<PAGE> 1
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDING SEPTEMBER 30, 1997
COMMISSION FILE NUMBER 000-22755
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COMPUTER MOTION, INC.
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(Exact name of registrant as specified on in its charter)
DELAWARE 77-0458805
- ------------------------------- ----------------------
(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
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As of October 17, 1997 there were 7,654,000 shares of the Registrant's common
stock outstanding.
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TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
PART I. FINANCIAL INFORMATION......................................................................2
ITEM 1 FINANCIAL STATEMENTS.......................................................................2
Condensed Balance Sheets at September 30, 1997 and December 31, 1996....................2
Condensed Statements of Operations for the three and nine months
ended September 30, 1997 and 1996.....................................................3
Condensed Statements of Cash Flows for the nine months
ended September 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.........................................................................15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..........................................................15
SIGNATURE..................................................................................................16
</TABLE>
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PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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COMPUTER MOTION, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
(Unaudited) (1)
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 35,579,000 $ 433,000
Accounts receivable 1,232,000 1,152,000
Inventory 639,000 645,000
Prepaid expenses 287,000 88,000
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Total current assets 37,737,000 2,318,000
Plant and equipment, net 815,000 609,000
Intangibles and other assets 320,000 629,000
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Total assets $ 38,872,000 $ 3,556,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 961,000 $ 902,000
Accrued expenses 729,000 761,000
Deferred revenue 205,000 74,000
Current portion of long-term liabilities 79,000 1,246,000
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Total current liabilities 1,974,000 2,983,000
Notes payable to shareholders -- 3,250,000
Other long-term liabilities 138,000 135,000
Redeemable preferred stock, series D -- 5,882,000
Shareholders' equity:
Preferred stock, series A, B, C and E -- 3,716,000
Common stock 8,000 386,000
Additional paid-in capital 58,202,000 153,000
Deferred compensation expense (1,921,000) (515,000)
Accumulated deficit (19,529,000) (12,434,000)
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Total shareholders' equity 36,760,000 (8,694,000)
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Total liabilities and shareholders' equity $ 38,872,000 $ 3,556,000
============ ============
</TABLE>
(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)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------------------------------
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Revenue $ 1,685,000 $ 1,134,000 $ 4,541,000 $ 2,512,000
Cost of revenue 678,000 682,000 2,053,000 1,583,000
----------- ----------- ----------- -----------
Gross profit 1,007,000 452,000 2,488,000 929,000
Selling, general and administrative
expense 1,938,000 1,042,000 5,615,000 2,643,000
Research and development expense 1,126,000 426,000 2,472,000 1,023,000
----------- ----------- ----------- -----------
Loss from operations (2,057,000) (1,016,000) (5,599,000) (2,737,000)
Other expense 128,000 88,000 1,495,000 207,000
----------- ----------- ----------- -----------
Loss before income taxes (2,185,000) (1,104,000) (7,094,000) (2,944,000)
Provision for taxes -- -- 1,000 1,000
----------- ----------- ----------- -----------
Net loss ($2,185,000) ($1,104,000) ($7,095,000) ($2,945,000)
=========== =========== =========== ===========
Weighted average shares outstanding
used to compute net loss per share 7,157,000 2,832,000 4,350,000 2,829,000
=========== =========== =========== ===========
Net loss per share ( $ .31) ($ .39) ($ 1.63) ($ 1.04)
=========== =========== =========== ===========
</TABLE>
See notes to condensed financial statements.
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COMPUTER MOTION, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net loss ($ 7,095,000) ($ 2,945,000)
Adjustments to reconcile net loss to cash used by operating
activities:
Depreciation and amortization 288,000 254,000
Provision for doubtful accounts 25,000 --
Loss on sale of fixed assets 1,000 13,000
Common stock issued for services 44,000 --
Amortization of interest costs attributable to the fixed
conversion feature of a convertible debenture and
warrants issued with notes payable to shareholders 1,442,000 --
Amortization of deferred compensation expense 938,000 --
Deferred revenue 130,000 251,000
Increase in working capital (274,000) (38,000)
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Net cash used by operating activities (4,501,000) (2,465,000)
Cash flows from investing activities:
Purchase of plant and equipment (434,000) (86,000)
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Net cash used by investing activities (434,000) (86,000)
Cash flows from financing activities:
Proceeds from issuance of debt 254,000 2,825,000
Repayment of debt (4,721,000) (600,000)
Proceeds from initial public offering 36,808,000 --
Proceeds from other common stock and warrant issuance 5,230,000 54,000
Proceeds from preferred stock issuance 2,341,000 425,000
Investment in sales-type lease (137,000) (124,000)
Proceeds from stock option exercises 307,000 --
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Net cash provided by financing activities 40,082,000 2,580,000
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Increase in cash and cash equivalents 35,147,000 29,000
Cash and cash equivalents at beginning of period 432,000 64,000
------------ ------------
Cash and cash equivalents at end of period $ 35,579,000 $ 93,000
============ ============
Supplemental disclosures:
Cash paid during the year for interest expense $ 266,000 $ 200,000
</TABLE>
See notes to condensed financial statements.
