<PAGE> 1
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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 SEPTEMBER 30, 2000
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)
1049 KIEL COURT
SUNNYVALE, CALIFORNIA 94089
(Address of principal executive offices)
(408) 548-2100
(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.
30,663,091 shares
As of October 31, 2000
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
TABLE OF CONTENTS
PART 1
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Item 1. Financial Statements (unaudited):
a. Consolidated Balance Sheets
as of September 30, 2000 and December 31, 1999 ......................... 1
b. Consolidated Statements of Operations & Comprehensive Loss for
the three months and nine months ended September 30, 2000 and 1999 ...... 2
c. Consolidated Statements of Cash Flows
for the nine months ended September 30, 2000 and 1999 ................... 3
d. Notes to Consolidated Financial Statements ............................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ................................................................. 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk ..................... 22
PART II
OTHER INFORMATION
Item 1. Legal Proceedings .............................................................. 23
Item 6. Exhibits and Reports on Form 8-K ............................................... 23
Signatures ..................................................................... 24
</TABLE>
<PAGE> 3
ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................. $ 4,356 $ 5,566
Marketable securities ...................................... 2,571 3,227
Accounts receivable, net of allowance for doubtful
accounts of $619 and $1,079 at September 30, 2000
and December 31, 1999, respectively ................. 3,686 8,119
Inventories ................................................ 6,452 6,983
Prepaids and other current assets .......................... 576 767
--------- ---------
Total current assets ..................................... 17,641 24,662
Property and equipment, net .................................. 1,030 1,220
Long-term marketable securities .............................. -- 4,520
Accounts receivable over one year, net of allowance for
doubtful accounts of $215 and $797 at September 30, 2000
and December 31, 1999, respectively ........................ 477 1,125
Other assets ................................................. 2,347 2,492
--------- ---------
Total assets ............................................. $ 21,495 $ 34,019
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................... $ 928 $ 1,819
Accrued liabilities ........................................ 6,787 9,557
Customer deposits .......................................... 211 145
Deferred revenue ........................................... 1,528 1,720
Note payable ............................................... 218 --
Current portion of capital lease obligation ................ 26 26
Current portion of long-term liabilities ................... 500 1,364
--------- ---------
Total current liabilities ............................ 10,198 14,631
Capital lease obligation, less current portion ............... 73 90
Long-term liabilities, less current portion .................. 452 725
--------- ---------
Total liabilities ........................................ 10,723 15,446
--------- ---------
Shareholders' equity:
Preferred stock:
no par value; 5,000 shares authorized; none issued and
outstanding ............................................... -- --
Common stock:
no par value; 50,000 shares authorized; 30,659 and 29,437
shares issued and outstanding at September 30, 2000 and
December 31, 1999, respectively ........................... 162,029 158,338
Deferred Compensation ........................................ (422) (466)
Accumulated other comprehensive loss ......................... (166) (75)
Accumulated deficit .......................................... (150,669) (139,224)
--------- ---------
Total shareholders' equity ................................. 10,772 18,573
--------- ---------
Total liabilities and shareholders' equity ................. $ 21,495 $ 34,019
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
1
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues ......................................... $ 5,014 $ 6,085 $ 17,299 $ 17,749
Cost of revenues ..................................... 2,460 2,952 7,489 7,727
-------- -------- -------- --------
Gross profit ..................................... 2,554 3,133 9,810 10,022
-------- -------- -------- --------
Operating expenses:
Research and development ........................... 1,183 2,475 4,278 9,452
Sales and marketing ................................ 3,474 3,914 12,368 11,953
General and administrative ......................... 1,697 1,289 4,908 5,998
Merger related costs ............................... -- 437 -- 7,414
-------- -------- -------- --------
Total operating expenses ......................... 6,354 8,115 21,554 34,817
-------- -------- -------- --------
Operating loss ............................... (3,800) (4,982) (11,744) (24,795)
Interest expense ..................................... (9) (21) (27) (41)
Interest and other income ............................ 65 97 326 563
-------- -------- -------- --------
Net loss ......................................... (3,744) (4,906) (11,445) (24,273)
-------- -------- -------- --------
Other comprehensive loss, net of tax:
Foreign currency translation adjustment ............ (119) -- (124) --
Unrealized holding gain (losses) arising
during the period ................................ 26 13 33 (26)
-------- -------- -------- --------
Other comprehensive income (loss) ........ (93) 13 (91) (26)
-------- -------- -------- --------
Comprehensive loss ............. $ (3,837) $ (4,893) $(11,536) $(24,299)
======== ======== ======== ========
Net loss per share:
Basic and diluted ....................... $ (0.12) $ (0.17) $ (0.38) $ (0.87)
======== ======== ======== ========
Weighted average shares outstanding ..... 30,191 28,591 29,977 28,052
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
2
<PAGE> 5
ECLIPSE SURGICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Cash from operating activities:
Net loss .................................................................. $(11,445) $(24,273)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization ........................................ 603 1,453
Provision for doubtful accounts ...................................... 491 1,273
Inventory reserves ................................................... 1,328 1,782
Amortization of deferred compensation for options to consultants ..... 595 343
Amortization of stock compensation to employees....................... -- 370
Amortization of license fees ......................................... 145 --
Loss on disposal of property and equipment ........................... -- 317
Changes in operating assets and liabilities:
Accounts receivable -- short term .................................... 3,625 (323)
Inventories .......................................................... (797) (581)
Prepaids and other current assets .................................... 191 702
Other assets ......................................................... -- (844)
Accounts receivable long -- term ..................................... 966 --
Accounts payable ..................................................... (891) 1,186
Accrued liabilities .................................................. (2,770) (1,852)
Current portion of long-term liabilities ............................. (864) 1,464
Long-term liabilities ................................................ (273) 14
Customer deposits .................................................... 66 (111)
Deferred revenue ..................................................... (192) (281)
-------- --------
Net cash used in operating activities ........................... (9,223) (19,361)
-------- --------
Cash flows from investing activities:
Purchase of marketable securities ......................................... (5,899) (36,271)
Maturities of marketable securities ....................................... 11,108 51,511
Acquisition of property and equipment ..................................... (413) (749)
-------- --------
Net cash provided by investing activities ....................... 4,796 14,491
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock from exercise of
options and warrants ................................................. 1,267 8,975
Net proceeds from issuance of common stock to Acqua-Wellington ............ 1,873 --
Proceeds on short term borrowings ......................................... 218 73
Payments of capital lease obligations ..................................... (17) (11)
-------- --------
Net cash provided by financing activities ............................ 3,341 9,037
-------- --------
Net increase in cash and cash equivalents ............................ (1,086) 4,167
Effect of exchange rates on cash and cash equivalents ................ (124) (21)
Cash and cash equivalents at beginning of period ................................ 5,566 3,273
-------- --------
Cash and cash equivalents at end of period ...................................... $ 4,356 $ 7,419
======== ========
Supplemental schedule of cash flow information:
Interest paid ............................................................. $ 27 $ 45
======== ========
Taxes paid ................................................................ $ 42 $ 90
======== ========
Supplemental schedule of noncash investing and financing activities:
Change in unrealized loss on marketable securities ........................ $ (28) $ (88)
======== ========
Deferred compensation ..................................................... $ 551 $ 217
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
3
<PAGE> 6
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED 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 adjustments, that are, in the opinion of
management, necessary for a fair presentation of the 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
Eclipse's audited financial statements and notes thereto for the year ended
December 31, 1999, contained in the Company's Annual Report on Form 10-K as
filed with the U.S. Securities and Exchange Commission (SEC).
