<PAGE>
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U.S. 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 MARCH 31, 1997
Commission file number 0-28288
---------------------------------
ECLIPSE SURGICAL TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------------------------
CALIFORNIA 77-0223740
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
559 WEDDELL DRIVE
SUNNYVALE, CALIFORNIA 94089
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(408) 747-0120
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) 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
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock outstanding as of the latest practicable date.
16,228,622 shares
As of April 25, 1997
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
TABLE OF CONTENTS
PART 1 - FINANCIAL INFORMATION
Page
----
Item 1 Financial Statements:
a. Balance Sheets
as of March 31, 1997 and December 31, 1996 . . . . . . . . . . 1
b. Statements of Operations
for the three months ended March 31, 1997 and 1996 . . . . . . 2
c. Statements of Cash Flows
for the three months ended March 31, 1997 and 1996 . . . . . . 3
d. Notes to Financial Statements. . . . . . . . . . . . . . . . . 4
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . 5
PART II - OTHER INFORMATION
Item 1 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 15
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
EXHIBITS
Index to Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . 17
Exhibit 11.1 Statement Regarding Computation of Net Income
(Loss) Per Share . . . . . . . . . . . . . . . . . . . . . . . . . 18
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . $ 21,270 $ 24,106
Marketable securities . . . . . . . . . . . . . . . . . 9,353 21,397
Accounts receivable, net of allowance for doubtful
accounts of $308 at March 31, 1997 and $280 at
December 31, 1996, respectively . . . . . . . . . . . 1,555 2,483
Inventories . . . . . . . . . . . . . . . . . . . . . . 3,093 2,464
Prepaids and other current assets . . . . . . . . . . . 171 431
-------- --------
Total current assets . . . . . . . . . . . . . . . . . 35,442 50,881
Property and equipment, net . . . . . . . . . . . . . . . 1,458 906
Marketable securities . . . . . . . . . . . . . . . . . . 17,338 6,560
Other assets . . . . . . . . . . . . . . . . . . . . . . 230 359
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . $ 54,468 $ 58,706
-------- --------
-------- --------
LIABILITIES
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . $ 1,373 $ 2,043
Accrued liabilities. . . . . . . . . . . . . . . . . . . 1,399 908
Customer deposits . . . . . . . . . . . . . . . . . . . 28 28
Current portion of long-term debt . . . . . . . . . . . 7 41
-------- --------
Total current liabilities . . . . . . . . . . . . . . 2,807 3,020
Long-term debt, less current portion . . . . . . . . . . 18 20
-------- --------
Total liabilities . . . . . . . . . . . . . . . . . . 2,825 3,040
-------- --------
SHAREHOLDERS' EQUITY
Preferred stock, no par value:
Authorized: 5,000 shares;
Issued and outstanding: none
Common stock, no par value:
Authorized: 50,000 shares;
Issued and outstanding: 16,205 at March 31, 1997 and
16,172 shares at December 31, 1996 . . . . . . . . . . 65,449 65,339
Unrealized gain on marketable securities. . . . . . . . . 222 498
Accumulated deficit . . . . . . . . . . . . . . . . . . . (14,028) (10,171)
-------- --------
Total shareholders' equity . . . . . . . . . . . . . . 51,643 55,666
-------- --------
Total liabilities and shareholders' equity . . . . . . $ 54,468 $ 58,706
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements
1
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
1997 1996
----------- -----------
(unaudited) (unaudited)
Net revenues . . . . . . . . . . . . . . . . . . . $ 1,208 $ 1,752
Cost of revenues . . . . . . . . . . . . . . . . . 630 502
------- -------
Gross profit . . . . . . . . . . . . . . . . . . 578 1,250
------- -------
Operating expenses:
Research and development . . . . . . . . . . . . 2,727 517
Sales and marketing . . . . . . . . . . . . . . 1,411 396
General and administrative . . . . . . . . . . . 795 211
------- -------
Total operating expenses . . . . . . . . . . . 4,933 1,124
------- -------
Operating income (loss). . . . . . . . . . . (4,355) 126
Interest expense . . . . . . . . . . . . . . . . . (6) (50)
Interest income . . . . . . . . . . . . . . . . . 504 -
------- -------
Net income (loss). . . . . . . . . . . . . . $(3,857) $ 76
------- -------
------- -------
Net income (loss) per share. . . . . . . . . . . . $ (0.24) $ 0.01
------- -------
------- -------
Shares used in per share calculation . . . . . . . 16,181 14,863
------- -------
------- -------
The accompanying notes are an integral part of these financial statements
2
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1997 1996
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . . . . . . . . . $ (3,857) $ 76
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization. . . . . . . . . . . . . 105 29
Provision for doubtful accounts. . . . . . . . . . . . 452 34
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable . . . . . 476 (942)
(Increase) decrease in inventories . . . . . . . . . (629) 58
(Increase) decrease in prepaids and other assets . . 260 (76)
Decrease in other assets . . . . . . . . . . . . . . 129 -
Increase (decrease) in accounts payable . . . . . . (670) 16
Increase in customer deposits . . . . . . . . . . . - 56
Increase in accrued liabilities. . . . . . . . . . . 491 128
-------- ------
Net cash used in operating activities. . . . . . . (3,243) (621)
-------- ------
Cash flows from investing activities:
Sale of marketable securities . . . . . . . . . . . . 12,044 -
Investment in marketable securities. . . . . . . . . . (11,054) -
Acquisition of property and equipment. . . . . . . . . (657) (35)
-------- ------
Net cash provided (used) by investing activities . 333 (35)
-------- ------
Cash flows from financing activities:
Payments on short-term borrowings . . . . . . . . . . - (34)
Net proceeds from issuance of common stock . . . . . . 110 1,969
Payments on long-term debt . . . . . . . . . . . . . . (36) (125)
-------- ------
Net cash provided by financing activities. . . . . 74 1,810
-------- ------
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . . (2,836) 1,154
Cash and cash equivalents at beginning of period . . . . 24,106 123
-------- ------
Cash and cash equivalents at end of period . . . . . . . $21,270 $1,277
-------- ------
-------- ------
Supplemental schedule of noncash investing and
financing activities:
Unrealized gain on marketable securities . . . . . . . $ 222 $ -
-------- ------
-------- ------
Acquisition of equipment under capital lease . . . . . $ - $ 30
-------- ------
-------- ------
</TABLE>
The accompanying notes are an integral part of these financial statements
3
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
INTERIM FINANCIAL INFORMATION (UNAUDITED):
The interim financial statements in this report reflect all adjustments,
consisting of normal recurring accruals, that are, in the opinion of
management, necessary for a fair statement of financial position, results of
operations and cash flows for the interim periods covered and of the
financial condition of the Company at the interim balance sheet dates.
