net cash provided by (used in) investing activities......... (25,253) 428 (27,600)
-------- ------- --------
Cash flows from financing activities:
Principal payments under capital lease obligations.................. (24) (25) (334)
Proceeds from sales-leaseback of capital equipment.................. -- -- 271
Proceeds from issuance of equity securities, net of repurchases..... 16 5 72,157
Proceeds from issuance of notes payable............................. -- -- 1,750
-------- ------- --------
Net cash provided by (used in) financing activities........ (8) (20) 73,844
-------- ------- --------
Net increase (decrease) in cash and cash equivalents.................. (27,402) (829) 17,301
Cash and cash equivalents at the beginning of the period.............. 44,703 1,247 --
-------- ------- --------
Cash and cash equivalents at the end of the period.................... $ 17,301 $ 418 $ 17,301
======== ======= ========
</TABLE>
See accompanying notes.
-5-
<PAGE>
KERAVISION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of KeraVision, Inc.
(the "Company" or "KeraVision"), a development stage entity, have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. The balance sheet as of March 31, 1996 and the statements of
operations and cash flows for the three-month periods ended March 31, 1996 and
1995 are unaudited but include all adjustments (consisting only of normal
recurring adjustments) which the Company considers necessary for a fair
presentation of the financial position at such date and the operating results
and cash flows for those periods. Although the Company believes that the
disclosures in these financial statements are adequate to make the information
presented not misleading, certain information normally included in financial
statements and related footnotes prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The accompanying
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's annual report and Form 10-K for the
year ended December 31, 1995. The accompanying condensed balance sheet at
December 31, 1995 is derived from audited financial statements at that date.
Results for any interim period are not necessarily indicative of results for
any other interim period of for the entire year.
2. NET LOSS PER SHARE
Net loss per share is computed using the weighted-average number of shares of
common stock outstanding during the periods presented. Common equivalent shares
are excluded from the computation as their effect is antidilutive, except that,
pursuant to the Securities and Exchange Commission Staff Accounting Bulletins,
common and common equivalent shares (stock options, warrants, convertible notes
and preferred stock) issued during the 12-month period prior to the Company's
initial public offering have been included in the calculation as if they were
outstanding for all periods through July 31, 1995 using the treasury stock
method for stock options and warrants and the if-converted method for
convertible preferred stock. Pro forma net loss per share for the three months
ended March 31, 1995, has been computed as described above and also gives effect
to the conversion of redeemable convertible preferred shares not included above
that automatically converted into common shares upon completion of the CompanyOs
initial public offering (using the if-converted method) from the original date
of issuance.
3. SHORT-TERM INVESTMENTS
The Company's short-term investments at March 31, 1996, classified as
available-for-sale securities, were composed of the following (in thousands):
<TABLE>
<CAPTION>
Estimated Fair
Value
--------------
<S> <C>
U.S. Government Obligations $11,971
Corporate Debt Securities 9,057
Municipal Investments 4,006
-------
$25,034
=======
</TABLE>
Gross realized and unrealized gains/losses were not significant during the
periods ended March 31, 1996 and 1995.
-6-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
The following discussion should be read in conjunction with the
unaudited financial statements and notes thereto included in Part I -- Item 1 of
this Quarterly Report and the audited financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's Annual Report and Form 10-K for the year
ended December 31, 1995.
OVERVIEW
Since its founding in November 1986, the Company has been engaged in the
research and development of the Intrastromal Corneal Ring (the "Corneal Ring")
and related technology. The Company has generated no revenues from the sales of
products and therefore has been unprofitable since inception and is considered
to be a development stage company. For the period from incorporation to March
31, 1996, KeraVision has incurred cumulative net losses of $32.6 million. The
Company does not expect to generate significant revenues in either 1996 or 1997
and expects to continue to incur substantial losses through at least the year
ending December 31, 1997. Furthermore, the Company expects its expenses in all
categories to increase as its clinical and other activities increase.
The research, manufacture, sale and distribution of medical devices such as
the Corneal Ring are subject to numerous regulations imposed by governmental
authorities, principally the FDA and corresponding state and foreign agencies.
