_______________________________________________
SECURITIES AND EXCHANGE
COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended April 30, 1998
Commission File Number 0-944
POSSIS MEDICAL, INC.
9055 Evergreen Boulevard N.W.
Minneapolis, Minnesota 55433-8003
(612) 780-4555
A Minnesota Corporation IRS Employer ID No. 41-0783184
_________________________________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___
The number of shares outstanding of the Registrant's Common Stock, $.40 par
value, as of May 21, 1998 was 12,209,466.
________________________________
<PAGE>
POSSIS MEDICAL, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets, April 30, 1998
and July 31, 1997......................................... 3
Consolidated Statements of Operations for three
months and nine months ended April 30, 1998 and 1997...... 4
Consolidated Statements of Cash Flows for the
nine months ended April 30, 1998 and 1997 ................ 5
Notes to Consolidated Financial Statements................ 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 8-12
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.......................... 13
SIGNATURES................................................ 14
<PAGE>
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS April 30, 1998 July 31, 1997
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................... $ 1,554,951 $ 3,849,194
Marketable securities................................................... 3,995,626 10,964,170
Receivables:
Trade (less allowances for doubtful accounts of $82,000 and
$80,000, respectively) .............................................. 1,187,258 878,893
Other................................................................ 62,410 120,558
Inventories:
Parts................................................................ 1,164,647 1,242,580
Work-in-progress..................................................... 1,445,622 940,918
Finished goods....................................................... 1,779,321 1,191,870
Prepaid expenses and other assets....................................... 227,159 264,117
Total current assets......................................... 11,416,994 19,452,300
PROPERTY:
Leasehold improvements.................................................. 1,207,863 1,166,306
Machinery and equipment................................................. 3,666,449 3,317,391
Assets-in-construction.................................................. 143,340 51,753
Total property............................................... 5,017,652 4,535,450
Less accumulated depreciation........................................... (2,271,861) 1,906,500
Property - net............................................... 2,745,791 2,628,950
OTHER ASSETS:
Goodwill................................................................ 287,922 341,922
TOTAL ASSETS................................................................. $ 14,450,707 $ 22,423,172
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable.................................................. $ 679,690 $ 648,502
Accrued salaries, wages, and commissions................................ 955,335 762,587
Current portion of long-term debt....................................... 15,037 28,356
Clinical trials accrual................................................. 442,752 879,166
Other liabilities....................................................... 580,760 294,002
Total current liabilities.................................... 2,673,574 2,612,613
OTHER LIABILITIES............................................................ 191,200 --
LONG-TERM DEBT............................................................... 175,000 10,213
SHAREHOLDERS' EQUITY:
Common stock - authorized 100,000,000 shares of $.40 par value each;
issued and outstanding, 12,209,466 shares and 12,121,312 shares,
respectively........................................................ 4,883,787 4,848,525
Additional paid-in capital.............................................. 41,803,424 41,118,611
Unearned compensation .................................................. (526,265) --
Unrealized loss on investments.......................................... (2,009) (5,836)
Retained deficit........................................................ (34,748,004) (26,160,954)
Total shareholders' equity................................... 11,410,933 19,800,346
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................... $ 14,450,707 $ 22,423,172
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For Three Months Ended For Nine Months Ended
April 30, 1998 April 30, 1997 April 30, 1998 April 30, 1997
<S> <C> <C> <C> <C>
REVENUES:
Medical product sales................................ $ 1,779,416 $ 1,075,229 $ 4,362,068 $ 1,628,319
Sales agreement and other............................ -- 247,330 -- 1,997,330
Total revenue............................... 1,779,416 1,322,559 4,362,068 3,625,649
COST OF SALES AND OTHER EXPENSES:
Cost of medical products............................. 1,320,760 1,230,375 4,335,411 3,605,514
Selling, general and administrative.................. 2,048,072 1,299,188 5,303,614 2,995,185
Research and development............................. 1,273,540 1,380,018 3,731,219 3,515,954
Total cost of sales and other expenses....... 4,642,372 3,909,581 13,370,244 10,116,653
Operating loss............................................. (2,862,956) (2,587,022) (9,008,176) (6,491,004)
Interest income............................................ 90,191 253,051 409,036 778,150
Gain (loss) on sale of marketable securities............... (2,074) -- 12,090 7,109
Loss from continuing operations - net...................... (2,774,839) (2,333,971) (8,587,050) (5,705,745)
Income from discontinued operations-net.................... -- -- -- 111,539
Net loss................................................... $(2,774,839) $(2,333,971) $(8,587,050 $(5,594,206)
Weighted average number of common
