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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal quarter ended: September 30, 1997 or
__ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________________ to ________________
Commission file number: 0-19806
CYBERONICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 76-0236465
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
17448 Highway 3, Suite 100
Webster, Texas 77598-4135
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (713) 332-1375
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, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 3, 1997
Common Stock - $0.01 par value 16,589,283
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CYBERONICS, INC.
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets
September 30, 1997 (unaudited) and June 30, 1997 ..... 3
Consolidated Statements of Operations (unaudited)
three months ended September 30, 1997 and 1996 ....... 4
Consolidated Statements of Cash Flows (unaudited)
three months ended September 30, 1997 and 1996 ....... 5
Notes to Consolidated Financial Statements ........... 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................... 8
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K ........................ 17
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CYBERONICS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, JUNE 30,
1997 1997
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ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . $ 35,150,639 $ 781,639
Securities held to maturity . . . . . . . . . 11,119,239 7,129,409
Accounts receivable, net. . . . . . . . . . . 974,848 548,542
Inventories . . . . . . . . . . . . . . . . . 1,132,188 1,005,356
Prepaid expenses. . . . . . . . . . . . . . . 353,530 126,799
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TOTAL CURRENT ASSETS. . . . . . . . . . . 48,730,444 9,591,745
Securities held to maturity . . . . . . . . . . . 1,730,020 212,408
Property and equipment, net . . . . . . . . . . . 571,247 362,333
Other assets, net . . . . . . . . . . . . . . . . 146,744 83,251
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$ 51,178,455 $ 10,249,737
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable. . . . . . . . . . . . . . . $ 1,077,613 $ 365,351
Accrued liabilities . . . . . . . . . . . . . 1,992,356 1,462,914
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TOTAL CURRENT LIABILITIES . . . . . . . . 3,069,969 1,828,265
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 2,500,000
shares authorized; no shares issued
or outstanding. . . . . . . . . . . . . . . -- --
Common stock, $.01 par value, 25,000,000
shares authorized; 16,356,228 and
13,322,175 shares issued and
outstanding at September 30, 1997
and June 30, 1997, respectively . . . . . . 163,562 133,222
Additional paid-in capital. . . . . . . . . . 101,733,507 57,338,856
Deferred compensation . . . . . . . . . . . . (58,969) (63,750)
Accumulated deficit . . . . . . . . . . . . . (54,124,200) (49,167,002)
Cumulative translation adjustments. . . . . . 394,586 180,146
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TOTAL STOCKHOLDERS' EQUITY. . . . . . . . 48,108,486 8,421,472
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$ 51,178,455 $ 10,249,737
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See accompanying notes to financial statements.
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CYBERONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
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1997 1996
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Net sales .................................... $ 1,103,234 $ 284,943
Cost of sales ................................ 321,874 69,291
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Gross profit ................................. 781,360 215,652
Operating expenses:
Research and development ................. 1,976,532 1,426,985
Selling, general and administrative ...... 3,959,225 810,250
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Total operating expenses .............. 5,935,757 2,237,235
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Loss from operations ......................... (5,154,397) (2,021,583)
Interest income, net ......................... 202,261 147,327
Other (expense) income, net .................. (5,062) 81,735
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Net loss ..................................... $ (4,957,198) $ (1,792,521)
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Net loss per share ........................... $ (0.36) $ (0.16)
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Shares used in computing net loss per share .. 13,820,939 11,216,235
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See accompanying notes to financial statements.
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CYBERONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
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1997 1996
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<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss......................................... $ (4,957,198) $ (1,792,521)
Non-cash items included in net loss:
Depreciation and amortization.................. 47,271 44,105
Compensation expense related to certain stock
options and common stock issuances........... 4,781 2,676
Change in operating assets and liabilities:
Accounts receivable............................ (426,306) 33,347
Inventories.................................... (126,832) (325,839)
Prepaid expenses............................... (226,731) 147,113
Accounts payable and accrued liabilities....... 1,241,704 (928,042)
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Net Cash Used In Operating Activities........ (4,443,311) (2,819,161)
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property and equipment.............. (256,185) (36,753)
Purchases of investments......................... (9,325,720) --
Maturities of investments........................ 3,818,278 36,345
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Net Cash Used In Investing Activities........ (5,763,627) (408)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock, net...... 44,424,991 11,348,790
Other............................................ (63,493) (122)
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Net Cash Provided By Financing Activities.... 44,361,498 11,348,668
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS................................. 214,440 (80,628)
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Net increase in cash and cash equivalents.... 34,369,000 8,448,471
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD... 781,639 2,121,930
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CASH AND CASH EQUIVALENTS AT END OF PERIOD......... $ 35,150,639 $ 10,570,401
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</TABLE>
See accompanying notes to financial statements.