The regulatory process is lengthy, expensive and uncertain. Prior to commercial
sale in the United States, most medical devices, including the Company's Corneal
Ring, must be cleared or approved by the FDA. Securing FDA approvals and
clearances will require the submission to the FDA of extensive clinical data and
supporting information. Current FDA enforcement policy strictly prohibits the
marketing of medical devices for uses other than those for which the product has
been approved or cleared. Product approvals and clearances can be withdrawn for
failure to comply with regulatory standards or the occurrence of unforeseen
problems following initial marketing. Foreign governments also have review
processes for medical devices which present many of the same risks.
The Company is currently conducting Phase II clinical trials for the Corneal
Ring. The Company does not believe it will be able to complete development of,
obtain regulatory approval for and begin commercial sales of the Corneal Ring in
Europe before late 1996 or early 1997, or in the United States before late 1999,
if ever. There can be no assurance that the Company's research and development
efforts will be successfully completed, and until the development and testing
processes for the Corneal Ring are complete, there can be no assurance that the
Corneal Ring will perform in the manner anticipated. There can be no assurance
that the Corneal Ring will prove to be safe or effective over the long term in
correcting vision, that the product will be approved for marketing by the FDA or
any other government agency or that the Corneal Ring or any other product
developed by the Company will be commercially successful, will be successfully
marketed or achieve market acceptance. There can be no assurance that the
Company will ever achieve either significant revenues from sales of the Corneal
Ring or any other potential products or ever achieve profitable operations.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Research and development expenses, which include clinical and regulatory
expenses, for the three-month period ended March 31, 1996 were $2.2 million, an
increase of $0.9 million from the three-month period ended March 31, 1995. The
increase is attributable to increased activities related to clinical trials and
additional investments in research and development of the Corneal Ring and
related technologies. Management expects research and development expenses to
continue to increase, as clinical trials continue in Europe and the United
States.
General and administrative expenses of $0.7 million were incurred in the
three-month period ended March 31, 1996, an increase of $0.4 million from the
$0.3 million incurred in the comparable prior year period. The increase was
primarily the result of increased expenses associated with marketing efforts,
hiring of personnel and operating as a public company.
-7-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS: (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
The Company recorded $0.5 million of net interest income for the three months
ended March 31, 1996, as compared to $0.1 million for the previous year.
Interest income increased due to the short-term investment of net proceeds of
$44.4 million from the Company's initial public offering completed on August 2,
1995. The net loss of $2.3 million for the three-month period ended March 31,
1996, increased $0.8 million from the $1.5 million reported in the comparable
prior year period. The Company believes that its net loss will significantly
increase in future periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since incorporation primarily through
its initial public offering, private sales of preferred stock and interest
income. The Company completed an initial public offering of its Common Stock on
August 2, 1995, from which it realized net proceeds (after underwriting
discounts and expenses) of $44.4 million. Through June 30, 1995 the Company had
raised approximately $29.5 million from the sale of common and preferred stock
and related warrants. The Company's capital expenditures have aggregated since
inception to $2.2 million through March 31, 1996 and cash used to fund operating
activities since incorporation is $28.9 million. Cash used in operating
activities for the first three months of 1996 has increased to $2.1 million from
$1.2 million in the same period of the prior year, reflecting increasing net
losses principally related to increased research and development expenditures.
Cash, cash equivalents and short-term investments were $42.3 million at March
31, 1996.
The Company expects to continue to incur substantial expenses in support of
additional research and development activities, including costs of clinical
studies, production costs, the establishment of a sales and marketing
organization and the support for ongoing administrative activities. The Company
anticipates that the existing cash, cash equivalents and short-term investments
will enable it to maintain its current and planned operations for at least the
next 24 months.
The Company's cash requirements may vary materially from those now planned
because of results of research, development, and clinical testing, establishment
of relationships with strategic partners, changes in focus and direction of the
Company's research and development programs, changes in the scale, timing, or
cost of the Company's manufacturing facility, competitive and technological
advances, the FDA or other regulatory processes, changes in the Company's
marketing and distribution strategy, and other factors. As a result, the Company
may need to raise additional funds in the form of equity or debt financing to
fund its future operations. The Company may also enter into collaborative
arrangements with corporate partners that could provide the Company with
additional funding in the form of equity, debt or license fees in exchange for
the Company's rights with respect to certain markets or technology. There can be
no assurance that the Company will be able to raise any additional funds or
enter into any such collaborative arrangements, in either case on favorable
terms or at all.
