<PAGE> 1
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 March 31, 1997
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: 000-28372
CARDIAC PATHWAYS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0278793
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
995 BENECIA AVENUE, SUNNYVALE, CA 94086
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 737-0505
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. X Yes____No
As of March 31, 1997 there were 9,457,040 shares of the Registrant's Common
Stock outstanding.
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CARDIAC PATHWAYS CORPORATION
<TABLE>
<CAPTION>
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C> <C>
Item 1. Financial Statements and Notes (Unaudited)
Consolidated Balance Sheets as of March 31, 1997 and
June 30, 1996 .............................................................. 3
Consolidated Statements of Operations for the three and nine months
ended March 31, 1997 and 1996 ........................................ 4
........
Consolidated Statements of Cash Flows for the nine months ended
March 31, 1997 and 1996 ............................................... 5
Notes to Consolidated Financial Statements ................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
and Results of Operations ................................................. 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ......................................... 23
SIGNATURES .......................................................................... 24
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS AND NOTES
CARDIAC PATHWAYS CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996 (1)
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,449,658 $ 29,112,255
Short-term investments 38,640,069 23,760,812
Accounts receivable, net of allowance for doubtful accounts
of $9,500 at March 31, 1997 and June 30, 1996 464,807 398,997
Receivable from related party -- 21,725
Inventories 437,300 162,516
Prepaid expenses 175,056 234,339
Notes receivable from related parties -- 256,656
Other current assets 515,651 340,291
------------ ------------
Total current assets 46,682,541 54,287,591
Property and equipment, net 2,759,974 2,835,355
Notes receivable from related parties 276,252 5,760
Deposits and other assets 88,105 59,188
------------ ------------
$ 49,806,872 $ 57,187,894
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 365,079 $ 511,386
Accrued compensation and related benefits 470,882 193,511
Accrued clinical expenses 517,842 150,004
Other accrued expenses 805,604 733,565
Note Payable 4,500,000 --
Interest Payable 1,056,938 --
Current obligations under capital leases 857,337 671,538
------------ ------------
Total current liabilities 8,573,682 2,260,004
Long-term obligations under capital leases 620,305 602,574
Deferred royalty income 2,960,473 3,000,000
Note payable -- 4,500,000
Interest payable -- 774,421
Commitments
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares authorized and none
issued and outstanding at March 31, 1997 and June 30, 1996 -- --
Common stock, $.001 par value; 30,000,000 shares authorized; 9,457,040
shares issued and outstanding at March 31, 1997 and 9,269,332
at June 30, 1996 9,457 9,270
Additional paid-in capital 78,890,166 77,656,634
Receivables from stockholders (420,000) (406,000)
Accumulated deficit (39,992,647) (31,053,238)
Deferred compensation (834,564) (155,771)
------------ ------------
Total stockholders' equity 37,652,412 46,050,895
------------ ------------
$ 49,806,872 $ 57,187,894
============ ============
</TABLE>
(1) Derived from the Company's audited consolidated balance sheet as of June
30, 1996.
See notes to consolidated financial statements.
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CARDIAC PATHWAYS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
--------------------------- ---------------------------
1997 1996 1997 1996
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 500,348 $ 512,293 $ 2,183,268 $ 1,078,977
Operating expenses:
Manufacturing start-up and cost
of goods sold 682,517 658,681 1,960,133 1,698,478
Research and development 2,945,191 1,722,631 8,502,755 4,804,762
Selling, general and administrative 918,194 453,933 2,315,329 1,342,614
------------ ------------ ------------ ------------
Total operating expenses 4,545,902 2,835,245 12,778,217 7,845,854
------------ ------------ ------------ ------------
Loss from operations (4,045,554) (2,322,952) (10,594,949) (6,766,877)
Other income (expense):
Interest income 646,207 168,821 2,023,413 466,677
Interest expense (133,335) (161,568) (391,382) (445,617)
Other, net 12,420 1,984 23,509 13,628
------------ ------------ ------------ ------------
Total other income (expense), net 525,292 9,237 1,655,540 34,688
------------ ------------ ------------ ------------
Net loss $ (3,520,262) $ (2,313,715) $ (8,939,409) $ (6,732,189)
============ ============ ============ ============
Net loss per share $ (0.37) $ (0.96)
============ ============
Shares used in computing
net loss per share 9,417,000 9,340,000
============ ============
Pro forma net loss per share $ (0.33) $ (0.97)
============ ============
Shares used in computing pro forma
net loss per share 6,975,000 6,975,000
============ ============
</TABLE>
See notes to consolidated financial statements.
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CARDIAC PATHWAYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
March 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (8,939,409) $ (6,732,189)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 905,668 593,068
Amortization of deferred compensation 176,707 22,041
Loss on disposal of property and equipment -- 12,860
Issuance of preferred stock warrants -- 33,000
Issuance of nonqualified stock options for services 10,000 21,131
Changes in operating assets and liabilities:
Accounts receivable (65,810) (137,284)
Receivable from related party 21,725 122,638
Inventories (274,784) (1,606)
Prepaid expenses 59,283 12,959
Other current assets (175,360) 22,374
Accounts payable (146,307) (183,464)
Accrued compensation and related benefits 277,371 150,289
Accrued clinical expenses 367,838 3,100
Other accrued expenses 72,039 (114,860)
Interest payable 282,517 305,812
Deferred royalty income (39,527) 3,000,000
------------ ------------
Net cash used in operating activities (7,468,049) (2,870,131)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments (45,924,257) (4,019,731)
Maturities and sales of short-term investments 31,045,000 3,577,991
Purchases of property and equipment, net (6,402) (398,392)
(Increase) decrease in notes receivable (13,836) 5,000
(Increase) in deposits and other assets (28,917) (79,951)
------------ ------------
Net cash used in investing activities (14,928,412) (915,083)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital lease obligations (620,355) (415,856)
Proceeds from sale of preferred stock -- 4,499,002
Proceeds from sale of common stock 368,219 102,922
(Increase) in notes receivable from stockholders (14,000) (10,000)
------------ ------------
Net cash provided by (used in) financing activities (266,136) 4,176,068
------------ ------------
Net increase (decrease) in cash and cash equivalents (22,662,597) 390,854
Cash and cash equivalents at beginning of period 29,112,255 5,372,945
------------ ------------
Cash and cash equivalents at end of period $ 6,449,658 $ 5,763,799
============ ============
</TABLE>
See notes to consolidated financial statements.
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CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated 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 preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
The operating results for the three and nine month periods ended March
31, 1997 are not necessarily indicative of the results that may be expected for
the fiscal year ending June 30, 1997. The accompanying consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 1996.
