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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
Commission file number 0-28288
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 77-0223740
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(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
559 WEDDELL DRIVE
SUNNYVALE, CALIFORNIA 94089
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(408) 747-0120
(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
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock outstanding as of the latest practicable date.
16,421,394 shares
As of July 31, 1997
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
TABLE OF CONTENTS
PART 1 - FINANCIAL INFORMATION
Page
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Item 1 Financial Statements:
a. Balance Sheets
as of June 30, 1997 and December 31, 1996................. 1
b. Statements of Operations for the three and six
months ended June 30, 1997 and 1996....................... 2
c. Statements of Cash Flows for the six months ended
June 30, 1997 and 1996.................................... 3
d. Notes to Financial Statements............................. 4
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 5
PART II - OTHER INFORMATION
Item 1 Legal Proceedings................................................. 17
Item 4 Submission of Matters to a Vote of Security Holders............... 17
Item 6 Exhibits and Reports on Form 8-K.................................. 17
Signatures........................................................ 18
EXHIBITS
Exhibit Index..................................................... 19
Exhibit 11.1 Statement Regarding Computation of Net Loss Per Share ...... 20
ECLIPSE SURGICAL TECHNOLOGIES, INC.
BALANCE SHEETS
(in thousands)
(unaudited)
ASSETS
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
Current assets:
Cash and cash equivalents....................... $ 22,186 $ 24,106
Marketable securities........................... 14,561 21,397
Accounts receivable, net of allowance for
doubtful accounts of $395 at June 30, 1997
and $280 at December 31, 1996,
respectively.................................. 1,566 2,483
Inventories..................................... 3,299 2,464
Prepaids and other current assets............... 879 431
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Total current assets .......................... 42,491 50,881
Property and equipment, net........................ 1,700 906
Marketable securities.............................. 6,996 6,560
Other assets....................................... - 359
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Total assets................................... $ 51,187 $ 58,706
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LIABILITIES
Current liabilities:
Accounts payable................................. $ 1,942 $ 2,043
Accrued liabilities.............................. 1,624 908
Customer deposits................................ 28 28
Current portion of long-term debt................ 7 41
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Total current liabilities...................... 3,601 3,020
Long-term debt, less current portion............... 17 20
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Total liabilities.............................. 3,618 3,040
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SHAREHOLDERS' EQUITY
Preferred stock, no par value:
Authorized: 5,000 shares;
Issued and outstanding: none
Common stock, no par value:
Authorized: 50,000 shares;
Issued and outstanding: 16,410 shares at
June 30, 1997 and 16,172 shares at
December 31, 1996.............................. 65,927 65,339
Unrealized gain on marketable securities........... 312 498
Accumulated deficit................................ (18,670) (10,171)
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Total shareholders' equity..................... 47,569 55,666
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Total liabilities and shareholders' equity..... $ 51,187 $ 58,706
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The accompanying notes are an integral part of these financial statements
1
ECLIPSE SURGICAL TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
-------- -------- -------- --------
Net revenues .................................. $ 1,254 $ 2,209 $ 2,462 $ 3,962
Cost of revenues............................... 634 853 1,264 1,355
-------- -------- -------- --------
Gross profit................................. 620 1,356 1,198 2,607
-------- -------- -------- --------
Operating expenses:
Research and development...................... 2,917 1,392 5,644 1,909
Sales and marketing........................... 1,466 479 2,877 882
General and administrative.................... 1,462 322 2,257 531
-------- -------- -------- --------
Total operating expenses.................... 5,845 2,193 10,778 3,322
-------- -------- -------- --------
Operating loss............................ (5,225) (837) (9,580) (715)
Interest expense............................... - (130) (6) (176)
Interest income................................ 583 237 1,087 237
-------- -------- -------- --------
Net loss.................................. $ (4,642) $ (730) $ (8,499) $ (654)
-------- -------- -------- --------
-------- -------- -------- --------
Net loss per share............................. $ (0.28) $ (0.05) $ (0.52) $ (0.05)
-------- -------- -------- --------
-------- -------- -------- --------
Shares used in per share calculation........... 16,284 13,328 16,233 13,046
-------- -------- -------- --------
-------- -------- -------- --------
The accompanying notes are an integral part of these financial statements
2
ECLIPSE SURGICAL TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
SIX MONTHS ENDED
JUNE 30,
1997 1996
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Cash flows from operating activities:
Net loss........................................ $ (8,499) $ (654)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 212 63
Provision for doubtful accounts............... 776 55
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable.. 141 (1,254)
(Increase) decrease in inventories.......... (835) 17
Increase in prepaids and other assets....... (448) (435)
Decrease in other assets.................... 359 -
Increase (decrease) in accounts payable..... (101) 696
Increase in accrued liabilities............. 716 39
Increase in customer deposits............... - 136
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Net cash used in operating activities..... (7,679) (1,337)
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Cash flows from investing activities:
Sale of marketable securities................... 6,836 -
Investment in marketable securities............. (622) (27,595)
Acquisition of property and equipment........... (1,006) (191)
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Net cash provided by (used in)
investing activities.................... 5,208 (27,786)
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Cash flows from financing activities:
Payments on short-term borrowings............... - (45)
Net proceeds from issuance of common stock...... 588 59,979
Payments on long-term debt...................... (37) (1,439)
Proceeds from notes receivable for common stock. - 104
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Net cash provided by financing activities. 551 58,599
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Net increase (decrease) in cash and
cash equivalents...................... (1,920) 29,476
Cash and cash equivalents at beginning of period.. 24,106 123
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Cash and cash equivalents at end of period ....... $ 22,186 $ 29,599
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Supplemental schedule of noncash investing and
financing activities:
Unrealized gain on marketable securities........ $ 312 $ -
--------- --------
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The accompanying notes are an integral part of these financial statements
3
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO 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 accruals, that are, in the opinion
of management, necessary for a fair statement of financial position, results of
operations and cash flows for the interim periods covered and of the financial
condition of the Company at the interim balance sheet dates. 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 the Company's audited financial statements and notes
thereto for the year ended December 31, 1996, contained in the Company's Annual
Report on Form 10-K as filed with the U.S. Securities and Exchange Commission
(SEC).
