FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------- --------------
Commission file number 0-20584
-----------
ABIOMED, INC.
-------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-2743260
-------- ----------
(State of incorporation) (IRS Employer No.)
22 CHERRY HILL DRIVE
DANVERS, MASSACHUSETTS 01923
----------------------------
(Address of principal executive offices, including zip code)
(978) 777-5410
--------------
(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) or 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 [ ]
As of November 2, 1999, there were 8,662,642 shares outstanding of the
registrant's Common Stock, $.01 par value.
ABIOMED, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
---------
Part I - Financial Information:
Item 1. Condensed Consolidated Financial Statements
Consolidated Balance Sheets
September 30, 1999 and March 31, 1999 3-4
Consolidated Statements of Operations
Three and Six Months Ended September 30, 1999
and September 30, 1998 5
Consolidated Statements of Cash Flows
Six Months Ended September 30, 1999 and
September 30, 1998 6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-19
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 20
Part II - Other Information 21-22
Signatures 23
2
ABIOMED, INC. AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS
September 30, March 31,
1999 1999
----------- -----------
Current Assets:
Cash and cash equivalents (Note 7) $ 5,117,314 $ 9,279,210
Short-term marketable securities (Note 8) 8,543,274 8,902,031
Accounts receivable, net of allowance for doubtful accounts
of $210,000 and $204,000 at September 30, 1999 and March 31,
1999, respectively 6,916,380 6,437,225
Inventories (Note 4) 3,559,112 2,895,857
Prepaid expenses and other current assets 578,774 335,403
----------- -----------
Total current assets 24,714,854 27,849,726
----------- -----------
Property and Equipment, at cost:
Machinery and equipment 5,854,020 5,443,930
Furniture and fixtures 1,036,796 575,166
Leasehold improvements 2,026,496 1,728,351
----------- -----------
8,917,312 7,747,447
Less: Accumulated depreciation and amortization 5,109,700 3,884,088
----------- -----------
3,807,612 3,863,359
----------- -----------
Other Assets, net (Notes 2 and 9) 1,136,334 1,268,536
----------- -----------
$29,658,800 $32,981,621
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
3
ABIOMED, INC. AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (continued)
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(unaudited)
LIABILITIES AND STOCKHOLDERS' INVESTMENT
September 30, March 31,
1999 1999
------------ ------------
Current Liabilities:
Accounts payable $ 1,728,964 $ 874,648
Accrued expenses 4,438,945 4,830,620
------------ ------------
Total current liabilities 6,167,909 5,705,268
------------ ------------
Long Term Liabilities 158,775 204,816
Stockholders' Investment (Note 5):
Class B Preferred Stock, $.01 par value-
Authorized 1,000,000 shares
Issued and outstanding-none -- --
Common Stock, $.01 par value-
Authorized 25,000,000 shares
Issued and Outstanding- 8,657,742 shares at
September 30, 1999 and 8,650,802 shares at
March 31, 1999 86,577 86,508
Additional paid-in capital 58,287,537 58,219,906
Accumulated deficit (35,041,998) (31,234,877)
------------ ------------
Total stockholders' investment 23,332,116 27,071,537
------------ ------------
$ 29,658,800 $ 32,981,621
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
4
ABIOMED, INC. AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (continued)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Six Months Ended
-------------------------------- ---------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
----------- ------------ ------------ ------------
Revenues:
Products $ 3,594,818 $ 4,352,983 $ 7,615,342 $ 7,877,493
Contracts 573,140 614,443 2,904,648 2,893,176
----------- ------------ ------------ ------------
4,167,958 4,967,426 10,519,990 10,770,669
----------- ------------ ------------ ------------
Costs and expenses:
Cost of product revenues 1,115,303 1,563,346 2,472,455 3,000,211
Research and development 3,450,526 3,950,444 6,842,159 6,984,224
Selling, general and administrative 2,911,648 2,306,439 5,410,000 4,538,306
----------- ------------ ------------ ------------
7,477,477 7,820,229 14,724,614 14,522,741
----------- ------------ ------------ ------------
Loss from operations (3,309,519) (2,852,803) (4,204,624) (3,752,072)
Interest and other income 240,421 369,791 397,503 727,003
----------- ------------ ------------ ------------
Net loss $(3,069,098) $ (2,483,012) $ (3,807,121) $ (3,025,069)
=========== ============ ============ ============
Net loss per share (Note 6):
Basic $ (0.35) $ (0.29) $ (0.44) $ (0.35)
Diluted $ (0.35) $ (0.29) $ (0.44) $ (0.35)
Weighted average shares outstanding (Note 6):
Basic 8,654,262 8,620,861 8,653,108 8,598,869
Diluted 8,654,262 8,620,861 8,653,108 8,598,869
The accompanying notes are an integral part
of these consolidated financial statements.
