===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the
- Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
COMMISSION FILE NO. 0-18602
ATS MEDICAL, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1595629
(state or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3905 ANNAPOLIS LANE, SUITE 105 55447
MINNEAPOLIS, MINNESOTA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (763) 553-7736
Former name, if changed since last report: N/A
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
----- -----
The number of shares outstanding of each of the registrant's classes of
common stock as of October 31, 2001 was:
Common Stock $.01 par value 22,203,940 shares
===============================================================================
ATS MEDICAL, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Statements of Financial Position - 3
September 30, 2001 (unaudited) and
December 31, 2000
Statements of Operations - 4
Three and Nine Months Ended September 30, 2001 and
2000 (unaudited)
Statements of Cash Flows - 5
Nine Months Ended September 30, 2001 and
2000 (unaudited)
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of 7
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 12
Market Risk
PART II. OTHER INFORMATION 13
Signatures 14
ATS MEDICAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------------ -----------------
ASSETS (Unaudited) (Note)
Current assets:
Cash and cash equivalents $ 7,700,766 $ 14,804,195
Short-term investments 12,278,636 16,273,270
----------- ------------
19,979,402 31,077,465
Accounts receivable, less allowance of $440,000
in 2001 and $425,000 in 2000 7,172,416 6,581,315
Inventories 54,803,653 51,488,128
Prepaid expenses 314,768 615,680
----------- ------------
Total current assets 82,270,239 89,762,588
Furniture, machinery and equipment, net 6,809,502 4,167,326
Other assets 8,435,925 8,423,862
----------- ------------
Total assets $97,515,666 $102,353,776
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,212,200 $ 3,484,674
Accrued payroll and expenses 601,011 343,997
----------- ------------
Total current liabilities 2,813,211 3,828,671
Long-term debt 0 0
Shareholders' equity:
Common Stock, $.01 par value:
Authorized 40,000,000 shares; Issued and
outstanding 22,183,270 and 22,097,501 shares at
Sept 30, 2001 and Dec 31, 2000, respectively 221,833 220,975
Additional paid-in capital 111,287,851 110,813,969
Accumulated deficit (16,807,229) (12,509,839)
----------- ------------
Total shareholders' equity 94,702,455 98,525,105
----------- ------------
Total liabilities and shareholders' equity $97,515,666 $102,353,776
=========== ============
Note: The balance sheet at December 31, 2000 has been derived from the
audited financial Statements at that date but does not include all
of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See notes to condensed financial statements.
ATS MEDICAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended September 30, Nine months ended September 30,
----------------------------------- -------------------------------------
2001 2000 2001 2000
------------------- -------------- ----------------- -----------------
Net sales $ 3,744,095 $ 3,707,529 $ 12,412,890 $10,539,064
Less cost of goods sold 3,252,971 2,432,834 8,733,319 6,822,605
------------ ------------ ------------ -----------
Gross profit 491,124 1,274,695 3,679,571 3,716,459
Expenses:
Research, development and engineering 1,102,737 500,592 2,951,613 1,440,324
Sales and marketing 1,304,415 208,226 3,603,502 615,962
General and administrative 658,085 900,816 2,327,372 2,189,080
------------ ------------ ------------ -----------
Total expenses 3,065,237 1,609,634 8,882,487 4,245,366
------------ ------------ ------------ -----------
Operating loss (2,574,113) (334,939) (5,202,916) (528,907)
Interest income 199,803 542,666 905,526 903,485
------------ ------------ ------------ -----------
Net income (loss) ($2,374,310) $ 207,727 ($4,297,390) $ 374,578
============ ============ ============ ===========
Net income (loss) per share:
Basic ($0.11) $0.01 ($0.19) $0.02
Diluted ($0.11) $0.01 ($0.19) $0.02
Weighted average number of shares outstanding:
Basic 22,179,009 21,070,721 22,145,413 19,350,934
Diluted 22,179,009 22,080,987 22,145,413 20,146,751
ATS MEDICAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2001 2000
------------ -------------
OPERATING ACTIVITIES
Net income (loss) $(4,297,390) $374,578
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation 504,887 211,613
Loss on disposal of equipment 11,307 0
Changes in operating assets and liabilities:
Accounts receivable (591,101) 801,980
Prepaid expenses 300,912 176,068
Other assets (12,063) (13,128)
Inventories (3,315,525) (9,704,054)