NET LOSS PER SHARE:
Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Pursuant to Securities and Exchange Commission
Staff Accounting Bulletin No. 83, common and common stock equivalent shares
issued by the Company during the twelve months preceding the initial offering
date, using the treasury stock method and the assumed public offering price per
share, have been included in the calculation of net income per share for the
three and six months ended June 30, 1996.
RECENT PRONOUNCEMENTS:
During February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share," (SFAS 128) which specifies the
computation, presentation and disclosure requirements for Earnings per Share.
SFAS will become effective for the Company's 1997 fiscal year. The impact of
adopting SFAS 128 is not expected to have a material impact on the Company's
financial condition or results of operations.
2. Inventories:
Inventories are stated at lower of cost (first-in, first-out) or market
and consist of the following (in thousands):
JUNE 30, 1997 DECEMBER 31,1996
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(UNAUDITED)
Raw materials.............................. $1,039 $ 511
Work in process............................ 182 99
Finished goods............................. 2,078 1,854
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$3,299 $2,464
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4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE DISCUSSION AND ANALYSIS BELOW CONTAINS TREND ANALYSIS AND OTHER
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1993 AND SECTION 21E OF THE SECURITIES ACT OF 1934. ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS
AS A RESULT OF THE RISK FACTORS SET FORTH BELOW AND IN THE COMPANY'S ANNUAL
REPORT ON FORM 10-K AND OTHER REPORTS FILED BY THE COMPANY.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH FINANCIAL
STATEMENTS AND NOTES THERETO INCLUDED IN ITEM 1 OF THIS QUARTERLY REPORT AND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTAINED IN THE COMPANY'S 1996 ANNUAL REPORT ON FORM 10-K AS FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC).
OVERVIEW
The Company designs, develops, manufactures and distributes laser-based
surgical and catheter products and disposable fiber-optic accessories for the
treatment of advanced cardiovascular disease through Transmyocardial
Revascularization ("TMR") and Percutaneous Transluminal Myocardial
Revascularization ("PTMR") . TMR is a surgical procedure performed on the
beating or non-beating heart in which a laser device is used to create pathways
through the myocardium directly into the heart chamber. The pathways are
intended to enable improved blood supply to the myocardium. PTMR is a catheter-
based procedure which is performed under local anesthesia by inserting a
catheter in a leg artery and creating the laser channels from the inside of the
heart. TMR and PTMR potentially offer end-stage cardiac patients who are not
candidates for percutaneous transluminal coronary angioplasty ("PTCA" or
"balloon angioplasty") or coronary artery bypass graft surgery ("CABG" or "open
heart bypass surgery") a means to alleviate their anginal symptoms and improve
their quality of life. In the U.S., the Company currently offers its laser
systems for sale in limited numbers for investigational use only pursuant to
Investigational Device Exemptions ("IDE") from the U.S. Food and Drug
Administration (the "FDA").
The Company was founded in 1989 as an outgrowth of certain research and
development efforts initially undertaken by the Company's founders in the early
1980s related to the use of laser technology to treat cardiovascular disease.
From 1989 through September 1995, the Company engaged in research, development
and sale of surgical laser products principally for procedures such as
atherectomy and arthroscopy. In 1993, the Company created and spun off to its
shareholders a balloon angioplasty company, Atlantis Catheter Company, Inc. In
1995, the Company determined that there is a significant opportunity in the TMR
and PTMR markets, and that the Company is well-positioned to enter these
markets because of the Company's expertise with laser-based surgical and
catheterization techniques and the treatment of cardiovascular disease.
Accordingly, in late 1995, the Company changed its strategic direction and
began to apply its laser expertise toward the nascent TMR and PTMR markets.
In late 1995, the Company began restructuring its operations and expanding
its management team in order to focus on the development and commercialization
of its TMR and PTMR products. In September 1995, the Company received an
Investigational Device Exemption ("IDE") allowing it to begin selling its TMR
products for investigational use only, and commenced clinical trials in the
United States and Europe in November 1995. In December 1996, the Company
received CE Marking allowing the commercial sale of its TMR laser system to the
European Community. In May 1997, the Company received ISO 9001 certification
of its manufacturing and quality organization. In July 1997, the Company
submitted an application to the FDA for marketing clearance ("PMA" or Pre-
Market Approval) of its TMR products in the United States. In June 1997, the
Company received an IDE allowing it to begin selling its PTMR products for
investigational use only and commenced clinical trials of PTMR in South America
and Asia.
5
Prior to 1996, the Company had focused almost exclusively on research and
development activities relating to surgical laser products, substantially
contributing to annual operating losses since inception. Since 1996, the
Company has focused on TMR and PTMR activities, particularly research and
development activities and clinical trials. At June 30, 1997, the Company had
an accumulated deficit of $18,670,000.