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CYBERONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1997
NOTE 1 - BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information, and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three months ended September 30, 1997 are not necessarily indicative of
the results that may be expected for the full year ending June 30, 1998. The
financial information presented herein should be read in conjunction with the
audited consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K/A for the year ended June 30, 1997.
NOTE 2 - INVESTMENT SECURITIES:
At September 30, 1997 and June 30, 1997, the Company's entire investment
portfolios consisted of securities held to maturity. Securities held to
maturity are primarily various types of corporate bonds and asset-backed
investments with various maturity dates over the next 18 months and have a
fair market value of $12,773,607 and a gross unrealized holding loss of
$75,652 at September 30, 1997.
NOTE 3 - INVENTORIES:
Inventories consist of the following:
SEPTEMBER 30, 1997 JUNE 30, 1997
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(UNAUDITED)
Raw materials and components......... $ 497,637 $ 454,122
Work-in-process...................... 300,319 206,282
Finished goods....................... 334,232 344,952
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$1,132,188 $1,005,356
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NOTE 4 - ACCRUED LIABILITIES:
Accrued liabilities are as follows:
SEPTEMBER 30, 1997 JUNE 30, 1997
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(UNAUDITED)
Clinical costs....................... $ 825,324 $ 688,271
Payroll and other compensation....... 335,887 219,288
Professional services................ 273,900 114,800
Warranties........................... 231,808 231,808
Marketing activities................. 175,000 58,562
Royalties............................ 103,514 46,320
Customer deposits.................... -- 18,364
Other................................ 46,923 85,501
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$1,992,356 $1,462,914
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NOTE 5 - STOCKHOLDERS' EQUITY:
In September 1997, the Company issued 3,000,000 shares of its Common
Stock in a follow-on public offering for $15.88 per share. Proceeds from the
issuance totaled approximately $44.3 million after commissions and offering
costs. In October 1997, the Company issued an additional 225,000 shares of
its Common Stock upon the exercise of a portion of the underwriter's
over-allotment option related to the Company's follow-on public offering.
Proceeds from the issuance totaled approximately $3.4 million after
commissions and offering costs.
NOTE 6 - NET LOSS PER SHARE:
In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share." Effective
July 1, 1997, Cyberonics adopted the provisions of the new statement,
changing from its current method of accounting for net loss per share as set
forth in APB Opinion No. 15. Adoption of Statement No. 128 requires
retroactive revision of the presentation of net loss per share in historical
financial statements. The Company's net loss per share presented in the
accompanying financial statements as calculated under the provisions of APB
Opinion No. 15 are the same as those had basic net loss per share under
Statement No. 128 been presented. Additionally, net loss per share as
presented herein are also the same as those had diluted net loss per share
under the provisions of Statement No. 128 been presented, since the Company's
outstanding stock options would not have been included in the calculation
because their effect would have been anti-dilutive.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934. ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT
OF A NUMBER OF IMPORTANT FACTORS. FOR A DISCUSSION OF IMPORTANT FACTORS THAT
COULD AFFECT THE COMPANY'S RESULTS, PLEASE REFER TO THE FINANCIAL STATEMENT
LINE ITEM DISCUSSIONS SET FORTH IN MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND TO THE SECTION ENTITLED
"FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS." READERS ARE ALSO
ENCOURAGED TO REFER TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K/A FOR A
FURTHER DISCUSSION OF THE COMPANY'S BUSINESS AND THE RISKS AND OPPORTUNITIES
ATTENDANT THERETO.
SUMMARY
Cyberonics was founded in 1987 to design, develop and bring to market
medical devices which provide a novel therapy, vagus nerve stimulation, for
the treatment of epilepsy and other debilitating neurological disorders.
Clinical trials of the NCP System began with the first patient implant in
November 1988 under an Investigational Device Exemption ("IDE") from the
United States Food and Drug Administration ("FDA"). The Company received FDA
approval to market the NCP System in the United States in July 1997 for use
as an adjunctive therapy in reducing the frequency of seizures in adults and
adolescents over twelve years of age with partial onset seizures that are
refractory to anti-epileptic drugs ("AEDs"). From inception through July
1997, the Company's primary focus was on obtaining FDA approval for the NCP
System. The Company has had minimal revenues to date, primarily consisting
of sales to clinical investigators and international sales, and has been
unprofitable since inception. Since inception, the Company has incurred
substantial expenses, primarily for research and development activities
(including product and process development and clinical trials and related
regulatory activities), sales and marketing activities and manufacturing
start-up. For the period from inception through June 30, 1997, the Company
incurred a cumulative net deficit of approximately $54.1 million.
Cyberonics was granted regulatory approval in 1994 to market and sell the
NCP System in the member countries of the European Union and also has
permission to sell in certain other international markets. However, through
fiscal 1996, the Company devoted only limited resources to marketing and
sales activities internationally, and only in early fiscal 1997 began
initiating significant marketing and sales activities. International sales
of the NCP System have been limited to date.
