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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDING JUNE 30, 1997
COMMISSION FILE NUMBER 000-22755
COMPUTER MOTION, INC.
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(Exact name of registrant as specified on in its charter)
DELAWARE 77-0458805
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
130-B CREMONA DRIVE
GOLETA, CA 93117
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(Address of principal executive offices)
(805) 968-9600
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(Registrant's telephone number, including area code)
Indicate by check [X] whether the registrant (1) has filed all reports required
to be filed by Sections 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 [ ]
As of August 11, 1997 there were 2,295,000 shares of the Registrant's common
stock outstanding.
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TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION......................................................2
ITEM 1 FINANCIAL STATEMENTS.......................................................2
- Condensed Balance Sheets at June 30, 1997 and December 31, 1996........2
- Condensed Statements of Operations for the three and six months
ended June 30, 1997 and 1996...........................................3
- Condensed Statements of Cash Flows for the six months
ended June 30, 1997 and 1996...........................................4
- Notes to Condensed Financial
Statements.............................................................5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................................6-15
PART II. OTHER INFORMATION..........................................................16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...........................................16
SIGNATURE PAGE......................................................................17
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMPUTER MOTION, INC.
CONDENSED BALANCE SHEETS
<TABLE>
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June 30, 1997 December 31,
(Unaudited) 1996(1)
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ASSETS
Current assets:
Cash and cash equivalents $ 2,600,000 $ 433,000
Accounts receivable 967,000 1,152,000
Inventory 742,000 645,000
Prepaid expenses 172,000 88,000
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Total current assets 4,481,000 2,318,000
Plant and equipment, net 751,000 609,000
Intangibles and other assets 929,000 629,000
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Total assets $ 6,161,000 $ 3,556,000
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 875,000 $ 902,000
Accrued expenses 820,000 761,000
Deferred revenue 293,000 74,000
Current portion of long-term liabilities 82,000 1,246,000
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Total current liabilities 2,070,000 2,983,000
Notes payable to shareholders 3,250,000 3,250,000
Other long-term liabilities 156,000 135,000
Commitments and contingencies
Redeemable preferred stock, series D 6,122,000 5,882,000
Shareholders' equity:
Preferred stock, series A, B, C and E 6,056,000 3,716,000
Common stock 712,000 386,000
Additional paid-in capital 7,181,000 153,000
Receivable from shareholders (126,000) --
Deferred compensation expense (1,916,000) (515,000)
Accumulated deficit (17,344,000) (12,434,000)
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Total shareholders' equity (5,437,000) (8,694,000)
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Total liabilities and shareholders' equity $ 6,161,000 $ 3,556,000
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</TABLE>
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(1) Derived from audited financial statements for the year ended December 31,
1996. See notes to condensed financial statements.
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COMPUTER MOTION, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three Months Ended Six Months Ended
June 30, June 30,
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1997 1996 1997 1996
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Revenue $ 1,483,000 $ 702,000 $ 2,856,000 $ 1,378,000
Cost of revenue 724,000 457,000 1,375,000 901,000
----------- ----------- ----------- -----------
Gross profit 759,000 245,000 1,481,000 477,000
Selling, general and administrative
expense 2,340,000 856,000 3,677,000 1,601,000
Research and development expense 788,000 261,000 1,346,000 597,000
----------- ----------- ----------- -----------
Loss from operations (2,369,000) (872,000) (3,542,000) (1,721,000)
Other expense 1,011,000 78,000 1,367,000 119,000
----------- ----------- ----------- -----------
Loss before income taxes (3,380,000) (950,000) (4,909,000) (1,840,000)
Provision for taxes -- -- 1,000 1,000
----------- ----------- ----------- -----------
Net loss $(3,380,000) $ (950,000) $(4,910,000) $(1,841,000)
=========== =========== =========== ===========
Weighted average shares outstanding used
to compute net loss per share 3,037,000 2,826,000 2,946,000 2,828,000
=========== =========== =========== ===========
Net loss per share $ (1.11) $ (.34) $ (1.66) $ (.65)
=========== =========== =========== ===========
Proforma weighted average shares
outstanding giving effect to conversion of
preferred stock
and subordinated debt 5,694,000 5,577,000
=========== ===========
Proforma net loss per share $ (.59) $ (.88)
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</TABLE>
See notes to condensed financial statements.