FORWARD LOOKING STATEMENTS
The Company notes that certain of the foregoing statements in this report are
forward looking and that actual results may differ materially due to a variety
of factors including, but not limited to, significant unforeseen delays in the
regulatory approval process as a result of (i) determinations by the FDA or
foreign regulatory bodies that the clinical data collected are insufficient to
support safety and efficacy of the Corneal Ring, (ii) the FDA's failure to
schedule advisory review panels, (iii) changes in regulatory review guidelines,
procedures, regulations or administrative interpretations, (iv) complications
relating to the Corneal Ring or the surgical procedure, (v) competitive products
and technology, and (vi) other risk factors described under the heading "Risk
Factors Affecting the Company, its Business and its Stock Price" set forth below
in this Item 2.
-8-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS: (CONTINUED)
CERTAIN RISK FACTORS AFFECTING THE COMPANY, ITS BUSINESS AND ITS STOCK PRICE
Early Stage of Product Development; Operating Losses; Uncertainty of
Product Development and Future Revenue. KeraVision, founded in 1986, has not
completed development of any products or generated any revenues to date.
Accordingly, the Company is classified as a development stage company and is
subject to the uncertainties and risks associated with any such company. The
Company has experienced operating losses every year since its incorporation.
Such losses have resulted principally from costs incurred in research and
development and clinical trials for the Corneal Ring. The Company expects
to incur substantial and increasing operating losses for at least the next
several years. The amount of net losses and the time required by the Company to
reach profitability are highly uncertain. There can be no assurance that the
Company will be able to generate product revenue or achieve profitability on a
sustained basis or at all.
To obtain revenue, the Company, alone or with others, must successfully
develop, obtain regulatory approval for, manufacture and market products. The
time frame for achievement of market success for any potential product is long
and uncertain. The Company has only recently completed enrollment of patients
for its United States Phase II clinical trials for its first potential product,
the Corneal Ring. The Corneal Ring will require additional clinical studies and
significant investment of capital prior to commercialization. There can be no
assurance that the Company's research and development efforts will be
successfully completed, and until the development and testing processes for the
Corneal Ring are complete, there can be no assurance that the Corneal Ring will
perform in the manner anticipated, or that results observed in animal, eye-bank
or human nonfunctional and sighted-eye testing will be experienced in long-term
use of the Corneal Ring in human sighted eyes. There can be no assurance that
the Corneal Ring will prove to be safe or effective over the long term in
correcting vision, that the product will be approved for marketing by the FDA or
any other government agency or that the Corneal Ring or any other product
developed by the Company will be commercially successful.
Government Regulation and Need for Product Approvals. The research,
manufacture, sale and distribution of medical devices such as the Corneal Ring
is subject to regulations imposed by numerous governmental authorities,
principally the FDA and corresponding state and foreign agencies. The
regulatory process is lengthy, expensive and uncertain. Prior to commercial
sale in the U.S., most medical devices, including the Company's Corneal Ring,
must be cleared or approved by the FDA. Securing FDA approvals and clearances
will require the submission to the FDA of extensive clinical data and supporting
information. Current FDA enforcement policy strictly prohibits the marketing of
medical devices for uses other than those for which the product has been
approved or cleared. Product approvals and clearances can be withdrawn for
failure to comply with regulatory standards or the occurrence of unforeseen
problems following initial marketing. FDA approval will be required for
commencement of additional clinical studies, which must be conducted prior to
applying for FDA approval to market the Corneal Ring in the United States. The
Company cannot, however, predict with certainty when it might first submit a
Premarket Approval (''PMA'') application to the FDA or apply for foreign
regulatory approvals. Similarly, the Company cannot predict when, if at all, it
will obtain FDA or foreign regulatory approvals to market the Corneal Ring.
Failure to obtain required FDA or foreign regulatory agency approvals would
prevent the Company from marketing the Corneal Ring in the jurisdiction
regulated by such agency.
