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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 SEPTEMBER 30, 2001
Commission file number 0-28288
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CARDIOGENESIS CORPORATION
(Exact name of Registrant as specified in its charter)
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CALIFORNIA 77-0223740
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(State of incorporation) (I.R.S. Employer
Identification Number)
26632 TOWNE CENTRE 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.
34,209,065 shares of Common Stock, no par value
As of October 15, 2001
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CARDIOGENESIS CORPORATION
TABLE OF CONTENTS
PART 1
FINANCIAL INFORMATION
Page
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Item 1. Consolidated Financial Statements (unaudited):
a. Consolidated Balance Sheets as of September 30, 2001 and
December 31, 2000................................................... 1
b. Consolidated Statements of Operations & Comprehensive Loss
for the three and nine months ended September 30, 2001 and 2000..... 2
c. Consolidated Statements of Cash Flows for the nine months ended
September 30, 2001 and 2000......................................... 3
d. Notes to Consolidated Financial Statements............................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................. 21
PART II
OTHER INFORMATION
Item 1. Legal Proceedings........................................................... 22
Item 2. Changes in Securities and Use of Proceeds................................... 22
Item 3. Defaults Upon Senior Securities............................................. 22
Item 4. Submission of Matters to a Vote of Security Holders......................... 22
Item 5. Other Information........................................................... 22
Item 6. Exhibits and Reports on Form 8-K............................................ 22
Signatures.................................................................. 23
CARDIOGENESIS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
(unaudited)
Current assets:
Cash and cash equivalents ..................................................... $ 983 $ 3,357
Accounts receivable, net of allowance for doubtful accounts of $578 and $353 at
September 30, 2001 and December 31, 2000, respectively..................... 3,646 3,654
Inventories, net of reserves of $1,560 and $2,180 at September 30, 2001 and
December 31, 2000, respectively ........................................... 3,825 5,400
Prepaids and other current assets ............................................. 877 837
--------- ---------
Total current assets .................................................. 9,331 13,248
Property and equipment, net ..................................................... 935 1,048
Accounts receivable over one year, net of allowance for doubtful
accounts of $0 and $443 at September 30, 2001 and
December 31, 2000, respectively .......................................... 257 119
Other assets .................................................................... 1,766 2,550
--------- ---------
Total assets .......................................................... $ 12,289 $ 16,965
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................ $ 928 $ 689
Accrued liabilities ............................................................. 5,531 5,789
Customer deposits ............................................................... 186 186
Deferred revenue ................................................................ 896 1,310
Note payable .................................................................... 291 86
Current portion of capital lease obligation ..................................... 26 26
Current portion of long-term liabilities ........................................ 490 500
--------- ---------
Total current liabilities ............................................... 8,348 8,586
Capital lease obligation, less current portion .................................... 45 66
Long-term liabilities, less current portion ....................................... -- 339
--------- ---------
Total liabilities ....................................................... 8,393 8,991
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Shareholders' equity:
Common stock:
No par value; 50,000,000 shares authorized; 34,209,065 and
30,836,000 shares issued and outstanding at September 30, 2001
and December 31, 2000, respectively ....................................... 165,725 161,938
Deferred compensation ........................................................... (5) (66)
Accumulated other comprehensive loss ............................................ (106) (65)
Accumulated deficit ............................................................. (161,718) (153,833)
--------- ---------
Total shareholders' equity .............................................. 3,896 7,974
--------- ---------
Total liabilities and shareholders' equity .............................. $ 12,289 $ 16,965
========= =========
The accompanying notes are an integral part of these
consolidated financial statements
1
CARDIOGENESIS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net revenues ...................................... $ 4,221 $ 5,014 $ 11,362 $ 17,299
Cost of revenues .................................. 1,627 2,460 4,745 7,489
-------- -------- -------- --------
Gross profit ............................ 2,594 2,554 6,617 9,810
-------- -------- -------- --------
Operating expenses:
Research and development ........................ 337 1,183 1,586 4,278
Sales, general and administrative ............... 4,309 5,171 11,203 17,276
Restructuring costs ............................. 442 -- 1,132 --
-------- -------- -------- --------
Total operating expenses ..................... 5,088 6,354 13,921 21,554
-------- -------- -------- --------
Operating loss .......................... (2,494) (3,800) (7,304) (11,744)
Interest expense .................................. (6) (9) (22) (27)
Interest income ................................... 19 65 93 326
Equity in net loss of investee .................... -- -- (652) --
-------- -------- -------- --------
Net loss ................................ (2,481) (3,744) (7,885) (11,445)
-------- -------- -------- --------
Other comprehensive income (loss):
Unrealized holding gains arising during period -- 26 -- 33
Foreign currency translation adjustment ...... (74) (119) (41) (124)
-------- -------- -------- --------
Other comprehensive income (loss) .......... (74) (93) (41) (91)
-------- -------- -------- --------
Comprehensive loss ...................... $ (2,555) $ (3,837) $ (7,926) $(11,536)
======== ======== ======== ========
Net loss per share:
Basic and diluted ............................... $ (0.07) $ (0.12) $ (0.24) $ (0.38)
======== ======== ======== ========
Weighted average shares outstanding ............. 34,209 30,191 32,866 29,977
======== ======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements
2
CARDIOGENESIS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net loss ................................................................ $ (7,885) $(11,445)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation ......................................................... 352 603
Loss from equity in investee ......................................... 652 --
Provision for doubtful accounts ...................................... 135 491
Inventory reserves ................................................... 932 1,328
Amortization of deferred compensation ................................ 57 595
Amortization of intangible asset ..................................... 156 145
Accretion of long-term liability ..................................... 26 --
Changes in operating assets and liabilities:
Accounts receivable - short term ................................... (127) 3,625
Inventories ........................................................ 643 (797)
Prepaids and other current assets .................................. 49 191
Accounts receivable - long term .................................... (138) 966
Other assets ....................................................... (19) --
Accounts payable ................................................... 239 (891)
Accrued liabilities ................................................ (195) (2,770)
Customer deposits .................................................. -- 66
Deferred revenue ................................................... (414) (192)
Current portion of long term liabilities ........................... (10) (864)
Long term liabilities .............................................. (365) (274)
-------- --------
Net cash used in operating activities ........................... (5,912) (9,223)
-------- --------
Cash flows from investing activities:
Purchase of marketable securities ....................................... -- (5,899)
Maturities of marketable securities ..................................... -- 11,108
Acquisition of property and equipment ................................... (302) (413)
-------- --------
Net cash (used in) provided by investing activities ............. (302) 4,796
-------- --------
Cash flows from financing activities:
Net proceeds from sales of common stock and from issuance of
common stock from the exercise of options ............................. 3,697 3,140
Proceeds from short term borrowings ..................................... 205 218
Repayments of capital lease obligations ................................. (21) (17)
-------- --------
Net cash provided by financing activities ....................... 3,881 3,341
-------- --------
Effects of exchange rate changes on cash and cash equivalents ... (41) (124)
-------- --------
Net decrease in cash and cash equivalents ....................... (2,374) (1,210)
Cash and cash equivalents at beginning of period .......................... 3,357 5,566
-------- --------
Cash and cash equivalents at end of period ................................ $ 983 $ 4,356
======== ========
Supplemental schedule of cash flow information:
Interest paid ........................................................... $ 18 $ 27
======== ========
Taxes paid .............................................................. $ 49 $ 42
======== ========
Supplemental schedule of noncash investing and financing activities:
Change in unrealized loss on marketable securities ...................... $ -- $ (28)
======== ========
Deferred compensation ................................................... $ (4) $ 551
======== ========
Issuance of warrants .................................................... $ 94 $ --
======== ========
The accompanying notes are an integral part of these
consolidated financial statements
3
CARDIOGENESIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Interim Financial Information (unaudited):
The interim financial statements in this report reflect all adjustments,
consisting of normal recurring adjustments, that are, in the opinion of
management, necessary for a fair presentation of the results of operations and
cash flows for the interim periods covered and of the financial position of the
Company at the interim balance sheet date. Results for interim periods are not
necessarily indicative of results to be expected for the full fiscal year. The
year-end balance sheet information was derived from audited financial statements
but does not include all disclosures required by generally accepted accounting
principles. These financial statements should be read in conjunction with
CardioGenesis Corporation's audited financial statements and notes thereto for
the year ended December 31, 2000, contained in the Company's Annual Report on
Form 10-K as filed with the U.S. Securities and Exchange Commission ("SEC").
