e10vk
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
Commission file number: 0-28288
Cardiogenesis Corporation
(formerly known as Eclipse Surgical Technologies, Inc.)
(Exact name of Registrant as specified in its charter)
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California |
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77-0223740 |
(State of incorporation) |
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(I.R.S. Employer
Identification Number) |
26632 Towne Center Drive, Suite 320
Foothill Ranch, California 92610
(Address of principal executive offices)
(714) 649-5000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, no par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of the
registrants knowledge, in definitive proxy or information
statements incorporated herein by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
Yes o No þ
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act Rule 12b-2.)
Yes o No þ
The aggregate market value of the voting and non-voting stock
held by non-affiliates of the Registrant was approximately
$19,920,658 as of June 30, 2004, based upon the closing
sale price reported for that date of $0.56 on the OTC
Bulletin Board. Shares of Common Stock held by each officer
and director and by each person who owns 5% or more of the
outstanding Common Stock have been excluded because such persons
may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for any
other purpose.
Indicate the number of shares outstanding of each of the
issuers classes of common stock outstanding as of the
latest practicable date.
42,186,988 shares
As of March 11, 2005
INDEX TO FORM 10-K
PART I
This Annual Report on Form 10-K contains forward-looking
statements that involve risks and uncertainties. The statements
contained herein that are not purely historical are
forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of
the Exchange Act, including without limitation statements
regarding our expectations, beliefs, intentions or strategies
regarding the future. All forward-looking statements included in
this document or incorporated by reference herein are based on
information available to us on the date hereof, and we assume no
obligation to update any such forward-looking statements. Our
actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors,
including those set forth in Item 7 and elsewhere.
General
Cardiogenesis Corporation, incorporated in California in 1989,
designs, develops and distributes laser-based surgical products
and disposable fiber-optic accessories for the treatment of
advanced cardiovascular disease through transmyocardial
revascularization (TMR) and percutaneous myocardial
channeling (PMC). PMC was formerly referred to as
percutaneous myocardial revascularization (PMR). The
new name PMC more literally depicts the immediate physiologic
tissue effect of the Cardiogenesis PMC system to ablate precise,
partial thickness channels into the heart muscle from the inside
of the left ventricle. TMR and PMC are recent laser-based heart
treatments in which channels are made in the heart muscle. Many
scientific experts believe these procedures encourage new vessel
formation, or angiogenesis. TMR is performed by a cardiac
surgeon through a small incision in the chest under general
anesthesia. PMC is performed by a cardiologist in a
catheter-based procedure which utilizes local anesthesia.
Clinical studies have demonstrated a significant reduction in
angina and increase in exercise duration in patients treated
with TMR or PMC plus medications, when compared with patients
who received medications alone.
In May 1997, we received CE Mark approval for our TMR system and
in April 1998 we received CE Mark approval for our PMC system.
The CE Mark allows us to commercially distribute these products
within the European Community. The CE Marking is an
international symbol of adherence to quality assurance standards
and compliance with applicable European medical device
directives. In February 1999, we received final approval from
the Food and Drug Administration (FDA) for our TMR
products for treatment of stable patients with certain types of
angina. Effective July 1999, the Centers for Medicare and
Medicaid Services (CMS), formerly known as the
Health Care Financial Administration (HCFA) began to
provide Medicare coverage for any TMR procedures. As a result,
hospitals and physicians are eligible to receive Medicare
reimbursement for TMR equipment and procedures on Medicare
patients.
We have completed pivotal clinical trials involving PMC, and
study results were submitted to the FDA in a Pre Market Approval
(PMA application) in December 1999 along with
subsequent amendments. In July 2001, the FDA Advisory Panel
recommended against approval of PMC for public sale and use in
the United States. In February 2003, the FDA granted an
independent panel review of our pending PMA application for PMC
by the Medical Devices Dispute Resolution Panel
(MDDRP). In July 2003, the FDA agreed to review
additional data in support of our PMA supplement for PMC under
the structure of an interactive review process between us and
the FDA review team. The independent panel review by the MDDRP
was cancelled in lieu of the interactive review, but the FDA has
agreed to reschedule the MDDRP hearing in the future, if the
dispute cannot be resolved.
In August 2004, we met with the FDA and agreed on the steps
needed to design and initiate a new clinical trial to confirm
the safety and efficacy of PMC. In January 2005, we again met
with the agency and agreed on major trial parameters. We are
working closely with the FDA in finalizing the clinical trial
protocol to be formally agreed upon. Once the agreement is
achieved and the related costs are clearly understood, we expect
to move forward, either on our own or with a corporate partner
in the interventional cardiology arena. There can be no
assurance, however, that we will receive a favorable
determination from the FDA.
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In March 1999, we merged with the former Cardiogenesis
Corporation. Under the terms of the combination, each share of
the former Cardiogenesis common stock was converted into 0.8 of
a share of our common stock, and the former Cardiogenesis has
become a wholly owned subsidiary of ours. As a result of the
transaction, our outstanding shares increased by approximately
9.9 million shares. The transaction was structured to
qualify as a tax-free reorganization and has been accounted for
as a pooling of interests.
Background
According to the American Heart Association, cardiovascular
disease is the leading cause of death and disability in the
U.S. Coronary artery disease is the principal form of
cardiovascular disease and is characterized by a progressive
narrowing of the coronary arteries which supply blood to the
heart. This narrowing process is usually due to atherosclerosis,
which is the buildup of fatty deposits, or plaque, on the inner
lining of the arteries. Coronary artery disease reduces the
available supply of oxygenated blood to the heart muscle,
potentially resulting in severe chest pain known as angina, as
well as damage to the heart. Typically, the condition worsens
over time and often leads to heart attack and/or death.
Based on standards promulgated by the Canadian Heart
Association, angina is typically classified into four classes,
ranging from Class 1, in which angina pain results only
from strenuous exertion, to the most severe, Class 4, in
which the patient is unable to conduct any physical activity
without angina and angina may be present even at rest. The
American Heart Association estimates that more than six million
Americans experience angina symptoms.
The primary therapeutic options for treatment of coronary artery
disease are drug therapy, balloon angioplasty also known as
percutaneous transluminal coronary angioplasty or
(PTCA), other interventional techniques which
augment or replace PTCA such as stent placement and atherectomy,
and coronary artery bypass grafting or (CABG). The
objective of each of these approaches is to increase blood flow
through the coronary arteries to the heart.
Drug therapy may be effective for mild cases of coronary artery
disease and angina either through medical effects on the
arteries that improve blood flow without reducing the plaque or
by decreasing the rate of formation of additional plaque (e.g.,
by reducing blood levels of cholesterol). Because of the
progressive nature of the disease, however, many patients with
angina ultimately undergo either PTCA or CABG.
Introduced in the early 1980s, PTCA is a less-invasive
alternative to CABG in which a balloon-tipped catheter is
inserted into an artery, typically near the groin, and guided to
the areas of blockage in the coronary arteries. The balloon is
then inflated and deflated at each blockage site, thereby
rupturing the blockage and stretching the vessel. Although the
procedure is usually successful in widening the blocked channel,
the artery often re-narrows within six months of the procedure,
a process called restenosis, often necessitating a
repeat procedure. A variety of techniques for use in conjunction
with PTCA have been developed in an attempt to reduce the
frequency of restenosis, including stent placement and
atherectomy. Stents are small metal frames delivered to the area
of blockage using a balloon catheter and deployed or expanded
within the coronary artery. The stent is a permanent implant
intended to keep the channel open. Atherectomy is a means of
using mechanical, laser or other techniques at the tip of a
catheter to cut or grind away plaque.
