<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period
ended March 31, 1997 Commission File Number 0-20991
CAMBRIDGE HEART, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3679946
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1 OAK PARK DRIVE
BEDFORD, MASSACHUSETTS 01730
(Address of principal executive offices) (Zip Code)
617-271-1200
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---------- --------
Number of shares outstanding of the issuer's classes of common stock as of May
12, 1997;
Class Number of Shares Outstanding
- --------------------------------------- ----------------------------
Common Stock, par value $.001 per share 10,379,885
<PAGE>
CAMBRIDGE HEART, INC.
INDEX
PAGE NUMBER
-----------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEET AT MARCH 31, 1997
AND DECEMBER 31, 1996 3
STATEMENT OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 1997 AND 1996 4
STATEMENT OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 1997 AND 1996 5
NOTES TO CONDENSED FINANCIAL
STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 8
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 11
SIGNATURE
This Quarterly Report on Form 10-Q contains forward-looking statements.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believes," "anticipates," "plans," "expects,"
and similar expressions are intended to identify forward-looking statements.
The important factors discussed below under the caption "Certain Factors That
May Affect Future Operating Results," among others, could cause actual results
to differ materially from those indicated by forward-looking statements made
herein and presented elsewhere by management from time to time.
2
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PART I - FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
------------ ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents....................... $18,588,583 $ 12,811,879
Marketable securities........................... - 4,105,721
Accounts receivable............................. 420,984 456,109
Inventory....................................... 251,788 315,623
Prepaid expenses and other current assets....... 384,422 312,774
------------ ------------
Total current assets.......................... 19,645,777 18,002,106
Fixed assets, net............................... 423,159 532,427
Other assets.................................... 160,523 142,989
------------ ------------
$20,229,459 $ 18,677,522
============ ============
Current liabilities:
Accounts payable................................ $ 202,377 $ 163,838
Accrued expenses................................ 283,333 174,556
License fees payable............................ 14,011 9,758
------------ ------------
Total current liabilities..................... 499,721 348,152
------------ ------------
Common stock, $.001 par value; 20,000,000 shares
authorized; 10,214,783 and 10,364,513 shares
issued and outstanding at December 31, 1996
and March 31, 1997, respectively............... 10,215 10,364
Additional paid-in-capital...................... 29,216,646 29,277,133
Accumulated deficit............................. (9,115,685) (10,599,127)
------------ ------------
20,111,176 18,688,370
Less: deferred compensation..................... (381,438) (359,000)
------------ ------------
Total stockholders' equity.................... 19,729,738 18,329,370
------------ ------------
$20,229,459 $ 18,677,522
============ ============
</TABLE>
See accompanying notes to condensed financial statements.
3
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STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
---------------------------
1996 1997
----------- ------------
<S> <C> <C>
Product revenue................................... $ 55,220 $ 319,028
Cost of goods sold................................ 49,037 305,358
----------- ------------
6,183 13,670
Cost and expenses:
Research and development.......................... 400,991 953,713
Selling, general and administrative............... 318,212 799,183
----------- ------------
Loss from operations............................ (713,020) (1,739,226)
Interest income................................... 46,554 255,784
----------- ------------
Net loss.......................................... $ (666,466) $(1,483,442)
=========== ============
Net loss per share................................ $ (0.14)
============
Weighted average common
shares outstanding.............................. 10,323,606
============
Pro forma net loss per share...................... $(0.08)
===========
Pro forma weighted average common and common
equivalent shares outstanding................... 8,102,288
===========
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1996 1997
------------ --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(666,466) $(1,483,442)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation.............................................. 12,316 39,284
Amortization of deferred compensation..................... - 22,438
Changes in assets and liabilities:........................
Increase in accounts receivable......................... (56,916) (35,125)
Increase in inventory................................... (86,732) (63,835)
Decrease in prepaid expenses and other
current assets......................................... 6,247 71,648
(Increase) decrease in other assets..................... (12,791) 17,534
Decrease in accounts payable
and accrued expenses................................... (84,073) (147,316)
Decrease in license fees payable........................ - (4,253)
------------ --------------
Net cash used for operating activities.................. (888,415) (1,583,067)
------------ --------------
Cash flows from investing activities:
Purchase of marketable securities......................... - (4,105,721)
Purchase of fixed assets.................................. (41,794) (148,552)
------------ --------------
Net cash used for investing activities.................. (41,794) (4,254,273)
------------ --------------
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 9,000 60,636
------------ --------------
Net decrease in cash and cash equivalents................. (921,209) (5,776,704)
Cash and cash equivalents at beginning
of period............................................... 3,948,147 18,588,583
------------ --------------
Cash and cash equivalents at end
of period............................................... $3,026,938 $12,811,879
============ ==============
</TABLE>
See accompanying notes to condensed financial statements.
