<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
Form 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
---- Exchange Act of 1934.
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
or
Transition report pursuant to Section 13 or 15(d) of the Securities
---- Exchange Act of 1934. For the transition period from ______ to _____.
Commission File Number
0-26890
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PERCLOSE, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 94-3154669
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
199 Jefferson Drive, Menlo Park, CA 94025-1114
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone, including area code: (650) 473-3100
-----------
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
requirements for the past 90 days. Yes X No
--- ---
As of December 26, 1997 there were 10,664,617 shares of the Registrant's
Common Stock.
Exhibit Index on page: 16
Total number of pages: 17 (hard copy version)
18 (Edgar version)
1
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PERCLOSE, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Balance Sheets as of December 31, 1997 and March 31, 1997 . 3
Statements of Operations for the three months and
nine months ended December 31, 1997 and 1996. . . . . . . . 4
Statements of Cash Flows for the nine months ended
December 31, 1997 and 1996. . . . . . . . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . 8
PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 16
EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2
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PERCLOSE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
------------ ---------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,717,951 $ 2,677,278
Short-term investments 23,830,460 24,995,229
Accounts receivable 1,862,587 1,529,959
Inventories 1,087,520 743,531
Prepaid expenses 1,240,150 279,894
----------- -----------
Total current assets 37,738,668 30,225,891
Equipment and leasehold improvements 4,492,302 3,101,256
Less accumulated depreciation (2,224,243) (1,454,533)
----------- -----------
2,268,059 1,646,723
Officer notes receivable 600,000 400,000
Other assets 150,684 241,221
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Total assets $40,757,411 $32,513,835
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
<S> <C> <C>
Current liabilities:
Accounts payable $ 513,864 $ 422,646
Accrued compensation 929,109 852,255
Accrued license fee 50,000 200,000
Accrued warranty 141,578 324,313
Accrued clinical trial costs 264,610 309,812
Other accrued expenses 990,157 520,247
Current portion of notes payable 211,458 373,795
----------- -----------
Total current liabilities 3,100,776 3,003,068
Long-term portion of notes payable - 128,387
Stockholders' equity:
Common stock, $0.001 par value 10,663 9,564
Additional paid-in capital 78,458,111 58,308,167
Deferred compensation (654,774) (891,789)
Accumulated deficit (40,157,365) (28,043,562)
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Total stockholders' equity 37,656,635 29,382,380
----------- -----------
Total liabilities and stockholders' equity $40,757,411 $32,513,835
----------- -----------
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</TABLE>
See accompanying notes.
3
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PERCLOSE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------------------- ---------------------------------
1997 1996 1997 1996
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net revenues $ 2,412,473 $ 892,568 $ 4,792,268 $ 3,427,097
Operating expenses:
Cost of goods sold 2,133,548 1,228,147 5,382,906 3,451,303
Research and development 1,377,128 1,293,208 3,902,344 3,687,852
Marketing, general and administrative 3,025,031 1,608,650 8,605,702 4,104,545
------------ ------------- ------------- ------------
Total operating expenses 6,535,707 4,130,005 17,890,952 11,243,700
Loss from operations (4,123,234) (3,237,437) (13,098,684) (7,816,603)
Interest income 305,784 470,582 1,010,747 1,424,619
Interest expense (9,731) (30,023) (102,111) (94,433)
------------ ------------- ------------- ------------
Net interest income 296,053 440,559 908,636 1,330,186
------------ ------------- ------------- ------------
Net loss $ (3,827,181) $ (2,796,878) $ (12,190,048) $ (6,486,417)
------------ ------------- ------------- ------------
------------ ------------- ------------- ------------
Basic and diluted loss per common share $ (0.38) $ (0.29) $ (1.25) $ (0.68)
------------ ------------- ------------- ------------
------------ ------------- ------------- ------------
Shares used in computing net loss per share 9,980,233 9,518,247 9,725,511 9,504,741
------------ ------------- ------------- ------------
------------ ------------- ------------- ------------
</TABLE>
See accompanying notes.