CABG is an open chest procedure developed in the 1960s in which
conduit vessels are taken from elsewhere in the body and grafted
to the blocked coronary arteries so that blood can bypass the
blockage. CABG typically requires the use of a heart-lung bypass
machine to render the heart inactive (to allow the surgeon to
operate on a still, relatively bloodless heart) and involves
prolonged hospitalization and patient recovery periods.
Accordingly, it is generally reserved for patients with severe
cases of coronary artery disease or those who have previously
failed to receive adequate relief of their symptoms from PTCA or
related techniques. Most bypass grafts fail within one to
fifteen years following the procedure. Repeating the surgery
(re-do bypass surgery) is possible, but is made more
difficult because of scar tissue and adhesions that typically
form as a result of the first operation. Moreover, for many
patients CABG is inadvisable for various reasons, such as the
severity of the patients overall condition, the extent of
coronary artery disease or the small size of the blocked
arteries.
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When these treatment options are exhausted, the patient is left
with no viable surgical or interventional alternative other
than, in limited cases, heart transplantation. Without a viable
surgical alternative, the patient is generally managed with drug
therapy, often with significant lifestyle limitations. TMR,
which bears the CE Marking and has received FDA approval, and
PMC, which bears the CE Marking and for which we are continuing
to pursue FDA approval for use in the U.S., offer potential
relief to a large population of patients with severe
cardiovascular disease.
The TMR and PMC Procedures
TMR is a surgical procedure performed on the beating or
non-beating heart, in which a laser device is used to create
pathways through the myocardium directly into the heart chamber.
The pathways are intended to supply blood to ischemic, or
oxygen-deprived regions of the myocardium and reduce angina in
the patient. TMR can be performed using open chest surgery or
minimally invasive surgery through a small incision between the
ribs. TMR offers end-stage cardiac patients who have regions of
ischemia not amenable to PTCA or CABG a means to alleviate their
symptoms and improve their quality of life. We have received FDA
approval for U.S. commercial distribution of our TMR laser
system for treatment of stable patients with angina (Canadian
Cardiovascular Society Class 4) refractory to medical
treatment and secondary to objectively demonstrated coronary
artery atherosclerosis and with a region of the myocardium with
reversible ischemia not amenable to direct coronary
revascularization.
PMC is an interventional procedure performed by a cardiologist.
PMC is based upon the same principles as TMR, but the procedure
is much less invasive. The procedure is performed under local
anesthesia and the patient is treated through a catheter
inserted in the femoral artery at the top of the leg. A laser
transmitting catheter is threaded up into the heart chamber,
where channels are created in the inner portion of the
myocardium (i.e. heart muscle). PMC has received the CE Marking
approving its use within the European Union. See our discussion
below under the caption Regulatory Status, for the
status of our PMA application with the FDA seeking approval of
PMC for public sale and use in the United States.
Business Strategy
Our objective is to become a recognized leader in the field of
myocardial revascularization, with TMR and PMC established as
well-known and acceptable therapies. Our strategies to achieve
this goal are as follows:
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Add Innovative New Technology to our Market Basket. Our
focus is to add innovative new tools to help address advanced
cardiovascular disease, and related co-morbidities of patients
being referred today to cardiovascular surgery. We are committed
to growing the TMR business with the Advanced TMR Plus platform
which includes two new minimally invasive handpieces for
thoracoscopic and robotic assisted TMR. These new products were
developed with key clinical champions to expand the TMR market.
We are also committed to identifying potential new products in
the cardiovascular arena. |
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Expand Market for our Products. We are seeking to expand
market awareness of our products among opinion leaders in the
cardiovascular field, the referring physician community and the
targeted patient population. We also currently intend to expand
our marketing efforts in Europe and to the rest of the world
through the establishment and expansion of direct international
sales and support organizations and third party distributors and
agents. In addition, we have developed a comprehensive training
program to assist physicians in acquiring the expertise
necessary to utilize our TMR and PMC products and procedures. |
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Demonstrate Clinical Utility of PMC. We are seeking to
demonstrate the clinical safety and effectiveness of PMC. We
have completed a pivotal clinical trial regarding PMC, and the
study results were submitted to the FDA in a PMA application in
December 1999, along with subsequent supplements. As discussed
below under the caption Regulatory Status, the FDA
Advisory Panel recommended against approval of PMC for public
sale and use in the United States and further informed us that
they believe the data submitted in August 2003 in connection
with the interactive review process is still not adequate to
support approval by the FDA of our PMC system. In August |
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2004, we met with the FDA and agreed on the steps needed to
design and initiate a new clinical trial to confirm the safety
and efficacy of PMC. In January 2005, we again met with the
agency and agreed on major trial parameters. We are working
closely with the FDA in finalizing the clinical trial protocol
to be formally agreed upon. Once the agreement is achieved and
the related costs are clearly understood, we expect to move
forward, either on our own or with a corporate partner in the
interventional cardiology arena. We cannot assure you, however,
that we will receive a favorable determination from the FDA. |
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Leverage Proprietary Technology. We believe that our
significant expertise in laser and catheter-based systems for
cardiovascular disease and the proprietary technologies we have
developed are important factors in our efforts to demonstrate
the safety and effectiveness of our TMR and PMC procedures. We
are seeking to develop additional proprietary technologies for
TMR, PMC and related procedures. We have and maintain multiple
U.S. and foreign patents and have multiple U.S. and foreign
patent applications pending relating to various aspects of TMR,
PMC and other cardiovascular related devices and therapies. |
Products and Technology
Our TMR system consists of a holmium laser console and a line of
fiber-optic, laser-based surgical tools. Each surgical tool
utilizes an optical fiber assembly to deliver laser energy from
the source laser base unit to the distal tip of the surgical
handpiece. The compact base unit occupies a small amount of
operating room floor space, operates on standard 110-volt or
220-volt power supply, and is light enough to move within the
operating room or among operating rooms in order to use
operating room space efficiently. Moreover, the flexible
fiberoptic assembly used to deliver the laser energy to the
patient enables ready access to the patient and to various sites
within the heart.
Our TMR system and related surgical procedures are designed to
be used without the requirement of the external systems utilized
with certain competitive TMR systems. Our TMR system does not
require electrocardiogram synchronization, which monitors the
electrical output of the heart and times the use of the laser to
minimize electrical disruption of the heart, or transesophageal
echocardiography, which tests each application of the laser to
the myocardium during the TMR procedure to determine if the
pathway has penetrated through the myocardium into the heart
chamber.
TMR 2000 laser system. TMR 2000 generates 2.1 micron
wavelength laser light by photoelectric excitation of a solid
state holmium crystal. The holmium laser, because it uses a
solid state crystal as its source, is compact, reliable and
requires minimal maintenance. The systems specifications are as
follows: size (35L x 28.5W x 45H), weight (450
Lbs.), and power compatibility (230V).
SolarGen 2100s laser system. SolarGen 2100s, approved in
December 2004, generates 2.1 micron wavelength laser light by
photoelectric excitation of a solid state holmium crystal. The
holmium laser, because it uses a solid state crystal as its
source, is compact, reliable and requires minimal maintenance.