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COMPUTER MOTION, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
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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
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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).
NOTE 3. INITIAL PUBLIC OFFERING
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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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
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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).
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OVERVIEW
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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, as well as
enable 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(R), is a
Food and Drug Administration ("FDA") cleared, robotic endoscope positioning
system.
The Company's robotic surgical system under development, ZEUS(TM), is
designed to fundamentally improve a surgeon's ability to perform complex
surgical procedures and enable new, minimally invasive surgical procedures,
including fully endoscopic multivessel coronary artery bypass grafts
("E-CABG(TM)"), which are currently impossible or very difficult to perform.
ZEUS(TM) 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(TM)
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(TM) 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(TM) in the United States.
The Company's voice controlled technology platform under development,
HERMES(TM), 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(TM) 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(TM) has the potential to improve safety, increase efficiency,
shorten procedure times and reduce costs. The Company has developed a prototype
of HERMES(TM) and expects to commence functionality testing in the fourth
quarter of 1997.
The Company's current commercial product, AESOP(R), 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, provides a surgeon with direct control
of the endoscope and results in a more stable and sustainable endoscopic image.
The Company believes that AESOP(R) is the world's first FDA-cleared robot and
first voice control interface for a surgical device. Over 250 AESOP(R) units
have been sold worldwide, which the Company believes have been used to perform
over 25,000 procedures.
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The Company has sustained significant losses since inception and expects
to continue to incur significant losses due to 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 anticipated growth. Furthermore, the Company anticipates that its
operating results may fluctuate significantly from quarter to quarter in the
future, depending 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 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 That May
Effect Future Results."
RESULTS OF OPERATIONS
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Three Months Ended September 30, 1997 compared to the Three Months Ended
September 30, 1996.
Revenues. Revenues increased $551,000 (49%) to $1,685,000 for the three
months ended September 30, 1997 from $1,134,000 for the same period in 1996. The
increase resulted from a 168% ($790,000) increase in AESOP(R) sales from the
third quarter 1996 to the third quarter 1997. AESOP(R) robotic arm unit sales
and average selling prices increased by approximately 56% and 70%, respectively
and were favorably impacted by the commercial introduction of an enhanced
version of AESOP(R) (the "AESOP(R) 2000") in the fourth quarter of 1996. The
third quarter of 1996 had included significant development related revenues for
the Company's ZEUS(TM) and HERMES(TM) product lines which did not recur to the
same extent in the third quarter of 1997.
Gross Profit. Gross profit increased $555,000 (123%) to $1,007,000 for
the three months ended September 30, 1997 from $452,000 for the same period in
1996. Gross margin increased to 59.8% in the third quarter of 1997 as compared
to 39.9% in the third quarter of 1996. The increase in gross margin was
primarily due to increased AESOP(R) average selling prices as well as
efficiencies of scale associated with increased unit production.
Selling, General and Administrative. Selling, general and administrative
expenses increased $896,000 (86%) to $1,938,000 for the three months ended
September 30, 1997 from $1,042,000 for the same period in 1996. The increase was
due to the addition of sales and managerial personnel as the Company expanded
its infrastructure, related recruiting and relocation costs, higher commissions
on increased AESOP(R) sales, and higher travel and business related expenses, as
well as amortization of non-cash compensation charges related to the grant of
stock, warrants and stock options of $150,000 in the third quarter of 1997. The
Company expects selling, general and administrative expenses to increase in
future periods as it continues to expand its sales and marketing capability.
Research and Development. Research and development expenses increased
$700,000 (164%) to $1,126,000 for the three months ended September 30, 1997 from
$426,000 for the same period in 1996, primarily as a result of increased
research and development efforts with respect to AESOP(R), HERMES(TM) and
ZEUS(TM), as well as for building additional R&D
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<PAGE> 9
regulatory infrastructure. The Company expects these expenditures to increase as
it continues to develop its technologies.
Other Expense. Other expense increased to $128,000 for the three months
ended September 30, 1997 from $88,000 for the same period in 1996. Other expense
in the third quarter of 1997 included the amortization of $316,000 of interest
cost related to warrants issued with notes payable to shareholders. The interest
cost was offset to a degree by interest income earned on the proceeds received
from the Company's initial public offering which was completed in August, 1997.
Nine Months Ended September 30, 1997 compared to the Nine Months Ended September
30, 1996.