Results for interim periods are not necessarily indicative of results to be
expected for the full fiscal year. The year-end balance sheet information
was derived from audited financial statements but does not include all
disclosures required by generally accepted accounting principles. These
financial statements should be read in conjunction with the Company's audited
financial statements and notes thereto for the year ended December 31, 1996,
contained in the Annual Report on Form 10-K as filed with the U.S. Securities
and Exchange Commission (SEC).
NET INCOME (LOSS) PER SHARE:
Net (income) loss per share is computed using the weighted average
number of common and common equivalent (when dilutive) shares of common stock
outstanding. Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, common and common stock equivalent shares issued by the
Company during the twelve months preceding the initial offering date, using
the treasury stock method and the assumed public offering price per share,
have been included in the calculation of net income per share for the three
months ended March 31, 1996.
RECENT PRONOUNCEMENTS:
During February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share," (SFAS 128) which specifies the
computation, presentation and disclosure requirements for Earnings per Share.
SFAS will become effective for the Company's 1997 fiscal year. The impact of
adopting SFAS 128 is not expected to have a material impact on the Company's
financial condition or results of operations.
2. Inventories:
Inventories are stated at lower of cost (first-in, first-out) or market
and consist of the following (in thousands):
MARCH 31, DECEMBER 31,
1997 1996
---- ----
(UNAUDITED)
Raw materials . . . . . . . . . . . . . . . $ 883 $ 511
Work in process . . . . . . . . . . . . . . 42 99
Finished goods. . . . . . . . . . . . . . . 2,168 1,854
------ ------
$3,093 $2,464
------ ------
------ ------
4
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE DISCUSSION AND ANALYSIS BELOW CONTAINS TREND ANALYSIS AND OTHER
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1993 AND SECTION 21E OF THE SECURITIES ACT OF 1934. ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A
RESULT OF THE RISK FACTORS SET FORTH BELOW AND IN THE COMPANY'S ANNUAL REPORT ON
FORM 10-K AND OTHER REPORTS FILED BY THE COMPANY.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH FINANCIAL
STATEMENTS AND NOTES THERETO INCLUDED IN ITEM 1 OF THIS QUARTERLY REPORT AND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTAINED IN THE COMPANY'S 1996 ANNUAL REPORT ON FORM 10-K AS FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC).
OVERVIEW
The Company designs, develops, manufactures and distributes laser-based
surgical products and disposable fiber-optic accessories for the treatment of
advanced cardiovascular disease through transmyocardial revascularization
("TMR"). TMR is a surgical procedure performed on the beating or non-beating
heart in which a laser device is used to create pathways through the myocardium
directly into the heart chamber. The pathways are intended to enable improved
blood supply to the myocardium. TMR potentially offers end-stage cardiac
patients who are not candidates for percutaneous transluminal coronary
angioplasty ("PTCA" or "balloon angioplasty") or coronary artery bypass graft
surgery ("CABG" or "open heart bypass surgery") a means to alleviate their
anginal symptoms and improve their quality of life. In the U.S., the Company
currently offers its laser systems for sale in limited numbers for
investigational use only pursuant to Investigational Device Exemptions ("IDE")
from the U.S. Food and Drug Administration (the "FDA").
The Company was founded in 1989 as an outgrowth of certain research and
development efforts initially undertaken by the Company's founders in the early
1980s related to the use of laser technology to treat cardiovascular disease.
From 1989 through September 1995, the Company engaged in research, development
and sale of surgical laser products principally for procedures such as
atherectomy and arthroscopy. In 1993, the Company created and spun off to its
shareholders a balloon angioplasty company, Atlantis Catheter Company, Inc. In
1995, the Company determined that there is a significant opportunity in the TMR
market, and that the Company is well-positioned to enter this market because of
the Company's expertise with laser-based surgical techniques and the treatment
of cardiovascular disease. Accordingly, in late 1995, the Company changed its
strategic direction and began to apply its laser expertise toward the nascent
TMR market.
In late 1995, the Company began restructuring its operations and expanding
its management team in order to focus on the development and commercialization
of its TMR products. In September 1995, the Company received an IDE allowing it
to begin selling its TMR products for investigational use only, and commenced
clinical trials in the United States and Europe in November 1995. In 1995 and
1996, the Company has installed a total of 68 TMR systems through March 31, 1997
in the hospitals.
