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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)  

ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2003

OR

o
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 001-16789

INVERNESS MEDICAL INNOVATIONS, INC.
(Exact Name Of Registrant As Specified In Its Charter)

DELAWARE
(State or other jurisdiction of
incorporation or organization)		   04-3565120
(I.R.S. Employer
Identification No.)

51 SAWYER ROAD, SUITE 200
WALTHAM, MASSACHUSETTS 02453
(Address of principal executive offices)

(781) 647-3900
(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 ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)

Yes ý    No o

        The number of shares outstanding of the registrant's common stock as of November 7, 2003 was 19,316,707.

INVERNESS MEDICAL INNOVATIONS, INC.

FORM 10-Q

For the Quarterly Period Ended September 30, 2003

        This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Readers can identify these statements by forward-looking words such as "may," "could," "should," "would," "intend," "will," "expect," "anticipate," "believe," "estimate," "continue" or similar words. There are a number of important factors that could cause actual results of Inverness Medical Innovations, Inc. and its subsidiaries to differ materially from those indicated by such forward-looking statements. These factors include, but are not limited to, the risk factors detailed in this quarterly report on Form 10-Q and other risk factors identified from time to time in our periodic filings with the Securities and Exchange Commission. Readers should carefully review the factors discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations—Certain Factors Affecting Future Results" and "Special Statement Regarding Forward-Looking Statements" beginning on pages 36 and 52, respectively, in this quarterly report on Form 10-Q and should not place undue reliance on our forward-looking statements. These forward-looking statements are based on information, plans and estimates at the date of this report. We undertake no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.

        Unless the context requires otherwise, references in this quarterly report on Form 10-Q to "we," "us," and "our" refer to Inverness Medical Innovations, Inc. and its subsidiaries.

        We have registered the following trademarks which appear in this quarterly report on Form 10-Q: Clearblue®, Fact plus®, Persona®, Clearview®, Wampole® and Signify®.

        The following are registered trademarks of parties other than us: Abbott TestPack® and e.p.t.®.


TABLE OF CONTENTS

 
    
   PAGE
PART I. FINANCIAL INFORMATION    

Item 1.
 
Consolidated Financial Statements (unaudited):
 
 

         a)
 
Consolidated Statements of Operations for the three and nine months ended September 30, 2003 and 2002
 
3

         b)
 
Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002
 
4

         c)
 
Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002
 
5

         d)
 
Notes to Consolidated Financial Statements
 
9

Item 2.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
21

Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
53

Item 4.
 
Controls and Procedures
 
55

PART II. OTHER INFORMATION
 
 

Item 1.
 
Legal Proceedings
 
57

Item 2.
 
Changes in Securities and Use of Proceeds
 
58

Item 6.
 
Exhibits and Reports on Form 8-K
 
59

SIGNATURE
 
60

2


PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except per share amounts)

 
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
  
 
   2003
   2002
   2003
   2002
  
Net product sales   $ 69,278   $ 52,162   $ 195,887   $ 139,141  
License revenue     3,115     1,785     7,030     3,766  
   
 
 
 
 
  Net revenue     72,393     53,947     202,917     142,907  
Cost of sales     40,902     30,155     113,217     79,686  
   
 
 
 
 
  Gross profit     31,491     23,792     89,700     63,221  
   
 
 
 
 
Operating expenses:                          
  Research and development     6,413     3,597     17,055     10,539  
  Sales and marketing     13,251     10,121     36,949     28,683  
  General and administrative     7,637     6,103     24,013     19,760  
  Charge related to asset impairment     —     —     —     12,682  
  Stock-based compensation(1) (Note 5)     60     —     66     10,169  
   
 
 
 
 
    Total operating expenses     27,361     19,821     78,083     81,833  
   
 
 
 
 
  Operating income (loss)     4,130     3,971     11,617     (18,612 )
Interest expense, including amortization of discounts     (2,410 )   (1,449 )   (6,776 )   (8,230 )
Other income (expense), net     334     (710 )   6,440     7,813  
   
 
 
 
 
  Income (loss) before income taxes and accounting change     2,054     1,812     11,281     (19,029 )
Provision for income taxes     392     671     2,019     1,827  
   
 
 
 
 
  Income (loss) before accounting change     1,662     1,141     9,262     (20,856 )
Cumulative effect of a change in accounting principle     —     —     —     (12,148 )
   
 
 
 
 
  Net income (loss)   $ 1,662   $ 1,141   $ 9,262   $ (33,004 )
   
 
 
 
 
Income (loss) available to common stockholders—basic (Note 6):                          
  Income (loss) before accounting change   $ 1,519   $ (6,725 ) $ 8,804   $ (32,524 )
   
