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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 MARCH 31, 2001
Commission file number 0-28288
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
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CALIFORNIA 77-0223740
(State of incorporation) (I.R.S. Employer
Identification Number)
1049 KIEL COURT
SUNNYVALE, CALIFORNIA 94089
(Address of principal executive offices)
(408) 548-2100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock outstanding as of the latest practicable date.
33,696,061 shares of Common Stock, no par value
As of April 30, 2001
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
TABLE OF CONTENTS
PART 1
FINANCIAL INFORMATION
PAGE
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Item 1. Financial Statements (unaudited):
a. Consolidated Balance Sheets
as of March 31, 2001 and December 31, 2000.................................. 1
b. Consolidated Statements of Operations & Comprehensive Loss
for the three months ended March 31, 2001 and 2000.......................... 2
c. Consolidated Statements of Cash Flows
for the three months ended March 31, 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.......................... 20
PART II
OTHER INFORMATION
Item 1. Legal Proceedings................................................................... 21
Item 6. Exhibits and Reports on Form 8-K.................................................... 21
Signatures.......................................................................... 22
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
(unaudited)
Current assets:
Cash and cash equivalents ................................................................... $ 3,142 $ 3,357
Accounts receivable, net of allowance for doubtful accounts of $443 and $353 at March 31,
2001 and December 31, 2000, respectively ................................................ 2,376 3,654
Inventories, net of reserve of $2,941 and $3,102 at March 31, 2001 and December 31, 2000,
respectively ............................................................................ 5,007 5,400
Prepaids and other current assets ........................................................... 409 837
--------- ---------
Total current assets ................................................................ 10,934 13,248
Property and equipment, net ................................................................... 966 1,048
Accounts receivable over one year, net of allowance for doubtful accounts of $443 and $443 at
March 31, 2001 and December 31, 2000, respectively ...................................... 50 119
Other assets .................................................................................. 2,145 2,550
--------- ---------
Total assets ........................................................................ $ 14,095 $ 16,965
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................................ $ 423 $ 689
Accrued liabilities ......................................................................... 4,980 5,789
Customer deposits ........................................................................... 186 186
Deferred revenue ............................................................................ 1,154 1,310
Note payable ................................................................................ -- 86
Current portion of capital lease obligation ................................................. 26 26
Current portion of long-term liabilities .................................................... 500 500
--------- ---------
Total current liabilities ........................................................... 7,269 8,586
Capital lease obligation, less current portion ................................................ 60 66
Long-term liabilities, less current portion ................................................... 224 339
--------- ---------
Total liabilities ................................................................... 7,553 8,991
--------- ---------
Shareholders' equity:
Preferred stock:
no par value; 6,600 shares authorized; none issued and outstanding ....................... -- --
Common stock:
no par value; 82,000 shares authorized; 31,696 and 30,836 shares issued and
outstanding at March 31, 2001 and December 31, 2000, respectively ....................... 162,958 161,938
Deferred compensation ....................................................................... (57) (66)
Accumulated other comprehensive loss ........................................................ (89) (65)
Accumulated deficit ......................................................................... (156,270) (153,833)
--------- ---------
Total shareholders' equity .......................................................... 6,542 7,974
--------- ---------
Total liabilities and shareholders' equity .......................................... $ 14,095 $ 16,965
========= =========
The accompanying notes are an integral part of these consolidated
financial statements
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------
2001 2000
-------- --------
Net revenues ................................................................... $ 3,111 $ 5,677
Cost of revenues ............................................................... 1,535 2,332
-------- --------
Gross profit ......................................................... 1,576 3,345
-------- --------
Operating expenses:
Research and development ..................................................... 543 1,786
Sales and marketing .......................................................... 1,952 4,549
General and administrative ................................................... 1,186 1,556
-------- --------
Total operating expenses ............................................. 3,681 7,891
-------- --------
Operating loss ....................................................... (2,105) (4,546)
Interest expense ............................................................... (5) (10)
Interest income ................................................................ 30 117
Equity in net loss of investee ................................................ (357) --
-------- --------
Net loss ............................................................. (2,437) (4,439)
Other comprehensive income (loss), net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during period ................... 3 --
Less: reclassification adjustment for gains included in net income ........ -- (3)
Foreign currency translation adjustment ................................. (27) --
-------- --------
Other comprehensive income (loss) ....................................... (24) (3)
-------- --------
Comprehensive loss ................................................... $ (2,461) $ (4,442)
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Net loss per share:
Basic and diluted ............................................................ $ (0.08) $ (0.15)
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Weighted average shares outstanding .......................................... 30,837 29,664