These financial statements contemplate the realization of assets and the
satisfaction of liabilities in the normal course of business. CardioGenesis
Corporation ("CardioGenesis") has sustained significant losses for the last
several years. CardioGenesis may require additional funding and may obtain debt
financing or sell additional shares of its common stock or preferred stock
through private placement or further public offerings.
There can be no assurance that CardioGenesis will be able to obtain
additional debt or equity financing, if and when needed, on terms acceptable to
the Company. Any additional equity or debt financing may involve substantial
dilution to CardioGenesis' stockholders, restrictive covenants or high interest
costs. The failure to raise needed funds on sufficiently favorable terms could
have a material adverse effect on CardioGenesis' business, operating results and
financial condition.
CardioGenesis' long-term liquidity also depends upon its ability to
increase revenues from the sale of its products and achieve profitability. The
failure to achieve these goals could have a material adverse effect on the
business, operating results and financial condition.
Net Loss Per Share:
Basic earnings per share is computed by dividing the net loss by 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 during the period. For the three and nine months ended
September 30, 2001 and 2000 dilutive potential common shares outstanding
reflects shares issuable under the Company's stock option plans and warrants.
There are no reconciling items in the numerator or denominator of the earnings
per share calculation for the periods presented.
Options and warrants to purchase 4,110,728 and 3,518,436 shares of
common stock were outstanding at September 30, 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):
SEPTEMBER 30, DECEMBER 31,
2001 2000
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(UNAUDITED)
Raw materials ..................... $1,889 $2,045
Work in process ................... 128 715
Finished goods .................... 1,808 2,640
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$3,825 $5,400
====== ======
4
3. Restructuring Costs:
In the third quarter of 2001, the Company recognized restructuring
charges of $442,000 related to the company-wide restructuring which began in the
second quarter of 2001. The restructuring included a reduction in headcount, the
closing of the Company's facilities in Sunnyvale, California and the move to a
new facility located in Foothill Ranch, California. As a result of the
restructuring, 48 employees were identified in the original plan and have since
been terminated, primarily from the Finance and Manufacturing departments.
The following table summarizes the restructuring activity and the
remaining restructuring reserve balance (in thousands):
Lease and Other Other
Personnel and Contractual Miscellaneous
Severance Costs Commitments Costs Total
--------------- --------------- ------------- -----
Balance at March 31, 2001 $ -- $ -- $ -- $ --
Provisions 304 248 138 690
Payments (98) -- -- (98)
Non-cash charges -- -- (58) (58)
----- ----- ----- -----
Balance as of June 30, 2001 206 248 80 534
Provisions 304 82 56 442
Payments (407) (238) (112) (757)
Non-cash charges -- (52) -- (52)
----- ----- ----- -----
Balance as of September 30, 2001 $ 103 $ 40 $ 24 $ 167
===== ===== ===== =====
The restructuring reserve balance is included in accrued liabilities.
Personnel and severance costs are comprised of severance, retention and
relocation costs. Certain employees were offered a retention incentive to stay
employed through a certain date while the Company was going through the
restructuring phase. Severance costs were accrued in the quarter in which the
restructuring event occurred. Employee retention costs and relocation costs were
accrued when incurred.
Lease and other contractual commitments are comprised of the termination
penalties associated with the early lease termination on the Company's
manufacturing and office facilities. At the end of the second quarter, the
Company had a reasonable estimate as to what the penalties would be on the
manufacturing facility, however, no such estimate was available on the office
facility. In the third quarter, the Company arrived at a settlement amount on
the office facility and these charges were expensed in the current quarter.
4. Recently Issued Accounting Standards:
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141 "Business
Combinations," and SFAS No. 142 "Goodwill and Other Intangible Assets," which
change the accounting for business combinations and goodwill. SFAS No. 141
requires that the purchase method of accounting be used for business
combinations initiated after June 30, 2001. Use of the pooling-of-interests
method is now prohibited. SFAS No. 142 changes the accounting for goodwill from
an amortization method to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations, will therefore cease
upon adoption of the Statement, which for the Company will be January 1, 2002.
The Company is currently evaluating SFAS No. 141 and SFAS No. 142, but does not
expect that they will have a material effect on its financial statements.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains descriptions of our expectations regarding future
trends affecting our business. These forward-looking statements and other
forward-looking statements made elsewhere in this document are made in reliance
upon the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. Please read the section below titled "Factors Affecting Future Results"
to review conditions which we believe could cause actual results to differ
materially from those contemplated by the forward-looking statements.
Forward-looking statements are identified by words such as "believes,"
"anticipates," "expects," "intends," "plans," "will," "may" and similar
expressions. In addition, any statements that refer to our plans, expectations,
strategies or other characterizations of future events or circumstances are
forward-looking statements. Our business may have changed since the date hereof
and we undertake no obligation to update these forward looking statements.
The following discussion should be read in conjunction with financial
statements and notes thereto included in this Quarterly Report on Form 10-Q.
OVERVIEW
CardioGenesis, incorporated in California in 1989, is a medical device
company which specializes in the treatment of cardiovascular disease. We design,
develop, and distribute laser-based surgical products and disposable fiber-optic
accessories for the treatment of advanced cardiovascular disease. Our laser
system and disposable fiber-optic accessories are used in two medical procedures
known as transmyocardial revascularization ("TMR") and percutaneous
transmyocardial revascularization ("PMR") to treat patients suffering from
angina.