 
 
 
 
  Net income (loss)   $ 1,519   $ (6,725 ) $ 8,804   $ (44,672 )
   
 
 
 
 
Income (loss) available to common stockholders—diluted (Note 6):                          
  Income (loss) before accounting change   $ 1,519   $ (6,725 ) $ 8,938   $ (32,524 )
   
 
 
 
 
  Net income (loss)   $ 1,519   $ (6,725 ) $ 8,938   $ (44,672 )
   
 
 
 
 
Income (loss) per common share—basic (Note 6):                          
  Income (loss) before accounting change   $ 0.09   $ (0.65 ) $ 0.60   $ (3.76 )
   
 
 
 
 
  Net income (loss)   $ 0.09   $ (0.65 ) $ 0.60   $ (5.16 )
   
 
 
 
 
Income (loss) per common share—diluted (Note 6):                          
  Income (loss) before accounting change   $ 0.08   $ (0.65 ) $ 0.53   $ (3.76 )
   
 
 
 
 
  Net income (loss)   $ 0.08   $ (0.65 ) $ 0.53   $ (5.16 )
   
 
 
 
 
Weighted average shares—basic     16,301     10,356     14,719     8,653  
   
 
 
 
 
Weighted average shares—diluted     18,176     10,356     16,788     8,653  
   
 
 
 
 
(1)
The charges for stock-based compensation for all periods presented were classified as general and administrative expenses.

The accompanying notes are an integral part of these consolidated financial statements.

3


INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands)

 
   September 30,
2003
   December 31,
2002
  
ASSETS              
Current assets:              
  Cash and cash equivalents   $ 24,837   $ 30,668  
  Accounts receivable, net of allowances of $7,253 at September 30, 2003 and $7,047 at December 31, 2002     47,762     37,283  
  Inventory     49,523     37,155  
  Deferred tax assets     2,137     2,137  
  Prepaid expenses and other current assets     8,837     6,456  
   
 
 
    Total current assets     133,096     113,699  

Property, plant and equipment, net
 
 
58,277
 
 
46,029
 
Goodwill     227,574     108,915  
Trademarks and trade name with indefinite lives     38,119     31,719  
Core technology and patents, net     29,644     25,805  
Other intangible assets, net     31,664     22,374  
Deferred financing costs, net, and other assets     7,602     4,908  
Deferred tax assets     5,943     4,297  
   
 
 
    Total assets   $ 531,919   $ 357,746  
   
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY              
Current liabilities:              
  Current portion of long-term debt   $ 6,048   $ 17,200  
  Current portion of capital lease obligations     462     642  
  Accounts payable     29,781     27,495  
  Accrued expenses and other current liabilities     40,014     40,382  
   
 
 
    Total current liabilities     76,305     85,719  
   
 
 
Long-term liabilities:              
  Long-term debt     167,908     84,533  
  Capital lease obligations     1,944     2,238  
  Deferred tax liabilities     15,026     9,365  
  Other liabilities     3,883     3,936  
   
 
 
    Total long-term liabilities     188,761     100,072  
   
 
 
Commitments and contingencies              

Series A redeemable convertible preferred stock, $0.001 par value:
 
 
 
 
 
 
 
  Authorized—2,667 shares
Issued—2,527 shares at September 30, 2003 and December 31, 2002
Outstanding—323 shares at September 30, 2003 and December 31, 2002		     9,509     9,051  
   
 
 
Stockholders' equity:              
  Preferred stock, $0.001 par value:              
    Authorized—2,333 shares, none issued     —     —  
  Common stock, $0.001 par value:              
    Authorized—50,000 shares
Issued and outstanding—19,235 shares at September 30, 2003 and 14,907 shares at December 31, 2002		     19     15  
  Additional paid-in capital     335,012     251,457  
  Notes receivable from stockholders     (14,691 )   (14,691 )
  Deferred compensation     —     (48 )
  Accumulated deficit     (68,916 )   (77,720 )
  Accumulated other comprehensive income     5,920     3,891  
   
 
 
    Total stockholders' equity     257,344     162,904  
   
 
 
    Total liabilities and stockholders' equity   $ 531,919   $ 357,746  
   
 
 

The accompanying notes are an integral part of these consolidated financial statements.