4
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PERCLOSE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
----------------------------------
1997 1996
-------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (12,190,048) $ (6,486,417)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 769,710 474,634
Deferred compensation amortization 237,015 73,799
Changes in operating assets and liabilities:
Accounts receivable (332,628) (1,202,117)
Inventory (343,989) (122,822)
Prepaid expenses (960,256) (102,532)
Accounts payable 91,218 (194,181)
Accrued expenses 168,827 1,323,787
------------- ------------
Net cash provided by (used in) operating activities (12,560,151) (6,235,849)
INVESTING ACTIVITIES
Purchases of short-term investments (17,118,986) (16,107,716)
Proceeds from sales and maturities of short-term investments 18,360,000 16,285,451
Purchases of equipment and improvements (1,391,046) (923,196)
Other assets 90,537 (90,800)
------------- ------------
Net cash provided by (used in) investing activities (59,495) (836,261)
FINANCING ACTIVITIES
Principal payments under notes payable (290,724) (265,070)
Proceeds from issuance (retirements) of common stock,
net of issuance costs 20,151,043 97,412
Repurchase of common stock - (47,396)
Issuance of employee notes receivable (200,000) -
------------- ------------
Net cash provided by (used in) financing activities 19,660,319 (215,054)
Net increase (decrease) in cash and cash equivalents 7,040,673 (7,287,164)
Cash and cash equivalents at beginning of period 2,677,278 9,803,777
------------- ------------
Cash and cash equivalents at end of period $ 9,717,951 $ 2,516,613
------------- ------------
------------- ------------
</TABLE>
See accompanying notes.
5
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PERCLOSE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited 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 information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.
The operating results of the interim periods presented are not necessarily
indicative of the results for the year ending March 31, 1998 or for any future
interim period. The accompanying financial statements should be read in
conjunction with the audited financial statements and notes thereto for the year
ended March 31, 1997 included in the Company's Annual Report on Form 10-K as
filed with the Securities Exchange Commission. The accompanying balance sheet
at March 31, 1997 is derived from audited financial statements at that date.
The Company's fiscal year ends on the last Friday in March. The Company's
fiscal quarters end on the Friday closest to the end of each calendar quarter.
The three month and nine month periods shown as having ended December 31, 1997
and 1996 actually ended on December 26, 1997 and December 27, 1996,
respectively. For ease of presentation, the accompanying financial statements
have been shown as ending on the last day of the calendar month.
NOTE 2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1997
----------- ----------
<S> <C> <C>
Raw materials $ 790,935 $ 311,952
Work-in-process 226,557 385,993
Finished goods 70,028 45,586
---------- ---------
$1,087,520 $ 743,531
---------- ---------
---------- ---------
</TABLE>
NOTE 3. NET LOSS PER SHARE
As required by the Financial Accounting Standards Board, the Company has adopted
Statement No. 128, Earnings per Share. Statement No. 128 requires two
calculations of EPS: Basic and diluted earnings per share. Since the Company
has had a loss from operations in the current fiscal year and all prior periods,
basic and diluted earnings (loss) per share are the same since the inclusion of
stock options would be antidilutive in the calculation of diluted earnings per
share.
6
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NOTE 4. CASH, CASH EQUIVALENTS AND AVAILABLE-FOR-SALE SECURITIES
The Company invests its excess cash in government and corporate
securities. Highly liquid investments with maturities of three months or less
at the date of acquisition are considered by the Company to be cash equivalents.
Investments with maturities beyond three months at the date of acquisition and
that mature within one year from the balance sheet are considered to be
short-term investments. Investments with maturities longer than one year from
the balance sheet date are classified as short-term investments.
The Company maintains its cash, cash equivalents and short-term investments
in a range of fixed income securities from various issuers with different
maturities and credit ratings. This diversification of risk is consistent with
the Company's investment policy, which is to maintain liquidity and ensure the
safety of principal.
All short-term investments are designated as available-for-sale.
