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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended December 31, 1999 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)
<TABLE>
<S> <C>
Delaware 76-0236465
- --------------------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
16511 Space Center Boulevard, Ste. 600
Houston, Texas 77058
- --------------------------------------------- -----------------------------------
(address of principal executive offices) (zip code)
</TABLE>
Registrant's telephone number, including area code: (281) 228-7200
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 FEBRUARY 4, 2000
Common Stock - $0.01 par value 18,168,355
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CYBERONICS, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets
December 31, 1999 (unaudited) and June 30, 1999............. 3
Consolidated Statements of Operations (unaudited)
three months and six months ended December 31, 1999 and 1998 4
Consolidated Statements of Cash Flows (unaudited)
six months ended December 31, 1999 and 1998................. 5
Notes to Consolidated Financial Statements (unaudited)......... 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...................................... 19
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
CYBERONICS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 1999
-------------- -------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents.................................. $ 1,726,402 $ 1,544,042
Securities held to maturity................................ 18,577,876 19,222,590
Accounts receivable, net................................... 6,362,296 5,450,003
Inventories................................................ 5,700,860 5,195,114
Other current assets....................................... 636,476 898,038
------------- ------------
Total current assets.................................. 33,003,910 32,309,787
Securities held to maturity................................... 1,253,920 4,091,491
Property and equipment, net................................... 4,688,840 3,272,960
Other assets, net............................................. 189,914 108,915
------------- ------------
$ 39,136,584 $ 39,783,153
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................... $ 1,552,757 $ 1,704,095
Accrued liabilities........................................ 3,078,907 4,630,613
------------- ------------
Total current liabilities............................. 4,631,664 6,334,708
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;
17,874,895 and 17,562,000 shares issued and outstanding
at December 31, 1999 and June 30, 1999, respectively.. 178,749 $ 175,620
Additional paid-in capital................................. 111,296,679 109,280,567
Accumulated other comprehensive income..................... (90,718) (128,476)
Accumulated deficit........................................ (76,879,790) (75,879,266)
------------- ------------
Total stockholders' equity............................ 34,504,920 33,448,445
------------- ------------
$ 39,136,584 $ 39,783,153
============= ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements (Unaudited).
3
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CYBERONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED,
DECEMBER 31, DECEMBER 31,
------------------------------ ---------------------------
1999 1998 1999 1998
--------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales.....................................$ 11,117,439 $ 6,602,921 $ 19,780,675 $ 11,938,678
Cost of sales................................. 2,639,972 1,632,290 4,926,873 3,048,289
-------------- ------------- ------------- ------------
Gross profit.................................. 8,477,467 4,970,631 14,853,802 8,890,389
Operating expenses:
Selling, general and administrative......... 7,377,991 7,507,784 14,018,070 14,909,214
Research & development...................... 1,609,567 1,887,192 3,285,367 3,740,287
-------------- ------------- ------------- ------------
Total operating expenses.................. 8,987,558 9,394,976 17,303,437 18,649,501
-------------- ------------- ------------- ------------
Loss from operations.......................... (510,091) (4,424,345) (2,449,635) (9,759,112)
Interest income, net.......................... 334,968 566,363 610,266 1,048,753
Other income (expense)........................ (48,641) (21,049) (42,305) 157,063
-------------- ------------- ------------- ------------
Net loss before cumulative effect of a
change in accounting principle..............$ (223,764) $ (3,879,031) $ (1,881,674) $ (8,553,296)
Cumulative effect on prior years (to June
30, 1999) of changing to a different method
of depreciation............................. -- -- 881,150 --
-------------- ------------- ------------- ------------
Net loss......................................$ (223,764) $ (3,879,031) $ (1,000,524) $ (8,553,296)
============== ============= ============= ============
Loss per share, basic and diluted:
Loss before cumulative effect of a change in
accounting principle........................$ (0.01) $ (0.22) $ (0.11) $ (0.49)
Cumulative effect on prior years (to June
30, 1999) of changing to a different method
of depreciation ............................$ -- $ -- $ 0.05 $ --
-------------- ------------- ------------- ------------
Net loss......................................$ (0.01) $ (0.22) $ (0.06) (0.49)
============== ============= ============= ============
Shares used in computing net loss per share... 17,767,726 17,409,296 17,679,066 17,339,334
============== ============= ============= ============
Comprehensive loss:
Net loss......................................$ (223,764) $ (3,879,031) $ (1,000,524) $ (8,553,296)
Foreign currency translation adjustment....... 16,538 1,128 37,758 (128,791)
-------------- ------------- ------------- ------------
Comprehensive loss............................$ (207,226) $ (3,877,903) $ (962,766) $ (8,682,087)
============== ============= ============= ============
Pro forma amounts assuming retroactive
application of accounting change:
Net loss......................................$ (223,764) $ (3,704,868) $ (1,881,674) $ (8,338,040)
Net loss per share - basic and diluted........$ (0.01) $ (0.21) $ (0.11) $ (0.48)
</TABLE>
See accompanying Notes to Consolidated Financial Statements (Unaudited).