The Company expects to continue to incur operating losses related to
research and development activities, including clinical studies, the expansion
of sales and marketing resources and the continued development of corporate
infrastructure. The timing and amounts of the Company's expenditures will
depend upon a number of factors, including the progress of the Company's
clinical trials, the status and timing of regulatory approval, the timing of
market acceptance, if any, of the Company's products, and the efforts required
to develop the Company's sales and marketing organization.
RESULTS OF OPERATIONS
REVENUES
Net revenues decreased 38% to $2,462,000 for the six months ended June 30,
1997 from $3,962,000 in the corresponding period of 1996, and decreased 43% to
$1,254,000 in the second quarter of 1997 compared to $2,209,000 in the second
quarter of 1996. The decrease for both the three and six months was primarily
due to a Health Care Financing Administration ("HCFA") policy effective May
19, 1997 which restricts Medicare reimbursement for TMR equipment and
procedures. The Company's products had received third party reimbursement under
the preceding HCFA policy. Reimbursement is a significant factor considered by
hospitals in determining whether to acquire new equipment.
Future revenues could continue to be affected by restrictions on third
party reimbursement and the timing and manner of sale of a limited number of
units of TMR and PTMR laser systems. The Company intends to continue selling
the systems to hospitals outright (list price is $295,000) or placing the
system with the hospital for a placement fee (currently $25,000) plus an
additional fee for each procedure performed. As a result of a new HCFA policy
restricting Medicare reimbursement for TMR equipment and procedures, the
Company anticipates that these sales will be more difficult to obtain in 1997
than in the prior year.
The list price of the Company's laser base units, the timing of individual
orders and shipments, as well as the manner of sale, could significantly impact
quarter to quarter results.
GROSS PROFIT
Gross profit decreased to $1,198,000 for the six months ended June 30,
1997 from $2,607,000 for the corresponding period in 1996. In the second
quarter of 1997, gross profit decreased to $620,000 as compared to $1,356,000
for the corresponding period in 1996. The gross profit percentage decreased to
49% for both the quarter and six months ended June 30, 1997, from 61% and 66%
for the corresponding periods of 1996. The decrease reflects unabsorbed
manufacturing costs caused by a decrease in revenues as well as an increase in
manufacturing overhead in the three and six months ended June 30, 1997 as
compared to the three and six months ended June 30, 1996. Manufacturing
headcount increased to 27 from 13 at June 30, 1997 and 1996, respectively.
Additionally, the expenses incurred in achieving CE Marking and obtaining ISO
9001 certification have been included in manufacturing overhead.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased to $5,644,000 or 229% of net
revenues for the six months ended June 30, 1997 from $1,909,000 or 48% of net
revenues for the six months ended June 30, 1996. In the second quarter of
1997, research and development expenses increased to $2,917,000 or 233% of net
revenues from $1,392,000 or 63% in the corresponding period in 1996.
6
The increase in these expenses reflects a higher level of research and
development expenses relating to TMR and PTMR including costs related to the
development of new products, costs to support an increasing number of
clinical trials, and an increase in headcount to 32 clinical, research and
development employees at June 30, 1997 from 12 at June 30, 1996. The
Company's products are currently in clinical trials, and therefore, subject to
limitations by the FDA. The Company believes that continued investment in the
development of new and improved products and procedures and continued
investment in the Company's clinical trials is critical to its future success.
Additionally, as a result of a new HCFA policy restricting Medicare
reimbursement for TMR equipment and procedures, the Company anticipates a
significant increase in future expenditures relating to hospital support of the
Company's clinical trials. Accordingly, the Company believes that research and
development expenses will continue to increase significantly over the short
term and possibly thereafter.
SALES AND MARKETING
Sales and marketing expenses increased to $2,877,000 or 117% of net
revenues in the six months ended June 30, 1997 from $882,000 or 22% of net
revenues in the corresponding period in 1996, and to $1,466,000 or 117% of net
revenues in the second quarter of 1997 from $479,000 or 22% of net revenues in
1996. The increase in both the three and six months ended June 30, 1997
reflects the Company's application of additional resources to the TMR and PTMR
markets including expansion of the Company's sales and marketing staff to 19
from nine at June 30, 1997 and 1996, respectively, increased travel and trade
show expenses, and costs to develop the international market. The Company
expects that sales and marketing expenses will continue to increase
significantly as the Company continues to focus resources on the development of
its products.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased to $2,257,000 or 92% of net
revenues for the six months ended June 30, 1997 from $531,000 or 13% of net
revenues for the six months ended June 30, 1996, and in the second quarter of
1997 increased to $1,462,000 or 117% of net revenues from $322,000 or 15% of
net revenues in the second quarter in 1996. The increase in both the three and
six months ended June 30, 1997 reflects increased headcount to 20 at June
30, 1997 from 11 at June 30, 1996, and expenses related to being a publicly
traded company, including investor relations, legal, accounting, stock
administration, and insurance expenses. Additionally, administrative expenses
related to patents and patent applications have increased significantly,
related to the increasing number of applications filed. The Company anticipates
that general and administrative expenses will continue to increase in relation
to sales, general headcount increases, and patent activity.
INTEREST INCOME AND EXPENSE
The Company earned $1,087,000 and $583,000 of interest income in the six
and three months ended June 30, 1997, respectively, as compared to $237,000 for
the six and three month periods in 1996, primarily from investment of proceeds
received in connection with its initial public offering in May 1996. Prior to
its initial public offering, the Company had limited cash balances and,
therefore, earned little if any interest income.