Cyberonics is engaged in obtaining reimbursement approvals from the
various health care provider systems in the United States and in key
international markets, and has received reimbursement approvals from certain
payment authorities in a limited number of international markets. The
Company does not expect to achieve significant sales unless and until
additional reimbursement approvals are obtained for the NCP System.
The Company expects to incur substantial costs related to sales and
marketing activities associated with United States and international market
entry, expansion of manufacturing capabilities, clinical trials and
regulatory activities and product and process development. It is expected
that there will be a significant delay between the increased levels of
spending and any resulting increase in revenues. Accordingly, the Company
expects to remain unprofitable through at least the fiscal year ending June
30, 1998. There can be no assurance that the Company will become profitable
after that time or, that if it becomes profitable, it will remain so in
future periods. Furthermore, the Company's results of operations may
fluctuate significantly from quarter to quarter and will depend upon numerous
factors, many of which are outside the Company's control. Such factors
include, but are not limited to, the extent to which the Company's NCP System
gains market acceptance, any approvals for reimbursement by third-party
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payors, the rate and size of expenditures incurred by the Company as it
expands its sales and marketing efforts, availability of key components,
materials and contract services which may be dependent on the Company's
ability to forecast sales and ability to achieve acceptable manufacturing
yields and costs.
RESULTS OF OPERATION
NET SALES. Net sales for the three months ended September 30, 1997
totaled $1.1 million compared to $285,000 for the three months ended
September 30, 1996, representing an overall increase of 287%. Net sales for
the three months ended September 30, 1997 consisted of $549,000 from
international markets and $554,000 from the United States. Net sales for the
three months ended September 30, 1996 were attributable entirely to the
Company's international markets. In July 1997, the Company received FDA
approval to market the NCP System in the United States. The Company's
domestic net sales for the three months ended September 30, 1997 were
generated entirely from commercial sales activities following FDA approval.
Domestic sales activities in previous quarters had been limited exclusively
to reimbursements related to the Company's clinical trials activities. While
such clinical trial reimbursements may continue in future periods, the
Company expects that the substantial majority of future domestic net sales
will be derived from commercial sources. Future increases in net sales will
be dependent upon development of increased market acceptance for the NCP
System and upon obtaining reimbursement approval in key markets.
GROSS PROFIT. The Company's gross margin percentage was 70.8% for the
three months ended September 30, 1997 compared to 75.7% in the prior year
period. Cost of sales consist primarily of direct labor, allocated
manufacturing overhead, third-party contractor costs and the acquisition cost
of raw materials and components. In addition, the Company is obligated to
pay royalties, ranging from 7% to 7.75% on the first $12 million in
cumulative net sales and from 4% to 4.75% thereafter, which are included in
cost of sales during the three months ended September 30, 1997. Gross margin
percentages can be expected to fluctuate in future periods based upon the mix
between domestic and international sales, direct and distributor sales, the
NCP System's selling price and levels of production volume.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses are
comprised of both expenses related to the Company's product and process
development efforts and expenses associated with conducting clinical trials
and certain related regulatory activities. Research and development expenses
totaled $2.0 million for the three months ended September 30, 1997 compared
to $1.4 million in the prior year period. The increase was due primarily to
costs associated with product design and development efforts and regulatory
costs associated with the recent receipt of FDA approval for the NCP System.
The Company intends to conduct further clinical trials of the NCP System for
additional indications both within and outside the field of epilepsy.
Accordingly, the Company expects research and development expenses to
fluctuate in future periods depending primarily upon the level of clinical
trial activity.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses totaled $4.0 million for the three months ended
September 30, 1997 compared to $810,000 for the three months ended September
30, 1996. The increase was primarily due to United States market launch
activities for the NCP System and to the continued expansion of international
market development efforts. The Company began expanding its sales and
marketing staff in late calendar 1996 and early 1997 to more actively pursue
international sales and in anticipation of FDA approval in the United States
and expects to add further sales and marketing personnel during fiscal 1998.
The Company also expects to add administrative personnel in anticipation of
higher levels of business activity. Accordingly, the Company expects its
future selling, general and administrative expenses in absolute amount to
remain at or increase beyond the amounts incurred during the three months
ended September 30, 1997.
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INTEREST INCOME, NET. Net interest income totaled $202,000 for the three
months ended September 30, 1997 compared to $147,000 for the same period in
the prior year. Interest income increased as a result of higher average cash
and investment balances on hand due to investment of the proceeds from
private placement of Common Stock completed in March 1997 and the completion
of a follow-on public equity offering in September 1997. The Company expects
that the investment of proceeds from the September 1997 equity offering will
generate increased levels of investment income in future quarters.
OTHER (EXPENSE) INCOME, NET. Other (expense) income totaled ($5,000) and
$82,000 during the three months ended September 30, 1997 and 1996,
respectively. For each of these periods, other income (expense) consisted of
net gains and losses resulting from foreign currency fluctuations.