Prior to 1996, the Company had focused almost exclusively on research and
development activities relating to surgical laser products, substantially
contributing to annual operating losses since inception. Since 1996, the Company
has focused on TMR activities, particularly research and development activities
and clinical trials. At March 31, 1997, the Company had an accumulated deficit
of $14,028,000.
The Company expects to continue to incur operating losses related to
research and development activities, including clinical studies, the expansion
of sales and marketing resources and the continued development of corporate
infrastructure. The timing and amounts of the Company's expenditures will depend
upon a number of factors, including the progress of the Company's clinical
trials, the status and timing of regulatory approval, the timing of market
acceptance, if any, of the Company's products, and the efforts required to
develop the Company's sales and marketing organization.
5
<PAGE>
RESULTS OF OPERATIONS
REVENUES
Net revenues decreased 31% to 1,208,000 for the three months ended March
31, 1997 from $1,752,000 in the corresponding period of 1996. The decrease was
primarily due to a new HCFA policy which restricts Medicare reimbursement for
TMR equipment and procedures. The Company's products had received third party
reimbursement under the preceding HCFA policy. Reimbursement is a significant
factor considered by hospitals in determining whether to acquire new equipment.
Future revenues could continue to be affected by restrictions on third
party reimbursement and the timing and manner of sale of a limited number of
units of TMR laser systems. The Company intends to continue selling the systems
to hospitals outright (list price is $295,000) or placing the system with the
hospital for a placement fee (currently $25,000) plus an additional fee for each
procedure performed. As a result of a new HCFA policy restricting Medicare
reimbursement for TMR equipment and procedures, the Company anticipates that
these sales will be more difficult to obtain in 1997 than in the prior year.
The list price of the Company's laser base units, the timing of individual
orders and shipments, as well as the manner of sale, could significantly impact
quarter to quarter results.
GROSS PROFIT
Gross profit decreased to $578,000 for the three months ended March 31,
1997 from $1,250,000 for the corresponding period in 1996. The gross profit
percentage decreased to 48% for the quarter from 71% for the corresponding
period of 1996. The decrease reflects unabsorbed manufacturing costs caused by
a decrease in revenues as well as an increase in manufacturing overhead in the
three months ended March 31, 1997 as compared to the three months ended March
31, 1996. Manufacturing headcount increased to 30 from eight at March 31, 1997
and 1996, respectively. Additionally, the expenses incurred in achieving CE Mark
and pursuing ISO 9001 have been included in manufacturing overhead.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased to $2,727,000 or 226% of net
revenues for the three months ended March 31, 1997 from $517,000 or 30% of net
revenues for the three months ended March 31, 1996.
The increase in these expenses reflects a higher level of research and
development expenses relating to TMR including costs related to the introduction
of new TMR products, filing of six patent applications, costs to support
clinical trials, and an increase in headcount to 25 research and development
employees at March 31, 1997 from six at March 31, 1996. The Company's products
are currently in clinical trials, and therefore, subject to limitations by the
FDA. The Company believes that continued investment in the development of new
and improved products and procedures and continued investment in the Company's
clinical trials is critical to its future success. Additionally, as a result of
a new HCFA policy restricting Medicare reimbursement for TMR equipment and
procedures, the Company anticipates a significant increase in future
expenditures relating to hospital support of the Company's clinical trials.
Accordingly, the Company believes that research and development expenses will
continue to increase significantly over the short term and possibly thereafter.
6
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SALES AND MARKETING
Sales and marketing expenses increased to $1,411,000 or 117% of net
revenues in the three months ended March 31, 1997 from $396,000 or 23% of net
revenues in the corresponding period in 1996. The increase in the three months
ended March 31,1997 reflects the Company's application of additional resources
to the TMR market including expansion of the Company's sales and marketing staff
to 12 from seven at March 31, 1997 and 1996, respectively, increased travel and
trade show expenses, and costs to develop the international market. The Company
expects that sales and marketing expenses will continue to increase
significantly as the Company continues to focus resources on the development of
its TMR products.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased to $795,000 or 66% of net
revenues for the three months ended March 31, 1997 from $211,000 or 12% of net
revenues for the three months ended March 31, 1996. The increase reflects
increased headcount to fourteen at March 31, 1997 from four at March 31, 1996,
and expenses related to being a publicly traded company, including investor
relations fees, legal, accounting and stock administration expenses. The Company
anticipates that general and administrative expenses will continue to increase
in relation to sales and general headcount increases.
INTEREST INCOME AND EXPENSE
The Company earned $504,000 of interest income in the three months ended
March 31, 1997, primarily from investment of proceeds received in connection
with its initial public offering in May 1996. Prior to its initial public
offering, the Company had limited cash balances and therefore earned little if
any interest income.
Interest expense decreased to $6,000 for the three months ended March 31,
1997 from $50,000 in the corresponding period of 1996 reflecting a decrease in
outstanding debt.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has satisfied its capital requirements
primarily through sales of its equity securities and, to a lesser extent, loans
from shareholders. In addition, the Company's operations have been funded in
part through sales of the Company's products. At March 31, 1997, the Company had
aggregate cash and marketable securities of $47,961,000 as compared to
$52,063,000 at December 31, 1996. The Company used $3,243,000 and $621,000 for
operating activities for the three months ended March 31, 1997 and 1996,
respectively. At March 31, 1997, the Company had an accumulated deficit of
$14,028,000.
The Company anticipates that its current cash and marketable securities,
together with sales of products for investigational use, will be sufficient to
meet the Company's capital requirements through at least calendar year 1997.