5
ABIOMED, INC. AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (continued)
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Six Months Ended
--------------------------------
September 30, September 30,
1999 1998
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,807,121) $ (3,025,069)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities-
Depreciation and amortization 1,330,504 763,872
Changes in assets and liabilities-
Accounts receivable (479,155) 194,661
Inventories (663,255) (882,131)
Prepaid expenses and other assets (216,061) (212,506)
Accounts payable 854,316 (813,063)
Accrued expenses (391,675) 287,609
Long-term liabilities (46,041) 23,865
Liabilities of discontinued operations, net -- (56,778)
----------- ------------
Net cash used in operating activities (3,418,488) (3,719,540)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of short-term marketable securities 7,440,457 18,772,594
Purchases of short-term marketable securities (7,081,700) (15,496,494)
Purchases of property and equipment (1,169,865) (1,174,378)
----------- ------------
Net cash provided by (used in) investing activities (811,108) 2,101,722
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and stock issued
under employee stock purchase plan 67,700 651,506
----------- ------------
Net cash provided by financing activities 67,700 651,506
----------- ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,161,896) (966,312)
CASH AND CASH EQUIVALENTS, EXCLUDING MARKETABLE
SECURITIES, AT BEGINNING OF PERIOD 9,279,210 2,683,151
----------- ------------
CASH AND CASH EQUIVALENTS , EXCLUDING MARKETABLE
SECURITIES, AT END OF PERIOD $ 5,117,314 $ 1,716,839
=========== ============
The accompanying notes are an integral part
of these consolidated financial statements.
6
ABIOMED, INC. AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION (continued)
ITEM 1: FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PREPARATION
Our unaudited consolidated financial statements of ABIOMED, Inc. (the
Company), presented herein have been prepared in accordance with the
instructions to Form 10-Q and do not include all of the information and note
disclosures required by generally accepted accounting principles. These
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in our latest audited financial
statements. These audited statements are contained in our Form 10-K for the year
ended March 31, 1999 and have been filed with the Securities and Exchange
Commission.
In our opinion, the accompanying consolidated financial statements
include all adjustments (consisting only of normal, recurring adjustments)
necessary to summarize fairly the financial position and results of operations
as of September 30, 1999 and for the six months then ended. The results of
operations for the six months ended September 30, 1999 may not be indicative of
the results that may be expected for the full fiscal year.
2. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company, its wholly owned subsidiaries, and the accounts of its majority-owned
subsidiary Abiomed Limited Partnership. All significant intercompany accounts
and transactions have been eliminated in consolidation.
3. ACCOUNTS RECEIVABLE
Accounts receivable includes amounts due from customers, excluding
long-term amounts due from customers under sales-type leases (see Note 9), net
of allowance for doubtful accounts. Accounts receivable also includes amounts
due from government and other third party sources related to our research and
development contracts and grants. These research and development contracts and
grants generally provide for payment on a cost-plus-fixed-fee basis. We seek
funding from third-parties, including government sources, to support our
research and development programs in their early stages and generally limit the
use of our own funds until the scientific risk associated with a potential
discovery or product is reduced. We recognize revenues under government
contracts and grants as work is performed, provided that the government has
appropriated sufficient funds for the work. The Company retains rights to all
technological discoveries and products resulting from these efforts. As of
September 30, 1999, accounts
7
ABIOMED, INC. AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION (continued)
ITEM 1: FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, continued)
3. ACCOUNTS RECEIVABLE (continued)
receivable included approximately $1.9 million due under a government
contract for AbioCor-TM- development scheduled to be collected over the
remaining term of that contract which expires September 30, 2000.