The systems specifications are as follows: size (21L x
14W x 36H), weight (120 Lbs.), and power
compatibility (115V and 230V for international customers).
SoloGrip III. The single use SoloGrip handpiece
system contains multiple, fine fiber-optic strands in a one
millimeter diameter bundle. The flexible fiber optic delivery
system combined with the ergonomic handpiece provides access for
treating all regions of the left ventricle.
The SoloGrip III fiber-optic delivery system has an easy to
install connector that screws into the laser base unit, and the
device is pre-calibrated in the factory so it requires no
special preparation.
Our PMC system is currently sold only outside the United States.
The PMC system consists of the PMC Laser and ECG Monitor.
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PMC Laser. Our holmium laser base unit generates 2.1
micron wavelength laser light in the mid-infrared spectrum. It
provides a reliable source for laser energy with low maintenance.
Axcis Catheter System. Our Axcis catheter system is an
over-the-wire system that consists of two components, the Axcis
laser catheter and Axcis aligning catheter. Our Axcis catheter
system is designed to provide controlled navigation and access
to target regions of the left ventricle. The coaxial Axcis laser
catheter has an independent, extendible lens with radiopaque
lens markers which show the location and orientation of the tip
for optimal contact with the ventricle wall. The Axcis laser
catheter also has nitinol petals at the laser-lens tip which are
designed for safe penetration of the endocardium and to provide
depth control.
In December 2004, we signed a distribution agreement to begin
selling platelet rich plasma (PRP) products. Our new
autologous platelet and growth factor concentrating system,
celleratOR, consists of a general use centrifuge and cell
separator tubes. The cell separator tubes, due to their
proprietary design, allow for the greatest amount of flexibility
in the end user determining the concentration and volume of the
platelet and growth factor concentrate, called PRP. The benefits
of this technology are known and embraced in several surgical
specialties because of its potential for contributing to
improved patient outcomes. celleratOR is our first new product
beyond laser myocardial revascularization devices, and we expect
it to be a useful addition to patient-centered cardiovascular
medicine.
Regulatory Status
United States. In February 1999, we received approval
from the FDA for use of our TMR 2000 laser console and SoloGrip
handpiece for treatment of stable patients with angina (Canadian
Cardiovascular Society Class 4) refractory to other medical
treatments and secondary to objectively demonstrated coronary
artery atherosclerosis and with a region of the myocardium with
reversible ischemia not amenable to direct coronary
revascularization.
We have completed pivotal clinical trials involving PMC, and
study results were submitted to the FDA in a Pre Market Approval
(PMA application) in December 1999 along with
subsequent amendments. In July 2001, the FDA Advisory Panel
recommended against approval of PMC for public sale and use in
the United States. In February 2003, the FDA granted an
independent panel review of our pending PMA application for PMC
by the Medical Devices Dispute Resolution Panel
(MDDRP). In July 2003, the FDA agreed to review
additional data in support of our PMA supplement for PMC under
the structure of an interactive review process between us and
the FDA review team The independent panel review by the MDDRP
was cancelled in lieu of the interactive review, but the FDA has
agreed to reschedule the MDDRP hearing in the future, if the
dispute cannot be resolved. In August 2004, we met with the FDA
and agreed on the steps needed to design and initiate a new
clinical trial to confirm the safety and efficacy of PMC. In
January 2005, we again met with the agency and agreed on major
trial parameters. We are working closely with the FDA in
finalizing the clinical trial protocol to be formally agreed
upon. Once the agreement is achieved and the related costs are
clearly understood, we expect to move forward, either on our own
or with a corporate partner in the interventional cardiology
arena. There can be no assurance, however, that we will receive
a favorable determination from the FDA.
In addition, the new Pearl 5.0 mm and 8.0 mm minimally invasive
handpieces have been included in applications to the FDA and to
international health authorities, and we are currently working
with these respective agencies toward approvals.
European Union. We have obtained approval to affix the CE
Marking to substantially all of our products, which enables us
to commercially distribute our TMR and PMC products throughout
the European Community.
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Sales and Marketing
We have received FDA approval for our surgical TMR laser system.
In July 1999, the Centers for Medicare and Medicaid Services
announced its coverage policy for TMR equipment and procedures.
We are promoting market awareness of our approved surgical
products among opinion leaders in the cardiovascular field and
are recruiting physicians and hospitals to use our TMR products.
In the United States, we currently offer a TMR 2000 laser base
unit at a current end user list price of $355,000 per unit,
a SolarGen 2100s laser system at a current end user list price
of $395,000, and the disposable TMR handpiece (at least one of
which must be used with each TMR procedure) at an end user unit
list price of $3,630. In addition to sales of lasers to
hospitals outright, in an effort to accelerate market adoption
of the TMR procedure, we developed a program in which we loan
lasers to hospitals in return for the hospital purchasing a
minimum number of handpieces at a premium over the list price.
Internationally, we sell our TMR and PMC products through a
direct sales and support organization and through distributors
and agents. We currently intend to expand our marketing efforts
in Europe and to the rest of the world through the establishment
and expansion of direct international sales and support
organizations and third party distributors and agents. We can
not assure you, however, that we will be successful in
increasing our international sales.
We have developed, in conjunction with several major hospitals
using our TMR or PMC products, a training program to assist
physicians in acquiring the expertise necessary to utilize our
products and procedures. This program includes a comprehensive
one-day course including didactic training and hands-on
performance of TMR or PMC in vivo. To date over 1,260
cardiothoracic surgeons have been trained on the Cardiogenesis
TMR system.
We exhibit our products at major meetings of cardiovascular
medicine practitioners. Evaluators of our products have made
presentations at meetings around the world, describing their
results. Abstracts and articles have been published in
peer-reviewed publications and industry journals to present the
results of our clinical trials.
Research and Development
We believe that focusing our research efforts and product
offerings is essential to our ability to stimulate growth and
maintain our market leadership position. Our ongoing research
and product development efforts are focused on the development
of new and enhanced lasers and fiber-optic handpieces for TMR
and PMC applications. In 2004, we developed the new and improved
SolarGen laser system as well as handpieces for our minimally
invasive and robotic assisted TMR platforms.
We believe our future success will depend, in part, upon the
success of our research and development programs. There can be
no assurance that we will realize financial benefit from these
efforts or that products or technologies developed by others
will not render our products or technologies obsolete or
non-competitive.
Manufacturing
We outsource the manufacturing and assembly of our TMR and PMC
handpiece systems to a single contract manufacturer. We also
outsource the manufacturing of our SolarGen 2100s laser system
to a different single contract manufacturer. The PMC laser
system is provided to us under a manufacturing agreement with a
laser manufacturing company.
Certain components of our laser units and fiber-optic handpieces
are generally acquired from multiple sources. Other laser and
fiber-optic components and subassemblies are purchased from
single sources. Although we have identified alternative vendors,
the qualification of additional or replacement vendors for
certain components or services is a lengthy process. Any
significant supply interruption would have a material adverse
effect on the ability to manufacture our products and,
therefore, would harm our business. We intend to continue to
qualify multiple sources for components that are presently
single sourced.
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Competition
We expect that the market for TMR and PMC, which is currently in
the early stages of development, will be competitive. At this
point in time, we believe that our only competitor is PLC
Systems, Inc. (PLC) which markets FDA-approved TMR
products in the U.S. and abroad. Other competitors may also
enter the market, including large companies in the laser and
cardiac surgery markets. Many of these companies have or may
have significantly greater financial, research and development,
marketing and other resources than we do.
