<PAGE>
UNITED STATES
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 MARCH 31, 1999
----------------
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO .
-------------- -------------
COMMISSION FILE NO. 0-22233
ENDOCARDIAL SOLUTIONS, INC.
- ---------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 41-1724963
- -------- ----------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
1350 ENERGY LANE (651) 523-6900
SUITE 110 -------------
SAINT PAUL, MINNESOTA 55108 (REGISTRANT'S TELEPHONE NUMBER
- ---------------------------- INCLUDING AREA CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES
AND ZIP 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 TWELVE (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
----- -----
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
COMMON STOCK, $.01 PAR VALUE 9,045,627
- ---------------------------- (NUMBER OF SHARES OUTSTANDING
(CLASS) AT MARCH 31, 1999)
1
<PAGE>
INDEX
ENDOCARDIAL SOLUTIONS, INC.
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - March 31, 1999 and December 31, 1998 3
Statements of Operations - Three month periods ended
March 31, 1999 and March 31, 1998 4
Statements of Cash Flows - Three months ended
March 31, 1999 and March 31, 1998 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 7-9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 10
PART II. OTHER INFORMATION
Items 1 through 5 have been omitted since all items are inapplicable or
answers negative.
Item 6. Exhibits and Reports on Form 8-K 10
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENDOCARDIAL SOLUTIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------------- -----------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,613,923 $ 654,529
Short-term investments 7,349,033 8,060,303
Accounts Receivable 931,199 475,750
Inventories 1,928,308 1,827,061
Prepaid expenses and other current assets 169,065 205,161
---------------- -----------------
Total current assets 11,991,528 11,222,804
Furniture and equipment 4,268,631 3,942,741
Less accumulated depreciation (1,840,312) (1,668,305)
---------------- -----------------
2,428,319 2,274,436
Deposits 81,709 81,709
Patents, net of accumulated amortization
(1999 - $78,630; 1998 - $74,440) 38,452 42,642
---------------- -----------------
Total assets $ 14,540,008 $ 13,621,591
---------------- -----------------
---------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,169,716 $ 762,147
Accrued salaries and expenses 524,366 706,724
Current portion of capital lease obligations 886,865 876,959
---------------- -----------------
Total current liabilities 2,580,947 2,345,830
Capital lease obligations 4,381,371 812,339
Stockholders' equity:
Undesignated Preferred Stock, par value $.01 per share:
Authorized shares--10,000,000
Issued and outstanding shares--none - -
Common Stock, $.01 par value
Authorized shares--March 31, 1999--40,000,000;
December 31, 1998--40,000,000
Issued and outstanding shares--March 31, 1999--9,045,627;
December 31, 1998--9,011,762 90,456 90,118
Additional paid-in capital 50,437,280 50,329,703
Accumulated deficit (42,880,450) (39,863,607)
Deferred compensation (69,596) (92,792)
---------------- -----------------
Total stockholders' equity 7,577,690 10,463,422
---------------- -----------------
Total liabilities and stockholders' equity $ 14,540,008 $ 13,621,591
---------------- -----------------
---------------- -----------------
</TABLE>
Note: The balance sheet at December 31, 1998 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
SEE ACCOMPANYING NOTES.
3
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
----------------------------------
March 31, March 31,
1999 1998
---------------- ----------------
<S> <C> <C>
Revenue $ 1,293,381 $ -
Cost of goods sold 1,441,918 517,125
---------------- ----------------
Gross margin (148,537) (517,125)
Operating expenses:
Research and development 1,364,980 5,339,649
General and administrative 475,549 374,132
Sales and marketing 978,542 247,239
---------------- ----------------
Operating loss (2,967,608) (6,478,145)
Other income (expense):
Interest income 113,077 277,935
Interest expense (58,551) (17,173)
---------------- ----------------
54,526 260,762
---------------- ----------------
Net loss for the period and accumulated deficit $ (2,913,082) $ (6,217,383)
---------------- ----------------
---------------- ----------------
Net loss per share - basic and diluted $ (0.32) $ (0.69)
---------------- ----------------
---------------- ----------------
Weighted average shares outstanding 9,023,632 8,961,187
---------------- ----------------
---------------- ----------------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
----------------------------------
March 31, March 31,
1999 1998
---------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (2,913,082) $ (6,217,383)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 176,197 123,787
Amortization of deferred compensation 23,196 54,129
Value of warrants granted in connection with purchase of technology - 2,085,602
Loss on disposal of equipment - -
Changes in operating assets and liabilities:
Accounts Receivable (455,449) -
Inventory (101,247) (265,514)
Prepaid expenses and other assets 36,096 (79,036)
Accounts payable 407,569 301,178
Accrued salaries and expenses (182,358) (345,040)
---------------- ----------------
Net cash provided by (used in) operating activities (3,009,078) (4,342,277)
INVESTING ACTIVITIES
Purchases of short-term investments (1,998,730) (3,183,113)
Maturities of short-term investments 2,710,000 6,692,606
Purchases of furniture and equipment (86,639) (155,758)
Patent expenditures - -
Proceeds from sale of equipment - -
---------------- ----------------
Net cash provided by (used in) investing activities 624,631 3,353,735
FINANCING ACTIVITIES
Proceeds from notes payable 3,500,000 -
Principal payments on notes payable and capital lease obligations (160,314) (124,617)
Proceeds from issuance of common stock 4,155 26,740
Proceeds from issuance of preferred stock - -
---------------- ----------------
Net cash provided by (used in) financing activities 3,343,841 (97,877)
Increase (decrease) in cash and cash equivalents 959,394 (1,086,419)
Cash and cash equivalents at beginning of period 654,529 1,512,656
---------------- ----------------
Cash and cash equivalents at end of period $ 1,613,923 $ 426,237
---------------- ----------------
---------------- ----------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Purchase of equipment through capital lease obligations $ 239,251 $ -
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
ENDOCARDIAL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all 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. Due to the Company's full market release in
Europe in the third quarter 1998, the Company is no longer considered to be
in the development stage. Operating results for the three months ended March
31, 1999, are not necessarily indicative of the results that may be expected
for the year ending December 31, 1999. These financial statements should be
read in conjunction with the audited financial statements and accompanying
notes for the fiscal year ended December 31, 1998, contained in the Company's
10-K.