Interest expense decreased to $6,000 for the six months ended June 30,
1997, as compared to $176,000 in the corresponding periods of 1996 reflecting
a decrease in outstanding debt.
7
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has satisfied its capital requirements
primarily through sales of its equity securities and, to a lesser extent, loans
from shareholders. In addition, the Company's operations have been funded in
part through sales of the Company's products. At June 30, 1997, the Company had
aggregate cash and marketable securities of $43,743,000 as compared to
$52,063,000 at December 31, 1996. The Company used $7,679,000 and $1,337,000
for operating activities for the six months ended June 30, 1997 and 1996,
respectively. At June 30, 1997, the Company had an accumulated deficit of
$18,670,000.
The Company anticipates that its current cash and marketable securities,
together with revenues from the sale of products for investigational use, will
be sufficient to meet the Company's capital requirements through at least
March, 1998. There can be no assurance, however, that the Company will not
require additional sources of cash at an earlier date in the future, depending
upon the progress of expansion of the Company's clinical trials, any need for
additional clinical trials or other testing of the Company's products, and the
timing of other required expenditures as indicated above. If the Company is
required to obtain additional financing in the future, there can be no
assurance that capital will be available on terms acceptable to the Company, if
at all.
8
CERTAIN FACTORS BEARING ON FUTURE RESULTS
CERTAIN OF THE STATEMENTS ABOVE ARE FORWARD-LOOKING STATEMENTS. IN
ADDITION, THE COMPANY MAY FROM TIME TO TIME MAKE ORAL FORWARD-LOOKING
STATEMENTS. THE FOLLOWING ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN ANY SUCH FORWARD-LOOKING
STATEMENTS.
EARLY STAGE OF CLINICAL TRIALS
The Company must obtain marketing clearance ("PMA") from the U.S. Food and
Drug Administration (the "FDA") before the Company will be able to offer its
products for TMR or PTMR on a commercial basis in the U.S. A necessary
prerequisite for submitting a PMA application is completion of clinical testing
to demonstrate the safety and effectiveness of the Company's TMR products.
On July 2, 1997, the Company submitted a PMA application to the FDA for
use of the Eclipse laser system to treat patients with Class IV angina (chest
pain) caused by coronary artery disease using the TMR procedure. The FDA review
process can be lengthy and uncertain. There can be no assurance that the FDA
will approve this application or when this approval will occur, if at all. On
July 28, 1997 an FDA panel recommended non-approval of a PMA application
submitted by a competitor of the Company, PLC Systems, Inc. This decision may
have an impact on the FDA's review and approval of the Company's application.
The Company has two other clinical studies underway that have reached Phase II,
and four additional studies currently in Phase I.
Completion of the clinical studies on a timely basis will depend on the
Company's ability to establish TMR and PTMR sites and enroll participating
patients. In addition, the clinical studies will require substantial financial
and management resources. There can be no assurance that the Company will have
the resources necessary to complete such clinical studies. Furthermore, there
can be no assurance that the Company's clinical studies will be completed
within the currently anticipated time frame or otherwise in a timely manner,
nor that such clinical studies will demonstrate the safety and effectiveness of
the Company's products to the extent necessary to obtain FDA and other
regulatory approvals and establish a commercial market for the Company's
products. Moreover, results of the initial clinical testing are not necessarily
predictive of results to be achieved in later clinical studies, if undertaken,
or commercially, if a PMA is obtained. Failure to complete the Company's
clinical studies in a timely manner or to demonstrate the safety and
effectiveness of the Company's TMR products could delay or prevent regulatory
approval and would materially and adversely affect the Company's business,
financial condition and results of operations.
NO ASSURANCE OF FDA OR OTHER REQUIRED GOVERNMENTAL APPROVALS
The Company's products are regulated in the U.S. as medical devices by the
FDA under the Federal Food, Drug, and Cosmetic Act ("FD&C Act") and, as such,
require FDA approval of a PMA application prior to commercial sale in the U.S.
The FDA approves PMA applications for specific indications only and FDA
regulation prohibits commercial marketing in the U.S. of devices for
indications that have not been approved by the FDA. The process of obtaining
required regulatory approvals from the FDA and other regulatory authorities is
lengthy, expensive and inherently uncertain, generally takes several years or
longer to complete, if approval is obtained at all, and requires the submission
of extensive clinical data and supporting information to the FDA.
On July 2, 1997, the Company submitted a PMA application to the FDA for
use of the Eclipse laser system to treat patients with Class IV angina (chest
pain) caused by coronary artery disease using the TMR procedure. The FDA review
process can be lengthy and uncertain. There can be no assurance that the FDA
will approve this application or when this approval will occur, if at all. On
July 28, 1997 an FDA panel recommended non-approval of a PMA
9
application submitted by a competitor of the Company, PLC Systems, Inc. This
decision may have an impact on the FDA's review and approval of the Company's
application. Failure to obtain FDA approval on a timely basis or for the
indications sought by the Company would materially and adversely affect the
Company's business, financial condition and results of operations.
The Company will also be required to follow applicable Good Manufacturing
Practices ("GMP") regulations of the FDA, which include testing, control and
documentation requirements, as well as similar requirements in other countries,
including International Standards Organization ("ISO") 9001 standards. Although
the Company became 9001 certified in May 1997, failure to meet these
requirements in the future would preclude the Company from marketing its
products on a commercial basis, and therefore would materially and adversely
affect the Company's business, financial condition and results of operations.