INCOME TAXES. Due to its net operating loss history, to date the Company
has established a valuation allowance to fully offset its deferred tax
assets, including those related to its carryforwards, resulting in no income
tax expense or benefit for financial reporting purposes. Current federal
income tax regulations with respect to changes in ownership could limit the
utilization of the Company's net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
From inception through February 1993, the Company financed its operations
primarily through private placements of its securities through which it
raised approximately $16.5 million in net proceeds. In February 1993, the
Company completed an initial public offering of 2,000,000 shares of its
Common Stock, generating net proceeds to the Company of approximately $22
million. In July 1996, the Company raised an additional $11.2 million in net
proceeds in a sale of 2,181,818 shares of its Common Stock to St. Jude
Medical, Inc. and, in March 1997, the Company raised an additional
approximately $6.8 million in a sale of 1,534,374 shares of its Common Stock
in a private placement. In September 1997, the Company completed a public
equity offering of 3,000,000 shares of its Common Stock, generating net
proceeds of approximately $44.3 million. Additionally, through September 30,
1997, the Company has funded approximately $530,000 of its equipment needs
with proceeds from an equipment lease agreement. The Company had no short-
or long-term borrowings outstanding at September 30, 1997, and had no credit
facilities available at that time.
The Company expects to incur substantial additional costs related to
sales and marketing activities associated with United States and
international market entry, expansion of manufacturing capabilities, clinical
trials and regulatory activities and product and process development. The
amount and timing of anticipated expenditures will depend upon numerous
factors both within and outside of the Company's control, including the
nature and timing of marketing and sales activities and the nature and timing
of additional clinical trials for additional indications, both within and
outside the field of epilepsy. Moreover, the Company's ability to generate
income from operations will be dependent upon obtaining reimbursement
approval from government and third-party payors as well as receiving market
acceptance for the NCP System.
During the quarter ended September 30, 1997, the Company used
approximately $4.4 million in cash in operating activities. During the
quarter, accounts receivable increased to $975,000 from $549,000 at June 30,
1997 reflecting the higher level of sales in the quarter, and inventories
increased to $1.1 million from $1.0 million at June 30, 1997 as the Company
continued to build inventory levels in anticipation of higher levels of
manufacturing and sales activities. During the quarter ended September 30,
1997, the Company raised approximately $44.4 million from the sale of Common
Stock in a public equity offering.
The Company's liquidity will continue to be reduced as amounts are expended
for expansion of sales and marketing activities, manufacturing expansion,
continuing clinical trials and related regulatory affairs, and product
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and process development. Although the Company has no firm commitments, the
Company expects to make capital expenditures of approximately $1.6 million
during the remainder of fiscal 1998 and approximately $3.0 million in fiscal
1999, primarily to expand manufacturing capabilities and to enhance general
infrastructure and facilities.
The Company believes that its current resources will be sufficient to
fund its operations at least through June 30, 1999. This estimate is based
on certain assumptions, which may not hold true. There can be no assurance
that the Company's available cash, cash equivalents, investment securities
and investment income, will be sufficient to meet the Company's capital
requirements through June 30, 1999. The availability of financing either
before or after that time will depend upon a number of important factors,
including the state of the United States capital markets and economy in
general and the health care and medical device segments in particular, the
status of the Company's international and domestic sales activities and the
status of the Company's clinical and regulatory activities. There can be no
assurance that the Company will be able to raise additional capital, if
needed, or that the terms upon which capital will be available will be
favorable to the Company.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
THE COMPANY'S FUTURE OPERATING RESULTS CAN BE EXPECTED TO VARY BASED UPON
A NUMBER OF FACTORS, INCLUDING THOSE DESCRIBED BELOW.
RELIANCE ON SINGLE PRODUCT. The Company has only one product, the NCP
System, which has been approved by the FDA only for a single indication: as
an adjunctive therapy in reducing the frequency of seizures in adults and
adolescents over twelve years of age with partial onset seizures that are
refractory to AEDs. The Company does not expect to have any other product or
approved indication for the NCP System for the foreseeable future. Although
the Company has been able to sell the NCP System in certain countries in
Europe since 1994 and recently received United States FDA approval and
Canadian approval, it is only now in the process of initiating full-scale
marketing and sales efforts in the United States and other countries. The
Company's inability to commercialize successfully the NCP System would have a
material adverse effect on the Company's business, financial condition and
results of operations.
UNCERTAINTY OF MARKET ACCEPTANCE. Although the NCP System was approved
for commercial sale in a number of European countries beginning in 1994, the
Company has sold, through June 30, 1997, a limited number of NCP Systems.