2. INVENTORIES
Inventories are carried at the lower of cost (first-in, first-out basis) or
market. The majority of inventory consists of purchased components. To
determine the technological feasibility of its software efforts, the Company
utilizes the working model approach available under SFAS No. 86 and believes
that the working model was achieved when the software was available for
commercial use in June 1998.
3. RECLASSIFICATIONS
Certain prior year items have been reclassified to conform to current year
presentations.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
Endocardial Solutions Inc. (the "Company"), was incorporated in May 1992. The
Company develops, manufactures and markets the EnSite 3000-TM- clinical
workstation and EnSite-TM- catheter for use by electrophysiologists in
diagnosing and mapping abnormal heart rhythms known as arryhthmias. The
EnSite 3000-TM- clinical workstation and EnSite-TM- catheter are available in
full market release to electrophysiologists in Europe.
RESULTS OF OPERATIONS
GENERAL. Net losses decreased to $2,913,082 for the three months ended March
31, 1999, from $6,217,383 for the same period in 1998. The loss for the three
months ended March 31, 1998 includes expenses of $3,585,602 for the
acquisition of locator technology that was purchased during the first quarter
from Medtronic, Inc. The Company expects losses to continue through at least
1999. The Company is continuing a period of growth in marketing expenses
related to market introduction, including increases in personnel costs.
REVENUE AND COST OF GOODS SOLD. The Company recorded revenue for the fourth
consecutive quarter since inception. Revenue for the three months ended March
31, 1999 was $1,293,381 and included sales of the Company's EnSite-TM-
catheter and EnSite 3000-TM- clinical workstation, including the Company's
proprietary software, patient interface unit and other peripherals. Cost of
goods sold and unabsorbed manufacturing expenses were $517,125 and $1,441,918
for the quarter ended March 31, 1998 and 1999, respectively. Manufacturing
expenses include costs for unabsorbed overhead from the production of
inventory held for re-sale.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$1,364,980 for the three month period ended March 31, 1999, compared to
$5,339,649 during the same period in 1998, a decrease of $3,974,669. The
expenses for the three months ended March 31, 1998, included $3,585,602 for
the acquisition of locator technology that was purchased during the first
quarter of 1998 from Medtronic, Inc. The Company experienced a decrease of
$389,000 in research and development expenses after subtracting for the
purchase of the locator technology. The decrease is attributable to a
reduction in clinical trial expenses and software development costs. The
Company believes research and development expenditures will increase slightly
for the remainder of 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were
$475,549 and $374,132 for the three months ended March 31, 1999 and 1998,
respectively. The increase of $101,417 was due to an increase in personnel
costs.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased to
$978,542 during the three months ended March 31, 1999, from $247,239 during
the same period in 1998, an increase of $731,303. The increase is
attributable to increases in personnel and costs associated with the
Company's European market release and market research activities. The Company
expects continued increases in sales and marketing expenses as the Company
prepares for a U.S. product launch.
INTEREST INCOME. Interest income was $113,077 and $277,935 for the three
months ended March 31, 1999 and 1998, respectively. The decrease of $164,858
was due to a reduction in the cash, cash equivalents and short-term
investments between March 31, 1999 and March 31, 1998.
7
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES.
On March 24, 1997, the Company received net proceeds of approximately
$18,833,000 from an initial public offering of 2,250,000 shares of its common
stock and approximately $6,278,000 from a concurrent private placement to
Medtronic, Inc. of 750,000 shares of its common stock. The Company's common
stock is listed on the NASDAQ National Market under the symbol "ECSI."
The Company's operations since inception have been funded by net proceeds
from the sales of common and preferred stock totaling approximately
$50,528,000 through March 31, 1999. As of March 31, 1999 and December 31,
1998, the Company had cash, cash equivalents and short-term investments of
approximately $8,963,000 and $8,715,000, respectively.
The Company announced a financing agreement with Medtronic, Inc. during the
first quarter 1999. Under the agreement, the Company will receive $7 million
from Medtronic Asset Management, which is repayable by 2001 or, if earlier,
at the close of a significant round of debt or equity financing.