On February 11, 1999, we received final approval from the Food and Drug
Administration ("FDA") for our TMR products for certain indications, and we are
now able to sell those products in the U.S. on a commercial basis. We have also
received the European Conforming Mark ("CE Mark") allowing the commercial sale
of our TMR laser systems and our PMR catheter system to customers in the
European Community. Effective July 1, 1999, the Health Care Financial
Administration began providing Medicare coverage for TMR. Hospitals and
physicians are now eligible to receive Medicare reimbursement for TMR equipment
and procedures.
We completed clinical trials involving PMR, and study results were
submitted to the FDA in a Pre-Market Approval ("PMA") application in December of
1999. On July 9, 2001, the Food and Drug Administration's Circulatory Devices
Panel recommended against approval by the Food and Drug Administration of our
PMR device for public sale and use in the United States based on concerns
related to the safety of the device and the data regarding adverse events in
clinical trials. The Advisory Panel cited a concern about complications reported
in the treated patients. While these individual events were not statistically
significant between the treated group and the control group, they were still a
concern for the Advisory Panel. We expect to be able to provide additional
follow up data and analysis to address these safety concerns.
RESULTS OF OPERATIONS
Net Revenues
Net revenues of $4,221,000 for the quarter ended September 30, 2001
decreased $793,000 or 16% from $5,014,000 for the quarter ended September 30,
2000. Net revenues of $11,362,000 for the nine months ended September 30, 2001
decreased $5,937,000 or 34% from $17,299,000 for the nine months ended September
30, 2000. The decrease on both the three month and nine month comparisons is due
to a decline in the unit sales of both lasers and disposables. The decline in
laser and disposable revenues in both the three and nine months ending September
30, 2001 from the same periods in 2000 are related to a sales force transition
during the six month period ending June 30, 2001. Since the transition ended in
the second quarter of 2001, the third quarter of 2001 was the first full quarter
with a new sales force.
6
In the fourth quarter of 2000, a sales force transition was initiated
and was completed in the second quarter of 2001. New sales representatives were
hired to fill territories resulting from general attrition and the release of
sales representatives who did not meet company sales objectives.
Gross Profit
Gross profit was $2,594,000 or 61% of net revenues for the quarter
ended September 30, 2001 compared to $2,554,000 or 51% of net revenues for the
quarter ended September 30, 2000. The improvement in gross margin resulted from
an improved margin on lasers and disposables sold partially as a result of
outsourcing of the manufacturing process during the quarter ended September 30,
2001.
Gross profit decreased to $6,617,000 or 58% of net revenues for the
nine months ended September 30, 2001 compared to $9,810,000 or 57% of net
revenues for the nine months ended September 30, 2000. The decline in gross
profit resulted primarily from lower net revenues partially offset by an
improvement in gross margin on lasers and disposables sold partially as a result
of outsourcing of the manufacturing process during the quarter ended September
30, 2001.
Research and Development
Research and development expenditures of $337,000 decreased $846,000 or
72% for the quarter ended September 30, 2001 from $1,183,000 for the quarter
ended September 30, 2000. The decrease in expenses resulted from a decrease in
employee expenses of $450,000 related to the December 2000 and second quarter of
2001 reductions in force. Facilities and office expenses decreased $220,000 as a
result of the move to Foothill Ranch, California and reduction in staff.
Additionally, clinical trials expenses of $140,000 decreased related to the
conclusion of clinical trials.
Research and development expenditures of $1,586,000 decreased
$2,692,000 or 63% for the nine months ended September 30, 2001 from $4,278,000
for the nine months ended September 30, 2000. The decrease in expenses resulted
from a decrease in employee expenses of $1,260,000 related to the December 2000
and second quarter of 2001 reductions in force and a reduction in clinical
trials expenses of $785,000 related to the conclusion of several of our major
clinical trials. Additionally, expenditures for engineering have decreased by
$540,000 due to a reduction in development activities.
Sales, General and Administrative
Sales, general and administrative expenditures of $4,309,000 decreased
$862,000 or 17% for the quarter ended September 30, 2001 from $5,171,000 for the
quarter ended September 30, 2000. The decrease resulted from a reduction in
employee expenses of $240,000 primarily related to the elimination of 15
clinical marketing positions that were occupied in the third quarter of 2000.
Additionally, general marketing expenses decreased by $245,000 as a result of
efforts to curtail costs, costs of materials used by the service department
decreased by $95,000 and expenses incurred for the use of outside services and
consultants decreased by $200,000.
Sales, general and administrative expenditures of $11,203,000 decreased
$6,073,000 or 35% for the nine months ended September 30, 2001 from $17,276,000
for the nine months ended September 30, 2000. The decrease in expenses resulted
primarily from a decrease in employee expenses of $3,340,000 related to the
December 2000 and second quarter of 2001 reductions in force and a decrease in
travel expenses of $1,005,000. Additionally, facilities and office expenses
decreased by $830,000, expenses for physician training decreased by $700,000 and
the cost of materials used by the service department decreased by $200,000.
Restructuring Costs
In the third quarter of 2001, we recognized restructuring charges of
$442,000 related to the company-wide restructuring which began in the second
quarter of 2001. The restructuring included a reduction in headcount, the
closing of the Company's facilities in Sunnyvale, California and the move to a
new facility located in Foothill Ranch, California. As a result of the
restructuring, 48 employees were identified in the original plan and have since
7
been terminated, primarily from the Finance and Manufacturing departments.
The following table summarizes the restructuring activity and the
remaining restructuring reserve balance (in thousands):
Lease and Other Other
Personnel and Contractual Miscellaneous
Severance Costs Commitments Costs Total
--------------- --------------- ------------- -----
Balance at March 31, 2001 $ -- $ -- $ -- $ --
Provisions 304 248 138 690
Payments (98) -- -- (98)
Non-cash charges -- -- (58) (58)
----- ----- ----- -----
Balance as of June 30, 2001 206 248 80 534
Provisions 304 82 56 442
Payments (407) (238) (112) (757)
Non-cash charges -- (52) -- (52)
----- ----- ----- -----
Balance as of September 30, 2001 $ 103 $ 40 $ 24 $ 167
===== ===== ===== =====
The restructuring reserve balance is included in accrued liabilities.
Personnel and severance costs are comprised of severance, retention and
relocation costs. Certain employees were offered a retention incentive to stay
employed through a certain date while we were going through the restructuring
phase. Severance costs were accrued in the quarter in which the restructuring
event occurred. Employee retention costs and relocation costs were accrued when
incurred.
Lease and other contractual commitments are comprised of the termination
penalties associated with the early lease termination on our manufacturing and
office facilities. At the end of the second quarter, we had a reasonable
estimate as to what the penalties would be on the manufacturing facility,
however, no such estimate was available on the office facility. In the third
quarter, we arrived at a settlement amount on the office facility and these
charges were expensed in the current quarter.
In addition, the relocation of our corporate headquarters resulted in
incremental charges of $25,000 that were not classified as restructuring charges
but are a component of sales, general and administrative expenses in the quarter
ended September 30, 2001. These incremental charges resulted from the
elimination of approximately 40 positions. As a result, we incurred charges of
$25,000 related to duplicate salaries for positions where a replacement employee
was hired and a Sunnyvale employee was retained through a short transition
period.