Market acceptance of the Company's NCP System will depend on the Company's
ability to convince the medical community of the clinical efficacy and safety
of vagus nerve stimulation and the NCP System, and on the approval and
availability of adequate levels of reimbursement. While the NCP System has
been used in approximately 1,000 patients through June 30, 1997, it provides
a new form of therapy with which many physicians are unfamiliar. The Company
believes that existing AEDs and surgery are the only other approved and
currently available therapies competitive with the NCP System in the
treatment of epileptic seizures. Such therapies may be more attractive to
patients or their physicians than the NCP System in terms of efficacy, cost
or reimbursement availability. There can be no assurance that the NCP System
will achieve market acceptance for the treatment of epilepsy or for any other
indication or that adequate levels of reimbursement from governmental or
third-party payors will be available. Failure of the NCP System to gain
market acceptance would have a material adverse effect on the Company's
business, financial condition and results of operations.
HISTORY OF LOSSES; PROFITABILITY UNCERTAIN; FLUCTUATIONS IN QUARTERLY
OPERATING RESULTS. The Company has incurred net losses and accumulated a
deficit of approximately $49.2 million through June 30, 1997. In July 1997, the
Company received FDA marketing approval which permits the Company to sell the
NCP System in the United States for use as an adjunctive therapy in reducing the
frequency of refractory partial onset seizures in patients over twelve years of
age. In addition, the Company has obtained "CE Marking," the designation of
market
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approval now accepted by all European Union member countries, for its NCP
System which, when combined with approvals from Canada and certain other
countries, permits the Company to sell the NCP System internationally. Even
with these marketing approvals, there can be no assurance that the Company
will be able to generate adequate sales to achieve profitability in the
future. In addition, in order to develop these markets, the Company will
incur substantial marketing and sales expenses. The amount and timing of
anticipated expenditures will depend on numerous factors, including the
nature and timing of marketing and sales activities, the expansion of the
Company's manufacturing capabilities, the nature and timing of additional
clinical trials, and the Company's product development efforts.
The Company's results of operations may fluctuate significantly from
quarter to quarter and will depend upon numerous factors, many of which are
outside the Company's control. Such factors include, but are not limited to,
the extent to which the Company's NCP System gains market acceptance, timing
of any approvals for reimbursement by third-party payors, the rate and size
of expenditures incurred as the Company expands its sales and marketing
efforts and availability of key components, materials and contract services
which may be dependent on the Company's ability to forecast sales.
LIMITATIONS ON THIRD-PARTY REIMBURSEMENT. The Company's ability to
commercialize the NCP System successfully will depend in part on whether
third-party payors, including private health care insurers, managed care
plans, the United States government's Medicare and Medicaid programs and
others, agree both to cover the NCP System and the procedures and services
associated therewith, and to reimburse for the costs of the NCP System and
the related services at adequate levels.
In deciding to cover a new therapy, third-party payors base their initial
coverage decisions on several factors including, but not limited to, the
status of the FDA's review of the product, the product's safety and efficacy,
the number of studies performed and peer-reviewed articles published with
respect to the product and how the product and therapy compares to
alternative therapies. There can be no assurance that third-party payors will
view the Company and the NCP System favorably with respect to any of the
above factors. The Company has only limited experience in seeking and
obtaining coverage decisions from third-party payors. A failure to achieve
favorable coverage decisions for the NCP System in a timely manner could
deter patients and their physicians from using the NCP System and could have
a material adverse effect on the Company's business, financial condition or
results of operations.
Once a favorable coverage determination is made with respect to a
product, payors must determine the level of reimbursement for the product and
related therapy and procedures. The Company believes that coverage and
reimbursement for most epilepsy patients who are likely candidates for
treatment with the NCP System will need to be obtained from third-party
private payors. In making decisions about reimbursement amounts, third-party
private payors typically reimburse for the costs of newly covered devices and
services using the standard methods they employ for other products and
services already covered. Many private insurers and managed care plans use a
variety of payment mechanisms, including, but not limited to, discounted
charges, per diem amounts, resource-based payment scales and reimbursed
costs. The Company believes that a significant number of epilepsy patients
in the United States are either eligible for benefits under the Medicare
program or are uninsured. The Medicare program uses a fixed-payment method
(based on Diagnosis Related Groups or "DRGs") to pay for hospital inpatient
services and uses a resource-based relative value scale to pay for
physicians' services. Under current DRG groupings, hospital inpatient
procedures for implanting the NCP System are assigned to one of two different
DRGs based on whether or not the patient has complications or comorbidities
(coexisting severe medical problems). The DRG grouping that would include
implantation of the NCP System for patients without complications or
comorbidities pays hospitals less than the costs of purchasing and implanting
the NCP System. The Company believes that this DRG grouping would apply to
most of the epilepsy patients covered by Medicare. In order to assure
adequate reimbursement for all epileptic
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patients eligible for benefits under Medicare, the Company intends to seek
changes in the DRG grouping so that NCP System implant cases would be
reclassified to other, higher-paying DRGs. The Company has only limited
experience in seeking and obtaining coverage and payment approvals from
third-party payors, and there can be no assurance that the Company would be
successful in achieving coverage or adequate reimbursement levels or in
obtaining new DRG assignments, or if hospitals or physicians view their
payments as inadequate, then patients, physicians and hospitals could be
deterred from using the NCP System, which could have a material adverse
effect on the Company's business, financial condition or results of
operations.