PLC is a publicly traded corporation which uses a CO2
laser and an articulated mechanical arm in its TMR products. PLC
obtained a Pre Market Approval for TMR in 1998. PLC has received
the CE Marking, which allows sales of its products commercially
in all European Union countries. PLC has been issued patents for
its apparatus and methods for TMR. Edwards Lifesciences, a well
known publicly traded provider of products and technologies to
treat cardiovascular disease, has assumed full sales and
marketing responsibility in the U.S. for PLCs TMR
Heart Laser 2 System and associated kits pursuant to a
co-marketing agreement between the two companies executed in
January 2001. Through its significantly greater financial and
human resources, including a well-established and extensive
sales representative network, we believe Edwards has the
potential to market to a greater number of hospitals and doctors
than we currently can.
We believe that the factors which will be critical to market
success include: the timing of receipt of requisite regulatory
approvals, effectiveness and ease of use of the TMR products and
applications, breadth of product line, system reliability, brand
name recognition, effectiveness of distribution channels and
cost of capital equipment and disposable devices.
TMR and PMC also compete with other methods for the treatment of
cardiovascular disease, including drug therapy, PTCA and CABG.
Even with the FDA approval of our TMR system in patients for
whom other cardiovascular treatments are not likely to provide
relief, and when used in conjunction with other treatments, we
cannot assure you that our TMR or PMC products will be accepted
by cardiovascular professionals. Moreover, technological
advances in other therapies for cardiovascular disease such as
pharmaceuticals or future innovations in cardiac surgery
techniques could make such other therapies more effective or
lower in cost than our TMR procedure and could render our
technology obsolete. We cannot assure you that physicians will
use our TMR procedure to replace or supplement established
treatments, or that our TMR procedure will be competitive with
current or future technologies. Such competition could harm our
business.
Our TMR laser system and any other product developed by us that
gains regulatory approval will face competition for market
acceptance and market share. An important factor in such
competition may be the timing of market introduction of
competitive products. Accordingly, the relative pace at which we
can develop products, complete clinical testing, achieve
regulatory approval, gain reimbursement acceptance and supply
commercial quantities of the product to the market are important
competitive factors. In the event a competitor is able to obtain
a PMA for its products prior to our doing so, we may not be able
to compete successfully. We may not be able to compete
successfully against current and future competitors even if we
obtain a PMA prior to our competitors.
Government Regulation
Laser-based surgical products and disposable fiber-optic
accessories for the treatment of advanced cardiovascular disease
through TMR are considered medical devices, and as such are
subject to regulation in the U.S. by the FDA and outside
the U.S. by comparable international regulatory agencies.
Our devices require the rigorous PMA process for approval to
market the product in the U.S. and must bear the CE Marking for
commercial distribution in the European Community.
To obtain a Pre Market Approval (PMA) for a medical
device, we must file a PMA application that includes clinical
data and the results of preclinical and other testing sufficient
to show that there is a reasonable assurance of safety and
effectiveness of the product for its intended use. To begin a
clinical study, an Investigational Device Exemption
(IDE) must be obtained and the study must be
conducted in accordance with FDA regulations. An IDE application
must contain preclinical test data demonstrating the safety of
the product for human investigational use, information on
manufacturing processes and procedures,
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and proposed clinical protocols. If the FDA clears the IDE
application, human clinical trials may begin. The results
obtained from these trials are accumulated and, if satisfactory,
are submitted to the FDA in support of a PMA application. Prior
to U.S. commercial distribution, premarket approval is
required from the FDA. In addition to the results of clinical
trials, the PMA application must include other information
relevant to the safety and effectiveness of the device, a
description of the facilities and controls used in the
manufacturing of the device, and proposed labeling. By law, the
FDA has 180 days to review a PMA application. While the FDA
has responded to PMA applications within the allotted time
frame, reviews more often occur over a significantly longer
period and may include requests for additional information or
extensive additional trials. There can be no assurance that we
will not be required to conduct additional trials which may
result in substantial costs and delays, nor can there be any
assurance that a PMA will be obtained for each product in a
timely manner, if at all. In addition, changes in existing
regulations or the adoption of new regulations or policies could
prevent or delay regulatory approval of our products.
Furthermore, even if a PMA is granted, subsequent modifications
of the approved device or the manufacturing process may require
a supplemental PMA or the submission of a new PMA which could
require substantial additional clinical efficacy data and FDA
review. After the FDA accepts a PMA application for filing, and
after FDA review of the application, a public meeting is
frequently held before an FDA advisory panel in which the PMA is
reviewed and discussed. The panel then issues a favorable or
unfavorable recommendation to the FDA or recommends approval
with conditions. Although the FDA is not bound by the
panels recommendations, it tends to give such
recommendations significant weight. In February 1999, we
received a PMA for our TMR laser system for use in certain
indications. As discussed above under the caption
Regulatory Status, the FDA Advisory Panel
recommended against approval of PMC for public sale and use in
the United States and further informed us that they believe the
data submitted in August 2003 in connection with the interactive
review process is still not adequate to support approval by the
FDA of our PMC system. In August 2004, we met with the FDA and
agreed on the steps needed to design and initiate a new clinical
trial to confirm the safety and efficacy of PMC. In January
2005, we again met with the agency and agreed on major trial
parameters. We are working closely with the FDA in finalizing
the clinical trial protocol to be formally agreed upon. Once the
agreement is achieved and the related costs are clearly
understood, we expect to move forward, either on our own or with
a corporate partner in the interventional cardiology arena.
There can be no assurance, however, that we will receive a
favorable determination from the FDA.
Products manufactured or distributed by us pursuant to a PMA
will be subject to pervasive and continuing regulation by the
FDA, including, among other things, postmarket surveillance and
adverse event reporting requirements. Failure to comply with
applicable regulatory requirements can result in, among other
things, warning letters, fines, suspensions or delays of
approvals, seizures or recalls of products, operating
restrictions or criminal prosecutions. The Federal Food, Drug
and Cosmetic Act requires us to manufacture our products in
registered establishments and in accordance with Good
Manufacturing Practices (GMP) regulations and to
list our devices with the FDA. Furthermore, as a condition to
receipt of a PMA, our facilities, procedures and practices will
be subject to additional pre-approval GMP inspections and
thereafter to ongoing, periodic GMP inspections by the FDA.
These GMP regulations impose certain procedural and
documentation requirements upon us with respect to manufacturing
and quality assurance activities. Labeling and promotional
activities are subject to scrutiny by the FDA. Current FDA
enforcement policy prohibits the marketing of approved medical
devices for unapproved uses. Changes in existing regulatory
requirements or adoption of new requirements could harm our
business. We may be required to incur significant costs to
comply with laws and regulations in the future and current or
future laws and regulations may harm our business.
We are also regulated by the FDA under the Radiation Control for
Health and Safety Act, which requires laser products to comply
with performance standards, including design and operation
requirements, and manufacturers to certify in product labeling
and in reports to the FDA that our products comply with all such
standards. The law also requires laser manufacturers to file new
product and annual reports, maintain manufacturing, testing and
sales records, and report product defects. Various warning
labels must be affixed and certain protective devices installed,
depending on the class of the product. In addition, we are
subject to California regulations governing the manufacture of
medical devices, including an annual licensing require-
8
ment. Our facilities are subject to ongoing, periodic
inspections by the FDA and California regulatory authorities.
