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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
Commission file number 0-28288
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CARDIOGENESIS CORPORATION
(Exact name of Registrant as specified in its charter)
----------------------
CALIFORNIA 77-0223740
(State of incorporation) (I.R.S. Employer
Identification Number)
26632 TOWNE CENTRE DRIVE, SUITE 320
FOOTHILL RANCH, CA 92610
(Address of principal executive offices)
(714) 649-5000
(Registrant's telephone number, including area code)
ECLIPSE SURGICAL TECHNOLOGIES, INC.
1049 KIEL COURT, SUNNYVALE, CA 94089
(Registrant's Former Name and Former Address)
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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock outstanding as of the latest practicable date.
34,209,065 shares of Common Stock, no par value
As of July 31, 2001
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CARDIOGENESIS CORPORATION
TABLE OF CONTENTS
PART 1
FINANCIAL INFORMATION
Page
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Item 1. Consolidated Financial Statements (unaudited):
a. Consolidated Balance Sheets
as of June 30, 2001 and December 31, 2000.......................... 1
b. Consolidated Statements of Operations & Comprehensive Loss
for the three and six months ended June 30, 2001 and 2000.......... 2
c. Consolidated Statements of Cash Flows
for the six months ended June 30, 2001 and 2000.................... 3
d. Notes to Consolidated Financial Statements......................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............. 22
PART II
OTHER INFORMATION
Item 1. Legal Proceedings....................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders..................... 22
Item 6. Exhibits and Reports on Form 8-K........................................ 23
Signatures.............................................................. 24
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CARDIOGENESIS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
JUNE 30, DECEMBER 31,
2001 2000
--------- ------------
(unaudited)
Current assets:
Cash and cash equivalents ........................................................... $ 3,346 $ 3,357
Accounts receivable, net of allowance for doubtful accounts of $557 and
$353 at June 30, 2001 and December 31, 2000, respectively ......................... 3,048 3,654
Inventories, net of reserves of $1,518 and $2,180 at June 30, 2001 and
December 31, 2000, respectively ................................................... 4,603 5,400
Prepaids and other current assets ................................................... 1,179 837
--------- ---------
Total current assets ........................................................ 12,176 13,248
Property and equipment, net ........................................................... 821 1,048
Accounts receivable over one year, net of allowance for doubtful accounts of
$0 and $443 at June 30, 2001 and December 31, 2000, respectively ................... 257 119
Other assets .......................................................................... 1,801 2,550
--------- ---------
Total assets ................................................................ $ 15,055 $ 16,965
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................................... $ 580 $ 689
Accrued liabilities ................................................................... 5,689 5,789
Customer deposits ..................................................................... 186 186
Deferred revenue ...................................................................... 1,061 1,310
Note payable .......................................................................... 391 86
Current portion of capital lease obligation ........................................... 26 26
Current portion of long-term liabilities .............................................. 500 500
--------- ---------
Total current liabilities ..................................................... 8,433 8,586
Capital lease obligation, less current portion .......................................... 52 66
Long-term liabilities, less current portion ............................................. 108 339
--------- ---------
Total liabilities ............................................................. 8,593 8,991
--------- ---------
Shareholders' equity:
Common stock:
No par value; 50,000,000 shares authorized; 34,209,000 and 30,836,000 shares
issued and outstanding at June 30, 2001 and December 31, 2000, respectively ...... 165,752 161,938
Deferred compensation ................................................................. (21) (66)
Accumulated other comprehensive loss .................................................. (32) (65)
Accumulated deficit ................................................................... (159,237) (153,833)
--------- ---------
Total shareholders' equity .................................................... 6,462 7,974
--------- ---------
Total liabilities and shareholders' equity .................................... $ 15,055 $ 16,965
========= =========
The accompanying notes are an integral part of these
consolidated financial statements
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CARDIOGENESIS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net revenues ............................................... $ 4,030 $ 6,608 $ 7,141 $ 12,285
Cost of revenues ........................................... 1,583 2,698 3,118 5,029
-------- -------- -------- --------
Gross profit ..................................... 2,447 3,910 4,023 7,256
-------- -------- -------- --------
Operating expenses:
Research and development ................................. 706 1,308 1,249 3,095
Sales and marketing ...................................... 2,396 4,345 4,348 8,894
General and administrative ............................... 1,360 1,655 2,546 3,211
Restructuring costs ...................................... 690 -- 690 --
-------- -------- -------- --------
Total operating expenses ......................... 5,152 7,308 8,833 15,200
-------- -------- -------- --------
Operating loss ................................... (2,705) (3,398) (4,810) (7,944)
Interest expense ........................................... (2) (8) (7) (17)
Interest income ............................................ 35 144 65 260
Equity in net loss of investee ............................. (295) -- (652) --
-------- -------- -------- --------
Net loss ......................................... (2,967) (3,262) (5,404) (7,701)
-------- -------- -------- --------
Other comprehensive income (loss):
Unrealized holding gains (losses) arising during period (3) (9) -- (8)
Less: reclassification adjustment for gains included in
net income .......................................... -- -- -- (2)
Foreign currency translation adjustment ............... 60 -- 33 --
-------- -------- -------- --------
Other comprehensive income (loss) ................... 57 (9) 33 (10)
-------- -------- -------- --------
Comprehensive loss ............................... $ (2,910) $ (3,271) $ (5,371) $ (7,711)
======== ======== ======== ========
Net loss per share:
Basic and diluted ........................................ $ (0.09) $ (0.11) $ (0.17) $ (0.26)
======== ======== ======== ========
Weighted average shares outstanding ...................... 33,631 30,064 32,227 29,866
======== ======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements
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CARDIOGENESIS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-----------------------
2001 2000
------- -------
Cash flows from operating activities:
Net loss ......................................................... $(5,404) $(7,701)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ................................. 246 465
Loss from equity in investee .................................. 652 --
Provision for doubtful accounts ............................... 109 345
Inventory reserves ............................................ 670 905
Amortization of deferred compensation ......................... 56 418
Accretion of long-term liability .............................. 19 --
Amortization of license fees .................................. 98 96
Changes in operating assets and liabilities:
Accounts receivable - short term ............................ 497 2,031
Inventories ................................................. 127 (960)
Prepaids and other current assets ........................... (249) (137)
Accounts receivable - long term ............................. (138) 834
Accounts payable ............................................ (109) (517)
Accrued liabilities ......................................... (100) (2,665)
Current portion of long term liabilities .................... -- (489)
Long term liabilities ....................................... (250) (161)
Customer deposits ........................................... -- 65
Deferred revenue ............................................ (249) (73)
------- -------
Net cash used in operating activities .................... (4,025) (7,544)
------- -------
Cash flows from investing activities:
Purchase of marketable securities ................................ -- (4,614)
Maturities of marketable securities .............................. -- 8,047
Acquisition of property and equipment ............................ (19) (195)
------- -------
Net cash (used in) provided by investing activities ...... (19) 3,238
------- -------
Cash flows from financing activities:
Net proceeds from sales of common stock and from issuance of
common stock from exercise of options .......................... 3,709 1,277
Proceeds from short term borrowings .............................. 305 407
Repayments of capital lease obligations .......................... (14) (13)
------- -------
Net cash provided by financing activities ................ 4,000 1,671
------- -------
Effects of exchange rate changes on cash and cash
equivalents ............................................ 33 (5)
------- -------
Net (decrease) increase in cash and cash equivalents ..... (11) (2,640)
Cash and cash equivalents at beginning of period ................... 3,357 5,566
------- -------
Cash and cash equivalents at end of period ......................... $ 3,346 $ 2,926
======= =======
Supplemental schedule of cash flow information:
Interest paid .................................................... $ 2 $ 17
======= =======
Taxes paid ....................................................... $ 26 $ 32
======= =======
Supplemental schedule of noncash investing and financing activities:
Change in unrealized gain (loss) on marketable securities ........ $ -- $ (10)
======= =======
Deferred compensation ............................................ $ 11 $ 118
======= =======
Issuance of warrants ............................................. $ 94 $ --
======= =======
The accompanying notes are an integral part of these
consolidated financial statements
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CARDIOGENESIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Interim Financial Information (unaudited):
The interim financial statements in this report reflect all adjustments,
consisting of normal recurring adjustments, that are, in the opinion of
management, necessary for a fair presentation of the results of operations and
cash flows for the interim periods covered and of the financial position of the
Company at the interim balance sheet date. Results for interim periods are not
necessarily indicative of results to be expected for the full fiscal year. The
year-end balance sheet information was derived from audited financial statements
but does not include all disclosures required by generally accepted accounting
principles. These financial statements should be read in conjunction with
CardioGenesis Corporation's (formerly known as Eclipse Surgical Technologies,
Inc.) audited financial statements and notes thereto for the year ended December
31, 2000, contained in the Company's Annual Report on Form 10-K as filed with
the U.S. Securities and Exchange Commission ("SEC").