Accounts payable and accrued expenses (1,015,460) 257,872
----------- -----------
Net cash used in operating activities (8,414,433) (7,895,071)
INVESTING ACTIVITIES
Purchase of short-term investments (16,691,055) (23,078,613)
Sale of short-term investments 20,685,689 7,472,905
Purchases of furniture, machinery and equipment (3,158,370) (650,532)
----------- -----------
Net cash provided by (used in) investing activities 836,264 (16,256,240)
FINANCING ACTIVITIES
Net proceeds from sale of common stock 474,740 38,907,388
----------- -----------
Net cash provided by financing activities 474,740 38,907,388
Effect of exchange rate changes on cash 0 (43,494)
----------- -----------
Increase (decrease) in cash and cash equivalents (7,103,429) 14,712,583
Cash and cash equivalents at beginning of period 14,804,195 4,030,641
----------- -----------
Cash and cash equivalents at end of period $ 7,700,766 $18,743,224
=========== ===========
See notes to condensed financial statements.
ATS MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2001
Note A - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and nine months ended September 30, 2001 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2001.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
We manufacture and market a mechanical bileaflet heart valve with a unique pivot
design. Our heart valve is used to treat heart valve failure caused by the
natural aging process, rheumatic heart disease and congenital defects. On
October 13, 2000, the FDA approved our Pre-Market Approval (PMA) application to
sell the ATS heart valve in the United States. We have received regulatory
approvals to market the ATS heart valve in several international markets,
principally Europe, Japan and Australia.
We commenced selling the ATS heart valve in international markets in 1992. We
sell the valve to independent distributors with assigned territories (generally
a specific country or region) who in turn sell the valve to hospitals or
clinics. Sales to our international distributors are denominated in U.S. dollars
so currency risk is borne by the distributor; however, as the dollar increases
in value relative to the distributor's local currency, the cost of the valve
increases for the distributor even though ATS does not change the selling price.
Since receiving FDA approval to market the ATS heart valve in the United States,
we have hired a direct sales force to sell the ATS heart valve in the United
States.
We currently purchase all of the pyrolytic carbon components for the ATS heart
valve from Sulzer-Carbomedics, Inc, ("Carbomedics") pursuant to a multi-year
supply agreement. The cost of the pyrolytic carbon components represents
approximately 80% of the total cost of the ATS heart valve. Under the supply
agreement, the cost of the pyrolytic carbon components has varied according to
annual volume purchases and is adjusted annually by reference to increases in
the U.S. Department of Labor Employment Cost Index. In December 1999, we
renegotiated the supply agreement with Carbomedics. The supply agreement, as
amended, provides for significant reductions in our minimum purchase
requirements and unit costs as of January 1, 2001. In addition, under a new
carbon agreement, Carbomedics has granted us an exclusive right to use its
carbon coating technology to manufacture pyrolytic carbon components for the ATS
heart valve. Carbomedics also has agreed to assist us in establishing our own
pyrolytic carbon component manufacturing facility. In return, we have agreed to
pay a license fee totaling $41 million over seven years, subject to attainment
of specified milestones. In December 2000, we again amended the supply agreement
to purchase additional valves in 2001 and eliminate the minimum units for 2007.
Results of Operations
Net sales for the quarter ended September 30, 2001 increased 1% to $3,744,095
compared to $3,707,529 for the quarter ended September 30, 2000, which
represented a gain of 585% in sales dollars in the United States, and a 17%
decrease in international sales. The large increase in the United States sales
is due to our receipt of FDA approval in October 2000. In the nine months ended
September 30, 2000, our sales in the U.S. were only to centers participating in
our clinical study of the valve. In the nine months ended September 30, 2001 we
were able to sell to any U.S. hospital. U.S. sales for the quarter ended
September 30, 2001 increased 29% over U.S. sales for the quarter ended June 30,
2001. Unit sales for the quarter ended September 30, 2001 declined by 8%
compared to quarter ended September 30, 2000. During the quarter ended
September 30, 2001 the euro continued to trade at low levels in exchange value
against the U.S. dollar.