The Company believes that its existing cash, cash equivalents and short-term
investments will be sufficient to fund the operations of the Company into the
first quarter 2000. The Company's future liquidity and capital requirements
will depend on numerous factors, including the timing of regulatory actions
regarding the Company's products, the results of clinical trials and
competition, the extent to which the Company's EnSite System gains market
acceptance and the costs and timing of expansion of sales, marketing and
manufacturing activities.
YEAR 2000
Many currently installed computer systems and software are coded to accept
only two-digit entries in the date code fields. These date code fields will
need to accept four-digit entries to distinguish 21st century dates. This
problem could result in system failures or miscalculations causing
disruptions of business operations (including, among other things, a
temporary inability to process transactions, send invoices or engage in other
similar business activities). As a result, many companies' computer systems
and software will need to be upgraded or replaced in order to comply with
Year 2000 requirements. The potential global impact of the Year 2000 problem
is not known, and if not corrected in a timely manner, could affect the
Company and the US and world economy generally.
The Company has formed a project team consisting of representatives from its
information technology, finance, manufacturing, product development and
quality department to address internal and external Year 2000 issues. The
Company's internal financial, manufacturing and other operational computer
systems have been upgraded to address Year 2000 issues. Management believes
that the new software substantially addresses Year 2000 issues. The Company
believes it has completed it Year 2000 compliance program for all of its
significant internal financial and manufacturing systems. The Company may be
required, however, to make minor modification to some of its existing
hardware and software packages in order for its computer system to function
properly in the year 2000 and thereafter.
The Company's product development processes contain steps to include
Year 2000 compliance verification for all current and future products. The
Company has tested the EnSite 3000 System and determined it to be Year 2000
compliant.
In addition, the Company has received assurances from its major suppliers
that they are addressing the Year 2000 issue and that product purchased by
the Company from such suppliers will function properly in
8
<PAGE>
the year 2000. These actions are intended to help mitigate the possible
external impact of the Year 2000 problem. Even assuming that all material
third parties confirm that they are or expect to be Year 2000 compliant by
December 31, 1999, it is not possible to state with certainty that such
parties will be so compliant. It is impossible to fully assess the potential
consequences in the event service interruptions from suppliers occur or in
the event that there are disruptions in infrastructure areas as utilities,
communication, transportation, banking and government.
The amount of remediation work required to address Year 2000 problems is not
expected to be extensive and the total estimated cost for resolving the
Company's Year 2000 issues is minimal and not expected to have a material
effect on the Company's financial position, results of operations, or cash
flows. The Company expects the remainder of the Year 2000 compliance program
to be substantially complete by third quarter 1999.
Based on the Company's assessment to date, the Company believes it will not
experience any material disruption as a result of Year 2000 problems in its
financial, internal manufacturing processes or the EnSite 3000-TM- System.
However, there can be no guarantee that the systems of other companies on
which the Company relies will be converted in a timely manner, or that a
failure to convert by another company, or a conversion that is incompatible
with the Company's systems, would not have a material adverse effect on the
Company. The Company has not yet developed a contingency plan to provide for
continuity of processing in such event of various problem scenarios, but it
will assess the need to develop such a plan based on the outcome of its
validation phase of its Year 2000 compliance program and the results of
surveying it major suppliers. Assuming no major disruption in service from
utility companies or other critical third-party providers, the Company
believes that it will be able to manage its total Year 2000 transition
without any material effect on the Company's results of operations or
financial condition. There can be no assurance, however, that unexpected
difficulties will not arise and, if so, that the Company will be able to
timely develop and implement a contingency plan.
CAUTIONARY STATEMENT
Except for the historical information contained herein, this Quarterly Report
on Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. When used in this Form 10-Q and
in future filings by the Company with the Securities and Exchange Commission,
in the Company's press releases and in oral statements made with the approval
of an authorized executive officer, the word or phrases "believes,"
"anticipates," "expects," "intends," "will likely result," "estimates,"
"projects" or similar expressions are intended to identify such
forward-looking statements, but are not the exclusive means of identifying
such statements. These forward-looking statements involve risks and
uncertainties that may cause the Company's actual results to differ
materially from the results discussed in the forward-looking statements.