These financial statements contemplate the realization of assets and the
satisfaction of liabilities in the normal course of business. CardioGenesis
Corporation ("CardioGenesis") has sustained significant losses for the last
several years. CardioGenesis will require additional funding and may sell
additional shares of its common stock or preferred stock through private
placement or further public offerings. (See Note 5).
There can be no assurance that CardioGenesis will be able to obtain
additional debt or equity financing, if and when needed, on terms acceptable to
the Company. Any additional equity or debt financing may involve substantial
dilution to CardioGenesis' stockholders, restrictive covenants or high interest
costs. The failure to raise needed funds on sufficiently favorable terms could
have a material adverse effect on CardioGenesis' business, operating results and
financial condition.
CardioGenesis' long-term liquidity also depends upon its ability to
increase revenues from the sale of its products and achieve profitability. The
failure to achieve these goals could have a material adverse effect on the
business, operating results and financial condition.
Net Loss Per Share:
Basic earnings per share is the weighted-average number of common shares
outstanding during the period, and diluted earnings per share is computed by
dividing net loss by the weighted-average common shares outstanding and all
dilutive potential common shares outstanding. For the three and six months ended
June 30, 2001 and 2000 dilutive potential common shares outstanding reflects
shares issuable under the Company's stock option plans and warrants. There are
no reconciling items in the numerator or denominator of the earnings per share
calculation for the periods presented.
Options and warrants to purchase 3,186,412 and 3,469,303 shares of common
stock were outstanding at June 30, 2001 and 2000 respectively, but were not
included in the calculation of diluted EPS because their inclusion would have
been antidilutive.
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2. Inventories:
Inventories are stated at lower of cost (first-in, first-out) or market and
consist of the following (in thousands):
JUNE 30, DECEMBER 31,
2001 2000
-------- ------------
(UNAUDITED)
Raw materials . $1,425 $2,045
Work in process 770 715
Finished goods 2,408 2,640
------ ------
$4,603 $5,400
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3. Restructuring Costs:
In the second quarter of 2001, the Company recognized one-time
restructuring charges of $690,000 related to a company-wide restructuring which
included a reduction in headcount, outsourcing of manufacturing and
the move to a new, less costly facility located in Foothill Ranch, CA. In
addition, progress was made towards completing the close of the CardioGenesis
B.V. office located in the Netherlands.
The following table summarizes the restructuring costs (in thousands).
DESCRIPTION AMOUNT
----------- ------
(unaudited)
Personnel severance ......................................... $140
Employee relocation ......................................... 100
Penalty for early termination of Sunnyvale facility lease ... 210
Closing of Netherlands office ............................... 135
Other costs including fixed asset write-offs and moving costs 105
----
Total ....................................................... $690
====
The following table summarizes the Company's restructuring reserve balances
(in thousands):
RESTRUCTURING ACTIVITY FOR THE THREE MONTH PERIOD
ENDED JUNE 30, 2001 AMOUNT
------------------------------------------------- ------
(unaudited)
Original balance ............................. $690
Less:
Non-cash charges ........................ 58
Cash payments ........................... 98
----
Restructuring Reserve balance at June 30, 2001 534
====
The restructuring reserve balance is included in accrued liabilities.
4. Recently Issued Accounting Standards:
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141 "Business
Combinations," and SFAS No. 142 "Goodwill and Other Intangible Assets," which
change the accounting for business combinations and goodwill. SFAS No. 141
requires that the purchase
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method of accounting be used for business combinations initiated after June 30,
2001. Use of the pooling-of-interests method will be prohibited. SFAS No. 142
changes the accounting for goodwill from an amortization method to an
impairment-only approach. Amortization of goodwill, including goodwill recorded
in past business combinations, will therefore cease upon adoption of the
Statement, which for the Company will be January 1, 2002. The Company is
currently evaluating SFAS No. 141 and SFAS No. 142, but does not expect that
they will have a material effect on its financial statements.
5. Subsequent Events:
In August 2001, the Company established a $2 million asset-based line of
credit with Pacific Business Funding, a division of Cupertino National Bank. As
of August 2001, the Company has access to the entire $2 million credit line
based on qualifying assets. The agreement expires in August of 2002 and provides
the Company with the option of borrowing at an annual rate of 12% plus an
administrative fee of 0.50%.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains descriptions of our expectations regarding future
trends affecting our business. These forward-looking statements and other
forward-looking statements made elsewhere in this document are made in reliance
upon the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. Please read the section below titled "Factors Affecting Future Results"
to review conditions which we believe could cause actual results to differ
materially from those contemplated by the forward-looking statements.
Forward-looking statements are identified by words such as "believes,"
"anticipates," "expects," "intends," "plans," "will," "may" and similar
expressions. In addition, any statements that refer to our plans, expectations,
strategies or other characterizations of future events or circumstances are
forward-looking statements. Our business may have changed since the date hereof
and we undertake no obligation to update these forward looking statements.
The following discussion should be read in conjunction with financial
statements and notes thereto included in this Quarterly Report on Form 10-Q.
OVERVIEW
CardioGenesis, formerly Eclipse Surgical Technologies, Inc., incorporated
in California in 1989, designs, develops, manufactures and distributes
laser-based surgical products and disposable fiber-optic accessories for the
treatment of advanced cardiovascular disease through transmyocardial
revascularization ("TMR") and percutaneous transmyocardial revascularization
("PMR").
On February 11, 1999, we received final approval from the Food and Drug
Administration ("FDA") for our TMR products for certain indications, and we are
now able to sell those products in the U.S. on a commercial basis. We have also
received the European Conforming Mark ("CE Mark") allowing the commercial sale
of our TMR laser systems and our PMR catheter system to customers in the
European Community. Effective July 1, 1999, the Health Care Financial
Administration began providing Medicare coverage for TMR. Hospitals and
physicians are now eligible to receive Medicare reimbursement for TMR equipment
and procedures.
We completed pivotal clinical trials involving PMR, and study results were
submitted to the FDA in a Pre-Market Approval ("PMA") application in December of
1999. On July 9, 2001, the Food and Drug Administration's Circulatory Devices
Panel recommended against approval by the Food and Drug Administration of our
PMR device for public sale and use in the United States based on concerns
related to the safety of the device and the data regarding adverse events in
clinical trials. The Advisory Panel cited a concern about complications reported
in the treated patients. While these individual events were not statistically
significant between the treated group and the control group, they were still a
concern for the Advisory Panel. We expect to be able to provide additional
follow up data and analysis to address these safety concerns.
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RESULTS OF OPERATIONS
Net Revenues
Net revenues of $4,030,000 for the quarter ended June 30, 2001 decreased
$2,578,000 or 39% from $6,608,000 for the quarter ended June 30, 2000. Net
revenues of $7,141,000 for the six months ended June 30, 2001 decreased
$5,144,000 or 42% from $12,285,000 for the six months ended June 30, 2000. The
decrease on both the three month and six month comparisons is due to a decline
in the unit sales of both lasers and disposables related to a sales force
transition during the six month period ending June 30, 2001.
At year-end, a sales force transition plan was initiated and was completed
in the second quarter of 2001. New sales representatives were hired to fill
territories resulting from general attrition and the release of sales
representatives who did not meet company sales objectives. As a result of the
transitioning sales force, disposable sales fell 13% in units domestically from
the quarter ended June 30, 2000 to the same period in 2001. Disposable sales
fell 18% in units domestically from the six-month period ended June 30, 2000 to
the same period in 2001.