The Company has incurred significant losses for the last several years
and at September 30, 2000 has an accumulated deficit of $150,669,000. The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern. The Company's ability to continue as a going
concern is dependent upon achieving profitable operations. Management's plans
include improving the effectiveness of sales and marketing efforts related to
the existing TMR product, pursuing timely regulatory approval for the PTMR
product currently under submission to the FDA, and reducing operating expenses.
Management also recognized the need for infusion of cash. In September 2000, the
Company raised approximately $1,873,000, net of offering costs, from the sale of
shares of common stock. Management believes that if revenue from sales or new
funds from debt or equity instruments is insufficient to maintain the current
expenditure rate, it will be necessary to significantly reduce its operations
until an appropriate solution is implemented.
Net Loss Per Share:
Basic earnings per share is the weighted-average number of common shares
outstanding during the period, and diluted earnings per share is the
weighted-average common shares outstanding and all dilutive potential common
shares outstanding. For the three and nine months ended September 30, 2000 and
1999 dilutive potential common shares outstanding reflects shares issuable under
the Company's stock option plans but have not been included in the computation
of dilutive EPS as the impact would be anti-dilutive.
Basic EPS is computed by dividing net loss by the weighted average
number of common shares outstanding for the period. Diluted EPS is computed
giving effect to all dilutive potential common shares that were outstanding
during the period.
A reconciliation of the numerator and denominator of basic and diluted
EPS is as follows (in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Numerator -- Basic and Diluted EPS
Net Loss ................................ $ (3,744) $ (4,906) $(11,445) $(24,273)
Denominator -- Basic and Diluted EPS
Weighted average shares outstanding ..... 30,191 28,591 29,977 28,052
Basic and diluted EPS ....................... $ (0.12) $ (0.17) $ (0.38) $ (0.87)
</TABLE>
Options to purchase 3,518,436 and 3,641,386 shares of common stock were
outstanding at September 30, 2000 and 1999 respectively, but were not included
in the calculation of diluted EPS because their inclusion would have been
antidilutive.
4
<PAGE> 7
ECLIPSE SURGICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies -- (Continued):
Recent Pronouncements:
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards of derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. In July 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral
of the Effective Date of FASB Statement No. 133" ("SFAS 137"). SFAS 137
deferred the effective date until fiscal year beginning after June 15, 2000. In
June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities" -- an amendment of SFAS 133. The
Company will adopt SFAS No. 133 and SFAS No. 138 in 2001. The Company has not
engaged in hedging activities or invested in derivative instruments and,
accordingly, does not believe that the implementation will have an impact on
the financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101
"Revenue Recognition in Financial Statements" which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. In June 2000, the SEC issued SAB 101B, "Second Amendment:
Revenue Recognition in Financial Statements" ("SAB 101B"). SAB 101B deferred the
implementation date of SAB 101 until no later than the fourth fiscal quarter of
fiscal years beginning after December 15, 1999. The Company believes that
adopting SAB 101 will not have a material impact on the Company's financial
position and 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):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
Raw materials ...................................... $2,195 $3,074
Work in process .................................... 1,063 624
Finished goods ..................................... 3,194 3,285
------ ------
$6,452 $6,983
====== ======
</TABLE>
5
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains descriptions of our expectations regarding future
trends affecting our business. These forward-looking statements and other
forward-looking statements made elsewhere in this document are made in reliance
upon the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. Please read the section below titled "Factors Affecting Future Results"
to review conditions which we believe could cause actual results to differ
materially from those contemplated by the forward-looking statements.
Forward-looking statements are identified by words such as "believes,"
"anticipates," "expects," "intends," "plans," "will," "may" and similar
expressions. In addition, any statements that refer to our plans, expectations,
strategies or other characterizations of future events or circumstances are
forward-looking statements. Our business may have changed since the date hereof
and we undertake no obligation to update these forward looking statements.
The following discussion should be read in conjunction with financial
statements and notes thereto included in this Quarterly Report on Form 10-Q.
OVERVIEW
We were founded in 1989. From 1989 through September 1995, we engaged in
the research, development and sale of surgical laser products principally for
procedures such as atherectomy and arthroscopy. In 1995, we determined that
there was a significant opportunity in the TMR market, and that we were
well-positioned to enter this market because of our expertise with laser-based
surgical techniques and the treatment of cardiovascular disease. Accordingly, in
late 1995, we changed our strategic direction to enter the TMR market.
Prior to 1996, we focused almost exclusively on research and development
activities relating to surgical laser products. Since 1996, we have focused on
TMR and PTMR activities, particularly research and development activities and
clinical trials.
On February 11, 1999, we received final approval from the FDA for our
TMR products for certain indications and are now able to sell those products in
the U.S. on a commercial basis. We have also received the European Conforming
Mark ("CE Mark") allowing the commercial sale of our TMR laser systems and our
PTMR catheter systems to customers in the European Community. Effective July 1,
1999, Health Care Financial Administration began providing Medicare coverage for
TMR. Hospitals and physicians are now eligible to receive Medicare reimbursement
for TMR equipment and procedures.
On March 17, 1999, we announced the completion of our business
combination with CardioGenesis Corporation. Under the terms of the combination,
each share of CardioGenesis common stock was converted into 0.8 of a share of
our common stock, and we have assumed all outstanding CardioGenesis stock
options. CardioGenesis has become a wholly-owned subsidiary of ours and its
shares are no longer publicly traded. As a result of the transaction, we
increased our outstanding shares by approximately 9.9 million. As of March 17,
1999 these shares represented approximately 36% of our post-combination
outstanding shares. The transaction was structured to qualify as a tax-free
reorganization and has been accounted for as a pooling of interests,
consequently, all prior period figures have been restated as if the combined
entity existed for all periods presented. There were no inter-company
transactions between the companies prior to the date of the business
combination. The fiscal year remained the same and thus, there were no changes
in retained earnings due to the business combination. Further, there were no
required adjustments needed to conform to the accounting policies between the
two companies.
As of September 30, 2000, we had an accumulated deficit of $150,669,000.
We expect to continue to incur operating losses related to sales and marketing
activities, research and development activities, and the continued development
of corporate infrastructure. The timing and amounts of our expenditures will
depend upon a number of factors, including the efforts required to develop our
sales and marketing organization, the timing of market acceptance, if any, of
our products, and the status and timing of regulatory approvals.
6
<PAGE> 9
RESULTS OF OPERATIONS
Net Revenues
Net revenues of $5,014,000 for the quarter ended September 30, 2000
decreased $1,071,000 or 18% when compared to net revenues of $6,085,000 for the
quarter ended September 30, 1999. The decrease in revenues is due to lower sales
of laser systems partially offset by increases in sales of disposable products.
Net revenues decreased 3% to $17,299,000 for the nine months ended September 30,
2000 from $17,749,000 for the nine months ended September 30, 1999. The decrease
in revenues for nine months is also explained by lower laser sales partially
offset by increase sales of disposable product. Export sales accounted for
approximately 7% of total sales for the three months ended September 30, 2000
and 18% for the three months ended September 30, 1999. This percentage decrease
in export sales for the three months ended September 30, 2000 relative to total
sales is due to a drop in international laser sales. Export sales accounted for
approximately 10% of total sales for the nine months ended September 30, 2000
and 15% for the nine months ended September 30, 1999. This percentage decrease
in export sales for the nine months ended September 30, 2000 relative to total
sales is also due to a drop of international laser sales. We define export sales
as sales to customers located outside of the United States. (See "--Factors
Affecting Future Results.")