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The accompanying notes are an integral part of these consolidated
financial statements
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------
2001 2000
------- -------
Cash flows from operating activities:
Net loss ..................................................................... $(2,437) $(4,439)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................. 121 246
Loss from investment in MicroHeart Holdings, Inc. ......................... 357 --
Provision for doubtful accounts ........................................... 91 10
Inventory reserves ........................................................ 230 456
Amortization of deferred compensation ..................................... 28 248
Amortization of license fees .............................................. 48 48
Changes in operating assets and liabilities:
Accounts receivable - short term ........................................ 1,187 1,856
Inventories ............................................................. 163 (565)
Prepaids and other current assets ....................................... 428 315
Accounts receivable - long term ......................................... 69 316
Accounts payable ........................................................ (266) (341)
Accrued liabilities ..................................................... (809) (2,299)
Current portion of long term liabilities ................................ -- (243)
Long term liabilities ................................................... (115) (179)
Customer deposits ....................................................... -- 69
Deferred revenue ........................................................ (156) 223
------- -------
Net cash used in operating activities ................................ (1,061) (4,279)
------- -------
Cash flows from investing activities:
Purchase of marketable securities ............................................ -- (775)
Maturities of marketable securities .......................................... -- 4,218
Acquisition of property and equipment ........................................ (39) (116)
------- -------
Net cash (used in) provided by investing activities .................. (39) 3,327
------- -------
Cash flows from financing activities:
Net proceeds from issuance of common stock from exercise of options and
warrants ................................................................... 1 1,033
Net proceeds from sale of common stock ....................................... 1,000 --
Proceeds from short term borrowings .......................................... (86) --
Repayments of capital lease obligations ...................................... (6) (6)
------- -------
Net cash provided by financing activities ............................ 909 1,027
Effects of exchange rate changes on cash and cash equivalents ........ (24) (1)
------- -------
Net (decrease) increase in cash and cash equivalents ................. (215) 74
Cash and cash equivalents at beginning of period ............................... 3,357 5,566
------- -------
Cash and cash equivalents at end of period ..................................... $ 3,142 $ 5,640
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Supplemental schedule of cash flow information:
Interest paid ................................................................ $ 5 $ 9
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Taxes paid ................................................................... $ 13 $ 11
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Supplemental schedule of noncash investing and financing activities:
Change in unrealized gain (loss) on marketable securities .................... $ 3 $ (3)
======= =======
Deferred compensation ........................................................ $ 19 $ 245
======= =======
The accompanying notes are an integral part of these consolidated
financial statements
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
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 Eclipse's 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. Eclipse has
sustained significant losses for the last several years and expects such losses
to continue through at least 2001. Eclipse 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 3)
There can be no assurance that Eclipse 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 Eclipse's stockholders, restrictive covenants or high interest
costs. The failure to raise needed funds on sufficiently favorable terms could
have a material adverse effect on Eclipse's business, operating results and
financial condition.
Eclipse's 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 Eclipse's 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 months ended March
31, 2001 and 2000 dilutive potential common shares outstanding reflects shares
issuable under the Company's stock option plans. There are no reconciling items
in the numerator or denominator of the earnings per share calculation for the
periods presented.
Options to purchase 4,004,834 and 3,535,925 shares of common stock were
outstanding at March 31, 2001 and 2000 respectively, but were not included in
the calculation of diluted EPS because their inclusion would have been
antidilutive.
2. Inventories:
Inventories are stated at lower of cost (first-in, first-out) or market
and consist of the following (in thousands):
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
(UNAUDITED)
Raw materials ........... $1,898 $2,045
Work in process ......... 759 715
Finished goods .......... 2,350 2,640
------ ------
$5,007 $5,400
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3. SUBSEQUENT EVENTS:
In April 2001, we sold 2,000,000 shares to a private company 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 May 2001, we entered into a facility lease for an office facility with
terms extending through May 2006. The minimum future rental payments are as
follows (in thousands):
Year Ending December 31,
2001 .................. $ 123
2002 .................. 492
2003 .................. 492
2004 .................. 492
2005 .................. 492
2006 .................. 205
------
$2,296
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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
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 transluminal myocardial revascularization ("PTMR").
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 PTMR catheter system to customers in the
European Community. Effective July 1, 1999, 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 have completed pivotal clinical trials involving PTMR, and study
results were submitted to the FDA in a Pre Market Approval ("PMA") application
in December of 1999 along with subsequent amendments. We are currently in final
negotiations with the FDA in the PTMR market approval process. There can be no
assurance, however, that we will receive a favorable decision from the agency.