Significant unforeseen delays in the approval process could occur as a result
of determinations by the FDA that the clinical data collected are insufficient
to support the safety and efficacy of one or more of the devices for their
intended uses, the FDA's failure to schedule advisory review panels, changes in
review guidelines, FDA procedures, regulations or administrative
interpretations. Delays in obtaining requisite regulatory approvals, or the
failure to obtain required clearances or approvals in the United States and
other countries, would adversely affect or prevent the marketing of the Corneal
Ring, impair the Company's ability to generate funds from operations, and may
furnish a competitive advantage to other companies that compete with the
Company. The Company may also be required to demonstrate that the Corneal Ring
represents an improved form of treatment over existing alternatives and/or that
the expected benefits of the Corneal Ring outweigh any of the risks associated
with its use. There can be no assurance that the Company will be able to obtain
required approvals or clearances in the United States or certain foreign
countries for the intended use of the Corneal Ring or any other of its potential
products.
If the Corneal Ring is approved for the correction of myopia, it may be
subject to additional post-market testing and surveillance programs required by
the regulatory agencies. As the developer of the Corneal Ring, the Company is
required to meet certain current Good Manufacturing Practices (''GMP''). In
-9-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS: (CONTINUED)
the event that the Company were to manufacture the Corneal Ring, the Company
would be required to adhere to additional GMP requirements for the development
and distribution of the Corneal Ring. The Company will be required to engage in
extensive recordkeeping and reporting, and possibly to conduct extensive post-
market surveillance or other device follow-up. Ongoing compliance with GMP,
labeling and other applicable regulatory requirements are monitored through
periodic inspections by state and federal agencies, including the FDA, and
comparable agencies in other countries. In addition, regulatory approval of
prices is generally required in many foreign countries. Failure to comply with
the applicable regulatory requirements can, among other things, result in fines,
injunctions, civil penalties, suspensions or withdrawal of regulatory approvals,
product recalls, product seizures, including cessation of manufacturing and
sales, operating restrictions and criminal prosecution, and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain approvals required by foreign countries may be longer or
shorter than that required for FDA approval, and requirements for licensing may
differ from FDA requirements. Export sales of investigational devices that have
not received FDA marketing clearance generally are subject to FDA export permit
requirements. Failure to comply with regulatory requirements could have a
material adverse effect on the Company's business, financial condition and
results of operations.
All of the above described government regulation and product approval risks
will apply to the Corneal Ring and any future potential product of the Company.
Government regulation may become more restrictive in the future. There can be no
assurance that the Company will not be required to incur significant costs to
comply with such laws and regulations in the future or that such laws and
regulations will not have a material adverse effect upon the Company's ability
to conduct business. As part of the process to commercialize in Europe, the
Company is currently working towards obtaining the CE mark status. The Company
believes not being able to obtain the CE mark status will have an adverse effect
on penetration of the European market.
Need for Market Acceptance of the Corneal Ring and Other Products; Limitations
on Potential Market. The Company's future performance will depend to a
substantial degree upon market acceptance of, and the Company's ability to
successfully manufacture, market, deliver and support, the Corneal Ring and
related products. The extent of, and rate at which, market acceptance and
penetration are achieved by the Corneal Ring and future products is a function
of many variables including, but not limited to, price, safety, efficacy,
reliability and marketing and sales efforts, as well as general economic
conditions affecting purchasing patterns. To be successful, the Company's
Corneal Ring will have to be accepted by ophthalmic surgeons as well as myopic
patients. Many of these surgeons may have already invested significant time and
resources in developing expertise in other corrective ophthalmic surgical
techniques. Accordingly, there can be no assurance that the Corneal Ring or any
future product will achieve or maintain acceptance in their target markets.
Similar risks may confront other products developed by the Company in the
future.
The Corneal Ring is designed to treat myopia. Of the 70 million myopic people
in the United States, an estimated 22 million patients in the age range of 25 to
54 have low to moderate myopia without significant astigmatism. The Company
views this age group as the primary population for refractive surgery because of
a lack of refractive stability in younger patients, and a possible preference
for eyeglasses and contact lenses among older patients. In addition to age and
degree of myopia, the Company believes that the potential market for the Corneal
Ring may be further limited by the inability of some patients to afford the
procedure and the psychological aversion of some patients to refractive surgery.
The Company also expects that the market will be affected by the relative
attractiveness and affordability of other refractive surgical techniques.