4. INVENTORIES
Inventories include raw materials, work-in-process, and finished goods,
and are priced at the lower of cost (first-in, first-out) or market and consist
of the following:
September 30, March 31,
1999 1999
---------- ----------
Raw materials $1,494,188 $1,403,253
Work-in-process 1,121,670 636,125
Finished goods 943,254 856,479
---------- ----------
$3,559,112 $2,895,857
========== ==========
Finished goods and work-in-process inventories consist of direct material, labor
and overhead.
5. STOCKHOLDERS' INVESTMENT
During the six months ended September 30, 1999, options to purchase
301,000 shares of Common Stock were granted at exercise prices ranging from
$8.875 to $16.000 per share. Options to purchase 21,750 shares were canceled and
2,300 options to purchase shares of Common Stock were exercised at a price of
$8.000 per share during the six month period.
During the six months ended September 30, 1999, 4,640 shares of Common
Stock were issued under the Employee Stock Purchase Plan.
6. NET LOSS PER COMMON SHARE
We calculate net loss per common share in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE, which
requires that we present both basic and diluted net loss per share for all
periods presented. Basic net loss per share
8
ABIOMED, INC. AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION (continued)
ITEM 1: FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, continued)
6. NET LOSS PER COMMON SHARE (continued)
("Basic EPS") is computed by dividing net loss by the weighted average number of
common shares outstanding during the period. Diluted net loss per share
("Diluted EPS") is computed by dividing net loss by the weighted average number
of common and common equivalent shares outstanding during the period using the
treasury stock method. In computing Diluted EPS, common equivalent shares are
not considered dilutive in periods in which a net loss is reported because they
are antidilutive. Accordingly, Basic EPS and Diluted EPS are the same for the
periods presented. The number of equivalent shares that otherwise would have
been dilutive for the three and six months ended September 30, 1999 are 275,630
and 283,768, respectively.
7. CASH AND CASH EQUIVALENTS
We classify marketable securities, with a maturity date of 90 days or
less at the time of purchase, as a cash equivalent.
8. MARKETABLE SECURITIES
We classify any security, with a maturity date of greater than 90 days
at the time of purchase, as marketable securities and classify marketable
securities with a maturity date of greater than one year from the balance sheet
date as long-term investments. At September 30, 1999 these marketable securities
consisted primarily of government grade securities and high-grade corporate
bonds. The amortized cost of these securities approximated market value.
9. OTHER ASSETS
Other assets include approximately $130,000 in unamortized purchase
cost of the Company's majority interest of the Abiomed Limited Partnership (the
Partnership). The interest in the Partnership is being amortized over its useful
life of five years. The Partnership was formed in March 1985 and provided
initial funding for the design and development of certain of our products.
Through August 3, 2000, a royalty is owed to the Partnership equal to
5.5% of certain revenues from these products. Because the Company owns 61.7% of
the Partnership, the net royalty expense to the Company is approximately 2.1% of
these product revenues. This royalty formula is subject to certain maximum
amounts and to certain additional
9
ABIOMED, INC. AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION (continued)
ITEM 1: FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, continued)
9. OTHER ASSETS (continued)
adjustments in the event that the Company sells the technology. The Partnership
is inactive except with respect to receiving and distributing proceeds from
these royalty rights.
Also included in other assets are long-term accounts receivable related
to sales-type leases. The terms of these non-cancelable leases are one to three
years. As of September 30, 1999, the total amount due from sales-type leases was
$1,946,000 of which $746,000 was classified as long-term receivables. As of
March 31, 1999, the total amount due from these sales-type leases was $2,263,000
of which $892,000 was classified as long-term receivables.