There can be no assurance, however, that the Company will not require additional
sources of cash at an earlier date in the future, depending upon the progress of
expansion of the Company's clinical trials, any need for additional clinical
trials or other testing of the Company's products, and the timing of other
required expenditures as indicated above. If the Company is required to obtain
additional financing in the future, there can be no assurance that capital will
be available on terms acceptable to the Company, if at all.
7
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CERTAIN FACTORS BEARING ON FUTURE RESULTS
CERTAIN OF THE STATEMENTS ABOVE ARE FORWARD-LOOKING STATEMENTS. IN
ADDITION, THE COMPANY MAY FROM TIME TO TIME MAKE ORAL FORWARD-LOOKING
STATEMENTS. THE FOLLOWING ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THOSE PROJECTED IN ANY SUCH FORWARD-LOOKING
STATEMENTS..
EARLY STAGE OF CLINICAL TRIALS
The Company must obtain marketing clearance ("PMA") from the U.S. Food and
Drug Administration (the "FDA") before the Company will be able to offer its
products for transmyocardial revascularization ("TMR") on a commercial basis in
the U.S. A necessary prerequisite for submitting a PMA application is
completion of clinical testing to demonstrate the safety and effectiveness of
the Company's TMR products.
The Company is currently at an early stage of clinical testing. The Company
has completed Phase I and Phase II of its initial clinical study, comparing "TMR
to Drug Therapy for Patients with Class IV Angina" who have no surgical option.
Data collection of follow up results, at six months and twelve months is
ongoing. The Company also has one other clinical study underway that has reached
Phase II, and three additional studies currently in Phase I. Completion of the
clinical studies on a timely basis will depend on the Company's ability to
establish TMR sites and enroll participating patients. In addition, the clinical
studies will require substantial financial and management resources. There can
be no assurance that the Company will have the resources necessary to complete
such clinical studies. Furthermore, there can be no assurance that the Company's
clinical studies will be completed within the currently anticipated time frame
or otherwise in a timely manner, nor that such clinical studies will demonstrate
the safety and effectiveness of the Company's TMR products to the extent
necessary to obtain FDA and other regulatory approvals and establish a
commercial market for the Company's products. Moreover, results of the initial
clinical testing are not necessarily predictive of results to be achieved in
later clinical studies, if undertaken, or commercially, if a PMA is obtained.
Failure to complete the Company's clinical studies in a timely manner or to
demonstrate the safety and effectiveness of the Company's TMR products could
delay or prevent regulatory approval and would materially and adversely affect
the Company's business, financial condition and results of operations.
NO ASSURANCE OF FDA OR OTHER REQUIRED GOVERNMENTAL APPROVALS
The Company's products are regulated in the U.S. as medical devices by the
FDA under the Federal Food, Drug, and Cosmetic Act ("FD&C Act") and, as such,
require FDA approval of a PMA application prior to commercial sale in the U.S.
The FDA approves PMA applications for specific indications only and FDA
regulation prohibits commercial marketing in the U.S. of devices for
indications that have not been approved by the FDA. The process of obtaining
required regulatory approvals from the FDA and other regulatory authorities is
lengthy, expensive and inherently uncertain, generally takes several years or
longer to complete, if approval is obtained at all, and requires the submission
of extensive clinical data and supporting information to the FDA. There can be
no assurance that FDA approval of products developed by the Company will be
obtained on a timely basis, if at all. Furthermore, there can be no assurance
that FDA approval will be obtained for any or all indications sought by the
Company. Failure to obtain FDA approval on a timely basis or for the indications
sought by the Company would materially and adversely affect the Company's
business, financial condition and results of operations.
The Company will also be required to follow applicable Good Manufacturing
Practices ("GMP") regulations of the FDA, which include testing, control and
documentation requirements, as well as similar requirements in other countries,
including International Standards Organization ("ISO") 9001 standards. Failure
to meet these requirements would preclude the Company from marketing its
products on a commercial basis, and therefore would materially and adversely
affect the Company's business, financial condition and results of operations.
8
<PAGE>
Sales of medical devices outside of the U.S. are subject to foreign
regulatory requirements that vary widely by country. In addition, the FDA must
approve the export of devices that require a PMA but are not yet approved
domestically. Foreign and domestic regulatory approvals, if granted, may
include significant limitations on the indicated uses for which the product may
be marketed. In addition, to obtain such approvals, medical device manufacturers
must comply with numerous other requirements of the FDA and certain foreign
regulatory authorities. For example, the European Conforming Mark (the "CE
Mark") is required to sell products in European Union countries. The Company
received CE Marking for its TMR laser in December 1996. However, product
approvals can be withdrawn for failure to comply with regulatory standards or
because of unforeseen problems following initial marketing.
RISKS ASSOCIATED WITH NEW SURGICAL PROCEDURE; NO ASSURANCE OF MARKET ACCEPTANCE
The Company's ability to successfully commercialize its TMR products will
depend upon its ability to achieve acceptance of its TMR systems and procedures
among cardiologists, cardiac surgeons and other members of the medical
community. The Company believes that it will not achieve such acceptance until
such time, if any, as the Company's TMR products can be demonstrated to be safe,
efficacious and cost-effective. Even if the clinical safety and effectiveness of
the Company's TMR products is established, cardiologists, cardiac surgeons and
other members of the medical community may elect not to recommend TMR for any
number of other reasons. Broad use of the Company's TMR products will require
training of numerous physicians, and the time required to complete such training
could adversely affect market acceptance. Moreover, even if TMR becomes
generally accepted by the medical community, physicians trained in competitive
TMR products may elect not to consider the Company's products, or may elect
instead to recommend a competitor's products. Failure of the Company's products
to achieve significant market acceptance would materially and adversely affect
the Company's business, financial condition and results of operations.