Gross Profit
Gross profit was $2,447,000 or 61% of net revenues for the quarter ended
June 30, 2001 compared to $3,910,000 or 59% of net revenues for the quarter
ended June 30, 2000. Gross profit decreased to $4,023,000 or 56% of net revenues
for the six months ended June 30, 2001 compared to $7,256,000 or 59% of net
revenues for the six months ended June 30, 2000. The decline in gross profit
resulted from lower net revenues. The improvement in gross margin for the three
months ended June 30, 2001 from the three months ended June 30, 2000 resulted
from an increase in production during the period. With increased production, the
fixed cost component of cost of goods sold was spread over more units and thus,
lowering the costs of goods sold on a per unit basis.
Research and Development
Research and development expenditures of $706,000 decreased $602,000 or 46%
for the quarter ended June 30, 2001 from $1,308,000 for the quarter ended June
30, 2000. The decrease in expenses from the three month period ended June 30,
2000 to the same period in 2001 resulted from a decrease in employee expenses of
$440,000 related to the December 2000 reduction in force, a decrease in clinical
trials expenses of $70,000 related to the conclusion of several of our major
clinical trials, a decrease in consulting expenses of $90,000 and a decrease in
development project expenses of $70,000. These decreases were offset by an
increase in consulting expenses of $160,000 related to the preparation for the
July 9, 2001 FDA panel meeting.
Research and development expenditures of $1,249,000 decreased $1,846,000 or
60% for the six months ended June 30, 2001 from $3,095,000 for the six months
ended June 30, 2000. The decrease in expenses from the six-month period ended
June 30, 2000 to the same period in 2001 resulted from a reduction in employee
expenses of $690,000 related to the December 2000 reduction in force and a
reduction in clinical trials expenses of $690,000 related to the conclusion of
several of our major clinical trials. Additionally, expenditures for engineering
have decreased due to a reduction in development activities.
Sales and Marketing
Sales and marketing expenditures of $2,396,000 decreased $1,949,000 or 45%
for the quarter ended June 30, 2001 from $4,345,000 for the quarter ended June
30, 2000. The decrease resulted from a reduction in employee expenses of
$1,570,000 related to the elimination of 15 clinical sales positions coupled
with a major transition in the sales force, which began at the end of 2000 and
was concluded in the second quarter of 2001. Additionally, expenses for
physician training decreased by $200,000 and general marketing expenses
decreased by $150,000.
Sales and marketing expenditures of $4,348,000 decreased $4,546,000 or 51%
for the six months ended June 30, 2001 from $8,894,000 for the six months ended
June 30, 2000. The decrease resulted from a reduction in employee expenses of
$2,740,000 related to the elimination of 15 clinical sales positions coupled
with a major transition in the sales force, which began at the end of 2000 and
was concluded in the second quarter of 2001.
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Additionally, expenses for physician training decreased by $350,000, the cost of
materials used by the service department decreased by $170,000 and general
marketing expenses decreased by $250,000.
General and Administrative
General and administrative expenses of $1,360,000 decreased $295,000 or 18%
for the quarter ended June 30, 2001 from $1,655,000 for the quarter ended June
30, 2000. The decrease is mainly due to a $140,000 reduction in deferred
compensation expense for stock options granted to consultants and a decrease in
consulting expenses of $140,000.
General and administrative expenses of $2,546,000 decreased $665,000 or 21%
for the six months ended June 30, 2001, compared to $3,211,000 for the six
months ended June 30, 2000. The decrease is mainly due to a $360,000 reduction
in deferred compensation expense for stock options granted to consultants and a
decrease of $350,000 in consulting expenses.
Restructuring Costs
In the second quarter of 2001, we recognized one-time restructuring charges
of $690,000 related to a company-wide restructuring which included a reduction
in headcount, outsourcing of manufacturing and the move to a new, less costly
facility located in Foothill Ranch, CA. In addition, progress was made towards
completing the close of the CardioGenesis B.V. office located in the
Netherlands.
The following table summarizes the restructuring costs (in thousands).
DESCRIPTION AMOUNT
----------- ------
Personnel severance ......................................... $140
Employee relocation ......................................... 100
Penalty for early termination of Sunnyvale facility lease ... 210
Closing of Netherlands office ............................... 135
Other costs including fixed asset write-offs and moving costs 105
----
Total $690
====
In addition, the relocation of our corporate headquarters resulted in
one-time charges that were not classified as restructuring charges but are a
component of operating expenses in the quarter ended June 30, 2001. These
one-time charges resulted from the termination of almost 50 positions of which
approximately 10 of the positions were replaced. As a result, we incurred
one-time charges of $150,000 related to duplicate salaries for positions where a
replacement employee was hired and a Sunnyvale employee was retained through a
short transition period. We also incurred $50,000 in travel costs for employees
who traveled to the Sunnyvale office until the new Foothill Ranch office opened
in June 2001.
Non-Operating Expenses
Equity in net loss of investee of $295,000 in the quarter ended June 30,
2001 and $652,000 for the six months ended June 30, 2001 represents our share of
the net loss of Microheart Holdings, Inc., a privately held company of which our
ownership is 31.1%.
Interest income of $35,000 in the quarter ended June 30, 2001 declined 76%
or $109,000 compared to $144,000 in the quarter ended June 30, 2000. Interest
income of $65,000 in the six months ended June 30, 2001 declined 75% or $195,000
compared to $260,000 in the six months ended June 30, 2000. The reduction in
interest income was a result of lower investments in marketable securities, cash
and cash equivalents.
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LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $3,346,000 at June 30, 2001 compared to
$3,357,000 at December 31, 2000. We used $4,025,000 of cash for operating
activities in the six-month period ended June 30, 2001 which was used primarily
to fund our operating losses. In addition, a decrease in accounts receivable
provided $500,000 in cash offset by a decrease in long-term liabilities of
$230,000. Investing activities provided cash of $19,000 in the first six months
of 2001. Financing activities provided cash of $4,000,000 in the first six
months of 2001, primarily from the issuance of common stock and the exercise of
employee stock options.
Since our inception, we have satisfied our capital requirements primarily
through sales of our equity securities. In addition, our operations have been
funded in part through sales of our products.
In March 2001, we sold 898,202 shares of common stock to Acqua Wellington
North American Equities Fund, Ltd. at a negotiated purchase price of $1.1133 per
share. We did not pay any other compensation in conjunction with the sale of our
common stock. In April 2001, the Board adopted an amendment to our Bylaws which
precludes the Company from entering into or exercising any rights under any
equity line agreement, including the Acqua Wellington equity line agreement,
unless approval from the shareholders holding a majority of the shares is
obtained.
In April 2001, we sold 2,000,000 shares of common stock to a governmental
entity at a negotiated purchase price of $1.00 per share. We did not pay any
other compensation in conjunction with the sale of our common stock.
In August 2001, the Company established a $2 million asset based line of
credit with Pacific Business Funding, a division of Cupertino National Bank. As
of August 2001, the Company has access to the entire $2 million credit line
based on qualifying assets. The agreement expires in August of 2002 and provides
the Company with the option of borrowing at an annual rate of 12% plus an
administrative fee of 0.50%.
We have incurred significant losses for the last several years and as of
June 30, 2001 we had an accumulated deficit of $159,237,000. The accompanying
financial statements have been prepared assuming we will continue as a going
concern. Our ability to continue as a going concern is dependent upon achieving
profitable operations in the future. Our plans include increasing sales through
direct sales and marketing efforts of existing products and pursuing regulatory
approval for certain other products for which clinical trials have been
completed. We also plan to continue our cost containment efforts that are
focused both on reducing cost of revenues and on bringing operating expenses in
line with revenues. With regard to reducing cost of revenues, we are in the
process of outsourcing our manufacturing which allows us to produce at lower
levels of costs. With regard to reducing operating expenses, we have focused our
efforts on reducing headcount and overall expenses in functions that are not
essential to critical activities.
Currently, one of the primary goals of the Company is to achieve break-even
followed by profitability within a relatively short span of time. In many
respects, the Company's actions have been guided by this imperative, and the
resulting cost containment measures have helped to conserve our cash. The focus
of the Company is upon critical activities, thus production activities and
operating expenses that are nonessential to our core operations have been or are
in the process of being eliminated.
