<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1996
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 0-28266
HEARTPORT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3222307
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 CHESAPEAKE DRIVE
REDWOOD CITY, CALIFORNIA 94063
(Address of principal executive offices)
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(415) 306-7900
(Registrant's telephone number, including area code)
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Indicate by check /X/ whether the registrant (1) has filed all reports
required to be filed by Sections 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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As of September 30, 1996 there were 24,323,347 shares of the
Registrant's Common Stock outstanding.
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HEARTPORT, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1. Financial Statements
Condensed Balance Sheets at September 30, 1996 and December 31, 1995................... 3
Condensed Statements of Operations for the three and nine months
ended September 30, 1996 and September 30, 1995........................................ 4
Condensed Statements of Cash Flows for the nine months ended
September 30, 1996 and September 30, 1995.............................................. 5
Notes to Condensed Financial Statements................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 8
PART II. OTHER INFORMATION
Item 5. Other Information.................................................................. 18
Item 6. Exhibits and Reports on Form 8-K................................................... 18
SIGNATURES.................................................................................. 19
</TABLE>
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Heartport, Port-Access, and endoCPB are trademarks of the Company.
2
<PAGE>
PART I. FINANCIAL
INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEARTPORT, INC.
(a development stage company)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995 (1)
-------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $14,256,619 $7,411,902
Short-term investments 88,777,779 5,198,274
Prepaid expenses and other 2,206,637 81,665
-------------- -------------
Total current assets 105,241,035 12,691,841
Property and equipment, net 4,875,160 1,367,726
Deposits, intangibles and other assets, net 205,193 206,926
-------------- -------------
Total assets $110,321,388 $14,266,493
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,999,801 $618,014
Accrued expenses 1,026,812 273,548
Accrued compensation and related benefits 1,182,716 172,750
Current portion of long-term debt 661,072 393,542
-------------- -------------
Total current liabilities 4,870,401 1,457,854
Noncurrent liabilities:
Long-term debt, less current portion 3,785,769 3,912,758
Other long-term liabilities 327,907 121,312
Deferred revenue 500,000 --
-------------- -------------
Total long-term liabilities 4,613,676 4,034,070
Stockholders' equity:
Convertible preferred stock -- 9,237
Common stock, $0.001 par value 24,324 9,084
Additional paid-in capital 141,477,880 26,394,926
Notes receivable from stockholders (984,100) (1,093,000)
Deficit accumulated during the development stage (39,680,793) (16,545,678)
--------------- --------------
Total stockholders' equity 100,837,311 8,774,569
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Total liabilities and stockholders' equity $110,321,388 $14,266,493
-------------- -------------
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</TABLE>
(1) DERIVED FROM THE AUDITED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1995.
3
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HEARTPORT, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Period From
Three Months Ended Nine Months Ended May 17, 1991
September 30, September 30, (Inception) to
--------------------------- ------------------------- September 30,
1996 1995 1996 1995 1996
------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Costs and expenses:
Research and development $ 6,312,494 $ 2,200,528 $ 14,500,732 $ 5,705,212 $ 29,106,243
General and administrative 3,273,186 300,344 5,723,707 864,222 8,260,850
Patent acquisition 5,215,708 -- 5,215,708 -- 5,215,708
------------ ----------- ------------ ----------- -------------
Loss from operations 14,801,388 2,500,872 25,440,147 6,569,434 42,582,801
Interest income 1,485,611 174,403 2,649,339 317,056 3,435,653
Interest expense (120,104) (47,459) (344,307) (82,084) (533,645)
------------ ----------- ------------ ----------- -------------
Net loss $(13,435,881) $(2,373,928) $(23,135,115) $(6,334,462) $(39,680,793)
------------ ----------- ------------ ----------- -------------
------------ ----------- ------------ ----------- -------------
Pro forma net loss per share $ (0.55) $ (0.12) $ (1.04) $ (0.32)
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Shares used in calculation of pro
forma net loss per share 24,252,000 19,783,000 22,239,000 19,783,000
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
</TABLE>
SEE ACCOMPANYING NOTES.