Net sales for the nine months ended September 30, 2001 totaled $12,412,890
compared to $10,539,064 for the nine months ended September 30, 2000, an
increase of 18%. Unit sales for the nine months ended September 30, 2001
increased by 10% compared to the nine months ended September 30, 2000. The
average selling price of the ATS valve increased approximately 10% for the
quarter ended September 30, 2001 compared to the quarter ended September 30,
2000 and increased approximately 8% for the nine months ended September 30, 2001
compared to the nine months ended September 30, 2000. In the U.S. market, ATS
reports the selling price to the hospital. In non-U.S. markets, ATS reports the
selling price to the distributor. As U.S. sales increase as a percentage of
overall sales, the overall average selling price may increase, even though the
average selling prices in some international markets may be steady or declining.
Hospital administrators continue to apply pressure for lower prices, and the
willingness of competitors to reduce prices will continue to put pressure on
revenue growth and margins.
In the United States, we have established a direct sales force to sell the
valve. Valves are consigned to hospitals desiring to use the ATS valve and a
sale is recorded once the valve is implanted. We had 19 sales people and three
regional managers located in the United States at September 30, 2001. The launch
of a product of critical importance to patients such as a heart valve is an
ongoing process. The "sales cycle" for new accounts can take from one to three
months. We feel we have a superior product, however our competitors have larger
sales staffs and greater financial resources so they are currently able to reach
more potential customers. The rate at which we open new accounts and realize new
implants is difficult to forecast from quarter to quarter.
Cost of sales for the three months ended September 30, 2001 totaled $3,252,971
or 87% of sales compared to $2,432,834 or 66% of sales for the three months
ended September 30, 2000. Cost of sales for the nine months ended September 30,
2001 totaled $8,733,319 or 70% of sales compared to $6,822,605 or 65% of sales
for the nine months ended September 30, 2000. During the quarter ended September
30, 2001, ATS recognized a $1,000,000 charge to cost of goods sold in its
statement of operations to write a portion of its inventories down to the lower
of cost or market for units to be sold in certain price sensitive markets. ATS
uses the first-in first-out ("FIFO") method of accounting for inventory. All of
our valves sold in the third quarter of 2001 were made with carbon purchased in
1998 (under FIFO).
Gross profit totaled $491,124 for the quarter ended September 30, 2001 or 13% of
sales, compared to gross profit of $1,274,695 or 34% of sales for quarter ended
September 30, 2000. For the nine months ended September 30, 2001 gross profit
totaled $3,679,571 or 30% of sales compared to gross profit for the nine months
ended September 30, 2000 of $3,716,459 or 35% of sales. The average selling
price per unit increased in the first nine months of 2001 compared to the first
nine months of 2000 and while the average cost per unit sold increased slightly,
gross margin was able to increase, before reflecting the charge for the lower of
cost or market adjustment.
Research, development and engineering expenses totaled $1,102,737 for the
quarter ended September 30, 2001 versus $500,592 for the quarter ended September
30, 2000, an increase of
120%. For the nine months ended September 30, 2001 research, development and
engineering expenses totaled $2,951,613 an increase of 105% over the $1,440,324
research, development and engineering expense reported for the nine months ended
September 30, 2000. Most of the increase is due to spending on our own carbon
manufacturing facility. Our focus during the nine months ended September 30,
2001 was making qualification and verification coating runs, training ATS
personnel on the new carbon manufacturing equipment installed during the period,
and documenting procedures.