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COMPUTER MOTION, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Six Months Ended
June 30,
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1997 1996
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Cash flows from operating activities:
Net loss $(4,910,000) $(1,841,000)
Adjustments to reconcile net loss to cash used by operating activities:
Depreciation and amortization 190,000 167,000
Provision for doubtful accounts 19,000 --
Loss on sale of fixed assets -- 12,000
Common stock issued for services 44,000 --
Amortization of interest costs attributable to the fixed conversion 1,126,000 --
feature of a convertible debenture and warrants issued with notes
payable to shareholders
Amortization of deferred compensation expense 788,000 --
Deferred public offering costs (213,000) --
Deferred revenue 219,000 183,000
Decrease in working capital 13,000 22,000
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Net cash used by operating activities (2,724,000) (1,457,000)
Cash flows from investing activities:
Purchase of plant and equipment (271,000) (54,000)
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Net cash used by investing activities (271,000) (54,000)
Cash flows from financing activities:
Proceeds from issuance of debt 254,000 2,825,000
Repayment of debt (1,451,000) (625,000)
Proceeds from common stock and warrant issuance 4,227,000 --
Proceeds from preferred stock issuance 2,341,000 --
Receivable from shareholders (126,000) --
Investment in sales-type lease (216,000) (79,000)
Proceeds from stock option exercises 134,000 --
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Net cash provided by financing activities 5,163,000 2,121,000
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Increase in cash and cash equivalents 2,168,000 610,000
Cash and cash equivalents at beginning of period 432,000 64,000
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Cash and cash equivalents at end of period $ 2,600,000 $ 674,000
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Supplemental disclosures:
Cash paid during the year for interest expense $ 112,000 $ 113,000
</TABLE>
See notes to condensed financial statements.
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COMPUTER MOTION, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
financial information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included.
The operating results of the interim periods presented are not
necessarily indicative of the results for the year ending December 31, 1997 or
for any other interim period. The accompanying condensed financial statements
should be read in conjunction with the audited financial statements and notes
thereto for the year ended December 31, 1996 included in the Company's
Registration Statement on Form S-1 as amended (No. 333-29505) filed with the
Securities and Exchange Commission.
NOTE 2. NET LOSS PER SHARE
Except as noted below, net loss per share is computed using the
weighted average number of common shares outstanding. Common equivalent shares
from stock options, warrants and convertible preferred stock are excluded from
the computation as their effect is antidilutive, except that pursuant to the
Securities and Exchange Commission Staff Accounting Bulletins, common and common
equivalent shares issued during the twelve-month period prior to the Company's
August 1997 initial public offering at prices substantially below the initial
public offering price have been included in the calculation as if they were
outstanding for all periods presented (using the treasury stock method at the
initial public offering price for stock options and warrants and the
if-converted method for convertible preferred stock).
Pro forma net loss per share for the three and six months ended June
30, 1997 has been computed as described above and also gives effect to the
conversion of convertible preferred shares not included above that automatically
converted upon completion of the Company's initial public offering (see Note 3)
from the original date of issuance and the conversion of a debenture into common
stock as if the conversion took place on the first day of the period.
NOTE 3. SUBSEQUENT EVENT
The Company closed its initial public offering of 2,500,000 shares of
common stock at a price of $14.00 per share in August 1997. In September 1997,
the underwriters exercised an option to purchase an additional 375,000 shares of
common stock at $14.00 per share. Net proceeds of approximately $37,000,000 were
received by the Company. In August 1997, notes payable to shareholders of
$3,250,000 were repaid by the Company from these proceeds.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
This report contains forward looking statements that involve risks and
uncertainties. The Company's actual results may differ materially due to factors
that include, but are not limited to, the risks discussed herein under "Risk
Factors That May Affect Future Results" as well as those discussed in the "Risk
Factors" section of the Company's Registration Statement on Form S-1, as amended
(No. 333-29505).
OVERVIEW
Computer Motion, Inc. (the "Company") develops and markets proprietary
robotic and computerized surgical systems that are intended to enhance a
surgeon's performance and centralize and simplify a surgeon's control of the
operating room ("OR"). The Company believes that its products and technologies
under development will provide surgeons with the precision and dexterity
necessary to perform complex, minimally invasive surgical procedures including
fully endoscopic multivessel coronary artery bypass grafts ("E-CABG") as well as
enabling surgeons to control critical devices in the OR through simple verbal
commands. The Company believes that its products and technologies under
development will broaden the scope and increase the effectiveness of minimally
invasive surgery, improve patient outcomes, and create a safer, more efficient
and cost effective OR. The Company's current commercial product, AESOP, is a
Food and Drug Administration (FDA) cleared, robotic endoscope positioning
system.