We believe our cash balance as of June 30, 2001 and borrowings available
under our new asset-based line of credit will be sufficient to meet our capital
and operating requirements through the end of 2001. In September 2000, March
2001 and April 2001, we raised approximately $1,873,000, $1,000,000 and
$1,895,000, respectively, net of offering costs, from the sale of shares of
common stock. We believe that if revenue from sales or new funds from debt or
equity instruments is insufficient to maintain the current expenditure rate, it
will be necessary to significantly reduce our operations until an appropriate
solution is implemented.
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RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141 "Business
Combinations," and SFAS No. 142 "Goodwill and Other Intangible Assets," which
change the accounting for business combinations and goodwill. SFAS No. 141
requires that the purchase method of accounting be used for business
combinations initiated after June 30, 2001. Use of the pooling-of-interests
method will be prohibited. SFAS No. 142 changes the accounting for goodwill from
an amortization method to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations, will therefore cease
upon adoption of the Statement, which for the Company will be January 1, 2002.
The Company is currently evaluating SFAS No. 141 and SFAS No. 142, but does not
expect that they will have a material effect on its financial statements.
FACTORS AFFECTING FUTURE RESULTS
In addition to the other information included in this Form 10-Q, the
following risk factors should be considered carefully in evaluating us and our
business.
OUR ABILITY TO CONTINUE AS A GOING CONCERN IS DEPENDENT UPON ACHIEVING
PROFITABLE OPERATIONS IN THE FUTURE.
We will have a continuing need for new infusions of cash until revenues are
increased to meet our operating expenses. We plan to increase our sales through
increased direct sales and marketing efforts on existing products and achieving
timely regulatory approval for other products under clinical trials. If we are
unable to increase our sales or achieve timely regulatory approval for our
products, we will be unable to significantly increase our revenues. We believe
that if we are unable to generate sufficient funds from sales or from debt or
equity issuances to maintain our current expenditure rate, it will be necessary
to significantly reduce our operations. This would raise substantial doubt about
our ability to continue as a going concern. We may be required to seek
additional sources of financing, which could include short-term debt, long-term
debt or equity. There is a risk that we may be unsuccessful in obtaining such
financing and will not have sufficient cash to fund our operations.
WE MAY FAIL TO OBTAIN REQUIRED REGULATORY APPROVALS TO MARKET OUR PRODUCTS
INCLUDING OUR PMR LASER SYSTEM IN THE UNITED STATES.
Our business could be harmed if any of the following events, circumstances
or occurrences related to the regulatory process occurred thereby causing a
reduction in our revenues:
o the failure to obtain regulatory approvals for our PMR system;
o any significant limitations in the indicated uses for which our
products may be marketed; and,
o substantial costs incurred in obtaining regulatory approvals.
The Food and Drug Administration has not approved our PMR laser systems for
any application in the United States. The PMR study compares PMR to conventional
medical therapy in patients with no option for other treatment. The Food and
Drug Administration may not accept the study as safe and effective, and PMR may
not be approved for commercial use in the United States. Responding to Food and
Drug Administration requests for additional information could require
substantial financial and management resources and take several years.
In October 2000, preliminary results from a competitor's clinical trial of
a catheter-based device employing Direct Myocardial Revascularization also known
as DMR were presented at a medical conference in Washington D.C. The trial's
principal investigator concluded that this catheter-based device did not show
significant evidence of clinical benefit with regard to angina class reduction
or exercise tolerance, and questioned the efficacy of other devices and
procedures relying on TMR. We believe that the preliminary results of that
catheter-based device study should not call the results of our PMR study into
question because the devices and procedures are substantially different. We
cannot predict, however, how those preliminary results of that catheter-based
device study will impact the Food and Drug Administration's decision on our PMR
system.
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IN THE FUTURE, THE FOOD AND DRUG ADMINISTRATION COULD RESTRICT THE CURRENT USES
OF OUR TMR PRODUCT.
The Food and Drug Administration has approved our TMR product for sale and
use by physicians in the United States. At the request of the Food and Drug
Administration, we are currently conducting post-market surveillance of our TMR
product. Though we are not aware of any safety concerns during our on-going
postmarket surveillance of our TMR product, if concerns over the safety of our
TMR product were to arise, the Food and Drug Administration could possibly
restrict the currently approved uses of our TMR product. In the future, if the
Food and Drug Administration were to restrict the range of uses for which our
TMR product can be used by physicians, such as restricting TMR's use with the
coronary artery bypass grafting procedure which occurs in more than half the
procedures in which TMR is used, it could lead to reduced sales of our TMR
product and our business could be adversely affected.
THE CIRCULATORY DEVICES PANEL OF THE FOOD AND DRUG ADMINISTRATION RECENTLY
RECOMMENDED AGAINST APPROVAL OF OUR PMR DEVICE FOR PUBLIC SALE AND USE IN THE
UNITED STATES, WHICH HAS EFFECTIVELY DELAYED POTENTIAL REVENUE, IF ANY, THAT MAY
HAVE BEEN DERIVED IN THE FUTURE FROM THE SALE OF THAT DEVICE IN THE UNITED
STATES AND WHICH MAY HAVE OTHER ADVERSE EFFECTS.
The Circulatory Devices Panel of the Food and Drug Administration recently
recommended that the Food and Drug Administration not approve our PMR device for
public sale and use in the United States based on concerns related to the safety
of the device and the data regarding adverse events in the clinical trials.
Although we do not expect to conduct further clinical trials of our PMR device,
this recommendation has necessitated the further investment of additional
resources toward obtaining the Food and Drug Administration's approval of our
PMR device. If the Food and Drug Administration accepts the recommendation of
the Advisory Panel and does not approve our PMR device for public sale and use
in the United States, we will not be able to derive any revenue from the sale of
that device in the United States until such time, if any, that the Food and Drug
Administration approves the device. Such inability to realize revenue from sales
of our PMR device in the United States will have an adverse effect on our
results of operations. Additionally, the trading price of our common stock on
the NASDAQ National Market fell substantially after the panel's recommendation
became public. If our common stock were to trade under $1.00 for 30 consecutive
days on the NASDAQ National Market, our common stock could be subject to certain
consequences established by the NASDAQ National Market, such as being delisted.
If our common stock were delisted, then we could apply for listing on the Nasdaq
SmallCap Market, subject to Nasdaq's approval. If our common stock is not
approved for trading on the Nasdaq SmallCap Market, then our common stock would
trade only in the secondary markets in the so-called "pink sheets" or Nasdaq's
"OTC Bulletin Board." Delisting from the Nasdaq National Market could adversely
affect the liquidity and price of our common stock and it could have a long-term
adverse impact on our ability to raise capital in the future.
THE MEDICAL COMMUNITY HAS NOT BROADLY ADOPTED OUR PRODUCTS, AND UNLESS OUR
PRODUCTS ARE BROADLY ADOPTED, OUR BUSINESS WILL SUFFER.
Our TMR products have not yet achieved broad commercial adoption, and our
PMR products are experimental and have not yet achieved broad clinical adoption.
We cannot predict whether or at what rate and how broadly our products will be
adopted by the medical community. Our business would be harmed if our TMR and
PMR systems fail to achieve significant market acceptance.
THE RECEIPT OF POSITIVE ENDORSEMENTS BY PHYSICIANS IS ESSENTIAL FOR THE SUCCESS
OF OUR PRODUCTS IN THE MARKET PLACE.
Positive endorsements, by physicians, are essential for clinical adoption
of our TMR and PMR laser systems. Even if the clinical efficacy of TMR and PMR
laser systems is established, physicians may elect not to recommend TMR and PMR
laser systems for any number of reasons.
Clinical adoption of these products will depend upon:
o our ability to facilitate training of cardiothoracic surgeons and
interventional cardiologists in TMR and PMR therapy;
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o willingness of such physicians to adopt and recommend such
procedures to their patients; and
o raising the awareness of TMR and then PMR with the targeted
patient population.
Patient acceptance of the procedure will depend on:
o physician recommendations;
o the degree of invasiveness;
o the effectiveness of the procedure; and
o the rate and severity of complications associated with the
procedure as compared to other procedures.
TO EXPAND OUR BUSINESS, WE MUST ESTABLISH EFFECTIVE SALES, MARKETING AND
DISTRIBUTION SYSTEMS.
To expand our business, we must establish effective systems to sell, market
and distribute products. To date, we have had limited sales which have consisted
primarily of U.S. sales of our TMR lasers and disposable handpieces on a
commercial basis since February 1999 and PMR lasers and disposable catheters for
investigational use only. We have been expanding our operations by hiring
additional sales and marketing personnel. This has required and will continue to
require substantial management effort and financial resources.