shares outstanding...................................... 12,207,036 12,126,397 12,184,132 12,091,076
Basic and dilutive net income (loss)
per common share:
Loss from continuing operations...................... $ (.23) $ (.19) $ (.70) $ (.47)
Income from discontinued operations ................. -- -- -- .01
Net loss............................................. $ (.23) $ (.19) $ (.70) $ (.46)
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
POSSIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For Nine Months Ended
April 30, 1998 April 30, 1997
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ........................................................... $(8,587,050) $(5,594,206)
Adjustments to reconcile net loss to net
cash used in operating activities:
Gain on sale of marketable securities.......................... (12,090) (7,109)
Gain on asset disposal ........................................ (2,100) (1,526)
Depreciation................................................... 482,261 355,149
Amortization of goodwill....................................... 54,000 54,000
Stock compensation............................................. 290,035 70,751
Increase in receivables........................................ (250,217) (401,409)
Increase in inventories........................................ (1,146,510) (655,400)
Increase (decrease) in other assets............................ 28,079 (70,066)
Increase in trade accounts payable............................. 31,188 131,048
Increase in accrued and other current liabilities.............. 5,976 403,304
Net cash used in operating activities............................... (9,106,428) (5,715,464)
INVESTING ACTIVITIES:
Additions to plant and equipment.................................... (466,814) (474,694)
Proceeds from the disposal of assets................................ 2,100 20,954
Purchase of marketable securities................................... (10,852) (1,987,665)
Proceeds from sale/maturity of marketable securities................ 6,995,313 7,011,641
Net cash provided by investing activities........................... 6,519,747 4,570,236
FINANCING ACTIVITIES:
Proceeds from notes payable......................................... 175,000 --
Repayment of long-term debt......................................... (23,532) (62,805)
Proceeds from issuance of stock and exercise of options............. 140,970 430,407
Net cash provided by financing activities........................... 292,438 367,602
DECREASE IN CASH AND CASH EQUIVALENTS .............................. (2,294,243) (777,626)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................... 3,849,194 7,688,507
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................... $ 1,554,951 $ 6,910,881
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid....................................................... $ 1,101 $ 4,790
Inventory transferred to fixed assets............................... 16,288 31,733
Issuance of restricted stock........................................ 816,300 --
Accrued payroll taxes related to restricted stock................... 286,002 --
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
POSSIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The accompanying consolidated financial statements and notes
should be read in conjunction with the audited financial statements and notes
thereto included in the Company's 1997 Annual Report.
2. INTERIM FINANCIAL STATEMENTS
Operating results for the three and nine month periods ended April 30, 1998
are not necessarily indicative of the results that may be expected for the year
ending July 31, 1998.
3. RECENTLY ISSUED ACCOUNTING STANDARD
Earnings per Share:
Effective January 31, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, Earnings per Share. SFAS No. 128
supersedes Accounting Principles Board Opinion No. 15, Earnings per Share, and
replaces the presentation of primary earnings per share with a presentation of
basic earnings per share. It also requires dual presentation for all entities
with complex capital structures and requires restatement of prior periods'
earnings per share calculations. The implementation of SFAS No. 128 did not
impact earnings per share because the Company had losses in all periods
presented.
4. COMPREHENSIVE INCOME
Effective August 1, 1998, the Company will adopt Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which
establishes standards for the reporting of comprehensive income and its
components. Comprehensive income is defined as the change in equity during the
period from transactions and other events and circumstances from non-owner
sources. Management believes that implementation of SFAS 130 will not have a
material effect on the Company's financial statements.
5. EARNINGS (LOSS) PER SHARE
The Company's outstanding stock options and stock warrants were not
included in the computation of earnings per share since the impact would have
been anti-dilutive because of the net loss.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three and Nine Month Periods Ended April 30, 1998 and 1997
Total revenues for the three and nine month periods ended April 30, 1998
were $1,779,000 and $4,362,000, respectively. This compared to total revenues of
$1,323,000 and $3,626,000 for the same periods the previous year. Sales
agreement and other revenue for the third quarter 1997 included $200,000 from
Baxter Healthcare Corporation ("Baxter") for the first anniversary payment due
Possis under a supply and distribution agreement for the Perma-Flow Coronary
Bypass Graft and an additional $47,000 from the termination and settlement of
the Company's Perma-Seal Dialysis Access Graft Supply and Distribution
Agreement. Sales agreement and other revenue for the nine months ended April 30,
1997 included $200,000 from Baxter and $1,997,000 from the termination and
settlement of the Company's Perma-Seal Graft Supply and Distribution Agreement.