The Company's robotic surgical system under development, ZEUS, is
designed to fundamentally improve a surgeon's ability to perform complex
surgical procedures and enable new, minimally invasive microsurgical procedures
that are currently impossible or very difficult to perform. ZEUS is comprised of
three surgeon-controlled robotic arms, one of which positions the endoscope and
two of which manipulate the Company's proprietary single-use and reusable
surgical instruments. The Company believes that ZEUS will improve a surgeon's
dexterity and precision and enhance visualization of, and access to, confined
operative sites. The Company also believes that new minimally invasive surgical
procedures performed with ZEUS will result in reduced patient pain and trauma,
fewer complications, lessened cosmetic concerns and shortened convalescent
periods and will increase the number of patients qualified for certain surgical
procedures. In addition, the Company believes that an increase in minimally
invasive procedures will result in lower overall healthcare costs to providers,
payors and patients. The Company has commenced limited pre-clinical testing in
several medical centers and intends to seek premarket approval ("PMA") by the
FDA to market ZEUS in the United States.
The Company's voice controlled technology platform under development,
HERMES, is designed to enable a surgeon to directly control multiple OR devices,
including various laparoscopic, arthroscopic and video devices, as well as the
Company's robotic devices, through simple verbal commands. HERMES is also
designed to provide standardized visual and digitized voice feedback to a
surgical team. The Company believes that the enhanced control and feedback
provided by HERMES has the potential to improve safety, increase efficiency,
shorten procedure times and reduce costs. The Company has developed a prototype
of HERMES and expects to commence functionality testing during the second half
of 1997.
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The Company's current commercial product, AESOP, approximates the form
and function of a human arm and allows control of the endoscope through simple
verbal commands. This eliminates the need for a member of a surgical staff to
manually control the endoscope and provides a surgeon with direct control of the
endoscope and results in a more stable and sustainable endoscopic image. The
Company believes that AESOP is the world's first FDA- cleared robot and first
voice control interface for a surgical device. Over 250 AESOP units have been
sold worldwide, which the Company believes have been used to perform over 20,000
procedures.
Since inception, the Company has sustained significant losses resulting
in an accumulated deficit of $17,344,000 as of June 30, 1997. The Company
expects to continue to incur significant losses due to its research and
development efforts, costs associated with obtaining regulatory approvals and
clearances, continued marketing expenditures to increase sales and other costs
associated with the Company's planned growth. Furthermore, the Company
anticipates that its operating results may fluctuate significantly from quarter
to quarter in the future, and that fluctuation will depend on a number of
factors, many of which are outside the Company's control. These factors include
timing and results of pre-clinical and clinical trials, delays associated with
FDA and other and clearance processes, changes in pricing policy by the Company
or its competitors, the number, timing and significance of product enhancements
and new products by the Company and its competitors, health care reimbursement
policies and product quality issues. These and additional factors are described
herein under "Risk Factors".
RESULTS OF OPERATIONS
Three Months ended June 30, 1997 compared to the Three Months Ended June 30,
1996.
Revenues. Revenues increased $781,000 (111%) to $1,483,000 for the
three months ended June 30, 1997 from $702,000 for the same period in 1996. The
increase resulted principally from an increase in AESOP sales of $628,000 and
second quarter 1997 Zeus development revenues of $165,000. AESOP unit sales and
average selling prices increased by approximately 48% and 40%, respectively and
were favorably impacted by the commercial introduction of an enhanced version of
AESOP in the fourth quarter of 1996.
Gross Profit. Gross profit increased $514,000 (210%) to $759,000 for
the three months ended June 30, 1997 from $245,000 for the same period in 1996.
Gross margin increased to 51% in the second quarter of 1997 as compared to 35%
in the second quarter of 1996. The increase in gross margin was primarily due to
increased AESOP average selling prices as well as efficiencies of scale
associated with increased unit production.
Selling, General and Administrative. Selling, general and
administrative expenses increased $1,484,000 (173%) to $2,340,000 for the three
months ended June 30, 1997 from $856,000 for the same period in 1996. Non-cash
compensation charges related to the grant of stock, warrants and stock options
of $762,000 in the second quarter 1997 accounted for a large portion of the
increase. The balance of the increase was due to the addition of sales and
managerial personnel as the Company expanded its infrastructure, higher
commissions on
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increased AESOP sales, higher travel and business related expenses and the cost
of the Company's first international congress on Computers and Robotics in the
Operating Room 2000. The Company expects selling, general and administrative
expenses to increase in future periods as it continues to expand its
infrastructure.