As of March 31, 2001, we had an accumulated deficit of $156,270,000. We
expect to continue to incur operating losses related to the expansion of sales
and marketing activities. The timing and amounts of our expenditures will depend
upon a number of factors, including the efforts required to develop our sales
and marketing organization, the timing of market acceptance, if any, of our
products, and the status and timing of regulatory approvals.
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RESULTS OF OPERATIONS
Net Revenues
Net revenues of $3,111,000 for the quarter ended March 31, 2001 decreased
$2,566,000 or 45% when compared to net revenues of $5,677,000 for the quarter
ended March 31, 2000. The decrease in revenues was mainly due to a $2.0 million
reduction in sales of laser systems. A new sales model implemented in the end of
1999 emphasized laser system placements to develop the disposable handpiece
market more rapidly. Laser sales have consequentially dropped in the current
quarter compared to the prior year quarter. In addition, a reduction in
handpiece sales accounted for roughly $0.5 million of the decrease in net
revenue between the first quarter of 2001 compared to the comparable period of
the prior year. Much of this decrease is due to the fact that the sales force
was in transition in the quarter ended March 31 2001. New sales representatives
were hired to fill openings resulting from the departure of under-performing
representatives and general attrition. As a result of the transitioning sales
force, disposable sales fell 20% in units domestically. Export sales accounted
for approximately 9% and 16% of total sales for the quarters ended March 31,
2001 and 2000, respectively. This percentage decrease in export sales relative
to total sales is mainly due to reduced international sales staffing after the
reduction in force implemented during the fourth quarter of 2000. We define
export sales as sales to customers located outside of the United States. (See
"--Factors Affecting Future Results.")
Gross Profit
Gross profit decreased to $1,576,000 or 51% of net revenues for the
quarter ended March 31, 2001 as compared to $3,345,000 or 59% of net revenues
for the quarter ended March 31, 2000. The decrease in absolute terms and as a
percentage of sales resulted from lower sales volume. With lower sales volume,
the fixed component of our cost of goods sold became more significant,
negatively impacting gross margins as a percent of sales.
Research and Development
Research and development expenditures of $543,000 decreased $1,243,000 or
70% for the quarter ended March 31, 2001 when compared to $1,786,000 for the
quarter ended March 31, 2000. The decrease in these expenses reflects the
decrease in activity associated with clinical trials, engineering project
expenses and lower employee expenses.
Sales and Marketing
Sales and marketing expenditures of $1,952,000 decreased $2,597,000 or
57% for the quarter ended March 31, 2001 when compared to $4,549,000 for the
quarter ended March 31, 2000. This decrease is mainly due to a reduction in
overall sales and marketing staffing between the first quarter of 2001 and the
first quarter of 2000. Many of these reductions were permanent reductions in
staffing. However, as we continue to rebuild the sales and marketing team, we
expect sales and marketing expense to increase in the quarters to come.
General and Administrative
General and administrative expenses of $1,186,000 decreased by $370,000
or 24% to $1,186,000 in the quarter ended March 31, 2001. The decrease is due to
reductions in staffing, legal and patent expense and deferred compensation
expense to consultants.
Non-Operating Expenses
Equity in net loss of investee of $357,000 in the quarter ended March 31,
2001 represents our share of the net loss of Microheart Holding Inc. On November
15th 2000, we exercised warrants to increase our ownership of Microheart to
32.1%. This non-cash expense did not exist in the quarter ended March 31, 2000.
Interest income of $30,000 in the quarter ended March 31, 2001 declined
74% or $87,000 compared to $117,000 in the quarter ended March 31, 2000. The
reduction in interest income was a result of lower investments in marketable
securities, and cash and cash equivalents.
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Interest expense of $5,000 in the quarter ended March 31, 2001 decreased
50% or $5,000 compared to $10,000 in the quarter ended March 31, 2000. This
decrease reflects a lower level of debt outstanding.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $3,142,000 at March 31, 2001 compared to
$3,357,000 at December 31, 2000, a decrease of 6%. We used $1,061,000 of cash
for operating activities, including funding our operating loss and decreases in
accrued liabilities in the first three months of 2001. A decrease in accounts
receivable provided $1,187,000 in cash. Investing activities used cash of
$36,000 in the first three months of 2001. Financing activities provided cash of
$909,000 in the first three months of 2001, primarily from the issuance of
common stock to a private company.
Since our inception, we have satisfied our capital requirements primarily
through sales of our equity securities. In addition, our operation has been
funded in part through sales of our products.
In March 2001, we sold 898,202 shares of common stock to Acqua Wellington
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. We are
contractually prohibited from obtaining any future financings with Acqua
Wellington.
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.