DEPENDENCE ON SINGLE PRODUCT LINE
The Company has elected to focus its resources on the continued development
and refinement of its TMR products. If the Company is unable to obtain requisite
regulatory approvals or to achieve commercial acceptance of its TMR products,
the Company's business, financial condition and results of operations will be
materially and adversely affected and could result in cessation of the Company's
current business.
UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY; RISKS OF
FUTURE LITIGATION
The Company's success will depend, in part, on its ability to obtain patent
protection for its products, preserve its trade secrets, and operate without
infringing the proprietary rights of others. The Company's policy is to seek to
protect its proprietary position by, among other methods, filing U.S. and
foreign patent applications related to its technology, inventions and
improvements that are important to the development of its business. The Company
holds five U.S. patents and related foreign patents relating to surgical
treatment with lasers and fiber-optic handpieces, and has applied for additional
patents relating to its laser technology, TMR applications and fiber-optic
handpieces. There can be no assurance that any of the Company's patents or
patent applications will not be challenged, invalidated or circumvented in the
future or that the rights granted thereunder will provide a competitive
advantage. The Company intends to vigorously protect and defend its intellectual
property. It is uncertain whether patent protection will continue to be
available for surgical methods in the future. Costly and time-consuming
litigation brought by the Company may be necessary to enforce patents issued to
the Company, to protect trade secrets or know-how owned by the Company, or to
determine the enforceability, scope and validity of the proprietary rights of
others.
The Company also relies upon trade secrets, technical know-how and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants and
advisors to execute confidentiality and assignment of inventions agreements
in connection with their employment, consulting or advisory relationships
with the Company. There can be no assurance, however, that these agreements
will not be breached or that the Company will have adequate remedies for any
breach. Furthermore, no assurance can
9
<PAGE>
be given that competitors will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's proprietary technology, or that the Company can meaningfully
protect its rights in unpatented proprietary technology.
The medical device industry in general, and the industry segment that
includes products for the treatment of cardiovascular disease in particular,
have been characterized by substantial competition and litigation regarding
patent and other intellectual property rights. In this regard, competitors of
the Company have been issued a number of patents related to TMR. In September
1995, the Company received from a competitor a notice of potential
infringement of the competitor's patent regarding a method for TMR utilizing
synchronization of laser pulses to the electrical signals from the heart. In
January 1996, the Company received from a second competitor a notice of
potential infringement of the competitor's patent regarding a method to
perform TMR using fiber optics. The Company has concluded in each case,
following discussion with its patent counsel, that it does not utilize the
process and/or apparatus which is the subject of the patent at issue, and has
responded to the respective competitor to such effect. The Company has
received no further correspondence on either matter. There can be no
assurance, however, that further claims or proceedings will not be initiated
by either competitor, or that claims by other parties will not arise in the
future. Any such claims in the future, with or without merit, could be
time-consuming and expensive to respond to and could divert the attention of
the Company's technical and management personnel. The Company may be involved
in litigation to defend against claims of infringement by the Company, to
enforce patents issued to the Company, or to protect trade secrets of the
Company. If any relevant claims of third party patents are upheld as valid
and enforceable in any litigation or administrative proceeding, the Company
could be prevented from practicing the subject matter claimed in such
patents, or would be required to obtain licenses from the patent owners of
each such patent or to redesign its products or processes to avoid
infringement.
Patent applications in the U.S. are maintained in secrecy until patents
issue, and patent applications in foreign countries are maintained in secrecy
for a period after filing. Publication of discoveries in the scientific or
patent literature tends to lag behind actual discoveries and the filing of
related patent applications. Accordingly, there can be no assurance that
current and potential competitors and other third parties have not filed or
in the future will not file applications for, or have not received or in the
future will not receive, patents or obtain additional proprietary rights that
will prevent, limit or interfere with the Company's ability to make, use or
sell its products either in the U.S. or internationally. In the event the
Company were to require licenses to patents issued to third parties, there
can be no assurance that such licenses would be available or, if available,
would be available on terms acceptable to the Company, or that the Company
would be successful in any attempt to redesign its products or processes to
avoid infringement. Accordingly, an adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could
prevent the Company from manufacturing and selling its products, which would
materially and adversely affect the Company's business, financial condition
and results of operations.
EXPECTATION OF INTENSE MARKET COMPETITION
The Company expects that the market for TMR, which is currently in the
early stages of development, will be intensely competitive. Competitors are
likely to include three laser competitors, PLC Systems, Inc. ("PLC"),
CardioGenesis Corporation ("CardioGenesis") and U.S. Surgical Corporation
("U.S. Surgical"), all three of which are currently selling TMR products for
investigational use in the U.S. and abroad. Other competitors may include
additional companies that elect to enter the market, including large
companies in the laser and cardiac surgery markets. Many of these companies
have significantly greater financial, development, marketing and other
resources than the Company. In the event a competitor is able to obtain a PMA
for its products prior to the Company, the Company's ability to compete
successfully could be materially and adversely affected.