Factors that might cause such differences include, but are not limited to,
the following: risks associated with the successful development and
commercialization of a new technology: limited clinical testing experience;
uncertainty of obtaining Food and Drug Administration and international
regulatory clearances; uncertainty of availability of treatments employing
the EnSite System; uncertainty of market acceptance of the EnSite System;
training requirements for electrophysiologists; the uncertainty of the
ability to diagnose and treat atrial fibrillation; the expectation of future
losses; significant competition and rapid technological change in the
tachycardia diagnostic market; risks associated with the Company's dependence
on patents and proprietary technology; risks associated with the Company's
limited manufacturing experience and dependence on suppliers; and the
uncertainty of third-party reimbursement for diagnostic medical procedures
employing the EnSite System. These factors are discussed in the cautionary
statements included in Exhibit 99 to this Form 10-Q for the quarter ended
March 31, 1999. Other forward-looking statements are found in the Company's
discussion of Year 2000 compliance issues and market risk. The Company
cautions investors and others to review the statements set forth in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Exhibit 99 and
9
<PAGE>
in the Company's other reports filed with the Securities and Exchange
Commission and that other factors may prove to be important in affecting the
Company's business and results of operations.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company had approximately $9 million of cash and investments on March 31,
1999. Substantially all of the investments were U.S. government or investment
grade, fixed income securities from domestic issuers. Because of the credit
risk criteria of the Company's investment policies, the primary market risk
associated with these investments is interest rate risk. The Company does not
use derivative financial instruments to manage interest rate risk or to
speculate on future changes in interest rates. A rise in interest rates could
negatively affect the fair value of the Company's investments; however,
because management considers it unlikely that the Company would need or
choose to substantially liquidate the Company's investments, management
believes that such an increase in interest rates would not have a material
impact on the Company's future earnings or cash flows. Even though the
Company distributes products abroad, the Company does not conduct sales in
foreign currencies. Therefore, management does not believe the Company is
exposed to any material foreign currency exchange rate risk.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
27 Financial Data Schedule (EDGAR filing only)
99 Cautionary Statement
</TABLE>
(b) Reports
The Company filed no reports on Form 8-K during the quarter ended March 31,
1999.
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENDOCARDIAL SOLUTIONS, INC.
Dated: May 17, 1999 By: /S/ James W. Bullock
--------------------
James W. Bullock
President and Chief Executive Officer
(Principal Executive Officer)
Dated: May 17, 1999 By:/S/ Leota L. Pearson
--------------------
Leota L. Pearson
Vice President Finance and Chief
Financial Officcer
(Principal Financial and Accounting
Officer)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ESI AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,613,923
<SECURITIES> 7,349,033
<RECEIVABLES> 931,199
<ALLOWANCES> 0
<INVENTORY> 1,928,308
<CURRENT-ASSETS> 11,991,528
<PP&E> 4,268,631
<DEPRECIATION> (1,840,312)
<TOTAL-ASSETS> 14,540,008
<CURRENT-LIABILITIES> 2,580,947
<BONDS> 0
0
0
<COMMON> 90,456
<OTHER-SE> 50,437,280
<TOTAL-LIABILITY-AND-EQUITY> 14,540,008
<SALES> 1,293,381
<TOTAL-REVENUES> 1,293,381
<CGS> 1,441,918
<TOTAL-COSTS> 1,441,918
<OTHER-EXPENSES> (2,967,608)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58,551
<INCOME-PRETAX> (2,913,082)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,913,082)
<EPS-PRIMARY> (.32)
<EPS-DILUTED> (.32)
</TABLE>
<PAGE>
EXHIBIT 99
CAUTIONARY STATEMENT
Forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "PSLRA") are included in our
Form 10-Q. The words or phrases "believes," "may," "will," "expects,"
"should," "continue," "anticipates," "intends," "will likely result,"
"estimates," "projects" or similar expressions identify forward-looking
statements in our Form 10-Q and in our future filings with the Securities and
Exchange Commission, in our press releases, in our presentations to
securities analysts or investors, and in oral statements made by or approved
by an executive officer of Endocardial Solutions, Inc. Forward-looking
statements involve risks and uncertainties that may materially and adversely
affect our business, results of operation, financial condition or prospects,
and may cause our actual results to differ materially from historical results
or the results discussed in the forward-looking statements.
You should consider carefully the following cautionary statements if
you own our common stock or are planning to buy our common stock. We intend
to take advantage of the "safe harbor" provisions of the PSLRA by providing
this discussion. We are not undertaking to address or update each factor in
future filings or communications regarding our business or results except to
the extent required by law.
OUR SUCCESS DEPENDS ON DEVELOPING AND COMMERCIALIZING THE ENSITE SYSTEM
The EnSite System is currently our only potential product, and our
success depends entirely on the successful development, commercialization and
market acceptance of the EnSite System. Development of the EnSite System is
ongoing and we have not yet demonstrated our system to be effective and safe
for left ventricular use according to United States guidelines. Modifications
to the EnSite System may require additional clinical trials and, ultimately,
United States and international regulatory approvals before they can be fully
marketed in the United States and abroad. Problems in the following areas
could materially impact the commecialization of the EnSite System:
- research and development,
- clinical testing,
- regulatory submissions and approval,
- product manufacturing and commercial scale-up,
- marketing, or
- product distribution.
We will not generate any significant revenue until the EnSite System is
successfully commercialized. We cannot assure you that we will ever derive
substantial revenues from the sale of the EnSite System.