Gross Profit
Gross profit decreased to $2,554,000 or 51% of net revenues for the
three months ended September 30, 2000, compared to $3,133,000 or 51% of net
revenues for the three months ended September 30, 1999. Gross profit decreased
to $9,810,000 or 57% of net revenues for the nine months ended September 30,
2000, compared to $10,022,000 or 56% of net revenues for the nine months ended
September 30, 1999. The decrease in gross profit during the nine months ended
September 30, 2000, in actual dollars, resulted from reduced sales volume;
whereas the increase in gross profit as a percentage of net revenues resulted
from lower fixed manufacturing expenses and higher production volumes.
Research and Development
Research and development expenditures decreased to $1,183,000 or 24% of
net revenues for the three months ended September 30, 2000, compared to
$2,475,000 or 41% of net revenues for the three months ended September 30, 1999.
Research and development expenditures decreased to $4,278,000 or 25% of net
revenues for the nine months ended September 30, 2000, compared to $9,452,000 or
53% of net revenues for the nine months ended September 30, 1999. The decrease
in these expenses reflects the decrease in activity associated with clinical
trials, lower employee expenses and cost savings resulting from the merger.
Some of our products have not been approved for commercial use and are
therefore subject to limitations by the FDA. We believe that investment in the
development of new and improved products and procedures and in new clinical
trials may be critical to our success in the future. As a result of the FDA
approval of our surgical TMR system and the coverage notice by HCFA for July 1,
1999, the level of research and development expenditures incurred in connection
with clinical trials has decreased, and we anticipate for it to continue to
decrease as a percentage of revenues. However, future revenues may not be
sufficient to cover the research and development expenses required in connection
with any future clinical trials.
Sales and Marketing
Sales and marketing expenses decreased to $3,474,000 or 69% of net
revenues for the three months ended September 30, 2000, from $3,914,000 or 64%
of net revenues for the three months ended September 30, 1999. This reduction
in absolute dollars is mainly due to lower commissions resulting from lower
revenues, along with a change in the commission structure. Sales and marketing
expenses increased to $12,368,000 or 71% of net revenues for the nine months
ended September 30, 2000, from $11,953,000 or 67% of net revenues for the nine
months ended September 30, 1999. This increase is mainly due to a higher level
of sales and marketing staffing in the current period.
7
<PAGE> 10
General and Administrative
General and administrative expenses were $1,697,000 or 34% of net
revenues for the three months ended September 30, 2000, compared to $1,289,000
or 21% of net revenues for the three months ended September 30, 1999. This
increase is mainly due to a higher provision for doubtful accounts in the
current quarter. General and administrative expenses decreased to $4,908,000 or
28% of net revenues for the nine months ended September 30, 2000, compared to
$5,998,000 or 34% of net revenues for the nine months ended September 30, 1999.
The decrease in the nine months ended September 30, 2000 is due to cost savings
resulting from the merger.
Merger Related Costs
There were no merger related costs incurred during the three-month and
nine-month periods ended September 30, 2000, compared to $437,000 and $7,414,000
of merger related costs recognized for the three-month and nine-month periods
ended September 30, 1999, respectively. The 1999 charges resulted from our
merger with CardioGenesis Corporation. We do not expect any further merger
related charges, and believe that the last merger-related payment occurred in
July of 2000.
Interest and Other Income
Interest income decreased 33% to $65,000 for the three months ended
September 30, 2000, compared to $97,000 for the three months ended September 30,
1999. Interest income decreased 42% to $326,000 for the nine months ended
September 30, 2000, compared to $563,000 for the nine months ended September 30,
1999. The decrease was due to lower investments in marketable securities and
cash and cash equivalents.
Interest expense decreased 57% to $9,000 for the three months ended
September 30, 2000, compared to $21,000 for the three months ended September 30,
1999. Interest expense decreased 34% to $27,000 for the nine months ended
September 30, 2000, compared to $41,000 for the nine months ended September 30,
1999. This decrease reflects a lower level of debt outstanding.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short and long-term marketable securities
were $6,927,000 at September 30, 2000 compared to $13,313,000 at December 31,
1999, a decrease of 48%. Marketable securities are classified as
"available-for-sale" and are readily marketable at their fair market value. We
used $9,223,000 of cash for operating activities, including funding our
operating loss and decreases in accrued liabilities during the nine month period
ended September 30, 2000. Investing activities, consisting primarily of
purchases and sales of marketable securities and additions to property and
equipment, provided cash of $4,796,000 during the nine month period ended
September 30, 2000. Financing activities provided cash of $3,341,000 primarily
from the sale of common stock to an outside investor and from the issuance of
stock pursuant to the exercise of stock options during the nine month period
ended September 30, 2000.
Since our inception, we have satisfied our capital requirements
primarily through sales of our equity securities and, to a lesser extent, loans
from shareholders. In addition, our operations have been funded in part through
sales of our products.
We have incurred significant losses for the last several years and at
September 30, 2000 have an accumulated deficit of $150,669,000. The accompanying
financial statements have been prepared assuming we will continue as a going
concern. Our ability to continue as a going concern is dependent upon achieving
profitable operations. Our plans include improving the effectiveness of sales
and marketing efforts related to the existing TMR product, pursuing timely
regulatory approval for the PTMR product currently under submission to the FDA,
and reducing operating expenses. We have also recognized the need for infusion
of cash. In September 2000, we raised approximately $1,873,000 net of offering
costs, from the sale of shares of common stock. We believe that if revenue from
sales or new funds from debt or equity instruments is insufficient to maintain
the current expenditure rate, it will be necessary to significantly reduce our
operations until an appropriate solution is implemented.
On July 10, 2000, the S.E.C. declared effective the Company's
Registration Statement on Form S-3 (File
8
<PAGE> 11
No. 333-38758), pursuant to which the Company may issue and sell up to an
aggregate of 4,000,000 shares of its common stock from time to time. Such
issuances and sales will be in varying amounts and at prices and on terms to be
determined at the time of sale.
On August 17, 2000 we entered into a common stock purchase agreement
with Acqua Wellington North American Equities Fund, Ltd. pursuant to which we
may, from time to time and in our sole discretion during the 15 months following
the date of the agreement, present Acqua Wellington with draw-down notices
requiring Acqua Wellington to purchase up to an aggregate of $20 million of our
common stock. A maximum of between $2,000,000 and $6,750,000 of our common stock
may be covered by each draw-down notice, depending upon the minimum market price
of our common stock set forth in the draw-down notice. We will issue and sell
the shares to Acqua Wellington pursuant to each draw-down notice at a per share
price equal to the average price of our common stock over a period of time after
the draw-down notice less a specified discount, depending upon the minimum
market price of our common stock set forth in the draw-down notice. We may
present Acqua Wellington with up to 12 draw-down notices during the term of the
agreement. In addition, in conjunction with any draw-down notice, we may, at our
option, grant Acqua Wellington options to purchase up to an aggregate of $10
million of our common stock during the term of the agreement.
The terms of the common stock purchase agreement with Acqua Wellington
specify a minimum market price of $3.50 per share at which we may, at our sole
discretion, issue a draw down notice. In addition, upon mutual agreement between
Acqua Wellington and Eclipse, we may issue a draw down notice specifying a lower
minimum market price than the $3.50 per share floor specified in the agreement.