TMR also competes with other methods for the treatment of cardiovascular
disease, including drug therapy, PTCA and CABG. Although the Company is
seeking to demonstrate the safety and effectiveness of the Company's TMR
procedures in patients for whom other cardiovascular treatments are not
likely to provide relief, and in the future intends to pursue the safety and
effectiveness of TMR when used in conjunction with other treatments, there
can be no assurance that the Company's TMR products will be accepted in these
markets. There can be no assurance that physicians will use the Company's TMR
procedures to replace or supplement established treatments, or that the
10
<PAGE>
Company's TMR procedures will be competitive with current or future
technologies. Such competition could materially and adversely affect the
Company's business, financial condition and results of operations.
Any product developed by the Company that gains regulatory approval will
face competition for market acceptance and market share. An important factor
in such competition may be the timing of market introduction of competitive
products. Accordingly, the relative pace at which the Company is able to
develop products, complete clinical testing and regulatory approval
processes, gain third party reimbursement acceptance and supply commercial
quantities of the product to the market are expected to be important
competitive factors. There can be no assurance that the Company will be able
to compete successfully against current and future competitors. Failure to do
so would materially and adversely affect the Company's business, financial
condition and results of operations.
HISTORY OF OPERATING LOSSES
From inception to March 31, 1997, the Company incurred cumulative net
losses of approximately $14 million. The Company's revenues and operating
income will continue to be constrained until such time, if ever, as FDA and
other regulatory approval is obtained for the Company's TMR products, and for
an indefinite period of time after any such approval is obtained.
Furthermore, the Company expects its expenses in all categories to increase
as its clinical trial and other business activities expand. Hence, there can
be no assurance that the Company will achieve or sustain profitability in the
future. Failure to achieve significant commercial revenues or profitability
would materially and adversely affect the Company's business, financial
condition and results of operations.
RISKS OF TECHNOLOGICAL CHANGE
Significant resources are continually being expended to develop new and
improved treatment methodologies for coronary disease. Accordingly, the
market acceptance and commercial success of the Company's TMR products and
procedures will depend not only on the safety and effectiveness of the
Company's TMR products and procedures, but also the relative safety and
effectiveness of alternative treatment measures, which alternatives could
potentially include new treatments or improvements or emergence of new
alternative treatments would materially and adversely affect the Company's
business, financial condition and results of operations.
POTENTIAL DIFFICULTIES IN MANAGING BUSINESS UNDERGOING RAPID CHANGE
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. In this regard, a number of
members of the Company's senior management team have only recently joined the
Company. Moreover, certain members of such management team have limited
experience as a senior executive of a public corporation. There can be no
assurance that the management team will operate together effectively. To
compete successfully against current and future competitors, complete
clinical trials in progress, prepare additional products for clinical trials
and develop future products, the Company believes that it must continue to
expand its operations, particularly in the areas of research and development,
sales and marketing, training, and manufacturing. If the Company were to
experience significant growth in the future, such growth would likely result
in new and increased responsibilities for management personnel and place
significant strain upon the Company's management, operating and financial
systems and resources. To accommodate such growth and compete effectively,
the Company must continue to implement and improve information systems,
procedures and controls, and to expand, train, motivate and manage its work
force. There can be no assurance that the Company's personnel, systems,
procedures and controls will be adequate to support the Company's future
operations. Any failure to implement and improve the Company's operational,
financial and management systems or to expand, train, motivate or manage
employees could materially and adversely affect the Company's business,
financial condition and results of operations.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
Results of operations are expected to fluctuate significantly from quarter
to quarter depending upon numerous factors, including the timing and results of
clinical trials; delays associated with the FDA and other
11
<PAGE>
regulatory approval processes; health care reform and reimbursement policies;
demand for the Company's products; changes in pricing policies by the Company
or its competitors; the number, timing and significance of product
enhancements and new product announcements by the Company and its
competitors; the ability of the Company to develop, introduce and market new
and enhanced versions of the Company's products on a timely basis; customer
order deferrals in anticipation of new or enhanced products offered by the
Company or its competitors; product quality problems; personnel changes;
changes in Company strategy; and the level of international sales. Quarter to
quarter operating results could also be affected by the timing of the receipt
of individual customer orders, order fulfillment and revenue recognition with
respect to small numbers of individual laser base units, since each unit
carries a high price per unit.
UNCERTAINTY REGARDING THIRD PARTY REIMBURSEMENT
The Company expects that its ability to successfully commercialize its
products will depend significantly on the availability of reimbursement for
surgical procedures using the Company's products from third party payors such
as governmental programs, private insurance and private health plans.
Reimbursement is a significant factor considered by hospitals in determining
whether to acquire new equipment. Notwithstanding FDA approval, if granted,
third party payors may deny reimbursement if the payor determines that a
therapeutic medical device is unnecessary, inappropriate, not cost-effective
or experimental or is used for a non-approved indication.
Medicare reimburses hospitals on a prospectively determined fixed amount
for the costs associated with an in-patient hospitalization based on the
patient's discharge diagnosis, and reimburses physicians on a prospectively
determined fixed amount based on the procedure performed, regardless of the
actual costs incurred by the hospital or physician in furnishing the care and
unrelated to the specific devices used in that procedure. Medicare and other
third party payors are increasingly scrutinizing whether to cover new
products and the level of reimbursement for covered products. In addition,
Medicare traditionally has considered items or services involving devices
that have not been approved or cleared for marketing by the FDA to be
precluded from Medicare coverage. Under a Health Care Financing
Administration ("HCFA") policy effective November 1, 1995, Medicare coverage
will not be precluded for items and related services involving devices that
have been classified by the FDA as "non-experimental/ investigational"
("Category B") devices and that are furnished in accordance with FDA-approved
protocols governing clinical trials. Even with items or services involving
Category B devices, however, Medicare coverage may be denied if other
coverage requirements are not met, for example if the treatment is not
medically needed for the specific patient. In November 1995, the Company
received Category B designation for its TMR procedure from the HCFA.