In April 1998, the Company renegotiated its Perma-Flow Graft agreement with
Baxter, whereby the Company agreed to forego the $200,000 payment due from
Baxter in exchange for Baxter's agreement to give up(i)Perma-Flow Graft
marketing rights for the U.S. and (ii) non-U.S. marketing exclusivity.
Product sales for the three and nine month periods ending April 30, 1998
increased $704,000 and $2,734,000, respectively, from the previous year. The
significant growth in product sales resulted primarily from U.S. AngioJet
Rheolytic Thrombectomy System sales, which received U.S. FDA marketing clearance
for blood clot removal in dialysis grafts in December 1996. U.S. AngioJet System
drive unit and disposable sales for the three and nine month periods ended April
30, 1998 were $1,599,000 and $3,965,000, respectively, an increase of $948,000
and $3,224,000 from the same periods in the previous year.
Since the U.S. market introduction of the AngioJet System, the Company has
listed its AngioJet System drive unit, considered capital equipment, at $80,000
to hospitals. Despite employing a variety of flexible drive unit acquisition
programs including outright purchase, rental, lease and fee-per-procedure, the
Company sold only 17 of the 150+ drive units placed in U.S. hospitals through
April 30, 1998. In May 1998, the AngioJet System drive unit list price was
reduced to $25,000 following a successful test of a lower price in two of the
Company's 15 sales territories. A lower drive unit sales price is intended to
improve the competitive position of the AngioJet System, facilitate evaluation
of the technology, ease sale closure on units currently under evaluation and
provide added time for the Company's direct sales force to encourage use of the
systems currently in the field.
<PAGE>
In December 1997 the Company received approval to commence a clinical study
of the AngioJet System for use in the treatment of stroke caused by blockage of
the carotid arteries, the main vessels supplying blood to the brain. The Company
believes that the treatment of stoke is a significant marketing opportunity for
the AngioJet System. In May 1998 the Company introduced it's AV60 AngioJet
Catheter. The AV60 Catheter has been designed specifically to more effectively
and efficiently remove blood clots from dialysis access grafts - the indication
for use for which Possis received FDA marketing approval in December 1996. In
May 1998 the FDA agreed to permit unblinding the Company's Vegas 2 Coronary
AngioJet U.S. clinical trial results. These important clinical results,
involving 300 patients, showed the AngioJet System to be much faster than
urokinase, removing blood clots in minutes versus the hours required by
urokinase. In addition, the AngioJet System typically achieved more complete
thrombus removal than urokinase, caused fewer adverse events and resulted in
lower treatment costs. The Company plans to submit a PMA application to the FDA
in August 1998 seeking approval to market the AngioJet System for coronary use
in the United States. The Company plans to file an AngioJet System 510(k)
application with the FDA in late June or July seeking U.S. marketing clearance
for peripheral artery and peripheral bypass graft blood clot removal. The
Company expects that U.S. AngioJet System sales will grow primarily through the
addition of sales people, the completion of clinical trials designed to yield
additional label-approved product uses, the publication of clinical performance
and cost effectiveness data and the introduction of additional catheter designs.
AngioJet System sales outside the United States were $149,000 in the most
recent quarter. Capital equipment, such as the Company's drive unit, is very
difficult to sell in the price-sensitive European market. The Company is
interviewing potential AngioJet System independent distributors for the German
market and expects to have a German distributor in place in 1998. Actions the
Company is taking to improve AngioJet System sales in Europe include conducting
European cost effectiveness studies, a carotid artery study in Germany, a deep
vein thrombosis study in Italy and developing European physician advocates for
the AngioJet System. In Japan, the coronary AngioJet System clinical study
enrollment was completed in the quarter ended April 30, 1998, and a regulatory
filing with the Japanese Ministry of Health and Welfare is planned for 1998.
Registrations are currently being finalized in Taiwan and the initial drive unit
was shipped in April 1998. The Company believes that the U.S. market will lead
the worldwide growth of AngioJet System sales revenue.