1
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OUR LIMITED CLINICAL TESTING HAS NOT YET PROVEN OUR PRODUCTS TO BE SAFE AND
EFFECTIVE
We have conducted only limited clinical trials on patients for
ventricular tachycardia ("VT") and supraventricular tachycardia ("SVT") in
the United States and in Europe, and we have at times experienced
complications in our clinical trials. During the third and fourth quarters of
1998, we submitted to the United States Food and Drug Administration (the
"FDA") two premarket notification applications under Section 510(k) of the
Food, Drug and Cosmetic Act (the "FDC Act") containing the results of our
left ventricular and right atrium multi-center clinical trials. We believe,
however, we will be required to conduct more extensive clinical testing in
the United States in order to support a premarket approval ("PMA")
application to the FDA for marketing approval for use of the EnSite System in
the left ventricle of the heart. Patients selected for clinical trials must
meet stringent guidelines to undergo testing, and we cannot assure you that
patients can be enrolled in clinical trials on a timely basis. Further, we
cannot assure you that any of our products will prove to be safe and
effective in clinical trials under United States or international regulatory
guidelines. The clinical trials may identify significant technical or other
obstacles to be overcome prior to obtaining approvals. If the EnSite System
does not prove to be safe and effective in clinical trials, our business,
financial condition and results of operations would be materially and
adversely affected.
WE MUST OBTAIN REGULATORY APPROVAL BEFORE WE CAN SELL OUR PRODUCTS
The manufacture and sale of medical devices, including the EnSite
System, are subject to extensive regulation in the United States, principally
by the FDA and corresponding state agencies, and in other countries. In the
United States, our products are subject to the FDA's premarket approval
requirements, which have not yet been satisfied for left ventricular use.
Securing FDA approvals requires us to submit extensive clinical data and
supporting information to the FDA. During the third and fourth quarters of
1998, we submitted to the FDA two premarket notification applications under
Section 510(k) of the FDC Act containing the results of our left ventricular
and right atrium multi-center clinical trials. The FDA has cleared the EnSite
System for use in the right atrium of the heart. In March 1999, we determined
that our FDA application for left ventricular use of the EnSite System will
be submitted as a PMA application. However, we may not be able to file a PMA
application with the FDA to market the EnSite System for diagnosing VT in the
United States until we complete more extensive clinical trials. The process
of obtaining FDA and other required regulatory approvals is lengthy,
expensive and uncertain.
Sales of medical devices outside of the United States are subject to
international regulatory requirements that vary from country to country, and
approval for sale internationally may take more or less time than that
required for FDA approval. We have obtained CE certification for the EnSite
catheter and for the EnSite 3000 clinical workstation, allowing us to sell
our products in member countries of the European Union. We may encounter
significant costs and requests for additional information in continuing our
efforts to obtain regulatory approvals in other countries, which could
substantially delay or preclude us from marketing our products
internationally.
Marketing approvals, if granted, may require us to limit the
indicated use of our product. FDA enforcement policy strictly prohibits the
marketing of approved medical devices for unapproved uses. Product approvals
could be withdrawn for failure to comply with regulatory standards or the
occurrence of unforeseen problems following the initial marketing. We will be
required to follow FDA regulations regarding Good Manufacturing Practices and
similar regulations in other countries, which include testing, control, and
documentation requirements. Ongoing compliance with Good Manufacturing
Practices and other applicable regulatory requirements will be monitored
through periodic inspections by federal and state agencies, including the
FDA, and by comparable agencies in other countries. If we fail to comply with
applicable regulatory requirements, we could be subjected to warning letters,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, refusal of the government to grant
premarket approval, withdrawal of approvals and criminal prosecution.
We cannot assure you that we will be able to obtain the necessary
regulatory approvals on a timely basis or at all. Delays in receipt of or
failure to receive the approvals, the loss of previously obtained approvals,
or failure to
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comply with existing or future regulatory requirements would have a material
and adverse effect on our business, financial condition and results of
operations.
TREATMENTS USING THE ENSITE SYSTEM MAY NOT BE AVAILABLE TO PATIENTS
We have developed the EnSite System to diagnose tachycardia and
assist electrophysiologists in selecting among treatment options. Current
treatments for VT include drugs, implantable defibrillators, surgery and,
potentially, catheter ablation. We believe that the EnSite System will enable
increased use of catheter ablation for treating complex VT. Because ablation
treatment for VT is relatively new and untested, the long term effects of
ablation on patients are unknown. As a result, the long term success of
ablation therapy in treating VT will not be known for several years. Catheter
ablation devices require PMA approval by the FDA. Accordingly, we cannot
assure you that a catheter ablation market will develop. Moreover, we cannot
assure you that the EnSite System will prove useful in diagnosing VT for
treatment by catheter ablation products. We are not in the process of
developing a catheter for ablation treatment and are entirely dependent upon
other medical device companies to develop those devices. If a market for
treating VT by catheter ablation does not develop, our business, financial
condition and results of operations could be materially and adversely
affected.
OUR PRODUCTS MAY BE UNABLE TO DIAGNOSE ATRIAL FIBRILLATION
In addition to assisting the diagnosis of VT, we intend to apply the
EnSite System to the diagnosis of SVT, including atrial fibrillation.
However, we have conducted only limited clinical studies of our technology on
patients suffering from atrial fibrillation. We may be unable to successfully
extend our technology to the mapping of atrial fibrillation or obtain
regulatory approval to test and market any products developed using the
technology to map atrial fibrillation. We have made, and expect to continue
to make, research and development expenditures to extend our technology to
the diagnosis of atrial fibrillation. We cannot assure you that we will
realize any benefit from these expenditures.
