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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 31,1998 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)
781-271-1200
(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
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Number of shares outstanding of each of the issuer's classes of common stock
as of May 15, 1998:
Class Number of Shares Outstanding
- --------------------------------------- ----------------------------
Common Stock, par value $.001 per share 10,633,474
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CAMBRIDGE HEART, INC.
INDEX
PAGE NUMBER
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEET AT DECEMBER 31, 1997 AND
MARCH 31, 1998 3
STATEMENT OF OPERATIONS
FOR THE THREE MONTH
PERIOD ENDED MARCH 31, 1997 AND 1998 4
STATEMENT OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED
MARCH 31, 1997 AND 1998 5
NOTES TO CONDENSED FINANCIAL
STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 7
ITEM 5. OTHER INFORMATION 14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES
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 the Company's management from time to time.
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PART I - FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents..................... $ 5,665,736 $ 5,342,098
Marketable securities......................... 7,090,605 5,726,142
Accounts receivable, net...................... 509,918 501,368
Inventory..................................... 416,224 397,685
Prepaid expenses and other current assets..... 301,127 292,459
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Total current assets........................ 13,983,610 12,259,752
Fixed assets, net............................. 574,660 644,137
Other assets.................................. 190,167 209,509
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$14,748,437 $13,113,398
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable.............................. $ 170,531 $ 202,311
Accrued expenses.............................. 356,606 331,559
----------- -----------
Total current liabilities..................... 527,137 533,870
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Stockholder's equity:
Common stock, $.001 par value; 20,000,000
shares authorized; 10,606,041 and
10,626,061 shares issued and outstanding
at December 31, 1997 and March 31, 1998,
respectively................................ 10,606 10,626
Additional paid-in capital.................... 29,405,685 29,448,300
Accumulated deficit........................... (15,163,304) (16,850,148)
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14,252,987 12,608,778
Deferred compensation......................... (31,687) (29,250)
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Total stockholders' equity.................. 14,221,300 12,579,528
----------- -----------
$14,748,437 $13,113,398
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
3
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CAMBRIDGE HEART, INC.
STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
1997 1998
----------- -----------
<S> <C> <C>
Revenue...................................................... $ 319,028 $ 406,848
Cost of goods sold........................................... 305,358 355,978
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13,670 50,870
Cost and expenses:
Research and development..................................... 953,713 1,006,863
Selling, general and administrative.......................... 799,183 906,747
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Loss from operations....................................... (1,739,226) (1,862,740)
Interest income.............................................. 255,784 175,896
----------- -----------
Net loss..................................................... $(1,483,442) $(1,686,844)
=========== ===========
Net loss per share--basic and diluted ....................... $ (0.14) $ (0.16)
=========== ===========
Weighted average common shares outstanding--basic and
diluted..................................................... 10,323,606 10,624,486
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
4
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STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------
1997 1998
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.......................................................................... $ (1,483,442) $(1,686,844)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation...................................................................... 39,284 67,970
Amortization of deferred compensation............................................. 22,438 2,437
Compensation expense related to non employee stock
options.......................................................................... -- 40,000
Changes in assets and liabilities:
(Increase) decrease in accounts receivable....................................... (35,125) 8,550
(Increase) decrease in inventory................................................. (63,835) 18,539
(Increase) decrease in prepaid expenses and other
current assets.................................................................. 71,648 8,668
(Increase) decrease in other assets.............................................. 17,534 (19,342)
Increase (decrease) in accounts payable
and accrued expenses............................................................ (151,569) 6,733
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Net cash used for operating activities........................................... (1,583,067) (1,553,289)
------------ -----------
Cash flows from investing activities:
Net (purchase) maturity of marketable securities.................................. (4,105,721) 1,364,463
Purchase of fixed assets.......................................................... (148,552) (137,447)
------------ -----------
Net cash (used for) provided by investing activities............................ (4,254,273) 1,227,016
------------ -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 60,636 2,635
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Net decrease in cash and cash equivalents......................................... (5,776,704) (323,638)
Cash and cash equivalents at beginning of period.................................. 18,588,583 5,665,736
------------ -----------
Cash and cash equivalents at end of period........................................ $ 12,811,879 $ 5,342,098
============ ===========
</TABLE>
See accompanying notes to condensed financial statements.