4
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CYBERONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
DECEMBER 31,
----------------------------
1999 1998
------------ -------------
<S> <C> <C>
Cash Flow From Operating Activities:
Net loss..................................................... $(1,000,524) $(8,553,296)
Non-cash items included in net loss:
Depreciation............................................... 618,108 624,006
Change in accounting principle............................. (881,150) --
Change in operating assets and liabilities:
Accounts receivable........................................ (912,293) 1,763,807
Inventories................................................ (505,746) (2,420,340)
Other current assets....................................... 261,562 262,309
Accounts payable and accrued liabilities................... (1,703,044) (2,662,466)
Other...................................................... (80,999) (32,023)
----------- -----------
Net Cash Used In Operating Activities.................... (4,204,086) (11,018,003)
Cash Flow From Investing Activities:
Purchases of property and equipment.......................... (1,152,838) (1,428,951)
Purchases of investments..................................... (27,701,596) (26,677,358)
Maturities of investments.................................... 31,183,881 36,907,115
----------- -----------
Net Cash Provided By Investing Activities................ 2,329,447 8,800,806
Cash Flow From Financing Activities:
Proceeds from issuance of Common Stock....................... 2,019,241 835,319
----------- -----------
Net Cash Provided By Financing Activities................ 2,019,241 835,319
Effect of exchange rate changes on cash and cash equivalents... 37,758 (128,791)
----------- -----------
Net (decrease) increase in cash and cash equivalents..... 182,360 (1,510,669)
Cash and cash equivalents, at beginning of period.............. 1,544,042 1,695,385
----------- -----------
Cash and cash equivalents, at end of period.................... $ 1,726,402 $ 184,716
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements (Unaudited).
5
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CYBERONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1999
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 six months ended December 31, 1999 are
not necessarily indicative of the results that may be expected for the full year
ending June 30, 2000. The financial information presented herein should be read
in conjunction with the audited consolidated financial statements and notes
thereto included in our Annual Report on Form 10-K for the year ended June 30,
1999.
NOTE 2 - INVESTMENT SECURITIES:
At December 31, 1999 and June 30, 1999, our entire investment portfolio
consisted of securities held to maturity that are reported at amortized cost.
Securities held to maturity are primarily corporate bonds, commercial paper and
United States (US) treasury obligations with various maturity dates and have a
fair market value of approximately $19,723,000 and a gross unrealized holding
loss of approximately $109,000 at December 31, 1999.
NOTE 3 - INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 JUNE 30, 1999
------------------- ----------------
(Unaudited)
<S> <C> <C>
Raw materials and components................ $ 1,779,954 $ 2,837,599
Work-in-process ............................ 1,471,414 794,410
Finished goods ............................. 2,449,492 1,563,105
--------- ---------
$ 5,700,860 $ 5,195,114
========= =========
</TABLE>
NOTE 4 - OTHER CURRENT ASSETS:
Other current assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 JUNE 30, 1999
------------------- ----------------
(Unaudited)
<S> <C> <C>
Prepaid assets.............................. $ 629,411 $ 835,467
Interest receivable ........................ 7,065 62,571
----- ------
$ 636,476 $ 898,038
======= =======
</TABLE>
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NOTE 5 - ACCRUED LIABILITIES:
Accrued liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 JUNE 30, 1999
------------------- -------------------
(Unaudited)
<S> <C> <C>
Clinical costs.............................. $ 1,143,114 $ 1,161,291
Payroll and other compensation.............. 607,869 2,086,849
Royalties................................... 434,642 398,800
Warranties.................................. 375,000 375,000
Business insurance.......................... 141,419 --
Professional services....................... 117,720 129,600
Sales returns and allowances................ 36,114 205,400
Marketing activities........................ - 50,250
Other ..................................... 223,029 223,423
------- -------
$ 3,078,907 $ 4,630,613
========= =========
</TABLE>
NOTE 6 - CHANGE IN ACCOUNTING PRINCIPLE:
Effective July 1, 1999, we changed our method of computing depreciation
on domestic fixed assets from the double declining method to the straight-line
method. This change was implemented to better match revenues and expenses taking
into account the nature of these assets and our business. The new depreciation
method was applied retroactively to all domestic assets acquired in prior years.