Other assets also include the unamortized cost of a number of awarded
and pending patents. As of September 30, 1999, the unamortized cost of these
patents approximated $261,000. As of March 31, 1999, the unamortized cost of
these patents approximated $176,000.
10. RECLASSIFICATION OF PRIOR YEAR AMOUNTS
Certain prior year financial statement information has been
reclassified to be consistent with the current year presentation.
11. SEGMENT AND ENTERPRISE WIDE DISCLOSURES
We believe that the Company operates in one business segment; the
research, development, and sale of medical devices, with a primary focus on
cardiac assist and heart replacement systems.
10
ABIOMED, INC. AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION (continued)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999
NET LOSS
Net loss for the three months ended September 30, 1999, was
approximately $3,069,000, or $0.35 per share. This compares to a net loss of
approximately $2,483,000, or $0.29 per share, in the same period of the previous
year. The net losses for both three month periods were primarily attributable to
costs incurred for the development and pre-clinical testing costs associated
with the AbioCor-TM- implantable replacement heart ("AbioCor").
REVENUES
Product revenues decreased by 17% to $3.6 million in the three months
ended September 30, 1999 from $4.4 million in the three months ended September
30, 1998. The decline in product revenues is primarily attributable to a
reduction in unit sales of BVS systems to new hospital customers partially
offset by increased unit sales and increased average selling prices of BVS
disposable blood pumps reordered by and sold to existing customers. We believe
that the decline in sales to new customers when compared to the prior year was
largely a result of a decision made by the Company at the beginning of its
current fiscal year to shift certain of its sales representatives away from
focusing on BVS system sales to new customers as their primary responsibility to
increasing support of existing customers in an effort to increase reorders of
higher margin BVS blood pumps. Reorders of the Company's blood pumps increased
by 18% during the second quarter of fiscal 2000 when compared to the same period
of the prior year. Domestic sales accounted for 96% of total product revenues in
the three months ended September 30, 1999 compared to 99% for the same period a
year earlier.
Contract and grant revenues were approximately $573,000 in the quarter
ended September 30, 1999 and $614,000 for the same period of the prior year. The
contract and grant revenues in both periods were primarily derived from the
Company's AbioBooster-TM- contract and various government grants. None of the
contract and grant revenue recognized in the three months ended September 30,
1999 and in the three months ended September 30, 1998 was derived from the
Company's AbioCor government contract. Funds allotted by the government for that
contract during fiscal years 2000 and 1999 were fully recognized in the
Company's first fiscal quarters of both years as a result of the accelerated
development of the AbioCor. The Company accounts for revenue under its
government contracts and grants as work
11
ABIOMED, INC. AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION (continued)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
REVENUES (continued)
is performed, provided that the government has appropriated sufficient funds for
the work. Through September 30, 1999, the government has appropriated all of the
$8.5 million AbioCor contract amount, including the $1.8 million appropriated
and recognized as revenue during the quarter ended June 30, 1999. No amount
remains to be recognized under the AbioCor contract as of September 30, 1999.
As of September 30, 1999, the Company's total backlog of research and
development contracts and grants was $2.7 million, including $1.1 million for
AbioBooster-TM- research and development. Funding for the Company's government
research and development contracts is subject to government appropriation, and
all of these contracts contain provisions that make them terminable at the
convenience of the government. The Company retains rights to all technological
discoveries and products resulting from these efforts.
COSTS AND EXPENSES
Total costs and expenses decreased to $7.5 million, 179% of total
revenues, for the three months ended September 30, 1999, from $7.8 million, 157%
of total revenues, for the three months ended September 30, 1998. The decrease
in total costs was predominately the result of decreased research and
development and cost of product revenues partially offset by increased selling,
general and administrative expenses. Total costs and expenses increased as a
percentage of total revenue due to the decline in revenues as a large portion of
sales, general and administrative charges represent fixed costs.