We have incurred significant losses for the last several years and at
March 31, 2001 have an accumulated deficit of $156,270,000. 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
increased direct sales and marketing efforts on existing products and pursuing
timely regulatory approval for certain other products under clinical trials. We
believe our cash balance as of March 31, 2001, as supplemented by the proceeds
received from the April 2001 issuance of our common stock, will be sufficient to
meet our capital and operating requirements through the end of 2001. We have
recognized the need for infusion of cash. In September 2000, March 2001 and
April 2001, we raised approximately $1,873,000, $1,000,000 and $1,925,000,
respectively, net of offering costs, from the sale of shares of common stock. We
are continuing negotiations with a financing company for a revolving line of
credit as well as exploring other financing alternatives. There can be no
assurance that we will be successful in obtaining such financing. 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.
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.
WE MAY NOT BE ABLE TO SECURE ADDITIONAL FINANCING IN THE FUTURE. In the
future, we may require additional funds for operating expenses. Our capital
requirements may vary and will depend on both internal and external factors.
Internal factors affecting our capital requirements include our ability to
generate increased sales, profits and cash flow from operations. External
factors affecting our capital requirements include the progress of our PTMR
submission with the FDA, and competing technological and market developments. 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. If this occurs, we may have to significantly reduce our
operations until an appropriate solution is implemented.
WE MAY FAIL TO OBTAIN REQUIRED REGULATORY APPROVALS TO MARKET OUR
PRODUCTS IN THE UNITED STATES. Our business, financial condition and results of
operations could be harmed by any of the following events, circumstances or
occurrences related to the regulatory process:
- the failure to obtain regulatory approvals for our PTMR system;
- significant limitations in the indicated uses for which our products may
be marketed;
- substantial costs incurred in obtaining regulatory approvals.
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In 1997, we submitted a PMA application to the FDA for certain
applications of our TMR laser system. On October 27, 1998, an advisory panel of
the FDA recommended that the FDA approve our PMA application for the TMR laser
system. Along with our approval, the FDA panel requested that we conduct
postmarket surveillance in a form to be determined through further discussions
with the FDA. On February 11, 1999, we received final approval from the FDA for
use of our TMR products for treatment of stable patients with angina (Canadian
Cardiovascular Society Class 4) refractory to other medical treatments and
secondary to objectively demonstrated coronary artery atherosclerosis and with a
region of the myocardium with reversible ischemia not amenable to direct
coronary revascularization.
In February 1996, we obtained FDA clearance to undertake Phase I of a
clinical study of TMR intended to assess the safety and effectiveness of "TMR
Used in Conjunction with CABG" as compared with coronary artery bypass graft,
known as CABG, alone. In September 1996, the FDA provided us with clearance to
begin Phase II of this study, which was subsequently completed. In July 1999, we
submitted a PMA supplement to FDA for an expanded indication to our approved TMR
labeling to include TMR in conjunction with CABG. In January 2000, we received a
response from the FDA requesting that we either provide more information or
modify our labeling request. Since TMR and CABG are each presently utilized to
treat separate regions of the heart, we concluded that our present FDA approved
labeling is adequate, and that the physician can best decide how to use the
laser system within the approved labeling. As a result, in March 2000, we
decided that we will not pursue any wording changes to our already approved TMR
labeling and have withdrawn our submission to the FDA for TMR in conjunction
with CABG.
In December 1999, we submitted a PMA application to the FDA seeking
marketing clearance for PTMR in the United States. To date, the FDA has not
granted approval of this application. The FDA may not approve this application
in a timely manner, if ever.
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 PTMR 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 PTMR systems
fail to achieve significant market acceptance.
Positive endorsements by physicians are essential for clinical adoption
of our TMR and PTMR laser systems. Even if the clinical efficacy of TMR and PTMR
laser systems is established, physicians may elect not to recommend TMR and PTMR
laser systems for any number of reasons. The reasons why TMR or PTMR laser
systems may effectively treat coronary artery disease are not fully understood.
Although we intend to use research, development and clinical efforts to
understand better the physiological effects of TMR and PTMR treatment, we may
not achieve such understanding on a timely basis, or at all. TMR and PTMR laser
systems may not be clinically adopted unless we:
- understand thoroughly the physiological effects of the products;
- provide scientific evidence of long term benefits for treated patients,
and
- disseminate such understanding within the medical community.
Clinical adoption of these products will also depend upon:
- our ability to facilitate training of cardiothoracic surgeons and
interventional cardiologists in TMR and PTMR therapy;
- willingness of such physicians to adopt and recommend such procedures to
their patients; and
- raising the awareness of TMR and then PTMR with the targeted patient
population.