4


INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

 
   Nine Months Ended
September 30,
  
 
   2003
   2002
  
Cash Flows from Operating Activities:              
Net income (loss)   $ 9,262   $ (33,004 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:              
  Interest expense related to amortization of noncash original issue discount, noncash beneficial conversion feature and deferred financing costs     1,133     3,927  
  Noncash (gain) loss related to interest rate swap agreement     (54 )   1,269  
  Noncash stock-based compensation expense     66     10,169  
  Noncash gain related to early extinguishment of debt     —     (9,600 )
  Noncash charge related to asset impairment and cumulative effect of a change in accounting principle     —     24,830  
  Depreciation and amortization     10,930     7,110  
  Deferred income taxes     371     —  
  Other noncash items     (4 )   297  
  Changes in assets and liabilities, net of acquisitions:              
    Accounts receivable, net     (2,672 )   (4,641 )
    Inventory     (3,556 )   (1,779 )
    Prepaid expenses and other current assets     (2,937 )   2,271  
    Accounts payable     353     6,667  
    Accrued expenses and other current liabilities     (7,013 )   (5,253 )
   
 
 
  Net cash provided by operating activities     5,879     2,263  
   
 
 
Cash Flows from Investing Activities:              
Purchases of property, plant and equipment     (8,427 )   (3,683 )
Proceeds from sale of property, plant and equipment     151     267  
Cash paid for purchase of certain assets from Abbott Laboratories     (55,570 )   —  
Cash paid for purchase of Applied Biotech, Inc., net of cash acquired     (13,896 )   —  
Cash paid for purchase of Ostex International, Inc., net of cash acquired     (3,806 )   —  
Cash paid for purchase of the Wampole Division of MedPointe Inc.     (1,442 )   (71,500 )
Cash paid for purchase of IVC Industries, Inc., net of cash acquired     (424 )   (6,953 )
Cash paid for purchase of Unipath business     (418 )   (5,537 )
Cash paid for purchase of intellectual property license     (585 )   —  
Increase in other assets     (44 )   (284 )
   
 
 
  Net cash used in investing activities     (84,461 )   (87,690 )
   
 
 

5

Cash Flows from Financing Activities:              
Cash paid for financing costs     (3,772 )   (2,052 )
Proceeds from issuance of common stock, net of issuance costs     3,985     35,547  
Proceeds from issuance of preferred stock, net of issuance costs     —     20,569  
Net proceeds from revolving line of credit     18,524     2,040  
Proceeds from borrowings under notes payable     58,643     35,000  
Repayments of notes payable     (5,875 )   (43,045 )
Principal payments of capital lease obligations     (521 )   (329 )
   
 
 
  Net cash provided by financing activities     70,984     47,730  
   
 
 
Foreign exchange effect on cash and cash equivalents     1,767     2,506  
   
 
 
  Net decrease in cash and cash equivalents     (5,831 )   (35,191 )
  Cash and cash equivalents, beginning of period     30,668     52,024  
   
 
 
  Cash and cash equivalents, end of period   $ 24,837   $ 16,833  
   
 
 

The accompanying notes are an integral part of these consolidated financial statements.

6

 
   Nine Months Ended
September 30,
  
 
   2003
   2002
  
Supplemental Disclosure of Cash Flow Information:              
  Interest paid   $ 5,677   $ 3,768  
   
 
 
  Taxes paid   $ 1,061   $ 1,622  
   
 
 
Supplemental Disclosure of Noncash Activities:              
  On September 30, 2003, the Company acquired certain assets from Abbott Laboratories —              
    Property, plant and equipment   $ 4,032   $ —  
    Intangible assets     89,038     —  
    Cash paid for purchase of certain assets from Abbott Laboratories     (55,570 )   —  
   
 
 
    Fair value of common stock issued   $ 37,500   $ —  
   
 
 
  On August 27, 2003, the Company acquired Applied Biotech, Inc. —              
    Accounts receivable   $ 6,367   $ —  
    Inventory     7,056     —  
    Property, plant and equipment     5,352     —  
    Intangible assets     14,974     —  
    Other assets     2,121     —  
    Accounts payable and accrued expenses     (4,616 )   —  
    Deferred tax liabilities     (3,090 )   —  
    Cash paid for purchase of Applied Biotech, Inc., net of cash acquired     (13,896 )   —  
   
 
 
    Fair value of common stock issued   $ 14,268   $ —  
   
 
 
  On June 30, 2003, the Company acquired Ostex International, Inc. —              
    Accounts receivable   $ 1,203   $ —  
    Inventory     928     —  
    Property, plant and equipment     584     —  
    Intangible assets     33,560     —  
    Other assets     178     —  
    Accounts payable and accrued expenses     (1,964 )   —  
    Deferred tax liabilities     (2,519 )   —  
    Long-term debt     (2,875 )   —  
    Cash paid for purchase of Ostex International, Inc., net of cash acquired     (3,806 )   —  
   
 
 
        $ 25,289   $ —  
   
 
 
    Fair value of common stock issued   $ 23,537   $ —