5
<PAGE>
CAMBRIDGE HEART, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. NATURE OF BUSINESS
Cambridge Heart, Inc. (the "Company"), was incorporated in Delaware on
January 16, 1990 and is engaged in the research, development and
commercialization of products for the non-invasive diagnosis of cardiac
disease.
2. BASIS OF PRESENTATION
The condensed financial statements have been prepared by the Company
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principals have been condensed or omitted pursuant to
such rules and regulations. These condensed financial statements should
be read in conjunction with the financial statements and the notes thereto
included in the Company's filing of its Form 10-K, dated March 31, 1997.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments necessary to present fairly the financial position of
Cambridge Heart, Inc. as of March 31, 1997, and the results of its
operations and the cash flows for the three month periods ending March 31,
1997 and March 31, 1996, have been made. The results of operations for
such interim period is not necessarily indicative of the results for the
full year.
Certain amounts in the prior quarter have been reclassified to conform to
the current quarter presentation. These reclassifications had no effect on
the Company's reported net income.
3. INVENTORIES
Inventories, consisting primarily of purchased components, are stated at
the lower of cost or market. Cost is determined using the first in, first
out (FIFO) method.
4. NET LOSS AND PRO FORMA NET LOSS PER SHARE
Net loss per share is determined by dividing net loss by the weighted
average number of common shares outstanding during the period. Common
share equivalents, consisting of common stock options and warrants and
convertible preferred stock, have been excluded from the calculation as
their effect is anti-dilutive.
Pro forma net loss per share is determined by dividing net loss by the
weighted average number of common shares and certain common share
equivalents outstanding during the period, as discussed below. Common
share equivalents have been excluded from the
6
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calculation as their effect is anti-dilutive, except that, pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, common
share equivalents issued and common stock sold at prices below the offering
price in the twelve month period preceding the initial filing of the
Company's Registration Statement on Form S-1 and through the effective date
of the initial public offering have been included in the calculation as if
outstanding for all periods through June 30, 1996.
On August 2, 1996, the date of the Company's initial public offering, all
of the preferred stock was converted to 4,455,708 shares of common stock.
The pro forma net loss per share information included in the accompanying
statement of operations for the three months ended March 31, 1996 reflect
the impact on pro forma net loss per share of such conversion as of the
beginning of the period using the if-converted method.
Historical net loss per share has not been presented for the three month
period ended March 31, 1996 on the basis that it is irrelevant due to the
significant change in the Company's capital structure and resultant loss
per share which resulted upon conversion of the convertible preferred
stock.
5. RECENTLY ENACTED ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"). SFAS 128 specifies modifications to the calculation of earnings per
share from that currently used by the Company. Under SFAS 128, "basic
earnings per share" will be calculated based upon the weighted average
number of common shares actually outstanding, and "diluted earnings per
share" will be calculated based upon the weighted average number of common
shares, dilutive common share equivalents and other dilutive convertible
securities outstanding. SFAS 128 is effective in the Company's fourth
quarter of 1997 and will be adopted at that time. The Company has
determined that the provisions of SFAS 128 would not have a material impact
on its reported results of operations for the periods presented. The
adoption of SFAS 128 will have no effect on the Company's financial
position or cash flows.
7
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Cambridge Heart, Inc., a Delaware corporation (the "Company") is engaged in
the research, development and commercialization of products for the non-invasive
diagnosis of cardiac disease. The Company has generated limited revenues from
the shipment of demonstration units of its first product and has experienced
substantial net losses since its inception, and expects to incur substantial and
increasing net losses for the foreseeable future. The Company believes that its
research and development expenses will increase significantly in the future as
it develops additional products and funds clinical trials of its products. The
Company's research and development expenses may also increase in the future as
it supplements its internal research and development with third party
technology licenses and potential product acquisitions. The Company also
expects that its selling, general and administrative expenses will continue to
increase in connection with the Company's continued expansion of its sales and
marketing activities. Revenues generated from the sale of the Company's
products will depend upon numerous factors, including the timing of regulatory
actions, progress of product development, the extent to which the Company's
products gain market acceptance, varying pricing promotions and volume discounts
to customers, competition and the availability of third party reimbursement.
The Company has incurred cumulative net losses since inception through March 31,
1997 of approximately $10,600,000.
RESULTS OF OPERATIONS
The Company's first product is the CH 2000 System. The system received
510(k) clearance from the U.S. Food and Drug Administration FDA in February 1996
and the Company's proprietary HiRes/TM/ disposable electrode received 510(k)
clearance in August 1996. This electrode enables the CH 2000 System to
measure T-wave alternans and perform more accurate electrocardiogram ("ECG")
readings.
THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1996
Revenues for the three months ended March 31, 1997 were $319,028. The
revenue for the corresponding period in 1996 was $55,200. This increase of
product revenue reflects continued shipments of the CH 2000 System to Japan as
well as to domestic and European sites. The cost of goods sold for the quarter
ended March 31, 1997 was $305,358. The same period for the previous year had
cost of goods sold of $49,037. The Company has incurred a number of fixed costs
as it has expanded its manufacturing operations. As the volume of production
increases the Company expects that the cost of goods sold will decrease as a
percentage of revenue.
Research and Development expenses increased to $953,713 in the quarter
ended March 31, 1997 from $400,991 in the same period a year earlier. This
increase was principally due to increased staffing in engineering and software
development, as well as higher clinical trial expenses. The Company expects to
continue to selectively increase personnel in this area and expand clinical
trials.
General and Administrative expenses increased to $799,183 in the quarter
ended March 31, 1997 from $318,212 in the same period in 1996. Most of this
increase was due to increases in staffing in management, marketing and
regulatory affairs.
8
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Interest income was $255,784 for the three months ended March 31, 1997
compared to $46,554 for the same period in 1996. This interest income reflects
the investment of the proceeds of a round of private financing in the second
quarter of 1995 and the proceeds of the initial public offering of the Company's
common stock in August 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company initially financed operations primarily from the sale of
convertible preferred stock. Through June 30, 1996, the Company had raised
$9,065,000 (net of stock issuance costs) from the sales of equity securities,
with net proceeds of $5,697,000 received in 1993 and $3,353,000 received in
1995. On August 2, 1996, the Company raised approximately $19,650,000 (net of
stock issuance costs) from the sale of 2,437,750 shares of Common Stock in the
Company's initial public offering. In conjunction with the initial public
offering, 4,455,708 shares of preferred stock were converted to Common Stock.
As of March 31, 1997, the Company had cash, cash equivalents and marketable
securities of $16,917,600. The proceeds of the equity offerings have been used
primarily to fund operating losses of $10,599,127, reflecting expenditures made
primarily to support research and development activities, to support a marketing
and sales organization, to support an administrative infrastructure and the
investment of approximately $729,000 in property and equipment as of March 31,
1997. In 1996, the Company used $4,674,000 to fund operating activities.
The Company expects its capital expenditures to increase as it continues to
commercialize its products, particularly in connection with the manufacture of
its proprietary Hi-Res electrodes. The Company does not expect capital
expenditures to exceed an aggregate $3,000,000 over the next two years.
Under the terms of various license, consulting and technology agreements,
the Company is required to pay royalties on sales of its products. Minimum
license maintenance fees under these license agreements, which are creditable
against royalties otherwise payable for each year, range from $20,000 to $45,000
per year in total through 2008. The Company is committed to pay an aggregate of
$450,000 of such minimum license maintenance fees subsequent to March 31, 1997.
As part of these agreements, the Company is also committed to meet certain
development and sales milestones, including a requirement to spend a minimum of
$200,000 in any two-year period for research and development, clinical trials,
marketing, sales and/or manufacturing of products related to certain technology
covered by the consulting and technology agreements.
The Company anticipates that its existing capital resources, including the
amounts raised in the initial public offering, will be adequate to satisfy its
capital requirements for at least the next two years. There may be
circumstances, however, that would accelerate the Company's use of this capital.
If this occurs, the Company may from time to time incur additional indebtedness
or issue, in public or private transactions, equity or debt securities.
However, there can be no assurance that suitable debt or equity financing will
be available to the Company on acceptable terms, if at all.
CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The foregoing forward-looking statements involve risks and uncertainties.