Patient acceptance of the procedure will depend on:
- physician recommendations;
- the degree of invasiveness;
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- the effectiveness of the procedure; and
- 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, AND WE HAVE LIMITED EXPERIENCE TO DATE ESTABLISHING THESE
OPERATIONS. 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 PTMR lasers and disposable catheters
for investigational use only.
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 handpieces
at a premium over the list 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. If the sales
force is not successful in increasing market share and selling our disposable
handpieces our business will suffer.
With FDA approval of our TMR laser system, we are marketing our products
primarily through our direct sales force. We have been expanding our operations
by hiring additional sales and marketing personnel. This has required and will
continue to require substantial management efforts and financial resources. If
we are not able to establish effective sales and marketing capabilities our
business will suffer.
THE EXPANSION OF OUR BUSINESS MAY PUT ADDED PRESSURE ON OUR MANAGEMENT
AND OPERATIONAL INFRASTRUCTURE AND COULD CREATE NUMEROUS RISKS AND CHALLENGES.
The growth in our business may place a significant strain on our limited
personnel, management and other resources. The evolving growth of our business
involves numerous risks and challenges, including:
- the dependence on the growth of the market for our TMR and PTMR systems;
- domestic and international regulatory developments;
- rapid technological change;
- the highly competitive nature of the medical devices industry; and
- the risk of entering emerging markets in which we have limited or no
direct experience.
Our future operating results will be significantly affected by our
ability to:
- successfully and rapidly expand sales to potential customers;
- implement operating, manufacturing and financial procedures and controls;
- improve coordination among different operating functions;
- continue to attract, train and motivate additional qualified personnel in
all areas; and
- achieve manufacturing efficiencies as production volume increases.
We may not be able to manage these activities and implement these strategies
successfully, and any failure to do so could harm our operating results.
OUR OPERATING RESULTS WILL 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:
- the level of product demand and the timing of customer orders;
- changes in strategy;
- delays associated with the FDA and other regulatory approval processes;
- personnel changes;
- the level of international sales;
- changes in competitive pricing policies;
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- the ability to develop, introduce and market new and enhanced versions of
products on a timely basis;
- deferrals in customer orders in anticipation of new or enhanced products;
- product quality problems; and
- 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. Our operating results have,
in the past, fallen below expectations and 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, the price of our
common stock may fall again, perhaps substantially.
WE WILL BE ABLE TO OBTAIN FDA APPROVAL ONLY FOR THOSE PRODUCTS THAT ARE
PROVEN SAFE AND EFFECTIVE IN CLINICAL SITES. The FDA has not approved our PTMR
laser systems for any indication in the United States. We submitted a PMA
Supplement for our Axcis PTMR system to the FDA in December 1999. The PTMR study
compares PTMR to conventional medical therapy in patients with no option for
other treatment. The FDA may not accept the study as safe and effective, and
PTMR may not be approved for commercial use in the United States. Responding to
FDA 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"
("DMR") were presented at a medical conference in Washington D.C. The trial's
principal investigator concluded that the DMR 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 the DMR device study should
not call the results of our PTMR study into question because the devices and
procedures are substantially different. We cannot assure you, however, that the
preliminary results of the DMR device study will not impact our submission for
the Axcis PTMR system to the FDA.
WE MAY NOT BE ABLE TO SUCCESSFULLY MARKET OUR PRODUCTS IF WE FAIL TO
OBTAIN THIRD PARTY REIMBURSEMENT FOR THE PROCEDURES PERFORMED WITH OUR PRODUCTS.
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 party
payors, such as Medicare, to reimburse all or part of the cost of the procedure
in which the medical device is being used. A failure by third party payors to
provide adequate reimbursement for the TMR and PTMR procedures that use our
products would harm our business.
Effective July 1, 1999 the Health Care Financing Administration commenced
Medicare coverage for TMR systems for any manufacturer's TMR procedures.
Hospitals are now eligible to receive Medicare reimbursement for TMR procedures.
The Health Care Financing Administration may not approve reimbursement for PTMR.
If it does not provide reimbursement, our business will suffer. We have limited
experience to date with the acceptability of our TMR procedures for
reimbursement by private insurance and private health plans. Private insurance
and private health plans may not approve reimbursement for TMR or PTMR
procedures. If they do not provide reimbursement, our business will suffer.
Third party payors may deny reimbursement if they determine that the
device used in a treatment is:
- unnecessary;
- inappropriate;
- experimental;
- used for a non-approved indication; or
- not cost-effective.