In June 1994, the Company was granted approval to use the CE Mark and to
market the NCP System in the European Union. The Company is continuing to
pursue appropriate reimbursement approvals in the European Union member
countries. The Company believes that significant sales volume will be
difficult to generate without appropriate reimbursement approvals. There can
be no assurance as to when or whether such reimbursement will be obtained in
any of the European Union countries or, if obtained, whether the levels of
reimbursement will be sufficient to enable the Company to sell the NCP System
on a profitable basis.
LIMITED MARKETING AND SALES EXPERIENCE. Although the Company has had
approval to market the NCP System in the member countries of the European
Union since 1994, it has only recently received FDA approval to commercialize
the NCP System in the United States and, consequently, it has limited
experience in marketing, direct sales and distribution. The Company has
recently established a marketing and sales force for the United States
market, but no assurance can be given that the Company's direct marketing and
sales force will succeed in promoting the NCP System to patients, health care
providers or third-party payors. The Company believes that, to market its
products directly, it must employ a marketing and sales force with technical
expertise. In addition, due to the limited market awareness of the NCP
System, the Company believes that the sales process could be lengthy,
requiring the Company to educate patients, health care providers and
third-party payors regarding the clinical benefits of the NCP System. In
certain international territories, the Company relies, and intends to
continue relying, upon independent distributors. There can be no assurance
that the Company will be able to recruit and retain skilled marketing and
sales personnel or foreign distributors, or that the Company's marketing
efforts will be successful. Failure by the Company to successfully market
the NCP System would have a material adverse effect on the Company's
business, financial condition and results of operations.
LIMITED MANUFACTURING EXPERIENCE. The Company has a limited history of
operations that, to date, has consisted primarily of manufacturing limited
quantities of the NCP System for clinical investigations and for commercial
sales activities in international markets. The Company does not have
experience manufacturing the NCP System in the volumes that will be necessary
to achieve significant commercial sales. The Company has recently entered
into a lease for a new facility, and intends to move all of its manufacturing
operations to the new facility, which is expected to begin production in
early calendar 1998. The Company may encounter difficulties in scaling up
production of the NCP System, in procuring the necessary supply of materials,
components and contract services, or in hiring and training additional
manufacturing personnel to support domestic and international demand. The
Company will be required to obtain FDA approval for its change in the
manufacturing facility. The new manufacturing facility will also have to be
inspected for compliance with the FDA's Quality System regulations ("QSR")
and with ISO 9001 and 9002 standards, which impose certain procedural and
documentation requirements with respect to device design, development,
manufacturing and quality assurance activities, before the Company can begin
commercial-scale production of the NCP System at the new manufacturing
facility. In addition, one of the Company's contract manufacturers has moved
its manufacturing operations to a new facility. The Company will be required
to obtain FDA approval for the change in the location of the contractor's
manufacturing facility, which generally requires a preapproval inspection by
the FDA to determine the contractor's compliance with the QSR. There can be
no assurance that the Company will be able to obtain the necessary FDA and
other approvals for its or its contract manufacturers' new facilities on a
timely basis, or at all. If the Company is unable to achieve
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commercial-scale production capability on a timely basis with acceptable
quality and manufacturing yield and costs, to sustain such capacity, or to
achieve FDA and other governmental approvals, the ability of the Company to
deliver products on a timely basis could be impaired which could have a
material adverse effect on the Company's business, financial condition or
results of operations.
DEPENDENCE ON KEY SUPPLIERS AND MANUFACTURERS. The Company relies upon
sole source suppliers for certain of the key components, materials and
contract services used in manufacturing the NCP System. The Company
periodically experiences discontinuation or unavailability of components,
materials and contract services which may require qualification of
alternative sources or, if no such alternative sources are identified,
product design changes. The Company believes that pursuing and qualifying
alternative sources and/or redesigning specific components of the NCP System,
when necessary, could consume significant Company resources. In addition,
such changes generally require regulatory submissions and approvals. Any
extended delays in or inability to secure alternative sources for these or
other components, materials and contract services could result in product
supply and manufacturing interruptions. These delays could have a material
adverse effect on the Company's ability to manufacture the NCP System on a
timely and cost competitive basis, and therefore on its business, financial
condition or results of operations.