As a direct or indirect result of any or a combination of any of the following
factors, the Company's actual results may differ significantly from the results
discussed in such forward-looking statements: The Company has a history of
operating losses and there is no assurance of market acceptance of the Company's
primary product, the CH 2000 System. The Company's products, product development
activities, manufacturing processes and sales and marketing are subject to
extensive and rigorous regulation by the FDA and comparable agencies in foreign
countries. The process of obtaining marketing clearance or approval for new
medical devices from the FDA can be
9
<PAGE>
costly and time consuming, and there can be no assurance that such clearance or
approval will be granted for the Company's future products on a timely basis, if
at all, or that the FDA review will not involve delays that will adversely
affect the Company's ability to commercialize additional products or expand
permitted uses of existing products. The medical device market is characterized
by intensive development efforts and rapidly advancing technology and is highly
competitive, and there can be no assurance that the Company will keep pace with
advancing technology and competitive innovations. The Company's future success
will depend, in part, on its ability to continue to develop patentable products,
enforce its patents and obtain patent protection for its products both in the
United States and in other countries. However, patent positions of medical
device companies, including the Company, are generally uncertain and involve
complex legal and factual questions. No assurance can be given that patents will
issue from any patent applications owned by or licensed to the Company or that,
if patents do issue, the claims allowed will be sufficiently broad to protect
the Company's technology. In addition, no assurance can be given that any issued
patents owned by or licensed to the Company will not be challenged, invalidated
or circumvented, or that the rights granted thereunder will provide competitive
advantages to the Company. The Company has limited manufacturing and marketing
experience and is dependent upon certain key suppliers. The Company is also
dependent upon certain key management personnel and consultants. The Company has
limited international sales and operations experience. The manufacture and sale
of medical devices entails significant risk of product liability claims in the
event that the use of such devices is alleged to have resulted in adverse
effects to a patient. The Company's product liability insurance coverage is
limited. For additional and more comprehensive discussion of the risks
associated with ownership of Common Stock of the Company, please see the
Company's Registration Statement filed on Form S-1 with the Securities and
Exchange Commission on May 31, 1996 and the Company's Annual Report filed on
Form 10-K with the Securities and Exchange Commission on March 31, 1997. As a
result of these and other factors, there can be no assurance that the Company
will not experience material fluctuations in future operating results on a
quarterly or annual basis.
RECENTLY ENACTED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
SFAS 128 specifies modifications to the calculation of earnings per share from
that currently used by the Company. Under SFAS 128, "basic earnings per share"
will be calculated based upon the weighted average number of common shares
actually outstanding, and "diluted earnings per share" will be calculated based
upon the weighted average number of common shares, dilutive common share
equivalents and other dilutive convertible securities outstanding. SFAS 128 is
effective in the Company's fourth quarter of 1997 and will be adopted at that
time. The Company has determined that the provisions of SFAS 128 would not have
a material impact on its reported results of operations for the periods
presented. The adoption of SFAS 128 will have no effect on the Company's
financial position or cash flows.
10
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PART II - OTHER INFORMATION
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
a. The exhibits listed in the Exhibit Index filed as part of this report
are filed as part of or are included in this report.
b. The Company filed no reports on Form 8-K during the quarter for which
this report is filed.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
CAMBRIDGE HEART, INC.
Date: May 14, 1997 By: /s/ Thomas V. Hennessey, Jr.
---------------------------------
Thomas V. Hennessey, Jr.
Vice President of Operations,
Treasurer and Chief
Financial Officer
11
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Exhibit 11
CAMBRIDGE HEART, INC.
COMPUTATION OF NET LOSS AND PRO FORMA NET LOSS PER SHARE
<TABLE>
<CAPTION>
For the three For the three
months ended months ended
March 31, 1996 March 31, 1997
--------------------------------
<S> <C> <C>
Net loss.......................................... $ (666,466) $ (1,483,442)
=============== ==============
Weighted average shares outstanding:
a. Shares attributable to common stock
outstanding 10,323,606
==============
Net loss per share $ (0.14)
==============
Pro forma weighted average shares outstanding:
a. Shares attributable to common stock
outstanding 3,164,153
b. Shares attributable to certain common stock
options (1) 482,427
c. Shares attributable to the assumed conversion
of Series A and B convertible preferred stock
outstanding upon closing of initial public
offering 4,455,708
---------------
Pro forma weighted average common and common
equivalent shares outstanding 8,102,288
===============
Pro forma net loss per share $ (0.08)
===============
</TABLE>
_______________
(1) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, stock options issued during the twelve months prior to the
Company's initial registration statement on Form S-1 have been included in
the above computation as if outstanding for periods through June 30, 1996,
even if such impact is anti-dilutive.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED MARCH 31, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 12,811,879
<SECURITIES> 4,105,721
<RECEIVABLES> 456,109
<ALLOWANCES> 0
<INVENTORY> 315,623
<CURRENT-ASSETS> 18,002,106
<PP&E> 696,447
<DEPRECIATION> 164,020
<TOTAL-ASSETS> 18,677,522
<CURRENT-LIABILITIES> 348,152
<BONDS> 0
0
0
<COMMON> 10,364
<OTHER-SE> 18,319,006
<TOTAL-LIABILITY-AND-EQUITY> 18,677,522
<SALES> 319,028
<TOTAL-REVENUES> 319,028
<CGS> 305,358
<TOTAL-COSTS> 305,358
<OTHER-EXPENSES> 1,752,896
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,483,442)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,483,442)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,483,442)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> 0
</TABLE>