Non-Operating Income and Expenses
Interest income of $19,000 in the quarter ended September 30, 2001
declined 71% or $46,000 compared to $65,000 in the quarter ended September 30,
2000. Interest income of $93,000 in the nine months ended September 30, 2001
declined 71% or $233,000 compared to $326,000 in the nine months ended September
30, 2000. The reduction in interest income was a result of lower investments in
marketable securities.
Equity in net loss of $652,000 for the nine months ended September 30,
2001, respectively, represents our share of the net loss of Microheart Holdings,
Inc., a privately-held company of which our ownership is 30.3%. As of September
30, 2001, we carry no investment balance on our financial statements for
Microheart Holdings, Inc.
8
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $983,000 at September 30, 2001 compared
to $3,357,000 at December 31, 2000. We used $5,912,000 of cash for operating
activities in the nine month period ended September 30, 2001, which was used
primarily to fund our operating losses. In addition, a decrease in inventories
provided $643,000 in cash offset by uses of cash resulting from an increase in
accounts receivable of $265,000, a decrease in deferred revenue of $414,000 and
a decrease in long-term liabilities of $365,000. Investing activities used cash
of $302,000 in the nine month period ended September 30, 2001. Financing
activities provided cash of $3,881,000 in the nine month period ended September
30, 2001, primarily from the issuance of common stock and the exercise of
employee stock options.
Since our inception, we have satisfied our capital requirements
primarily through sales of our equity securities. In addition, our operations
have been funded in part through sales of our products. In March 2001, we sold
898,202 shares of common stock to Acqua Wellington North American Equities Fund,
Ltd. at a negotiated purchase price of $1.1133 per share. 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. In August 2001, we established a $2 million
asset based line of credit with Pacific Business Funding, a division of
Cupertino National Bank. As of September 30, 2001, we have access to the entire
$2 million credit line based on qualifying assets and have borrowed a total of
$57,000 against the line. The agreement expires in August of 2002 and provides
us with the option of borrowing at an annual rate of 12% plus an administrative
fee of 0.50%.
We have incurred significant losses for the last several years and as
of September 30, 2001 we had an accumulated deficit of $161,718,000. The
accompanying financial statements have been prepared assuming we will continue
as a going concern. Our ability to continue as a going concern is dependent upon
achieving profitable operations in the future. Our plans include increasing
sales through direct sales and marketing efforts of existing products and
pursuing regulatory approval for certain other products for which clinical
trials have been completed. We also plan to continue our cost containment
efforts by focusing on reducing cost of revenues and on reducing sales, general
and administrative expenses. With regard to reducing cost of revenues, we are in
the process of completing the outsourcing of our manufacturing which allows us
to purchase products at lower levels of costs. With regard to reducing operating
expenses, we have focused our efforts on reducing headcount and overall expenses
in functions that are not essential to core and critical activities.
Currently, one of our primary goals is to achieve break-even followed
by profitability within a relatively short span of time. Our actions have been
guided by this imperative, and the resulting cost containment measures have
helped to conserve our cash. Our focus is upon core and critical activities,
thus production activities and operating expenses that are nonessential to our
core operations have been or are in the process of being eliminated.
We believe our cash balance as of September 30, 2001 and borrowings
available under our asset-based line of credit will be sufficient to meet our
capital and operating requirements through the end of 2001. In September 2000,
March 2001 and April 2001, we raised approximately $1,873,000, $1,000,000 and
$1,895,000, respectively, net of offering costs, from the sale of shares of
common stock. We believe that if revenue from sales or new funds from debt or
equity instruments is insufficient to maintain the current expenditure rate, it
will be necessary to significantly reduce our operations until an appropriate
solution is implemented.
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141 "Business
Combinations," and SFAS No. 142 "Goodwill and Other Intangible Assets," which
change the accounting for business combinations and goodwill. SFAS No. 141
requires that the purchase method of accounting be used for business
combinations initiated after June 30, 2001. Use of the pooling-of-interests
method is now prohibited. SFAS No. 142 changes the accounting for goodwill from
an amortization method to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations, will therefore cease
upon adoption of the Statement, which for the Company will be January 1, 2002.
The Company is currently evaluating SFAS No. 141 and SFAS No. 142, but does not
expect that they will have a material effect on its financial statements.
9
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 regulatory approval for other products under clinical trials. If we
are unable to increase our sales or achieve 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. We may be required to seek additional
sources of financing, which could include short-term debt, long-term debt or
equity. There is a risk that we may be unsuccessful in obtaining such financing
and will not have sufficient cash to fund our operations.
WE MAY FAIL TO OBTAIN REQUIRED REGULATORY APPROVALS TO MARKET OUR PRODUCTS
INCLUDING OUR PMR LASER SYSTEM IN THE UNITED STATES.
Our business could be harmed if any of the following events,
circumstances or occurrences related to the regulatory process occurred thereby
causing a reduction in our revenues:
- the failure to obtain regulatory approvals for our PMR system;
- any significant limitations in the indicated uses for which our
products may be marketed; and,
- substantial costs incurred in obtaining regulatory approvals.
The Food and Drug Administration has not approved our PMR laser systems
for any application in the United States. The PMR study compares PMR to
conventional medical therapy in patients with no option for other treatment. The
Food and Drug Administration may not accept the study as safe and effective, and
PMR may not be approved for commercial use in the United States. Responding to
Food and Drug Administration requests for additional information could require
substantial financial and management resources and take several years.
In October 2000, preliminary results from a competitor's clinical trial
of a catheter-based device employing Direct Myocardial Revascularization also
known as DMR were presented at a medical conference in Washington D.C. The
trial's principal investigator concluded that this catheter-based device did not
show significant evidence of clinical benefit with regard to angina class
reduction or exercise tolerance, and questioned the efficacy of other devices
and procedures relying on TMR. We believe that the preliminary results of that
catheter-based device study should not call the results of our PMR study into
question because the devices and procedures are substantially different. We
cannot predict, however, how those preliminary results of that catheter-based
device study will impact the Food and Drug Administration's decision on our PMR
system.
IN THE FUTURE, THE FOOD AND DRUG ADMINISTRATION COULD RESTRICT THE CURRENT USES
OF OUR TMR PRODUCT.
The Food and Drug Administration has approved our TMR product for sale
and use by physicians in the United States. At the request of the Food and Drug
Administration, we are currently conducting post-market surveillance of our TMR
product. Though we are not aware of any safety concerns during our on-going
postmarket surveillance of our TMR product, if concerns over the safety of our
TMR product were to arise, the Food and Drug Administration could possibly
restrict the currently approved uses of our TMR product. In the future, if the
Food and Drug Administration were to restrict the range of uses for which our
TMR product can be used by physicians, such as restricting TMR's use with the
coronary artery bypass grafting procedure which occurs in more than half the
procedures in which TMR is used, it could lead to reduced sales of our TMR
product and our business could be adversely affected.