Cost of product revenues as a percentage of product revenues were 31%
for the three months ended September 30, 1999 and 36% for the three months ended
September 30, 1998. The majority of this decrease in cost of products sold as a
percentage of product revenues was attributable to higher average selling prices
for BVS blood pumps during the quarter ended September 30, 1999 compared to the
same period of the prior year and to an increase in the proportion of higher
margin BVS blood pumps sales relative to lower margin BVS console sales.
Research and development expenses decreased by 13% to $3.5 million, 83%
of total revenues, for the three months ended September 30, 1999, from $4.0
million, 80% of total revenues for the three months ended September 30, 1998.
The decrease primarily reflects the timing of expenditures for materials used in
the manufacture of AbioCor devices used in pre-clinical testing. Research and
development expenses during the three months ended September 30, 1999 included
12
ABIOMED, INC. AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION (continued)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
COSTS AND EXPENSES (continued)
$2.4 million of expenses incurred in connection with the Company's development
activities for the AbioCor, compared to $3.0 million for the same period of the
prior year. We anticipate that AbioCor expenses will increase in coming fiscal
quarters as materials are scheduled to be received in order for the Company to
manufacture AbioCor systems for various testing purposes.
Selling, general and administrative expenses increased by 26% to
$2.9 million, 70% of total revenues, for the three months ended September 30,
1999, from $2.3 million, 46% of total revenues, for the three months ended
September 30, 1998. This increase is primarily attributed to increased legal
expenses and to increased marketing activities.
INTEREST AND OTHER INCOME
Interest and other income consists primarily of interest on the
Company's investment balances, net of interest and other expenses. Interest and
other income decreased to $240,000 for the three months ended September 30, 1999
from $370,000 for the three months ended September 30, 1998. This decrease was
primarily due to lower average funds available for investment.
Income taxes incurred during these periods were not material and the
Company continues to have significant net tax operating loss and tax credit
carryforwards.
13
ABIOMED, INC. AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION (continued)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
SIX MONTHS ENDED SEPTEMBER 30, 1999
NET LOSS
Net loss for the six months ended September 30, 1999, was approximately
$3,807,000, or $0.44 per share. This compares to a net loss of approximately
$3,025,000, or $0.35 per share, for the same period of the previous year. The
losses for both six month periods are primarily attributable to costs incurred
for the development and pre-clinical testing costs associated with the AbioCor
implantable replacement heart.
REVENUES
Product revenues decreased by 3% to $7.6 million in the six months
ended September 30, 1999 from $7.9 million in the six months ended September 30,
1998. The decline in product revenues is primarily attributable to a reduction
in unit sales of BVS systems sold to new customers partially offset by increased
units sales and increased average selling prices of BVS disposable blood pumps
reordered by and sold to existing customers. We believe that the decline in
sales to new customers was largely a result of a decision made by the Company at
the beginning of its current fiscal year to shift certain of its sales
representatives away from focusing on sales to new customers as their primary
responsibility to increasing support of existing customers in an effort to
increase reorders of higher margin BVS blood pumps. Reorders of BVS blood pumps
increased by 11% during the six months ended September 30, 1999 compared to the
same period of the prior year. Domestic sales accounted for 97% of total product
revenue in the six months ended September 30, 1999, compared to 96% for the same
period a year earlier.
Contract and grant revenues were $2.9 million during the first six
months of both fiscal 2000 and fiscal 1999. Approximately $1.8 million of the
contract and grant revenue recognized in both years was derived from the
Company's AbioCor government contract. The remaining $1.1 million in contract
and grant revenue recorded during the six months ended September 30, 1999 and
September 30, 1998 was primarily derived from the Company's AbioBooster contract
and other government grants.
14
ABIOMED, INC. AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION (continued)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
COSTS AND EXPENSES
Total costs and expenses increased to $14.7 million, 140% of total
revenues, for the six months ended September 30, 1999, from $14.5 million, 135%
of total revenues, for the six months ended September 30, 1998. The increase is
primarily due to increased development activities related to new BVS products
and enhancements and increased sales, general and administrative expenses.