Sales, manufacturing and further development of our TMR and PMC
systems also may be subject to additional federal regulations
pertaining to export controls and environmental and worker
protection, as well as to state and local health, safety and
other regulations that vary by locality and which may require
obtaining additional permits. We cannot predict the impact of
these regulations on our business.
Sales of medical devices outside of the U.S. are subject to
foreign regulatory requirements that vary widely by country. In
addition, the FDA must approve the export of devices to certain
countries. To market in Europe, a manufacturer must obtain the
certifications necessary to affix to its products the CE
Marking. The CE Marking is an international symbol of adherence
to quality assurance standards and compliance with applicable
European medical device directives. In order to obtain and to
maintain a CE Marking, a manufacturer must be in compliance with
appropriate ISO 9001 standards and obtain certification of its
quality assurance systems by a recognized European Union
notified body. However, certain individual countries within
Europe require further approval by their national regulatory
agencies. We have achieved International Standards Organization
and European Union certification for our manufacturing facility.
In addition, we have completed CE mark registration for all of
our products in accordance with the implementation of various
medical device directives in the European Union. Failure to
maintain the right to affix the CE Marking or other requisite
approvals could prohibit us from selling our TMR and PMC
products in member countries of the European Union or elsewhere.
Intellectual Property Matters
Our success depends, in part, on our ability to obtain patent
protection for our products, preserve our trade secrets, and
operate without infringing the proprietary rights of others. Our
policy is to seek to protect our proprietary position by, among
other methods, filing U.S. and foreign patent applications
related to our technology, inventions and improvements that are
important to the development of our business. We have and
maintain multiple U.S. and foreign patents and have multiple
U.S. and foreign patent applications pending relating to various
aspects of TMR, PMC and other cardiovascular related devices and
therapies. Our patents or patent applications may be challenged,
invalidated or circumvented in the future or the rights granted
may not provide a competitive advantage. We intend to vigorously
protect and defend our intellectual property. We do not know if
patent protection will continue to be available for surgical
methods in the future. Costly and time-consuming litigation
brought by us may be necessary to enforce our patents and to
protect our trade secrets and know-how, or to determine the
enforceability, scope and validity of the proprietary rights of
others.
We also rely upon trade secrets, technical know-how and
continuing technological innovation to develop and maintain our
competitive position. We typically require our employees,
consultants and advisors to execute confidentiality and
assignment of inventions agreements in connection with their
employment, consulting, or advisory relationships with us. If
any of these agreements are breached, we may not have adequate
remedies available there under to protect our intellectual
property or we may incur substantial expenses enforcing our
rights. Furthermore, our competitors may independently develop
substantially equivalent proprietary information and techniques
or otherwise gain access to our proprietary technology, or we
may not be able to meaningfully protect our rights in unpatented
proprietary technology.
The medical device industry in general, and the industry segment
that includes products for the treatment of cardiovascular
disease in particular, have been characterized by substantial
competition and litigation regarding patent and other
intellectual property rights. In this regard, our competitors
have been issued a number of patents related to TMR and PMC.
There can be no assurance that claims or proceedings will not be
initiated against us by competitors or other third parties in
the future. In particular, the introduction in the United States
market of our PMC technology, should that occur, may create new
exposures to claims of infringement of third party patents. Any
such claims in the future, regardless of whether they have
merit, could be time-consuming and expensive to respond to and
could divert the attention of our technical and management
personnel. We may be involved in litigation to defend against
claims of our infringement, to enforce our patents, or to
protect our trade secrets. If any relevant claims of third party
patents are upheld as
9
valid and enforceable in any litigation or administrative
proceeding, we could be prevented from practicing the subject
matter claimed in such patents, or we could be required to
obtain licenses from the patent owners of each such patent or to
redesign our products or processes to avoid infringement.
We cannot assure that our current and potential competitors and
other third parties have not filed or in the future will not
file patent applications for, or have not received or in the
future will not receive, patents or obtain additional
proprietary rights that will prevent, limit or interfere with
our ability to make, use or sell our products either in the
U.S. or internationally. In the event we were to require
licenses to patents issued to third parties, such licenses may
not be available or, if available, may not be available on terms
acceptable to us. In addition, we cannot assure you that we
would be successful in any attempt to redesign our products or
processes to avoid infringement or that any such redesign could
be accomplished in a cost-effective manner. Accordingly, an
adverse determination in a judicial or administrative proceeding
or failure to obtain necessary licenses could prevent us from
manufacturing and selling our products, which would harm our
business.
Third Party Reimbursement
We expect that sales volumes and prices of our products will
continue to depend significantly on the availability of
reimbursement for surgical procedures using our products from
third party payors such as governmental programs, private
insurance and private health plans. Reimbursement is a
significant factor considered by hospitals in determining
whether to acquire new equipment. Reimbursement rates from third
party payors vary depending on the third party payor, the
procedure performed and other factors. Moreover, third party
payors, including government programs, private insurance and
private health plans, have in recent years been instituting
increasing cost containment measures designed to limit payments
made to healthcare providers by, among other measures, reducing
reimbursement rates, limiting services covered, negotiating
prospective or discounted contract pricing and carefully
reviewing and increasingly challenging the prices charged for
medical products and services.
Medicare reimburses hospitals on a prospectively determined
fixed amount for the costs associated with an in-patient
hospitalization based on the patients discharge diagnosis,
and reimburses physicians on a prospectively determined fixed
amount based on the procedure performed, regardless of the
actual costs incurred by the hospital or physician in furnishing
the care and unrelated to the specific devices used in that
procedure. Medicare and other third party payors are
increasingly scrutinizing whether to cover new products and the
level of reimbursement for covered products. In addition,
Medicare traditionally has considered items or services
involving devices that have not been approved or cleared for
marketing by the FDA to be precluded from Medicare coverage. In
July 1999, Centers for Medicare and Medicaid Services began
coverage of FDA approved TMR systems for any manufacturers
TMR procedures. In October of 1999, CMS further clarified its
coverage policy to include coverage of TMR when performed as an
adjunctive to CABG.
In contrast to Medicare which covers a significant portion of
the patients who are candidates for TMR, private insurers and
health plans each make any individual decision whether or not to
provide reimbursement for TMR and, if so, at what reimbursement
level. We have limited experience to date ascertaining the
acceptability of our TMR procedures for reimbursement by private
insurance and private health plans. Private insurance and
private health plans may not approve reimbursement for TMR or
PMC. The lack of private insurance and health plans
reimbursement may harm our business. Based on physician
feedback, we believe many private insurers are reimbursing
hospitals and physicians when the procedure is performed on
non-Medicare patients. In May 2001, Blue Cross/ Blue
Shields Technology Evaluation Center (TEC)
assessed our therapy and confirmed that both TMR and TMR used as
an adjunct to bypass surgery, improves net health
outcomes. While TEC decisions are not binding, many Blue
Cross/ Blue Shield plans and other third-party payers use the
center as a benchmark and adopt into policy those therapies that
meet the TEC assessment.
In foreign markets, reimbursement is obtained from a variety of
sources, including governmental authorities, private health
insurance plans and labor unions. In most foreign countries,
there are also private insurance systems that may offer payments
for alternative therapies. Although not as prevalent as in the
U.S., health maintenance organizations are emerging in certain
European countries. We may need to seek
10
international reimbursement approvals, and we may not be able to
attain these approvals in a timely manner, if at all. Failure to
receive foreign reimbursement approvals could make market
acceptance of our products in the foreign markets in which such
approvals are sought more difficult.