10
THE CIRCULATORY DEVICES PANEL OF THE FOOD AND DRUG ADMINISTRATION RECENTLY
RECOMMENDED AGAINST APPROVAL OF OUR PMR DEVICE FOR PUBLIC SALE AND USE IN THE
UNITED STATES, WHICH HAS EFFECTIVELY DELAYED POTENTIAL REVENUE, IF ANY, THAT MAY
HAVE BEEN DERIVED IN THE FUTURE FROM THE SALE OF THAT DEVICE IN THE UNITED
STATES AND WHICH MAY HAVE OTHER ADVERSE EFFECTS.
The Circulatory Devices Panel of the Food and Drug Administration
recently recommended that the Food and Drug Administration not approve our PMR
device for public sale and use in the United States based on concerns related to
the safety of the device and the data regarding adverse events in the clinical
trials. Although we do not expect to conduct further clinical trials of our PMR
device, this recommendation has necessitated the further investment of
additional resources toward obtaining the Food and Drug Administration's
approval of our PMR device. If the Food and Drug Administration accepts the
recommendation of the Advisory Panel and does not approve our PMR device for
public sale and use in the United States, we will not be able to derive any
revenue from the sale of that device in the United States until such time, if
any, that the Food and Drug Administration approves the device. Such inability
to realize revenue from sales of our PMR device in the United States will have
an adverse effect on our results of operations. Additionally, the trading price
of our common stock on the NASDAQ National Market fell substantially after the
panel's recommendation became public. If our common stock were to trade under
$1.00 for 30 consecutive days on the NASDAQ National Market, our common stock
could be subject to certain consequences established by the NASDAQ National
Market, such as being delisted. If our common stock were delisted, then we could
apply for listing on the Nasdaq SmallCap Market, subject to Nasdaq's approval.
If our common stock is not approved for trading on the Nasdaq SmallCap Market,
then our common stock would trade only in the secondary markets in the so-called
"pink sheets" or Nasdaq's "OTC Bulletin Board." Delisting from the Nasdaq
National Market could adversely affect the liquidity and price of our common
stock and it could have a long-term adverse impact on our ability to raise
capital in the future.
THE MEDICAL COMMUNITY HAS NOT BROADLY ADOPTED OUR PRODUCTS, AND UNLESS OUR
PRODUCTS ARE BROADLY ADOPTED, OUR BUSINESS WILL SUFFER.
Our TMR products have not yet achieved broad commercial adoption, and
our PMR products are experimental and have not yet achieved broad clinical
adoption. We cannot predict whether or at what rate and how broadly our products
will be adopted by the medical community. Our business would be harmed if our
TMR and PMR systems fail to achieve significant market acceptance.
THE RECEIPT OF POSITIVE ENDORSEMENTS BY PHYSICIANS IS ESSENTIAL FOR THE SUCCESS
OF OUR PRODUCTS IN THE MARKET PLACE.
Positive endorsements, by physicians, are essential for clinical
adoption of our TMR and PMR laser systems. Even if the clinical efficacy of TMR
and PMR laser systems is established, physicians may elect not to recommend TMR
and PMR laser systems for any number of reasons.
Clinical adoption of these products will depend upon:
o our ability to facilitate training of cardiothoracic surgeons
and interventional cardiologists in TMR and PMR therapy;
o willingness of such physicians to adopt and recommend such
procedures to their patients; and
o raising the awareness of TMR and then PMR with the targeted
patient population.
Patient acceptance of the procedure will depend on:
o physician recommendations;
o the degree of invasiveness;
o the effectiveness of the procedure; and
o the rate and severity of complications associated with the
procedure as compared to other procedures.
11
TO EXPAND OUR BUSINESS, WE MUST ESTABLISH EFFECTIVE SALES, MARKETING AND
DISTRIBUTION SYSTEMS.
To expand our business, we must establish effective systems to sell,
market and distribute products. To date, we have had limited sales which have
consisted primarily of U.S. sales of our TMR lasers and disposable handpieces on
a commercial basis since February 1999 and PMR lasers and disposable catheters
for investigational use only. We have been expanding our operations by hiring
additional sales and marketing personnel. This has required and will continue to
require substantial management effort and financial resources.
IF OUR SALES FORCE IS NOT SUCCESSFUL IN INCREASING MARKET SHARE AND SELLING OUR
DISPOSABLE HANDPIECES, OUR BUSINESS WILL SUFFER.
With Food and Drug Administration approval of our TMR laser system, we
are marketing our products primarily through our direct sales force. If the
sales force is not successful in increasing market share and selling our
disposable handpieces, our business will suffer. In the fourth quarter of 1999,
we changed our U.S. sales strategy to include both selling lasers to hospitals
outright, as well as loaning lasers to hospitals in return for the hospital
purchasing a minimum number of disposable handpieces at a higher price. During
the current year, the majority of lasers shipped have been under this loan
program. The purpose of this strategy is to focus our sales force on increasing
market penetration and selling disposable handpieces used in connection with our
TMR procedure.
THE EXPANSION OF OUR BUSINESS MAY PUT ADDED PRESSURE ON OUR MANAGEMENT AND
OPERATIONAL INFRASTRUCTURE AFFECTING OUR ABILITY TO MEET ANY INCREASED DEMAND
FOR OUR PRODUCTS AND POSSIBLY HAVING AN ADVERSE EFFECT ON OUR OPERATING RESULTS.
The growth in our business may place a significant strain on our
limited personnel, management, financial systems and other resources. The
evolving growth of our business presents numerous risks and challenges,
including:
o the dependence on the growth of the market for our TMR and PMR
systems;
o our ability to successfully and rapidly expand sales to
potential customers in response to increasing clinical
adoption of the TMR procedure;
o the costs associated with such growth, which are difficult to
quantify, but could be significant;
o domestic and international regulatory developments;
o rapid technological change;
o completing the clinical trials that are currently in progress
as well as developing and preparing additional products for
clinical trials;
o the highly competitive nature of the medical devices industry;
and
o the risk of entering emerging markets in which we have limited
or no direct experience.
To accommodate any such growth and compete effectively, we must obtain
additional funding to improve information systems, procedures and controls and
expand, train, motivate and manage our employees, and such funding may not be
available in sufficient quantities, if at all. If we are not able to manage
these activities and implement these strategies successfully to expand to meet
any increased demand, our operating results could suffer.
OUR OPERATING RESULTS ARE EXPECTED TO FLUCTUATE AND QUARTER-TO-QUARTER
COMPARISONS OF OUR RESULTS MAY NOT INDICATE FUTURE PERFORMANCE.
Our operating results have fluctuated significantly from
quarter-to-quarter and are expected to fluctuate significantly from
quarter-to-quarter due to a number of events and factors, including:
o the level of product demand and the timing of customer orders;
12
o changes in strategy;
o delays associated with the Food and Drug Administration and
other regulatory approval processes;
o personnel changes including our ability to continue to
attract, train and motivate additional qualified personnel in
all areas;
o the level of international sales;
o changes in competitive pricing policies;
o the ability to develop, introduce and market new and enhanced
versions of products on a timely basis;
o deferrals in customer orders in anticipation of new or
enhanced products;
o product quality problems; and
o the enactment of health care reform legislation and any
changes in third party reimbursement policies.