4
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HEARTPORT, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------------
1996 1995
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<S> <C> <C>
Operating activities:
Net loss $ (23,135,115) $ (6,334,462)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 608,212 225,517
Foregiveness of note receivable 50,000 --
Acceleration of stock option vesting 183,450 --
Issuance of common stock for patents 4,173,568 --
Changes in operating assets and
liabilities:
Prepaid expenses and other (2,124,972) 201,991
Accounts payable and accrued expenses 3,351,613 257,306
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Net cash used in operating activities (16,893,244) (5,649,648)
Investing activities:
Purchase of short-term investments (111,579,505) (4,200,000)
Sales and maturities of short-term investments 28,000,000 1,092,025
Purchase of property and equipment (4,096,665) (514,359)
Increase in deposits, intangibles and other assets (67,249) (70,017)
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Net cash used in investing activities (87,743,419) (3,692,351)
Financing activities:
Proceeds from issuance of preferred stock -- 15,433,348
Proceeds from issuance of common stock 110,800,989 154,160
Proceeds from payment of stockholders' notes
receivable 39,850 --
Proceeds from long-term borrowings 1,043,113 4,347,615
Repayment of long-term borrowings (402,572) (171,592)
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Net cash provided by financing activities 111,481,380 19,763,531
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Net increase in cash and cash equivalents 6,844,717 10,421,532
Cash and cash equivalents at beginning of period 7,411,902 365,152
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Cash and cash equivalents at end of period $ 14,256,619 $ 10,786,684
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</TABLE>
SEE ACCOMPANYING NOTES
5
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HEARTPORT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and in accordance with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the financial information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included.
The operating results of the interim periods presented are not
necessarily indicative of the results for the year ending December 31, 1996
or for any other interim period. The accompanying condensed financial
statements should be read in conjunction with the unaudited financial
statements for the three months ended March 31, 1996 and the audited
financial statements and notes thereto for the year ended December 31, 1995
included in the Company's Registration Statement on Form S-1 (No. 333-1906)
filed with the Securities and Exchange Commission.
Note 2. Available-for-Sale Securities
At September 30, 1996 and December 31, 1995, all short-term investments
were designated as available-for-sale. Available-for-sale securities are
carried at fair value with unrealized gains and losses, net of tax, reported
in a separate component of stockholders' equity. The amortized cost of
available-for-sale debt securities is adjusted for the amortization of
premiums and the accretion of discounts to maturity. Such amortization is
included in interest income. Realized gains and losses and declines in value
judged to be other-than-temporary on available-for-sale securities are
included in investment income. The cost of securities sold is based on the
specific identification method. Interest and dividends on securities
classified as available-for-sale are included in interest income.
The following is a summary of the fair value of short-term investments:
September 30, December 31,
1996 1995
----------- ----------
Obligations of U.S. federal
government agencies $20,430,653 $ --
Obligations of foreign
governments -- 998,274
U.S. and foreign corporate notes 43,194,094 --
Auction rate preferred 14,000,000 4,200,000
Corporate bonds 9,167,841 --
Corporate commercial paper 1,985,191 --
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$88,777,779 $5,198,274
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----------- ----------
6
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At September 30, 1996 and December 31, 1995, the cost of securities
approximated fair value, and the amount of unrealized gains or losses was not
significant. There were no realized gains or losses for the nine month
periods ended September 30, 1996 or 1995. Securities mature through July
1998.
Note 3. Patent Acquisition
In July 1996 the Company acquired a United States patent and related rights
from Endosurgical Development Corporation for consideration consisting of
shares of Common Stock and cash. All costs associated with this acquisition
have been recorded as an expense in the accompanying financial statements.
Note 4. Net Loss Per Share
Historical net loss per share is computed using the weighted
average number of common shares outstanding. Common equivalent shares from
stock options, warrants and convertible preferred stock are excluded from the
computation as their effect is antidilutive, except that pursuant to the
Securities and Exchange Commission Staff Accounting Bulletins, common and
common equivalent shares issued during the twelve-month period prior to the
Company's April 1996 initial public offering at prices substantially below
the initial public offering price have been included in the calculation as if
they were outstanding for all periods presented (using the treasury stock
method at the initial public offering price for stock options and warrants
and the if-converted method for convertible preferred stock).