At the close of market on November 7, 2000, our share price was $1.375, which is
below the $3.50 floor specified in the agreement. There can be no assurance that
Acqua Wellington will, if asked, agree to purchase shares from us if the market
price of our shares is below $3.50 per share.
On September 19, 2000 we offered and sold 526,496 shares of our common
stock to Acqua Wellington North American Equities Fund, Ltd. The common stock
was purchased by Acqua Wellington at a negotiated purchase price of $3.7987 per
share. We did not pay any other compensation in conjunction with the sale of our
common stock.
YEAR 2000
We have not incurred material costs associated with our efforts to
become Year 2000 compliant. Furthermore, based on our assessment to date, we
believe that any future costs associated with our Year 2000 compliance efforts
will not be material.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards of derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. In July 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral
of the Effective Date of FASB Statement No. 133" ("SFAS 137"). SFAS 137
deferred the effective date until fiscal year beginning after June 15, 2000. In
June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities" -- an amendment of SFAS 133. The
Company will adopt SFAS No. 133 and SFAS No. 138 in 2001. The Company has not
engaged in hedging activities or invested in derivative instruments and,
accordingly, does not believe that the implementation will have an impact on
the financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101
"Revenue Recognition in Financial Statements" which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. In June 2000, the SEC issued SAB 101B, "Second Amendment:
Revenue Recognition in Financial Statements" ("SAB 101B"). SAB 101B deferred the
implementation date of SAB 101 until no later than the fourth fiscal quarter of
fiscal years beginning after December 15, 1999. The Company believes that
adopting SAB 101 will not have a material impact on the
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Company's financial position and results of operations.
FACTORS AFFECTING FUTURE RESULTS
In addition to the other information included in this Form 10-Q, the
following risk factors should be considered carefully in evaluating us and our
business.
WE MAY FAIL TO OBTAIN REQUIRED REGULATORY APPROVALS TO MARKET OUR
PRODUCTS IN THE UNITED STATES. Our business, financial condition and results of
operations could be harmed by any of the following events, circumstances or
occurrences related to the regulatory process:
- the failure to obtain regulatory approvals for our products;
- significant limitations in the indicated uses for which our products
may be marketed;
- substantial costs incurred in obtaining regulatory approvals; or
- delays in initiating or completing new clinical trials.
We must submit, and the FDA must approve applications for preliminary market
approval, known as PMA, before we can sell our TMR and PTMR laser systems as
medical devices. Before submitting a PMA application, we must complete clinical
testing to demonstrate the safety and effectiveness of our products.
In 1997, we submitted a PMA application to the FDA for certain
applications of our TMR laser system. On October 27, 1998, an advisory panel of
the FDA recommended that the FDA approve our PMA application for the TMR laser
system. Along with our approval, the FDA panel requested that we conduct
postmarket surveillance in a form to be determined through further discussions
with the FDA. On February 11, 1999, we received final approval from the FDA for
use of our TMR products for treatment of stable patients with angina (Canadian
Cardiovascular Society Class 4) refractory to other medical treatments and
secondary to objectively demonstrated coronary artery atherosclerosis and with a
region of the myocardium with reversible ischemia not amenable to direct
coronary revascularization.
In February 1996, we obtained FDA clearance to undertake Phase I of a
clinical study of TMR intended to assess the safety and effectiveness of "TMR
Used in Conjunction with CABG" as compared with coronary artery bypass graft,
known as CABG, alone. In September 1996, the FDA provided us with clearance to
begin Phase II of this study, which was subsequently completed. In July 1999, we
submitted a PMA supplement to FDA for an expanded indication to our approved TMR
labeling to include TMR in conjunction with CABG. In January 2000, we received a
response from the FDA requesting that we either provide more information or
modify our labeling request. Since TMR and CABG are each presently utilized to
treat separate regions of the heart, we concluded that our present FDA approved
labeling is adequate, and that the physician can best decide how to use the
laser system within the approved labeling. As a result, in March 2000, we
decided that we will not pursue any wording changes to our already approved TMR
labeling and have withdrawn our submission to the FDA for TMR in conjunction
with CABG.
We applied for and received Investigational Device Exemptions, known as
IDEs, to engage in various clinical trials of our PTMR products and procedures.
In December, 1999, we submitted a PMA application to the FDA seeking marketing
clearance for PTMR in the United States. To date, the FDA has not granted
approval of this application. The FDA may not approve this application in a
timely manner, if ever.
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THE MEDICAL COMMUNITY HAS NOT BROADLY ADOPTED OUR PRODUCTS, AND UNLESS
OUR PRODUCTS ARE BROADLY ADOPTED, OUR BUSINESS WILL SUFFER. Our TMR products
have not yet achieved broad commercial adoption, and our PTMR products are
experimental and have not yet achieved broad clinical adoption. We cannot
predict whether or at what rate and how broadly our products will be adopted by
the medical community. Our business would be harmed if:
- our products fail to achieve significant clinical adoption; or
- our TMR or PTMR laser systems fail to achieve significant market
acceptance.
Positive endorsements by physicians are essential for clinical adoption
of our TMR and PTMR laser systems. Even if the clinical efficacy of TMR and PTMR
laser systems is established, physicians may elect not to recommend TMR and PTMR
laser systems for any number of reasons. The reasons why TMR or PTMR laser
systems may effectively treat coronary artery disease are not well understood.
Although we intend to use research, development and clinical efforts to
understand better the physiological effects of TMR and PTMR treatment, we may
not achieve such understanding on a timely basis, or at all. TMR and PTMR laser
systems may not be clinically adopted unless we:
- understand thoroughly the physiological effects of the products; and
- disseminate such understanding within the medical community.
Clinical adoption of these products will also depend upon:
- our ability to facilitate training of cardiothoracic surgeons and
interventional cardiologists in TMR and PTMR therapy; and
- willingness of such physicians to adopt and recommend such
procedures to their patients.
Patient acceptance of the procedure will depend on:
- physician recommendations;
- the degree of invasiveness;
- the effectiveness of the procedure; and
- the rate and severity of complications associated with the procedure
as compared to other procedures.
TO EXPAND OUR BUSINESS, WE MUST ESTABLISH EFFECTIVE SALES, MARKETING AND
DISTRIBUTION SYSTEMS, AND WE HAVE LIMITED EXPERIENCE TO DATE ESTABLISHING THESE
OPERATIONS. To expand our business, we must establish effective systems to sell,
market and distribute products. To date, we have had limited sales which have
consisted primarily of sales of our TMR lasers and disposable handpieces on a
commercial basis since February, 1999 and PTMR lasers and disposable catheters
for investigational use only.
In the fourth quarter of 1999, we changed our U.S. sales strategy to
include both selling lasers to hospitals outright, as well as loaning lasers to
hospitals in return for the hospital purchasing a minimum number of handpieces
at a premium over the list price. During the current year, the majority of
lasers shipped have been under this loan program. The purpose of this strategy
is to focus our sales force on increasing market penetration and selling
disposable handpieces used in connection with our TMR procedure. If the sales
force is not successful in increasing market share and selling our disposable
handpieces our business will suffer.
With FDA approval of our TMR laser system, we are marketing our products
primarily through our direct sales force. We have been expanding our operations
by hiring additional sales and marketing personnel. This has required and will
continue to require substantial management efforts and financial resources. If
we are not able to establish effective sales and marketing capabilities our
business will suffer.
THE EXPANSION OF OUR BUSINESS MAY PUT ADDED PRESSURE ON OUR MANAGEMENT
AND OPERATIONAL INFRASTRUCTURE AND COULD CREATE NUMEROUS RISKS AND CHALLENGES.