2. SHORT-TERM INVESTMENTS
At March 31, 1997 and June 30, 1996, all short-term investments were
classified as held-to-maturity and available-for-sale. The amortized cost of
held-to-maturity securities is adjusted for the amortization of premiums and
the accretion of discounts to maturity. Such amortization of premiums and
accretion of discounts are included in interest income. At March 31, 1997 and
June 30, 1996, these securities were valued at amortized cost, which
approximates fair value. Available-for-sale securities are carried at fair
value with unrealized gains and losses, net of tax, reported as a separate
component of stockholders' equity. To date, the Company has not experienced
any significant unrealized gains or losses on available-for-sale securities
and, accordingly, no adjustments have been made to stockholders' equity.
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The following is a summary of held-to-maturity and available-for-sale
securities at cost, which approximates fair value:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
DESCRIPTION 1997 1996
------------- --------------
<S> <C> <C>
Held-to-maturity:
U.S. government agency $ 14,477,952 $ 1,999,879
U.S. corporate bonds 21,062,117 16,760,933
Available-for-sale:
Money market instruments 3,100,000 5,000,000
------------- --------------
$ 38,640,069 $ 23,760,812
============= ==============
</TABLE>
There were no realized gains or losses for the three and nine month
periods ending March 31, 1997 and 1996. The cost of securities sold is based on
the specific identification method. Held-to-maturity securities at March 31,
1997 mature at various dates through March 1999.
3. CONSOLIDATED BALANCE SHEET COMPONENTS
Certain balance sheet components are as follows:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1996
---------- ----------
<S> <C> <C>
Inventories:
Raw materials $ 275,128 $ 125,459
Work-in-process 14,511 --
Finished goods 147,661 37,057
---------- ----------
$ 437,300 $ 162,516
========== ==========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1996
------------ ------------
<S> <C> <C>
Property and equipment:
Equipment $ 4,356,016 $ 3,472,535
Leasehold improvements 138,253 83,047
Equipment-in-process 919,472 1,027,872
------------ ------------
5,413,741 4,583,454
Less accumulated depreciation and
amortization 2,653,767 1,748,099
------------ ------------
$ 2,759,974 $ 2,835,355
============ ============
</TABLE>
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4. STOCKHOLDERS' EQUITY
In June 1996, the Company completed its initial public offering of
2,500,000 shares of common stock. The net proceeds to the Company were
approximately $43,137,000. Upon completion of the offering, all of the
preferred stock outstanding automatically converted into common stock.
5. NET LOSS PER SHARE
Except as noted below, net loss per share is computed using the
weighted average number of shares of common stock outstanding. Common
equivalent shares from stock options, warrants and convertible preferred stock
are excluded from the computation of net loss per share for the three and nine
months ended March 31, 1997, as their effect is antidilutive. Pro forma net
loss per share for the three and nine months ended March 31, 1996 is computed
using the weighted average number of shares of common stock outstanding and
includes, pursuant to the Securities and Exchange Commission Staff Accounting
Bulletins, common and common equivalent shares issued at prices substantially
below the public offering price during the twelve-month period prior to the
filing of the initial public offering as if they were outstanding for the
entire period (using the treasury stock method). In addition, the computation
of pro forma net loss per share for the three and nine months ended March 31,
1996 gives effect to the conversion of convertible preferred shares not
included above that automatically converted upon completion of the Company's
initial public offering (using the if-converted method) from the original date
of issuance.
6. NOTE PAYABLE
At March 31, 1997, the Company had a $4,500,000 note payable due to a
European biomedical company. The note bears interest at the prime rate (8.50%
at March 31, 1997) as quoted in The Wall Street Journal, and all principal and
accrued interest are due on June 27, 1999.
The note is immediately payable in the event the Company completes a
follow-on public offering pursuant to which the Company realizes more than
$5,000,000 or in the event the Company has positive cash flow from operations
in excess of $500,000 for any fiscal quarter. In addition, the note is
immediately payable upon the close of a merger, reorganization, or sale of
substantially all of the assets of the Company.
The Company is currently in negotiations to repay the loan within the
next twelve months. Accordingly, the principal and accrued interest amounts in
the balance sheet at March 31, 1997 have been classified in current
liabilities.
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7. STOCKHOLDER RIGHTS PLAN
On April 16, 1997, the Board of Directors approved a stockholder
rights plan and declared a dividend of one preferred share purchase right (a
"Right") for each outstanding share of common stock of the Company to holders
of record as of April 30, 1997. Each Right will entitle stockholders to
purchase 1/1000th of a share of Series A participating preferred stock of the
Company (a newly designated series of preferred stock for which each 1/1000th
of a share has economic attributes and voting rights equivalent to those of one
share of the Company's common stock) at an exercise price of $125. The Rights
only become exercisable in certain limited circumstances involving acquisitions
of or tender offers for 15% or more of the Company's capital stock by another
person or group of persons. For a limited period of time after the
announcement of any such acquisition or offer, the Rights are redeemable at a
price of $.01 per Right. After becoming exercisable, each Right entitles its
holder to purchase for $125 an amount of common stock of the Company, or in
certain circumstances, securities of the acquiror, having a then current market
value equal to two times the exercise price of the Right. The Rights expire on
April 16, 2007.
8. RECENT PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (FAS 128), "Earnings per
Share", which is required to be adopted on December 31, 1997. At that time,
the Company will be required to change the method currently used to compute
earnings per share and to restate all prior periods. Under the new
requirements for calculating basic earnings per share, the dilutive effect of
stock options will be excluded. The Company has studied the implications of
FAS 128 and does not expect its adoption to have a material impact on the
Company's calculation of earnings per share.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements based
upon current expectations that involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, that include, but
are not limited to, the risks discussed in "Factors That May Impact Future
Operations" as well as those discussed in the following "Overview" section.
These forward-looking statements include the statement in the first paragraph
of "Overview" relating to expectations of operating losses, the statement in
the second paragraph of "Overview" relating to anticipated filing and approval
time periods for PMA applications, the statements in the last paragraph of "Net
Sales," the statements in the last sentence in each of the "Manufacturing
Start-up and Cost of Goods Sold", "Research and Development" and "Selling,
General, and Administrative" paragraphs, the statements regarding future
capital expenditures in the third paragraph of "Liquidity and Capital
Resources" and the Company's forecast in the fourth paragraph of "Liquidity and
Capital Resources" of the period of time through which its financial resources
will be adequate to support its operations.