Vascular graft sales were $32,000 and $85,000 for the three and nine months
ended April 30, 1998. This compared to $20,000 and $167,000, for the three and
nine months ended April 30, 1997. Perma-Flow Coronary Bypass Graft sales were
$82,000 and $43,000 for the nine months ended April 30, 1998 and 1997,
respectively. In April 1998 the Company received Humanitarian Device Exception
(HDE) approval from the FDA, clearing the way for U.S. marketing of the
Perma-Flow Coronary Bypass Graft for patients who require coronary bypass
surgery but who have inadequate blood vessels of their own for use in the
surgery. The sales for the nine months ended April 30, 1997 included $124,000 to
the Company's worldwide Perma-Seal Dialysis Access Graft distributor. This
Distributor Agreement was terminated in January 1997. In April 1998 an FDA
Circulatory Systems Advisory Panel recommended that the Company's Perma-Seal
Dialysis Access Graft receive U.S. market approval with appropriate labeling.
The Company expects to receive FDA marketing approval for the Perma-Seal Graft
by July 1998. In January 1998 the Company engaged Salomon Smith Barney to assist
in the development and implementation of a strategic plan designed to maximize
the value of the Company's vascular graft business. This project is in process.
<PAGE>
The Company is planning for continued growth in product sales for the
remainder of fiscal 1998 and beyond and believes that most of this growth will
come from AngioJet System sales in the U.S. marketplace.
Cost of medical products increased 7% and 20% in the fiscal 1998 three and
nine month periods, respectively, over the same periods in the previous year.
AngioJet System production costs increased $175,000 and $734,000, respectively,
in the fiscal 1998 three and nine month periods as compared to the previous
year. The increase is primarily due to the significant growth in the AngioJet
System product sales. Medical product gross margins improved by $614,000 and
$2,004,000, respectively, in the fiscal 1998 three and nine month periods as
compared to the previous year. The Company believes that manufacturing costs per
unit will be reduced and gross margins will continue to improve as product sales
and related production volumes continue to grow.
Selling, general and administrative expenses in the three and nine months
ended April 30, 1998, increased $749,000 and $2,308,000, respectively, compared
to the same periods a year ago. The primary factors are increased sales and
marketing expenses related to the establishment of a direct U.S. sales
organization to sell the AngioJet System and expenses of marketing the product
in the United States. At April 30, 1998, the Company had 25 direct salespersons
as compared to eight as of April 30, 1997. Sales and marketing expenditures are
expected to grow significantly in the current year and beyond. During the
quarter ended April 30, 1998, the Company agreed to settle a lawsuit with its
former German AngioJet System distributor for $200,000. This amount was expensed
in the quarter ended April 30, 1998.
Research and development expenses decreased 8% in the three months ended
April 30, 1998 as compared to the same period in the previous year. Research and
development expenses increased 6% for the nine month ended April 30, 1998 as
compared to the same period in the previous year. The increase is primarily due
to the increased expenses of conducting the AngioJet System coronary clinical
trial in the U.S. and the cost of developing new AngioJet System thrombectomy
applications. Vascular graft research and development expenses decreased 30% and
17%, respectively, from the prior year. The decrease is primarily due to the
reduced new enrollment in the Company's Perma-Flow Coronary Bypass Graft
clinical trial, the completion of the enrollment of the Company's Perma-Seal
Dialysis Graft clinical trial in May 1997 and the decision not to conduct a
Perma-Flow Graft clinical study investigators meeting in the Spring of in 1998.
The Company believes that research and development expenses will continue to
increase as it completes the development of its current products, invests in
development of new AngioJet System thrombectomy applications, new vascular
grafts and new AngioJet technology-based products.
<PAGE>
Interest income has decreased in the most recent periods due to the use of
the Compan's cash reserves in funding the Company's operations.
The Company recorded the final income relating to the sale of its Technical
Service division during the first quarter of fiscal 1997.
Liquidity and Capital Resources
Cash, cash equivalents, and marketable securities totaled $5,551,000 at
April 30, 1998 versus $14,813,000 at July 31, 1997.
Net cash usage for the nine months ended April 30, 1998 averaged $1,030,000
per month, consistent with the Company's expectations. Most of the $9,106,000
cash used in operations in the most recent nine month period is due to the
$8,587,000 net loss. The other primary use of cash is the increase in inventory.
The Company believes that product sales of the AngioJet System, primarily in the
U.S., will yield meaningful sales growth going forward. Concurrently, sales and
marketing expenditures are planned to increase with the sales growth. Research
and development expenditures are expected to grow as well. The Company expects
to report a loss for the last quarter of the current fiscal year. In addition,
the Company expects that increasing working capital investments in trade
receivables and inventory will be required to support growing product sales.