Available-for-sale securities are carried at fair value with unrealized gains
and losses, net of tax, reported in accumulated deficit. The amortized cost of
available-for-sale debt securities is adjusted for the amortization of premiums
and the accretion of discounts to maturity. Such amortization is included in
interest income.
Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in interest
income. The cost of securities sold is based on the specific identification
method. Interest and dividends on securities classified as available-for-sale
are included in interest income.
NOTE 5. PUBLIC OFFERING
In November 1997 the Company issued 1,000,000 shares of common stock at
$21.00 per share in a public offering which resulted in net proceeds to the
Company of approximately $19.2 million (after deducting underwriting commissions
and estimated expenses). At December 26, 1997 there were 10,664,617 shares of
common stock outstanding.
NOTE 6. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997 the Financial Accounting Standards Board issued the Statement
of Financial Accounting Standard No. 130 ("SFAS 130") "Reporting Comprehensive
Income," which the Company is required to adopt for its fiscal year ending March
31, 1999. This Statement requires that all items that are required to be
recognized under the accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. In June 1997 the Financial Accounting Standards
Board issued the Statement of Financial Accounting Standard No. 131 ("SFAS
131"), "Disclosures about Segments of an Enterprise and Related Information,"
which the Company is required to adopt for its fiscal year ending March 31,
1999. This Statement establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. Both standards will require additional
disclosures, but will not have a material effect on the Company's financial
position or results of operations.
7
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
IN ADDITION TO THE OTHER INFORMATION IN THIS REPORT ON FORM 10-Q (THIS
"REPORT") AND IN THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN, CERTAIN
STATEMENTS IN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ARE FORWARD LOOKING STATEMENTS. WHEN USED IN THIS REPORT,
THE WORD "EXPECTS," "ANTICIPATES," "ESTIMATES," AND SIMILAR EXPRESSIONS ARE
INTENDED TO IDENTIFY FORWARD LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE PROJECTED. THESE RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE RISKS SET FORTH BELOW UNDER "FACTORS AFFECTING FUTURE
OPERATING RESULTS," IN PARTICULAR, THOSE RELATING TO THE COMPANY'S DEPENDENCE ON
THE PROSTAR AND TECHSTAR PRODUCTS, UNCERTAINTY OF MARKET ACCEPTANCE, HISTORY OF
LOSSES AND EXPECTATION OF FUTURE LOSSES, FLUCTUATIONS IN OPERATING RESULTS,
GOVERNMENT REGULATION, COMPETITION AND RISK OF TECHNOLOGICAL OBSOLESCENCE,
LIMITED MANUFACTURING EXPERIENCE AND SCALE-UP RISK, UNCERTAINTY RELATING TO NEW
PRODUCT DEVELOPMENT, LIMITED SALES AND MARKETING EXPERIENCE, RELIANCE ON PATENTS
AND PROPRIETARY TECHNOLOGY AND UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT.
OVERVIEW
Perclose designs, develops, manufactures and markets minimally invasive
medical devices that automate the delivery of needles and sutures for the
surgical closure or connection of blood vessels. The Company's first family of
products, the Prostar and Techstar products, surgically close arterial access
sites (termed percutaneous vascular surgery or "PVS") after catheterization
procedures such as angioplasty, stenting, atherectomy and angiography. The
Company is also developing devices that automate the connection of blood vessels
in conventional and minimally invasive coronary artery bypass graft ("CABG")
procedures.
The Company commenced international shipments of its Prostar and Techstar
products in December 1994 and July 1995, respectively. In 1997 the Company
received FDA approvals for commercial sale in the United States for the Prostar,
Prostar Plus, Prostar XL, Techstar and Techstar XL products.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
Net revenues increased from $0.9 million for the three months ended
December 31, 1996 to $2.4 million for the three months ended December 31, 1997.
The increase in revenues from the comparable year ago period was due to the
commencement of sales of PVS products in the United States in May 1997. United
States sales comprised 80% of net sales for the three months ended December 31,
1997. International revenue for the three months ended December 31, 1997
decreased from the comparable year ago period due primarily to a re-allocation
of several sales personnel from the international sales organization to the U.S.
sales organization to assist with the U.S. launch of PVS products. No customer
accounted for more than 10% of revenue in the December 1997 quarter.