5
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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 principles have been omitted pursuant to such rules and
regulations. These condensed financial statements should be read in
conjunction with the financial statements dated December 31, 1997 and the
notes thereto included in the Company's Annual Report on Form 10-K. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position of the
Company as of March 31, 1998, and the results of its operations and its cash
flows for the three month periods ended March 31, 1997 and 1998, have been
made. The results of operations for such interim periods are not necessarily
indicative of the results for the full year or any future period.
Certain amounts in the three month period ended March 31, 1997 have been
reclassified to conform to the current period presentation. These
reclassifications had no effect on the Company's reported net loss.
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 PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings
per Share," which establishes new standards for computing and presenting
earnings per share. The new standard replaces the presentation of primary
earnings per share prescribed by Accounting Principles Board Opinion No. 15
("APB 15"), "Earnings per Share," with a presentation of basic earnings per
share and also requires dual presentation of basic and diluted earnings per
share on the face of the statement of operations for all entities with
complex capital structures. Basic earnings per share excludes dilution and is
computed by dividing income available to holders of common stock by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share includes dilutive potential common stock (such as stock
subject to repurchase, options, warrants and convertible preferred stock) and
is computed similarly to fully-diluted earnings per share pursuant to APB 15.
The Company adopted
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SFAS 128 and Securities and Exchange Commission Staff Accounting Bulletin No.
98, which provides new guidance with respect to earnings per share
computations in the periods preceding a company's initial public offering, in
the fourth quarter of fiscal 1997 and has restated all prior periods in its
financial statements.
Consistent with SFAS 128, basic loss per share amounts are based on
the weighted average number of shares of common stock outstanding during the
period. Diluted loss per share amounts are based on the weighted average
number of shares of common stock and potential common stock outstanding
during the period. The Company has excluded potential common stock from the
calculation of diluted weighted average share amounts for the three months
ended March 31, 1997 and 1998, as its inclusion would have been anti-
dilutive.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Cambridge Heart, Inc. (the "Company" or "Cambridge Heart") is engaged in
the research, development and commercialization of products for the non-invasive
diagnosis of cardiac disease, the leading cause of death in the United States
and many other developed countries. Using innovative technologies, including
proprietary disposable electrodes, the Company is addressing such key problems
in cardiac diagnosis as (i) the identification of those at risk of sudden
cardiac death, accounting for approximately 50% of all deaths due to heart
attack, (ii) the early detection of coronary artery disease and (iii) the prompt
and accurate diagnosis of heart attack. The Company 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 product
candidates. The Company's research and development expenses may also increase in
the future as it supplements its internal research and development with
additional third party technology licenses and potential acquisition of
complimentary products and technologies. 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, 1998 of
$16,850,148.
Effective January 1, 1998, the Company gave notice of termination of its
exclusive distribution agreement with Kontron Instruments Ltd., ("Kontron") due
to their failure to meet contract terms. The Company expects to enter into
separate agreements with Kontron for distribution of the Company's products in
France and Italy. The Company intends to pursue agreements with other partners
for distribution of its products in the remaining European countries. The
Company does not anticipate that this will have a material, adverse effect on
its business, financial condition or results of operations.
RESULTS OF OPERATIONS
The Company's principal products are the CH 2000 System and Hi-Resolution
electrodes. Both products have received 510(k) clearance from the Food and Drug
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Administration ("FDA") for sale in the United States, have received the CE mark
for sale in Europe and have been approved for sale by the Ministry of Health in
Japan. The 510(k) clearance for the CH 2000 System includes the claim that the
CH 2000 System can measure T-wave alternans but no claim about the applicability
or prognostic value of the T-wave alternans measurement. The Company is
currently conducting further clinical studies and expects to make a subsequent
submission to the FDA with additional clinical data with the intention of
obtaining a subsequent 510(K) clearance with broader claims.
