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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO
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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CARDIOGENESIS CORPORATION
(formerly known as Eclipse Surgical Technologies, Inc.)
(Exact name of Registrant as specified in its charter)
----------------------
CALIFORNIA 77-0223740
(State of incorporation) (I.R.S. Employer
Identification Number)
26632 TOWNE CENTER DRIVE
SUITE 320
FOOTHILL RANCH, CALIFORNIA 92610
(Address of principal executive offices)
(714) 649-5000
(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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CARDIOGENESIS CORPORATION
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................................................................. 5
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 20
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.................................................................. 20
Item 6. Exhibits and Reports on Form 8-K................................................... 20
Signatures......................................................................... 21
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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 $2,024 and $,2,113 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; 50,000 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)
======== ========
Net loss per share:
Basic and diluted ........................................................ $ (0.08) $ (0.15)
======== ========
Weighted average shares outstanding ...................................... 30,837 29,664
======== ========
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
======= =======
Supplemental schedule of cash flow information:
Interest paid ................................................................ $ 5 $ 9
======= =======
Taxes paid ................................................................... $ 13 $ 11
======= =======
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 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 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.
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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):
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
====== ======
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
=======
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.
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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 Corporation formerly known as 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 ("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, 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 PMR, and study
results were submitted to the FDA in a Pre Market Approval ("PMA") application
in December of 1999 along with subsequent amendments. As discussed below under
the caption "Material Event," the FDA Advisory Panel recommended against
approval of PMR for public sale and use in the United States. However, we will
continue to pursue FDA approval for PMR. 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.
MATERIAL EVENT
On July 9, 2001, the Food and Drug Administration Advisory Panel
recommended against approval by the Food and Drug Administration of our PMR
device for public sale and use in the United States. The practical effect of the
Advisory Panel's recommendation is to delay indefinitely, until such time as the
Food and Drug Administration decides differently, the introduction of our PMR
device for sale and use in the United States. Consequently, the Advisory Panel's
recommendation has effectively delayed potential revenue, if any, that may have
been derived in the future from the sale of our PMR device. Moreover, this
recommendation has necessitated the further investment of additional resources
toward obtaining the Food and Drug Administration's approval of our PMR device.
However, we do not expect to conduct further clinical trials. Additionally, the
trading price of our common stock on the NASDAQ National Market fell
substantially after the Advisory Panel's recommendation became public. As
discussed in our risk factor section, 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.
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 first quarter of 2000.
Much of this decrease is due to the fact that the sales force was in transition
in the quarter ended March 31 2001. At year-end a sales force transition was
underway which is expected to continue through the second quarter of 2001. New
sales representatives are being hired to fill openings resulting from general
attrition and the release of sales representatives who did not meet their sales
objectives. 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.
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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 a $600,000
reduction in clinical trials expenses, a $400,000 reduction in employee
expenses, as headcount was reduced by 14 employees as a result of the December
reduction in force or not replacing general attrition. Lastly, there was also a
$200,000 reduction in engineering project 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 reduction was caused by the elimination of
fifteen clinical sales positions for a quarter to quarter saving of $750,000,
while a reduced presence in international sales caused a $700,000 reduction in
expense. Other reductions include $400,000 lower travel, $350,000 lower outside
service in marketing and $300,000 lower commissions due to lower sales. At
year-end a sales force transition was underway which is expected to continue
through the second quarter of 2001. New sales representatives are being hired to
fill openings resulting from general attrition and the release of sales
representatives who did not meet their sales objectives. 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 mainly
due to a $210,000 reduction in deferred compensation expense to consultants, a
$140,000 reduction in legal and patent expense.
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 Holdings 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.
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 a decrease of
$809,000 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, 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.
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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
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. In order to reduce our cost of revenues, we have focused our efforts
on the following activities: (i) downsizing the manufacturing work force to
levels consistent with current production activity; (ii) simplifying and
improving manufacturing procedures; and (iii) reducing the number of products
offered for sale worldwide. In order to reduce operating expenses, we have
focused our efforts on reducing headcount in functions that are not essential to
critical activities.
Currently, a priority of the company is to achieve break-even followed by
profitability within a relatively short span of time. In many respects, our
actions have been guided by this imperative, and the resulting cost containment
measures have helped to conserve our cash. Our focus is upon critical
activities. Production activities or 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 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- an Interpretation of APB 25." FIN 44 provides updated accounting
guidance regarding implementing and interpreting APB 25, and should be applied
on a prospective basis from July 1, 2000. The Company's adoption of this
pronouncement had no impact on the Company's financial position or results of
operations.