RISK OF PRODUCT RECALL. The NCP System includes a complex electronic
device and lead designed to be implanted in the human body. Component
failures, manufacturing errors or design defects could result in an unsafe
condition in patients. The occurrence of such problems or other adverse
reactions could result in a recall of the Company's products, possibly
requiring removal (and potentially reimplantation) of NCP Generators and/or
leads. In 1991, a failure of an NCP System caused permanent paralysis of one
patient's left vocal cord. In addition, several patients experienced vagus
nerve lead failures which, although not harmful to the patient, reduced the
efficacy of the treatment and required lead replacement. Since the
occurrence of these failures, changes have been made to the Company's product
designs and no similar failures have been reported to the Company. There can
be no assurance, however, that the Company will not experience similar or
other product problems or that the Company will not be required to recall
products. Any product recall could have a material adverse effect on the
Company's business, financial condition or results of operations.
DEPENDENCE ON PATENTS, LICENSES AND PROPRIETARY RIGHTS. The Company's
success will depend in part on its ability to obtain and maintain patent and
other intellectual property protection for the NCP System and its
improvements, and for vagus nerve stimulation therapy. To that end, the
Company has acquired licenses under certain patents and has patented and
intends to continue to seek patents on its own inventions used in its
products and treatment methods. The process of seeking patent protection can
be expensive and time consuming and there can be no assurance that patents
will issue from the currently pending or future applications or that, if
patents are issued, they will be of sufficient scope or strength to provide
meaningful protection of the Company's technology, or any commercial
advantage to the Company.
Cyberonics believes that the licenses held by the Company provide it with
protection in the United States in the field of cranial nerve stimulation,
including vagus nerve stimulation for the control of epilepsy, movement
disorders, including Parkinson's disease and essential tremor, and additional
indications for which method patents have been issued. The protection
offered by the licensed international patents is not as strong as that
offered by the licensed United States patents due to differences in patent
laws. In particular, the European Patent Convention prohibits patents
covering methods for treatment of the human body by surgery or therapy. In
addition, there has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry. Litigation,
which could result in substantial cost to and diversion of effort by the
Company, may be necessary to enforce patents issued or licensed to the
Company, to protect trade secrets or know-how owned by the Company or to
defend the Company against claimed infringement of the rights of others and
to determine the scope and validity of the
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<PAGE>
proprietary rights of others. Adverse determinations in litigation could
subject the Company to significant liabilities to third parties, could
require the Company to seek licenses from third parties and could prevent the
Company from manufacturing, selling or using the NCP System, any of which
could have a material adverse effect on the Company's business, financial
condition or results of operations. There can be no assurance that any
required license would be available on acceptable terms, if at all.
COMPETITION; RAPID TECHNOLOGICAL CHANGE. The Company believes that
existing and future AEDs will be the primary competition for its NCP System.
The Company may also face competition from other medical device companies for
the treatment of partial seizures. Medtronic, Inc. has clinically assessed
an implantable signal generator used with an invasive deep brain probe
(thalamic stimulator) for the treatment of neurological disorders and has
received FDA approval for the device for the treatment of essential tremor,
including that associated with Parkinson's disease. The Company could also
face competition from other large medical device companies which have the
technology, experience and capital resources to develop alternative devices
for the treatment of epilepsy. Many of the Company's competitors have
substantially greater financial, manufacturing, marketing and technical
resources than the Company and have obtained third-party reimbursement
approvals. In addition, the health care industry is characterized by
extensive research efforts and rapid technological progress. There can be no
assurance that the Company's competitors will not develop technologies and
obtain regulatory approval for products that are more effective in treating
epilepsy than the Company's current or future products. There can also be no
assurance that advancements in surgical techniques will not make surgery a
more attractive therapy for epilepsy. The development by others of new
treatment methods with novel AEDs, medical devices or surgical techniques for
epilepsy could render the NCP System non-competitive or obsolete. There can
be no assurance that the Company will be able to compete successfully against
current and future competitors or that competition, including the development
and commercialization of new products and technology, will not have a
material adverse effect on the Company's business, financial condition or
results of operations.
MANAGEMENT OF GROWTH. In connection with the commercialization of the
NCP System in the United States, the Company has begun and intends to
continue to significantly expand the scope of its operations, in particular
in marketing and sales. Such activities have placed, and may continue to
place, a significant strain on the Company's resources and operations. The
Company's ability to effectively manage such growth will depend upon its
ability to attract, hire and retain highly qualified employees and management
personnel. The Company competes for such personnel with other companies,
academic institutions, government entities and other organizations. There
can be no assurance that the Company will be successful in hiring or
retaining qualified personnel. The Company's success will also depend on the
ability of its officers and key employees to continue to implement and
improve its operational, management information and financial control
systems, of which there can be no assurance. The Company's ability to manage
growth effectively could have a material adverse effect on the Company's
business, financial condition or results of operations.
PRODUCT LIABILITY AND AVAILABILITY OF INSURANCE. The manufacture and
sale of the NCP System entails the risk of product liability claims.