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OVERVIEW
The Company was founded in April 1991 and to date has engaged
primarily in researching, developing, testing and obtaining regulatory
clearances for its products. The Company has experienced significant operating
losses since inception and, as of March 31, 1997, had an accumulated deficit of
approximately $40.0 million. The Company has generated only limited revenues
primarily from sales of Trio/Ensemble diagnostic catheters, Radii
supraventricular tachycardia mapping and ablation catheters, Mercator Mapping
Baskets, Model 8002 and 8004 Radiofrequency Generator Systems and Model 8100
Arrhythmia Mapping Systems. The Company expects its operating losses to
continue through at least the middle of calendar 1999 as it continues to expend
substantial funds for clinical trials in support of regulatory approvals,
expansion of research and development activities, establishment of
commercial-scale manufacturing capabilities and expansion of sales and
marketing activities.
The Company believes that its Ventricular Tachycardia Ablation System,
Arrhythmia Mapping Systems and Atrial Fibrillation Ablation System and their
component catheters and equipment are currently the Company's only significant
potential products. The Ventricular Tachycardia Ablation System and Arrhythmia
Mapping System for diagnostic mapping of ventricular tachycardia are in the
early stages of clinical testing, and clinical data obtained to date are
insufficient to demonstrate the safety and efficacy of these products under
applicable United States Food and Drug Administration ("FDA") regulatory
guidelines. In addition, the ablation catheter and ablation equipment that
together form the Atrial Fibrillation Ablation System and the mapping catheter
and mapping equipment that together form the Arrhythmia Mapping System for
atrial fibrillation are in the early stages of clinical testing and will
require further development. The design, manufacturing, labeling, distribution
and marketing of the Company's products are subject to extensive and rigorous
government regulation in the United States and certain other countries where
the process of obtaining required regulatory approvals is lengthy, expensive
and uncertain. In order for the Company to market the Ventricular Tachycardia
Ablation System, Arrhythmia Mapping Systems or Atrial Fibrillation Ablation
System and related catheters and equipment in the United States, the Company
must obtain clearance approval from the FDA. At the earliest, the Company does
not anticipate filing a PMA application for any system for at least one year,
and does not anticipate receiving a PMA for any such system until at least one
to three years after such PMA application is accepted for filing, if at all.
The Company will not generate any significant revenue in the United States
until such time, if ever, as its Ventricular Tachycardia Ablation System,
Arrhythmia Mapping Systems or Atrial Fibrillation Ablation System obtain
clearance or approval from the FDA. Even if one or more of the Company's
products obtain FDA clearance or approval, there can be no assurance that any
of the Company's products for diagnosis and treatment of ventricular
tachycardia and atrial fibrillation will be successfully commercialized or that
the Company will achieve significant revenues from either international or
domestic sales. See "Factors That May Impact Future Operating Results -
Clinical Trials" for a discussion of the status of the clinical trials
conducted to date for the Company's products.
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The Company does not have any experience in manufacturing, marketing
or selling its products for diagnosis and treatment of ventricular tachycardia
and atrial fibrillation in commercial quantities. If the Company receives FDA
clearance or approval for its products, it will need to expend significant
capital resources and develop manufacturing expertise to establish large-scale
manufacturing capabilities. Manufacturers often encounter difficulties in
scaling up production of new products, including problems involving production
yields, quality control and assurance, component supply shortages, shortages of
qualified personnel, compliance with FDA regulations, and the need for further
FDA approval of new manufacturing processes. In addition, if FDA clearances or
approvals are received, the Company intends to market its products primarily
through a direct sales force in the United States and indirect sales channels
internationally. Establishing a marketing and sales capability sufficient to
support sales in commercial quantities will require substantial efforts and
require significant management and financial resources.
RESULTS OF OPERATIONS
Net Sales. The Company's net sales to date have resulted primarily
from limited sales of the Trio/Ensemble diagnostic catheters, Radii
supraventricular tachycardia mapping and ablation catheters, Mercator Mapping
Baskets, Radiofrequency Generator Systems and Arrhythmia Mapping Systems. The
Company's net sales decreased to $500,000 for the three months ended March 31,
1997 compared to $512,000 for the three months ended March 31, 1996. The
decrease in net sales was primarily attributable to decreased sales of
Trio/Ensemble diagnostic catheters, partially offset by international sales of
four Model 8100 Arrhythmia Mapping Systems. For the nine months ended March
31, 1997, the Company had net sales of $2.2 million compared to $1.1 million
for the nine months ended March 31, 1996. The increase in net sales is
primarily due to higher overall shipments of Trio/Ensemble catheters and the
shipment of the four Model 8100 Arrhythmia Mapping Systems referred to above,
partially offset by the nonrecurrence of the sale of certain Model 8002 and
8004 Radiofrequency Generator Systems in the nine months ended March 31, 1996.
The Company expects its Trio/Ensemble catheter revenue to decrease in future
periods because the rate of sales to Japan will decrease as initial stocking
orders have been filled.
In December 1995, the Company received $3.0 million pursuant to a
royalty agreement with Arrow International, Inc. ("Arrow"). This amount was
recorded as deferred royalty income and will be amortized to income for those
Trio/Ensemble catheters that Arrow manufactures and sells. The royalty rate is
5% of the Trio/Ensemble catheter's sales price and approximately $40,000 of
royalty income has been recorded through March 31, 1997.
Manufacturing Start-Up and Cost of Goods Sold. Manufacturing start-up
and cost of goods sold primarily includes raw materials costs, catheter
fabrication costs and system assembly and test costs. Cost of goods sold was
$683,000 for the three months ended March 31, 1997, resulting in a gross margin
deficit of approximately $182,000. For the three months ended March 31, 1996,
manufacturing start-up and cost of goods sold were $659,000, producing a gross
margin deficit of approximately $146,000. For the nine months ended March 31,
1997, the Company had a gross margin of $223,000 or 10% compared to a gross
margin deficit of $620,000 for the nine months ended March 31, 1996. The
improvement in gross margin in the nine months ended March 31, 1997 compared to
March 31, 1996, was primarily attributable to higher sales volumes and the
non-recurrence of certain manufacturing start-up costs associated with the
expansion of catheter production capacity, partially offset by increased
compensation and associated labor costs for assembly, quality control and
engineering support personnel. In addition,
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<PAGE> 12
increased production and sales levels for the Trio/Ensemble diagnostic
catheters have resulted in generally lower per unit manufacturing costs. The
Company expects future gross margins to fluctuate as other products are
commercialized.
The Company is currently encountering low yields, vendor shortages and
other significant production inefficiencies in the manufacture of its Mercator
Left Ventricular Mapping Basket and Mercator Atrial Mapping Basket. Although
the Company is taking appropriate steps to address these yield and other
production inefficiencies, there can be no assurance that such improvements
will be achieved. Failure to obtain acceptable yields in the manufacture of
such products will adversely affect the ability of the Company to expand its
mapping system clinical sites and commence commercialization of this product in
international markets within the next three months.