The growth in our business may place a significant strain on our
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limited personnel, management and other resources. The evolving growth of our
business involves numerous risks and challenges, including:
- the dependence on the growth of the market for our TMR and PTMR
systems;
- domestic and international regulatory developments;
- rapid technological change;
- the highly competitive nature of the medical devices industry; and
- the risk of entering emerging markets in which we have limited or no
direct experience.
Our future operating results will be significantly affected by our
ability to:
- successfully and rapidly expand sales to potential customers;
- implement operating, manufacturing and financial procedures and
controls;
- improve coordination among different operating functions; and
- continue to attract, train and motivate additional qualified
personnel in all areas.
We may not be able to manage these activities and implement these strategies
successfully, and any failure to do so could harm our operating results.
OUR OPERATING RESULTS WILL FLUCTUATE AND QUARTER TO QUARTER COMPARISONS
OF OUR RESULTS MAY NOT INDICATE FUTURE PERFORMANCE. Our operating results have
fluctuated significantly from quarter to quarter and are expected to fluctuate
significantly from quarter to quarter due to a number of events and factors,
including:
- the level of product demand and the timing of customer orders;
- changes in strategy;
- delays associated with the FDA and other regulatory approval
processes;
- personnel changes;
- the level of international sales;
- the timing and results of clinical trials;
- changes in competitive pricing policies;
- the ability to develop, introduce and market new and enhanced
versions of products on a timely basis;
- deferrals in customer orders in anticipation of new or enhanced
products;
- product quality problems; and
- the enactment of health care reform legislation and any changes in
third party reimbursement policies.
We believe that quarter to quarter comparisons of our operating results
are not a good indication of our future performance. Our operating results have,
in the past, fallen below expectations and it is likely or possible that our
operating results for a future quarter will fall below the expectations of
public market analysts and investors. When this occurred in the past the price
of our common stock fell substantially and if this occurs, the price of our
common stock may fall again, perhaps substantially.
WE WILL BE ABLE TO OBTAIN FDA APPROVAL ONLY FOR THOSE PRODUCTS THAT ARE
PROVEN SAFE AND EFFECTIVE IN CLINICAL SITES. The FDA has not approved our PTMR
laser systems for any indication in the United States. We submitted a PMA
Supplement for our Axcis PTMR system to the FDA in December, 1999. The PTMR
study compares PTMR to conventional medical therapy in patients with no option
for other treatment. The FDA may not accept the study as safe and effective, and
PTMR may not be approved for commercial use in the United States. Responding to
FDA requests for additional information could require substantial financial and
management resources and take several years.
Recently, in October 2000, preliminary results from a competitor's
clinical trial of a catheter-based device employing "Direct Myocardial
Revascularization" (DMR) were presented at a medical conference in Washington
D.C. The trial's principal investigator concluded that the DMR device did not
show significant evidence of clinical benefit with regard to angina class
reduction or exercise tolerance, and he questioned the efficacy of other devices
and procedures relying on TMR.
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We believe that the preliminary results of the DMR device study should not call
the results of our PTMR study into question because the devices and procedures
are substantially different. We cannot assure you, however, that the
preliminary results of the DMR device study will not impact our submission for
the Axcis PTMR system to the FDA.
We cannot determine if our PTMR laser systems will prove to be safe or
effective. Our business would be materially and adversely harmed if our PTMR
laser systems do not prove to be safe and effective in clinical trials.
WE MAY NOT BE ABLE TO SUCCESSFULLY MARKET OUR PRODUCTS IF WE FAIL TO
OBTAIN THIRD PARTY REIMBURSEMENT FOR THE PROCEDURES PERFORMED WITH OUR PRODUCTS.
Few individuals are able to pay directly for the costs associated with the use
of our products. In the United States, hospitals, physicians and other
healthcare providers that purchase medical devices generally rely on third party
payors, such as Medicare, to reimburse all or part of the cost of the procedure
in which the medical device is being used. A failure by third party payors to
provide adequate reimbursement for the TMR and PTMR procedures that use our
products would harm our business.
Effective July 1, 1999 the Health Care Financing Administration
commenced Medicare coverage for TMR systems for any manufacturer's TMR
procedures. Hospitals are now eligible to receive Medicare reimbursement for TMR
equipment and procedures. The Health Care Financing Administration may not
approve reimbursement for PTMR. If it does not provide reimbursement, our
business will suffer. We have limited experience to date with the acceptability
of our TMR procedures for reimbursement by private insurance and private health
plans. Private insurance and private health plans may not approve reimbursement
for TMR or PTMR procedures. If they do not provide reimbursement, our business
will suffer.
Although we do not anticipate receiving Medicare reimbursements for our
laser systems that are in clinical trials, we will seek reimbursement from other
third party payors. However, such reimbursement may not be available.
Third party payors may deny reimbursement if they determine that the
device used in a treatment is:
- unnecessary;
- inappropriate;
- experimental;
- used for a non-approved indication; or
- not cost-effective.
Potential purchasers must determine whether the clinical benefits of our
TMR and PTMR laser systems justify:
- the additional cost or the additional effort required to obtain
prior authorization or coverage; and
- the uncertainty of actually obtaining such authorization or
coverage.
WE FACE INTENSE COMPETITION AND COMPETITIVE PRODUCTS COULD RENDER OUR
PRODUCTS OBSOLETE. The market for TMR and PTMR laser systems is intensely
competitive and is constantly becoming more competitive. If our competitors are
more effective in developing new products and procedures and marketing existing
and future products, our business will suffer.
The market for TMR and PTMR laser systems is characterized by rapid
technical innovation. Accordingly, our current or future competitors may succeed
in developing TMR and PTMR products or procedures that:
- are more effective than our products;
- are more effectively marketed than our products; or
- may render our products or technology obsolete.
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We currently compete with PLC Systems, Inc., Johnson & Johnson and
Boston Scientific. PLC is currently selling TMR commercially in the United
States and abroad, while Johnson & Johnson is currently selling PTMR products
for investigational use. Boston Scientific has acquired radio frequency
technology to begin a percutaneous feasibility trial in the United States under
a preliminary IDE.
Earlier entrants in the market in a therapeutic area often obtain and
maintain greater market share than later entrants. PLC obtained a PMA approval
of its TMR laser system in 1998 prior to our PMA approval and thus, could be
able to capture a greater market share.
Even with the FDA approval for our TMR laser system, we will face
competition for market acceptance and market share for that product. Our ability
to compete may depend in significant part on the timing of introduction of
competitive products into the market, and will be affected by the pace, relative
to competitors, at which we are able to:
- develop products;
- complete clinical testing and regulatory approval processes;
- obtain third party reimbursement acceptance; and
- supply adequate quantities of the product to the market.
OUR PRODUCTS ALSO COMPETE WITH ALTERNATIVE TREATMENT METHODS AND OUR
PRODUCTS MUST REPLACE THESE METHODS TO BE COMMERCIALLY SUCCESSFUL. Many of the
medical indications that may be treatable with TMR and PTMR laser systems are
currently being treated by drug therapies or surgery and other interventional
therapies, including PTCA and CABG.
Our business would be materially harmed if TMR technology fails to
replace or augment existing therapies or to be more effective, safer or more
cost effective than new therapies. A number of the existing therapies are widely
accepted in the medical community, have a long history of use and continue to be
enhanced rapidly.