Atrial fibrillation is a complex disease and the subject of
continuing research. The therapies presently available for atrial
fibrillation are in the developmental stage with no proven effectiveness.
Even if we are successful in extending our technology to provide products
that are capable of diagnosing atrial fibrillation, we cannot assure you that
treatments for atrial fibrillation will exist that will require the
diagnostic capabilities of any of our products. As a result, a commercial
market may never develop for any product we develop for the diagnosis of
atrial fibrillation. We have no present intention to develop any medical
devices on our own for the treatment of atrial fibrillation.
OUR PRODUCTS MAY NOT SUCCEED IN THE MARKET
The commercial success of the EnSite System depends upon the number
of diagnostic procedures performed by electrophysiologists using the system.
Our system may not gain any significant degree of market acceptance among
electrophysiologists, patients, health care insurers and managed care
providers. Electrophysiologists will not recommend diagnostic procedures
until clinical data demonstrate the safety and efficacy of those procedures.
Even if we demonstrate the safety and efficacy of the EnSite System,
electrophysiologists and other physicians may elect not to recommend the
procedures for any number of other reasons, including the availability of
alternative procedures and treatment options, or inadequate levels of
reimbursement. Broad use of the EnSite System will require time-consuming
training of electrophysiologists, which could adversely also affect market
acceptance. If our products are not accepted by the market, our business,
financial condition and results of operations would be materially and
adversely affected.
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WE FACE SIGNIFICANT INDUSTRY COMPETITION
The cardiac medical device market is highly competitive, and the
EnSite System is a new technology that must compete with more established
devices. Certain of our competitors are developing new approaches and new
products for diagnosing VT and SVT, including contact mapping systems using
multi-electrode basket contact catheters and single-point mapping
technologies. Certain of our competitors have integrated product lines that
include products for both diagnosis and ablation treatment, which may afford
them opportunities for product bundling and other marketing advantages. Many
of our competitors have an established presence in the field of
electrophysiology and established relationships with electrophysiology labs.
Many of our competitors have substantially greater financial and other
resources than we do, including larger research and development staffs and
more experience and capabilities in conducting research and development
activities, testing products in clinical trials, obtaining regulatory
approvals, and manufacturing, marketing and distributing products. Some of
our competitors may achieve patent protection, regulatory approval or product
commercialization more quickly than us, which may decrease our ability to
compete.
OUR PRODUCTS MAY BECOME OBSOLETE IF WE ARE UNABLE TO ANTICIPATE AND ADAPT TO
RAPIDLY CHANGING TECHNOLOGY
The medical device industry is subject to rapid technological
innovation and, consequently, the life cycle of any particular product is
short. Alternative diagnostic systems or other discoveries and developments
with respect to mapping tachycardia may render our products obsolete.
Furthermore, the greater financial and other resources of many of our
competitors may permit them to respond more rapidly than us to technological
advances. If we fail to demonstrate the safety, benefit, efficacy and cost
effectiveness of our products as compared to those of our competitors, or if
we fail to develop new technologies and products before our competitors, our
business, financial condition and results of operations would be materially
and adversely affected.
WE DEPEND ON OUR PATENTS AND PROPRIETARY TECHNOLOGY, WHICH WE MAY NOT BE ABLE
TO PROTECT
Our success will depend in part on our ability to obtain patent
protection for our products and processes, to preserve our trade secrets and
to operate without infringing the intellectual property rights of others. The
patent positions of medical device companies are uncertain and involve
complex and evolving legal and factual questions. We cannot assure you that
any of our pending or future patent applications will result in issued
patents, that any current or future patents will not be challenged,
invalidated or circumvented, that the scope of any of our patents will
exclude competitors or that the patent rights granted to us will provide us
any competitive advantage. We may discover that our technology infringes
patents or other rights owned by others, and we cannot be certain that we
were the first to make the inventions covered by each of our issued patents
and our pending patent applications, or that we were the first to file patent
applications for such inventions. In addition, we cannot assure you that our
competitors will not seek to apply for and obtain patents that will prevent,
limit or interfere with our ability to make, use or sell our products either
in the United States or in international markets. Further, the laws of
certain foreign countries may not protect our intellectual property rights to
the same extent as do the laws of the United States.
In addition to patents, we rely on trade secrets and proprietary
knowledge that we seek to protect, in part, through confidentiality
agreements with employees, consultants and others. We cannot assure you that
our proprietary information or confidentiality agreements will not be
breached, that we will have adequate remedies for any breach, or that our
trade secrets will not otherwise become known to or independently developed
by competitors.
WE MAY FACE INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS WHICH WOULD BE COSTLY
TO RESOLVE
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry and our
competitors may resort to intellectual property litigation as a means of
competition. Intellectual property litigation is complex and expensive and
the outcome is difficult to predict. We cannot assure you that we will not
become subject to patent infringement claims or litigation, or interference
proceedings declared by the United States Patent and Trademark Office to
determine the priority of inventions. Litigation or regulatory
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proceedings may also be necessary to enforce our patent or other intellectual
property rights. We may not always have the financial resources to assert
patent infringement suits or to defend ourselves from claims. An adverse
result in any litigation could subject us to liabilities to, or require us to
seek licenses from or pay royalties to, others that may be substantial.