Preliminary data from the study being conducted for this submission was
presented on May 6, 1998, at the annual meeting of the North American Society of
Pacing and Electrophysiology ("NASPE") by Michael R. Gold, M.D., Ph.D. the
study's principal investigator. The data presented by Dr. Gold was on the first
148 of an expected total enrollment of 270 patients in the study, and showed
T-wave alternans to be a statistically significant predictor of the results of
invasive Electrophysiology ("EP") study and of events (ventricular arrhythmias
and death) during follow up. In the study, which is being conducted in 9 centers
in the United States, the measurement of T-wave alternans is being compared with
signal average ECG (an older non-invasive test for determining risk of
arrhythmia) as a predictor of the results of invasive EP study. In additon, the
use of T-wave alternans, signal average ECG and EP studies are all being
compared as predictors of actual patient events. The initial results of the
Company's study support the results of earlier studies conducted and are
consistent with the goals of this trial.
THREE MONTH PERIOD ENDED MARCH 31, 1997 AND 1998
Revenues for the three month period ended March 31, 1997 and 1998 were
$319,028 and $406,848, respectively, an increase of 28%. The Company's domestic
revenues increased 201% from $41,252 during the three month period ended March
31, 1997 to $124,338 for the same period in 1998. The domestic increase
resulted from the expansion of the Company's direct sales force from three
representatives at March 31, 1997 to five representatives at March 31, 1998.
The Company has also increased the number of independent manufacturers
representatives under contract from 9 at March 31, 1997 to over 40 at March 31,
1998. International revenues for the three month period ended March 31, 1997
and 1998 were $277,776 and $282,510 respectively, an increase of 2%.
The cost of goods sold for the three month period ended March 31, 1997 was
$305,358 (96% of revenues) compared to $355,978 (87% of revenues) for the same
period in 1998. The improved ratio of costs to revenues primarily reflects the
impact of increased volume on the allocation of fixed manufacturing overhead.
The Company anticipates that this factor, in addition to the impact of programs
targeted at reducing the cost of direct materials, will continue to favorably
affect the overall gross margins.
Research and development expenses increased 6% from $953,713 in the three
month period ended March 31, 1997 to $1,006,863 for the same period of 1998.
This reflects the costs incurred by the Company in support of its clinical trial
activities targeted at the filing of a 510(k) with the FDA in 1998 for expanded
product labeling claims for its T-wave alternans technology. The Company
intends to continue to increase its funding in support of third party clinical
trials to further the adoption of T-wave alternans testing and in-house research
8
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in support of its T-wave alternans and cardiac electrical imaging ("CEI")
technologies.
Selling, general and administrative expenses increased 13% from $799,183 in
the three month period ended March 31, 1997 to $906,747 in the same period in
1998. Most of this increase in costs was the result of the expansion of the
Company's U.S. field sales organization and its marketing efforts targeted at
the adoption of T-wave alternans testing by the clinical cardiologists.
Interest income was $255,784 for the three month period ended March 31, 1997
compared to $175,896 for the same period in 1998. This decrease reflected a
decline in the remaining proceeds of the initial public offering of the
Company's common stock in August 1996, as a result of the operating losses
incurred by the Company.
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.
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, 1998, the Company had cash, cash equivalents and
marketable securities of $11,068,240. The proceeds of the equity offerings have
been used primarily to fund operating losses of approximately $16,850,000,
reflecting expenditures made primarily to support research, new product
development, and clinical trial activities, to support a marketing and sales
organization, and to support an administrative infrastructure and the investment
of approximately $1,075,000 in property and equipment as of March 31, 1998.
During the three month period ended March 31, 1998, the Company's cash,
cash equivalents and marketable securities decreased by $1,688,101, or 13%
consistent with its net loss for the quarter of $1,686,844. Fixed asset
additions during the quarter of $137,447 represent increased sales demonstration
and clinical research units to support the Company's expanded efforts in these
areas.
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-Resolution electrodes. The Company does not expect capital
expenditures to exceed an aggregate of $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
$430,000 of such minimum license maintenance fees subsequent to March 31, 1998.
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.
9
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The Company anticipates that its existing capital resources will be adequate
to satisfy its capital requirements until at least June 30, 1999. The Company's
future liquidity and capital requirements will depend on numerous factors
including the success of commercializing the CH 2000 System, the ability of the
Company's suppliers to continue to meet the demands of the Company at current
contract prices, obtaining and enforcing patents important to the Company's
business, the status of regulatory approvals and competition. Changes in these
circumstances could accelerate the Company's use of capital. If this occurs,
the Company may from time to time incur 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 Company is engaged primarily in the commercialization, manufacture,
research and development of its products for the non-invasive diagnosis of
cardiac disease. The Company has incurred substantial and increasing net losses
through March 31, 1998. There can be no assurance that the Company will ever
generate substantial revenues or achieve profitability on a quarterly or annual
basis.