Pro forma net loss per share for the three and nine months ended September
30, 1996 and 1995 has been computed as described above and also includes the
effect of the convertible preferred shares from their respective dates of
issuance.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This report may contain forward-looking statements that involve risks
and uncertainties. The Company's actual results may differ materially from
any such forward-looking statements due to factors that include, but are not
limited to, the risks discussed in "Risk Factors That May Affect Future
Results" as well as those discussed in the following overview section, and
the risks discussed in the "Risk Factors" section of the Company's
Registration Statement on Form S-1, as amended, filed with the Securities and
Exchange Commission (No. 333-1906).
OVERVIEW
Since its inception in May 1991, the Company has been engaged in the
research and development of minimally invasive cardiac surgery systems and
related technology. The Company's systems for minimally invasive cardiac
surgery consist of a common platform, the endovascular cardiopulmonary bypass
("endoCPB") system, and procedure-specific application systems comprising
proprietary reusable and disposable devices. Using the Company's endoCPB
platform and application systems, a surgeon is able to place the patient on
cardiopulmonary bypass, stop and protect the patient's heart, and operate on
the heart via a series of small ports between the patient's ribs. The Company
has developed systems for Port-Access coronary artery bypass graft ("CABG")
and Port-Access mitral valve repair and mitral valve replacement
(collectively, "MVR") procedures. The Company believes that its endoCPB
platform and procedure-specific Port-Access application systems can be
applied to a broad range of cardiac diseases, while offering the safety and
efficacy of conventional cardiac surgery.
To date, the Company has generated no revenues from the sale of
products, and it has been unprofitable since inception. For the period from
incorporation to September 30, 1996, the Company has incurred cumulative net
losses of approximately $39.7 million. The Company expects that its expenses
in all categories will continue to increase significantly and expects to
continue to incur substantial and increasing losses.
The Company has hired a significant number of employees to conduct and
support its research and development activities. At December 31, 1995, and
September 30, 1996, the Company had 73 and 190 employees, respectively. The
Company anticipates that its workforce will continue to grow rapidly to
support product development, clinical trials, manufacturing scale-up,
commercialization, and initial sales and marketing of its products.
The research and development, manufacture, sale, and distribution of the
endoCPB, Port-Access CABG, Port-Access MVR, and other Port-Access systems are
subject to numerous regulations imposed by governmental authorities,
principally the U.S. Food and Drug Administration (the "FDA") and
corresponding state and foreign agencies. The regulatory process is lengthy,
expensive, and uncertain. Prior to commercial sale in the United States, most
medical devices must be approved or cleared by the FDA. The Company recently
received clearance from the FDA to market the endoCPB system in the United
States. In addition, the Company recently received pre-market notification
exemptions from the FDA, clearing its core reusable and disposable surgical
devices to be labeled and used for minimally-invasive cardiovascular surgery.
Securing FDA approvals and clearances for additional Port-Access devices and
other products under development by the Company will require submission to
the FDA of extensive technical information and may require submission of
extensive clinical data. There can be no assurance that the Company will
receive FDA clearance or approval on any such additional devices
8
<PAGE>
or products. Many foreign governments and the European Union also have
extensive review processes for medical devices.
There can be no assurance that the Company's research and development
efforts will be successfully completed, and there can be no assurance that
the endoCPB, Port-Access CABG, and Port-Access MVR systems will prove to be
safe and effective. There can be no assurance that the Company's current
products will be cleared or approved for marketing by any foreign government
agency or that the endoCPB, Port-Access CABG, or Port-Access MVR systems or
any other product developed by the Company will be successfully introduced or
achieve market acceptance. There can be no assurance that the Company will
ever achieve significant revenues from sales of the endoCPB, Port-Access
CABG, or Port-Access MVR systems or any other potential products, or will
ever achieve profitability.
9
<PAGE>
RESULTS OF OPERATIONS
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consist primarily of personnel costs, consulting fees and other costs in
support of product development, clinical trials, physician training, and
regulatory submissions, costs incurred in producing products for research and
development activities, physician training, and clinical trials, expenses
associated with building the Company's infrastructure, and the cost of
prosecuting United States and foreign patent applications relating to the
Company's technology. Research and development expenses increased to $6.3
million in the third quarter of 1996 from $2.2 million in the second quarter
of 1995, and increased to $14.5 million for the first nine months of 1996
from $5.7 million during the corresponding period of 1995. The increase in
spending in both periods was primarily attributable to the hiring of
additional personnel required to support expanded clinical trials, physician
training, and product development activities, and to the cost of producing
products for clinical trials, physician training, and research and
development activities. The Company anticipates that it will continue to
devote substantial resources to research and development and that research
and development expenses will continue to increase substantially.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses consist primarily of costs for administrative, sales and marketing
personnel, as well as legal, accounting and other professional fees. General
and administrative expenses increased to $3.3 million in the third quarter of
1996 from $300,000 in the third quarter of 1995, and increased to $5.7
million for the first nine months of 1996 from $864,000 for the corresponding
period of 1995. These increases were primarily due to increased staffing and
associated expenses necessary to manage and support the Company's increased
scale of operations and to prepare for commercialization of certain products.