Cost of goods sold increased from $1.2 million for the three months ended
December 31, 1996 to $2.1 million for the three months ended December 31, 1997.
The Company achieved a positive gross margin of 12% in the three months ending
December 31, 1997. The primary reason for the increased cost of goods sold was
the higher volume of units sold, resulting in higher material and labor costs
during the December 1997 quarter. In addition, the primary products approved in
the U.S. market during the December 1997 quarter (the Prostar 9 and 11) were
8
<PAGE>
not sold at all by the Company during the December 1996 quarter, and have a
standard cost approximately two times the standard cost of the rest of the
Company's products. On December 30, 1997 the FDA approved new generations of
products that will replace the Prostar 9 and 11. As a result of these
approvals, all products now on the market in the United States have the lower
standard cost referred to above. Also, the rapid rate of U.S. product
approvals resulted in frequent phase in and phase out of products in
production and increased the number and types of PVS products in production
during the December 1997 quarter. With the recent FDA approvals, the Company
expects a more harmonized and stable product offering across international
and domestic sales areas. The factors increasing cost of goods sold were
offset, in part, by a decrease related to a change in expense allocation
methodology between the research and manufacturing departments.
Research and development expenses remained relatively unchanged at
$1.4 million for the three months ended December 31, 1997 compared to $1.3
million for the three months ended December 31, 1996. Research and development
expenses increased due to increased payroll expense resulting from headcount
additions and a change in the cost allocation methodology of capturing expenses
relating to research and development. Offsetting these increases was the
absence of clinical trial expenses during the December 31, 1997 period.
Marketing, general and administrative expenses increased from $1.6 million
for the three months ended December 31, 1996 to $3.0 million for the three
months ended December 31, 1997. The increase was primarily due to expenses
associated with the U.S. field sales force in the December 1997 quarter, which
didn't exist in the comparable quarter, along with an increase in the support
staff required to handle the increased volume of sales.
Net interest income decreased from $441,000 for the three months ended
December 31, 1996 to $296,000 for the three months ended December 31, 1997
primarily due to a lower level of cash and short-term investments.
NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996
Net revenues increased 40% from $3.4 million for the nine months ended
December 31, 1996 to $4.8 million for the nine months ended December 31, 1997.
The same factors that affected net revenues during the December 1997 quarter
were present for the nine months ended December 31, 1997. Sales in the United
States comprised 72% of net revenues for the nine months ended December 31,
1997. Sales to the Company's German distributor represented 11% of net sales
for the nine months ended December 31, 1997.
Cost of goods sold increased from $3.5 million for the nine months ended
December 31, 1996 to $5.4 million for the nine months ended December 31, 1997.
The same factors that affected cost of goods sold during the December 1997
quarter were present for the nine months ended December 31, 1997.
Research and development expenses increased from $3.7 million for the nine
months ended December 31, 1996 to $3.9 million for the nine months ended
December 31, 1997. Research and development expenses were higher in the current
year due to increased payroll expense of $0.7 million related to headcount
additions. In addition, a change in the cost allocation methodology of
capturing expenses relating to research and development resulted in another $0.7
million increase over the same period last year. Offsetting most of these
increases was a decrease of $1.2 million in clinical trial expenses during the
December 31, 1997 period.
9
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Marketing, general and administrative expenses increased from $4.1 million
for the nine months ended December 31, 1996 to $8.6 million for the nine months
ended December 31, 1997. The increase was primarily due to the establishment of
a U.S. field sales force in March 1997.
Net interest income decreased from $1.3 million for the nine months ended
December 31, 1996 to $909,000 for the nine months ended December 31, 1997
primarily due to a lower level of cash and short-term investments. Although the
Company raised additional cash from a public stock offering at the end of
November 1997, the additional funds did not have a significant impact on
interest income for the nine months ending December 31, 1997.