Although the Company maintains product liability insurance, there can be no
assurance that the coverage limits of the Company's insurance policies will
be adequate. Such insurance is expensive and in the future may not be
available on acceptable terms, if at all. A successful claim brought against
the Company in excess of its insurance coverage could have a material adverse
effect on the Company's business, financial condition or results of
operations.
GOVERNMENT REGULATION. The preclinical and clinical testing,
manufacturing, labeling, sale, distribution and promotion of the NCP System
are subject to extensive and rigorous regulation in the United States by
federal agencies, primarily the FDA, and by comparable state agencies. The
NCP System is regulated as a medial device by the FDA and is subject to the
FDA's premarket approval ("PMA") requirements. In July 1997, the Company
received
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<PAGE>
FDA approval to market the NCP System in the United States for use as an
adjunctive therapy in reducing the frequency of seizures in adults and
adolescents over twelve years of age with partial onset seizures that are
refractory to AEDs. Nonetheless, in the future, it will be necessary for the
Company to file PMA supplements, and apply for additional regulatory
approvals, possibly including new investigational device exemptions ("IDEs")
and additional PMAs, for other applications of the NCP System and for
modified or future-generation products. Commercial distribution in certain
foreign countries is also subject to obtaining regulatory approvals from the
appropriate authorities in such countries. The process of obtaining FDA and
other required regulatory approvals is lengthy, expensive and uncertain.
Moreover, regulatory approvals may include regulatory restrictions on the
indicated uses for which a product may be marketed. Failure to comply with
applicable regulatory requirements can result in, among other things, fines,
suspension or withdrawal of approvals, confiscations or recalls of products,
operating restrictions and criminal prosecution. Furthermore, changes in
existing regulations or adoption of new regulations could prevent the Company
from obtaining, or affect the timing of, future regulatory approvals. There
can be no assurance that the Company will be able to obtain additional future
regulatory approvals on a timely basis or at all. Delays in receipt of or
failure to receive such future approvals, suspension or withdrawal of
previously received approvals, or recalls of the NCP System could have a
material adverse effect on the Company's business, financial condition or
results of operations.
FUTURE CAPITAL REQUIREMENTS. Although the Company believes that its
current resources, together with the proceeds from an anticipated public
offering of Common Stock, will be sufficient to meet its capital requirements
at least through June 30, 1999, there can be no assurance that the Company
will not require additional financing either before or after that date. This
estimate is based on certain assumptions, which may not hold true, including
the timely completion of a financing. There can be no assurance that such
financing will be completed on a timely basis or at all, or that proceeds
from such financing, if any, combined with Company's available cash, cash
equivalents, investment securities and investment income, will be sufficient
to meet the Company's capital requirements through June 30, 1999. The
Company's future capital requirements will depend upon numerous factors,
including the extent and timing of future product sales, the scale-up of the
Company's manufacturing facilities, and the nature, timing and success of
clinical trials for additional indications for the NCP System. Such
financing, if required, may not be available on satisfactory terms, or at
all. Lack of access to sufficient financing would impair the Company's
ability to fully pursue its business objectives, which could have a material
adverse effect on the Company's business, financial condition, or results of
operations.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. Although the NCP System
has been approved for commercialization in the European Union countries since
1994, the Company has not generated significant revenues from such countries
to date. The Company currently is expanding its marketing and sales
activities in international markets. There can be no assurance that the
Company will successfully increase international sales or that the Company
will be successful in obtaining reimbursement or any regulatory approvals
required in foreign countries. Changes in overseas economic conditions,
currency exchange rates, foreign tax laws or tariffs or other trade
regulations could have a material adverse effect on the Company's business
financial condition or results of operations. The anticipated international
nature of the Company's business is also expected to subject the Company and
its representatives, agents and distributors to laws and regulations of the
foreign jurisdictions in which they operate or where the NCP System is sold.
The regulation of medical devices in a number of such jurisdictions,
particularly in the European Union, continues to develop and there can be no
assurance that new laws or regulations will not have an adverse effect on the
Company's business, financial condition or results of operations. In
addition, the laws of certain foreign countries do not protect the Company's
intellectual property rights to the same extent as do the laws of the United
States. In particular, the European Patent Convention prohibits patents
covering methods for the treatment of the human body by surgery or therapy.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter
ended September 30, 1996.
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<PAGE>
SIGNATURE
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.
CYBERONICS, INC.
Registrant
BY: /s/ JOHN K. BAKEWELL
------------------------------------
John K. Bakewell
Vice President, Finance and
Administration and Chief Financial
Officer (principal financial and
accounting officer)
Dated: November 7, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS FOUND ON PAGES 3 AND 4
OF THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1997, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
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<SECURITIES> 12,849,259
<RECEIVABLES> 974,848
<ALLOWANCES> 0
<INVENTORY> 1,132,188
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<COMMON> 163,562
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<TOTAL-LIABILITY-AND-EQUITY> 51,178,455
<SALES> 1,103,234
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