IF OUR SALES FORCE IS NOT SUCCESSFUL IN INCREASING MARKET SHARE AND SELLING OUR
DISPOSABLE HANDPIECES, OUR BUSINESS WILL SUFFER.
With Food and Drug Administration approval of our TMR laser system, we are
marketing our products primarily through our direct sales force. If the sales
force is not successful in increasing market share and selling our disposable
handpieces, our business will suffer. In the fourth quarter of 1999, we changed
our U.S. sales strategy to include both selling lasers to hospitals outright, as
well as loaning lasers to hospitals in return for the hospital purchasing a
minimum number of disposable handpieces at a higher price. During the current
year, the majority of lasers shipped have been under this loan program. The
purpose of this strategy is to focus our sales force on increasing market
penetration and selling disposable handpieces used in connection with our TMR
procedure.
THE EXPANSION OF OUR BUSINESS MAY PUT ADDED PRESSURE ON OUR MANAGEMENT AND
OPERATIONAL INFRASTRUCTURE AFFECTING OUR ABILITY TO MEET ANY INCREASED DEMAND
FOR OUR PRODUCTS AND POSSIBLY HAVING AN ADVERSE EFFECT ON OUR OPERATING RESULTS.
The growth in our business may place a significant strain on our limited
personnel, management, financial systems and other resources. The evolving
growth of our business presents numerous risks and challenges, including:
o the dependence on the growth of the market for our TMR and PMR
systems;
o our ability to successfully and rapidly expand sales to potential
customers in response to increasing clinical adoption of the TMR
procedure;
o the costs associated with such growth, which are difficult to
quantify, but could be significant;
o domestic and international regulatory developments;
o rapid technological change;
o completing the clinical trials that are currently in progress as
well as developing and preparing additional products for clinical
trials;
o the highly competitive nature of the medical devices industry;
and
o the risk of entering emerging markets in which we have limited or
no direct experience.
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To accommodate any such growth and compete effectively, we must obtain
additional funding to improve information systems, procedures and controls and
expand, train, motivate and manage our employees, and such funding may not be
available in sufficient quantities, if at all. If we are not able to manage
these activities and implement these strategies successfully to expand to meet
any increased demand, our operating results could suffer.
OUR OPERATING RESULTS ARE EXPECTED TO FLUCTUATE AND QUARTER-TO-QUARTER
COMPARISONS OF OUR RESULTS MAY NOT INDICATE FUTURE PERFORMANCE.
Our operating results have fluctuated significantly from quarter-to-quarter
and are expected to fluctuate significantly from quarter-to-quarter due to a
number of events and factors, including:
o the level of product demand and the timing of customer orders;
o changes in strategy;
o delays associated with the Food and Drug Administration and other
regulatory approval processes;
o personnel changes including our ability to continue to attract,
train and motivate additional qualified personnel in all areas;
o the level of international sales;
o changes in competitive pricing policies;
o the ability to develop, introduce and market new and enhanced
versions of products on a timely basis;
o deferrals in customer orders in anticipation of new or enhanced
products;
o product quality problems; and
o the enactment of health care reform legislation and any changes
in third party reimbursement policies.
We believe that quarter-to-quarter comparisons of our operating results are
not a good indication of our future performance. Due to the emerging nature of
the markets in which we compete, forecasting operating results is difficult and
unreliable. Over the past year, our revenue has been lower than anticipated,
largely attributable to the transition to our new sales strategy. It is likely
or possible that our operating results for a future quarter will fall below the
expectations of public market analysts and investors. When this occurred in the
past, the price of our common stock fell substantially, and if this occurs
again, the price of our common stock may fall again, perhaps substantially.
GROWTH IN OUR FUTURE OPERATING RESULTS IS HIGHLY CONTINGENT AND SUBJECT TO
SIGNIFICANT RISKS.
Our future operating results will be significantly affected by our ability
to:
o successfully and rapidly expand sales to potential customers;
o implement operating, manufacturing and financial procedures and
controls;
o improve coordination among different operating functions; and
o achieve manufacturing efficiencies as production volume
increases.
WE MAY NOT BE ABLE TO SUCCESSFULLY MARKET OUR PRODUCTS IF THIRD PARTY
REIMBURSEMENT FOR THE PROCEDURES PERFORMED WITH OUR PRODUCTS IS NOT AVAILABLE
FOR OUR HEALTH CARE PROVIDER CUSTOMERS.
Few individuals are able to pay directly for the costs associated with the
use of our products. In the United States, hospitals, physicians and other
healthcare providers that purchase medical devices generally rely on third
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party payors, such as Medicare, to reimburse all or part of the cost of the
procedure in which the medical device is being used.
Effective July 1, 1999 the Health Care Financing Administration commenced
Medicare coverage for TMR systems for any manufacturer's TMR procedures.
Hospitals and physicians are now eligible to receive Medicare reimbursement
covering 100% of the costs for TMR procedures and equipment. The Health Care
Financing Administration may not approve reimbursement for PMR. If it does not
provide reimbursement, our ability to successfully market and sell our PMR
products will be harmed. We have limited experience to date with the
acceptability of our TMR procedures for reimbursement by private insurance and
private health plans and thus do not have reliable data as to the success of our
patients in obtaining reimbursement for the costs of our TMR products outside of
the Medicare system. Private insurance and private health plans may not approve
reimbursement TMR or PMR procedures. If they do not provide reimbursement, our
business will suffer.
Potential purchasers must determine whether the clinical benefits of our
TMR and PMR laser systems justify:
o the additional cost or the additional effort required to obtain
prior authorization or coverage; and
o the uncertainty of actually obtaining such authorization or
coverage.
WE FACE COMPETITION FROM OUR COMPETITOR'S PRODUCTS WHICH COULD LIMIT MARKET
ACCEPTANCE OF OUR PRODUCTS AND RENDER OUR PRODUCTS OBSOLETE.
The market for TMR laser systems is competitive. If our competitor is more
effective in developing new products and procedures and marketing existing and
future products, our business will suffer. The market for TMR laser systems is
characterized by rapid technical innovation. Accordingly, our current or future
competitors may succeed in developing TMR products or procedures that:
o are more effective than our products;
o are more effectively marketed than our products; or
o may render our products or technology obsolete.
We currently compete with PLC Systems. PLC recently announced a
co-marketing agreement with Edwards Life Sciences to distribute their lasers and
disposables which is expected to add another 18 direct domestic sales
representatives involved in promoting the PLC technology.
Even with the Food and Drug Administration approval for our TMR laser
system, we will face competition for market acceptance and market share for that
product. Our ability to compete may depend in significant part on the timing of
introduction of competitive products into the market, and will be affected by
the pace, relative to competitors, at which we are able to:
o develop products;
o complete clinical testing and regulatory approval processes;
o obtain third party reimbursement acceptance; and
o supply adequate quantities of the product to the market.
OUR PRODUCTS DEPEND ON TMR TECHNOLOGY THAT IS RAPIDLY CHANGING WHICH MAY REQUIRE
US TO INCUR SUBSTANTIAL PRODUCT DEVELOPMENT EXPENDITURES TO PREVENT OUR PRODUCTS
FROM BECOMING OBSOLETE.
The medical device industry is characterized by rapid and significant
technological change. Our future success will depend in large part on our
ability to respond to such changes through further product research and
development. In addition, we must expand the indications and applications for
our products by developing and introducing enhanced and new versions of our TMR
and PMR laser systems. Product research and development requires substantial
expenditures and is inherently risky. We may not be able to:
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o identify products for which demand exists; or
o develop products that have the characteristics necessary to treat
particular indications.
OVERALL INCREASES IN MEDICAL COSTS COULD ADVERSELY AFFECT OUR BUSINESS.
We believe that the overall escalating cost of medical products and
services has led, and will continue to lead, to increased pressures on the
health care industry, both foreign and domestic, to reduce the cost of products
and services, including products offered by them. We cannot assure you that in
either United States or international markets that:
o third party reimbursement and coverage will be available or
adequate;
o current reimbursement amounts will not be decreased in the
future; or
o future legislation, regulation or reimbursement policies of third
party payors will not otherwise adversely affect the demand for
our products or our ability to profitably sell our products.