The Company expects to secure additional capital by July 31, 1998.
Year 2000
The Company formed a team that is assessing and addressing the possible
exposures related to the year 2000 issue. The Company does not use internally
developed computer software and is therefore not anticipating major
reprogramming efforts. The Company's primary financial and operational system
has been assessed and is certified "Year 2000 Compliant." The financial impact
of the year 2000 issue is not expected to be material to the Company's
consolidated financial position, results of operations and cash flows.
Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains certain "forward-looking statements" as defined
in the Private Securities Litigation Reform Act of 1995. Such statements
relating to future events and financial performance, including the submission of
applications to the FDA, revenue and expense levels and future capital
requirements, are forward-looking statements that involve risks and
uncertainties, including the Company's ability to meet its timetable for FDA
submissions, the review time at the FDA, changes in the Company's marketing
strategies, the Company's ability to establish product distribution channels,
changes in manufacturing methods, market acceptance of the AngioJet System,
changes in the levels of capital expenditures by hospitals, the levels of sales
of the Company's products that can be achieved, ability to raise additional
capital and other risks identified in Exhibit 99 to this Quarterly Report on
Form 10-Q and detailed from time to time in the Company's various Securities and
Exchange Commission filings.
<PAGE>
Part II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Certain of the following exhibits are incorporated by reference from prior
filings. The form with which each exhibit was filed and the date of filing are
indicated below.
Exhibit Form Date Filed Description
3.1 10-K Fiscal year ended Articles of incorporation as
July 31, 1994 amended and restated to date.
3.2 S-2 Amendment No. 1 Bylaws as amended and
August 9, 1994 restated to date.
27 Financial data schedule
99 Quarter ended Investment Risk Factors
April 30, 1998
(b) Reports on Form 8-K
Possis Medical, Inc. filed no reports on form 8-K during the quarter ended
April 30, 1998.
<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.
POSSIS MEDICAL, INC.
DATE: June 9, 1998 BY: /s/ Robert G. Dutcher
ROBERT G. DUTCHER
President and Chief Executive Officer
DATE: June 9, 1998 BY: /s/ Russel E. Carlson
RUSSEL E. CARLSON
Vice President of Finance
Chief Financial and Accounting Officer
<PAGE>
EXHIBIT 99
INVESTMENT RISK FACTORS
In evaluating the Company and its business, prospective investors should
carefully consider the following risk factors. This Exhibit contains, in
addition to historical information, forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from the results discussed in the forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed below as well.
History of Operating Losses; No Assurance of Future Profitability
The Company has incurred losses for the years 1995, 1996 and 1997, and as
of July 31, 1997 had a retained deficit of $26.2 million. For the year ended
July 31, 1995, the Company had a net operating loss of $5.6 million. For the
year ended July 31, 1996, the Company incurred a net operating loss of $9.9
million. The Company incurred a net operating loss of $9.6 million for the year
ended July 31 1997, and a net operating loss for the nine months ended April 30,
1998 of $8.6 million. No assurance can be given that the Company will operate
profitably on a quarterly or annual basis in the future. See "Selected
Consolidated Financial Data," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the 1997 Annual Report on Form
10-K and Quarterly Report on Form 10-Q for the quarter ended April 30, 1998.
The Company does not expect to become profitable unless it achieves
significant sales in the United States and its products receive additional
United States Food and Drug Administration ("FDA") marketing approvals. There
can be no assurance that significant sales or additional marketing approvals
will occur. In addition, the Company must also convince health care
professionals, third party payors and the general public of the medical and
economic benefits of its AngioJet, Perma-Flow and Perma-Seal Products. However,
no assurance can be given that the Company will be successful in marketing the
AngioJet System, the Perma-Flow Graft, or the Perma-Seal Graft, or that the
Company will be able to operate profitably on a consistent basis, even following
FDA approval. See "Management' s Discussion and Analysis of Financial Condition
and Results of Operations" in the 1997 Annual Report on Form 10-K and Quarterly
Report on Form 10-Q for the quarter ended April 30, 1998.
Limited Regulatory Approval for Company's Products; Government Regulation
The Company's products and its manufacturing activities are subject to
extensive and rigorous federal and state regulation in the United States and to
various regulatory requirements in other countries, including Japan. Regulatory
approvals, if granted, may include significant limitations on the indicated uses
for which a product may be marketed. In addition, the process of obtaining and
maintaining required regulatory approvals can be lengthy, expensive and
uncertain. See Business Description - Government Regulation" in the 1997 Annual
Report on Form 10-K.