Cost of product revenues as a percentage of product revenues were 32%
for the six months ended September 30, 1999 and 38% for the six months ended
September 30, 1998. The majority of this decrease in cost of products sold as a
percentage of product revenues was attributable to higher average selling prices
for BVS blood pumps during the six months ended September 30, 1999 compared to
the same period of the prior year and to an increase in the proportion of higher
margin BVS blood pumps sold relative to lower margin BVS console sales.
Research and development expenses were $6.8 million for the six months
ended September 30, 1999, compared to $7.0 million for the same period of the
previous year. Expenditures remained consistent at 65% of total revenues for
each six month period. During the six months ended September 30, 1999, lower
spending for the development of the AbioCor was offset by increased spending on
new products and enhancements to the BVS. Research and development expenses
during the six months ended September 30, 1999 included $4.7 million of expenses
incurred in connection with our development activities for the AbioCor, compared
to $5.2 million for the same period of the prior year.
Selling, general and administrative expenses increased by 19% to $5.4
million, 51% of total revenues, for the six months ended September 30, 1999,
compared to $4.5 million, 42% of total revenues, for the six months ended
September 30, 1998. This increase is primarily attributed to increased selling
and marketing expenditures as a result of our implementing new programs designed
to improve sales of our disposable blood pumps, and increased legal expenses.
INTEREST AND OTHER INCOME
Interest and other income consists primarily of interest on the
Company's investment balances, net of interest and other expenses. Interest and
other income decreased to $398,000 for the six months
15
ABIOMED, INC. AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION (continued)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
INTEREST AND OTHER INCOME
ended September 30, 1999 from $727,000 for the six months ended September 30,
1998. This decrease was primarily due to lower average funds available for
investment.
Income taxes incurred during these periods were not material and the
Company continues to have significant net tax operating loss and tax credit
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company's balance in cash and short-term
marketable securities was $13.7 million. The Company also has a $3 million line
of credit from a bank that expires on October 13, 2000, and which was entirely
available at September 30, 1999.
In the six months ended September 30, 1999, operating activities used
cash of $3,418,000. Net cash used by operating activities during this period
resulted from a net loss of $3,807,000 and increases in accounts receivable,
inventory, and prepaid expenses of $479,000, $663,000, and $216,000,
respectively. It also resulted from decreases in accrued expenses and long-term
liabilities of $392,000 and $46,000, respectively. These uses of cash were
partially offset by increases in trade payables of $854,000 and noncash charges
for depreciation and amortization of $1,331,000 included in the net loss. The
increase in inventory is primarily attributable to lower than planned product
sales.
During the six months ended September 30, 1999, investing activities
used $811,000 of cash. Cash used in these activities included purchases of
capital equipment and expenditures for leasehold improvements of $1,170,000,
made primarily in connection with building out and furnishing the Company's new
79,000 square foot facility located in Danvers, Massachusetts. These capital
expenditures were partially offset by $359,000 of cash provided from the sale of
short-term marketable securities, net of purchases of similar securities.
During the six months ended September 30, 1999, financing activities
provided $68,000 of cash from the exercise of employee stock options and from
employee purchases of Common Stock under the Employee Stock Purchase Plan.
16
ABIOMED, INC. AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION (continued)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
Although the Company does not currently have significant capital
commitments, we believe that we will continue to make significant investments
over the next several years to support the development and commercialization of
new products. In addition, we estimate that we will incur additional costs of
approximately $1,000,000 in 1999 and 2000 to complete construction,
qualification and occupancy of the larger manufacturing area in the Company's
new facility to be used in the manufacture of BVS and AbioCor devices.