Procedures using TMR and PTMR technology may not be able to replace or
augment such established treatments. Clinical research results may not support
the use of TMR or PTMR procedures to augment or replace existing treatments.
Others are developing new surgical procedures and new drug therapies to
treat coronary artery disease. These new procedures and drug therapies could be
more effective, safer or more cost effective than TMR and PTMR laser systems.
The market acceptance and commercial success of our TMR and PTMR laser
systems will depend not only upon their safety and effectiveness, but also upon
the relative safety and effectiveness of alternative treatments.
OUR PRODUCTS DEPEND ON TMR TECHNOLOGY THAT IS RAPIDLY CHANGING, WHICH
COULD REQUIRE US TO INCUR SUBSTANTIAL PRODUCT DEVELOPMENT EXPENDITURES TO
RESPOND TO INDUSTRY CHANGES. TMR and PTMR laser systems are our only products.
Accordingly, if we fail to develop and commercialize successfully our TMR and
PTMR laser systems, then our business would suffer.
The medical device industry is characterized by rapid and significant
technological change. Our future success will depend in large part on our
ability to respond to such changes. In addition, we must expand the indications
and applications for our products by developing and introducing enhanced and new
versions of our TMR and PTMR laser systems. Product research and development
requires substantial expenditures and is inherently risky. We may not be able
to:
- identify products for which demand exists; or
- develop products that have the characteristics necessary to treat
particular indications.
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Even if we identify and develop such products, we may not receive
regulatory approval and may not be commercially successful.
OVERALL INCREASES IN MEDICAL COSTS COULD ADVERSELY AFFECT OUR BUSINESS.
We believe that the overall escalating cost of medical products and services has
led, and will continue to lead, to increased pressures on the health care
industry, both foreign and domestic, to reduce the cost of products and
services, including products offered by them. We can not assure you that in
either United States or international markets that:
- third party reimbursement and coverage will be available or
adequate;
- current reimbursement amounts will not be decreased in the future;
or
- future legislation, regulation or reimbursement policies of third
party payors will not otherwise adversely affect the demand for our
products or our ability to profitably sell our products.
Fundamental reforms in the healthcare industry in the United States and
Europe continue to be considered. We cannot predict whether or when any
healthcare reform proposals will be adopted and what effect such proposals might
have on our business.
WE HAVE A HISTORY OF LOSSES AND MAY NOT BE PROFITABLE IN THE FUTURE. We
have incurred significant losses since inception. Our revenues and operating
income will be constrained:
- until such time, if ever, as we obtain broad commercial adoption of
our TMR laser systems by healthcare facilities in the United States;
- until such time, if ever, as we obtain FDA and other regulatory
approvals for our PTMR laser systems; and
- for an uncertain period of time after such approvals are obtained.
We may not achieve or sustain profitability in the future.
IF WE EXPERIENCE INCREASED DEMAND FOR OUR PRODUCTS, WE MAY NOT BE ABLE
TO EXPAND OUR BUSINESS TO MEET SUCH DEMAND. We may be required to expand our
business to:
- respond to increasing clinical adoption of the TMR procedure;
- develop future products;
- generally compete successfully;
- complete the clinical trials that are currently in progress; and
- prepare additional products for clinical trials.
Such expansion could place a significant strain on managerial,
operational and financial systems and resources. To accommodate such expansion
and compete effectively, we must improve information systems, procedures and
controls and expand, train, motivate and manage our employees.
THIRD PARTIES MAY LIMIT THE DEVELOPMENT AND PROTECTION OF OUR
INTELLECTUAL PROPERTY, WHICH COULD ADVERSELY AFFECT OUR COMPETITIVE POSITIONS.
Our success is dependent in large part on our ability to:
- obtain patent protection for our products and processes;
- preserve our trade secrets and proprietary technology; and
- operate without infringing upon the patents or proprietary rights of
third parties.
The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights. Companies
in the medical device industry have employed intellectual property litigation to
gain a competitive advantage. Certain competitors and potential competitors of
ours have obtained United States patents covering technology that could be used
for certain TMR and PTMR procedures. We do not know if such competitors,
potential competitors or others have filed and hold international patents
covering other TMR or PTMR technology. In addition, international patents may
not be interpreted the same as any counterpart United States
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patents.
In September 1995, one of our competitors sent us a notice of potential
infringement of their patent regarding a method for TMR utilizing
synchronization of laser pulses to the electrical signals from the heart. After
discussion with patent counsel, we concluded that we did not utilize the process
and/or apparatus that was the subject of the patent at issue, and we provided a
response to the competitor to that effect. We have not received any additional
correspondence from this competitor on these matters.
In 1996, prior to the merger with us, CardioGenesis initiated a suit in
the United States against PLC seeking a judgment that the PLC patent is invalid
and unenforceable. In 1997, PLC counterclaimed in that suit alleging
infringement by CardioGenesis of the PLC patent. Also in 1997, PLC initiated
suit in Germany against CardioGenesis and CardioGenesis' former German sales
agent alleging infringement of a European counterpart to the PLC patent. In
1997, CardioGenesis filed an Opposition in the European Patent Office to a
European counterpart to the PLC patent, seeking to have the European patent
declared invalid.
On January 5, 1999, before trial on the United States suit commenced,
CardioGenesis and PLC settled all litigation between them, both in the United
States and in Germany, with respect to the PLC patent and the European patents.
Under the Settlement and License Agreement signed by the parties, CardioGenesis
stipulated to the validity of the PLC patents and PLC granted CardioGenesis a
non-exclusive worldwide license to the PLC patents. CardioGenesis agreed to pay
PLC a license fee, and minimum royalties, totaling $2.5 million over an
approximately forty-month period, with a running royalty credited against the
minimums.
The Settlement and License Agreement applies only to those products or
that technology covered by the PLC patents, and the agreement does not provide
PLC any rights to any CardioGenesis intellectual property. The Eclipse TMR 2000
laser system does not use the technology associated with the PLC patents.
While we periodically review the scope of our patents and other relevant
patents of which we are aware, the question of patent infringement involves
complex legal and factual issues. Any conclusion regarding infringement may not
be consistent with the resolution of any such issues by a court.
We may not be able to protect our intellectual property because:
- patents may not be issued;
- patents may be challenged, invalidated or designed around by
competitors; or
- patent protection may not continue to be available for surgical
methods in the future.
COSTLY LITIGATION MAY BE NECESSARY TO PROTECT INTELLECTUAL PROPERTY
RIGHTS. We may have to engage in time consuming and costly litigation to protect
our intellectual property rights or to determine the proprietary rights of
others. In addition, we may become subject to patent infringement claims or
litigation, or interference proceedings declared by the United States Patent and
Trademark Office to determine the priority of inventions.
Defending and prosecuting intellectual property suits, United States
Patent and Trademark Office interference proceedings and related legal and
administrative proceedings are both costly and time-consuming. We may be
required to litigate further to:
- enforce our issued patents;
- protect our trade secrets or know-how; or
- determine the enforceability, scope and validity of the proprietary
rights of others.
Any litigation or interference proceedings will result in substantial
expense and significant diversion of effort by technical and management
personnel. If the results of such litigation or interference proceedings are
adverse to us, then the results may:
- subject us to significant liabilities to third parties;
- require us to seek licenses from third parties;
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- prevent us from selling our products in certain markets or at all;
or
- require us to modify our products.
Although patent and intellectual property disputes regarding medical
devices are often settled through licensing and similar arrangements, costs
associated with such arrangements may be substantial and could include ongoing
royalties. Furthermore, we may not be able to obtain the necessary licenses on
satisfactory terms, if at all.