<PAGE>
Current FDA enforcement policy strictly prohibits the marketing of approved
medical devices for unapproved uses. In addition, product approvals could be
withdrawn for failure to comply with regulatory standards or the occurrence of
unforeseen problems following initial marketing. The Company will be required to
adhere to applicable regulations setting forth Quality System Regulations
("QSR"), which include design, development, manufacturing, servicing, testing
and documentation requirements. Failure to comply with applicable QSR or other
regulatory requirements can result in, among other sanctions, fines, delays or
suspensions of approvals, injunctions against further distribution, seizures or
recalls of products, adverse publicity, operating restrictions and criminal
prosecutions. Furthermore, changes in existing regulations or adoption of new
regulations could prevent the Company from obtaining, or affect the timing of,
future regulatory approvals and could adversely affect the continued marketing
of the Company's existing products. No assurance can be given that the Company
will be able to obtain necessary regulatory approvals on a timely basis or at
all, and delays in receipt of or failure to receive such approvals, the loss of
previously received approvals, or failure to comply with regulatory requirements
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business Description - Government
Regulation" in the 1997 Annual Report on Form 10-K.
Uncertainty of Clinical and Marketing Acceptance; Technology Uncertainty
Use of the AngioJet System for vascular, cardiovascular and intercranial
clots is new and only now becoming widely known. Similarly, use of the
Perma-Flow Graft in lieu of saphenous veins to perform CABG procedures is new
and not yet widely known. Market acceptance of the Company's AngioJet,
Perma-Flow and Perma-Seal Products will depend in large part on the Company's
ability to demonstrate to the medical community in general, and to cardiac
surgeons and cardiologists in particular, the efficacy, relative safety and cost
effectiveness of treating cardiovascular disease using the Company's products
and to train cardiac surgeons and cardiologists to perform necessary procedures
using the Company's products. There can be no assurance that the Company's
products will provide benefits considered adequate by providers of
cardiovascular and vascular treatments or that a sufficient number of such
providers will use the Company's products for commercial success to be achieved.
To date, the Company has trained only a limited number of physicians and will
need to expand its marketing and training capabilities. Moreover, even if the
Company's products become generally accepted by the medical community,
physicians trained in the use of the Company's products may elect not to use or
to recommend a competitor's products instead of the Company's products. The
ability of the Company to conduct such marketing programs prior to FDA approval
of the Company's products may be limited or restricted by FDA regulations,
guidelines or policies. No assurance can be given that the Company's products
will be accepted as an alternative to other existing or new therapies, or that
cardiologists, cardiac surgeons or other physicians will accept AngioJet,
Perma-Flow or Perma-Seal Products as appropriate courses of treatment for their
patients. Lack of clinical and market acceptance would have a material adverse
effect on the Company's business, financial condition and results of operations.
<PAGE>
Dependence on AngioJet Products
The Company is focusing its resources on the continued development and
refinement of its AngioJet System. If the Company is unable to obtain requisite
regulatory approvals or to achieve commercial acceptance of the AngioJet System
for multiple purposes, the Company's business, financial condition and results
of operations will be materially and adversely affected.
Rapid Technological Change and Intense Competition
The medical products market is characterized by rapidly evolving technology
and intense competition. The future success of the Company will depend on its
ability to keep pace with advancing technology and competitive innovations. Many
potential competitors have significantly greater research and development
capabilities, experience in obtaining regulatory approvals, established
marketing and financial and managerial resources than the Company. Many
potential competitors have developed or are in the process of developing
technologies that are, or in the future may be, the basis for competitive
products, some of which may employ an entirely different approach or means of
accomplishing the desired therapeutic effect than products being developed by
the Company.
The Company believes that its AngioJet System will face intense competition
from a variety of treatments for the ablation and removal of blood clots,
including thrombolytic drug therapies, surgical intervention, balloon
embolectomy, mechanical and laser thrombectomy devices, ultrasound ablators, and
other thrombectomy devices based on waterjet systems that are currently being
developed by other companies. The Company is aware of a small number of
synthetic grafts being developed that could compete with the Perma-Flow Graft.