INCOME TAXES
The Company has incurred only state minimum taxes since inception, which
are included in net interest income. The Company has incurred net losses in
prior fiscal years and expects to incur a net loss in the current fiscal year.
The Company has not generated any net income to date and therefore has not paid
any federal taxes since inception.
Realization of deferred tax assets is dependent on future earnings, if any,
the timing and amount of which are uncertain. Accordingly, a valuation
allowance has been established in an amount equal to the net deferred assets of
the Company to reflect these uncertainties.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash used in operating activities was $12.6 million for
the nine months ended December 31, 1997, compared to $6.2 million for the nine
months ended December 31, 1996. The increase reflected higher spending levels
in sales and marketing which accompanied initial product introductions in the
United States, as well as increased spending in manufacturing as the Company
prepared for the production of the Techstar product in higher volumes required
for the U.S. market and for the line changes required to accommodate rapid
product approvals in the United States.
The Company's net cash used by investing activities was $59,000 for the
nine months ended December 31, 1997 compared to net cash used in investing
activities of $836,000 for the nine months ended December 31, 1996. For the
nine months ended December 31, 1997, net sales of short-term investments
generated $1.2 million in cash that was offset by $1.4 million for purchases of
equipment. These equipment purchases were primarily for production equipment
and, to a lesser degree, computer equipment due to increased personnel hires and
manufacturing activities. In the nine months ended December 31, 1996, net
proceeds from short-term investments generated $178,000 that was offset by
$923,000 for equipment purchases.
The Company's net cash provided by financing activities was $19.7 million
for the nine months ended December 31, 1997, compared to net cash used in
financing activities of $215,000 for the nine months ended December 31, 1996.
For the nine months ended December 31, 1997, net proceeds from the issuance of
Common Stock of $20.2 million were offset by principal payments under notes
payable of $291,000 and issuance of employee loans of $200,000. For the nine
months ended December 31, 1996, principal payments under notes payable of
$265,000 were offset by net proceeds from the issuance of Common Stock of
$50,000.
10
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The Company's principal source of liquidity at December 31, 1997 consisted
of cash, cash equivalents, and short-term investments of $33.5 million. In
November 1997, the Company completed an offering of 1,000,000 shares of Common
Stock, which resulted in net proceeds to the Company of approximately $19.2
million (after deducting underwriting commissions and estimated expenses). In
addition, the Company has borrowed $1.3 million under an equipment credit
facility, of which a balance of approximately $211,000 remained outstanding as
of December 31, 1997.
The Company anticipates that its operating losses will continue for at
least the next two fiscal quarters since it plans to expend substantial
resources in funding product development and continues to expand manufacturing
activities. Although Perclose believes that current cash balances and
short-term investments along with cash generated from the future sales of
products will be sufficient to meet the Company's operating and capital
requirements through fiscal 1999, there can be no assurance that the Company
will not require additional financing within this time frame or after. There
can be no assurance that such additional financing will be available on
satisfactory terms or at all. In any event, Perclose may in the future seek to
raise additional funds. Perclose's future liquidity and capital requirements
will depend on numerous factors, including actions relating to regulatory and
reimbursement matters, the costs and timing of expansion of marketing, sales,
manufacturing and product development activities, the extent to which the
Company's products gain market acceptance and competitive developments.
FACTORS AFFECTING OPERATING RESULTS
DEPENDENCE UPON PROSTAR AND TECHSTAR PRODUCTS. The Prostar and Techstar
products for percutaneous closure of arterial access sites following
catheterization procedures are currently the Company's only marketed products.
If the Company is unable to commercialize the Prostar and Techstar products
successfully in the United States, the Company's business, financial condition
and results of operations will be materially and adversely affected. In
addition, there can be no assurance as to when or whether the Company will
receive FDA clearance or approval for sale of other PVS products or any other
products in the United States. There can be no assurance that the Company's
development efforts will be successful or that any further PVS products or any
other product developed by the Company will be safe or effective, capable of
being manufactured in commercial quantities at acceptable costs, approved by
appropriate regulatory and reimbursement authorities or successfully marketed.