Research and Development. Research and development expenses increased
$527,000 (202%) to $788,000 for the three months ended June 30, 1997 from
$261,000 for the same period in 1996, primarily as a result of increased
research and development efforts with respect to AESOP, HERMES and ZEUS, as well
as for building additional R&D infrastructure. The Company expects these
expenditures to increase as it continues to develop its technologies.
Other Expense. Other expense increased to $1,011,000 for the three
months ended June 30, 1997 from $78,000 for the same period in 1996. Other
expense in the second quarter of 1997 included the amortization of $833,000 of
interest cost attributable to the fixed conversion feature of a convertible
debenture and $63,000 of interest cost related to warrants issued with notes
payable to shareholders. The remainder of the increase in interest expense was
attributable to an increase in overall indebtedness.
Six Months Ended June 30, 1997 compared to the Six Months Ended June 30, 1996.
Revenues. Revenues increased $1,478,000 (107%) to $2,856,000 for the
six months ended June 30, 1997 from $1,378,000 for the same period in 1996. The
increase resulted principally from an increase in AESOP sales of $1,212,000 and
year-to-date 1997 ZEUS development revenues of $275,000. AESOP unit sales and
average selling prices increased by approximately 37% and 39%, respectively and
were favorably impacted by the commercial introduction of the enhanced version
of AESOP in the fourth quarter of 1996.
Gross Profit. Gross profit increased $1,004,000 (210%) to $1,481,000
for the six months ended June 30, 1997 from $477,000 for the same period in
1996. Gross margin increased to 52% for the first half of 1997 as compared to
35% for the first half of 1996. The increase in gross margin was primarily due
to increased AESOP average selling prices, as well as efficiencies of scale
associated with increased unit production.
Selling, General and Administrative. Selling, general and
administrative expenses increased $2,076,000 (130%) to $3,677,000 for the first
half of 1997 as compared to $1,601,000 for the first half of 1996. Non-cash
compensation charges related to the grant of stock, warrants and stock options
of $788,000 in the first half of 1997 accounted for a significant portion of the
increase. The balance of the increase was due to the addition of sales and
managerial personnel, greater travel and business expenses, higher commissions
based on the increased sales, and the cost of several conferences, including the
Company's international congress on Computers and Robotics in the
Operating Room 2000.
Research and Development. Research and development expenses increased
$749,000 (125%) to $1,346,000 for the first half of 1997 as compared to $597,000
for the first half of 1996, primarily as a result of increased research and
development efforts with respect to AESOP, HERMES and ZEUS, as well as for
building additional R&D infrastructure.
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Other Expense. Other expense increased to $1,367,000 for the first half
of 1997 from $119,000 for the first half of 1996. Other expense in the first
half of 1997 included the amortization of $1,000,000 of interest cost
attributable to the fixed conversion feature of a convertible debenture and
$126,000 of interest cost attributable to warrants issued with notes payable to
shareholders.
Income Taxes. Minimal provisions for the state income taxes have been
recorded for the Company's pre-tax losses to date. As of December 31, 1996, the
Company had federal and state net operating loss carryforwards of approximately
$11.0 million and $4.9 million, respectively which are available to offset
future federal and state taxable income. Federal carryforwards expire fifteen
years after the year of loss and state carryforwards expire from five to seven
years after the year of loss. The Company has provided a full valuation
allowance on the deferred tax asset because of the uncertainty regarding its
realization.
FINANCIAL CONDITION
Since its inception, the Company's expenses have exceeded its revenues,
resulting in an accumulated deficit of $17,344,000 as of June 30, 1997. The
Company has primarily relied on proceeds from issuance of preferred stock and
common stock and bridge debt financing to fund its operations.
At June 30, 1997, the Company's current ratio (current assets divided
by current liabilities) was 2.2 to 1 versus 0.8 to 1 at December 31, 1996.
For the six months ended June 30, 1997, the Company had net cash used
in operating activities of $2,724,000 primarily attributable to the net loss
partially offset by depreciation and amortization, amortization of interest
costs attributable to the fixed conversion feature of a convertible debenture
and warrants issued with notes payable to shareholders, and amortization of
deferred compensation expense.
For the six months ended June 30, 1997, cash outflows from investing
activities of $271,000 was for purchases of plant and equipment. The Company
currently has no material commitments for capital expenditures.
For the six months ended June 30, 1997, net cash provided by financing
activities of $5,163,000 was principally attributable to proceeds from
preferred and common stock stock issuances of $6,568,000 offset somewhat by
$1,451,000 repayment of debt.