Revenues. Revenues increased $2,029,000 (81%) to $4,541,000 for the nine
months ended September 30, 1997 from $2,512,000 for the same period in 1996. The
increase resulted almost entirely from an increase in AESOP(R) sales of
$2,002,000 (116%). AESOP(R) robotic arm unit sales and average selling prices
increased by approximately 43% and 47%, respectively and were favorably impacted
by the commercial introduction of the AESOP(R) 2000 in the fourth quarter of
1996.
Gross Profit. Gross profit increased $1,559,000 (168%) to $2,488,000 for
the nine months ended September 30, 1997 from $929,000 for the same period in
1996. Gross margin increased to 54.8% for the first nine months of 1997 as
compared to 37.0% for the first nine months of 1996. The increase in gross
margin was primarily due to increased AESOP(R) average selling prices, as well
as efficiencies of scale associated with increased unit production.
Selling, General and Administrative. Selling, general and administrative
expenses increased $2,972,000 (112%) to $5,615,000 for the first nine months of
1997 as compared to $2,643,000 for the first nine months of 1996. Non-cash
compensation charges related to the grant of stock, warrants and stock options
of $938,000 in the first nine months 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 and related recruiting and relocation costs, 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
$1,449,000 (142%) to $2,472,000 for the first nine months of 1997 as compared to
$1,023,000 for the first nine months of 1996, primarily as a result of increased
research and development efforts with respect to AESOP(R), HERMES(TM) and
ZEUS(TM), as well as for building additional R&D and regulatory infrastructure.
Other Expense. Other expense increased to $1,495,000 for the first nine
months of 1997 from $207,000 for the first nine months of 1996. Other expense in
the first nine months of 1997 included the amortization of $1,000,000 of
interest cost attributable to the fixed conversion feature of a convertible
debenture and $442,000 of interest cost attributable to warrants issued with
notes payable to shareholders.
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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 $19,529,000 as of September 30, 1997.
Until its initial public offering, the Company had primarily relied on proceeds
from issuance of preferred and common stock and bridge debt financing to fund
its operations.
During the third quarter the Company filed an S-1 registration statement
with the Securities and Exchange Commission (Registration No. 333-29505) for
2,875,000 shares of its common stock. The registration statement was granted
effectiveness on August 11, 1997 and on August 15, 1997 the Company completed
its initial public offering ("IPO") by selling 2,500,000 shares of its common
stock at $14.00 per share, less underwriting discounts and commissions of $.98
per share, to its underwriters, Montgomery Securities and Piper Jaffray Inc. The
Company received net proceeds of $32,550,000 from this sale before deducting
offering expenses. Effective upon the closing of the IPO, all of the outstanding
shares of convertible preferred stock of the Company were converted into
2,344,387 shares of common stock and all accrued dividends payable thereon were
reversed and eliminated.
On September 16, 1997, the underwriters exercised their option to
purchase an additional 375,000 shares of common stock directly from the Company
at a price of $14.00 per share, less underwriting discounts and commissions of
$.98 per share. The Company received net proceeds of $4,883,000 from this sale
before deducting offering expenses.
In conjunction with completing the IPO, the Company incurred total
direct offering expenses of approximately $543,000 which were payable to third
parties and $82,000 which were reimbursed expenses to Company employees. Total
net proceeds to the Company from the IPO and the exercise of the over-allotment
option, after deducting underwriting discounts and commissions and total direct
offering expenses, was $36,808,000.
The Company has used $3,250,000 of the net proceeds from the IPO for
repayment of certain outstanding indebtedness, certain holders of which are
officers, directors and persons owning in excess of ten percent of the Company's
common stock, and $163,000 to make capital purchases from unrelated third
parties. Proceeds from the IPO are also funding the Company's current operating
losses. The remaining net proceeds of the IPO of approximately $33,000,000 have
been invested in short-term investment grade debt securities.
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At September 30, 1997, the Company's current ratio (current assets
divided by current liabilities) was 19.1 to 1 versus 0.8 to 1 at December 31,
1996, reflecting the initial public offering proceeds.
For the nine months ended September 30, 1997, the Company had net cash
used in operating activities of $4,501,000 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 nine months ended September 30, 1997, cash outflows from
investing activities of $434,000 was for purchases of plant and equipment. The
Company currently has no material commitments for capital expenditures, but is
procuring additional leased space in anticipation of continued business growth.
For the nine months ended September 30, 1997, net cash provided by
financing activities of $40,082,000 was almost entirely attributable to proceeds
from the initial public offering of $36,808,000 and other common stock and
warrant issuances of $5,230,000, offset somewhat by $4,721,000 repayment of
debt.