Sales and marketing expenses increased as expected in the quarter ended
September 30, 2001 to $1,304,415 compared to $208,226 in the quarter ended
September 30, 2000. For the nine months ended September 30, 2001 sales and
marketing expenses totaled $3,603,502 compared to $615,962 for nine months ended
September 30, 2000. The addition of 22 sales people and increased marketing
expenses for the launch of the ATS valve in the United States in 2001 were
primarily responsible for the change.
General and administrative expenses totaled $658,085 for the three months ended
September 30, 2001, a decrease from the $900,816 reported for the three months
ended September 30, 2000. The decrease was due in part to the reversal of an
accrual in the amount of $115,000 for a management bonus program in the three
months ended September 30, 2001. For the nine months ended September 30, 2001
general and administrative expenses totaled $2,327,372, an increase of 6% over
the $2,189,080 general and administrative expense reported for the nine months
ended September 30, 2000. We had 122 employees at September 30, 2001 compared to
92 employees at September 30, 2000. The addition of support personnel in
shipping and other administrative functions is one of the major causes of the
increase.
Interest income totaled $199,803 for the quarter ended September 30, 2001
compared to $542,666 for the quarter ended September 30, 2000. Interest income
for the nine months ended September 30, 2001 totaled $905,526 compared to
$903,485 for the nine months ended September 30, 2000. The decrease in interest
income in the third quarter of 2001 was the result of lower average investable
cash balances during the third quarter of 2001 and lower interest rates.
ATS recorded a net loss of $2,374,310 or ($0.11) per share for the quarter ended
September 30, 2001 compared to net income of $207,727 or $0.01 per share for the
quarter ended September 30, 2000. For the nine months ended September 30, 2001,
ATS recorded a net loss of $4,297,390 or ($0.19) per share compared to net
income of $374,578 or $0.02 per share for the nine months ended September 30,
2000. The increase in research and development spending and the costs associated
with the direct sales force are the major factors in the losses for the quarter
and nine months ended September 30, 2001. We are working to increase sales,
particularly in the United States, in order to return to profitability in future
quarters. Also, in an effort to improve our financial performance, we are taking
steps to reduce expenses, including reducing excess product capacity. Unless
sales increase, we may make further production capacity reductions.
ATS has accumulated approximately $16.5 million of net operating loss
carryforwards for U.S. tax purposes. ATS believes that its ability to fully
utilize the existing net operating loss carryforwards will be restricted to
approximately $3 million per year. ATS incurred losses in the first three
quarters of 2001 and did not accrue any tax benefits for such losses.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments decreased by $11,098,063 from
$31,077,465 at December 31, 2000 to $19,979,402 at September 30, 2001. ATS will
continue to use more cash than is generated from operations in 2001, as it
expands its direct sales force, purchases carbon components from Carbomedics and
continues to equip, test and qualify its carbon manufacturing facility.
During 2001, ATS contracted to purchase $12.0 million of components in
accordance with the terms of its amended long-term supply agreement with
Carbomedics (the "Supply Agreement"). These purchases under the Supply Agreement
are not tied to sales of the ATS valve. We do not expect sales of the valve to
exceed the minimum purchase requirements under the Supply Agreement through
2002.
In December 1999, ATS renegotiated its Supply Agreement with Carbomedics. The
Supply Agreement, as amended, provides for significant reductions in our minimum
purchase requirements and unit costs for the years 2001 through 2006. ATS
estimates that its minimum purchase requirements under the Supply Agreement from
2002 through 2006 will total approximately $27 million. Under the new carbon
agreement entered into in December 1999, ATS agreed to pay Carbomedics a license
fee of $41 million in installments over the next seven years. In addition to
granting ATS an exclusive worldwide right and license to use its carbon coating
technology to manufacture pyrolytic carbon components for the valve under this
agreement, Carbomedics agreed to assist ATS in designing, building and
commencing operations in its own pyrolytic carbon production facility in
Minneapolis, Minnesota.
Accounts receivable increased from $6,581,315 at December 31, 2000 to $7,172,416
at September 30, 2001. Our sales in international markets have been in U.S.
dollars. The U.S. dollar has been gaining in exchange value with most
international currencies and, in particular, the Euro for nearly three years.