In August 1997, the Company closed its initial public offering for
2,500,000 shares of common stock and in September 1997 the Company's
underwriters exercised an option for an additional 375,000 shares of common
stock. The Company raised approximately $37,000,000 from these transactions.
The Company's operations to date have consumed substantial amounts of
cash, and the Company expects its capital and operating expenditures to continue
to increase. The Company
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believes that the net proceeds of its initial public offering which was
completed in August, 1997 should be adequate to fund its expected operating
losses and satisfy its capital requirements through at least 1998. The Company's
need for additional financing will depend upon numerous factors, including, but
not limited to, the extent and duration of the Company's future operating
losses, the level and timing of future revenues and expenditures, the progress
and scope of clinical trials, the timing and costs required to receive both
United States and international governmental approvals or clearances, market
acceptance of new products, the results and scope of ongoing research and
development projects, competing technologies, the costs of training physicians
to become proficient in the use of the Company's products and procedures, the
cost of developing marketing and distribution capabilities, and other market and
regulatory developments. To the extent that existing resources are insufficient
to fund the Company's activities, the Company may seek to raise additional funds
through public or private financing. There can be no assurance that additional
financing, if required, would be available on acceptable terms, if at all. If
adequate funds are not available, the Company's business, financial condition
and results of operations would be materially adversely affected.
RISK FACTORS THAT MAY EFFECT FUTURE RESULTS
The Company operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Company's control. The following
discussion highlights some of these risks. These risks could affect the
Company's actual future results and could cause them to differ materially from
any forward-looking statements made by the Company. These risks should be read
in conjunction with the "Risk Factors" section included in the Company's
Registration Statement on Form S-1, as amended (No. 333-29505).
LIMITED OPERATING HISTORY; ABSENCE OF PROFITABILITY
From its inception in 1989 through June 30, 1997, the Company has
incurred cumulative losses of approximately $17,344,000 and expects to incur
significant additional losses for the foreseeable future as it significantly
increases its spending with respect to research and development efforts,
clinical trials, manufacturing and marketing. There can be no assurance that the
Company will ever achieve significant commercial revenues, particularly from
sales of its HERMES or ZEUS product lines, or that the Company will be
profitable. There can be no assurance that the Company will not encounter
substantial delays or incur unexpected expenses related to the introduction of
HERMES and ZEUS, or future products.
RELIANCE ON SALES OF FUTURE PRODUCTS; UNCERTAINTY OF MARKET ACCEPTANCE The
Company has been producing and selling its AESOP products since 1994,
but the Company has not received regulatory clearance or approval to market its
other products. If regulatory clearance or approval for HERMES and ZEUS is
obtained, the Company anticipates that HERMES and ZEUS will comprise a
substantial majority of the Company's sales. Accordingly, the Company's future
success depends on the successful development, regulatory clearance or approval,
commercialization and market acceptance of these products. Even if the Company
is successful in obtaining the necessary regulatory clearances or approvals for
HERMES and ZEUS, their successful commercialization will depend upon the
Company's ability to demonstrate the clinical safety and efficacy, ease-of-use,
reliability and cost-effectiveness of such products in a clinical setting.
Neither HERMES nor ZEUS has yet been operated in human clinical practice. Even
if the safety and efficacy of procedures using HERMES and ZEUS is
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established, surgeons may elect not to recommend the use of these products for
any number of reasons, including inadequate levels of reimbursement. Broad use
of the Company's products will require training surgeons and the time required
to complete such training could adversely affect market acceptance.
GOVERNMENT REGULATION AND LACK OF REGULATORY APPROVAL
The Company's products in the United States are regulated as medical
devices by the FDA. The process of obtaining United States regulatory approvals
and clearances is lengthy, expensive and uncertain. Commercial distribution of
the Company's products in foreign countries is also subject to varying
government regulations which may delay or restrict marketing of the Company's
products in those countries. In addition, such regulatory authorities may impose
limitations on the use of the Company's products. After mid-1998, the Company
will be required to obtain the certifications necessary to enable the Conformite
Europeene (CE) Mark to be affixed to the Company's products in order to sell its
products in member countries of the European Union. The Company has not obtained
such certification and there can be no assurance it will be able to do so in a
timely manner, if at all. The Company's manufacturing operations are subject to
the FDA's Quality System Regulation ("QSR"), and similar regulations in other
countries regarding the manufacturing, testing, labeling, record keeping and
storage of devices. Ongoing compliance with QSR requirements and other
applicable regulatory requirements will be monitored through periodic inspection
by federal and state agencies, including the FDA, and comparable agencies in
other countries.