The cumulative prior years' effect of the changes was $881,150 (net of income
tax of $0) and is included in income for the six months ended December 31, 1999.
The effect of the change on the loss from operations for the three months and
the six months ended December 31, 1999 is not material. The pro forma amounts,
shown on the income statement, reflect the effect of retroactive application on
depreciation that would have been made in the three months and the six months
ended December 31, 1998 had the new method been in effect.
NOTE 7 - RECLASSIFICATION:
Certain amounts in the balance sheet as of June 30, 1999 have been
reclassified to conform with those at December 31, 1999.
NOTE 8 - NET LOSS PER SHARE:
We compute basic net loss per share by dividing our net loss by the
weighted average number of shares outstanding during each period. For purpose of
computing diluted net loss per share, no exercise of options was assumed since
the result would have been antidilutive.
7
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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
our 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 our Annual Report on
Form 10-K for the year ended June 30, 1999 for a further discussion of our
business and the risks and opportunities attendant thereto.
SUMMARY
We design, develop, manufacture and market the NeuroCybernetic
Prosthesis, or NCP(R) System, an implantable medical device for the treatment of
epilepsy and other debilitating neurological disorders. On July 16, 1997, we
received approval from the United States Food and Drug Administration, also
referred to as the FDA, to market the NCP System in the United States as an
adjunctive therapy for reducing the frequency of seizures in patients over
twelve years of age with partial onset seizures that are refractory or resistant
to antiepileptic drugs. We have also received regulatory approval to sell the
NCP System in Canada, Europe and certain countries in the Far East with the
broader indication of refractory epilepsy and without discrimination to patient
age. From inception through July 1997, our primary focus was on obtaining FDA
approval for the NCP System. Since inception, we have had limited revenues and
have 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. We have been unprofitable since inception. For the period from
inception through December 31, 1999 we have incurred a cumulative net deficit of
approximately $77 million.
We were granted regulatory approval in 1994 to market and sell the NCP
System in the member countries of the European Union and also have permission to
sell in certain other international markets. However, we have devoted limited
resources to marketing and sales activities internationally and international
sales of the NCP System have been limited to date.
We believe that significant market acceptance of the NCP System for the
treatment of epilepsy or other indications will require that the treatment be
eligible for reimbursement from government and private health care payors both
within and outside the United States. We have gained coverage recommendations
from Health Care Administration or HCFA, Blue Cross and Blue Shield,
CHAMPUS/Tricare, Kaiser, a number of State Medicaid agencies and numerous other
payors. We are in the process of seeking additional coverage recommendations and
appropriate payment levels from these and other third party payors in the United
States and in a limited number of key international markets.
We expect to incur substantial costs related to sales and marketing
activities, clinical trials
8
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and regulatory activities, product and process development and infrastructure
development. We expect there will be a delay between the increased levels of
spending and any resulting increase in revenues. We have been unprofitable since
inception and we cannot assure you that our results of operations will become
profitable after that time or, that if our operations become profitable, they
will remain so in future periods. Furthermore, our results of operations may
fluctuate significantly from quarter to quarter and will depend upon numerous
factors, many of which are outside our control. Such factors include, but are
not limited to, the extent to which the NCP System gains market acceptance, any
approvals for reimbursement by third-party payors, the rate and size of
expenditures in sales and marketing and clinical trials and regulatory
activities, availability of key components, materials and contract services
which may be dependent on our ability to forecast sales, the ability to achieve
acceptable manufacturing yields and costs and the extent and timing of the
development of corporate infrastructure.