Furthermore, we cannot assure you that the necessary licenses would be
available to us on satisfactory terms, if at all.
WE HAVE LIMITED MANUFACTURING EXPERIENCE
We have limited experience in manufacturing the EnSite catheter and
the patient interface unit of the EnSite System. We currently manufacture our
products in limited quantities for laboratory and clinical testing and only
have begun to manufacture our products for commercial sale. We have no
experience manufacturing our products in the volumes that will be necessary
for us to achieve significant commercial sales, and we cannot assure you that
reliable, high-volume manufacturing capacity can be established or maintained
at commercially reasonable costs. If we receive regulatory approval for our
products, we will need to expend significant capital resources and develop
the necessary expertise to establish large-scale manufacturing capabilities.
We may encounter the following difficulties in scaling up production of our
products:
- problems involving production yields,
- quality control and assurance,
- component supply shortages,
- shortages of qualified personnel,
- compliance with FDA and foreign regulations, or
- the need for further FDA or foreign regulatory approval of
new manufacturing processes.
Our manufacturing facilities will be periodically inspected by
United States and foreign regulatory authorities. In order to manufacture
products for sale in the United States, our operations must undergo "Good
Manufacturing Practices" compliance inspections conducted by the FDA. Our
facilities and manufacturing processes have not yet undergone any inspections
by the FDA. We will also be required to comply with ISO 9001 and 9002 and CE
Mark standards in order to sell our products in Europe. We received ISO 9001
certification for our catheter and quality system in August 1997 and ISO 9002
certification for the clinical workstation and a CE Mark for each of the
EnSite catheter and the clinical workstation in the first quarter of 1998. If
we fail to comply with Good Manufacturing Practices or ISO 9001 and 9002 and
CE Mark standards in future audits, we may be required to modify our
manufacturing policies and procedures. In addition, we may be required to
stop all or part of our operations until we can demonstrate that appropriate
steps have been taken to comply with the regulations.
WE DEPEND ON A FEW SUPPLIERS FOR KEY COMPONENTS OF OUR PRODUCTS
We purchase raw materials and certain key components of our
products, including the computer workstation and certain components for our
catheter, from one or a few suppliers. For certain of these components, there
are relatively few alternative sources of supply. We currently have no
agreements that would assure delivery of raw materials and components from
alternate suppliers. Establishing additional or replacement suppliers for any
of the components used in our products, if required, may not be accomplished
quickly and could involve significant additional costs. If our suppliers are
unable to provide an adequate supply of components in a timely manner, or if
we are unable to locate qualified alternate suppliers for materials and
components at a reasonable cost, our business, financial condition and
results of operations could be materially and adversely affected. In the
event we had to replace a single source supplier, a new supplier would be
required to meet Good Manufacturing Practices and other regulatory standards.
WE HAVE LIMITED COMMERCIAL SALES AND MARKETING EXPERIENCE
We have limited experience marketing the EnSite System. We cannot
assure you that we will be able to build and maintain a suitable sales force
or enter into or maintain satisfactory marketing arrangements with others.
Our sales and marketing efforts may not be successful.
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WE WILL NEED TO CAREFULLY MANAGE OUR EXPANDING OPERATIONS
In order to complete clinical trials in progress, prepare additional
products for clinical trials, and develop future products, we believe that we
will be required to expand our operations, particularly in the areas of
research and development, manufacturing, quality assurance and sales and
marketing. As we expand our operations in these areas, the expansion will
likely result in new and increased responsibilities for management. To
accommodate any growth and compete effectively, we must implement and improve
our information systems, procedures, and controls, and expand, train,
motivate and manage our work force. Our future success will depend
significantly on the ability of our current and future management to operate
effectively. We cannot assure you that our personnel, systems, procedures and
controls will be adequate to support our future operations.
INTERNATIONAL OPERATIONS WILL EXPOSE US TO ADDITIONAL RISKS
We plan to market the EnSite System through distributors in
international markets, once we receive the required foreign regulatory
approvals, and sales in foreign markets are initially expected to be our only
source of revenue. We have entered into a distribution agreement granting
Medtronic exclusive distribution rights for our products in Canada, Europe
and Japan and certain rights for distribution in other regions outside of the
United States. In the first quarter of 1998, we received ISO 9002
certification for our workstation and a CE Mark for each of the EnSite
catheter and the clinical workstation, allowing us to begin selling our
products in member countries of the European Union. We have no distribution
arrangements for other international markets, and currently retain all
distribution rights in the United States. We cannot assure you that
international distributors for our products will devote adequate resources to
selling our products.
Changes in overseas economic conditions, currency exchange rates,
foreign tax laws or tariffs or other trade regulations could materially and
adversely affect on our ability to market our products internationally. Our
business is also expected to subject us and our representatives, agents and
distributors to laws and regulations of the foreign jurisdictions in which we
operate or our products are sold. We may depend on foreign distributors and
agents for compliance and adherence to foreign laws and regulations.