However, the Company believes it is the first developer to obtain FDA approval
for U.S. clinical trials with a synthetic coronary bypass graft and the first to
obtain CE Mark approval for marketing such a product in Europe. The Company's
Perma-Seal Graft will compete with ePTFE grafts and other synthetic grafts with
needle sealing properties.
Many of the companies manufacturing these devices have substantially
greater capital, as well as greater research and development, regulatory,
manufacturing and marketing resources and experience than the Company and
represent significant competition for the Company. Such companies may succeed in
developing products that are more effective and/or less costly in treating
thrombosis than the AngioJet System and more effective and/or less costly than
the Perma-Flow and Perma-Seal grafts. Further, these companies may be more
successful than the Company in manufacturing and marketing their products. No
assurance can be given that the Company's competitors or others will not succeed
in developing technologies, products or procedures that are more effective or
less invasive than any being developed by the Company or that would render the
Company's technology and products obsolete or noncompetitive. The advent of new
devices, procedures or new pharmaceutical agents could hinder the Company's
ability to compete effectively and have a material adverse effect on its
business, financial condition and results of operations.
<PAGE>
Reliance Upon Patents and Proprietary Rights
The Company's success depends and will continue to depend in part on its
ability to maintain patent protection for products and processes, to preserve
its trade secrets and to operate without infringing the proprietary rights of
third parties. The Company's policy is to attempt to protect its technology by,
among other things, filing patent applications for technology that it considers
important to the development of its business. The Company currently holds five
United States patents and 18 foreign patents related to the Perma-Flow Graft and
has two patent applications pending in the United States and two patent
applications pending in foreign jurisdictions. The Company also holds five
United States patents relating to the AngioJet System. In addition, the Company
has eleven United States and numerous foreign patent applications pending
relating to the AngioJet System. Two AngioJet System patent applications have
been accepted by the European Patent Office. In connection with the Perma-Seal
Graft, two United States patents are pending and four foreign patent
applications are pending. The validity and breadth of claims covered in medical
technology patents involve complex legal and factual questions and, therefore,
may be highly uncertain. No assurance can be given that the Company's pending
applications will result in patents being issued or, if issued, that such
patents, or the Company's existing patents, will provide a competitive
advantage, or that competitors of the Company will not design around any patents
issued to the Company. In addition, no assurance can be given that third parties
will not receive patent protection on their own waterjet devices.
The Company has acquired rights through licensing agreements to patents
relating to processes used in the manufacture of the Perma-Seal Graft. Under
these agreements, Possis is required to pay certain annual fees and royalties
based on net sales of products using the technology covered by these patents.
The Company requires all its employees to execute non-disclosure agreements
upon commencement of employment with the Company. These agreements generally
provide that all confidential information developed or made known to the
individual by the Company during the course of the individual's employment with
the Company is to be kept confidential and not disclosed to third parties. There
can be no assurance, however, that the Company's non-disclosure agreements and
other safeguards will protect its proprietary information and know-how or
provide adequate remedies for the Company in the event of unauthorized use or
disclosure of such information, or that others will not be able to independently
develop such information. In addition, others may hold or receive patents which
contain claims that may cover products developed by the Company.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry. Litigation, which
could result in substantial cost to and diversion of effort by the Company, may
be necessary to enforce patents issued to the Company, to protect trade secrets
or know-how owned by the Company, to defend the Company against claimed
infringement of the rights of others to determine the ownership, scope or
validity of the proprietary rights of the Company and others. An adverse
determination in any such litigation could subject the Company to significant
liabilities to third parties, could require the Company to seek licenses from
third parties and could prevent the Company from manufacturing. selling or using
its products, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
<PAGE>
The Company also relies upon unpatented proprietary technology and trade
secrets that it seeks to protect, in part, through confidentiality agreements
with employees and other parties. No assurance can be given that these
agreements will not be breached, that the Company will have adequate remedies
for any breach, that others will not independently develop or otherwise acquire
substantially equivalent proprietary technology and trade secrets or disclose
such technology or that the Company can meaningfully protect its rights in such
unpatented technology. Any disclosure of such information could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Potential Limitations on Third-Party Reimbursement
Health care providers, such as hospitals and physicians, that purchase
medical devices such as the AngioJet System or the Perma-Seal and Perma-Flow
Grafts for use on their patients generally rely upon third party payors, such as
Medicare, Medicaid and private insurance plans, to reimburse all or part of the
costs and fees associated with the health care services provided to their
patients. Medicare and Medicaid payors (in some states) determine whether to
provide coverage for a particular procedure and reimburse hospitals for
inpatient medical procedures at a prospectively determined rate according to
Diagnosis Related Groups ("DRGs"). The Health Care Financing Administration (the
"HCFA"), the agency responsible for administering the Medicare system, has
prohibited Medicare coverage for procedures that are not deemed safe and
effective for the condition being treated, or which are still investigational.