RESULTS OF OPERATIONS
Net Sales. Net sales for the three months ended December 31, 1999
totaled $11,117,000 compared to $6,603,000 for the three months ended December
31, 1998, representing an overall increase of $4.5 million, or 68%. Net sales
for the six months ended December 31, 1999 totaled $19,781,000 compared to
$11,939,000 for the six months ended December 31, 1998 representing an overall
increase of $7,842,000, or 66%. Net sales for the three months ended December
31, 1999 consisted of $9.7 million from the United States and $1.4 million from
international markets. Net sales for the quarter ended December 31, 1998
consisted of $5.6 million from the United States and $1.0 million from
international markets. Future increases in net sales will depend upon
development of increased market acceptance for the NCP System and upon obtaining
or expanding reimbursement approval in key markets.
Gross Profit. Gross margin, as a percent of net sales, was 76.3% for the
quarter ended December 31, 1999 compared to 75.3% in the same prior year period.
The gross margin percentage for the six months ended December 31, 1999 was 75.1%
compared to 74.5% for the same period a year ago. The increase over the prior
year is attributable to the greater proportion of net sales being derived from
the United States and direct markets in Europe, which generally have higher
gross margins than sales generated through indirect channels. Cost of sales
consist primarily of direct labor, direct materials and components, allocated
manufacturing overhead, third-party contractor costs and certain manufacturing
period expenses. In addition, we are required to pay royalties at a rate of
approximately 4% of net sales. 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, manufacturing yields, period expenses and levels of production volume.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses totaled $7.4 million, or 66.4% of net sales, for the
three months ended December 31, 1999 compared to $7.5 million, or 113.7% of net
sales, for the three months ended December 31, 1998. Selling, general and
administrative expenses totaled $14.0 million, or 70.9% of net sales, for the
six months ended December 31, 1999 compared to $14.9 million, or 124.9% of net
sales, for the same period a year ago. The decrease in absolute dollars for the
three months ended December 31, 1999 as
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compared to the same period last year was primarily the result of net reductions
in costs for professional and consulting services which were brought in-house or
otherwise reduced during the current period. The decrease in absolute dollars
for the six months ended December 31, 1999 as compared to the same period last
year included reductions in professional and consulting expenses as experienced
during the quarter as well as reductions in costs associated with national sales
and marketing events. The decrease of such expenses as a percentage of net sales
is primarily the result of the increase in net sales in the quarter ended
December 31, 1999 as compared to the same prior year period. We expect to add
administrative and sales and marketing personnel in anticipation of higher
levels of business activity in the last six months of fiscal year 2000.
Accordingly, we expect our future selling, general and administrative expenses
in absolute amount to increase beyond the amounts incurred during the three
months ended December 31, 1999.
Research and Development Expenses. Research and development expenses are
comprised of both expenses related to our product and process development
efforts and expenses associated with conducting clinical trials and certain
related regulatory activities. Research and development expenses totaled $1.6
million, or 14.5% of net sales, for the three months ended December 31, 1999,
compared to $1.9 million, or 28.6% of net sales, in the prior year period.
Research and development expenses were $3.3 million, or 16.6% of net sales, and
$3.7 million or 31.3% of net sales, for the six months ended December 31, 1999
and December 31, 1998 respectively. The decrease in absolute dollars for the
three months and the six months ended December 31, 1999 was primarily due to
reduction in product development costs and clinical study costs. The large
decrease of such expenses as a percentage of net sales is primarily the result
of the increase in sales for the three months and the six months ended December
31, 1999 as compared to the same prior year periods. We intend to conduct
further clinical trials of the NCP System for additional indications both within
and outside the field of epilepsy including chronic depression and morbid
obesity. Accordingly, we expect research and development expenses in dollars to
increase beyond the amounts incurred during the three months ended December 31,
1999.
Interest Income. Interest income totaled $335,000 and $566,000 for the
three months ended December 31, 1999 and December 31, 1998, respectively, and
$610,000 and $1,049,000 for the six months ended December 31, 1999 and December
31, 1998 as a result of declining cash and investment balances on hand. We
expect interest income to gradually decline in future periods as we utilize our
resources to fund future working capital requirements.
Other Income (Expense), Net. Other income (expense) net totaled
($49,000) and ($21,000) during the three months ended December 31, 1999 and
1998, respectively. For the six months ended December 31, 1999 and December 31,
1998, other income (expense) net totaled ($42,000) and $157,000, respectively.
For each of these periods, other income consisted primarily of net gains and
losses resulting from foreign currency fluctuations. We expect other income to
fluctuate in future periods depending upon the mix between international and
domestic business activities, business exposures to foreign currencies and upon
fluctuations in currency exchange rates.