Accordingly, the Company's procedures had received third party reimbursement
in many cases under HCFA's policy. As of May 19, 1997, although Category B
status is retained, under a recent HCFA ruling, there will not be coverage
for any manufacturer's TMR procedures at this time. There can be no assurance
that this coverage will be given in the future or that Medicare will
adequately reimburse the costs of the Company's TMR procedures when and if a
PMA is granted. While the Company is unable to determine the ultimate effect
of this policy change on the business and operating results, the Company
anticipates that research and development expenses will increase
significantly due to increased expenses in support of clinical trials, and
revenues from sale of investigational products are likely to decrease, at
least over the short term and possibly thereafter.
There can be no assurance as to whether third party payors will cover
TMR or as to the levels of reimbursement. There also can be no assurance that
levels of reimbursement, if any, will not be decreased in the future, or that
future legislation, regulation, or reimbursement policies of third party
payors will not otherwise adversely affect the demand for the Company's
products or its ability to sell its products on a profitable basis.
Fundamental reforms in the healthcare industry in the U.S. and Europe that
could affect the availability of third party reimbursement continue to be
proposed, and the Company cannot predict the timing or effect of any such
proposal. If third party payor coverage or reimbursement is unavailable or
inadequate, the Company's business, financial condition and results of
operations could be materially and adversely affected.
12
<PAGE>
LIMITED SALES, MARKETING AND DISTRIBUTION SYSTEMS
The Company has made limited sales of its TMR products to date, for
investigational use only. Accordingly, the Company has maintained a limited
sales and marketing organization in the U.S. and abroad. The Company plans to
market its TMR products, if approved, through a direct sales force in the
U.S. and through a relationship with a major cardiovascular surgical products
company or companies for international sales. Establishment of a sales force
capable of effectively commercializing the Company's TMR products will
require substantial efforts and require significant management and financial
resources. There can be no assurance that the Company will be able to
establish such a sales capability on a timely basis, if at all. Moreover,
there can be no
assurance that the Company's international distributor or distributors will
devote sufficient resources to development of the markets for the Company's
products or will be successful in such commercialization efforts.
RISK OF PRODUCT LIABILITY
The Company faces an inherent and significant business risk of exposure
to product liability claims in the event that the use of its products results
in personal injury or death, and there can be no assurance that material
product liability claims will not be assessed against the Company in the
future. The Company maintains insurance against product liability claims in
the amount of $3 million per occurrence and $3 million in the aggregate, and
expects to seek to increase such coverage if and when a PMA is obtained.
However, there can be no assurance that such coverage will continue to be
available in the amount desired or on terms acceptable to the Company, or
that such coverage will be adequate for liabilities actually incurred. Also,
in the event that any of the Company's products prove to be defective, the
Company may be required to recall or redesign such products. Any uninsured or
underinsured claim brought against the Company or any claim or product recall
that results in significant cost to or adverse publicity against the Company
could materially and adversely affect the Company's business, financial
condition and results of operations.
LIMITED MANUFACTURING EXPERIENCE; DEPENDENCE ON KEY SUPPLIERS
The Company's success will depend in part on its ability to manufacture
its products in a timely, cost-effective manner and in compliance with GMP,
ISO 9001 and other regulatory requirements. The manufacture of the Company's
products is a labor-intensive, complex operation involving a number of
separate processes and components. The Company's manufacturing activities to
date have consisted primarily of manufacturing limited quantities of systems
for use in clinical trials. The Company does not have experience in
manufacturing its products in the commercial quantities that might be
required if the Company receives regulatory approval for its TMR products.
Furthermore, as a condition to receipt of PMA approval, the Company's
facilities, procedures and practices will be subject to pre-approval and
ongoing GMP inspections by FDA.
Manufacturers often encounter difficulties in scaling up manufacturing
of new products, including problems involving product yields, quality control
and assurance, component and service availability, adequacy of control
policies and procedures, lack of qualified personnel, compliance with FDA
regulations, and the need for further FDA approval of new manufacturing
processes and facilities. There can be no assurance that manufacturing
yields, costs or quality will not be adversely affected as the Company seeks
to increase production, and any such adverse effect could materially and
adversely affect the Company's business, financial condition and results of
operations.
The Company currently purchases certain laser and fiber-optic components
from single sources. Although the Company has identified alternative vendors,
the qualification of additional or replacement vendors for certain components or
services is a lengthy process. There can be no assurance that materials obtained
from outside suppliers will continue to be available in adequate quantities or
at the times required by the Company or that the Company will be able to locate
alternative suppliers on a timely basis. Any significant supply interruption
would have a material adverse effect on the Company's ability to manufacture its
products and, therefore, would materially and adversely affect the Company's
business, financial condition and results of operations. The Company expects to
manufacture its products based on forecasted product orders, and intends to
purchase subassemblies and components prior to receipt of purchase orders from
customers. Lead times for materials and components ordered by the
13
<PAGE>
Company vary significantly, and depend on factors such as the business
practices of the specific supplier, contract terms and general demand for a
component at a given time. As a result, there is a risk of excess or
inadequate inventory if orders do not match forecasts.
DEPENDENCE ON KEY PERSONNEL
The Company's future business and operating results depend in
significant part upon the continued contributions of its key technical and
senior management personnel, including Douglas Murphy-Chutorian, M.D., the
Company's Chief Executive Officer and Richard L. Mueller, Jr., the Company's
President and Chief Operating Officer. The Company maintains key person life
insurance policies on both of these individuals in the amount of $2 million.