On October 14, 1999, the Company entered into an agreement with its
primary bank whereby it will be able to draw up to $1.2 million in term loans
through March 31, 2000 for the acquisition of manufacturing equipment and
leasehold improvements. These promissory notes are subject to various financing
covenants, secured by the acquired equipment and are to be repaid in equal
monthly installments through September 1, 2003. These notes will bear interest
at either the Prime Rate or LIBOR Rate, at the Company's election. Although no
funds have been drawn on this loan facility as of September 30, 1999,
approximately $250,000 expended for leasehold improvements through that date
will be included in the first term loan that we anticipate will be executed in
November 1999. These notes are incremental to and separate from the Company's $3
million line of credit with this bank.
We believe that the Company's revenue and existing resources will be
sufficient to fund our planned operations, including the planned increases in
our internally funded AbioCor and new BVS development and product extension
efforts, for at least the next twelve months. However, we estimate that it will
require significant additional funds in order to complete the development,
conduct clinical trials, and achieve regulatory approvals of the AbioCor and
other products under development over the next several years.
YEAR 2000 READINESS DISCLOSURE
As the year 2000 approaches, it is generally anticipated that
computers, software and other equipment utilizing microprocessors may be unable
to function properly. We have evaluated this potential issue with respect to our
products, our financial and management information systems and our suppliers.
With respect to the our products, the software controlling the BVS drive console
includes internal counters, but the BVS operation is not related in any way to a
specific calendar date. Accordingly, we believe that the BVS will not need any
repair or modification with regard to the Year 2000 issue.
17
ABIOMED, INC. AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION (continued)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
YEAR 2000 READINESS DISCLOSURE (continued)
With respect to the our financial and management information systems,
we successfully installed and tested a year 2000 upgrade to our primary system
and have completed an assessment of all personal computers ("PCs") and installed
applications. All significant systems have been upgraded or replaced where
necessary. Expenditures for new PCs, software applications, and operating
systems under our Year 2000 plan have amounted to less than $100,000, with no
significant costs remaining before the start of calendar year 2000. We are
completing an assessment of key suppliers begun in fiscal 1999 and have
increased safety stocks of materials inventory where a prolonged loss of
material deliveries would have an adverse impact on our business, financial
condition and results of operations. We have also made inquiries to assess key
service providers such as financial institutions, our payroll service provider,
and our retirement plan administrator as to their year 2000 readiness and have
received assurances that the vendors' critical systems have been updated,
tested, and found to be compliant.
Although we do not expect Year 2000 issues to have a material impact on
our business or future results of operations, there can be no assurance that
there will not be interruptions of operations or other limitations of system
functionality or that we may incur significant costs to avoid such interruptions
or limitations. To the extent that we can not eliminate all Year 2000 issues,
the most reasonably likely worst case year 2000 scenario is systemic failures
beyond the control of the Company, such as a prolonged telecommunications or
electrical failure, or a general disruption in supplies and services provided to
the Company which could have a material adverse effect on the our business,
results of operations and financial condition.
RISK FACTORS WHICH MAY AFFECT FUTURE RESULTS
This document contains forward looking statements, including statements
regarding the anticipated timing and cost of our AbioCor development
activities, enhancements to be made to the BVS, planned expansion of our
manufacturing facilities, adequacy of existing resources and overcoming Year
2000 related issues. The Company's actual results, including our AbioCor
development, BVS new products and enhancements, facility expansion, adequacy
of resources and overcoming Year 2000 issues may differ materially based on a
number of factors, both known and unknown, including: uncertainty of product
development and clinical trials, complex manufacturing, high quality
requirements, unproven demonstration of required reliability of products
under development, dependence on key personnel, risks associated with growing
number of
18
ABIOMED, INC. AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION (continued)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
RISK FACTORS WHICH MAY AFFECT FUTURE RESULTS (continued)
employees, inability to recruit required human resources on schedule,
competition and technological change, government regulations including the FDA
and other regulatory agencies, reliance on government contracts, dependence on
limited sources of supply, future capital needs and uncertainty of additional
funding, dependence on third-party reimbursement, potential inadequacy of
product liability insurance, dependence on patents and proprietary rights and
other risks detailed in our Form 10-K for the year ended March 31, 1999 which
was filed with the Securities and Exchange Commission. Investors are cautioned
that all such statements involve risks and uncertainties. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date of this document. We undertake no obligation to publicly
release the results of any revisions to these forward-looking statements that
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
19
ABIOMED, INC. AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION (continued)
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
The Company does not use derivative financial instruments for
speculative or trading purposes. However, it is exposed to market risk
related to changes in interest rates. The Company maintains an investment
portfolio consisting mainly of federal agency obligations, state and
municipal bonds, and U.S. Treasury notes with maturities of one year or less.