LACK OF CLINICAL TESTING EXPERIENCE; SAFETY AND EFFICACY NOT YET ESTABLISHED
The Company has only limited, experimental pre-clinical data with
respect to ZEUS and HERMES. In order to conduct clinical trials with ZEUS, which
is considered to be a significant risk device, the Company must submit and
obtain approval of an Investigational Device Exemption ("IDE") application. The
Company has not yet submitted an IDE to the FDA. There can be no assurance that
the FDA will allow the Company to conduct clinical trials or that ZEUS will
prove to be safe and effective in clinical trials under United States or
international regulatory requirements or that the Company will not encounter
problems in clinical testing that will cause a delay in or prohibit
commercialization of ZEUS. Moreover, the clinical trials may identify
significant technical or other obstacles to overcome prior to obtaining
necessary regulatory or reimbursement approvals, resulting in significant
additional product development expense and delays.
INTENSE COMPETITION
Many medical conditions that can be treated using the Company's
systems, particularly ZEUS, can also be treated by pharmaceuticals or other
medical devices and procedures. Many of these alternative treatments are widely
accepted in the medical community and have a long history of use. In addition,
technological advances with other procedures could make such therapies more
effective or inexpensive than using the Company's products and could render the
Company's technology obsolete or unmarketable. There can be no assurance that
physicians will use the Company's products to replace or supplement established
treatments or that the Company's products will be competitive with current or
future technologies.
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LIMITATIONS ON THIRD PARTY REIMBURSEMENT
In the United States, the Company's products would be acquired
primarily by medical institutions which then bill various third-party payors,
such as Medicare, Medicaid and other government programs and private insurance
plans for the health care services provided to their patients. Government
agencies, certain private insurers and certain other payors generally reimburse
hospitals for medical treatment at a fixed rate based on the diagnosis related
group ("DRG") established by the federal Health Care Financing Administration
("HCFA") which covers this treatment. The Company believes that the procedures
using AESOP are eligible and future products will be eligible for reimbursement
under existing DRG reimbursement codes. However, Medicare and other third-party
payors are increasingly scrutinizing whether to cover new products and the level
of reimbursement. In addition, third-party payors have required, following
further study regarding safety and efficacy, establishment of new reimbursement
codes. Even if a procedure is covered by DRG, payors may deny reimbursement if
they determine that the device used in the treatment was unnecessary,
inappropriate, not cost-effective, experimental or used for a non-approved
indication.
Reimbursement systems in international markets vary significantly by
country. Many international markets have government managed health care systems
that control reimbursement for new products and procedures. In most markets,
there are private insurance systems, as well as governmental managed systems,
that control reimbursement for new products and procedures. Market acceptance of
the Company's products will depend on the availability and level of
reimbursement in international markets targeted by the Company. There can be no
assurance that the Company will obtain reimbursement in any country within a
particular time, for a particular time, for a particular amount, or at all.
DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY
The success of the Company will depend, in part, on its ability to
obtain and maintain patent protection for its products, to preserve its trade
secrets, and to operate without infringing the proprietary rights of others. The
Company's policy is to seek to protect its proprietary positions by, among other
methods, filing United States and foreign patent applications related to its
technology, inventions and improvements that are important to the development of
its business. There can be no assurance that the Company's issued patents or any
patents that may be issued will not be challenged, invalidated or circumvented
in the future. Further, there can be no assurance that competitors, many of
which have substantially more resources than the Company and have made
substantial investments in competing technologies, will not seek to apply for
and obtain patents that will prevent, limit or interfere with the Company's
ability to make, use or sell its products either in the United States or
internationally. There can be no assurance that the Company will not become
subject to patent infringement claims or litigation. The defense and prosecution
of intellectual property suits are costly, time-consuming, divert the attention
of management and technical personnel and could result in substantial
uncertainty regarding the Company's future viability.
-12-
<PAGE> 14
RAPID TECHNOLOGICAL CHANGE; NEW PRODUCT DEVELOPMENT
The market for the Company's products and products under development is
characterized by rapidly changing technology and new product introductions and
enhancements. In addition to the risks associated with market acceptance of
AESOP and the Company's other products under development, the Company's success
will depend to a significant extent upon its ability to enhance and expand the
utility of AESOP and its other products and to develop and introduce additional
innovative products that gain market acceptance. The Company maintains research
and development programs to continually improve and refine its product offerings
and those under development. There can be no assurances, however, that such
efforts will be successful or that the Company will be successful in selecting,
developing, manufacturing and marketing new products or enhancing its existing
products on a timely or cost-effective basis. Moreover, the Company may
encounter technical problems in connection with its product development efforts
that could delay introduction of new products or product enhancements.