Potential purchasers must determine whether the clinical benefits of our
TMR and PTMR laser systems justify:
- the additional cost or the additional effort required to obtain prior
authorization or coverage; and
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- the uncertainty of actually obtaining such authorization or coverage.
WE FACE INTENSE COMPETITION AND COMPETITIVE PRODUCTS COULD RENDER OUR
PRODUCTS OBSOLETE. The market for TMR and PTMR laser systems is intensely
competitive and is constantly becoming more competitive. If our competitors are
more effective in developing new products and procedures and marketing existing
and future products, our business will suffer.
The market for TMR and PTMR laser systems is characterized by rapid
technical innovation. Accordingly, our current or future competitors may succeed
in developing TMR and PTMR products or procedures that:
- are more effective than our products;
- are more effectively marketed than our products; or
- may render our products or technology obsolete.
We currently compete with PLC Systems, Inc., Johnson & Johnson and Boston
Scientific. PLC is currently selling TMR commercially in the United States and
abroad, while Johnson & Johnson is currently selling PTMR products for
investigational use. Boston Scientific has acquired radio frequency technology
to begin a percutaneous feasibility trial in the United States under a
preliminary Investigational Device Exemption ("IDE"). PLC recently announced a
co-marketing agreement with Edwards Life Sciences to distribute their lasers and
disposables. This action will add another 18 direct domestic sales
representatives involved in promoting the PLC technology.
Even with the FDA 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:
- develop products;
- complete clinical testing and regulatory approval processes;
- obtain third party reimbursement acceptance; and
- supply adequate quantities of the product to the market.
OUR PRODUCTS ALSO COMPETE WITH ALTERNATIVE TREATMENT METHODS AND OUR
PRODUCTS MUST REPLACE THESE METHODS TO BE COMMERCIALLY SUCCESSFUL. Many of the
medical indications that may be treatable with TMR and PTMR laser systems are
currently being treated by drug therapies or surgery and other interventional
therapies, including percutaneous transluminal coronary angioplasty ("PTCA") and
coronary artery bypass graft ("CABG"). Our business would be materially harmed
if TMR technology fails to replace or augment existing therapies or to be more
effective, safer or more cost effective than new therapies. A number of the
existing therapies are widely accepted in the medical community, have a long
history of use and continue to be enhanced rapidly. Procedures using TMR and
PTMR technology may not be able to replace or augment such established
treatments.
Others are developing new surgical procedures and new drug therapies to
treat coronary artery disease. These new procedures and drug therapies could be
more effective, safer or more cost effective than TMR and PTMR laser systems.
The market acceptance and commercial success of our TMR and PTMR laser
systems will depend not only upon their safety and effectiveness, but also upon
the relative safety and effectiveness of alternative treatments.
OUR PRODUCTS DEPEND ON TMR TECHNOLOGY THAT IS RAPIDLY CHANGING WHICH
COULD REQUIRE US TO INCUR SUBSTANTIAL PRODUCT DEVELOPMENT EXPENDITURES TO
RESPOND TO INDUSTRY CHANGES. TMR and PTMR laser systems are our only products.
Accordingly, if we fail to develop and commercialize successfully our TMR and
PTMR laser systems, then our business would suffer.
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. In addition, we must expand the
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indications and applications for our products by developing and introducing
enhanced and new versions of our TMR and PTMR laser systems. Product research
and development requires substantial expenditures and is inherently risky. We
may not be able to:
- identify products for which demand exists; or
- develop products that have the characteristics necessary to treat
particular indications.
Even if we identify and develop such products, we may not receive
regulatory approval and may not be commercially successful.
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 can not assure you that in
either United States or international markets that:
- third party reimbursement and coverage will be available or adequate;
- current reimbursement amounts will not be decreased in the future; or
- 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:
- until such time, if ever, as we obtain broad commercial adoption of our
TMR laser systems by healthcare facilities in the United States;
- until such time, if ever, as we obtain FDA and other regulatory approvals
for our PTMR laser systems; and
- for an uncertain period of time after such approvals are obtained.
We may not achieve or sustain profitability in the future.
IF WE EXPERIENCE INCREASED DEMAND FOR OUR PRODUCTS, WE MAY NOT BE
ABLE TO EXPAND OUR BUSINESS TO MEET SUCH DEMAND. We may be required to expand
our business to:
- respond to increasing clinical adoption of the TMR procedure;
- develop future products;
- generally compete successfully;
- complete the clinical trials that are currently in progress; and
- prepare additional products for clinical trials.
Such expansion could place a significant strain on managerial,
operational and financial systems and resources. To accommodate such expansion
and compete effectively, we must improve information systems, procedures and
controls and expand, train, motivate and manage our employees.