Even if a device has FDA approval, Medicare payors may deny reimbursement if
they conclude that the device is experimental or used for an unimproved
indication. In certain foreign markets, pricing or profitability of health care
products is subject to government control. Reimbursement levels with respect to
a medical products such as those of the Company are critical for the market
acceptance of the product and the financial results of its manufacturer.
There can be no assurance that adequate third party coverage will be
available for the Company to maintain price levels for its products sufficient
to realize an appropriate return on its investment in product development.
The market for the Company's products could also be adversely affected by
future legislation to reform the nation's health care system or by changes in
industry practices regarding reimbursement policy and procedures.
<PAGE>
Dependence Upon Key Personnel
The Company is highly dependent on a limited number of key management and
technical personnel. In addition, the highly technical nature of the Company's
business, its ability to continue its technological developments and to market
its products and thereby develop a competitive edge in the marketplace depends,
in large part, on its ability to attract and maintain qualified technical and
key management personnel. Competition for such personnel is intense, and no
assurance can be given that the Company will be able to attract and retain such
personnel. The loss of key personnel, or inability to hire or retain qualified
personnel, could have a material adverse effect on the Company's business,
financial and results of operations.
Product Liability and Possible Insufficiency of Insurance
The manufacture and sale of the Company's products entail the risk of
product liability claims. A recent United States Supreme Court decision held
that despite a company's compliance with FDA regulations, it still may not be
shielded from common-law negligent design claims or manufacturing and labeling
claims based on state rules. No assurance can be given that the coverage limits
of the Company's product liability insurance policies will be adequate. Such
insurance is expensive and in the future may not be available on acceptable
terms, if at all. A successful claim or series of claims brought against the
Company in excess of its insurance coverage, and the effect any product
liability litigation may have upon the reputation and marketability of the
Company's technology and products, together with diversion of the attention of
the Company's key personnel, could have a material adverse effect on the
Company's business, financial condition and results of operations.
Possible Need for Additional Funding
Management is currently in the process of raising additional capital.
Management believes that if it is successful in raising additional capital, the
net proceeds from such additional capital together with the Company's current
capital resources andrevenues from existing products will be sufficient to meet
its cash requirements for 12 to 18 months. However, delays in raising additional
capital, delays in obtaining regulatory approvals of the Company's products, or
unanticipated decreases in operating revenues or increases in expenses, may
adversely impact the Company's expected funding requirements, in which event the
Company may require additional funding. In such an event, the Company would need
to obtain financing through the issuance and sale of debt or equity securities,
bank financing, joint ventures or other means, and no assurance can be given
that additional capital will be available to the Company or that capital, if
any, will be available upon satisfactory terms.
<PAGE>
Volatile Securities Market Factors and Possible Wide Fluctuations in Stock Price
The market price of the Company's stock has in the past been subject to
significant fluctuations. Moreover, the markets for equity security in general,
and for those of medical device manufacturers in particular, have been volatile
and the price of the Company's common stock in the future could be subject to
wide fluctuations in response to quarterly variations in operating results, news
and product announcements, trading volume, general market trends and other
factors. No assurance can be given that the Company's common stock will trade in
the future at market prices in excess of its current market price.
Non-Payment of Dividends
The Company has never paid cash dividends on its common stock. The Company
currently intends to retain all future earnings, if any, for use in its business
and does not anticipate that cash dividends will be paid in the foreseeable
future.
Dependence on Single Source Suppliers
The Company depends on single source suppliers for certain of the raw
materials used in the manufacture of its graft products. In the event the
Company must obtain alternative sources for key raw materials, there can be no
assurance that such materials will be available for purchase from alternative
suppliers, that alternative suppliers will agree to supply the Company, or that
the Company's use of such suppliers would be approved by the FDA. Although the
Company currently has an adequate supply of raw materials and believes it will
be adequate for the needs of its graft business, there can be no assurance that
new sources of supply will be available when necessary. Any interruption in
supply of raw materials could have a material adverse effect on the Company's
ability to manufacture its products until a new source of supply is located and,
therefore, could have a material adverse effect on its business, financial
condition and results of operations.
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