Fundamental reforms in the healthcare industry in the United States and
Europe continue to be considered. We cannot predict whether or when any
healthcare reform proposals will be adopted and what effect such proposals might
have on our business.
WE HAVE A HISTORY OF LOSSES AND MAY NOT BE PROFITABLE IN THE FUTURE.
We have incurred significant losses since inception. Our revenues and
operating income will be constrained:
o until such time, if ever, as we obtain broad commercial adoption
of our TMR laser systems by healthcare facilities in the United
States;
o until such time, if ever, as we obtain Food and Drug
Administration and other regulatory approvals for our PMR laser
systems; and
o for an uncertain period of time after such approvals are
obtained.
We may not achieve or sustain profitability in the future.
THIRD PARTIES MAY LIMIT THE DEVELOPMENT AND PROTECTION OF OUR INTELLECTUAL
PROPERTY, WHICH COULD ADVERSELY AFFECT OUR COMPETITIVE POSITION.
Our success is dependent in large part on our ability to:
o obtain patent protection for our products and processes;
o preserve our trade secrets and proprietary technology; and
o operate without infringing upon the patents or proprietary rights
of third parties.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. Companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. Certain competitors and potential competitors of ours
have obtained United States patents covering technology that could be used for
certain TMR and PMR procedures. We do not know if such competitors, potential
competitors or others have filed and hold international patents covering other
TMR or PMR technology. In addition, international patents may not be interpreted
the same as any counterpart United States patents.
In September 1995, one of our competitors sent us a notice of potential
infringement of their patent regarding a method for TMR utilizing
synchronization of laser pulses to the electrical signals from the heart. After
discussion with patent counsel, we concluded that we did not utilize the process
and/or apparatus that was the subject
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of the patent at issue, and we provided a response to the competitor to that
effect. We have not received any additional correspondence from this competitor
on these matters.
In 1996, prior to the merger with us, the company formerly known as
CardioGenesis Corporation initiated a suit in the United States against PLC
seeking a judgment that the PLC patent is invalid and unenforceable. In 1997,
PLC counterclaimed in that suit alleging infringement by the former
CardioGenesis Corporation of the PLC patent. Also in 1997, PLC initiated suit in
Germany against the former CardioGenesis Corporation and the former
CardioGenesis Corporation's former German sales agent alleging infringement of a
European counterpart to the PLC patent. In 1997, the former CardioGenesis
Corporation filed an Opposition in the European Patent Office to a European
counterpart to the PLC patent, seeking to have the European patent declared
invalid.
On January 5, 1999, before trial on the United States suit commenced, the
company formerly known as CardioGenesis Corporation and PLC settled all
litigation between them, both in the United States and in Germany, with respect
to the PLC patent and the European patents. Under the Settlement and License
Agreement signed by the parties, the former CardioGenesis Corporation stipulated
to the validity of the PLC patents and PLC granted the former CardioGenesis
Corporation a non-exclusive worldwide license to the PLC patents. The former
CardioGenesis Corporation agreed to pay PLC a license fee, and minimum
royalties, totaling $2.5 million in equal monthly installments over an
approximately forty-month period, with a running royalty credited against the
minimums.
The Settlement and License Agreement applies only to those products or that
technology covered by the PLC patents, and the agreement does not provide PLC
any rights to any former CardioGenesis Corporation intellectual property. Our
TMR 2000 laser system does not use the technology associated with the PLC
patents.
While we periodically review the scope of our patents and other relevant
patents of which we are aware, the question of patent infringement involves
complex legal and factual issues. Any conclusion regarding infringement may not
be consistent with the resolution of any such issues by a court.
COSTLY LITIGATION MAY BE NECESSARY TO PROTECT INTELLECTUAL PROPERTY RIGHTS.
We may have to engage in time consuming and costly litigation to protect
our intellectual property rights or to determine the proprietary rights of
others. In addition, we may become subject to patent infringement claims or
litigation, or interference proceedings declared by the United States Patent and
Trademark Office to determine the priority of inventions.
Defending and prosecuting intellectual property suits, United States Patent
and Trademark Office interference proceedings and related legal and
administrative proceedings are both costly and time-consuming. We may be
required to litigate further to:
o enforce our issued patents;
o protect our trade secrets or know-how; or
o determine the enforceability, scope and validity of the
proprietary rights of others.
Any litigation or interference proceedings will result in substantial
expense and significant diversion of effort by technical and management
personnel. If the results of such litigation or interference proceedings are
adverse to us, then the results may:
o subject us to significant liabilities to third parties;
o require us to seek licenses from third parties;
o prevent us from selling our products in certain markets or at
all; or
o require us to modify our products.
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Although patent and intellectual property disputes regarding medical
devices are often settled through licensing and similar arrangements, costs
associated with such arrangements may be substantial and could include ongoing
royalties. Furthermore, we may not be able to obtain the necessary licenses on
satisfactory terms, if at all.
Adverse determinations in a judicial or administrative proceeding or
failure to obtain necessary licenses could prevent us from manufacturing and
selling our products. This would harm our business.
The United States patent laws have been amended to exempt physicians, other
health care professionals, and affiliated entities from infringement liability
for medical and surgical procedures performed on patients. We are not able to
predict if this exemption will materially affect our ability to protect our
proprietary methods and procedures.
WE RELY ON PATENT AND TRADE SECRET LAWS, WHICH ARE COMPLEX AND MAY BE DIFFICULT
TO ENFORCE.
The validity and breadth of claims in medical technology patents involve
complex legal and factual questions and, therefore, may be highly uncertain.
Issued patent or patents based on pending patent applications or any future
patent application may not exclude competitors or may not provide a competitive
advantage to us. In addition, patents issued or licensed to us may not be held
valid if subsequently challenged and others may claim rights in or ownership of
such patents.
Furthermore, we cannot assure you that our competitors:
o have not developed or will not develop similar products;
o will not duplicate our products; or
o will not design around any patents issued to or licensed by us.
Because patent applications in the United States were, until recently,
maintained in secrecy until patents issue, we cannot be certain that:
o others did not first file applications for inventions covered by
our pending patent applications; or
o we will not infringe any patents that may issue to others on such
applications.
WE DEPEND ON SINGLE SOURCE SUPPLIERS FOR KEY COMPONENTS AND PRODUCTION COULD BE
INTERRUPTED IF A KEY SUPPLIER HAD TO BE REPLACED.
We currently purchase critical laser and fiber-optic components from single
sources. These sources may have difficulties supplying our needs for these
components. In addition, we do not have long term supply contracts. As a result,
these sources are not obligated to continue to provide these critical components
to us. Although we have identified alternative suppliers, a lengthy process
would be required to qualify them as additional or replacement suppliers. Any
significant interruption in the supply of critical materials or components could
delay our ability to manufacture our products and could disrupt our
manufacturing operations and harm our business.
LEAD TIMES FOR MATERIALS AND COMPONENTS VARY SIGNIFICANTLY WHICH COULD LEAD TO
EXCESS INVENTORY LEVELS AS WELL AS SHORTAGES OF CRITICAL COMPONENTS IF OUR
SUPPLY FORECASTS ARE INACCURATE.
We anticipate that products will be manufactured based on forecasted demand
and will seek to purchase subassemblies and components in anticipation of the
actual receipt of purchase orders from customers. Lead times for materials and
components vary significantly and depend on factors such as the business
practices of each specific supplier and the terms of particular contracts, as
well as the overall market demand for such materials and components at any given
time. If the forecasts are inaccurate, we could experience fluctuations in
inventory levels, resulting in excess inventory, or shortages of critical
components, either of which could cause our business to suffer.
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WE MAY NOT BE ABLE TO MEET FUTURE DEMAND INCREASES ON A TIMELY BASIS BECAUSE
SOME OF OUR SUPPLIERS COULD HAVE DIFFICULTY MEETING SIGNIFICANT OR RAPIDLY
INCREASING ORDER AMOUNTS.
Some of our suppliers could have difficulty expanding their manufacturing
capacity to meet our needs if demand for our TMR and PMR laser systems were to
increase rapidly or significantly. In addition, any defect or malfunction in the
laser or other products provided by such suppliers could cause a delay in
regulatory approvals or adversely affect product acceptance. We cannot predict
if:
o materials obtained from outside suppliers will be available in
adequate quantities to meet our future needs; or
o replacement suppliers can be qualified on a timely basis if our
current suppliers are unable to meet our needs.