THIRD PARTIES MAY LIMIT THE DEVELOPMENT AND PROTECTION OF OUR
INTELLECTUAL PROPERTY, WHICH COULD ADVERSELY AFFECT OUR COMPETITIVE POSITIONS.
Our success is dependent in large part on our ability to:
- obtain patent protection for our products and processes;
- preserve our trade secrets and proprietary technology; and
- operate without infringing upon the patents or proprietary rights of
third parties.
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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 PTMR procedures. We do not know if such competitors,
potential competitors or others have filed and hold international patents
covering other TMR or PTMR 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 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, CardioGenesis 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 CardioGenesis of the PLC patent. Also in 1997, PLC initiated
suit in Germany against CardioGenesis and CardioGenesis' former German sales
agent alleging infringement of a European counterpart to the PLC patent. In
1997, CardioGenesis 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,
CardioGenesis 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, CardioGenesis
stipulated to the validity of the PLC patents and PLC granted CardioGenesis a
non-exclusive worldwide license to the PLC patents. CardioGenesis agreed to pay
PLC a license fee, and minimum royalties, totaling $2.5 million 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 CardioGenesis intellectual property. The Eclipse 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.
We may not be able to protect our intellectual property because:
- patents may not be issued;
- patents may be challenged, invalidated or designed around by competitors;
or
- patent protection may not continue to be available for surgical methods
in the future.
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:
- enforce our issued patents;
- protect our trade secrets or know-how; or
- determine the enforceability, scope and validity of the proprietary
rights of others.
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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:
- subject us to significant liabilities to third parties;
- require us to seek licenses from third parties;
- prevent us from selling our products in certain markets or at all; or
- require us to modify our products.
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.
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:
- have not developed or will not develop similar products;
- will not duplicate our products; or
- 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:
- others did not first file applications for inventions covered by our
pending patent applications; or
- we will not infringe any patents that may issue to others on such
applications.
The United States patent laws 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 amendment will materially affect our ability to protect our proprietary
methods and procedures.
Competitors may independently develop proprietary information
substantially equivalent to our proprietary information and techniques, or
otherwise gain access to our proprietary technology.
In addition to our patents, we rely upon trade secrets, technical
know-how and continuing technological innovation to develop and maintain our
competitive position. We may not be able to meaningfully protect our unpatented
technology because:
- our employees, consultants and advisors may breach their confidentiality
and invention assignment agreements and there may not be an adequate
remedy for such breach;
- our competitors may independently develop substantially equivalent
proprietary information and techniques; or
- competitors may otherwise gain access to our proprietary technology.
Our inability to protect our unpatented intellectual property could
materially harm our business.
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WE DEPEND ON SINGLE SOURCE SUPPLIERS FOR CERTAIN KEY COMPONENTS AND
PRODUCTION WOULD BE INTERRUPTED IFA KEY SUPPLIER HAD TO BE REPLACED. We
currently purchase certain critical laser and fiber-optic components from single
sources. 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 harm our manufacturing
operations, business and results of operations.
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.
Certain of our suppliers could have difficulty expanding their
manufacturing capacity to meet our needs if demand for our TMR and PTMR 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
can not predict if:
- materials obtained from outside suppliers will continue to be available
in adequate quantities; or
- alternative suppliers can be located on a timely basis.
We operate on a purchase order basis with most of our suppliers. Such
vendors could at any time determine to cease the supply and production of such
components.
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. Manufacturers often encounter difficulties
in increasing production, including problems involving:
- production yields;
- adequate supplies of components;
- quality control and assurance (including failure to comply with good
manufacturing practices regulations, international quality standards and
other regulatory requirements); and
- shortages of qualified personnel.
We also may not be able to successfully increase manufacturing capacity or avoid
manufacturing difficulties or product recalls.
OUR PRODUCTS MAY 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 PTMR laser systems. Any such occurrence
could cause a delay in regulatory approvals or adversely affect the commercial
acceptance of our products and could cause harm to our business.
WE MUST COMPLY WITH FDA MANUFACTURING STANDARDS OR FACE FINES OR OTHER
PENALTIES INCLUDING SUSPENSION OF PRODUCTION. We are required to demonstrate
compliance with the FDA's current good manufacturing practices regulations if we
market devices in the United States or manufacture finished devices in the
United States. The FDA inspects manufacturing facilities on a regular basis to
determine compliance. If we fail to comply with applicable FDA or other
regulatory requirements, we can be subject to:
- fines, injunctions, and civil penalties;
- recalls or seizures of products;
- total or partial suspensions of production; and
- criminal prosecutions.