Research and Development. Research and development expenses include
costs associated with product research, clinical trials, prototype development,
obtaining regulatory approvals and costs associated with hiring regulatory,
clinical, research and engineering personnel. Research and development
expenses increased to $2.9 million for the three months ended March 31, 1997
compared to $1.7 million for the three months ended March 31, 1996. Research
and development expenses were $8.5 million for the nine months ended March 31,
1997 compared to $4.8 million for the nine months ended March 31, 1996. The
increases in each period were primarily attributable to increased costs
associated with the hiring of additional engineering, regulatory and clinical
personnel, increased prototype development costs, and increased costs related
to manufacture and placement of Ventricular Tachycardia Ablation and Arrhythmia
Mapping Systems and related catheter products at clinical sites in the United
States and Europe. The Company believes that research and development
expenditures will increase in the future as the Company invests in product and
process improvements related to its ventricular tachycardia and atrial
fibrillation products, expands clinical research activities and increases its
research and development efforts related to new products and technologies.
Selling, General and Administrative. Selling, general and
administrative expenses include compensation and benefits for sales, marketing,
senior management and administrative personnel, various legal and professional
fees including those in connection with obtaining patent protection, and costs
of trade shows. Selling, general and administrative expenses increased to
$918,000 for the three months ended March 31, 1997 compared to $454,000 for the
three months ended March 31, 1996. Selling, general and administrative expenses
were $2.3 million of the nine months ended March 31, 1997 compared to $1.3
million for the nine months ended March 31, 1996. The increases in each period
were primarily attributable to increased expenditures for administrative
personnel, increased professional fees related to the filing and registration
of the Company's patents, costs related to obtaining certain insurance
policies, costs associated with the realignment of certain foreign distributor
relationships, costs related to the Company's internal computer network and
investor relations expenses. The Company anticipates that selling, general and
administrative expenses will increase in future periods as additional personnel
are added to support growing business operations in all functional areas.
Other Income (Expense), Net. Other income (expense), net increased to
net other income of $525,000 for the three months ended March 31, 1997 compared
to net other income of $9,000 for the three months ended March 31, 1996. Other
income (expense), net increased to net other income of $1.7 million for the
nine months ended March 31, 1997 compared to net other income of $35,000 for
the nine months ended March 31, 1996. The net increases in each period are the
result of interest income earned on substantially higher cash, cash equivalent
and short-term investment balances following the closing of the Company's
initial public offering in June 1996, the net proceeds of which were
approximately $43.1 million.
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Net Loss. The Company's net loss increased to $3.5 million for the
three months ended March 31, 1997 compared to $2.3 million for the three months
ended March 31, 1996. The increase in the net loss primarily resulted from
increased product development, clinical research and selling, general and
administrative expenses, partially offset by increased interest income. Net
loss for the nine months ended March 31, 1997 was $8.9 million compared to $6.7
million for the nine months ended March 31, 1996. The increase in the net loss
primarily resulted from increased product development, clinical research and
selling, general and administrative expenses, partially offset by increased
sales and interest income.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations through a
combination of private placements of equity securities yielding approximately
$33.5 million, a private placement of debt securities yielding approximately
$4.5 million, equipment lease financing arrangements yielding approximately
$3.2 million and a prepaid royalty arrangement yielding $3.0 million. In
addition, the Company closed its initial public offering in June 1996 raising
net proceeds of approximately $43.1 million. As of March 31, 1997, the Company
had approximately $45.1 million in cash, cash equivalents and short-term
investments.
Net cash used in operating activities was approximately $7.5 million
and $2.9 million for the nine months ended March 31, 1997 and 1996,
respectively. For such periods, net cash used in operating activities resulted
primarily from net losses, partially offset in the nine months ended March 31,
1996 by the $3.0 million prepaid royalty discussed above. Net cash used in
investing activities was approximately $14.9 million for the nine months ended
March 31, 1997 and approximately $915,000 for the nine months ended March 31,
1996. The net cash used in investing activities for the nine months ended
March 31, 1997 was primarily attributable to the purchase of short-term
investments following the Company's initial public offering in June 1996,
partially offset by maturities and sales of short-term investments. Net cash
used in financing activities was approximately $266,000 for the nine months
ended March 31, 1997 and net cash provided by financing activities was
approximately $4.2 million for the nine months ended March 31, 1996. The net
cash provided by financing activities for the nine months ended March 31, 1996
primarily resulted from the sale of preferred stock in December 1995.
As of March 31, 1997, the Company had capital equipment of $5.4
million less accumulated depreciation and amortization of $2.6 million to
support its clinical, development, manufacturing and administrative activities.
The Company has financed approximately $3.2 million from capital lease
obligations through March 31, 1997. The Company expects capital expenditures
to increase over the next several years as it expands facilities and acquires
equipment to support the planned expansion of manufacturing capabilities.
As of March 31, 1997, the Company had a $4,500,000 note payable due to
a European biomedical company. The note bears interest at the prime rate
(8.50% at March 31, 1997) and all principal and accrued interest were
originally due on June 27, 1999. The Company is currently in negotiations to
repay the loan within the next twelve months. Accordingly, the principal and
accrued interest amounts in the balance sheet at March 31, 1997 have been
classified in current liabilities. The Company intends to use existing cash and
cash equivalent balances or proceeds from liquidation of short-term investments
to fund repayment of the note.
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The Company's future liquidity and capital requirements will depend
upon numerous factors, including the progress of the Company's product
development efforts, the progress of the Company's clinical trials, actions
relating to regulatory matters, the costs and timing of expansion of product
development, manufacturing, marketing and sales activities, the extent to which
the Company's products gain market acceptance, and competitive developments.
Although the Company believes that its current cash, cash equivalent and
short-term investment balances and cash generated from the future sale of
products will be sufficient to meet the Company's operating and capital
requirements through the end of calendar 1998, there can be no assurance that
the Company will not require additional financing within this time frame.
The factors described in the previous paragraph and elsewhere in this
report will impact the Company's future capital requirements and the adequacy
of its available funds. The Company may be required to raise additional funds
through public or private financing, collaborative relationships or other
arrangements. There can be no assurance that such additional funding, if
needed, will be available on terms attractive to the Company, or at all.
Furthermore, any additional equity financing may be dilutive to stockholders,
and debt financing, if available, may involve restrictive covenants.
Collaborative arrangements, if necessary to raise additional funds, may require
the Company to relinquish its rights to certain of its technologies, products
or marketing territories. The failure of the Company to raise capital when
needed could have a material adverse effect on the Company's business,
financial condition and results of operations.