The Company believes that its general and administrative expenses will
continue to increase as a result of an expansion of the Company's
administrative staff to support its growing operations and as a result of
increases in expenses associated with being a public company. In addition,
the Company expects that its expenditures will increase substantially as the
Company builds its sales force and marketing staff in connection with
commercialization of its products.
PATENT ACQUISITION EXPENSES. Patent acquisition expenses consist of the
cost to acquire a United States patent and related rights from Endosurgical
Development Corporation in July 1996 for consideration consisting of shares
of Common Stock and cash.
INTEREST INCOME. Interest income primarily represents interest earned
by the Company on its cash and short-term investments. Interest income
increased to $1.5 million in the third quarter of 1996 and $2.6 million for
the first nine months of 1996 from $174,000 in the third quarter of 1995 and
$317,000 for the first nine months of 1995. The increases in each period were
primarily due to the Company's higher average investment balances resulting
from cash received in the Company's initial public offering.
INTEREST EXPENSE. Interest expense represents interest expense on
long-term debt. Interest expense increased to $120,000 in the third quarter
of 1996 and $344,000 for the first nine months of 1996 from $47,000 in the
third quarter of 1995 and $82,000 for the first nine months of 1995. The
increases in each period were due to additional long-term borrowings.
INCOME TAXES. The Company has not generated any net income to date and
therefore has not paid any federal income taxes since its inception. The
provision for income taxes consists solely of state minimum taxes.
Realization of deferred tax assets is dependent on future earnings, if any,
the amount and timing of which are uncertain. Accordingly, a valuation
allowance has been established in an amount equal to the net deferred tax
10
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assets of the Company to reflect these uncertainties.
LIQUIDITY AND CAPITAL RESOURCES
From inception through early 1996, the Company funded its operations and
investments in property and equipment through the private sale of preferred
stock, totaling approximately $25.1 million, a long-term loan from St. Jude
Medical, Inc. of $3.0 million, and borrowings under an equipment financing
agreement. On April 25, 1996, the Company completed an initial public
offering, selling 5,750,000 shares of Common Stock and raising net proceeds
of $110.8 million.
During the nine month periods ended September 30, 1996 and September 30,
1995, net cash used in operating activities was $16.9 million and $5.6
million, respectively. For such periods, net cash used in operating
activities resulted primarily from increasing net losses. Net cash used in
investing activities was $87.7 million and $3.7 million for the first nine
months of 1996 and 1995, respectively. The net cash used in investing
activities was primarily attributable to the purchase of short-term
investments and the purchase of property and equipment. Net cash provided by
financing activities was $111.5 million and $19.8 million during the nine
month periods ended September 30, 1996 and September 30, 1995, respectively.
The net cash provided by financing activities in 1996 was primarily
attributable to proceeds from the Company's initial public offering, while
the net cash provided in 1995 was primarily attributable to the sale of
preferred stock and proceeds from long-term borrowings.
The Company expects to continue to incur substantial expenses in support
of additional research and development activities, clinical trials, physician
training, manufacturing expansion, building a sales and marketing
organization, full-scale market launch of its Port-Access CABG and
Port-Access MVR systems in 1997, and ongoing administrative activities. The
Company believes that its existing cash, cash equivalents, and short-term
investments will be adequate to meet its cash needs at least through 1997.
Thereafter, the Company may require additional funds to support its operating
requirements or for other purposes and may seek to raise such additional
funds through public or private equity financings or from other sources.
There can be no assurance that additional financing will be available at all
or that, if available, such financing would be obtainable on terms favorable
to the Company.
11
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RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Company's control. The
following discussion highlights some of these risks. These risks could
affect the Company's actual future results and could cause them to differ
materially from any forward-looking statements made by the Company. These
risks should be read in conjunction with the "Risk Factors" section included
in the Company's Registration Statement on Form S-1, as amended, filed with
the Securities and Exchange Commission (No. 333-1906).