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Income Taxes. Due to our net operating loss history, to date we have
established a valuation allowance to fully offset deferred tax assets, including
those related to tax 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
operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through
public and private placements of our securities. We had no short or long-term
borrowings outstanding at December 31, 1999, and had no credit facilities
available at that time.
We expect to incur substantial additional costs related to sales and
marketing activities, clinical trials and regulatory activities, product and
process development and infrastructure development. The amount and timing of
anticipated expenditures will depend upon numerous factors both within and
outside our control, including the nature and timing of marketing and sales
activities, the development of corporate infrastructure and the nature and
timing of additional clinical trials for additional indications, both within and
outside the field of epilepsy. Moreover, our ability to generate income from
operations will be dependent upon maintaining and broadening reimbursement
approval from government and third-party payors as well as receiving market
acceptance for the NCP System.
During the six months ended December 31, 1999, net cash used in
operating activities was approximately $4.2 million. Accounts receivable
increased to $6.4 million, from $5.5 million at June 30, 1999. Inventories
increased to $5.7 million at December 31, 1999 from $5.2 million at June 30,
1999. We also reduced current liabilities to $4.6 million at December 31, 1999
from $6.3 million at June 30, 1999.
Our liquidity will continue to be reduced as amounts are expended for
sales and marketing activities, continuing clinical trials and related
regulatory affairs, product and process development and infrastructure
development. Although we have no firm commitments, we expect to make capital
expenditures of approximately $1.8 million during the remainder of fiscal 2000,
primarily to support manufacturing operations and to enhance general
infrastructure and facilities.
We believe that our current resources will be sufficient to fund our
operations at least through June 30, 2001, although there can be no assurance of
this as this estimate is based on a number of assumptions, which may not hold
true. The availability of financing either before or after that time will depend
upon a number of important factors, including the strength of the United States
capital markets and economy in general and the health care and medical device
segments in particular, the status of our sales activities and the status of our
clinical and regulatory activities. We may not be able to raise additional
capital when needed on terms favorable to us.
11
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IMPACT OF YEAR 2000
Many currently installed computer systems and software products were
coded using two digits rather than four to define the applicable year. As a
result these computer systems and software products have time-sensitive software
that recognize a date using "00" as the year 1900 rather than the year 2000.
This could cause a system failure or miscalculations, causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, to send invoices, or to engage in similar normal business
activities. Some computers may also not properly roll from year 1999 to year
2000, resulting instead with arbitrary dates such as January 4, 1980. Finally,
computer systems and software products may fail to process accurately the leap
year logic associated with the Year 2000. To date, we have not experienced any
adverse consequences from Year 2000 issues.
FACTORS AFFECTING FUTURE OPERATING RESULTS
In addition to the factors described above in this section, the
following additional factors could effect our future results.
We rely on only one product for our revenues and if sales of this
product are not achieved, our operating results will be severely harmed. We have
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 antiepileptic drugs. We do not expect to have
any other product or approved indication for the NCP System in the United States
for at least the next three years. Although sales of our NCP System have been
increasing, we cannot assure you that sales will continue to increase at the
same rate or at all. We are currently requesting approval for the use of the NCP
System for the treatment of major depression in patients with unipolar and
bipolar depressive disorder. We do not yet have approvals necessary to
commercialize the NCP System for the treatment of depression. We cannot assure
you that any approvals for the treatment of depression with the NCP System will
be granted, nor can we assure you that even if the approval is granted, we will
be successful in commercializing the NCP System for the treatment of depression
or any other indications. Our inability to commercialize successfully the NCP
System will severely harm our business.
We may not achieve market acceptance of the use of our NCP System to
treat epilepsy, which could cause our sales to decrease. Continued market
acceptance of our NCP System will depend on our ability to convince the medical
community of the clinical efficacy and safety of vagus nerve stimulation and the
NCP System. While the NCP System has been used in approximately 6,500 patients
through December 31, 1999, many physicians are still unfamiliar with this form
of therapy. We believe that existing antiepileptic drugs and surgery are the
only other approved and currently available therapies competitive with the NCP
System in the treatment of epileptic seizures. These therapies may be more
attractive to patients or their physicians than the NCP System in terms of
efficacy, cost or reimbursement availability. We cannot assure you that the NCP
System will
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achieve market acceptance for the treatment of epilepsy or for any other
indication. Failure of the NCP System to gain market acceptance would severely
harm our business, financial condition and results of operations.