Adverse determinations in a judicial or administrative proceeding or
failure to obtain necessary licenses could prevent us from manufacturing and
selling our products. This would harm our business.
WE RELY ON PATENT AND TRADE SECRET LAWS, WHICH ARE COMPLEX AND MAY BE
DIFFICULT TO ENFORCE. The validity and breadth of claims in medical technology
patents involve complex legal and factual questions and, therefore, may be
highly uncertain. Issued patent or patents based on pending patent applications
or any future patent application may not exclude competitors or may not provide
a competitive advantage to us. In addition, patents issued or licensed to us may
not be held valid if subsequently challenged and others may claim rights in or
ownership of such patents.
Furthermore, we cannot assure you that our competitors:
- have not developed or will not develop similar products;
- will not duplicate our products; or
- will not design around any patents issued to or licensed by us.
Because patent applications in the United States are currently
maintained in secrecy until patents issue, we cannot be certain that:
- others did not first file applications for inventions covered by our
pending patent applications; or
- we will not infringe any patents that may issue to others on such
applications.
The United States patent laws were recently amended to exempt
physicians, other health care professionals, and affiliated entities from
infringement liability for medical and surgical procedures performed on
patients. We are not able to predict if this amendment will materially affect
our ability to protect our proprietary methods and procedures.
Competitors may independently develop proprietary information
substantially equivalent to our proprietary information and techniques, or
otherwise gain access to our proprietary technology.
In addition to our patents, we rely upon trade secrets, technical
know-how and continuing technological innovation to develop and maintain our
competitive position. We may not be able to meaningfully protect our unpatented
technology because:
- our employees, consultants and advisors may breach their
confidentiality and invention assignment agreements and there may
not be an adequate remedy for such breach;
- our competitors may independently develop substantially equivalent
proprietary information and techniques; or
- competitors may otherwise gain access to our proprietary technology.
Our inability to protect our unpatented intellectual property could
materially harm our business.
WE DEPEND ON SINGLE SOURCE SUPPLIERS FOR CERTAIN KEY COMPONENTS AND
PRODUCTION COULD BE INTERRUPTED IF A KEY SUPPLIER HAD TO BE REPLACED. We
currently purchase certain critical laser and fiber-optic components from single
sources. Although we have identified alternative suppliers, a lengthy process
would be required to qualify them as additional or replacement suppliers. Any
significant interruption in the supply of critical materials or components could
delay our ability to manufacture our products and could harm our manufacturing
operations, business and results of operations.
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We anticipate that products will be manufactured based on forecasted
demand and will seek to purchase subassemblies and components in anticipation of
the actual receipt of purchase orders from customers. Lead times for materials
and components vary significantly and depend on factors such as the business
practices of each specific supplier and the terms of particular contracts, as
well as the overall market demand for such materials and components at any given
time. If the forecasts are inaccurate, we could experience fluctuations in
inventory levels, resulting in excess inventory, or shortages of critical
components, either of which could cause our business to suffer.
Certain of our suppliers could have difficulty expanding their
manufacturing capacity to meet our needs if demand for our TMR and PTMR laser
systems were to increase rapidly or significantly. In addition, any defect or
malfunction in the laser or other products provided by such suppliers could
cause a delay in regulatory approvals or adversely affect product acceptance. We
can not predict if:
- materials obtained from outside suppliers will continue to be
available in adequate quantities; or
- alternative suppliers can be located on a timely basis.
We operate on a purchase order basis with most of our suppliers. Such
vendors could at any time determine to cease the supply and production of such
components.
WE HAVE LIMITED MANUFACTURING EXPERIENCE WHICH COULD PREVENT US FROM
SUCCESSFULLY INCREASING CAPACITY IN RESPONSE TO MARKET DEMAND. We have limited
experience in manufacturing products. Manufacturers often encounter difficulties
in increasing production, including problems involving:
- production yields;
- adequate supplies of components;
- quality control and assurance (including failure to comply with good
manufacturing practices regulations, international quality standards
and other regulatory requirements); and
- shortages of qualified personnel.
We also may not be able to successfully increase manufacturing
capacity or avoid manufacturing difficulties or product recalls.
OUR PRODUCTS MAY CONTAIN DEFECTS WHICH COULD DELAY REGULATORY APPROVAL
OR MARKET ACCEPTANCE OF OUR PRODUCTS. We may experience future product defects,
malfunctions, manufacturing difficulties or recalls related to the lasers or
other components used in our TMR and PTMR laser systems. Any such occurrence
could cause a delay in regulatory approvals or adversely affect the commercial
acceptance of our products and could cause harm to our business.
WE MUST COMPLY WITH FDA MANUFACTURING STANDARDS OR FACE FINES OR OTHER
PENALTIES INCLUDING SUSPENSION OF PRODUCTION. We are required to demonstrate
compliance with the FDA's current good manufacturing practices regulations if we
market devices in the United States or manufacture finished devices in the
United States. The FDA inspects manufacturing facilities on a regular basis to
determine compliance. If we fail to comply with applicable FDA or other
regulatory requirements, we can be subject to:
- fines, injunctions, and civil penalties;
- recalls or seizures of products;
- total or partial suspensions of production; and
- criminal prosecutions.
WE MAY SUFFER LOSSES FROM PRODUCT LIABILITY CLAIMS IF OUR PRODUCTS CAUSE
HARM TO PATIENTS. We are exposed to potential product liability claims and
product recalls. These risks are inherent in the design, development,
manufacture and marketing of medical devices. Our products are designed to be
used in life-threatening situations where there is a high risk of serious injury
or death, and we could be subject to product liability claims if the use of our
TMR or PTMR laser systems is alleged to have caused adverse effects on a patient
or such products are believed to be defective.
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Any regulatory clearance for commercial sale of these products will not
remove these risks. Any failure to comply with the FDA's good manufacturing
practices or other regulations could hurt our ability to defend against product
liability lawsuits. Although we have not experienced any product liability
claims to date, any such claims could cause our business to suffer.
OUR INSURANCE MAY BE INSUFFICIENT TO COVER PRODUCT LIABILITY CLAIMS
AGAINST US. Our product liability insurance may not be adequate for any future
product liability problems or continue to be available on commercially
reasonable terms, or at all.
If we were held liable for a product liability claim or series of claims
in excess of our insurance coverage, such liability could harm our business and
financial condition. We maintain insurance against product liability claims in
the amount of $10 million per occurrence and $10 million in the aggregate.
We may require increased product liability coverage as sales of approved
products increase and as additional products are commercialized. Product
liability insurance is expensive and in the future may not be available on
acceptable terms, if at all.
WE DEPEND HEAVILY ON CERTAIN KEY PERSONNEL. Our future business and
results of operations depend in significant part upon the continued
contributions of our key technical and senior management personnel.
Our future business and results of operations also depend in significant
part upon our ability to attract and retain additional qualified management,
manufacturing, technical, marketing and sales and support personnel for our
operations. If we lose a key employee or if a key employee fails to perform in
his or her current position, or if we are not able to attract and retain skilled
employees as needed, our business could suffer.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DISTRACT OUR MANAGEMENT, CAUSE
US TO INCUR DEBT, OR DILUTE OUR SHAREHOLDERS. We may, from time to time, acquire
or invest in other complementary businesses, products or technologies. While
there are currently no commitments with respect to any particular acquisition or
investment, our management frequently evaluates the strategic opportunities
available related to complementary businesses, products or technologies. The
process of integrating an acquired company's business into our operations may
result in unforeseen operating difficulties and expenditures and may absorb
significant management attention that would otherwise be available for the
ongoing development of our business. Moreover, the anticipated benefits of any
acquisition or investment may not be realized. Any future acquisitions or
investments by us could result in potentially dilutive issuances of equity
securities, the incurrence of debt and contingent liabilities and amortization
expenses related to goodwill and other intangible assets, any of which could
materially harm our operating results and financial condition.