These held-to-maturity securities are subject to interest rate risk and will
fall in value if market interest rates increase. If market interest rates
were to increase immediately and uniformly by 10 percent from levels at
September 30, 1999, the fair market value of the portfolio would decline by
an immaterial amount. The Company has the ability to hold the majority of its
fixed income investments until maturity, and therefore the Company would not
expect its operating results or cash flows to be affected to any significant
degree by the effect of a sudden change in market interest rates on its
securities portfolio.
20
ABIOMED, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On January 20, 1998, World Heart Corporation and the Ottawa Heart
Institute Research Corporation filed a complaint in the United States District
Court for the District of Delaware. The complaint seeks damages and injunctive
relief for alleged breaches of contract, misappropriation of trade secrets,
conversion of trade secrets and patent infringement by the Company. These claims
and allegations relate to certain technology used in its transcutaneous energy
transmission system that is a component of the AbioCor under development by the
Company.
On May 7, 1999, the Company filed a motion requesting leave of court to
assert a counterclaim alleging that World Heart Corporation and Ottawa Heart
Institute misappropriated the Company's trade secrets.
On October 20, 1999, World Heart Corporation informed the Company that
their discovery has identified no infringement by the Company of the patent held
by the Ottawa Heart Institute Research Corporation and that their patent
infringement claims and allegations against the Company will be dropped while
World Heart Corporation and the Ottawa Heart Institute Research Corporation
continue to seek evidence regarding their trade secret and breach of contract
allegations.
The Company does not believe that it is infringing nor has ever
infringed any patent, trade secret or other intellectual property rights of the
plaintiffs and is vigorously defending this position. The Company cannot assure
that it will prevail in the defense of the remaining claims and allegation and
the Company cannot assure that it will prevail in its claims or allegations
against World Heart Corporation and the Ottawa Heart Institute Research
Corporation. Further evaluation and discovery is being conducted by all parties
involved. Unless otherwise resolved, the claims by the plaintiff against the
Company are scheduled for trial in early 2000.
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
21
ABIOMED, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION (continued)
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders held on August 11,
1999, the stockholders approved the following:
a) Elected two persons to serve as Class I directors as follows:
Director Votes for Votes Withheld
-------- --------- --------------
David M. Lederman 8,119,356 42,600
Desmond H. O'Connell, Jr. 8,120,756 41,200
b) A proposal to amend the Company's 1989 Non-Qualified Stock Option
Plan. The proposal received 7,891,228 votes for and 172,149 votes
against. There were 34,208 abstentions and 64,371 non-voting.
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
Exhibit 10
a) Letter of Agreement between the Company and Fleet National Bank,
dated as of October 14, 1999 with respect to Demand and Term Loans.
b) Form of Change of Control Agreement.*
c) Schedule related to Change of Control Agreement.*
Exhibit 27 - Financial Data Schedule
b) REPORTS ON FORM 8-K
None
* Compensatory plan or arrangement.
22
ABIOMED, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION (continued)
- --------------------------------------------------------------------------------
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.
ABIOMED, Inc.
Date: November 9, 1999 /s/ David M. Lederman
-----------------------------
David M. Lederman
CEO and President
Date: November 9, 1999 /s/ John F. Thero
-----------------------------
John F. Thero
Senior Vice President Finance
and Treasurer
Chief Financial Officer
Principal Accounting Officer
23