We believe that quarter-to-quarter comparisons of our operating results
are not a good indication of our future performance. Due to the emerging nature
of the markets in which we compete, forecasting operating results is difficult
and unreliable. Over the past year, our revenue has been lower than anticipated,
largely attributable to the transition to our new sales strategy. It is likely
or possible that our operating results for a future quarter will fall below the
expectations of public market analysts and investors. When this occurred in the
past, the price of our common stock fell substantially, and if this occurs
again, the price of our common stock may fall again, perhaps substantially.
GROWTH IN OUR FUTURE OPERATING RESULTS IS HIGHLY CONTINGENT AND SUBJECT TO
SIGNIFICANT RISKS.
Our future operating results will be significantly affected by our
ability to:
o successfully and rapidly expand sales to potential customers;
o implement operating, manufacturing and financial procedures
and controls;
o improve coordination among different operating functions; and
o achieve manufacturing efficiencies as production volume
increases.
WE MAY NOT BE ABLE TO SUCCESSFULLY MARKET OUR PRODUCTS IF THIRD PARTY
REIMBURSEMENT FOR THE PROCEDURES PERFORMED WITH OUR PRODUCTS IS NOT AVAILABLE
FOR OUR HEALTH CARE PROVIDER CUSTOMERS.
Few individuals are able to pay directly for the costs associated with
the use of our products. In the United States, hospitals, physicians and other
healthcare providers that purchase medical devices generally rely on third 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.
13
Potential purchasers must determine whether the clinical benefits of
our TMR and PMR laser systems justify:
o the additional cost or the additional effort required to
obtain prior authorization or coverage; and
o the uncertainty of actually obtaining such authorization or
coverage.
WE FACE COMPETITION FROM OUR COMPETITOR'S PRODUCTS WHICH COULD LIMIT MARKET
ACCEPTANCE OF OUR PRODUCTS AND RENDER OUR PRODUCTS OBSOLETE.
The market for TMR laser systems is competitive. If our competitor is
more effective in developing new products and procedures and marketing existing
and future products, our business will suffer. The market for TMR laser systems
is characterized by rapid technical innovation. Accordingly, our current or
future competitors may succeed in developing TMR products or procedures that:
o are more effective than our products;
o are more effectively marketed than our products; or
o may render our products or technology obsolete.
We currently compete with PLC Systems. PLC recently announced a
co-marketing agreement with Edwards Life Sciences to distribute their lasers and
disposables which is expected to add another 18 direct domestic sales
representatives involved in promoting the PLC technology.
Even with the Food and Drug Administration approval for our TMR laser
system, we will face competition for market acceptance and market share for that
product. Our ability to compete may depend in significant part on the timing of
introduction of competitive products into the market, and will be affected by
the pace, relative to competitors, at which we are able to:
o develop products;
o complete clinical testing and regulatory approval processes;
o obtain third party reimbursement acceptance; and
o supply adequate quantities of the product to the market.
OUR PRODUCTS DEPEND ON TMR TECHNOLOGY THAT IS RAPIDLY CHANGING WHICH MAY REQUIRE
US TO INCUR SUBSTANTIAL PRODUCT DEVELOPMENT EXPENDITURES TO PREVENT OUR PRODUCTS
FROM BECOMING OBSOLETE.
The medical device industry is characterized by rapid and significant
technological change. Our future success will depend in large part on our
ability to respond to such changes through further product research and
development. In addition, we must expand the indications and applications for
our products by developing and introducing enhanced and new versions of our TMR
and PMR laser systems. Product research and development requires substantial
expenditures and is inherently risky. We may not be able to:
o identify products for which demand exists; or
o develop products that have the characteristics necessary to
treat particular indications.
OVERALL INCREASES IN MEDICAL COSTS COULD ADVERSELY AFFECT OUR BUSINESS.
We believe that the overall escalating cost of medical products and
services has led, and will continue to lead, to increased pressures on the
health care industry, both foreign and domestic, to reduce the cost of products
and services, including products offered by them. We cannot assure you that in
either United States or international markets that:
o third party reimbursement and coverage will be available or
adequate;
o current reimbursement amounts will not be decreased in the
future; or
14
o future legislation, regulation or reimbursement policies of
third party payors will not otherwise adversely affect the
demand for our products or our ability to profitably sell our
products.
Fundamental reforms in the healthcare industry in the United States and
Europe continue to be considered. We cannot predict whether or when any
healthcare reform proposals will be adopted and what effect such proposals might
have on our business.
WE HAVE A HISTORY OF LOSSES AND MAY NOT BE PROFITABLE IN THE FUTURE.
We have incurred significant losses since inception. Our revenues and
operating income will be constrained:
o until such time, if ever, as we obtain broad commercial
adoption of our TMR laser systems by healthcare facilities in
the United States;
o until such time, if ever, as we obtain Food and Drug
Administration and other regulatory approvals for our PMR
laser systems; and
o for an uncertain period of time after such approvals are
obtained.
We may not achieve or sustain profitability in the future.
THIRD PARTIES MAY LIMIT THE DEVELOPMENT AND PROTECTION OF OUR INTELLECTUAL
PROPERTY, WHICH COULD ADVERSELY AFFECT OUR COMPETITIVE POSITION.
Our success is dependent in large part on our ability to:
o obtain patent protection for our products and processes;
o preserve our trade secrets and proprietary technology; and
o operate without infringing upon the patents or proprietary
rights of third parties.
The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights. Companies
in the medical device industry have employed intellectual property litigation to
gain a competitive advantage. Certain competitors and potential competitors of
ours have obtained United States patents covering technology that could be used
for certain TMR and PMR procedures. We do not know if such competitors,
potential competitors or others have filed and hold international patents
covering other TMR or PMR technology. In addition, international patents may not
be interpreted the same as any counterpart United States patents.
In September 1995, one of our competitors sent us a notice of potential
infringement of their patent regarding a method for TMR utilizing
synchronization of laser pulses to the electrical signals from the heart. After
discussion with patent counsel, we concluded that we did not utilize the process
and/or apparatus that was the subject 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
15
the parties, the former CardioGenesis Corporation stipulated to the validity of
the PLC patents and PLC granted the former CardioGenesis Corporation a
non-exclusive worldwide license to the PLC patents. The former CardioGenesis
Corporation agreed to pay PLC a license fee, and minimum royalties, totaling
$2.5 million in equal monthly installments over an approximately forty-month
period, with a running royalty credited against the minimums.
The Settlement and License Agreement applies only to those products or
that technology covered by the PLC patents, and the agreement does not provide
PLC any rights to any former CardioGenesis Corporation intellectual property.
Our TMR 2000 laser system does not use the technology associated with the PLC
patents.
While we periodically review the scope of our patents and other
relevant patents of which we are aware, the question of patent infringement
involves complex legal and factual issues. Any conclusion regarding infringement
may not be consistent with the resolution of any such issues by a court.