Lack of Long-Term Follow-Up Data; Complications and Visual Side Effects. The
Company has developed only limited clinical data to date on the safety and
efficacy of the Corneal Ring in correcting myopia, and has not yet developed any
long-term safety or efficacy data. The Corneal Ring technology is relatively new
technology. The first procedure for the treatment of myopia using the Corneal
Ring was performed in 1991, and to date only a limited number of procedures have
been conducted. The Corneal Ring is in United States Phase II clinical trials,
and it cannot yet be determined if the Corneal Ring technology will prove to be
effective for the predictable treatment of myopia or other common vision
problems. There can be no assurance that the initial clinical trial results are
necessarily indicative of future
-10-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS: (CONTINUED)
clinical trial results. Because KeraVision has conducted only limited clinical
studies to date, there can be no assurance that long-term safety and efficacy
data when collected will be consistent with these clinical trial results and
will demonstrate that the Corneal Ring can be used safely and successfully to
treat myopia in a broad segment of the population or on a long-term basis.
All surgical procedures, including the Corneal Ring procedure, involve some
inherent risk of complications. Certain complications have been observed in a
small number of patients who have received the Corneal Ring, but no patient has
suffered any serious or lasting injury to the eye or any material loss of either
uncorrected or best corrected visual acuity. The complications observed to date
with the Corneal Ring appear to be related to surgical technique. These
complications are typically caused by the placement of the incision and include,
among other things: small stromal defects in the upper region of the cornea near
the incision; a single, nonprogressive blood vessel entering along the incision;
induced astigmatism; and a temporary reduction in central corneal sensation.
Furthermore, there have been patients who had their Corneal Rings removed due to
a surgery-related infection. In addition, patients undergoing the Corneal Ring
procedure have reported certain visual side effects. These include glare, haloes
and reduced night vision. The preliminary clinical results have suggested that
as the surgical incision heals, the incidence of these visual side effects may
decrease. No assurance can be given that these complications or side effects
will not be serious or lasting or will not impair or preclude the Company from
obtaining regulatory approval for its potential products.
Reliance on a Single Potential Product. The Company has concentrated its
efforts primarily on the development of the Corneal Ring for the correction of
myopia and will be dependent upon the successful development of that potential
product to generate revenues. The Company has performed only limited research on
other applications of the Corneal Ring technology. There can be no assurance
that the Corneal Ring technology will prove safe and effective in vision
correction, or that if proven safe and effective, the technology will be
successfully commercialized.
Dependence on Patents and Proprietary Technology. The Company has depended and
will continue to depend substantially on its technological expertise in the
development and manufacture of the Corneal Ring and any other potential
products. In addition, the commercial success of the Company will depend in part
on acquiring and maintaining patent and trade secret protection with respect to
the Corneal Ring technology, the Corneal Ring and any other potential products
the Company seeks to develop. There can be no assurance that the Company will be
successful in obtaining necessary patents or license rights, that the Company's
patent applications will result in the issuance of patents, that the Company
will develop additional proprietary technology that is patentable, that any
issued patents will provide the Company with any competitive advantages or will
withstand challenges by third parties or that patents of others will not have an
adverse effect on the Company. A large healthcare company with refractive
surgery products and substantial resources holds a recently issued United States
patent covering a method for changing the curvature of the cornea by inserting
in the cornea a solid ring. Because this method requires the use of a solid
ring, it necessitates a continuous 360 degree incision around the entire
central zone of the cornea. A major United States university holds two United
States patents, one issued in 1992 and the other in 1994, covering a method for
changing the curvature of the cornea by injecting hydrogel material into
separated layers of the corneal tissue. The Company believes the university may
be seeking to commercialize this technology and may have sold or licensed this
technology to a large corporation. The Company does not believe it is infringing
any of such patents. Except as noted above, the Company is not aware of any
other commercial entity involved in intrastromal corneal ring development,
although it is aware of ongoing academic research on both solid and injectable
forms of corneal inserts. There can be no assurance that others will not
independently develop similar products, duplicate the Company's products or
design products that circumvent any patents used by the Company. No assurance
can be given that the Company's processes or products will not infringe patents
or proprietary rights of others or that any licenses required under any such
patents or proprietary rights would be made available on terms acceptable to the
Company, if at all. If the Company does not obtain such licenses, it could
encounter delays in product introductions while it attempts to design around
such patents, or it could find that the development, manufacture or sale of
products requiring such licenses could be enjoined. In addition, the Company
could incur substantial costs in defending itself in suits brought against the
Company on such patents or in bringing suits to protect the Company's patents
against infringement. If the outcome of any such litigation is adverse to the
Company, the Company's business could be adversely affected. To determine the
priority of inventions, the Company may have to participate in proceedings
before the U.S. Patent and Trademark Office, which could result in substantial
cost to the Company and/or be decided adversely to the Company.