Furthermore, because the Prostar and Techstar products represent the Company's
sole near-term product focus, the Company could be materially and adversely
affected if these products are not successfully commercialized and if future
generation products are not successfully developed, do not receive regulatory
approvals and are not successfully commercialized.
UNCERTAINTY OF MARKET ACCEPTANCE. The Company's Prostar and Techstar products
represent a new method of closing arterial access sites and there can be no
assurance that these products will gain any significant degree of market
acceptance among physicians, patients and health care payors, even if necessary
international and U.S. regulatory and reimbursement approvals are obtained.
Physicians will not use the Prostar and Techstar products unless they determine,
based on clinical data and other factors, that these products are an attractive
alternative to other means of closing arterial access sites and that the
clinical benefits to the patient and cost savings achieved through use of these
products outweigh the cost of the products. Such determinations will depend, in
part, on the ability of the Company's products to reduce the time to ambulation
and the length of hospital stays associated with coronary catheterization
procedures. Failure of the Company's products to achieve significant market
acceptance will have a material adverse effect on the Company's business,
financial condition and results of operations.
11
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HISTORY OF LOSSES AND EXPECTATION OF FUTURE LOSSES. The Company has a limited
history of operations. Since its inception in March 1992, the Company has been
primarily engaged in research and development of its percutaneous arterial
access site closure products. The Company has generated limited revenues from
international sales in certain markets, which sales commenced in December 1994.
Since May 1997, the Company has generated limited revenues from domestic sales.
The Company has experienced significant operating losses since inception and, as
of December 31, 1997, had an accumulated deficit of $40.2 million. The Company
expects its operating losses to continue for at least the next two fiscal
quarters as it continues to expend substantial resources in funding expansion of
manufacturing, marketing, sales, research and development activities. There
can be no assurance that the Company will achieve or sustain profitability.
FLUCTUATIONS IN OPERATING RESULTS. The Company anticipates that its results of
operations will fluctuate significantly from quarter to quarter and will depend
upon numerous factors, including actions relating to regulatory and
reimbursement matters, progress and results of clinical trials, the extent to
which the Company's or its competitors' products gain market acceptance,
introduction of alternative means for arterial access site closure and
competitive developments. Due to the elective nature of many coronary
catheterization procedures, patients may defer such procedures during the summer
vacation season. As a result, the Company may experience seasonal fluctuations
in its results of operations, particularly in the second fiscal quarter.
Results of operations will also be affected by the timing of orders received
from distributors, the extent to which the Company is able to expand its
manufacturing capabilities and its international and domestic distribution
networks and the ability of distributors to effectively promote the Company's
products. In addition, depending upon the timing of new product introductions,
competitive factor, warranty claims and product returns, the Company may need to
make allowances for product obsolescence, excess inventory, warranty claims and
product returns. While the Company is currently and will likely continue to
make such allowances, there can be no assurance that such allowances will be
adequate to cover all costs associated with such items.
GOVERNMENT REGULATION. Clinical testing, manufacture, promotion and sale of the
Company's products are subject to extensive regulation by numerous governmental
authorities in the United States, principally the FDA, and corresponding foreign
regulatory agencies. The Federal Food, Drug, and Cosmetic Act ("FDC Act"), and
other federal and state statutes and regulations govern or influence the
testing, manufacture, labeling, advertising, distribution and promotion of drugs
and devices. Noncompliance with applicable requirements can result in fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, refusal to authorize the marketing of new products or
to allow the Company to enter into government supply contracts, and criminal
prosecution. The Company's Prostar and Techstar PVS products are regulated as
Class III medical devices for which FDA approval of a PMA application must be
obtained prior to U.S. commercial sales.