COSTLY LITIGATION MAY BE NECESSARY TO PROTECT INTELLECTUAL PROPERTY RIGHTS.
We may have to engage in time consuming and costly litigation to
protect our intellectual property rights or to determine the proprietary rights
of others. In addition, we may become subject to patent infringement claims or
litigation, or interference proceedings declared by the United States Patent and
Trademark Office to determine the priority of inventions.
Defending and prosecuting intellectual property suits, United States
Patent and Trademark Office interference proceedings and related legal and
administrative proceedings are both costly and time-consuming. We may be
required to litigate further to:
o enforce our issued patents;
o protect our trade secrets or know-how; or
o determine the enforceability, scope and validity of the
proprietary rights of others.
Any litigation or interference proceedings will result in substantial
expense and significant diversion of effort by technical and management
personnel. If the results of such litigation or interference proceedings are
adverse to us, then the results may:
o subject us to significant liabilities to third parties;
o require us to seek licenses from third parties;
o prevent us from selling our products in certain markets or at
all; or
o require us to modify our products.
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.
16
WE RELY ON PATENT AND TRADE SECRET LAWS, WHICH ARE COMPLEX AND MAY BE DIFFICULT
TO ENFORCE.
The validity and breadth of claims in medical technology patents
involve complex legal and factual questions and, therefore, may be highly
uncertain. Issued patent or patents based on pending patent applications or any
future patent application may not exclude competitors or may not provide a
competitive advantage to us. In addition, patents issued or licensed to us may
not be held valid if subsequently challenged and others may claim rights in or
ownership of such patents.
Furthermore, we cannot assure you that our competitors:
o have not developed or will not develop similar products;
o will not duplicate our products; or
o will not design around any patents issued to or licensed by
us.
Because patent applications in the United States were, until recently,
maintained in secrecy until patents issue, we cannot be certain that:
o others did not first file applications for inventions covered
by our pending patent applications; or
o we will not infringe any patents that may issue to others on
such applications.
WE MAY NOT BE ABLE TO MEET FUTURE PRODUCT DEMAND INCREASES ON A TIMELY BASIS AND
MAY BE SUBJECT TO DELAYS AND INTERRUPTIONS TO PRODUCT SHIPMENTS BECAUSE WE
DEPEND ON SINGLE SOURCE THIRD PARTY SUPPLIERS AND MANUFACTURERS.
We currently purchase critical laser products and components from
single sources. In addition, we are vulnerable to delays and interruptions, for
reasons out of our control, because we outsource the manufacturing of some of
these products to third parties. We may experience harm to our business if these
sources have difficulties supplying our needs for these products and 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 products or
components to us. Although we have identified alternative suppliers and
manufacturers, a lengthy process would be required to qualify them as additional
or replacement suppliers or manufacturers. Also, it is possible some of our
suppliers or manufacturers could have difficulty meeting 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 and manufacturers could cause a delay in regulatory approvals or
adversely affect product acceptance. Further, we cannot predict:
o if materials and products obtained from outside suppliers and
manufacturers will always be available in adequate quantities
to meet our future needs; or
o whether replacement suppliers and/or manufacturers can be
qualified on a timely basis if our current suppliers and/or
manufacturers are unable to meet our needs for any reason.
OUR PRODUCTS COULD 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.
17
WE MUST COMPLY WITH FOOD AND DRUG ADMINISTRATION MANUFACTURING STANDARDS OR FACE
FINES OR OTHER PENALTIES INCLUDING SUSPENSION OF PRODUCTION.
We are required to demonstrate compliance with the Food and Drug
Administration's current good manufacturing practices regulations if we market
devices in the United States or manufacture finished devices in the United
States. The Food and Drug Administration inspects manufacturing facilities on a
regular basis to determine compliance. If we fail to comply with applicable Food
and Drug Administration or other regulatory requirements, we can be subject to:
o fines, injunctions, and civil penalties;
o recalls or seizures of products;
o total or partial suspensions of production; and
o criminal prosecutions.
The impact on the company of any such failure to comply would depend on
the impact of the remedy imposed on us.
WE MAY SUFFER LOSSES FROM PRODUCT LIABILITY CLAIMS IF OUR PRODUCTS CAUSE HARM TO
PATIENTS.
We are exposed to potential product liability claims and product
recalls. These risks are inherent in the design, development, manufacture and
marketing of medical devices. We could be subject to product liability claims if
the use of our TMR or PMR laser systems is alleged to have caused adverse
effects on a patient or such products are believed to be defective. Our products
are designed to be used in life-threatening situations where there is a high
risk of serious injury or death. We are not aware of any material side effects
or adverse events arising from the use of our TMR product. Though we are in the
process of responding to the Food and Drug Administration's Circulatory Devices
Panel's recent recommendation against approval of our PMR product because of
concerns over the safety of the device and the data regarding adverse events in
the clinical trials, we believe there are no material side effects or adverse
events arising from the use of our PMR product. When being clinically
investigated, it is not uncommon for new surgical or interventional procedures
to result in a higher rate of complications in the treated population of
patients as opposed to those reported in the control group. In light of this, we
believe that the difference in the rates of complications between the treated
groups and the control groups in the clinical trials for our PMR product are not
statistically significant, which is why we believe that there are no material
side effects or material adverse events arising from the use of our PMR product.
Any regulatory clearance for commercial sale of these products will not
remove these risks. Any failure to comply with the Food and Drug
Administration's good manufacturing practices or other regulations could hurt
our ability to defend against product liability lawsuits. Although we have not
experienced any product liability claims to date, any such claims could cause
our business to suffer.
OUR INSURANCE MAY BE INSUFFICIENT TO COVER PRODUCT LIABILITY CLAIMS AGAINST US.
Our product liability insurance may not be adequate for any future
product liability problems or continue to be available on commercially
reasonable terms, or at all.
If we were held liable for a product liability claim or series of
claims in excess of our insurance coverage, such liability could harm our
business and financial condition. We maintain insurance against product
liability claims in the amount of $10 million per occurrence and $10 million in
the aggregate.
We may require increased product liability coverage as sales of
approved products increase and as additional products are commercialized.
Product liability insurance is expensive and in the future may not be available
on acceptable terms, if at all.
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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 Chief Executive Officer until we hired our current Chief Executive
Officer, Michael Quinn, in October of 2000. Our former Chief Financial Officer,
Dick Powers, resigned from the company in July 2000. Ian Johnston, our then Vice
President of Finance who resigned in June 2001, acted as interim Chief Financial
Officer until our current Chief Financial Officer, J. Stephen Wilkins, was hired
in May 2001. Richard Lanigan moved from Vice President of Sales to Vice
President of Government Affairs and Business Development in March 2001 and
Thomas Kinder was hired in March 2001 as our new Vice President of Worldwide
Sales. Darrell Eckstein was hired in December 2000 as our Vice President of
Operations, replacing Bill Picht, who resigned earlier in 2000.