NO ASSURANCE OF REGULATORY CLEARANCE OR APPROVAL; SIGNIFICANT DOMESTIC
AND INTERNATIONAL REGULATION. The Company's individual devices are subject to
regulatory clearances or approvals by the FDA. The Company believes that
certain of its devices and systems will be subject to United States
regulatory clearance through the 510(k) premarket notification process rather
than a more extensive pre-market approval ("PMA") submission. Although the
Company has recently received clearance from the FDA to market the endoCPB
system in the United States, securing FDA approvals and clearances for
additional Port-Access devices and other products under development by the
Company will require submission to the FDA of extensive technical information
and may require submission of extensive clinical data. There can be no
assurance that the FDA will act favorably or quickly on the Company's 510(k)
or other submissions, and significant difficulties and costs may be
encountered by the Company in its efforts to obtain FDA clearance that could
delay or preclude the Company from marketing and selling its products in the
United States. Furthermore, there can be no assurance that the FDA will not
request additional data, require that the Company conduct further clinical
studies, or require a more extensive PMA submission, causing the Company to
incur substantial costs and delays. The Company's business, financial
condition, and results of operations are critically dependent upon FDA
clearance or approval of the Company's systems. Failure to obtain such
clearance or approval, or to obtain such clearance or approval on a timely
basis, would have a material adverse effect on the Company's business,
financial condition, and results of operations, and could result in
postponement of the commercialization of the Company's products or even
cessation of the Company's business in the United States.
Sales of medical devices outside of the United States are subject to
foreign regulatory requirements that vary widely from country to country. The
time required to obtain approval for sale in foreign countries may be longer
or shorter than that required for FDA clearance or approval, and the
requirements may differ. In addition, if the FDA were to require a PMA
submission for the Company's products, the Company would be required to
obtain FDA approval to export such devices and systems to international
markets prior to their approval by the FDA for commercialization in the
United States. In Europe, the Company must obtain certifications necessary to
enable the "CE" mark to be affixed to its systems, which will allow the
Company to market the systems throughout Europe. Although the Company is
seeking regulatory approval to begin marketing its systems in Europe by early
1997, there can be no assurance that such approval will be received on a
timely basis, or at all. Most other countries in which the Company intends to
operate either do not currently regulate medical systems or have minimal
regulatory requirements, although these countries may adopt more extensive
regulations in the future that could impact the Company's ability to market
its systems. In addition, significant costs and requests for additional
information may be encountered by the Company in its efforts to obtain
regulatory approvals. Any such events could substantially delay or preclude
the Company from marketing its systems internationally.
In addition, the FDA and certain foreign regulatory authorities impose
numerous other requirements with which medical device manufacturers must
comply. Product approvals can be withdrawn for failure to comply with
regulatory standards or the occurrence of unforeseen problems following
initial marketing. The Company will also be required to adhere to applicable
FDA regulations
12
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setting forth current Good Manufacturing Practices ("GMP") requirements,
which include testing, control, and documentation requirements. Ongoing
compliance with GMP and other applicable regulatory requirements is monitored
through periodic inspections by state and federal agencies, including the
FDA, and by comparable agencies in other countries. Failure to comply with
applicable regulatory requirements can result in fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, denial or withdrawal of premarket clearance or premarket approval
for devices, and criminal prosecution. Furthermore, changes in existing
regulations or adoption of new regulations or policies could delay or even
prevent the Company from obtaining future regulatory approvals or clearances.
For example, the FDA is currently considering major revisions to its GMP
regulations. Such revisions could have a material adverse effect on the
Company's business, financial condition, and results of operations.