The Company believes that its future success substantially depends upon the
successful commercialization and market acceptance of its T-wave alternans
technology. The analysis of T-wave alternans to diagnose ventricular arrhythmia
is a new diagnostic approach that is currently investigational. The Company
anticipates that it will submit its 510(k) application for clearance from the
FDA for a labeling claim covering the applicability or prognostic use of its T-
wave alternans technology during 1998. There can be no assurance as to when or
if the FDA will accept or approve the Company's submission. Market acceptance
will depend upon the Company's ability to obtain regulatory clearance or
approval for claims covering the applicability or prognostic use of T-wave
alternans measurement, as well as its ability to demonstrate the diagnostic
advantages and cost-effectiveness of the technology. There can be no assurance
that regulatory approval for such claims will ever be received or that the
Company will be able to successfully commercialize or achieve market acceptance
of its T-wave alternans technology or that the Company's competitors will not
develop competing technologies that are superior to those of the Company.
The Company has sponsored and is continuing to sponsor clinical studies
relating to its T-wave alternans technology and Hi-Resolution electrodes to
establish the prognostic value of such technology. While these studies on high
risk patients to date have indicated that T-wave alternans is associated with
ventricular arrhythmia to a degree comparable to EP testing, there can be no
assurances that the results of such studies will continue to do so. Any results
of clinical studies or trials which fail to demonstrate that T-wave alternans is
at least comparable in accuracy to alternative diagnostic tests, or which
otherwise call into question the cost-effectiveness, efficacy or safety of this,
or other Company technologies, would have a material adverse effect on the
Company's business, financial condition and results of operations.
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 regulatory agencies in foreign countries.
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In the United States, the FDA regulates the introduction of medical devices as
well as manufacturing, labeling and record keeping procedures for such products.
In order for the Company to market its products for clinical use in the United
States, the Company must obtain from the FDA clearance of a 510(k) pre-market
notification. Marketing clearance or approval for new medical devices from the
FDA can be 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 FDA review will not involve delays that will
adversely affect the Company's ability to commercialize additional product or
expand permitted uses of existing products.
A significant portion of the Company's revenue is dependent upon sales of
its products outside the United States. Foreign regulatory bodies have
established varying regulations, duties and tax requirements. Specifically, the
European Union has promulgated rules which require that medical products receive
the right to affix the CE mark, an international symbol of adherence to quality
assurance standards and compliance with applicable European medical device
directives. There is no assurance that the Company will be able to obtain EC
approval for any future products. The inability or failure of the Company or its
international distributors to comply with varying foreign regulations or the
imposition of new regulations could restrict or, in certain countries, result in
the prohibition of the sale of the Company's products, and thereby adversely
affect the Company's business, financial condition and results of operations.
The medical device market is characterized by intense competition and
rapidly advancing technology. The future success of the Company will depend, in
large part, upon its ability to anticipate and keep pace with advancing
technology and competitive innovations. However, there can be no assurance that
the Company will be successful in identifying, developing and marketing new
products or enhancing its existing products. In addition, there can be no
assurance that new products or alternative diagnostic techniques will not be
developed that will render the Company's current or planned products obsolete or
inferior. Rapid technological development by competitors may result in the
Company's products becoming obsolete before the Company recovers a significant
portion of the research, development and commercialization expenses incurred
with respect to such products.
Competition from competitors' medical devices that help to diagnose cardiac
disease is intense and likely to increase. The Company competes with
manufacturers of ECG stress tests, the conventional method of diagnosing
ischemic heart disease, and may compete with manufacturers of other non-invasive
tests, including ECG's, Holter monitors, ultrasound tests and systems of
measuring cardiac late potentials. Many of the Company's competitors and
potential competitors have substantially greater capital resources, name
recognition, research and development experience and regulatory, manufacturing
and marketing capabilities. Many of these competitors offer well established,
broad product lines and ancillary services not offered by the Company. Some of
the Company's competitors have long-term or preferential supply arrangements
with physicians and hospitals which may act as a barrier to market entry.