In August 1997, a competitor of the Company petitioned the FDA for review
of the PMA product's approval granted to the Prostar 9 and 11 products. The
competitor subsequently withdrew the petition. The Company believes that there
will be no further action regarding an FDA review of the Prostar 9 and 11
regulatory approval. Even if such a review were to occur, the Company believes
it would have no material impact on the Company's financial condition as the
Prostar 9 and 11 products have been superseded and replaced by the Prostar 8 and
10 products throughout the world.
Sales of medical devices outside of the United States are subject to
international regulatory requirements that vary from country to country. The
time required to obtain approval for sale internationally may be longer or
shorter than that required for FDA approval, and the requirements may differ.
12
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The Company has obtained the certifications necessary to enable the CE mark
to be affixed to the Company's Prostar and Techstar products for commercial
sales in member countries of the European Union. The Company has not
obtained all other such international certifications and there can be no
assurance it will be able to do so in a timely manner. The Company has
received regulatory approval to market the Prostar and Techstar products in
Japan. The Company, through its Japanese distributor, intends to commence
clinical trials in Japan that will form the basis of an application for
reimbursement approvals in the Japanese health care system. There can be no
assurance Japanese reimbursement approvals will be obtained in a timely
manner or at all.
COMPETITION AND RISK OF TECHNOLOGICAL OBSOLESCENCE. Competition in the emerging
market for arterial access site closure devices is intense and expected to
increase. Most of the Company's competitors have significantly greater name
recognition, experience, financial, technical, research, marketing, sales,
distribution and other resources than the Company. There can be no assurance
that the Company's competitors will not succeed in developing or marketing
technologies and products that are technologically superior, more effective or
commercially attractive than any that are being developed by the Company, or
that such competitors will not succeed in obtaining regulatory approval,
introducing or commercializing any such products prior to the Company. Such
developments could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the medical device
market is generally characterized by rapid and significant technological change
and frequent emergence of new technologies, products and procedures.
Accordingly, the Company's success will also depend in part on its ability to
respond quickly to medical and technological changes.
LIMITED MANUFACTURING EXPERIENCE AND SCALE-UP RISK. The Company has only
limited experience in manufacturing the Prostar and Techstar products. The
Company currently manufactures in limited quantities the Prostar and Techstar
products for U.S. clinical trials, limited domestic commercial sales,
international clinical trials and limited international commercial sales. There
can be no assurance that future manufacturing difficulties, which could have a
material adverse effect on the Company's business, financial condition and
results of operations, will not occur.
DEPENDENCE UPON KEY SUPPLIERS. Perclose purchases components used in its
products from various suppliers and relies on single sources for several
components. For certain of these components, there are relatively few
alternative sources of supply. Establishing additional or replacement suppliers
for any of the components used in the Company's products, if required, may not
be accomplished quickly and could involve significant additional costs. Any
supply interruption from vendors or failure of the Company to obtain alternative
vendors, if required, for any of the components used to manufacture the
Company's products would limit the Company's ability to manufacture its products
and could therefore have a material adverse effect on the Company's business,
financial condition and results of operations.
UNCERTAINTY RELATING TO NEW PRODUCT DEVELOPMENT. The Company's strategy
involves the design and development of new products designed to allow cardiac
surgeons to automate the rapid placement of sutures in blood vessels during CABG
surgery. The product development process is time-consuming and costly, and
there can be no assurance that product development will be successfully
completed, that necessary regulatory clearances or approvals will be granted by
the FDA on a timely basis, or at all, or that the potential products will
achieve market acceptance. Failure by the Company to develop, obtain necessary
regulatory clearances or approvals for, or successfully market potential new
products could have a material adverse effect on the Company's business,
financial condition and results of operations.