FACTORS THAT MAY IMPACT FUTURE OPERATIONS
CLINICAL TRIALS
The Ventricular Tachycardia Ablation System and Arrhythmia Mapping
System for diagnostic mapping of ventricular tachycardia are in the early
stages of clinical testing. Clinical data obtained to date are insufficient to
demonstrate the safety and efficacy of these products under applicable FDA
regulatory guidelines. There can be no assurance that any of the Company's
products will prove to be safe and effective in clinical trials under
applicable United States or international regulatory guidelines or that
additional modifications to the Company's products will not be necessary. In
addition, the clinical trials may identify significant technical or other
obstacles to be overcome prior to obtaining necessary regulatory or
reimbursement approvals. In addition, the ablation catheter and ablation
equipment that together form the Company's Atrial Fibrillation Ablation System
and the mapping catheter and mapping equipment that together form the Company's
Arrhythmia Mapping Systems for atrial fibrillation are still under development.
There can be no assurance that the Company will be successful in completing
development of the atrial fibrillation products and submitting the appropriate
IDEs or that the FDA will permit the Company to undertake clinical trials of
the atrial fibrillation products. If the Ventricular Tachycardia Ablation
System, Arrhythmia Mapping Systems and Atrial Fibrillation Ablation System and
their component catheters and equipment do not prove to be safe and effective
in clinical trials or if the Company is otherwise unable to commercialize these
products successfully, the Company's business, financial condition and results
of operations will be materially adversely affected. In addition, because
ablation treatment of these cardiac arrhythmias is a relatively new and to date
untested treatment, the long-term effects of radiofrequency ablation on
patients are unknown. As a result, the long-term success of ablation therapy
in treating ventricular tachycardia and atrial fibrillation will not be known
for several years.
The Company is currently conducting a clinical trial of the Chilli
Cooled Ablation Catheter and the Model 8004 Radio Frequency Generator and
Integrated Fluid Pump, the products that together form
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<PAGE> 15
the Company's Ventricular Tachycardia Ablation System. In addition, the
Company is currently conducting clinical trials of the Mercator Left
Ventricular Mapping Basket and the Model 8100/8300 Arrhythmia Mapping System,
the products that together form the Company's Arrhythmia Mapping System for
diagnostic mapping of ventricular tachycardia. In June 1996, the Company
received IDE approval from the FDA to conduct a clinical trial of the Mercator
Atrial Mapping Basket for the right atrium. In August, 1996, the Company
received IDE approval from the FDA to conduct a clinical trial of the Atrial
Fibrillation System for the right atrium.
The Company initiated a clinical trial for the Ventricular Tachycardia
Ablation System in the United States and Europe in November 1995 under an IDE
approved by the FDA. The clinical trial is being conducted at 15 clinical
sites and will involve a total of approximately 200 patients randomized using
the Ventricular Tachycardia Ablation System versus antiarrhythmic drugs.
Pursuant to the IDE, the FDA will evaluate the safety and efficacy of the
Ventricular Tachycardia Ablation System. The Company anticipates that this
clinical trial will be completed by early calendar 1998. At the conclusion of
the clinical trials, the Company plans to file a PMA application for approval
to market the Ventricular Tachycardia Ablation System and its component
catheters and equipment in the United States.
As of May 1, 1997, 102 patients had been enrolled in the clinical
trial for the Ventricular Tachycardia Ablation System, of whom 71 were
randomized to receive ablation treatment and 31 patients were in the drug
control group. In approximately 72% of patients receiving ablation, the
procedures were acutely successful and in 77% of the patients there were
chronic successes. Acute success is defined as patients in whom ventricular
tachycardia can not be induced post the ablation procedure. Chronic success is
defined as patients in whom there was a 75% reduction in ventricular
tachycardia episodes in the two months after the ablation procedure compared to
the two month period before the procedure. Fourteen patients from the drug
control group crossed over to the ablation group. Among all treated patients
there were four major adverse events: one death due to stroke, one death due to
acute myocardial infarction, one non-fatal stroke, and one cardiac perforation,
most likely the consequence of the use of a non-Cardiac Pathways right
ventricular diagnostic catheter. In addition, three patients had complete
heart block, two created intentionally, which required permanent pacemaker
insertion.
In January 1996, the Company received FDA approval to conduct an IDE
feasibility study to evaluate the safety of the Arrhythmia Mapping System for
diagnostic mapping of ventricular tachycardia. The feasibility study is being
conducted at two clinical sites in the United States and one European site and
will involve a total of 12 patients. The purpose of the clinical trial is to
evaluate and test the success of the deployment of the Mercator Left
Ventricular Mapping Basket into the ventricle, the fit of the catheter and the
system's ability to accurately map the electrical signals of the left
ventricle. At the conclusion of the feasibility study, the Company intends to
submit an IDE to the FDA to perform additional clinical trials. Enrollment in
the clinical trial began in March 1996, and as of May 1, 1997, 12 patients had
been enrolled. One of the enrolled patients developed asymptomatic mild aortic
valvular regurgitation following the procedure that the Company believes
resulted from basket deployment difficulties. In response, the Company made a
slight modification to the deployment system of the Mercator Left Ventricular
Mapping Basket. In June 1996, the Company received an IDE supplement approval
for the modification to the deployment system. One patient has developed a
cardiac perforation attributable to the use of the mapping basket and guide
catheter.
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The Company has also tested the Mercator Left Ventricular Mapping
Basket and Arrhythmia Mapping System in Europe outside of the IDE study. As of
May 1, 1997, the Mercator basket was used to map the ventricular tachycardia of
12 patients. One patient developed cardiac perforation attributed to the use
of a non-Cardiac Pathways right ventricular diagnostic catheter. None of the
other patients has had complications as a result of the Mercator Left
Ventricular Mapping Basket and Arrhythmia Mapping System.
In June 1996, the Company received IDE approval by the FDA to conduct
a clinical trial of the Mercator Atrial Mapping Basket for the right atrium and
Arrhythmia Mapping System for atrial fibrillation. The clinical trial is being
conducted at three clinical sites in the United States and will be expanded to
eight sites in the United States and Europe. The purpose of this clinical
trial will be to demonstrate the equivalency of the Right Mercator Atrial
Mapping Basket and the Arrhythmia Mapping System to commercially available
mapping catheters. As of May 1, 1997, 12 patients in the United States
enrolled in the clinical trial. In Europe, five patients have been treated
outside of the IDE; five with the right atrial mapping system and one with the
left atrial mapping system and no patient complications have been noted.
In January 1997, the Company received IDE approval by the FDA to
conduct a clinical trial of the Atrial Fibrillation Ablation System. The
purpose of this clinical trial will be to assess the safety and performance in
creating continuous linear lesions. As of May 1, 1997, 10 patients in the U.S.
have been enrolled in the clinical trial at two sites. One patient developed a
cardiac perforation attributed to the use of a non-Cardiac Pathways right
atrial diagnostic catheter. In 1996 the Nexus Linear Lesion Catheter was used
in two patients in Europe and no patient complications have been noted.