WE HAVE LIMITED MANUFACTURING EXPERIENCE WHICH COULD PREVENT US FROM
SUCCESSFULLY INCREASING CAPACITY IN RESPONSE TO MARKET DEMAND.
We have limited experience in manufacturing products. In the course of
manufacturing our products, we may encounter difficulties in increasing
production, including problems involving:
o production yields;
o adequate supplies of components;
o achieving manufacturing efficiencies as production volume
increases;
o quality control and assurance (including failure to comply with
good manufacturing practices regulations, international quality
standards and other regulatory requirements); and
o shortages of qualified personnel.
OUR PRODUCTS CONTAIN DEFECTS WHICH COULD DELAY REGULATORY APPROVAL OR MARKET
ACCEPTANCE OF OUR PRODUCTS.
We may experience future product defects, malfunctions, manufacturing
difficulties or recalls related to the lasers or other components used in our
TMR and PMR laser systems. Any such occurrence could cause a delay in regulatory
approvals or adversely affect the commercial acceptance of our products. We are
unable to quantify the likelihood or costs of any such occurrences, but they
could potentially be significant. Our business could be harmed because we may be
unable to sufficiently remedy a significant product recall while still
maintaining our daily manufacturing quotas.
WE MUST COMPLY WITH FOOD AND DRUG ADMINISTRATION MANUFACTURING STANDARDS OR FACE
FINES OR OTHER PENALTIES INCLUDING SUSPENSION OF PRODUCTION.
We are required to demonstrate compliance with the Food and Drug
Administration's current good manufacturing practices regulations if we market
devices in the United States or manufacture finished devices in the United
States. The Food and Drug Administration inspects manufacturing facilities on a
regular basis to determine compliance. If we fail to comply with applicable Food
and Drug Administration or other regulatory requirements, we can be subject to:
o fines, injunctions, and civil penalties;
o recalls or seizures of products;
o total or partial suspensions of production; and
o criminal prosecutions.
The impact on the company of any such failure to comply would depend on the
impact of the remedy imposed on us.
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WE MAY SUFFER LOSSES FROM PRODUCT LIABILITY CLAIMS IF OUR PRODUCTS CAUSE HARM TO
PATIENTS.
We are exposed to potential product liability claims and product recalls.
These risks are inherent in the design, development, manufacture and marketing
of medical devices. We could be subject to product liability claims if the use
of our TMR or PMR laser systems is alleged to have caused adverse effects on a
patient or such products are believed to be defective. Our products are designed
to be used in life-threatening situations where there is a high risk of serious
injury or death. We are not aware of any material side effects or adverse events
arising from the use of our TMR product. Though we are in the process of
responding to the Food and Drug Administration's Circulatory Devices Panel's
recent recommendation against approval of our PMR product because of concerns
over the safety of the device and the data regarding adverse events in the
clinical trials, we believe there are no material side effects or adverse events
arising from the use of our PMR product. When being clinically investigated, it
is not uncommon for new surgical or interventional procedures to result in a
higher rate of complications in the treated population of patients as opposed to
those reported in the control group. In light of this, we believe that the
difference in the rates of complications between the treated groups and the
control groups in the clinical trials for our PMR product are not statistically
significant, which is why we believe that there are no material side effects or
material adverse events arising from the use of our PMR product.
Any regulatory clearance for commercial sale of these products will not
remove these risks. Any failure to comply with the Food and Drug
Administration's good manufacturing practices or other regulations could hurt
our ability to defend against product liability lawsuits. Although we have not
experienced any product liability claims to date, any such claims could cause
our business to suffer.
OUR INSURANCE MAY BE INSUFFICIENT TO COVER PRODUCT LIABILITY CLAIMS AGAINST US.
Our product liability insurance may not be adequate for any future product
liability problems or continue to be available on commercially reasonable terms,
or at all.
If we were held liable for a product liability claim or series of claims in
excess of our insurance coverage, such liability could harm our business and
financial condition. We maintain insurance against product liability claims in
the amount of $10 million per occurrence and $10 million in the aggregate.
We may require increased product liability coverage as sales of approved
products increase and as additional products are commercialized. Product
liability insurance is expensive and in the future may not be available on
acceptable terms, if at all.
WE DEPEND HEAVILY ON KEY PERSONNEL AND TURNOVER OF KEY EMPLOYEES AND SENIOR
MANAGEMENT COULD HARM OUR BUSINESS.
Our future business and results of operations depend in significant part
upon the continued contributions of our key technical and senior management
personnel. They also depend in significant part upon our ability to attract and
retain additional qualified management, manufacturing, technical, marketing and
sales and support personnel for our operations. If we lose a key employee or if
a key employee fails to perform in his or her current position, or if we are not
able to attract and retain skilled employees as needed, our business could
suffer.
During the last two years, we have had significant change in our senior
management team. Our former Chief Executive Officer, Allen Hill, resigned from
the company in December 1999. One of our current Directors, Alan Kaganov, acted
as interim Chief Executive Officer until we hired our current Chief Executive
Officer, Michael Quinn, in October of 2000. Our former Chief Financial Officer,
Dick Powers, resigned from the company in July 2000. Ian Johnston, our then Vice
President of Finance who resigned in June 2001, acted as interim Chief Financial
Officer until our current Chief Financial Officer, J. Stephen Wilkins, was hired
in May 2001. Richard Lanigan moved from Vice President of Sales to Vice
President of Government Affairs and Business Development in March 2001 and
Thomas Kinder was hired in March 2001 as our new Vice President of Worldwide
Sales. Darrell Eckstein was hired in December 2000 as our Vice President of
Operations, replacing Bill Picht, who resigned earlier in 2000.
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Our future business could be harmed by our turnover in senior management if
we have difficulty familiarizing and training our new management with respect to
our business. Further significant turnover in our senior management could
significantly deplete our institutional knowledge held by our existing senior
management team. We depend on the skills and abilities of these key employees in
managing the manufacturing, technical, marketing and sales aspects of our
business, any part of which could be harmed by further turnover.
WE MAY FAIL TO COMPLY WITH INTERNATIONAL REGULATORY REQUIREMENTS AND COULD BE
SUBJECT TO REGULATORY DELAYS, FINES OR OTHER PENALTIES.
Regulatory requirements in foreign countries for international sales of
medical devices often vary from country to country. In addition, the Food and
Drug Administration must approve the export of devices to certain countries. The
occurrence and related impact of the following factors would harm our business:
o delays in receipt of, or failure to receive, foreign regulatory
approvals or clearances;
o the loss of previously obtained approvals or clearances; or
o the failure to comply with existing or future regulatory
requirements.
To market in Europe, a manufacturer must obtain the certifications
necessary to affix to its products the CE Marking. The CE Marking is an
international symbol of adherence to quality assurance standards and compliance
with applicable European medical device directives. In order to obtain and to
maintain a CE Marking, a manufacturer must be in compliance with the appropriate
quality assurance provisions of the International Standards Organization and
obtain certification of its quality assurance systems by a recognized European
Union notified body. However, certain individual countries within Europe require
further approval by their national regulatory agencies.
We have achieved International Standards Organization and European Union
certification for our manufacturing facility. In addition, we have completed CE
mark registration for all of our products in accordance with the implementation
of various medical device directives in the European Union. Failure to maintain
the right to affix the CE Marking or other requisite approvals could prohibit us
from selling our TMR products in member countries of the European Union or
elsewhere. Any enforcement action by international regulatory authorities with
respect to past or future regulatory noncompliance could cause our business to
suffer. Noncompliance with international regulatory requirements could result in
enforcement action such as not being allowed to market our product in the
European Union, which would significantly reduce international revenue.
WE SELL OUR PRODUCTS INTERNATIONALLY, WHICH SUBJECTS US TO SPECIFIC RISKS OF
TRANSACTING BUSINESS IN FOREIGN COUNTRIES.
In future quarters, international sales may become a significant portion of
our revenue if our products become more widely used outside of the United States
according to our plan. Our international revenue is subject to the following
risks, the occurrence of any of which could harm our business:
o foreign currency fluctuations;
o economic or political instability;
o foreign tax laws;
o shipping delays;
o various tariffs and trade regulations;
o restrictions and foreign medical regulations;
o customs duties, export quotas or other trade restrictions; and
o difficulty in protecting intellectual property rights.