Our future business could be harmed by our turnover in senior
management if we have difficulty familiarizing and training our new management
with respect to our business. Further significant turnover in our senior
management could significantly deplete our institutional knowledge held by our
existing senior management team. We depend on the skills and abilities of these
key employees in managing the manufacturing, technical, marketing and sales
aspects of our business, any part of which could be harmed by further turnover.
WE MAY FAIL TO COMPLY WITH INTERNATIONAL REGULATORY REQUIREMENTS AND COULD BE
SUBJECT TO REGULATORY DELAYS, FINES OR OTHER PENALTIES.
Regulatory requirements in foreign countries for international sales of
medical devices often vary from country to country. In addition, the Food and
Drug Administration must approve the export of devices to certain countries. The
occurrence and related impact of the following factors would harm our business:
o delays in receipt of, or failure to receive, foreign
regulatory approvals or clearances;
o the loss of previously obtained approvals or clearances; or
o the failure to comply with existing or future regulatory
requirements.
To market in Europe, a manufacturer must obtain the certifications
necessary to affix to its products the CE Marking. The CE Marking is an
international symbol of adherence to quality assurance standards and compliance
with applicable European medical device directives. In order to obtain and to
maintain a CE Marking, a manufacturer must be in compliance with the appropriate
quality assurance provisions of the International Standards Organization and
obtain certification of its quality assurance systems by a recognized European
Union notified body. However, certain individual countries within Europe require
further approval by their national regulatory agencies.
We have achieved International Standards Organization and European
Union certification for our manufacturing facility. In addition, we have
completed CE mark registration for all of our products in accordance with the
implementation of various medical device directives in the European Union.
Failure to maintain the right to affix the CE Marking or other requisite
approvals could prohibit us from selling our TMR products in member countries of
the European Union or elsewhere. Any enforcement action by international
regulatory authorities with respect to past or future regulatory noncompliance
could cause our business to suffer. Noncompliance with international regulatory
requirements could result in enforcement action such as not being allowed to
market our product in the European Union, which would significantly reduce
international revenue.
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WE SELL OUR PRODUCTS INTERNATIONALLY, WHICH SUBJECTS US TO SPECIFIC RISKS OF
TRANSACTING BUSINESS IN FOREIGN COUNTRIES.
In future quarters, international sales may become a significant
portion of our revenue if our products become more widely used outside of the
United States according to our plan. Our international revenue is subject to the
following risks, the occurrence of any of which could harm our business:
o foreign currency fluctuations;
o economic or political instability;
o foreign tax laws;
o shipping delays;
o various tariffs and trade regulations;
o restrictions and foreign medical regulations;
o customs duties, export quotas or other trade restrictions; and
o difficulty in protecting intellectual property rights.
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 impairment/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 October 19, 2001, the
closing prices of our common stock as reported on the NASDAQ National Market
ranged from a high of $3.12 to a low of $0.50. We expect our stock price to be
subject to fluctuations as a result of a variety of factors, including factors
beyond our control. These factors include:
o actual or anticipated variations in our quarterly operating
results;
o announcements of technological innovations or new products or
services by us or our competitors;
o announcements relating to strategic relationships or
acquisitions;
20
o changes in financial estimates by securities analysts;
o statements by securities analysts regarding us or our
industry;
o conditions or trends in the medical device industry; and
o changes in the economic performance and/or market valuations
of other medical device companies.
Because of this volatility, we may fail to meet the expectations of our
shareholders or of securities analysts at some time in the future, and our stock
price could decline as a result.
In addition, the stock market has experienced significant price and
volume fluctuations that have particularly affected the trading prices of equity
securities of many high technology companies. These fluctuations have often been
unrelated or disproportionate to the operating performance of these companies.
Any negative change in the public's perception of medical device companies could
depress our stock price regardless of our operating results. If our common stock
were to trade under $1.00 for 30 consecutive days on the NASDAQ National Market,
our common stock could be subject to certain consequences established by the
NASDAQ National Market such as being delisted. If our common stock were
delisted, then we could apply for listing on the Nasdaq SmallCap Market, subject
to Nasdaq's approval. If our common stock is not approved for trading on the
Nasdaq SmallCap Market, then our common stock would trade only in the secondary
markets in the so-called "pink sheets" or Nasdaq's "OTC Bulletin Board."
Delisting from the Nasdaq National Market could adversely affect the liquidity
and price of our common stock and it could have a long-term adverse impact on
our ability to raise capital in the future.
Recently, when the market price of a stock has been volatile, holders
of that stock have often instituted securities class action litigation against
the company that issued the stock. If any of our shareholders brought such a
lawsuit against us, we could incur substantial costs defending the lawsuit. The
lawsuit could also divert the time and attention of our management.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUANTITATIVE DISCLOSURES
The Company is exposed to market risks inherent in its operations,
primarily related to interest rate risk. These risks arise from transactions and
operations entered into in the normal course of business. The Company does not
use derivatives to alter the interest characteristics of its debt instruments.
The Company has no holdings of derivative or commodity instruments.
Interest Rate Risk. The Company is subject to interest rate risks on
cash and cash equivalents, existing long-term debts and any future financing
requirements. The long-term debt at June 30, 2001 consists of outstanding
balances on lease obligations.
Assets
Cash and cash equivalents...................... $983,000
Average interest rate.......................... 1.2%
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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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On June 15, 2001, the Board of Directors of CardioGenesis approved the
adoption of a Shareholder Rights Plan. The Shareholder Rights Plan, effective at
the close of business on August 17, 20001, authorized a dividend of one
preferred share purchase right for each share of common stock, no par value per
share, of CardioGenesis which was distributed to shareholders of record at the
close of business on August 30, 2001. The preferred stock purchase rights are
not exercisable until any person becomes or attempts to become a 15% or more
shareholder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits required to be filed by Item 601 of Regulation S-K:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
4.1 Form of Rights Agreement, dated as of August 17, 2001,
between CardioGenesis Corporation and Equiserve Trust
Company, N.A., as Rights Agent, which includes as Exhibit
A the Form of Right Certificate, Form of Assignment and
Form of Election to Purchase (incorporated by reference to
the Registrant's Form 8-K filed August 20, 2001).
4.2 Form of Certificate of Determination of Series A Preferred
Stock (incorporated by reference to the Registrant's Form
8-K filed August 20, 2001).
b) Reports on Form 8-K
(i) A report on Form 8-K was filed on July 26, 2001, to report
under Item 5, Other Events, CardioGenesis' issuance of a press release
of the same date announcing its second 2001 financial results.
(ii) A report on Form 8-K was filed on August 20, 2001, to
report under Item 5, Other Events, the adoption and execution of a
Shareholder Rights Plan by CardioGenesis.
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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: November 9, 2001 /s/ Michael J. Quinn
----------------------------------------
Michael J. Quinn
Chief Executive Officer, President and
Chairman of the Board
(Principal Executive Officer)
Date: November 9, 2001 /s/ J. Stephen Wilkins
----------------------------------------
J. Stephen Wilkins
Vice President and Chief Financial
Officer (Principal Accounting and
Financial Officer)
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