Sales of medical devices outside of the U.S. are subject to foreign
regulatory requirements that vary widely by country. In addition, the FDA must
approve the export of devices that require a PMA but are not yet approved
domestically. Foreign and domestic regulatory approvals, if granted, may
include significant limitations on the indicated uses for which the product may
be marketed. In addition, to obtain such approvals, medical device
manufacturers must comply with numerous other requirements of the FDA and
certain foreign regulatory authorities. For example, the European Conforming
Mark (the "CE Mark") is required to sell products in European Union countries.
The Company received CE Marking for its TMR laser in December 1996. However,
product approvals can be withdrawn for failure to comply with regulatory
standards or because of unforeseen problems following initial marketing.
RISKS ASSOCIATED WITH NEW SURGICAL PROCEDURE; NO ASSURANCE OF MARKET ACCEPTANCE
The Company's ability to successfully commercialize its TMR and PTMR
products will depend upon its ability to achieve acceptance of its products
and procedures among cardiologists, cardiac surgeons and other members of the
medical community. The Company believes that it will not achieve such
acceptance until such time, if any, as the Company's TMR or PTMR products can
be demonstrated to be safe, efficacious and cost-effective. Even if the
clinical safety and effectiveness of the Company's TMR products is established,
cardiologists, cardiac surgeons and other members of the medical community may
elect not to recommend TMR or PTMR for any number of other reasons. Broad use
of the Company's products will require training of numerous physicians, and the
time required to complete such training could adversely affect market
acceptance. Moreover, even if TMR and PTMR become generally accepted by the
medical community, physicians trained in competitive products may elect not to
consider the Company's products, or may elect instead to recommend a
competitor's products. Failure of the Company's products to achieve significant
market acceptance would materially and adversely affect the Company's business,
financial condition and results of operations.
DEPENDENCE ON SINGLE PRODUCT LINE
The Company has elected to focus its resources on the continued
development and refinement of its TMR and PTMR products. If the Company is
unable to obtain requisite regulatory approvals or to achieve commercial
acceptance of these products, the Company's business, financial condition and
results of operations will be materially and adversely affected and could
result in cessation of the Company's current business.
UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY; RISKS
OF FUTURE LITIGATION
The Company's success will depend, in part, on its ability to obtain
patent protection for its products, preserve its trade secrets, and operate
without infringing the proprietary rights of others. The Company's policy is to
seek to
10
protect its proprietary position by, among other methods, filing U.S. and
foreign patent applications related to its technology, inventions and
improvements that are important to the development of its business. The
Company holds five U.S. patents and related foreign patents relating to
surgical treatment with lasers and fiber-optic handpieces, and has applied
for additional patents relating to its laser technology, TMR and PTMR
applications and fiber-optic handpieces. There can be no assurance that any
of the Company's patents or patent applications will not be challenged,
invalidated or circumvented in the future or that the rights granted
thereunder will provide a competitive advantage. The Company intends to
vigorously protect and defend its intellectual property. It is uncertain
whether patent protection will continue to be available for surgical methods
in the future. Costly and time-consuming litigation brought by the Company
may be necessary to enforce patents issued to the Company, to protect trade
secrets or know-how owned by the Company, or to determine the enforceability,
scope and validity of the proprietary rights of others.
The Company also relies upon trade secrets, technical know-how and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants and
advisors to execute confidentiality and assignment of inventions agreements in
connection with their employment, consulting or advisory relationships with the
Company. There can be no assurance, however, that these agreements will not be
breached or that the Company will have adequate remedies for any breach.
Furthermore, no assurance can be given that competitors will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to the Company's proprietary technology, or that the
Company can meaningfully protect its rights in unpatented proprietary
technology.
The medical device industry in general, and the industry segment that
includes products for the treatment of cardiovascular disease in particular,
have been characterized by substantial competition and litigation regarding
patent and other intellectual property rights. In this regard, competitors of
the Company have been issued a number of patents related to TMR. In September
1995, the Company received from a competitor a notice of potential infringement
of the competitor's patent regarding a method for TMR utilizing synchronization
of laser pulses to the electrical signals from the heart. In January 1996, the
Company received from a second competitor a notice of potential infringement of
the competitor's patent regarding a method to perform TMR using fiber optics.
The Company has concluded in each case, following discussion with its patent
counsel, that it does not utilize the process and/or apparatus which is the
subject of the patent at issue, and has responded to the respective competitor
to such effect. The Company has received no further correspondence on either
matter. There can be no assurance, however, that further claims or proceedings
will not be initiated by either competitor, or that claims by other parties
will not arise in the future. Any such claims in the future, with or without
merit, could be time-consuming and expensive to respond to and could divert the
attention of the Company's technical and management personnel. The Company may
be involved in litigation to defend against claims of infringement by the
Company, to enforce patents issued to the Company, or to protect trade secrets
of the Company. If any relevant claims of third party patents are upheld as
valid and enforceable in any litigation or administrative proceeding, the
Company could be prevented from practicing the subject matter claimed in such
patents, or would be required to obtain licenses from the patent owners of each
such patent or to redesign its products or processes to avoid infringement.
Patent applications in the U.S. are maintained in secrecy until patents
issue, and patent applications in foreign countries are maintained in secrecy
for a period after filing. Publication of discoveries in the scientific or
patent literature tends to lag behind actual discoveries and the filing of
related patent applications. Accordingly, there can be no assurance that
current and potential competitors and other third parties have not filed or in
the future will not file applications for, or have not received or in the
future will not receive, patents or obtain additional proprietary rights that
will prevent, limit or interfere with the Company's ability to make, use or
sell its products either in the U.S. or internationally. In the event the
Company were to require licenses to patents issued to third parties, there can
be no assurance that such licenses would be available or, if available, would
be available on terms acceptable to the Company, or that the Company would be
successful in any attempt to redesign its products or processes to avoid
infringement. Accordingly, an adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
the Company from manufacturing and selling its products, which would materially
and adversely affect
11
the Company's business, financial condition and results of operations.