OUR SUCCESS MAY DEPEND ON ACHIEVING ADEQUATE LEVELS OF THIRD-PARTY
REIMBURSEMENT
Sales of our products will depend largely on the availability of
adequate reimbursement for tachycardia diagnostic procedures from third-party
payors, such as government and private insurance plans, health maintenance
organizations and preferred provider organizations. In the United States, our
products, if and when approved for commercial sale, would be purchased
primarily by health care providers such as doctors and hospitals who will
then seek to be reimbursed for the health care services provided to their
patients. Third-party payors are increasingly challenging the pricing of
medical products and procedures they consider unnecessary, inappropriate, not
cost-effective, experimental or used for a non-approved indication. Even if a
procedure is eligible for reimbursement, the level of reimbursement may not
be adequate to enable us to achieve or maintain market acceptance of our
products or maintain price levels which exceed our costs of developing and
manufacturing our products.
It is anticipated that our EnSite catheter will be sold at a premium
compared to existing single point catheters used in current diagnostic or
mapping procedures. In addition, an initial capital outlay will be required
for the EnSite clinical workstation. Assuming no increase in the level of
reimbursement for cardiovascular procedures utilizing our products, we will
be required to justify the relative increased cost of using the EnSite
System. This will require us to demonstrate the enhanced benefits of the
EnSite System to health care providers and payors in terms of such factors as
enhanced patient procedural efficiencies, reduced radiation exposure and
improved patient outcomes. Without adequate support from third-party payors,
the market for our products may be severely limited.
Moreover, we are unable to predict what additional legislation or
regulation, if any, relating to the health care industry or third-party
coverage and reimbursement may be enacted in the future, or what effect such
legislation or regulation would have on us. Reforms may include mandated
basic health care benefits, limitations
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on the growth of private health insurance premiums and Medicare and Medicaid
spending, greater reliance on prospective payment systems, the creation of
large insurance purchasing groups and fundamental changes to the health care
delivery system. We anticipate that Congress and state legislatures will
continue to review and assess alternative health care delivery systems and
payment methodologies. We cannot predict whether any reform proposals will be
adopted or what impact they may have on us.
Reimbursement systems in international markets vary significantly by
country and by region within some countries. Many international markets have
government managed health care systems that control reimbursement for new
devices and procedures. In most international markets, there are private
insurance systems as well as government managed systems. We cannot assure you
that reimbursement for our products will be available in international
markets under either government or private reimbursement systems.
OUR PRODUCTS MAY EXPOSE US TO COSTLY LITIGATION
We may be exposed to product liability claims if a patient is
adversely affected by our products. We currently carry product liability
insurance covering our clinical trial operations with an aggregate limit of
$5 million. We cannot assure you that our existing insurance coverage limits
are adequate to cover any liabilities we might incur in connection with the
distribution of our products. Although we expect to obtain product liability
insurance coverage in connection with the commercialization of the EnSite
System, insurance may not be available on commercially reasonable terms, if
at all. Insurance, even if obtained, might not adequately cover any product
liability claim.
WE HAVE A HISTORY OF OPERATING LOSSES AND EXPECT FUTURE LOSSES
We have generated limited revenue and have sustained significant
operating losses each year since our inception. We expect our losses to
continue at least through 1999. We may never generate substantial operating
revenues or achieve profitability. Our ability to generate revenues from
operations and make a profit depends upon successful development, regulatory
approval, manufacturing and commercialization of the EnSite System and our
successful transition from a research and development company to a
manufacturing and sales company.
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS
We may require substantial funds to meet our working capital
requirements for continued research and development, testing, regulatory
approval and full-scale commercial introduction of our EnSite System. In
order to meet our funding needs, we may be required to raise additional funds
through public or private financings, including the sale of equity or debt.
Any additional equity financings may dilute current stockholders, and debt
financing, if available, may involve restrictive covenants. Adequate funds
for our operations, whether from financial markets or from other sources, may
not be available when needed on attractive terms, if at all. Insufficient
funds may require us to delay, scale back or eliminate some or all of our
programs designed to facilitate the commercial introduction of the EnSite
System or prevent commercial introduction altogether.
OUR SYSTEMS MAY BE SUBJECT TO YEAR 2000 PROBLEMS
We have formed a project team consisting of representatives from our
information technology, finance, manufacturing, product development and
quality department to address internal and external Year 2000 issues. Based
on our assessment to date, we believe we will not experience any material
disruption as a result of Year 2000 problems in our financial, internal
manufacturing processes or the EnSite 3000 System. However, we cannot
guarantee that the systems of other companies on which we rely will be
converted in a timely manner, or that a failure to convert by another
company, or a conversion that is incompatible with our systems, would not
have a material and adverse effect on us. We have not yet developed a
contingency plan in the event of various problem scenarios, but we will
assess the need to develop a plan based on the outcome of our validation
phase of our Year 2000 compliance program and the results of surveying our
major suppliers. Assuming no major disruption in service from utility
companies or other critical third-party providers, we believe that we will be
able to manage our
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total Year 2000 transition without any material effect on our results of
operations or financial condition. We cannot assure you, however, that
unexpected difficulties will not arise and, if so, that we will be able to
timely develop and implement a contingency plan.
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