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.
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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:
- the failure to obtain regulatory approvals for our PMR
system;
- significant limitations in the indicated uses for which our
products may be marketed;
- 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 assure you, however, that the preliminary results of that catheter-based
device study will impact the Food and Drug Administration's decision on our PMR
system.
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:
- our ability to facilitate training of cardiothoracic
surgeons and interventional cardiologists in TMR and PMR
therapy;
- willingness of such physicians to adopt and recommend such
procedures to their patients; and
- raising the awareness of TMR and then PMR with the targeted
patient population.
Patient acceptance of the procedure will depend on:
- physician recommendations;
- the degree of invasiveness;
- the effectiveness of the procedure; and
- the rate and severity of complications associated with the
procedure as compared to other procedures.
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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:
- the dependence on the growth of the market for our TMR and
PMR systems;
- our ability to successfully and rapidly expand sales to
potential customers in response to increasing clinical
adoption of the TMR procedure;
- the costs associated with such growth, which are difficult
to quantify, but could be significant;
- domestic and international regulatory developments;
- rapid technological change;
- completing the clinical trials that are currently in
progress as well as developing and preparing additional
products for clinical trials;
- 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.
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:
- the level of product demand and the timing of customer
orders;
- changes in strategy;
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- delays associated with the Food and Drug Administration and
other regulatory approval processes;
- personnel changes including our ability to continue to
attract, train and motivate additional qualified personnel
in all areas;
- the level of international sales;
- changes in competitive pricing policies;
- 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. 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:
- successfully and rapidly expand sales to potential
customers;
- implement operating, manufacturing and financial procedures
and controls;
- improve coordination among different operating functions;
and
- 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 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:
- 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 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:
- 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. 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:
- 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 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:
- identify products for which demand exists; or
- 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:
- 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.
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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 Food and Drug
Administration and other regulatory approvals for our PMR
laser systems; and
- 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:
- 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.
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 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 CardioGenesis 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.
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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:
- enforce our issued patents;
- protect our trade secrets or know-how; or
- 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:
- 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.
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:
- have not developed or will not develop similar products;
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- 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.
WE DEPEND ON SINGLE SOURCE SUPPLIERS FOR KEY COMPONENTS AND PRODUCTION WOULD 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.
WE MAY NOT BE ABLE TO MEET FUTURE DEMAND INCREASES ON 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:
materials obtained from outside suppliers will be available in adequate
quantities to meet our future needs; or
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:
- production yields;
- adequate supplies of components;
- achieving manufacturing efficiencies as production volume
increases;
- 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.
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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 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:
- fines, injunctions, and civil penalties;
- recalls or seizures of products;
- total or partial suspensions of production; and
- criminal prosecutions.
The impact on the company of any such failure to comply would depend on
the impact of the remedy imposed on us.
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 PMR laser
systems is alleged to have caused adverse effects on a patient or such products
are believed to be defective. We are not aware of any material side effects or
adverse events arising from the use of our products.
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.
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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 CEO until we hired our current CEO, Michael Quinn, in October of
2000. Our former Chief Financial Officer, Dick Powers, resigned from the company
in July 2000. Ian Johnson acted as Interim CFO until our current CFO, J. Stephen
Wilkins, was hired in May 2001. Richard Lanigan moved from Vice President of
Sales to Vice President of Regulatory and Government Affairs in March 2001 and
Thomas Kinder was hired in March 2001 as our new Vice President of Sales.
Darrell Eckstein was hired in December 2000 as our Vice President of Operations,
replacing Bill Picht, who resigned earlier in 2000.
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:
- 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.
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.
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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:
- 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.
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 July 10, 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:
- 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;
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- 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
Cash and cash equivalents............ $3,142
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 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits required to be filed by Item 601 of Regulation S-K: None
b) Reports on Form 8-K
No reports on Form 8-K were filed by CardioGenesis during the
three-month period ended March 31, 2001.
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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: July 13, 2001 /s/ Michael J. Quinn
--------------------
Michael J. Quinn
Chief Executive Officer, President and
Chairman of the Board
(Principal Executive Officer)
Date: July 13, 2001 /s/ J. Stephen Wilkins
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J. Stephen Wilkins
Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
20