MARKETING AND DISTRIBUTION
The Company currently has only a limited sales and marketing
organization. If FDA clearances or approvals are received for the Company's
ventricular tachycardia or atrial fibrillation products, the Company intends to
market its products primarily through a direct sales force in the United States
and indirect sales channels internationally.
Establishing a marketing and sales capability sufficient to support
sales in commercial quantities will require substantial efforts and require
significant management and financial resources. There can be no assurance that
the Company will be able to build such a marketing staff or sales force, that
establishing such a marketing staff or sales force will be cost-effective or
that the Company's sales and marketing efforts will be successful. If the
Company is successful in obtaining the necessary regulatory approvals for its
ventricular tachycardia and atrial fibrillation products in international
markets, it expects to establish a sales and marketing capability in those
markets primarily through distributors. The Company has not begun discussions
with all needed international distributors. The Company is currently in
discussions with its distributor in France, U.K., Spain and Portugal to
terminate the relationship for strategic reasons. There can be no assurance
that the Company will be able to enter into agreements with desired
distributors on a timely basis or at all, or that such distributors will devote
adequate resources to selling the Company's products. Failure to establish
appropriate distribution relationships could have a material adverse effect
upon the Company's business, financial condition and results of operations.
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MANUFACTURING
Components and raw materials are purchased from various qualified
suppliers and subjected to stringent quality specifications. The Company
conducts quality audits of suppliers and is establishing a vendor certification
program. A number of components such as the computer workstation, the fluid
pump, integrated circuit components, flex circuit and biocompatible coating are
provided by sole source suppliers. For certain of these components, there are
relatively few alternative sources of supply, and establishing additional or
replacement vendors for such components, particularly flex circuits, could not
be accomplished quickly. The Company plans to qualify additional suppliers if
and as future production volumes increase. Because of the long lead time for
some components that are currently available from a single source, a vendor's
inability to supply such components in a timely manner could have a material
adverse effect on the Company's ability to manufacture the mapping basket,
mapping equipment and ablation equipment and therefore on its business,
financial condition and ability to market its products as currently
contemplated.
The Company has no experience manufacturing its products in the
volumes that will be necessary for the Company to achieve significant
commercial sales, and there can be no assurance that reliable, high-volume
manufacturing capacity can be established or maintained at commercially
reasonable costs. If the Company receives FDA clearance or approval for its
products, it will need to expend significant capital resources and develop
manufacturing expertise to establish large-scale manufacturing capabilities.
Manufacturers often encounter difficulties in scaling up production of new
products, including problems involving production yields, quality control and
assurance, component supply shortages, shortages of qualified personnel,
compliance with FDA regulations, and the need for further FDA approval of new
manufacturing processes. In addition, the Company believes that substantial
cost reductions in its manufacturing operations will be required for it to
commercialize its catheters and systems on a profitable basis. Any inability
of the Company to establish and maintain large-scale manufacturing capabilities
would have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's manufacturing facilities are subject to periodic
inspection by regulatory authorities, and its operations must undergo GMP
compliance inspections conducted by the FDA. To date, the Company's facilities
and manufacturing processes have not undergone any such inspections. The
Company will be required to comply with GMP requirements in order to produce
products for sale in the United States and with ISO 9001 standards in order to
produce products for sale in Europe. Any failure of the Company to comply with
GMP or ISO 9001 standards may result in the Company being required to take
corrective actions, such as modification of its policies and procedures. The
State of California also requires that the Company obtain a license to
manufacture medical devices. To date, the Company's facilities and
manufacturing processes have not undergone any such inspection. If the Company
is unable to maintain such a license, it would be unable to manufacture or ship
any product, which inability would have a material adverse effect on the
Company's business, financial condition and results of operations.
PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in part on its ability to obtain
patent and copyright protection for its products and processes, to preserve its
trade secrets and to operate without infringing or violating the proprietary
rights of third parties. The Company's strategy is to actively pursue patent
protection in the United States and foreign jurisdictions for technology that
it believes to be proprietary
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and that offers a potential competitive advantage for its products. The
Company holds issued and allowed Patents covering a number of fundamental
aspects of the Company's Ventricular Tachycardia Ablation System, Arrhythmia
Mapping Systems and Atrial Fibrillation Ablation System. The patent positions
of medical device companies, including those of the Company, are uncertain and
involve complex and evolving legal and factual questions. The coverage sought
in a patent application either can be denied or significantly reduced before or
after the patent is issued. Consequently, there can be no assurance that any
patents from pending patent applications or from any future patent application
will be issued, that the scope of any patent protection will exclude
competitors or provide competitive advantages to the Company, that any of the
Company's patents will be held valid if subsequently challenged or that others
will not claim rights in or ownership of the patents and other proprietary
rights held by the Company. In addition, there can be no assurance that
competitors, many of which have substantial resources 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 in international
markets. Litigation or regulatory proceedings, which could result in
substantial cost and uncertainty to the Company may also be necessary to
enforce patent or other intellectual property rights of the Company or to
determine the scope and validity of other parties' proprietary rights. There
can be no assurance that the Company will have the financial resources to
defend its patents from infringement or claims of invalidity.
In addition to patents, the Company relies on trade secrets and
proprietary know-how to compete, which it seeks to protect, in part, through
appropriate confidentiality and proprietary information agreements. These
agreements generally provide that all confidential information developed or
made known to individuals by the Company during the course of the relationship
with the Company is to by kept confidential and not disclosed to third parties,
except in specific circumstances. The agreements also generally provide that
all inventions conceived by the individual in the course of rendering service
to the Company shall be the exclusive property of the Company. There can be no
assurance that proprietary information or confidentiality agreements with
employees, consultants and others will not be breached, that the Company will
have adequate remedies for any breach, or that the Company's trade secrets will
not otherwise become known to or independently developed by competitors.
The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights, and
companies in the medical device industry have employed intellectual property
litigation to gain a competitive advantage. There can be no assurance that the
Company will not become subject to patent infringement claims or litigation in
a court of law, or interference proceedings declared by the United States
Patent and Trademark Office ("USPTO") to determine the priority of inventions
or an opposition to a patent grant in a foreign jurisdiction. The defense and
prosecution of intellectual property suits, USPTO interference or opposition
proceedings and related legal and administrative proceedings are both costly
and time-consuming. Any litigation, opposition or interference proceedings
will result in substantial expense to the Company and significant diversion of
effort by the Company's technical and management personnel. An adverse
determination in litigation or interference proceedings to which the Company
may become a party could subject the Company to significant liabilities to
third parties, require disputed rights to be licensed from third parties or
require the Company to cease using such technology. Although patent and
intellectual property disputes in the medical device area have often been
settled through licensing or similar arrangements, costs associated with such
arrangements may be substantial and could include ongoing royalties.