Our quarterly operating results may fluctuate in the future, which may
cause our stock price to decline. Our results of operations may fluctuate
significantly from quarter to quarter and may be below the expectations of
security analysts. If so, the market price of our shares may decline. Our
quarterly revenues, expenses and operating results may vary significantly from
quarter to quarter for several reasons including the extent to which our NCP
System gains market acceptance, the timing of obtaining marketing approvals for
our NCP System for other indications, the timing of any approvals for
reimbursement by third-party payors, the rate and size of expenditures incurred
as we expand our clinical, manufacturing, sales and marketing corporate
infrastructure development efforts and the availability of key components,
materials and contract services, which may depend on our ability to forecast
sales.
Our current and future expense estimates are based, in large part, on
estimates of future sales, which are difficult to predict. We may be unable to,
or may elect not to, adjust spending quickly enough to offset any unexpected
sales shortfall. If our expenses were not accompanied by increased sales, our
results of operations and financial condition for any particular quarter would
be harmed.
We may be unable to obtain adequate third-party reimbursement on our
product. Our ability to commercialize the NCP System successfully depends 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 associated
procedures and services and to reimburse at adequate levels for the costs of the
NCP System and the related services we have in the United States or
internationally. If we fail to achieve or expand favorable coverage decisions
for the NCP System in a timely manner, patients and their physicians could be
deterred from using the NCP System which could reduce our sales and severely
harm our business.
We may not be successful in our marketing and sales efforts, which could
severely harm our business. We continue to expand our marketing and sales force
for the United States market, and we cannot assure you that this expanded direct
marketing and sales force will succeed in promoting the NCP System to patients,
health care providers or third-party payors on a broad basis. In addition, due
to limited market awareness of the NCP System, we believe that the sales process
could be lengthy, requiring us to continue to educate patients, health care
providers and third-party payors regarding the clinical benefits and
cost-effectiveness of the NCP System. In certain international territories, we
rely, and intend to continue to rely, upon independent distributors. We may not
be able to recruit and retain skilled marketing and sales personnel or foreign
distributors to support our marketing and sales efforts. Our failure to
successfully market and sell our NCP System would severely impair our sales and
our business.
We have limited manufacturing experience and may not be able to ramp up
our manufacturing to meet anticipated product demand. Our manufacturing
activities to date have consisted primarily of manufacturing limited quantities
of the NCP System for clinical investigations, for two years of commercial sales
activities in the United States and for commercial
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sales activities in international markets. We do not have experience
manufacturing the NCP System in the volumes that will be necessary to achieve
significant commercial sales. We 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. In
addition, our manufacturing facilities must continue to comply with the FDA's
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. If we are unable to achieve
commercial-scale production capability on a timely basis with acceptable quality
and manufacturing yield and costs, to sustain such capacity, or to maintain FDA
and other governmental approvals, our ability to deliver products on a timely
basis could be impaired which could severely harm our business.
If our sole suppliers and manufacturers are unable to meet our demand
for materials, components and contract services, we may be forced to qualify new
vendors or change our product design which would impair our ability to deliver
products to our customers on a timely basis. We rely upon sole source suppliers
for certain of the key components, materials and contract services used in
manufacturing the NCP System. We periodically experience discontinuation or
unavailability of components, materials and contract services which may require
us to qualify alternative sources or, if no such alternative sources are
identified, change our product design. We believe that pursuing and qualifying
alternative sources and/or redesigning specific components of the NCP System,
when necessary, could consume significant resources. In addition, such changes
generally require regulatory submissions and approvals. Any extended delays in
or an inability to secure alternative sources for these or other components,
materials and contract services could result in product supply and manufacturing
interruptions, which could significantly harm our business.
Our products may be found to have significant defects that could harm
the human body and result in product recalls. The NCP System includes a complex
electronic device and lead designed to be implanted in the human body. Component
failures, manufacturing or shipping 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 our products, possibly requiring removal
and potentially reimplantation of the NCP System or a component of the NCP
System. For example, in 1991, a failure of an NCP System caused permanent
paralysis of one patient's left vocal cord. In addition, several patients
experienced bipolar 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 our product designs and
no similar failures have been reported. However in the future, we may experience
similar or other product problems or may be required to recall products. Any
product recall could severely harm our business, financial condition and results
of operations.