-11-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS: (CONTINUED)
The Company also relies on trade secrets and proprietary know-how which it
seeks to protect by confidentiality agreements with its employees, consultants,
investigators and advisors. There can be no assurance that these agreements will
not be breached, that the Company will have adequate remedies for any breach, or
that the Company's trade secrets and proprietary know-how will not otherwise
become known or be independently discovered by competitors.
Intense Competition and Rapid Technological Change. The Company is engaged in
a rapidly evolving field. There are many companies, both public and private,
universities and research laboratories engaged in activities relating to
research on vision correction alternatives, including RK, PRK, Laser in situ
Keratomileusis ("LASIK"), Automated Lamellar Keratoplasty ("ALK") and refractive
intraocular lenses. Competition from these companies, universities and
laboratories is intense and expected to increase. Two companies, Summit
Technology and VISX, have conducted Phase III clinical studies in the United
States to evaluate PRK for the treatment of myopia. Both companies have received
approval to market their products in the United States. In addition to Summit
Technology and VISX, there are a number of other entities that currently market
and sell laser systems overseas for use in refractive surgery, including
Aesculap-Meditec GmBH (Germany), Chiron-Technolas (Germany), Nidek (Japan) and
Schwind (Germany). Furthermore, a large healthcare company with refractive
surgery products and substantial resources holds a recently issued United States
patent covering a method for changing the curvature of the cornea by inserting
in the cornea a solid ring. Because this method requires the use of a solid
ring, it necessitates a continuous 360 degree incision around the entire
central zone of the cornea. A major United States university holds two United
States patents, one issued in 1992 and the other in 1994, covering a method for
changing the curvature of the cornea by injecting hydrogel material into
separated layers of the corneal tissue. The Company believes the university may
be seeking to commercialize this technology and may have sold or licensed this
technology to a large corporation. Except as noted above, the Company is not
aware of any other commercial entity involved in intrastromal corneal ring
development, although it is aware of ongoing academic research on both solid and
injectable forms of corneal inserts. Many of these companies and institutions
have substantially greater resources, research and development staffs,
facilities, experience in research and development, obtaining regulatory
approval and manufacturing and marketing medical device products than the
Company, and represent significant long-term competition for the Company. In
addition to those mentioned above, other recently developed technologies or
procedures are, or may in the future be, the basis of competitive products.
There can be no assurance that the Company's competitors will not succeed in
developing technologies, procedures or products that are more effective or
economical than those being developed by the Company or that would render the
Company's technology and proposed product obsolete or noncompetitive.
Furthermore, if the Company is permitted to commence commercial sales of
products, it will also be competing with respect to manufacturing efficiency and
marketing capabilities, areas in which the Company has no experience. Finally,
the Company intends to market its proposed products to people whose vision can
be corrected with eyeglasses or contact lenses. There can be no assurance that
these persons will elect to undergo surgical insertion of the Corneal Ring when
such non-surgical vision-correction alternatives are available.