Furthermore, there can be no assurance that necessary licenses from others
would be available to the Company on satisfactory terms, if at all. Adverse
determinations in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent the Company from manufacturing and
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selling its products, which would have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
is aware of certain patents owned or licensed by others and relating to cardiac
catheters and cardiac monitoring. Certain enhancements of the Company's
products are still in the design and pre-clinical testing phase. Depending on
the ultimate design specifications and results of pre-clinical testing of these
enhancements there can be no assurance that the Company would be able to obtain
a license to such patents or that a court would find that such patents are
either not infringed by such enhancements or are invalid. Further, there can
be no assurance that owners or licensees of these patents will not attempt to
enforce their patent rights against the Company in a patent infringement suit
or other legal proceeding, regardless of the likely outcome of such suit or
proceeding.
COMPETITION
At present, the Company considers its primary competition to be
companies involved in current, more established therapies for the treatment of
ventricular tachycardia and atrial fibrillation, including drugs, external
electrical cardioversion and defibrillation, implantable defibrillators,
ablation accompanied by pacemaker implantation, and open-heart surgery. In
addition, several competitors are also developing new approaches and new
products for the treatment and mapping of ventricular tachycardia and atrial
fibrillation, including ablation systems using ultrasound, microwave, laser and
cryoablation technologies and mapping systems using contact mapping,
single-point spacial mapping and non-contact, multisite electrical mapping
technologies. Many of the Company's competitors have an established presence
in the field of interventional cardiology and electrophysiology. Many
competitors have substantially greater financial and other resources than the
Company, including larger research and development staffs and more experience
and capabilities in conducting research and development activities, testing
products in clinical trials, obtaining regulatory approvals, and manufacturing
marketing and distributing products. There can be no assurance that the
Company will succeed in developing and marketing technologies and products that
are more clinically efficacious and cost effective than the more established
treatments or the new approaches and products developed and marketed by its
competitors. Furthermore, there can be no assurance that the Company will
succeed in developing new technologies and products that are available prior to
its competitors' products. The failure of the Company to demonstrate the
efficacy and cost effective advantages of its products over those of its
competitors or the failure to develop new technologies and products before its
competitors could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company believes that the primary competitive factors in the
market for cardiac ablation and mapping devices are safety, efficacy, ease of
use and price. In addition, the length of time required for products to be
developed and to receive regulatory and, in some cases, reimbursement approval
is an important competitive factor. The medical device industry is
characterized by rapid and significant technological change. Accordingly, the
Company's success will depend in part on its ability to respond quickly to
medical and technological changes through the development and introduction of
new products. Product development involves a high degree of risk and there can
be no assurance that the Company's new product development efforts will result
in any commercially successful products. The Company believes it competes
favorably with respect to these factors, although there is no assurance that it
will be able to continue to do so.
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GOVERNMENT REGULATION
United States
Clinical testing, manufacture and sale of the Company's products are
subject to regulation by numerous governmental authorities, principally the FDA
and corresponding state and foreign regulatory agencies. Pursuant to the FDC
Act, the FDA regulates the clinical testing, manufacture, labeling,
distribution and promotion of medical devices. Noncompliance with applicable
requirements can result in, among other things, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant premarket clearance or premarket
approval for devices, withdrawal of marketing approvals, a recommendation by
the FDA that the Company not be permitted to enter into government contracts
and criminal prosecution. The FDA also has the authority to request repair,
replacement or refund of the cost of any device manufactured or distributed by
the Company.
Before a new device can be introduced into the market, the
manufacturer must generally obtain marketing clearance through a premarket
notification under Section 510(k) of the FDC Act ("510(k)") or an approval of a
PMA application under Section 515 of the FDC Act. Commercial distribution of a
device for which a 510(k) clearance is required can only begin after the FDA
issues an order finding the device to be "substantially equivalent" to a
predicate device. If the Company cannot establish that a proposed device is
substantially equivalent to a legally marketed predicate device, the Company
must seek premarket approval of the proposed device from the FDA through the
submission of a PMA application.
The process of obtaining a PMA and other required regulatory approvals
can be expensive, uncertain, and lengthy, and there can be no assurance that
the Company will ever obtain such approvals. At the earliest, the Company does
not anticipate filing a PMA application for any system for at least the next
two years, and does not anticipate receiving a PMA for any such system until at
least one to three years after such PMA application is accepted for filing, if
at all. There can be no assurance that the FDA will act favorably or quickly
on any of the Company's submissions to the FDA, 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 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, causing the Company to incur substantial cost and delay. In addition,
there can be no assurance that the FDA will not impose strict labeling
requirements, onerous operator training requirements or other requirements as a
condition of its PMA approval, any of which could limit the Company's ability
to market its systems. Labeling and promotional activities are subject to
scrutiny by the FDA and, in certain circumstances, by the Federal Trade
Commission ("FTC"). FDA enforcement policy strictly prohibits the marketing of
FDA cleared or approved medical devices for unapproved uses. Further, if a
company wishes to modify a product after FDA approval of a PMA, including
changes in indications or other modifications that could affect safety or
efficacy, additional clearances or approvals will be required from the FDA.
Failure to receive or delays in receipt of FDA clearances or approvals,
including the need for additional clinical trials or data as a prerequisite to
clearance or approval, or any FDA conditions that limit the ability of the
Company to market its systems, could have a material adverse effect on the
Company's business, financial condition and results of operations.
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International
In order for the Company to market its products in Europe and certain
other foreign jurisdictions, the Company must obtain required regulatory
approvals and clearances and otherwise comply with extensive regulations
regarding safety and manufacturing processes and quality. These regulations,
including the requirements for approvals or clearance to market and the time
required for regulatory review, vary from country to country. There can be no
assurance that the Company will obtain regulatory approvals in such countries
or that it will not be required to incur significant costs in obtaining or
maintaining its foreign regulatory approvals. Delays in receipt of approvals
to market the Company's products, failure to receive these approvals or future
loss of previously received approvals could have a material adverse effect on
the Company's business, financial condition and results of operations.
THIRD-PARTY REIMBURSEMENT AND UNCERTAINTY RELATED TO HEALTH CARE REFORM
In the United States, health care providers, including hospitals and
physicians, that purchase medical products for treatment of their patients,
generally rely on third-party payors, principally federal Medicare, state
Medicaid and private health insurance plans, to reimburse all or a part of the
costs and fees associated with the procedures performed using these products.