NO ASSURANCE OF MARKET ACCEPTANCE. There can be no assurance that
the Company's endoCPB and Port-Access systems will gain any significant
degree of market acceptance among physicians, patients, and health care
payers, even if necessary regulatory and reimbursement clearances and
approvals are obtained. The Company believes that physicians' acceptance and
healthcare payers' reimbursement of Port-Access procedures will be essential
for market acceptance of its systems, and there can be no assurance that any
such recommendations or approvals will be obtained. Physicians will not
recommend Port-Access procedures unless they conclude, based on clinical data
and other factors, that Port-Access procedures are an attractive alternative
to traditional treatments for cardiovascular disease. Most patients with
cardiovascular disease first consult with a cardiologist, who may treat the
patient with pharmaceuticals or non-surgical interventions such as
percutaneous transluminal coronary angioplasty ("PTCA") and intravascular
stents, or may refer the patient to a cardiac surgeon for open-chest CABG
surgery. Cardiologists may not recommend Port-Access procedures until such
time, if any, as Port-Access CABG can be successfully demonstrated to be as
safe and cost-effective as other accepted treatments. In addition, cardiac
surgeons may elect not to recommend Port-Access procedures until such time,
if any, as the efficacy of the Company's Port-Access procedures can be
successfully demonstrated as compared to conventional, open-chest surgery
methods, which have become widely adopted by cardiac surgeons since the
initial use of such surgery in the mid-1950s. Even if the clinical efficacy
of Port-Access procedures is established, cardiologists, cardiac surgeons,
and other physicians may elect not to recommend the procedures for any number
of other reasons. Failure of the Company's products to achieve significant
market acceptance would have a material adverse effect on the Company's
business, financial condition, and results of operations.
RISKS ASSOCIATED WITH NEW SURGICAL PROCEDURE. Clinical trials of the
Company's endoCPB, Port-Access CABG systems, and Port-Access MVR systems
conducted to date have shown that, as with any novel surgical procedure,
there is a learning process involved for surgeons and other members of the
cardiac surgery team to become proficient. Broad use of the Company's
systems will require training of numerous physicians, and the time required
to begin and complete such training could adversely affect market acceptance.
FLUCTUATIONS IN OPERATING RESULTS. Results of operations may vary
significantly from quarter to quarter depending upon numerous factors,
including the following: 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 its initial and enhanced versions of the Company's
products on a timely basis; customer order deferrals in anticipation of
enhancements or new products offered by the Company or its competitors;
product quality problems; personnel changes; and the level of international
13
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sales. In addition, the Company intends to develop both a domestic and an
international direct sales force. The timing of such development and the rate
at which new sales people become productive could also cause material
fluctuations in the Company's quarterly operating results.
Operating results have been and will continue to be difficult to
forecast. Future revenue, if any, is also difficult to forecast because the
market for minimally invasive cardiac surgery systems is rapidly evolving,
and due to the inherent risks associated with new medical device technology.
Accordingly, the Company believes that period-to-period comparisons of its
operating results are not necessarily meaningful and should not be relied
upon as indications of future performance. Failure by the Company, for any
reason, to achieve additional regulatory approvals and to begin to generate
and increase revenue from sales of its products would have a material adverse
effect on the Company's business, operating results, and financial condition.
Due to the foregoing factors, it is likely that in some future quarter the
Company's operating results will be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common
Stock would likely be materially adversely affected.
SIGNIFICANT COMPETITION; RAPID TECHNOLOGICAL CHANGE. The Company expects
that the market for minimally invasive cardiac surgery, which is currently in
the early stages of development, will be intensely competitive. Competitors
are likely to include a variety of different companies that currently
specialize in devices for conventional cardiac surgery, as well as those that
specialize in non-cardiac minimally invasive surgery. The Company believes
that a number of large companies, including the Ethicon Endosurgery division
of Johnson & Johnson, United States Surgical Corporation, Medtronic, and
others with significantly greater financial, manufacturing, marketing,
distribution, and technical resources and experience than the Company, may be
focusing on the development of minimally invasive cardiac surgery technology.
In addition, new companies have been and will continue to be started to
pursue opportunities in this market. Several companies have announced
interest in and development of products for the minimally invasive cardiac
surgery field. For example, there are companies pursuing minimally invasive
cardiac surgery on a beating heart, which, if successful, could materially
adversely affect the Company's ability to establish a market for its
technology. In addition, some of these companies may be able to market their
products sooner than the Company.
Cardiovascular diseases that can be treated with the Company's
Port-Access systems can also be treated by pharmaceuticals or other medical
devices and procedures including PTCA, intravascular stents, atherectomy
catheters and lasers. Many of these alternative treatments are widely
accepted in the medical community and have a long history of use. In
addition, technological advances with other therapies for heart disease such
as drugs or future innovations in cardiac surgery techniques could make such
other therapies more effective or lower in cost than the Company's
Port-Access procedures and could render the Company's technology obsolete.