EXPECTATION OF INTENSE MARKET COMPETITION
The Company expects that the markets for TMR and PTMR, which are currently
in the early stages of development, will be intensely competitive. Competitors
are likely to include three laser competitors, PLC Systems, Inc. ("PLC"),
CardioGenesis Corporation ("CardioGenesis") and U.S. Surgical Corporation
("U.S. Surgical"), all three of which are currently selling TMR products for
investigational use in the U.S. and abroad. Other competitors may include
additional companies that elect to enter the market, including large companies
in the laser, cardiac devices and cardiac surgery markets. Companies who are
known to have distribution rights to current or future products in TMR or PTMR
include Boston Scientific Corp., Baxter International, Inc., C.R. Bard, Inc.,
and Cordis, a Johnson & Johnson company. Many of these companies have
significantly greater financial, development, marketing and other resources
than the Company. In the event a competitor is able to obtain a PMA for its
products prior to the Company, the Company's ability to compete successfully
could be materially and adversely affected.
TMR and PTMR also compete with other methods for the treatment of
cardiovascular disease, including drug therapy, PTCA and CABG. Although the
Company is seeking to demonstrate the safety and effectiveness of the Company's
TMR procedures in patients for whom other cardiovascular treatments are not
likely to provide relief, and in the future intends to pursue the safety and
effectiveness of TMR or PTMR when used in conjunction with other treatments,
there can be no assurance that the Company's products will be accepted in
these markets. There can be no assurance that physicians will use the Company's
procedures to replace or supplement established treatments, or that the
Company's procedures will be competitive with current or future technologies.
Such competition could materially and adversely affect the Company's business,
financial condition and results of operations.
Any product developed by the Company that gains regulatory approval will
face competition for market acceptance and market share. An important factor in
such competition may be the timing of market introduction of competitive
products. Accordingly, the relative pace at which the Company is able to
develop products, complete clinical testing and regulatory approval processes,
gain third party reimbursement acceptance and supply commercial quantities of
the product to the market are expected to be important competitive factors.
There can be no assurance that the Company will be able to compete successfully
against current and future competitors. Failure to do so would materially and
adversely affect the Company's business, financial condition and results of
operations.
HISTORY OF OPERATING LOSSES
From inception to June 30, 1997, the Company incurred cumulative net
losses of approximately $18.7 million. The Company's revenues and operating
income will continue to be constrained until such time, if ever, as FDA and
other regulatory approval is obtained for the Company's products, and for an
indefinite period of time after any such approval is obtained. Furthermore, the
Company expects its expenses in all categories to increase as its clinical
trial and other business activities expand. Hence, there can be no assurance
that the Company will achieve or sustain profitability in the future. Failure
to achieve significant commercial revenues or profitability would materially
and adversely affect the Company's business, financial condition and results of
operations.
RISKS OF TECHNOLOGICAL CHANGE
Significant resources are continually being expended to develop new and
improved treatment methodologies for coronary disease. Accordingly, the market
acceptance and commercial success of the Company's TMR and PTMR products and
procedures will depend not only on the safety and effectiveness of the
Company's TMR and PTMR products and procedures, but also the relative safety
and effectiveness of alternative treatment measures, which
12
alternatives could potentially include new treatments or improvements or
emergence of new alternative treatments would materially and adversely affect
the Company's business, financial condition and results of operations.
POTENTIAL DIFFICULTIES IN MANAGING BUSINESS UNDERGOING RAPID CHANGE
The Company's future success will depend to a significant extent on the
ability of its current and future management personnel to operate effectively,
both independently and as a group. In this regard, a number of members of the
Company's senior management team have only recently joined the Company.
Moreover, certain members of such management team have limited experience as a
senior executive of a public corporation. There can be no assurance that the
management team will operate together effectively. To compete successfully
against current and future competitors, complete clinical trials in progress,
prepare additional products for clinical trials and develop future products,
the Company believes that it must continue to expand its operations,
particularly in the areas of research and development, sales and marketing,
training, and manufacturing. If the Company were to experience significant
growth in the future, such growth would likely result in new and increased
responsibilities for management personnel and place significant strain upon the
Company's management, operating and financial systems and resources. To
accommodate such growth and compete effectively, the Company must continue to
implement and improve information systems, procedures and controls, and to
expand, train, motivate and manage its work force. There can be no assurance
that the Company's personnel, systems, procedures and controls will be adequate
to support the Company's future operations. Any failure to implement and
improve the Company's operational, financial and management systems or to
expand, train, motivate or manage employees could materially and adversely
affect the Company's business, financial condition and results of operations.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
Results of operations are expected to fluctuate significantly from quarter
to quarter depending upon numerous factors, including the timing and results of
clinical trials; delays associated with the FDA and other regulatory approval
processes; health care reform and reimbursement policies; demand for the
Company's products; changes in pricing policies by the Company or its
competitors; the number, timing and significance of product enhancements and
new product announcements by the Company and its competitors; the ability of
the Company to develop, introduce and market new and enhanced versions of the
Company's products on a timely basis; customer order deferrals in anticipation
of new or enhanced products offered by the Company or its competitors; product
quality problems; personnel changes; changes in Company strategy; and the level
of international sales. Quarter to quarter operating results could also be
affected by the timing of the receipt of individual customer orders, order
fulfillment and revenue recognition with respect to small numbers of individual
laser base units, since each unit carries a high price per unit.