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WE MAY NOT ACHIEVE WIDE ACCEPTANCE OF OUR PRODUCTS IN FOREIGN MARKETS IF WE FAIL
TO OBTAIN THIRD PARTY REIMBURSEMENT FOR THE PROCEDURES PERFORMED WITH OUR
PRODUCTS.
If we obtain the necessary foreign regulatory registrations or approvals,
market acceptance of our products in international markets would be dependent,
in part, upon the availability of reimbursement within prevailing health care
payment systems. Reimbursement is a significant factor considered by hospitals
in determining whether to acquire new equipment. A hospital is more inclined to
purchase new equipment if third-party reimbursement can be obtained.
Reimbursement and health care payment systems in international markets vary
significantly by country. They include both government sponsored health care and
private insurance. Although we expect to seek international reimbursement
approvals, any such approvals may not be obtained in a timely manner, if at all.
Failure to receive international reimbursement approvals could hurt market
acceptance of TMR products in the international markets in which such approvals
are sought, which would significantly reduce international revenue.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT COULD DISTRACT OUR MANAGEMENT, CAUSE
US TO INCUR DEBT, OR DILUTE OUR SHAREHOLDERS.
We may, from time to time, acquire or invest in other complementary
businesses, products or technologies. While there are currently no commitments
with respect to any particular acquisition or investment, our management
frequently evaluates the strategic opportunities available in complementary
businesses, products or technologies. The process of integrating an acquired
company's business into our operations may result in unforeseen operating
difficulties and expenditures and may absorb significant management attention
that would otherwise be available for the ongoing development of our business.
Moreover, the anticipated benefits of any acquisition or investment may not be
realized. Any future acquisitions or investments by us could result in
potentially dilutive issuances of equity securities, the incurrence of debt and
contingent liabilities and amortization expenses related to goodwill and other
intangible assets, any of which could materially harm our operating results.
THE PRICE OF OUR COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY, WHICH MAY RESULT IN
LOSSES FOR INVESTORS.
The market price for our common stock has been and may continue to be
volatile. For example, during the 52-week period ended August 13, 2001, the
closing prices of our common stock as reported on the NASDAQ National Market
ranged from a high of $4.68 to a low of $0.50. We expect our stock price to be
subject to fluctuations as a result of a variety of factors, including factors
beyond our control. These factors include:
o actual or anticipated variations in our quarterly operating
results;
o announcements of technological innovations or new products or
services by us or our competitors;
o announcements relating to strategic relationships or
acquisitions;
o changes in financial estimates by securities analysts;
o statements by securities analysts regarding us or our industry;
o conditions or trends in the medical device industry; and
o changes in the economic performance and/or market valuations of
other medical device companies.
Because of this volatility, we may fail to meet the expectations of our
shareholders or of securities analysts at some time in the future, and our stock
price could decline as a result.
In addition, the stock market has experienced significant price and volume
fluctuations that have particularly affected the trading prices of equity
securities of many high technology companies. These fluctuations have often been
unrelated or disproportionate to the operating performance of these companies.
Any negative change in the public's perception of medical device companies could
depress our stock price regardless of our operating results. If our common stock
were to trade under $1.00 for 30 consecutive days on the NASDAQ National
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Market, our common stock could be subject to certain consequences established by
the NASDAQ National Market such as being delisted. If our common stock were
delisted, then we could apply for listing on the Nasdaq SmallCap Market, subject
to Nasdaq's approval. If our common stock is not approved for trading on the
Nasdaq SmallCap Market, then our common stock would trade only in the secondary
markets in the so-called "pink sheets" or Nasdaq's "OTC Bulletin Board."
Delisting from the Nasdaq National Market could adversely affect the liquidity
and price of our common stock and it could have a long-term adverse impact on
our ability to raise capital in the future.
Recently, when the market price of a stock has been volatile, holders of
that stock have often instituted securities class action litigation against the
company that issued the stock. If any of our shareholders brought such a lawsuit
against us, we could incur substantial costs defending the lawsuit. The lawsuit
could also divert the time and attention of our management.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUANTITATIVE DISCLOSURES
The Company is exposed to market risks inherent in its operations,
primarily related to interest rate risk. These risks arise from transactions and
operations entered into in the normal course of business. The Company does not
use derivatives to alter the interest characteristics of its debt instruments.
The Company has no holdings of derivative or commodity instruments.
Interest Rate Risk. The Company is subject to interest rate risks on cash
and cash equivalents, existing long-term debts and any future financing
requirements. The long-term debt at June 30, 2001 consists of outstanding
balances on lease obligations.
Assets
Cash and cash equivalents.................... $3,346,000
Average interest rate........................ 4.0%
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no pending legal proceedings against us other than ordinary
litigation incidental to our business, the outcome of which, individually or in
the aggregate, is not expected to have a material adverse effect on our business
or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At CardioGenesis Corporation's Annual Meeting of Shareholders held on June
15, 2001, the following proposals were adopted by the margins indicated.
1. To elect five (5) directors to serve until the next Annual Meeting of
Shareholders or until their successors are elected and qualified.
Number of Shares Voted:
For Withheld
---------- ---------
Michael J. Quinn 26,945,345 3,497,500
Jack M. Gill, Ph.D. 26,666,186 3,776,659
Alan L. Kaganov, Sc.D. 29,372,067 1,070,778
Robert L. Mortensen 29,377,235 1,065,610
Robert C. Strauss 29,379,935 1,062,910
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2. To approve an amendment to Eclipse Surgical Technologies, Inc.'s
Restated Articles of Incorporation to change the name of Eclipse
Surgical Technologies, Inc. to Cardiogenesis Corporation.
Number of Shares Voted:
For Against Abstain
---------- ------- ---------
28,837,797 413,637 1,191,411
3. To ratify the appointment of PricewaterhouseCoopers LLP as the
independent auditors of Eclipse Surgical Technologies, Inc. for the
fiscal year ending December 31, 2001.
Number of Shares Voted:
For Against Abstain
---------- ------- -------
30,352,767 38,848 51,230
4. To approve an amendment to the Stock Option Plan to increase the
number of shares of Common Stock reserved for issuance thereunder by
500,000 shares.
Number of Shares Voted:
For Against Abstain
---------- ------- -------
26,217,555 4,130,975 94,314
5. To approve an amendment to the Employee Stock Purchase Plan to
increase the number of shares of Common Stock reserved for issuance
thereunder by 300,000 shares.
Number of Shares Voted:
For Against Abstain
---------- ------- -------
29,644,747 715,685 82,413
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits required to be filed by Item 601 of Regulation S-K:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Amended and Restated Bylaws of CardioGenesis Corporation
adopted as of April 11, 2001 herein incorporated by
reference from CardioGenesis' Form 8-K filed on April 23,
2001.
3.2 Certificate of Amendment to Articles of Incorporation of
CardioGenesis Corporation filed with the Secretary of State
of California on June 18, 2001.
b) Reports on Form 8-K
(i) A report on Form 8-K was filed on April 23, 2001, to report under
Item 5, Other Events, CardioGenesis' sale of common stock to the State of
Wisconsin Investment Board and amendment to CardioGenesis' Bylaws.
(ii) A report on Form 8-K was filed on June 20, 2001, to report under
Item 5, Other Events, the change of CardioGenesis' name from its former
name of Eclipse Surgical Technologies, Inc. (Nasdaq: ESTI) to CardioGensis
Corporation (Nasdaq: CGCP).
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CARDIOGENESIS CORPORATION
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.
CARDIOGENESIS CORPORATION
Registrant
Date: August 14, 2001 /s/ Michael J. Quinn
---------------------------
Michael J. Quinn
Chief Executive Officer,
President and Chairman of
the Board
(Principal Executive
Officer)
Date: August 14, 2001 /s/ J. Stephen Wilkins
---------------------------
J. Stephen Wilkins
Vice President and Chief
Financial Officer
(Principal Accounting and
Financial Officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.2 Certificate of Amendment to Articles of Incorporation of
CardioGenesis Corporation filed with the Secretary of State of
California on June 18, 2001.