We believe that reimbursement in the future will be subject to
increased restrictions such as those described above, both in
the U.S. and in foreign markets. We also believe that the
escalating cost of medical products and services has led to and
will continue to lead to increased pressures on the healthcare
industry, both foreign and domestic, to reduce the cost of
products and services, including products offered by us. Third
party reimbursement and coverage may not be available or
adequate in U.S. or foreign markets, current levels of
reimbursement may be decreased in the future and future
legislation, regulation, or reimbursement policies of third
party payors may reduce the demand for our products or our
ability to sell our products on a profitable basis. Fundamental
reforms in the healthcare industry in the U.S. and Europe that
could affect the availability of third party reimbursement
continue to be proposed, and we cannot predict the timing or
effect of any such proposal. If third party payor coverage or
reimbursement is unavailable or inadequate, our business may
suffer.
Product Liability and Insurance
We maintain insurance against product liability claims in the
amount of $10 million per occurrence and $10 million
in the aggregate. We may not be able to obtain additional
coverage or continue coverage in the amount desired or on terms
acceptable to us, and such coverage may not be adequate for
liabilities actually incurred. Any uninsured or underinsured
claim brought against us or any claim or product recall that
results in a significant cost to or adverse publicity against us
could harm our business.
Employees
As of December 31, 2004 we had 38 employees, of which 20
employees were in sales and marketing. None of our employees are
covered by a collective bargaining agreement and we have not
experienced any work stoppages to date.
Our executive officers as of March 1, 2005 were as follows:
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Name |
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Age | |
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Position |
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Michael J. Quinn
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61 |
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President, Chief Executive Officer, and Chairman of the Board
and Director |
Christine G. Ocampo
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32 |
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Vice President, Chief Financial Officer, Chief Accounting
Officer, Treasurer and Secretary |
Joseph R. Kletzel, II
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55 |
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Senior Vice President, General Manager of Pacific Division |
Richard P. Lanigan
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46 |
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Senior Vice President of Marketing |
Henry R. Rossell, Jr.
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49 |
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Senior Vice President, General Manager of Atlantic Business Unit |
Gerard A. Arthur
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46 |
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Vice President, General Manager of Worldwide Services Division |
Janet M. Fauls
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42 |
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Vice President, Regulatory, Quality and Clinical Affairs Division |
Lee S. Langford
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31 |
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Vice President, General Manager of Central Division |
Michael J. Quinn has served as our Chief Executive
Officer, Chairman of the Board and Director since October 2000
and also President from October 2000 to May 2002 and from
November 2003 to the present. From November 1999 to September
2000, Mr. Quinn served as Chief Executive Officer,
President and a member of the Board of Directors for Premier
Laser Systems, a manufacturer of surgical and dental products.
From January 1998 to November 1999, Mr. Quinn served as
President and Chief Operating Officer of Imagyn Medical
Technologies, Inc., a manufacturer of minimally invasive
surgical specialty products. From 1995 through December 1997,
Mr. Quinn served as President and Chief Operating Officer
of Fisher Scientific
11
Company. Prior to 1995, Mr. Quinn held senior operating
management positions at major healthcare organizations including
American Hospital Supply Corporation, Picker International,
Cardinal Health Group and Bergen Brunswig.
Christine G. Ocampo has served as our Vice President,
Chief Financial Officer, Chief Accounting Officer, Treasurer and
Secretary since November 2003. From 2001 to November 2003,
Ms. Ocampo served in the role of Vice President and
Corporate Controller. She first joined the Company in April 1997
and spent four years as our Accounting Manager. Prior to joining
us, Ms. Ocampo held a management position in Finance at
Mills-Peninsula Health Systems in Burlingame, CA, and spent
three years as an Audit Senior for Ernst & Young LLP.
She graduated with a Bachelors of Science in Accounting from
Seattle University and became a licensed Certified Public
Accountant in 1996.
Joseph R. Kletzel, II has served as the Senior Vice
President, General Manager of Pacific Division, which includes
all of the United States west of the Mississippi, since July
2004. Mr. Kletzel is a veteran executive with more than
25 years of operations and strategic management experience
with leading biotech and medical device companies.
Mr. Kletzel has been a member of the Cardiogenesis Board of
Directors for nearly three years and will continue to serve on
the Board. From 2000 to 2004 Mr. Kletzel served as Chief
Operating Officer of La Jolla, CA-based Advanced Tissue
Sciences, one of the nations leaders in human tissue
engineering. From 1996 to 1998, Mr. Kletzel was President
of Pittsburgh-based Fisher Scientific International, an
international manufacturer and distributor of laboratory
supplies and equipment, and, from 1992 to 1996, was President
and Chief Operating Officer of Chatsworth, CA-based Devon
Industries, a privately-held international manufacturer of
surgical products. Mr. Kletzel has a bachelors degree
in biology from Villanova University and is a former Captain in
the U.S. Marine Corps.
Richard P. Lanigan has been our Senior Vice President of
Marketing since November 2003. Prior to November 2003,
Mr. Lanigan served in a variety of different capacities.
From March 2001 to October 2003, Mr. Lanigan was Vice
President of Government Affairs and Business Development. From
March 2000 to March 2001, Mr. Lanigan served as Vice
President of Sales and Marketing and from 1997 to 2000, he was
the Director of Marketing. From 1992 to 1997, Mr. Lanigan
served in various positions, most recently Marketing Manager, at
Stryker Endoscopy. From 1987 to 1992, Mr. Lanigan served in
Manufacturing and Operations management at Raychem Corporation.
From 1981 to 1987, he served in the U.S. Navy where he
completed six years of service as Lieutenant in the Supply
Corps. Mr. Lanigan has a Bachelors of Arts in Finance from
Notre Dame and a Masters degree in Systems Management from the
University of Southern California.
Henry R. Rossell, Jr. has been our Senior Vice
President, General Manager of the Atlantic Business Unit since
January 2004. Prior to that, Mr. Rossell served as our
Senior Vice President of Worldwide Sales and Marketing since
January 2003. From 1999 to 2002, Mr. Rossell served as
Senior Vice-President, Sales and Marketing, Surgical Products
Division at Imagyn Medical Technologies, Inc. From 1998 to 1999,
he served as Vice President of the Education Services Group at
Medascend, Inc. From 1994 to 1998, Mr. Rossell served as
Vice President of Sales at Deknatel Snowden-Pencer and at
Genzyme Surgical Products following the acquisition of Deknatel
by Genzyme. Prior to Genzyme, Mr. Rossell spent
17 years in several sales management positions at Baxter
Healthcare International where his most recently held position
was Area Vice President, Corporate Sales and Marketing.
Mr. Rossell has a Bachelors of Arts in History from Duke
University.
Gerard A. Arthur has served as Vice President, General
Manager of the Worldwide Service Division since December 2003.
From 1993 to December 2003, Mr. Arthur was Director of
Worldwide Service. Prior to Cardiogenesis, from 1991 to 1993,
Mr. Arthur served as Service Manager at Intelligent
Surgical Lasers, Inc. From 1990 to 1991, he served as Manager,
Laser Services at National Instrument Service Corporation. From
1986 to 1990, he served as Service Manager, Medical Lasers at
Carl Zeiss, Inc. Mr. Arthur has worked in the medical laser
field for over twenty years. He is a graduate of the School of
Marine Radio & Radar, Limerick, Ireland.