WE MAY FAIL TO COMPLY WITH INTERNATIONAL REGULATORY REQUIREMENTS AND
COULD BE SUBJECT TO REGULATORY DELAYS, FINES OR OTHER PENALTIES. Regulatory
requirements in foreign countries for international sales of medical devices
often vary from country to country. The impact of the following factors would
harm our business:
- delays in receipt of, or failure to receive, foreign regulatory
approvals or clearances;
- the loss of previously obtained approvals or clearances; or
- the failure to comply with existing or future regulatory
requirements.
Our products will be subject to other regulatory requirements in the
European Union and other countries. Any enforcement action by international
regulatory authorities with respect to past or future regulatory noncompliance
could cause our business to suffer.
The time required to obtain approval for sale in foreign countries may
be longer or shorter than required for FDA approval, and the requirements may
differ. In addition, there may be foreign regulatory barriers other than
regulatory approval. Except as stated in the following sentence, the FDA must
approve exports of devices that require a PMA but are not yet approved
domestically. An unapproved device may be exported without prior FDA approval to
any member country of the European Union and the other "listed" countries,
including Australia,
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Canada, Israel, Japan, New Zealand, Switzerland and South Africa:
- if the device is approved for sale by that country; or
- for investigational use in accordance with the laws of that country.
We received the CE Mark for our TMR laser system in December 1996 and
for our PTMR laser system in July 1998. In addition, the Vertex TMR Probe and
the Axcis PTMR Catheter system, acquired in the merger with Cardiogenesis,
received CE mark approval in July 1996 and January 1998, respectively. In the
European Economic Area, we will be:
- subject to continued supervision;
- required to report any serious adverse incidents to the appropriate
authorities; and
- required to comply with additional national requirements that are
outside the scope of the Medical Device Directive.
We became ISO 9001 certified in May 1997. We may not be able to:
- achieve or maintain the compliance required for CE marking on all or
any of our products; and
- produce our products profitably and in a timely manner while
complying with the requirements of the Medical Device Directive and
other regulatory requirements.
If we fail to comply with applicable regulatory requirements we
could face:
- fines, injunctions, civil penalties;
- recalls or seizures of products;
- total or partial suspensions of production;
- refusals by foreign governments to permit product sales; and
- criminal prosecution.
Furthermore, if existing regulations are changed or new regulations
or policies are adopted, we may:
- not be able to obtain, or affect the timing of, future regulatory
approvals or clearances;
- not be able to obtain necessary regulatory clearances or approvals
on a timely basis or at all; and
- be required to incur significant costs in obtaining or maintaining
such foreign regulatory approvals.
WE SELL OUR PRODUCTS INTERNATIONALLY WHICH SUBJECTS US TO CERTAIN
SIGNIFICANT RISKS OF TRANSACTING BUSINESS IN FOREIGN COUNTRIES. Our
international revenue is subject to the following risks:
- foreign currency fluctuations;
- economic or political instability;
- foreign tax laws;
- shipping delays;
- various tariffs and trade regulations;
- restrictions and foreign medical regulations;
- customs duties, export quotas or other trade restrictions; and
- difficulty in protecting intellectual property rights.
Any of these factors could have an adverse effect on our international
sales revenues. In future quarters, international sales could become a
significant portion of our revenue.
WE MAY NOT ACHIEVE WIDE ACCEPTANCE OF OUR PRODUCTS IN FOREIGN MARKETS IF
WE FAIL TO OBTAIN THIRD PARTY REIMBURSEMENT FOR THE PROCEDURES PERFORMED WITH
OUR PRODUCTS. If we obtain the necessary foreign regulatory registrations or
approvals, market acceptance of our products in international markets would be
dependent, in part, upon the availability of reimbursement within prevailing
health care payment systems. Reimbursement and health care payment systems in
international markets vary significantly by country. They include both
government
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sponsored health care and private insurance. Although we expect to seek
international reimbursement approvals, any such approvals may not be obtained in
a timely manner, if at all. Failure to receive international reimbursement
approvals could hurt market acceptance of TMR products in the international
markets in which such approvals are sought.
THE PRICE OF OUR COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY, WHICH MAY
RESULT IN LOSSES FOR INVESTORS. The market price for our common stock has been
and may continue to be volatile. For example, during the 52-week period ended
September 30, 2000, the closing prices of our common stock as reported on the
Nasdaq National Market ranged from a high of $15.25 to a low of $2.88. We expect
our stock price to be subject to fluctuations as a result of a variety of
factors, including factors beyond our control. These factors include:
- actual or anticipated variations in our quarterly operating results;
- announcements of technological innovations or new products or
services by us or our competitors;
- announcements relating to strategic relationships or acquisitions;
- changes in financial estimates by securities analysts;
- statements by securities analysts regarding us or our industry;
- conditions or trends in the medical device industry; and
- changes in the economic performance and/or market valuations of
other medical device companies.
Because of this volatility, we may fail to meet the expectations of our
stockholders or of securities analysts at some time in the future, and our stock
price could decline as a result.
In addition, the stock market has experienced significant price and
volume fluctuations that have particularly affected the trading prices of equity
securities of many high technology companies. These fluctuations have often been
unrelated or disproportionate to the operating performance of these companies.
Any negative change in the public's perception of medical device companies could
depress our stock price regardless of our operating results.
Recently, when the market price of a stock has been volatile, holders of
that stock have often instituted securities class action litigation against the
company that issued the stock. If any of our stockholders brought such a lawsuit
against us, we could incur substantial costs defending the lawsuit. The lawsuit
could also divert the time and attention of our management.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have an investment portfolio of fixed income securities that are
classified as "available-for-sale securities". The investment portfolio is
comprised of highly liquid instruments. These securities are subject to interest
rate risk and will fall in value if market interest rates increase. We do not
use derivative financial instruments in our investment portfolio. The table
below presents principal amounts as of September 30, 2000 (in thousands) and
related weighted average interest rates as of September 30, 2000 for our
investment portfolio and cash and cash equivalents.
Assets
<TABLE>
<CAPTION>
<S> <C>
Cash and cash equivalents ........ $4,356
Average interest rate ............ 4.1%
Available-for-sale securities .... $2,571
Average interest rate ............ 5.7%
</TABLE>
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no pending legal proceedings against us other than ordinary
litigation incidental to our business, the outcome of which, individually or in
the aggregate, is not expected to have a material adverse effect on our business
or financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit 27
b) Reports on Form 8-K
A report on Form 8-K was filed by Eclipse on August 18, 2000
regarding a common stock purchase agreement with Acqua Wellington
North American Equities Fund, Ltd..
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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: November 13, 2000 /s/ Michael J. Quinn
-------------------------------------------
Michael J. Quinn
Chief Executive Officer, President
Chairman of the Board and Director
(Principal Executive Officer)
Date: November 13, 2000 /s/ Ian A. Johnston
--------------------------------------------
Ian A. Johnston
Vice President of Finance and Treasurer
(Principal Financial and Accounting Officer)
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<PAGE> 27
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT DESCRIPTION
-------------- -------------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