No Manufacturing Experience; Dependence on Third Parties. The Company has no
volume manufacturing capacity or experience in manufacturing medical devices or
other products. To be successful, the Company's proposed products must be
manufactured in commercial quantities in compliance with regulatory requirements
at acceptable costs. Production in clinical or commercial-scale quantities may
involve technical challenges for the Company. Establishing its own manufacturing
capabilities would require significant scale-up expenses and additions to
facilities and personnel. The Company may consider seeking collaborative
arrangements with other companies to manufacture certain of its potential
products, including the Corneal Ring. In addition, the manufacturer of the
Company's potential products will be subject to periodic inspection by
regulatory authorities. Any such operations must undergo GMP compliance
inspections conducted by the FDA and equivalent inspections conducted by state
and foreign officials. There can be no assurance that the Company will be able
to obtain necessary regulatory approvals on a timely basis or at all. Delays in
receipt of or failure to receive such approvals or loss of previously received
approvals would have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
the Company will be able to develop clinical or commercial-scale manufacturing
capabilities at acceptable costs or enter into agreements with third parties
with respect to these activities. If the Company is dependent upon third parties
for the manufacture of its proposed products, then the Company's profit margins
and its ability to develop and deliver such products on a timely basis may be
adversely affected. Moreover, there can be no assurance that such parties will
adequately perform and any failures by third parties may delay the submission of
-12-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS: (CONTINUED)
products for regulatory approval, impair the Company's ability to deliver
products on a timely basis, or otherwise impair the Company's competitive
position.
No Sales or Marketing Experience. The Company has never marketed or sold a
product and there are no implantable corneal devices currently being marketed
and sold to treat refractive problems. The Company intends to market and sell
the Corneal Ring and related technology in the United States and certain foreign
countries, if and when required regulatory authorization is obtained, through a
direct sales force or a combination of a direct sales force and distributors.
Establishing sufficient marketing and sales capability will require significant
resources. There can be no assurance that the Company will be able to recruit
and retain skilled sales management, direct salespersons or distributors, or
that the Company's sales effort will be successful. To the extent that the
Company enters into distribution arrangements for the sale of its products, the
Company will be dependent on the efforts of third parties. There can be no
assurance that such efforts will be successful.
Risk of Product Liability Litigation; Potential Unavailability of Insurance.
The testing, manufacture, marketing and sale of medical devices entail the
inherent risk of liability claims or product recalls. As a result, the Company
faces a risk of exposure to product liability claims and/or product recalls in
the event that the use of its Corneal Ring or other future potential products
are alleged to have resulted in adverse effects. While the Company has taken,
and intends to continue to take, what it believes are appropriate precautions to
minimize exposure to product liability claims, there can be no assurance that it
will avoid significant liability. The Company has, and prior to
commercialization of any of its products, intends to maintain, product liability
insurance in the amount of $1.0 million per claim with an annual aggregate limit
of $2.0 million. After any commercialization of its products, the Company will
seek to obtain an appropriate increase in its coverage; however, there can be no
assurance that adequate insurance coverage will continue to be available at an
acceptable cost, if at all, before or after commercialization of any of its
products. Consequently, a product liability claim, product recall or other
claims with respect to uninsured liabilities or in excess of insured liabilities
could have a material adverse effect on the business or financial condition of
the Company.
Future Capital Requirements and Uncertainty of Future Funding. The Company
anticipates that the existing cash, cash equivalents and short-term investments
will enable it to maintain its current and planned operations for at lease the
next 24 months. However, the Company will be required to commit substantial
resources to conduct the research and development, clinical studies and
regulatory activities necessary to bring any potential medical device product to
market and to establish production, marketing and sales capabilities. There can
be no assurance that the Company's current cash, cash equivalents and short-term
investments will be sufficient to fund the Company's operations to profitability
or through completion of the United States Phase III clinical trial for the
Corneal Ring for the treatment of myopia. The Company may need to raise
substantial additional funds for these purposes. The Company may seek such
additional funding through collaborative arrangements and through public or
private debt or equity financings. Any additional equity financing may be
dilutive to stockholders, and any debt financing, if available, may involve
restrictions on the Company's ability to pay dividends on its capital stock or
the manner in which the Company conducts its business. The Company currently has
no commitments for any additional financings, and there can be no assurance that
any such financings, if needed, will be available to the Company or that
adequate funds for the Company's operations, whether from the Company's
revenues, financial markets, collaborative or other arrangements with corporate
partners or from other sources, will be available when needed or on terms
attractive to the Company. The inability to obtain sufficient funds may require
the Company to delay, scale back or eliminate some or all of its research and
product development programs, clinical studies and/or regulatory activities or
to license third parties to commercialize products or technologies that the
Company would otherwise seek to develop itself.