The Company's success will be dependent upon, among other things, the ability
of health care providers to obtain satisfactory reimbursement from third-party
payors for medical procedures in which the Company's products are used.
Third-party payors may deny reimbursement if they determine that a prescribed
device has not received appropriate regulatory clearances or approvals, is not
used in accordance with cost-effective treatment methods as determined by the
payor, or is experimental, unnecessary or inappropriate.
Reimbursement systems in international markets vary significantly by
county and by region within some countries, and reimbursement approvals must be
obtained on a country-by-country basis. Many international markets have
government managed health care systems that control reimbursement for new
products and procedures. In most markets, there are private insurance systems
as well as government managed systems. Market acceptance of the Company's
products will depend on the availability and level of reimbursement in
international markets targeted by the Company. There can be no assurance that
the Company will obtain reimbursement in any country within a particular time,
for a particular time, for a particular amount, or at all.
Regardless of the type of reimbursement system, the Company believes
that physician advocacy of the Company's products will be required to obtain
reimbursement. The Company believes that less invasive procedures generally
provide less costly overall therapies as compared to conventional drug, surgery
and other treatments. In addition, the Company believes that a patient's
underlying arrhythmia will typically not recur after treatment with the
Company's procedures. The Company anticipates that hospital administrators and
physicians would justify the use of the Company's products by the attendant
cost savings and clinical benefits that the Company believes would be derived
from the use of its products. However, there can be no assurance that this
will be the case. There can be no assurance that reimbursement for the
Company's products will be available in the United States or in international
markets under either government or private reimbursement systems, or that
physicians will support and advocate reimbursement for procedures using the
Company's products. Failure by hospitals and other users of the Company's
products to obtain reimbursement from third party payors, or changes in
government and private third-party payors' policies toward reimbursement for
procedures employing the Company's products, would have a material adverse
effect on the Company's business, financial condition and results of
operations. Moreover, the Company is unable to predict what additional
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legislation or regulation, if any, relating to the health care industry or
third-party coverage and reimbursement may be enacted in the future, or what
effect such legislation or regulation would have on the Company.
PRODUCT LIABILITY AND INSURANCE
The development, manufacture and sale of medical products entail
significant risk of product liability claims and product failure claims. The
Company has conducted only limited clinical trials and does not yet have, and
will not have for a number of years, sufficient clinical data to allow the
Company to measure the risk of such claims with respect to its products. The
Company faces an inherent business risk of financial exposure to product
liability claims in the event that the use of its products results in personal
injury or death. The Company also faces the possibility that defects in the
design or manufacture of the Company's products might necessitate a product
recall. There can be no assurance that the Company will not experience losses
due to product liability claims or recalls in the future. In addition, the
Company will require increased product liability coverage if any potential
products are successfully commercialized. Such insurance is expensive,
difficult to obtain and may not be available in the future on acceptable terms,
or at all. Any claims against the Company's business, financial condition and
results of operations.
EMPLOYEES
The Company's ability to operate successfully depends in significant
part upon the continued service of certain key scientific, technical, clinical,
regulatory and managerial personnel, and its continuing ability to attract and
retain additional highly qualified scientific, technical, clinical, regulatory
and managerial personnel. Competition for such personnel is intense, and there
can be no assurance that the Company can retain such personnel or that it can
attract or retain other highly qualified scientific, technical, clinical,
regulatory and managerial personnel in the future, including key sales and
marketing personnel. The loss of key personnel or the inability to hire and
retain qualified personnel could have a material adverse effect upon the
Company's business, financial condition and results of operations.
In addition, in order to complete clinical trials in progress, prepare
additional products for clinical trials, and develop future products, the
Company believes that it will be required to expand its operations,
particularly in the areas of research and development, manufacturing and sales
and marketing. As the Company expands its operations in these areas, such
expansion will 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 any
such growth and compete effectively, the Company will be required to implement
and improve information systems, procedures, and controls, and to expand,
train, motivate and manage its work force. 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 as
required by future growth, if any, could have a material adverse effect on the
Company's business, financial condition and results of operations.
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CARDIAC PATHWAYS CORPORATION
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.
(b) No reports on Form 8-K were filed by the Registrant
during the nine months ended March 31, 1997.
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CARDIAC PATHWAYS CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: MAY 9, 1997 CARDIAC PATHWAYS CORPORATION
/S/ WILLIAM N. STARLING
--------------------------------------
WILLIAM N. STARLING
PRESIDENT AND CHIEF EXECUTIVE OFFICER
/S/ DAVID W. GRYSKA
--------------------------------------
DAVID W. GRYSKA
VICE PRESIDENT OF FINANCE AND CHIEF
FINANCIAL OFFICER
24
<PAGE> 25
CARDIAC PATHWAYS CORPORATION
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION PAGE NO.
- ----------- ------------------------------------------------------------ --------
<S> <C> <C>
11.1 Statement Regarding Computation of Net Loss Per Share 26
27.1 Financial Data Schedule 27
</TABLE>
25
<PAGE> 1
EXHIBIT 11.1
CARDIAC PATHWAYS CORPORATION
STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss $(3,520,262) $(2,313,715) $(8,939,409) $(6,732,189)
=========== =========== =========== ===========
Weighted average common shares outstanding 9,417,000 870,000 9,340,000 870,000
Common equivalent shares:
Convertible preferred stock outstanding 5,450,000 5,450,000
Shares related to SAB No. 55, 64, and 83 655,000 655,000
----------- ----------- ----------- -----------
Total weighted average shares and common
equivalent shares outstanding 9,417,000 6,975,000 9,340,000 6,975,000
=========== =========== =========== ===========
Net loss per share $ (0.37) $ (0.96)
=========== ===========
Pro forma net loss per share $ (0.33) $ (0.97)
=========== ===========
</TABLE>
26
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 6,450
<SECURITIES> 38,640
<RECEIVABLES> 465
<ALLOWANCES> 10
<INVENTORY> 437
<CURRENT-ASSETS> 46,683
<PP&E> 5,414
<DEPRECIATION> 2,654
<TOTAL-ASSETS> 49,807
<CURRENT-LIABILITIES> 8,574
<BONDS> 620
0
0
<COMMON> 9
<OTHER-SE> 37,643
<TOTAL-LIABILITY-AND-EQUITY> 49,807
<SALES> 2,183
<TOTAL-REVENUES> 2,183
<CGS> 1,960
<TOTAL-COSTS> 1,960
<OTHER-EXPENSES> 8,503
<LOSS-PROVISION> 10
<INTEREST-EXPENSE> 391
<INCOME-PRETAX> (8,939)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,939)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,939)
<EPS-PRIMARY> (0.96)
<EPS-DILUTED> (0.96)
</TABLE>