The Company currently markets its products in the United States through a
small direct sales force and independent manufacturers' representatives. There
can be no assurance that the Company will be able to continue to recruit and
retain skilled sales management, direct sales persons or independent
manufacturers' representatives. The Company markets its products internationally
through independent distributors. These distributors may also distribute
competing products under certain circumstances. The loss of a significant
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international distributor could have a material adverse effect on the Company's
business if a new distributor, sales representative or other suitable sales
organization cannot be found on a timely basis in the relevant geographic
market. To the extent that the Company relies on sales in certain territories
through distributors, any revenues the Company receives in those territories
will depend upon the efforts of its distributors. Furthermore, there can be no
assurance that a distributor will market the Company's products successfully or
that the terms of its distribution arrangements will be acceptable to the
Company.
The testing, manufacture, marketing and sale of medical devices entail the
inherent risk of liability claims or product recalls. Although the Company
maintains product liability insurance in the United States and in other
countries in which the Company intends to conduct business, including clinical
trials and product marketing and sales, there can be no assurance that such
coverage is adequate or will continue to be available. Product liability
insurance is expensive and in the future may not be available on acceptable
terms, if at all. A successful product liability claim or product recall could
inhibit or prevent commercialization of the CH 200 System, or cause a
significant financial burden on the Company, or both, and could have a material
adverse effect on the Company's business, financial condition and ability to
market the CH 2000 System as currently contemplated.
The Company's success will depend in part on its ability to develop patentable
products, enforce its patents and obtain patent protection for its products both
in the United States and in other countries. However, the patent positions of
medical device companies, including Cambridge Heart, are generally uncertain and
involve complex legal and factual questions. No assurance can be given that
patents will issue from any patent applications owned or licensed to Cambridge
Heart 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 also relies on
unpatented trade secrets to protect its proprietary technology, and no assurance
can be given that others will not independently develop or otherwise acquire
substantially equivalent techniques or otherwise gain access to the Company's
proprietary technology or disclose such technology or that the Company can
ultimately protect meaningful rights to such unpatented proprietary technology.
The commercial success of the Company will also depend in part on its neither
infringing patents issued to others nor breaching the licenses upon which the
Company's products might be based. The Company's licenses of patents and patent
applications impose various commercialization, sublicensing, insurance, royalty
and other obligations on the Company. Failure of the Company to comply with
these requirements could result in conversion of the licenses from being
exclusive to nonexclusive in nature or termination of the licenses.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. Litigation, which
would likely result in substantial cost to the Company, may be necessary to
enforce any patents issued or licensed to the Company and/or to determine the
scope and validity of others' proprietary rights. In particular, competitors of
the Company and other third parties hold issued patents and are assumed by the
Company to hold pending patent applications which may result in claims of
infringement against the Company to hold pending patent applications which may
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result in claims of infringement against the Company or other patent litigation.
The Company also may have to participate in interference proceedings declared by
the United States Patent and Trademark Office, which could result in substantial
cost to the Company, to determine the priority of inventions. Furthermore, the
Company may have to participate at substantial cost in International Trade
Commission proceedings to abate importation of products which would compete
unfairly with products of the Company.
The Company relies on confidentiality agreements with its collaborators,
employees, advisors, vendors and consultants. There can be no assurance that
these agreements will not be breached, that the Company would have adequate
remedies for any breach or that the Company's trade secrets will not otherwise
become known or be independently developed by competitors. Failure to obtain or
maintain patent and trade secret protection, for any reason, could have a
material adverse effect on the Company.
The Company's ability to successfully market its products is likely to depend
in part on the extent to which reimbursement for the cost of such products and
the procedures in which such products are used will be available from
government third party payors (including the Medicare and Medicaid programs),
government health administration authorities, private health insurers and other
organizations. These third party payors may deny coverage if they determine
that a procedure was not reasonable or necessary as determined by the payor, was
experimental or was used for an unapproved indication. In addition, certain
healthcare providers are moving towards a managed care system in which such
providers contract to provide comprehensive healthcare for a fixed cost per
person, irrespective of the amount of care actually provided. Such providers,
in an effort to control healthcare costs are increasingly challenging the prices
charged for medical products and services, and in some instances, have pressured
medical suppliers to lower their prices. The Company is unable to predict what
changes will be made in the reimbursement methods utilized by third party
healthcare payors, Furthermore, the Company could be adversely affected by
changes in reimbursement policies of governmental or private healthcare payors,
particularly to the extent any such changes affect reimbursement for procedures
in which the Company's products are used. If coverage and adequate reimbursement
levels are not provided by government or third party payors for uses on the
Company's technologies or products, the Company's business, financial position
and ability to market its technologies or products may be adversely affected.