Dependence on Sole Source Supplier. The raw material used in manufacturing the
Corneal Ring is currently purchased from a single source. Although the Company
has not experienced difficulty acquiring this material for the manufacture of
its products for clinical trials, no assurance can be given that interruptions
in supplies will not occur in the future or that the Company would not have to
obtain substitute vendors, which would require additional regulatory
submissions. Any such interruption of supply could have a material adverse
effect on the Company's ability to manufacture its products.
-13-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS: (CONTINUED)
International Sales and Operations Risks. The Company initially plans to sell
the Corneal Ring and any future products to customers outside of the United
States. In addition, the Company may begin manufacturing or operating activities
outside of the United States. A number of risks are inherent in international
transactions. International sales and operations may be limited or disrupted by
the imposition of the regulatory approval process, government controls, export
license requirements, political instability, price controls, trade restrictions,
changes in tariffs or difficulties in staffing and managing international
operations. Foreign regulatory agencies have or may establish product standards
different from those in the United States and any inability to obtain foreign
regulatory approvals on a timely basis could have an adverse effect on the
Company's international business and its financial condition and results of
operations. Additionally, the Company's business, financial condition and
results of operations may be adversely affected by fluctuations in currency
exchange rates, increases in duty rates and difficulties in obtaining export
licenses. There can be no assurance that the Company will be able to
successfully commercialize the Corneal Ring or any future product in any foreign
market.
Dependence on and Need for Additional Key Personnel. The success of the
Company and of its business strategy is dependent in large part on the ability
of the Company to attract and retain key management, scientific and operating
personnel. Such persons are in high demand and are often subject to competing
employment offers. The Company will need to develop expertise and add skilled
personnel or retain consultants in such areas as research and development,
clinical testing, government approvals, sales, marketing and manufacturing in
the future. There can be no assurance that the Company will be able to attract
and retain the qualified personnel or develop the expertise needed for its
business. The Company currently has a small research and management group with
limited operating experience. The loss of the services of one or more members of
the research or management group or the inability to hire additional personnel
and develop expertise as needed could have a material adverse effect on the
Company. The Company does not have employment agreements with any of its
employees.
Possible Volatility of Stock Price. The market prices for securities of
medical device companies have been highly volatile. Announcements regarding the
results of regulatory approval filings, clinical studies or other testing,
technological innovations or new commercial products by the Company or its
competitors, government regulations, developments concerning proprietary rights
or public concern as to safety of technology have historically had, and are
expected to continue to have, a significant impact on the market prices of the
stocks of medical device companies. The trading price of the Common Stock could
also be subject to significant fluctuations in response to variations in
operating results.
-14-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER ITEMS
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See exhibit index on page 17.
(b) Reports on Form 8-K: None
-15-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KERAVISION, INC.
/s/ Mark Fischer-Colbrie
------------------------
Mark Fischer-Colbrie
Vice President, Finance and Administration
and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: May 6, 1996
-16-
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
EXHIBITS PAGE NUMBER
- - - -------- -----------
<C> <S> <C>
11.1 Statement computation of net income (loss) per share 18
27 Financial Data Schedule 19
</TABLE>
-17-
<PAGE>
EXHIBIT 11.1
KERAVISION, INC.
STATEMENT OF COMPUTATION OF NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1996
------------------
<S> <C>
Net Loss.................................................... $(2,297)
=======
Shares used in computation of net loss per share:
Weighted average common shares outstanding................ 12,266
=======
Net loss per share.......................................... $ (0.19)
=======
<CAPTION>
Three Months Ended
March 31, 1995
------------------
<S> <C>
Net Loss.................................................... $(1,524)
=======
Shares used in calculation of pro forma net loss per share:
Weighted average shares of common stock outstanding....... 2,941
Shares related to Staff Accounting Bulletins Nos. 55,
64 and 83:
Stock option grants................................. 84
Issuances of common stock........................... 2
Preferred stock on an as-if converted basis............... 5,263
-------
8,290
=======
Pro forma net loss per share................................ $ (0.18)
=======
</TABLE>
-18-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 17,301
<SECURITIES> 25,034
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 42,457
<PP&E> 2,402
<DEPRECIATION> 1,376
<TOTAL-ASSETS> 43,547
<CURRENT-LIABILITIES> 1,655
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 41,790
<TOTAL-LIABILITY-AND-EQUITY> 43,547
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,844
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,297)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,297)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
</TABLE>