There can be no assurance that physicians will use Port-Access procedures to
replace or supplement established treatments, such as conventional open-chest
heart surgery, PTCA, or intravascular stents, or that the Company's
Port-Access systems will be competitive with current or future technologies.
Such competition could have a material adverse effect on the Company's
business, financial condition, and results of operations. Any product
developed by the Company that gains regulatory clearance or approval will
have to compete 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 speeds with which the Company can develop
products, complete clinical testing and regulatory approval processes, train
physicians in the use of its products, gain 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.
14
<PAGE>
Failure to do so would have a material adverse effect upon the Company's
business, financial condition, and results of operations.
UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY;
RISKS OF FUTURE LITIGATION. The Company believes that its competitive
position will be dependent in significant part on its ability to protect its
intellectual property. The Company's policy is to seek to protect its
proprietary position by, among other methods, filing United States and
foreign patent applications related to its technology, inventions, and
improvements that are important to the development of its business. As of
November 11, 1996, the Company owns 21 issued or allowed United States
patents, and owns an exclusive field of use license on one issued United
States patent and on one issued foreign patent. In addition, as of November
11, 1996, the Company has 88 pending United States patent applications and
has filed 25 patent applications that are currently pending in Europe, Japan,
Australia, and Canada. There can be no assurance that the Company's issued
United States patents, or any patents that may be issued in the future, will
effectively protect the Company's technology or provide a competitive
advantage. 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. In addition, there can be no assurance that competitors, many of
which have substantially more resources than the Company and have made
substantial investments in competing technologies, will not seek to apply for
and obtain patents that will prevent, limit, or interfere with the Company's
ability to make, use, or sell its products either in the United States or
internationally.
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.
Patent applications in the United States 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. Patents issued and patent
applications filed relating to medical devices are numerous and 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 relating to products or processes used or proposed to be
used by the Company. The Company is aware of patents issued to third parties
that contain subject matter related to the Company's technology. Based, in
part, on advice of its patent counsel, the Company believes that the
technologies employed by the Company in its devices and systems do not
infringe the claims of any such patents. There can be no assurance, however,
that third parties will not seek to assert that the Company's devices and
systems infringe their patents or seek to expand their patent claims to cover
aspects of the Company's technology.
The medical device industry in general, and the industry segment that
includes products for the treatment of cardiovascular disease in particular,
has been characterized by substantial competition and litigation regarding
patent and other intellectual property rights. Any such claims, whether with
or without merit, could be time-consuming and expensive to respond to and
15
<PAGE>
could divert 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. 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 have a material adverse effect on the Company's
business, financial condition, and results of operations. The Company intends
to vigorously protect and defend its intellectual property. 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.
LIMITED MANUFACTURING EXPERIENCE; DEPENDENCE ON KEY SUPPLIERS. To date,
the Company's manufacturing activities have consisted primarily of
manufacturing limited quantities of products for use in laboratory testing
and clinical trials. The manufacture of the Company's products is a complex
operation, involving a number of separate processes and components. Certain
manufacturing processes are labor-intensive, and achieving significant cost
reductions will depend in part upon reducing the time required to complete
these processes. The Company does not have experience in manufacturing its
products in commercial quantities. The Company believes that substantial
cost reductions in its manufacturing operations will be required for it to
commercialize its systems on a profitable basis. 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. The
Company has considered and will continue to consider as appropriate the
internal manufacture of components currently provided by third parties, as
well as the implementation of new production processes. There can be no
assurance that manufacturing yields or costs will not be adversely affected
by the transition to in-house production or to new production processes when
such efforts are undertaken, or that FDA GMP requirements can be met, and
that such a transition would not materially and adversely affect the
Company's business, financial condition, and results of operations.
The Company uses or relies on certain components and services used in
its devices that are provided by sole source suppliers. The qualification of
additional or replacement vendors for certain components or services is a
lengthy process. Any significant supply interruption would have a material
adverse effect on the Company's ability to manufacture its products and,
therefore, a material adverse effect on its 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. Certain components used in
the Company's products have long lead times. As a result, there is a risk of
excess or inadequate inventory if orders do not match forecasts.