Janet M. Fauls has served as Vice President, Regulatory,
Quality and Clinical Affairs since November 2001. Prior to
joining Cardiogenesis, Ms. Fauls held various management
positions, most recently Director of Worldwide Regulatory
Affairs, Biologics at Allergan. In the preceding 15 years,
she held increasingly
12
responsible management positions in Regulatory Affairs at
Edwards Lifesciences, Alliance Pharmaceutical Corporation, and
Allergan. From 1984 to 1987, she served as a chemist in the
aerospace industry. Ms. Fauls holds a Bachelor of Science
degree in Chemistry from the University of California,
Santa Barbara.
Lee S. Langford joined Cardiogenesis in January 2005 as
Vice President, General Manager of the Central Division. Prior
to that, from 2002 to 2004 Mr. Langford worked for Given
Imaging, first as a Capital Sales Representative, then as a
Regional Manager. From 2000 to 2002 Mr. Langford excelled
as a sales representative with Imagyn Medical Technologies in
their surgical and oncology divisions. Mr. Langford is a
graduate of the U.S. Military Academy (West Point) and
served as a commissioned officer in the U.S. Army (Ranger
Infantry Officer), attaining the rank of Captain.
Risk Factors
In addition to the other information included in this
Form 10-K, the following risk factors should be considered
carefully in evaluating us and our business.
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Our ability to maintain current operations is dependent
upon sustaining profitable operations or obtaining financing in
the future. |
We have incurred significant losses since inception. For
example, for the fiscal years 2004, 2003 and 2002 we incurred
net losses of $1,319,000, $348,000 and $530,000 respectively. We
will have a continuing need for new infusions of cash if we
continue to incur losses in the future. We plan to increase our
revenues through increased direct sales and marketing efforts on
existing products and achieving regulatory approval for other
products. If our direct sales and marketing efforts are
unsuccessful or we are unable to achieve regulatory approval for
our products, we will be unable to significantly increase our
revenues. We believe that if we are unable to generate
sufficient funds from sales or from debt or equity issuances to
maintain our current expenditure rate, it will be necessary to
significantly reduce our operations, including our sales and
marketing efforts and research and development. If we are
required to significantly reduce our operations, our business
will be harmed.
We have recently obtained $6.0 million of convertible debt
financing which we believe will be sufficient to satisfy our
capital needs for at least the next 12 months. However,
changes in our business, financial performance or the market for
our products may require us to seek additional sources of
financing, which could include short-term debt, long-term debt
or equity. Although in the past we have been successful in
obtaining financing, there is a risk that we may be unsuccessful
in obtaining financing in the future on terms acceptable to us
and that we will not have sufficient cash to fund our continued
operations.
Our revenues and operating income may be constrained:
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if commercial adoption of our TMR laser systems by healthcare
providers in the United States declines; |
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until such time, if ever, as we obtain FDA and other regulatory
approvals for our PMC laser systems; and |
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for an uncertain period of time after such approvals are
obtained. |
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We may not be able to successfully market our products if
third party reimbursement for the procedures performed with our
products is not available for our health care provider
customers. |
Few individuals are able to pay directly for the costs
associated with the use of our products. In the United States,
hospitals, physicians and other healthcare providers that
purchase medical devices generally rely on third party payors,
such as Medicare, to reimburse all or part of the cost of the
procedure in which the medical device is being used. Effective
July 1, 1999, the Centers for Medicare and Medicaid
Services (CMS), formerly the Health Care Financing
Administration, commenced Medicare coverage for TMR systems for
any manufacturers TMR procedures. Hospitals and physicians
are eligible to receive Medicare
13
reimbursement covering 100% of the costs for TMR procedures. If
CMS were to materially reduce or terminate Medicare coverage of
TMR procedures, our business and results of operation would be
harmed.
In July 2004, CMS convened the Medicare Advisory Committee
(MCAC) to review the clinical evidence regarding
laser myocardial revascularization as a treatment option for
Medicare patients. The MCAC meeting was a non-binding public
hearing to consider the body of scientific evidence concerning
the safety and efficacy of laser myocardial revascularization
and to provide advice and recommendations to the CMS on clinical
issues. The MCAC reviewed more than six years of clinical
evidence on laser myocardial revascularization and heard
testimony from a group of leading physicians regarding TMR. CMS
does not have a pending National Coverage Determination relating
to laser myocardial revascularization. In September 2004, we
confirmed that CMS does not intend to commence any action on TMR
coverage at this time.
As PMC has not been approved by the FDA, the CMS has not
approved reimbursement for PMC. If we obtain FDA approval for
PMC in the future and CMS does not provide reimbursement, our
ability to successfully market and sell our PMC products may be
affected.
Even though Medicare beneficiaries appear to account for a
majority of all patients treated with the TMR procedure, the
remaining patients are beneficiaries of private insurance and
private health plans. We have limited experience to date with
the acceptability of our TMR procedures for reimbursement by
private insurance and private health plans. If private insurance
and private health plans do not provide reimbursement, our
business will suffer.
If we obtain the necessary foreign regulatory registrations or
approvals for our products, market acceptance in international
markets would be dependent, in part, upon the availability of
reimbursement within prevailing healthcare payment systems.
Reimbursement is a significant factor considered by hospitals in
determining whether to acquire new equipment. A hospital is more
inclined to purchase new equipment if third-party reimbursement
can be obtained. Reimbursement and health care payment systems
in international markets vary significantly by country. They
include both government sponsored health care and private
insurance. Although we expect to seek international
reimbursement approvals, any such approvals may not be obtained
in a timely manner, if at all. Failure to receive international
reimbursement approvals could hurt market acceptance of our TMR
and PMC products in the international markets in which such
approvals are sought, which would significantly reduce
international revenue.
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We may fail to obtain required regulatory approvals in the
United States to market our PMC laser system. |
The FDA has not approved our PMC laser system for any
application in the United States. In July 2001, the FDA Advisory
Panel recommended against approval of PMC for public sale and
use in the United States. In February 2003, the FDA granted an
independent panel review of our pending PMA application for PMC
by the Medical Devices Dispute Resolution Panel
(MDDRP). In July 2003, the FDA agreed to an
alternative process in which additional data in support of our
PMA supplement for PMC could be submitted and reviewed by the
FDA in an interactive review process. The data was submitted in
August 2003 and the panel review by the MDDRP was cancelled. The
FDA agreed to reschedule the MDDRP hearing in the future if the
dispute cannot be resolved.
In March 2004, the FDA informed us that the data submitted in
August 2003 was not adequate to support approval by the FDA of
our PMC system. In August 2004, we met with the FDA and agreed
on the steps needed to design and initiate a new clinical trial
to confirm the safety and efficacy of PMC. In January 2005, we
again met with the agency and agreed on major trial parameters.
We are working closely with the FDA in finalizing the clinical
trial protocol to be formally agreed upon. Once the agreement is
achieved and the related costs are clearly understood, we expect
to move forward, either on our own or with a corporate partner
in the interventional cardiology arena. There can be no
assurance, however, that we will receive a favorable
determination from the FDA.