The Company's future business and operating results also depend in
significant part upon its ability to attract and retain qualified additional
management, manufacturing, technical, marketing and sales and support
personnel for its operations. Competition for such personnel is intense, and
there can be no assurance that the Company will be successful in attracting
or retaining such personnel. The loss of any key employee, the failure of any
key employee to perform in his or her current position, or the Company's
inability to attract and retain skilled employees, as needed, could
materially and adversely affect the Company's business, financial condition
and results of operations.
TRADING MARKET FOR COMMON STOCK; VOLATILITY OF STOCK PRICE
Prior to the Company's initial public offering on May 31, 1996, there
was no public market for the Company's Common Stock, and there can be no
assurance that an active trading market will develop or be sustained. The
market price of the Common Stock has been and is likely to continue to be
highly volatile and may be significantly affected by factors such as actual
or anticipated fluctuations in the Company's operating results, announcements
of technological innovations, new products or new contracts by the Company or
its competitors, developments with respect to patents or proprietary rights,
conditions and trends in the medical device and other technology industries,
healthcare reform measures, adoption of new accounting standards affecting
the medical device industry, changes in financial estimates by securities
analysts, general market conditions and other factors. In addition, the stock
market has from time to time experienced significant price and volume
fluctuations that have particularly affected the market prices for the common
stocks of early stage companies. These broad market fluctuations may
materially and adversely affect the market price of the Common Stock. In the
past, following periods of volatility in the market price of a particular
company's securities, securities class action litigation has often been
brought against that company. Such litigation, if brought against the
Company, could result in substantial costs and a diversion of management's
attention and resources.
CONCENTRATION OF SHARE OWNERSHIP
The present directors and executive officers of the Company and their
affiliates beneficially own approximately 38.1% of the outstanding Common
Stock. As a result, these shareholders will be able to exercise significant
influence over matters requiring shareholder approval, including the election
of directors and approval of significant corporate transactions. Such
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company.
POTENTIAL NEED FOR ADDITIONAL CAPITAL
Although the Company anticipates that its current cash balances,
together with sales of products for investigational use, will be sufficient
to meet the Company's capital requirements through at least calendar year
1997, there can be no assurance that the Company will not require additional
sources of cash at an earlier date. This will depend upon the progress of
expansion of the Company's clinical trials and any need for additional trials
or other testing of the Company's products, and the timing of required
expenditures. If the Company is required to obtain additional financing in
the future, there can be no assurance that capital will be available on terms
acceptable to the Company, if at all.
14
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not involved in any material litigation outside of the
ordinary course of business.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBIT
See page 18 for Exhibit 11.1, Statement Regarding Computation of Net
Income (Loss) Per Share.
b.) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the three
month period ended March 31, 1997.
15
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
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.
ECLIPSE SURGICAL TECHNOLOGIES, INC.
Registrant
Date: April 28, 1997 /s/ Douglas Murphy-Chutorian, M.D.
------------------------------------------------
Douglas Murphy-Chutorian, M.D.
Chief Executive Officer
Date: April 28, 1997 /s/ Barbara A. Dreblow
------------------------------------------------
Barbara A. Dreblow
Chief Financial Officer
(Principal Financial and Accounting Officer)
16
<PAGE>
ECLIPSE SURGICAL TECHNOLOGIES, INC.
EXHIBIT INDEX
Exhibit
Number
- --------
11.1 Statement Regarding Computation of Net Income (Loss) Per Share.........18
17
<PAGE>
EXHIBIT 11.1
ECLIPSE SURGICAL TECHNOLOGIES, INC.
STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
1997 1996
------ ------
Weighted average common shares outstanding for the
period . . . . . . . . . . . . . . . . . . . . . . 16,181 10,470
Common equivalent shares assuming conversion of
stock options and warrants under the treasury
stock method . . . . . . . . . . . . . . . . . . . - 2,098
Common equivalent shares pursuant to Staff
Accounting Bulletin No. 83 . . . . . . . . . . . . - 2,295
------- -------
Shares used in per share calculations . . . . . . . 16,181 14,863
------- -------
------- -------
Net income (loss) . . . . . . . . . . . . . . . . . $(3,857) $ 76
------- -------
------- -------
Net income (loss) per share . . . . . . . . . . . . $ (0.24) $ 0.01
------- -------
------- -------
All share numbers reflect the Company's three-for-one stock split.
There is no difference between primary and fully diluted earnings per share
for each period presented.
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ECLIPSE
SURGICAL TECHNOLOGIES FORM 10-Q 3/31/97 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 21,270
<SECURITIES> 26,691
<RECEIVABLES> 1,863
<ALLOWANCES> (308)
<INVENTORY> 3,093
<CURRENT-ASSETS> 35,442
<PP&E> 2,030
<DEPRECIATION> (572)
<TOTAL-ASSETS> 54,468
<CURRENT-LIABILITIES> 2,807
<BONDS> 0
0
0
<COMMON> 51,643
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 54,468
<SALES> 1,208
<TOTAL-REVENUES> 1,208
<CGS> 630
<TOTAL-COSTS> 630
<OTHER-EXPENSES> 4,933
<LOSS-PROVISION> 308
<INTEREST-EXPENSE> 6
<INCOME-PRETAX> (3,857)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,857)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,857)
<EPS-PRIMARY> $(0.24)
<EPS-DILUTED> 0
</TABLE>