CONTROL BY MANAGEMENT, EXISTING SHAREHOLDERS AND AFFILIATED ENTITIES
The present directors and executive officers of the Company and their
affiliates, in the aggregate, beneficially own approximately 35% of the
Company's outstanding common stock. As a result, these shareholders, acting
together, have the ability to significantly influence the election of the
Company's directors and most other shareholders' action and, as a result, direct
the Company's affairs and business. Such concentration may have the effect of
delaying or preventing a change in control of the Company. The Company's
management will have broad discretion to allocate the proceeds of the initial
public offering and to determine the timing of expenditures.
FLUCTUATIONS IN OPERATING RESULTS; LENGTHY SALES CYCLE
The Company's results of operations may vary significantly from quarter
to quarter depending upon numerous factors, including the following: delays
associated with the FDA and other regulatory approval processes; health care
reimbursement policies; timing and results of clinical trials; demand for the
Company's products; changes in pricing policies by the Company or its
competitors; the number, timing and significance of product enhancements and new
product enhancements and new products by the Company and its competitors; and
product quality issues. Sales of the Company's products are often subject to
delays associated with lengthy approval processes that typically accompany
capital expenditures by bureaucratic entities such as hospitals. Accordingly, it
is inherently difficult to accurately predict the sales cycle of any particular
order.
EXPANSION OF MARKETING ACTIVITIES; LIMITED DISTRIBUTION
The Company anticipates it will significantly increase the number of
sales personnel to more fully cover its target markets, particularly as
additional products become commercially available. There can be no assurance
that the Company will be able to compete effectively in attracting, motivating
and retaining qualified sales personnel, as needed. The Company currently
intends to market and sell its products outside the United States principally
through distributors. In order to accomplish this, the Company will be required
to significantly expand its distributor network. There can be no assurance that
the Company will be
-13-
<PAGE> 15
able to identify suitable distribution agreements on acceptable terms, if at
all, or that such distribution agreements will result in significant sales.
DEPENDENCE ON INDEPENDENT CONTRACT MANUFACTURERS; LIMITED MANUFACTURING
EXPERIENCE
The Company relies on independent contract manufacturers, some of which
are single source suppliers, for the manufacture of the principal components of
AESOP. Reliance on independent contract manufacturers involves several risks,
including the potential inadequacy of capacity, the unavailability of or
interruptions in access to certain process technologies and reduced control over
product quality, delivery schedules, manufacturing yields and costs. Shortages
of raw materials, production capacity constraints or delays on the part of the
Company's contract manufacturers could negatively affect the Company's ability
to meet its production obligations which could result in delays in shipments of
the Company's products.
The Company does not have experience in manufacturing its products in
commercial quantities. The Company's manufacturing experience to date has been
focused primarily on assembling components produced by third party manufacturers
for its AESOP product. The Company's manufacturing activities to date with
respect to HERMES and ZEUS have consisted primarily of manufacturing a limited
number of prototypes for use in laboratory testing. Manufacturers often
encounter difficulties in scaling up manufacturing of new products, including
problems involving quality control and assurance, component and service
availability, adequacy of control policies and procedures, lack of qualified
personnel, compliance with FDA QSR regulations, and the need for FDA approval of
new manufacturing processes. The Company has considered and will continue to
consider as appropriate the internal manufacture of components currently
provided by third parties, as well as the implementation of new production
processes. There can be no assurance that manufacturing yields or costs will not
be adversely affected by a transition to in-house production or to new
production processes if such efforts are undertaken or that FDA QSR
requirements or any international certification requirements can be met.
RISK OF PRODUCT LIABILITY CLAIMS
The Company faces an inherent business risk of financial exposure to
product liability claims in the event that the use of its products results in
personal injury or death. The Company also faces the possibility that defects in
the design or manufacture of the Company's products might necessitate a product
recall. There can be no assurance that the Company will not experience losses
due to product liability claims or recall in the future. The Company currently
maintains product liability insurance with coverage limits of $5 million per
occurrence and $5 million annually in the aggregate. There can be no assurance
that these coverage limits will be adequate.