UNCERTAINTY REGARDING THIRD PARTY REIMBURSEMENT
The Company expects that its ability to successfully commercialize its
products will depend significantly on the availability of reimbursement for
surgical procedures using the Company's products from third party payors such
as governmental programs, private insurance and private health plans.
Reimbursement is a significant factor considered by hospitals in determining
whether to acquire new equipment. Notwithstanding FDA approval, if granted,
third party payors may deny reimbursement if the payor determines that a
therapeutic medical device is unnecessary, inappropriate, not cost-effective or
experimental or is used for a non-approved indication.
Medicare reimburses hospitals on a prospectively determined fixed amount
for the costs associated with an in-patient hospitalization based on the
patient's discharge diagnosis, and reimburses physicians on a prospectively
determined fixed amount based on the procedure performed, regardless of the
actual costs incurred by the hospital or physician in furnishing the care and
unrelated to the specific devices used in that procedure. Medicare and other
third party payors are increasingly scrutinizing whether to cover new products
and the level of reimbursement for covered products. In addition, Medicare
traditionally has considered items or services involving devices that have not
been
13
approved or cleared for marketing by the FDA to be precluded from Medicare
coverage. Under a Health Care Financing Administration ("HCFA") policy
effective November 1, 1995, Medicare coverage will not be precluded for items
and related services involving devices that have been classified by the FDA
as "non-experimental/ investigational" ("Category B") devices and that are
furnished in accordance with FDA-approved protocols governing clinical
trials. Even with items or services involving Category B devices, however,
Medicare coverage may be denied if other coverage requirements are not met,
for example if the treatment is not medically needed for the specific
patient. In November 1995, the Company received Category B designation for
its TMR procedure from the HCFA. Accordingly, the Company's procedures had
received third party reimbursement in many cases under HCFA's policy. As of
May 19, 1997, although Category B status is retained, under a recent HCFA
ruling, there will not be coverage for any manufacturer's TMR procedures at
this time. There can be no assurance that this coverage will be given in the
future or that Medicare will adequately reimburse the costs of the Company's
TMR and PTMR procedures when and if a PMA is granted. While the Company is
unable to determine the ultimate effect of this policy change on the business
and operating results, the Company anticipates that research and development
expenses will increase significantly due to increased expenses in support of
clinical trials, and revenues from sale of investigational products are
likely to decrease, at least over the short term and possibly thereafter.
There can be no assurance as to whether third party payors will cover TMR
or PTMR or as to the levels of reimbursement. There also can be no assurance
that levels of reimbursement, if any, will not be decreased in the future, or
that future legislation, regulation, or reimbursement policies of third party
payors will not otherwise adversely affect the demand for the Company's
products or its ability to sell its products on a profitable basis. Fundamental
reforms in the healthcare industry in the U.S. and Europe that could affect the
availability of third party reimbursement continue to be proposed, and the
Company cannot predict the timing or effect of any such proposal. If third
party payor coverage or reimbursement is unavailable or inadequate, the
Company's business, financial condition and results of operations could be
materially and adversely affected.
LIMITED SALES, MARKETING AND DISTRIBUTION SYSTEMS
The Company has made limited sales of its TMR products to date, for
investigational use only. Accordingly, the Company has maintained a limited
sales and marketing organization in the U.S. and abroad. The Company plans to
market its TMR and PTMR products, if approved, through a direct sales force
and through a relationship with a major cardiovascular surgical products
company or companies for international sales. Establishment of a sales force
capable of effectively commercializing the Company's TMR and PTMR products will
require substantial efforts and require significant management and financial
resources. There can be no assurance that the Company will be able to establish
such a sales capability on a timely basis, if at all. Moreover, there can be no
assurance that the Company's international distributor or distributors will
devote sufficient resources to development of the markets for the Company's
products or will be successful in such commercialization efforts.
RISK OF PRODUCT LIABILITY
The Company faces an inherent and significant business risk of exposure to
product liability claims in the event that the use of its products results in
personal injury or death, and there can be no assurance that material product
liability claims will not be assessed against the Company in the future. The
Company maintains insurance against product liability claims in the amount of
$3 million per occurrence and $3 million in the aggregate. However, there can
be no assurance that such coverage will continue to be available in the amount
desired or on terms acceptable to the Company, or that such coverage will be
adequate for liabilities actually incurred. Also, in the event that any of the
Company's products prove to be defective, the Company may be required to recall
or redesign such products. Any uninsured or underinsured claim brought against
the Company or any claim or product recall that results in significant cost to
or adverse publicity against the Company could materially and adversely affect
the Company's business, financial condition and results of operations.
14
LIMITED MANUFACTURING EXPERIENCE; DEPENDENCE ON KEY SUPPLIERS
The Company's success will depend in part on its ability to manufacture
its products in a timely, cost-effective manner and in compliance with GMP, ISO
9001 and other regulatory requirements. The manufacture of the Company's
products is a labor-intensive, complex operation involving a number of separate
processes and components. The Company's manufacturing activities to date have
consisted primarily of manufacturing limited quantities of systems for use in
clinical trials. The Company does not have experience in manufacturing its
products in the commercial quantities that might be required if the Company
receives regulatory approval for its TMR products. Furthermore, as a condition
to receipt of PMA approval, the Company's facilities, procedures and practices
will be subject to pre-approval and ongoing GMP inspections by FDA.