We may not be able to protect our technology from unauthorized use,
which could diminish the value of our products and impair our ability to
compete. Our success depends upon our 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, we have acquired licenses
under certain patents and have patented and intend to continue to seek patents
on our own inventions used in our products and treatment methods. The process of
seeking patent protection can be
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expensive and time consuming and we cannot assure you that patents will issue
from our currently pending or future applications or that, if patents are
issued, they will be of sufficient scope or strength to provide meaningful
protection of our technology, or any commercial advantage to us. Further, 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.
We may have to engage in litigation to protect our proprietary rights,
or defend against infringement claims by third parties, causing us to suffer
significant expenses or prevent us from selling our products. 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 us, may be necessary to enforce patents
issued or licensed to us, to protect trade secrets or know-how owned by us or to
defend ourselves against claimed infringement of the rights of others and to
determine the scope and validity of the proprietary rights of others. Adverse
determinations in litigation could subject us to significant liabilities to
third parties, could require us to seek licenses from third parties and could
prevent us from manufacturing, selling or using the NCP System, any of which
could severely harm our business.
Intense competition and rapid technological changes could reduce our
ability to market our products and achieve sales. We believe that existing and
future antiepileptic drugs will continue to be the primary competition for our
NCP System. We may also face competition from other medical device companies
that have the technology, experience and capital resources to develop
alternative devices for the treatment of epilepsy. Many of our competitors have
substantially greater financial, manufacturing, marketing and technical
resources than we do and have obtained third-party reimbursement approvals for
their therapies.
In addition, the health care industry is characterized by extensive
research efforts and rapid technological progress. Our competitors may develop
technologies and obtain regulatory approval for products that are more effective
in treating epilepsy than our current or future products. In addition,
advancements in surgical techniques may make surgery a more attractive therapy
for epilepsy. The development by others of new treatment methods with novel
antiepileptic drugs, medical devices or surgical techniques for epilepsy could
render the NCP System non-competitive or obsolete. We may not be able to compete
successfully against current and future competitors, including new products and
technology, which could severely harm our business, financial condition or
results of operations.
If we fail to effectively manage our growth, our ability to maintain our
costs or capture new business could suffer. In connection with the
commercialization of the NCP System in the United States, we have significantly
expanded the scope of our operations, in particular in manufacturing and in
marketing and sales. Such activities have placed, and may continue to place, a
significant strain on our resources and operations. Our ability to effectively
manage such growth will depend upon our ability to attract, hire and retain
highly qualified employees and management personnel. We compete for such
personnel with other companies, academic institutions, government entities and
other organizations and we may not be successful in hiring or retaining
qualified personnel. Our
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success will also depend upon the ability of our officers and key employees to
continue to implement and improve our operational, management information and
financial control systems. If we fail to manage our growth effectively, our
business would suffer.
We are subject to claims of product liability and we may not have the
resources or insurance to cover the cost for losses under these claims. As an
implantable medical device, the manufacture and sale of the NCP System entails
the risk of product liability claims. Our product liability coverage may not be
adequate to cover any of these claims. Product liability insurance is expensive
and in the future may not be available on acceptable terms, if at all. A
successful claim brought against us in excess of our insurance coverage could
significantly harm our business and financial condition.
If we do not continue to comply with changing government regulations, we
could lose our ability to market and sell our product. 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.
In the future, it will be necessary for us to obtain additional government
approvals 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 us from obtaining, or affect the timing of,
future regulatory approvals. We may not 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 severely harm our ability
to market and sell our current and future products and improvements.
Our international operations are subject to risks not generally
associated with commercialization efforts in the United States. We have recently
begun to focus our marketing and sales activities in international markets. We
may not be successful in increasing our international market sales or in
obtaining reimbursement or any regulatory approvals required in foreign
countries. The anticipated international nature of our business is also expected
to subject us and our representatives, agents and distributors to laws and
regulations of the foreign jurisdictions in which we 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 new
laws or regulations may impair our ability to market and sell our products in
those jurisdictions.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
*27 Financial Data Schedule.
* Previously filed.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the
quarter ended December 31, 1999.
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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/ PAMELA B. WESTBROOK
-----------------------------------------
Pamela B. Westbrook
Vice President, Finance and Administration
and Chief Financial Officer (principal
financial and accounting officer)
Dated: February 14, 2000
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27* Financial Data Schedule
* Previously Filed