DEPENDENCE ON KEY PERSONNEL
The Company's future business and operating results depend in
significant part on its key management, scientific and technical personnel, many
of whom would be difficult to replace, and its future success will depend
partially upon its ability to retain these persons and recruit additional
qualified management, technical, marketing, sales and support, regulatory and
manufacturing personnel for its operations. Competition for such personnel is
intense, and there can be no assurance that the Company will be successful in
attracting or retaining such personnel.
-14-
<PAGE> 16
MANAGEMENT OF GROWTH
The Company's growth will continue to place significant demands on the
Company's management and resources. In order to compete effectively against
current and future competitors, prepare products for clinical trials and develop
future products, the Company believes it must continue to expand its operations,
particularly in the areas of research and development and sales and marketing.
It is likely that the Company will be required to implement additional operating
and financial controls, hire and train additional technical, marketing and
administrative personnel, install additional reporting and management
information systems, expand its manufacturing operations, and improve
coordination between the product development, marketing, sales and finance
functions. The Company's future success will depend, in part, on management's
ability to manage future growth and there can be no assurance that these efforts
will be successful.
MARKET VOLATILITY
The market price of the Company's common stock is likely to be volatile
and may be affected by actual or anticipated decisions by the FDA with respect
to approvals or clearances of the Company's products, actual or anticipated
fluctuations in the Company's operating results, announcements of technological
innovations, new commercial products by the Company or its competitors, changes
in third party reimbursement policies, developments concerning proprietary
rights, conditions and trends in the medical device industry, governmental
regulation, changes in financial estimates by securities analysts, and general
stock market conditions.
ADVERSE IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE
The exercise of existing options and warrants would have a dilutive
effect on the interests of current investors. As of August 11, 1997, there were
approximately 4,200,000 shares of common stock that will be eligible for sale
beginning 180 days after the effective date of the Company's initial public
offering.
-15-
<PAGE> 17
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 3, 1997 (prior to the Company's initial public offering), shareholders
of the Company holding 3,758,791 shares (88% of the voting stock of the Company)
approved the following matters at the Company's annual meeting:
(i) Election of directors (Gene Wang, Yulun Wang, Robert W. Duggan, Stephen
F. Wiggins, David R. Doiron, W. Peter Geis, and William D. Williams)
with all votes for, except for 12,549 votes withheld for one director.
(ii) The 1997 Stock Incentive Plan by a vote of 3,756,198 for; 2,593
abstaining; and 0 against.
(iii) The Employee Stock Purchase Plan by a vote of 3,724,177 for; 34,614
abstaining; and 0 against.
In addition, on July 10, 1997 (prior to the Company's initial public offering)
shareholders of the Company holding 3,801,504 shares (89% of the voting stock of
the Company) unanimously approved the following matters by written consent:
(i) Change in the Company's state of incorporation from California to
Delaware.
(ii) Indemnification agreements for the officers and directors of the
Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
27 - Financial data schedule
b) No Reports on Form 8-K were filed during the quarter ended June 30,
1997.
-16-
<PAGE> 18
SIGNATURE PAGE
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.
DATE: September 16, 1997 COMPUTER MOTION, INC.
By: /s/ STEPHEN L. WILSON
--------------------------------------------
STEPHEN L. WILSON
Executive Vice President, Chief Financial
Officer and Secretary
(Principal Financial and Accounting Officer)
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEETS AND CONDENSED STATEMENTS OF OPERATIONS FOUND ON PAGES
TWO AND THREE OF THE COMPANY'S FORM 10-Q FOR THE YEAR TO DATE AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,600,000
<SECURITIES> 0
<RECEIVABLES> 1,025,000
<ALLOWANCES> 58,000
<INVENTORY> 742,000
<CURRENT-ASSETS> 4,481,000
<PP&E> 1,752,000
<DEPRECIATION> 1,001,000
<TOTAL-ASSETS> 6,161,000
<CURRENT-LIABILITIES> 2,070,000
<BONDS> 0
0
6,056,000
<COMMON> 712,000
<OTHER-SE> (12,205,000)
<TOTAL-LIABILITY-AND-EQUITY> 6,161,000
<SALES> 2,856,000
<TOTAL-REVENUES> 2,856,000
<CGS> 1,375,000
<TOTAL-COSTS> 1,375,000
<OTHER-EXPENSES> 7,000
<LOSS-PROVISION> 19,000
<INTEREST-EXPENSE> 1,403,000
<INCOME-PRETAX> (4,909,000)
<INCOME-TAX> 1,000
<INCOME-CONTINUING> (4,910,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,910,000)
<EPS-PRIMARY> (1.66)
<EPS-DILUTED> (1.66)
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