November 13, 1997
SPINE TECH INC (SPYN)
Quarterly Report (SEC form 10-Q)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Since
commencing full-time operations in July 1991, the Company has been engaged in the design, development, manufacture and sale of spinal implants and
instruments for the surgical treatment of degenerative disc disease and other spinal conditions. The Company's spinal implants are designed to facilitate
fusion of spinal vertebrae in order to reduce spinal instability that can cause chronic, disabling back pain. A clinical trial of the Company's BAK-TM-
Interbody Fusion System device began in April 1992 under an Investigational Device Exemption ("IDE") in the United States. Based upon data from the
clinical trial, the Company submitted a Pre-Market Approval Application ("PMA") to the United States Food and Drug Administration (the "FDA"). On May
23, 1996, the Orthopaedic and Rehabilitation Devices Advisory Panel reviewed and recommended approval of the Company's PMA application for
clearance to market the BAK Interbody Fusion System. On September 20, 1996, the Company received FDA approval to market the BAK Interbody Fusion
System in the United States, and the Company commenced domestic commercial shipments of the BAK. Since receiving FDA approval on September 20,
1996 the Company has submitted supplements to its original PMA. In May, 1997, the Company received FDA approval to market 31 additional sizes of
BAK implants. In October, 1997, the Company received FDA approval to market its new BAK/PROXIMITY Interbody Fusion Implant, an advanced,
patented implant design. In the domestic market, the Company sells BAK implants primarily through direct sales representatives. Currently, the Company
has 42 direct sales representatives, ten clinical specialists and five regional sales managers, all of whom live in the geographic areas they service. In addition
to these direct sales representatives, the Company uses independent sales agents in four geographic areas (for example, Montana, Utah and Nevada are
serviced by independent agents). These independent sales agents employ approximately twenty salespeople who sell the Company's products. All domestic
sales whether accomplished by direct sales representatives or independent agents are made directly to hospitals. The Company has developed and is
developing additional products which address degenerative disc disease and other spinal conditions. In addition to the BAK Interbody Fusion System, the
Company has developed the BAK/C-TM- which is used in the cervical spine. Like the BAK, the BAK/C is subject to extensive clinical trials under a
separate IDE from the FDA. The BAK/C clinical trial commenced during the first quarter of fiscal 1995. The BAK/C has been introduced into certain
international markets. As international approvals are received, the BAK/C will be introduced into additional international markets. In May 1995, the
Company introduced Cervi-Lok-Registered Trademark-, an anterior cervical implantable plate and screw system for use in the cervical spine, pursuant to a
510(k) clearance received from the FDA. While the product has been rolled-out on a nationwide basis, sales efforts have been minimal on this product since
BAK commercial launch. International roll-out of Cervi-Lok began in the fourth quarter of fiscal 1995. In September 1993, the Company entered into an
exclusive agreement with Smith & Nephew-Richards, Inc. ("Smith & Nephew") for the distribution of the BAK Interbody Fusion System outside of the
United States as long as quarterly minimum purchases were made by Smith & Nephew from the Company. During the first quarter of 1996, Smith &
Nephew informed the Company that they would not make their required minimum purchases under the contract. Based upon provisions in the agreement,
the Company terminated Smith & Nephew's exclusive distribution rights. Under terms of the agreement, Smith & Nephew retained non- exclusive rights to
distribute the BAK outside of the United States for a period of one year from notification of termination of exclusive rights. The Company has been
appointing independent international distributors on a country by country basis to distribute the BAK product line. There can be no assurance that the
Company will be successful in identifying and appointing independent international distributors who will be able to successfully sell the BAK product line.
RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996 Net sales increased to $16.0 million for
the three months ended September 30, 1997 from $1.5 million for the three months ended September 30, 1996. Net sales for the period were primarily
affected by the previously discussed FDA approval to market the BAK in the United States. For the three months ended September 30, 1997, domestic
BAK sales accounted for 92% of net sales, as compared to 87% of net sales for the three months ended September 30, 1996. Total domestic sales increased
to $15.2 million for the three months ended September 30, 1997 from $1.2 million for the three months ended September 30, 1996. Total international sales
increased to $864,000 for the three months ended September 30, 1997 from $326,000 for the three months ended September 30, 1996. International sales
for the period were primarily affected by increased BAK sales to an expanded distributor network. Gross profit increased to $12.5 million for the three
months ended September 30, 1997 from $1.1 million for the three months ended September 30, 1996. This increase was primarily due to the substantial
increase in net sales for the third quarter of 1997 over the third quarter of 1996. As a percentage of net sales, gross profit was 77.6% for the three months
ended September 30, 1997, as compared to 69.0% in the comparable period in 1996. This improvement is the direct result of the increased BAK sales as a
percentage of total sales. Total operating expenses increased to $7.2 million for the three months ended September 30, 1997 from $2.8 million for the three
months ended September 30, 1996. Sales and marketing expenses increased to $4.8 million for the three months ended September 30, 1997 from $1.3
million for the three months ended September 30, 1996, decreasing as a percentage of net sales to 30.2%, as compared to 85.6% for the comparable period
in 1996. Most of the increase was related to the expanding the Company's direct sales force in the United States, increased sales commissions to both direct
sales representatives and independent sales agents, the cost of conducting surgeon BAK training programs and increased marketing efforts. General and
administrative expenses increased to $1.5 million for the three months ended September 30, 1997 from $995,000 for the three months ended September 30,
1996, decreasing as percentage of net sales to 9.4%, as compared to 65.3% for the comparable period in 1996. Expense increases relate primarily to
additional personnel needed to support increased sales activities. Research and development expenses increased to $894,000 for the three months ended
September 30, 1997, from $493,000 for the three months ended September 30, 1996, decreasing as a percentage of net sales to 5.6%, as compared to
32.4% for the comparable period in 1996. Research and development expenses have increased due to the addition of personnel and increased spending on
independent research projects. Interest income totaled $342,000 for the three months ended September 30, 1997, as compared to $293,000 for the three
months ended September 30, 1996. The increase is due to additional funds available for short term investments during the three months ended September
30, 1997, due to the generation of cash from operations in excess of working capital needs and capital purchases during the past twelve month period.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996 Net sales increased to $39.7 million for the nine months ended September
30, 1997 from $4.5 million for the nine months ended September 30, 1996. Net sales for the period were primarily affected by the previously discussed
FDA approval to market the BAK in the United States. For the nine months ended September 30, 1997, domestic BAK sales accounted for 92% of net
sales, as compared to 66% of net sales for the nine months ended September 30, 1996. Total domestic sales increased to $37.4 million for the nine months
ended September 30, 1997 from $3.2 million for the nine months ended September 30, 1996. Total international sales increased to $2.2 million for the nine
months ended September 30, 1997 from $1.3 million for the nine months ended September 30, 1996. International sales for the period were primarily
affected by increased BAK sales to an expanded distributor network. Gross profit increased to $30.7 million for the nine months ended September 30, 1997
from $2.9 million for the nine months ended September 30, 1996. This increase was primarily due to the substantial increase in net sales for the first nine
months of 1997 over the first nine months of 1996. As a percentage of net sales, gross profit was 77.3% for the nine months ended September 30, 1997, as
compared to 64.2% in the comparable period in 1996. This improvement is the direct result of the increased BAK sales as a percentage of total sales. Total
operating expenses increased to $19.0 million for the nine months ended September 30, 1997 from $6.3 million for the nine months ended September 30,
1996. Sales and marketing expenses increased to $12.3 million for the nine months ended September 30, 1997 from $2.6 million the nine months ended
September 30, 1996, decreasing as a percentage of net sales to 31.0%, as compared to 59.1% for the comparable period in 1996. Most of the increase was
related to expanding the Company's direct sales force in the United States, increased sales commissions to both direct sales representatives and independent
agents, the cost of conducting surgeon BAK training programs and increased marketing efforts. General and administrative expenses increased to $4.3
million for the nine months ended September 30, 1997 from $2.3 million for the nine months ended September 30, 1996, decreasing as percentage of net
sales to 10.9%, as compared to 51.9% for the comparable period in 1996. Expense increases relate primarily to additional personnel needed to support
increased sales activities. Research and development expenses increased to $2.4 million for the nine months ended September 30, 1997, from $1.4 million
for the nine months ended September 30, 1996, decreasing as a percentage of net sales to 5.9%, as compared to 30.6% for the comparable period in 1996.
Interest income totaled $747,000 for the nine months ended September 30, 1997, as compared to $1.1 million for the nine months ended September 30,
1996. The decrease is due to the reduced amount of funds available for short term investments during the nine months ended September 30, 1997 resulting
from the use of cash to fund working capital needs and capital purchases during the past twelve month period. LIQUIDITY AND CAPITAL RESOURCES
During the three months ended September 30, 1997, cash and cash equivalents increased by $298,000. Of this amount, $687,000 was generated by
operating activities, $592,000 provided by the exercise of stock options, while $248,000 was used to purchase property and equipment, and $732,000 was
used to purchase short-term investments. Until funds are needed for operating purposes, they have been invested primarily in short term U.S. government
obligations and corporate debt securities. As of September 30, 1997, the Company had $20.1 million of these investments, of which $18.9 million mature
in one year or less. The Company believes that its currently available cash and cash equivalents combined with additional cash flow from operations will be
adequate to finance ongoing operations for the foreseeable future. The Company's future liquidity and capital requirements will depend on numerous
factors, including FDA regulatory actions and continued domestic and international sales of its entire product line. |