Days Sales Outstanding in accounts receivable were 159 days at September 30,
2001 compared to 165 days at December 31, 2000.
Current liabilities decreased from $3,828,671 at December 31, 2000 to $2,813,211
at September 30, 2001. The majority of the decrease is in accounts payable and
is related to the amount owing to Carbomedics under the Supply Agreement.
Based upon the current rate of sales, the anticipated purchase obligations under
the Supply Agreement, the license fee payments under the carbon agreement, the
expenses associated with establishing a direct sales force in the United States
and other expected expenses, ATS anticipates that cash and marketable securities
on hand at September 30, 2001 should meet its requirements through 2002.
Depending on the rate of increase in sales, ATS may need additional capital, and
if it does, ATS cannot be certain that additional capital will be available or
that, if available, it will be on terms favorable to ATS.
ATS does not use derivatives and therefore does not face market risk from
currency or interest rate changes on these types of instruments. If we were
required to finance future operations with debt we would have exposure to
increases in interest rates on borrowings.
THE SINGLE EUROPEAN CURRENCY
A significant portion of our sales occur in Europe. We sell to all of our
customers in U.S. dollars. Our selling prices are similar to most of its
European distributors and therefore should not cause significant disruption
whether in dollars or euros. From its introduction in January 1999, the rate of
exchange for the Euro versus the U.S. dollar declined by as much as 34%. Several
of our European distributors were unable to increase their local currency
selling price for the valve, and, as a result, they informed us that their
profits were being squeezed. Europe is a very important market for us.
Disruption or loss of a portion of the European business could have a material
and adverse impact on our financial position.
CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their business, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. ATS desires to take
advantage of the safe harbor provisions with respect to any forward-looking
statements it may make in this filing, other filings with the Securities and
Exchange Commission and any public oral statements or written releases. The
words or phrases "will likely," "is expected," "will continue," "is
anticipated," "estimate," "projected," "forecast," or similar expressions are
intended to identify forward-looking statements within the meaning of the Act.
Such statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected. ATS cautions readers
not to place undue reliance on any such forward-looking statements, which speak
only as of the date made.
In accordance with the Act, ATS identifies the following important general
factors which if altered from the current status could cause our actual results
to differ from those described in any forward-looking statements: the continued
acceptance of our mechanical heart valve in international markets, the rate of
increase of acceptance of the valve in the United States, our ability to
recruit, hire and manage a direct sales force in the United States, the
continued performance of our mechanical heart valve without structural failure,
the actions of our competitors including pricing changes and new product
introductions, the continued performance of our independent distributors in
selling the valve, the risk of product returns in connection with distributor
terminations, the actions of our supplier of pyrolytic carbon components for the
valve and difficulties we may encounter establishing and operating our own
pyrolytic carbon manufacturing capability. This list is not exhaustive, and we
may supplement this list in filings with the Securities and Exchange Commission
(e.g., Exhibit 99 to ATS' Annual Report on Form 10-K for the year ended December
31, 2000) or in connection with the making of any specific forward-looking
statement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities in which we invest
may have market risk. This means that a change in prevailing interest rates may
cause the fair market value of the principal amount of the investment to
fluctuate. For example, if we hold a security that was issued with a fixed
interest rate at the then-prevailing rate and the prevailing interest rate later
rises, the fair value of the principal amount of our investment will probably
decline. To minimize this risk we maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial paper,
money market funds, government and non-government debt securities. The average
duration of all of our investments has generally been less than one year. Due to
the short-term nature of these investments, we believe we have no material
exposure to interest rate risk arising from our investments.
We do not use derivatives and therefore does not face market risk from currency
or interest rate changes on these types of instruments.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
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.
Date: November 13 2001 ATS MEDICAL, INC.
By: /s/ John H. Jungbauer
-------------------------------------
John H. Jungbauer, Vice President/CFO
(Principal Financial Officer and
Authorized Signatory)