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 believes that the net proceeds of its initial public
offering 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 AFFECT 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).
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LIMITED OPERATING HISTORY; ABSENCE OF PROFITABILITY
- ---------------------------------------------------
The Company has incurred significant losses from its inception and
expects to incur significant additional losses for the foreseeable future as it
increases its spending with respect to research and development efforts,
clinical trials, manufacturing and distribution. There can be no assurance that
the Company will ever achieve significant commercial revenues, particularly from
sales of its HERMES(TM) or ZEUS(TM) 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(TM) and ZEUS(TM), or future products.
RELIANCE ON FUTURE PRODUCTS; UNCERTAINTY OF REGULATORY APPROVAL AND MARKET
- --------------------------------------------------------------------------
ACCEPTANCE
- ----------
The Company has been producing and selling its AESOP(R) 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(TM)
and ZEUS(TM) is obtained, the Company anticipates that HERMES(TM) and ZEUS(TM)
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(TM) and ZEUS(TM), 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(TM) nor ZEUS(TM) has yet
been operated in human clinical practice. In order to conduct clinical trials
with ZEUS(TM), 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(TM) 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(TM). 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. Even if the safety and
efficacy of procedures using HERMES(TM) and ZEUS(TM) is 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
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<PAGE> 13
the FDA's Quality System Regulation ("QSR"), and similar regulations in other
countries regarding the manufacturing, testing, labeling, record keeping and
storage of devices.
INTENSE COMPETITION
- -------------------
Many medical conditions that can be treated using the Company's systems,
particularly ZEUS(TM), 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.
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(R) 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. 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 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 seeks to protect its proprietary positions by 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
- 12 -
<PAGE> 14
United States or internationally. There can be no assurance that the Company
will not become subject to patent infringement claims or litigation.
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. The Company's success will depend to a significant extent upon its
ability to enhance and expand the utility of AESOP(R) 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, DEPENDENCE ON KEY PERSONNEL
- --------------------------------------------------
The present directors and executive officers of the Company and their
affiliates, in the aggregate, beneficially own approximately 30% of the
Company's outstanding common stock, on a fully diluted basis. These
shareholders, acting together, have the ability to significantly influence the
election of the Company's directors and other shareholder actions and, as a
result, direct the Company's affairs and business, including delaying or
preventing a change in control of the Company.
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, regulatory, clinical and manufacturing personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting or retaining such personnel.
- 13 -
<PAGE> 15
FLUCTUATIONS IN OPERATING RESULTS; MARKET VOLATILITY
- ----------------------------------------------------
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. 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 or competitors'
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.
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 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(R). 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 ship products and derive revenues. 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(R)
product. The Company's manufacturing activities to date with respect to
HERMES(TM) and ZEUS(TM) have consisted primarily of manufacturing a limited
number of prototypes for use in laboratory testing. In scaling up manufacturing
of new products, the Company may encounter difficulties involving quality
control and assurance, component and service availability, adequacy of control
policies and procedures, lack of qualified personnel and compliance with FDA QSR
regulations. The Company may elect to internally manufacture components
currently provided by third parties, as well as to implement 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.
- 14 -
<PAGE> 16
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 $5,000,000. There
can be no assurance that these coverage limits will be adequate.
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 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.
ADVERSE IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE
- -------------------------------------------------
The exercise of existing stock options and warrants, totaling
approximately 3,324,000 shares, would have a dilutive effect on the interests of
current investors. There are 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.
PART II OTHER INFORMATION
- ----------------------------
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 September 30,
1997.
- 15 -
<PAGE> 17
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.
DATE: November 7, 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)
- 16 -
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 35,579,000
<SECURITIES> 0
<RECEIVABLES> 1,291,000
<ALLOWANCES> 59,000
<INVENTORY> 639,000
<CURRENT-ASSETS> 37,737,000
<PP&E> 1,913,000
<DEPRECIATION> 1,098,000
<TOTAL-ASSETS> 38,872,000
<CURRENT-LIABILITIES> 1,974,000
<BONDS> 0
0
0
<COMMON> 8,000
<OTHER-SE> 36,752,000
<TOTAL-LIABILITY-AND-EQUITY> 38,872,000
<SALES> 4,541,000
<TOTAL-REVENUES> 4,541,000
<CGS> 2,053,000
<TOTAL-COSTS> 2,053,000
<OTHER-EXPENSES> 14,000
<LOSS-PROVISION> 25,000
<INTEREST-EXPENSE> 1,767,000
<INCOME-PRETAX> (7,094,000)
<INCOME-TAX> 1,000
<INCOME-CONTINUING> (7,095,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,095,000)
<EPS-PRIMARY> (1.63)
<EPS-DILUTED> (1.63)
</TABLE>