The Company expects to derive a substantial majority of its future revenues
from sales of the CH 2000 System. If the Company is unable to commercialize the
CH 2000 System successfully, it would have a material adverse effect on the
Company's business, financial condition and results of operations.
USE OF PROCEEDS
The Company's Securities Act registration statement on Form S-1 (SEC File
No. 333-04879) became effective on August 2, 1996. To date, the Company has used
approximately $738,000 for the purchase and installation of machinery and
equipment and approximately $9,277,000 for working capital.
13
<PAGE>
Item 5. OTHER INFORMATION
On April 10, 1998, Harris A. Berman was elected as a member of the Board of
Directors.
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, 1998 By: /s/ Jeffrey M. Arnold
---------------------------------------
Jeffrey M. Arnold
Chairman, President, Chief
Executive Officer
14
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
10.1 Notice of Termination of Exclusive Distribution
Agreement by and between the Registrant and Kontron
Instruments Ltd., dated December 30, 1997.
11 Statement re Computation of Net Loss per Share
27 Financial Data Schedule
15
<PAGE>
EXHIBIT 10.1
CAMBRIDGE
HEART MEMORANDUM
- --------------------------------------------------------------------------------
DATE: DECEMBER 30, 1997
TO: LES SMITH, KONTRON INSTRUMENTS
FROM: ERIC DUFFORD
C.C.: J. ARNOLD
SUBJECT: TERMINATION OF CURRENT AGREEMENT
- --------------------------------------------------------------------------------
Dear Les,
As a follow up to our most recent conversation, this memo confirms the
termination of our distribution agreement with Kontron in its current form. I
feel confident that we will be able to build an even stronger partnership by
collectively assessing the fit between Cambridge Heart and Kontron on a country
by country basis and developing specific strategies to achieve our shared
objectives.
When we spoke you expressed concern that the motivation of the country managers
and sales representatives may be compromised as a result terminating the global
agreement and reestablishing individual agreements with each motivated country
manager. For this reason, I've refrained from sending any correspondence to the
country managers until you and I have had an opportunity to speak again and
discuss all of our alternatives.
I will call you on Monday morning in an effort to determine the best way to
restructure our agreement and specifically what we want to communicate to the
country managers. One we speak, I will be prepared to immediately send my 1998
business planning requests directly to each manager.
I hope you had a wonderful holiday. I look forward to working with you in the
New Year!
Best regards,
/s/ Eric Dufford
P.s. If you receive this prior to Monday, January 5 and would like to talk, fell
free to call me at my home. . . .
<PAGE>
Exhibit 11
Cambridge Heart, Inc.
Computation of Net Loss per Share-Basic and Diluted
<TABLE>
<CAPTION>
For the three months ended
March 31,
1997 1998
---------- ----------
<S> <C> <C>
Net Loss $(1,483,442) $(1,686,844)
=========== ===========
Weighted average shares outstanding:
a. Shares attributable to common stock outstanding 10,323,606 10,624,486
=========== ===========
Net loss per share $ (0.14) $ (0.16)
=========== ===========
</TABLE>
- ----------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED MARCH 31, 1998 FINANCIAL STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,342,098
<SECURITIES> 5,726,142
<RECEIVABLES> 522,168
<ALLOWANCES> 20,800
<INVENTORY> 397,685
<CURRENT-ASSETS> 12,259,752
<PP&E> 972,882
<DEPRECIATION> 328,745
<TOTAL-ASSETS> 13,113,398
<CURRENT-LIABILITIES> 533,870
<BONDS> 0
0
0
<COMMON> 10,626
<OTHER-SE> 12,568,902
<TOTAL-LIABILITY-AND-EQUITY> 13,113,398
<SALES> 406,848
<TOTAL-REVENUES> 406,848
<CGS> 355,978
<TOTAL-COSTS> 355,978
<OTHER-EXPENSES> 1,006,863
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,686,844)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,686,844)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,686,844)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