Manufacturers often encounter difficulties in scaling up manufacturing of
new products, including problems involving product yields, quality control and
assurance, component and service availability, adequacy of control policies and
procedures, lack of qualified personnel, compliance with FDA regulations, and
the need for further FDA approval of new manufacturing processes and
facilities. There can be no assurance that manufacturing yields, costs or
quality will not be adversely affected as the Company seeks to increase
production, and any such adverse effect could materially and adversely affect
the Company's business, financial condition and results of operations.
The Company currently purchases certain laser and fiber-optic components
from single sources. Although the Company has identified alternative vendors,
the qualification of additional or replacement vendors for certain components
or services is a lengthy process. There can be no assurance that materials
obtained from outside suppliers will continue to be available in adequate
quantities or at the times required by the Company or that the Company will be
able to locate alternative suppliers on a timely basis. Any significant supply
interruption would have a material adverse effect on the Company's ability to
manufacture its products and, therefore, would materially and adversely affect
the Company's business, financial condition and results of operations. The
Company expects to manufacture its products based on forecasted product orders,
and intends to purchase subassemblies and components prior to receipt of
purchase orders from customers. Lead times for materials and components ordered
by the Company vary significantly, and depend on factors such as the business
practices of the specific supplier, contract terms and general demand for a
component at a given time. As a result, there is a risk of excess or inadequate
inventory if orders do not match forecasts.
DEPENDENCE ON KEY PERSONNEL
The Company's future business and operating results depend in significant
part upon the continued contributions of its key technical and senior
management personnel, including Douglas Murphy-Chutorian, M.D., the Company's
Chief Executive Officer and Richard L. Mueller, Jr., the Company's President
and Chief Operating Officer. The Company maintains key person life insurance
policies on both of these individuals in the amount of $2 million. The
Company's future business and operating results also depend in significant part
upon its ability to attract and retain qualified additional management,
manufacturing, technical, marketing and sales and support personnel for its
operations. Competition for such personnel is intense, and there can be no
assurance that the Company will be successful in attracting or retaining such
personnel. The loss of any key employee, the failure of any key employee to
perform in his or her current position, or the Company's inability to attract
and retain skilled employees, as needed, could materially and adversely affect
the Company's business, financial condition and results of operations.
TRADING MARKET FOR COMMON STOCK; VOLATILITY OF STOCK PRICE
Prior to the Company's initial public offering on May 31, 1996, there was
no public market for the Company's Common Stock. The market price of the Common
Stock has been and is likely to continue to be highly volatile and may be
significantly affected by factors such as actual or anticipated fluctuations in
the Company's operating results, announcements of technological innovations,
new products or new contracts by the Company or its competitors, developments
with respect to patents or proprietary rights, conditions and trends in the
medical device and other
15
technology industries, healthcare reform measures, adoption of new accounting
standards affecting the medical device industry, changes in financial
estimates by securities analysts, general market conditions and other
factors. In addition, the stock market has from time to time experienced
significant price and volume fluctuations that have particularly affected the
market prices for the common stocks of early stage companies. These broad
market fluctuations may materially and adversely affect the market price of
the Common Stock. In the past, following periods of volatility in the market
price of a particular company's securities, securities class action
litigation has often been brought against that company. Such litigation, if
brought against the Company, could result in substantial costs and a
diversion of management's attention and resources.
CONCENTRATION OF SHARE OWNERSHIP
The present directors and executive officers of the Company and their
affiliates beneficially own approximately 38% of the outstanding Common Stock.
As a result, these shareholders will be able to exercise significant influence
over matters requiring shareholder approval, including the election of
directors and approval of significant corporate transactions. Such
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company.
POTENTIAL NEED FOR ADDITIONAL CAPITAL
Although the Company anticipates that its current cash balances, together
with sales of products for investigational use, will be sufficient to meet the
Company's capital requirements through at least March, 1998, there can be no
assurance that the Company will not require additional sources of cash at an
earlier date. This will depend upon the progress of expansion of the Company's
clinical trials and any need for additional trials or other testing of the
Company's products, and the timing of required expenditures. If the Company is
required to obtain additional financing in the future, there can be no
assurance that capital will be available on terms acceptable to the Company, if
at all.
16
ECLIPSE SURGICAL TECHNOLOGIES, INC.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not involved in any material litigation outside of the
ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 23, 1997 the Company held an Annual Meeting of Shareholders.
Shareholders reelected all five directors and ratified the appointment of
Coopers & Lybrand L.L.P. as independent accountants of the Company for the
fiscal year ending December 31, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBIT
See page 18 for Exhibit 11.1, Statement Regarding Computation of Net
Loss Per Share.
b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the six
month period ended June 30, 1997.
17
ECLIPSE SURGICAL TECHNOLOGIES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
ECLIPSE SURGICAL TECHNOLOGIES, INC.
Registrant
Date: August 5, 1997 /s/ Douglas Murphy-Chutorian, M.D.
--------------------------------------------
Douglas Murphy-Chutorian, M.D.
Chief Executive Officer
Date: August 5, 1997 /s/ Barbara A. Dreblow
--------------------------------------------
Barbara A. Dreblow
Chief Financial Officer
(Principal Financial and Accounting Officer)
18
ECLIPSE SURGICAL TECHNOLOGIES, INC.
EXHIBIT INDEX
Exhibit
Number
- -------
11.1 Statement Regarding Computation of Net Loss Per Share.............20
19