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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. Our products are designed to be
used in life-threatening situations where there is a high risk of serious injury
or death, and we could be subject to product liability claims if the use of our
TMR or PTMR laser systems is alleged to have caused adverse effects on a patient
or such products are believed to be defective.
Any regulatory clearance for commercial sale of these products will not
remove these risks. Any failure to comply with the FDA'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. Our future business and results of
operations depend in significant part upon the continued contributions of our
key technical and senior management personnel.
Our future business and results of operations 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.
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. The impact of the following factors would
harm our business:
- delays in receipt of, or failure to receive, foreign regulatory approvals
or clearances;
- the loss of previously obtained approvals or clearances; or
- the failure to comply with existing or future regulatory requirements.
Our products will be subject to other regulatory requirements in the
European Union and other countries. Any enforcement action by international
regulatory authorities with respect to past or future regulatory noncompliance
could cause our business to suffer.
The time required to obtain approval for sale in foreign countries may be
longer or shorter than required for FDA approval, and the requirements may
differ. In addition, there may be foreign regulatory barriers other than
regulatory approval. Except as stated in the following sentence, the FDA must
approve exports of devices that require a PMA but are not yet approved
domestically. An unapproved device may be exported without prior FDA approval to
any member country of the European Union and the other "listed" countries,
including Australia, Canada, Israel, Japan, New Zealand, Switzerland and South
Africa:
- if the device is approved for sale by that country; or
- for investigational use in accordance with the laws of that country.
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We received the CE Mark for our TMR laser system in May 1997 and for our
PTMR laser system in April 1998. In the European Economic Area, we will be:
- subject to continued supervision;
- required to report any serious adverse incidents to the appropriate
authorities; and
- required to comply with additional national requirements that are outside
the scope of the Medical Device Directive.
We became ISO 9001 certified in May 1997. We may not be able to:
- achieve or maintain the compliance required for CE marking on all or any
of our products; and
- produce our products profitably and in a timely manner while complying
with the requirements of the Medical Device Directive and other
regulatory requirements.
If we fail to comply with applicable regulatory requirements we could
face:
- fines, injunctions, civil penalties;
- recalls or seizures of products;
- total or partial suspensions of production;
- refusals by foreign governments to permit product sales; and
- criminal prosecution.
Furthermore, if existing regulations are changed or new regulations or
policies are adopted, we may:
- not be able to obtain, or affect the timing of, future regulatory
approvals or clearances;
- not be able to obtain necessary regulatory clearances or approvals on a
timely basis or at all; and
- be required to incur significant costs in obtaining or maintaining such
foreign regulatory approvals.
WE SELL OUR PRODUCTS INTERNATIONALLY WHICH SUBJECTS US TO CERTAIN RISKS
OF TRANSACTING BUSINESS IN FOREIGN COUNTRIES. Our international revenue is
subject to the following risks:
- foreign currency fluctuations;
- economic or political instability;
- foreign tax laws;
- shipping delays;
- various tariffs and trade regulations;
- restrictions and foreign medical regulations;
- customs duties, export quotas or other trade restrictions; and
- difficulty in protecting intellectual property rights.
Any of these factors could have an adverse effect on our international
sales revenues. In future quarters, international sales could become a
significant portion of our revenue.
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 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.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DISTRACT OUR MANAGEMENT, CAUSE
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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 related to 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 and financial condition.
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
March 31, 2001, the closing prices of our common stock as reported on the NASDAQ
National Market ranged from a high of $7.688 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:
- actual or anticipated variations in our quarterly operating results;
- announcements of technological innovations or new products or services by
us or our competitors;
- announcements relating to strategic relationships or acquisitions;
- changes in financial estimates by securities analysts;
- statements by securities analysts regarding us or our industry;
- conditions or trends in the medical device industry; and
- 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 Market,
our common stock could be subject to certain consequences established by the
NASDAQ National Market, such as being delisted.
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 March 31, 2001 consists of outstanding
balances on lease obligations.
Assets
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Cash and cash equivalents................ $3,142
Average interest rate.................... 4.0%
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
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 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits required to be filed by Item 601 st Regulation S-K: None
b) Reports on Form 8-K
No reports on Form 8-K were filed by Eclipse during the three-month
period ended March 31, 2001.
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
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.
ECLIPSE SURGICAL TECHNOLOGIES, INC.
Registrant
Date: May 15, 2001 /s/ Michael J. Quinn
---------------------
Michael J. Quinn
Chief Executive Officer, President and
Chairman of the Board
(Principal Executive Officer)
Date: May 15, 2001 /s/ J. Stephen Wilkins
----------------------
J. Stephen Wilkins
Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
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