16
<PAGE>
NEED TO MANAGE A CHANGING BUSINESS. In order to compete effectively
against current and future competitors, 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 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. The
Company is currently in the process of implementing an integrated financial,
manufacturing, and inventory information system. Implementing such a system
can be time-consuming and expensive and requires significant management
resources. There can be no assurance that such system will be implemented on
a timely basis. Although the Company has recently hired several new members
of management, all of the foregoing demands will require additional
management personnel as well. 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. 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
have a material adverse effect on the Company's business, financial
condition, and results of operations.
RELIANCE ON STRATEGIC RELATIONSHIPS. The Company intends to pursue
strategic relationships with corporations and research institutions with
respect to the research, development, regulatory approval, and marketing of
certain of its potential products and procedures. The Company's future
success may depend, in part, on its relationships with third parties,
including, for example, the Company's relationship with St. Jude Medical,
Inc., their strategic interest in the potential products or procedures under
development and, eventually, their success in marketing such product or
procedure or willingness to purchase any such products. The Company
anticipates that these third parties may have the unilateral right to
terminate any such relationship without significant penalty. There can be no
assurance that the Company will be successful in establishing or maintaining
any such strategic relationships in the future or that any such relationship
will be successful.
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 the Company will not experience any material
product liability losses in the future. 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. The Company maintains insurance against
product liability claims in the amount of $5,000,000 per occurrence and
$5,000,000 in the aggregate, but there can be no assurance that such coverage
will continue to be available on terms acceptable to the Company or that such
coverage will be adequate for liabilities actually incurred. A successful
claim brought against the Company in excess of available insurance coverage,
or any claim or product recall that results in significant adverse publicity
against the Company, may have a material adverse effect on the Company's
business, financial condition, and results of operations.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The exhibits listed on the accompanying Exhibit Index are filed
as a part hereof and are incorporated by reference.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended September
30, 1996.
18
<PAGE>
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, 1996 HEARTPORT, INC.
By: /s/ David B. Singer
----------------------------------
David B. Singer
Senior Vice President, Finance and
Chief Financial Officer
19
<PAGE>
HEARTPORT, INC.
FORM 10-Q
EXHIBIT INDEX
Exhibit
Number Exhibit Description Page
- ------ ------------------- ----
11.1 Computation of per share losses..........................21
27.1 Financial Data Schedule..................................22
20
<PAGE>
Exhibit 11.1
HEARTPORT, INC.
STATEMENT RE: COMPUTATION OF PER SHARE LOSSES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1996 1995 1996 1995
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
PRO FORMA
Net Loss $(13,435,881) $(2,373,928) $(23,135,115) $(6,334,462)
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Weighted averge common shares outstanding 24,252,000 5,983,000 14,560,000 5,983,000
Convertible preferred shares outstanding -- 9,238,000 6,158,000 9,238,000
Shares related to SAB No. 55, 64 and 83 -- 4,562,000 1,521,000 4,562,000
------------ ----------- ------------ -----------
Total weighted average common shares
outstanding 24,252,000 19,783,000 22,239,000 19,783,000
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Net loss per share $ (0.55) $ (0.12) $ (1.04) $ (0.32)
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
HISTORICAL
Net Loss $(13,435,881) $(2,373,928) $(23,135,115) $(6,334,462)
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Weighted average common shares outstanding 24,252,000 5,983,000 16,828,000 5,983,000
Shares related to SAB No. 55, 64 and 83 -- 7,128,000 2,376,000 7,128,000
------------ ----------- ------------ -----------
Total weighted average common shares
outstanding 24,252,000 13,111,000 19,204,000 13,111,000
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Net loss per share $ (0.55) $ (0.18) $ (1.20) $ (0.48)
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
</TABLE>
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEETS AND CONDENSED STATEMENTS OF OPERATIONS FOUND ON
PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 14,256,619
<SECURITIES> 88,777,779
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 105,241,035
<PP&E> 5,971,525
<DEPRECIATION> 1,096,365
<TOTAL-ASSETS> 110,321,388
<CURRENT-LIABILITIES> 4,870,401
<BONDS> 0
0
0
<COMMON> 24,324
<OTHER-SE> 100,812,987
<TOTAL-LIABILITY-AND-EQUITY> 110,321,388
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 344,307
<INCOME-PRETAX> (23,135,115)
<INCOME-TAX> 0
<INCOME-CONTINUING> (23,135,115)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,135,115)
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.04
</TABLE>