13
<PAGE>
RELIANCE ON PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY. The Company's
ability to compete effectively will depend in part on its ability to develop and
maintain proprietary aspects of its technology. There can be no assurance that
the Company's issued patents, any patents that may be issued as a result of the
Company's U.S. or international patent applications, or the patent under which
the Company has license rights, will offer any degree of protection. There can
be no assurance that any patents that may be issued or licensed to the Company
or any of the Company's patent applications will not be challenged, invalidated
or circumvented in the future. In addition, there can be no assurance that
competitors, many of which have substantial resources and have made substantial
investments in competing technologies, will not seek to apply for and obtain
patents that will prevent, limit or interfere with the Company's ability to
make, use or sell its products either in the United States or in international
markets.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. There can be no
assurance that the Company will not in the future become subject to patent
infringement claims and litigation or interference proceedings declared by the
United States Patent and Trademark Office ("USPTO") to determine the priority of
inventions. Any litigation or interference proceedings will result in
substantial expense to the Company and significant diversion of effort by the
Company's technical and management personnel. An adverse determination in
litigation or interference proceedings to which the Company may become a party
could subject the Company to significant liabilities to third parties or require
the Company to seek licenses from third parties. Although patent and
intellectual property disputes in the medical device area have often been
settled through licensing or similar arrangements, costs associated with such
arrangements may be substantial and could include ongoing royalties.
Furthermore, there can be no assurance that necessary licenses would be
available to the Company on satisfactory terms if at all. Adverse
determinations in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent the Company from manufacturing and selling its
products, which would have a material adverse effect on the Company's business,
financial condition and results of operations.
UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT. In the United States, health care
providers, such as hospitals and physicians that purchase medical devices such
as the Company's products, generally rely on third-party payors, principally
federal Medicare, state Medicaid and private health insurance plans, to
reimburse all or part of the cost of therapeutic and diagnostic catheterization
procedures. Reimbursement for catheterization procedures performed using
devices that have received FDA approval has generally been available in the
United States. The Company anticipates that in a prospective payment system,
such as the disease related group ("DRG") system utilized by Medicare, and in
many managed care systems used by private health care payors, the cost of the
Company's products will be incorporated into the overall cost of the procedure
and that there will be no separate, additional reimbursement for the Company's
products. Failure by physicians, hospitals and other users of the Company's
products to obtain sufficient reimbursement from health care payors for
procedures in which the Company's products are used or adverse changes in
governmental and private third-party payors' policies toward reimbursement for
such procedures would have a material adverse effect on the Company's business,
financial condition and results of operations.
In international markets, market acceptance of the Company's products may
be dependent in part upon the availability of reimbursement within prevailing
health care payment systems. Failure of the Company to receive international
reimbursement approvals could have an adverse effect on market acceptance of the
Company's products in the international markets in which such approvals are
sought.
14
<PAGE>
PRODUCT LIABILITY AND RECALL RISK; LIMITED INSURANCE COVERAGE. The
manufacture and sale of medical products entail significant risk of product
liability claims or product recalls. There can be no assurance that the
Company's existing insurance coverage limits are adequate to protect the
Company from any liabilities it might incur in connection with the clinical
trials or sales of its products. In addition, the Company may require
increased product liability coverage as its products are commercialized.
Such insurance is expensive and in the future may not be available on
acceptable terms, if at all. A successful product liability claim or series
of claims brought against the Company in excess of its insurance coverage, or
a recall of the Company's products, could have a material adverse effect on
the Company's business, financial condition and results of operations.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings None
Item 2. Changes in Securities None
Item 3. Defaults upon Senior Securities None
Item 4. Submission of Matters to a Vote of Security Holders None
Item 5. Other Information None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits: The exhibits listed in the Index to Exhibits
are filed as a part hereof and are
incorporated by reference.
b) Reports on Form 8-K: On November 1997 the Registrant filed a
report of form 8-K relating to information
included in certain previously filed
Exchange Act reports.
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.14 1997 Stock Plan and form of Stock Option Agreement thereunder.
10.15 1998 Director Option Plan, as amended to date.
27.1 Financial Data Schedule (Edgar version only).
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this 10-Q report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 9, 1998 PERCLOSE, INC.
/s/ HENRY A. PLAIN, JR.
---------------------------------------
Henry A. Plain, Jr.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
/s/ KENNETH E. LUDLUM
---------------------------------------
Kenneth E. Ludlum
VICE PRESIDENT FINANCE AND ADMINISTRATION,
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
17
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