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In August 2004, we decided to rename the PMC platform to
Percutaneous Myocardial Channeling (PMC). The new
name more literally depicts the immediate physiologic tissue
effect of the percutaneous procedure.
We will not be able to derive any revenue from the sale of our
PMC system in the United States until such time, if any, that
the FDA approves the device. Such inability to realize revenue
from sales of our PMC device in the United States may have an
adverse effect on our results of operations.
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We may incur impairment charges on long-lived assets if
future events indicate asset values my not be
recoverable. |
In January 1999, we entered into an agreement with PLC Systems,
Inc., which granted us non-exclusive worldwide use of certain
PLC patents. In return, we paid PLC a license fee totaling
$2,500,000 over a forty-month period. The present value of the
payments of $2,300,000 was recorded as an asset and is included
in other assets. The PLC patents are valuable to our PMC product
line. The PMC product line is not approved for sale in the
United States but is sold internationally. If PMC product sales
decline in the future, we may suffer an impairment of the
assets value on our balance sheet.
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We may fail to obtain required regulatory approvals in the
United States to market our new minimally invasive and
robotically assisted handpieces. |
The Pearl 5.0 mm and 8.0 mm minimally invasive handpieces have
been included in applications to the FDA and to international
health authorities, and we are currently working with these
respective agencies toward approvals. We will not be able to
derive any revenue from the sale of our new minimally invasive
and robotically assisted handpieces in the United States until
such time, if any, that the FDA approves these devices. Such
inability to realize revenue from sales of these devices in the
United States may have an adverse effect on our results of
operations.
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In the future, the FDA could restrict the current uses of
our TMR product and thereby restrict our ability to generate
revenues. |
We currently derive approximately 99% of our revenues from our
TMR product. The FDA has approved this product for sale and use
by physicians in the United States. At the request of the FDA,
we are currently conducting post-market surveillance of our TMR
product. If we should fail to meet the requirements mandated by
the FDA or fail to complete our post-market surveillance study
in an acceptable time period, the FDA could withdraw its
approval for the sale and use of our TMR product by physicians
in the United States. Additionally, although we are not aware of
any safety concerns during our on-going post-market surveillance
of our TMR product, if concerns over the safety of our TMR
product were to arise, the FDA could possibly restrict the
currently approved uses of our TMR product. In the future, if
the FDA were to withdraw its approval or restrict the range of
uses for which our TMR product can be used by physicians in the
United States, such as restricting TMRs use with the
coronary artery bypass grafting procedure, either outcome could
lead to reduced or no sales of our TMR product in the United
States and our business could be materially and adversely
affected.
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We must comply with FDA manufacturing standards or face
fines or other penalties including suspension of
production. |
We are required to demonstrate compliance with the FDAs
current good manufacturing practices regulations if we market
devices in the United States or manufacture finished devices in
the United States. The FDA inspects manufacturing facilities on
a regular basis to determine compliance. If we fail to comply
with applicable FDA or other regulatory requirements, we can be
subject to:
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fines, injunctions, and civil penalties; |
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recalls or seizures of products; |
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total or partial suspensions of production; and |
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criminal prosecutions. |
The impact on us of any such failure to comply would depend on
the impact of the remedy imposed on us.
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We may fail to comply with international regulatory
requirements and could be subject to regulatory delays, fines or
other penalties. |
Regulatory requirements in foreign countries for international
sales of medical devices often vary from country to country. In
addition, the FDA must approve the export of devices to certain
countries. The occurrence and related impact of the following
factors would harm our business:
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delays in receipt of, or failure to receive, foreign regulatory
approvals or clearances; |
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the loss of previously obtained approvals or clearances; or |
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the failure to comply with existing or future regulatory
requirements. |
To market in Europe, a manufacturer must obtain the
certifications necessary to affix to its products the CE
Marking. The CE Marking is an international symbol of adherence
to quality assurance standards and compliance with applicable
European medical device directives. In order to obtain and to
maintain a CE Marking, a manufacturer must be in compliance with
the appropriate quality assurance provisions of the
International Standards Organization and obtain certification of
its quality assurance systems by a recognized European Union
notified body. However, certain individual countries within
Europe require further approval by their national regulatory
agencies.
We have completed CE Mark registration for all of our products
in accordance with the implementation of various medical device
directives in the European Union. Failure to maintain the right
to affix the CE Marking or other requisite approvals could
prohibit us from selling our products in member countries of the
European Union or elsewhere. Any enforcement action by
international regulatory authorities with respect to past or
future regulatory noncompliance could cause our business to
suffer. Noncompliance with international regulatory requirements
could result in enforcement action such as prohibitions against
us marketing our products in the European Union, which would
significantly reduce international revenue.
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We may not be able to meet future product demand on a
timely basis and may be subject to delays and interruptions to
product shipments because we depend on single source third party
suppliers and manufacturers. |
We purchase certain critical products and components for lasers
and disposable handpieces from single sources. In addition, we
are vulnerable to delays and interruptions, for reasons out of
our control, because we outsource the manufacturing of our
products to third parties. We may experience harm to our
business if we cannot timely provide lasers to our customers or
if our outsourcing suppliers have difficulties supplying our
needs for products and components.
In addition, we do not have long-term supply contracts. As a
result, our sources are not obligated to continue to provide
these critical products or components to us. Although we have
identified alternative suppliers and manufacturers, a lengthy
process would be required to qualify them as additional or
replacement suppliers or manufacturers. Also, it is possible
some of our suppliers or manufacturers could have difficulty
meeting our needs if demand for our TMR and PMC laser systems
were to increase rapidly or significantly. We believe that we
have an adequate supply of lasers to meet our expected demand
for the next twelve months. However, if demand for our TMR laser
is greater than we currently anticipate and there is a delay in
obtaining production capacity, unless we are able to obtain
lasers originally placed through our loaned laser program and no
longer utilized by a hospital, we may not be able to meet the
demand for our TMR laser. In addition, any defect or malfunction
in the laser or other products provided by our suppliers and
manufacturers could cause delays in regulatory approvals or
adversely affect product acceptance. Further, we cannot predict:
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if materials and products obtained from outside suppliers and
manufacturers will always be available in adequate quantities to
meet our future needs; or |
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whether replacement suppliers and/or manufacturers can be
qualified on a timely basis if our current suppliers and/or
manufacturers are unable to meet our needs for any reason. |
Expansion of our business
may put added pressure on our management and operational
infrastructure affecting our ability to meet any increased
demand for our products and possibly having an adverse effect on
our operating results.
In 2001 we began a restructuring of our business to bring our
cost structure more in line with our revenues. As part of this
restructuring we significantly reduced our workforce. Growth in
our business may place a significant strain on our limited
personnel, management, financial systems and other resources.
The evolving growth of our business presents numerous risks and
challenges, including:
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the dependence on the growth of the market for our TMR and PMC
systems; |
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our ability to successfully and rapidly expand sales to
potential customers in response to potentially increasing
clinical adoption of the TMR procedure; |
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the costs associated with such growth, which are difficult to
quantify, but could be significant; |
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domestic and international regulatory developments; |
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rapid technological change; |
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the highly competitive nature of the medical devices
industry; and |
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the risk of entering emerging markets in which we have limited
or no direct experience. |
To accommodate any such growth and compete effectively, we may
need to obtain additional funding to improve information
systems, procedures and controls and expand, train, motivate and
manage our employees, and such funding may not be available in
sufficient quantities, if at all. If we are not able to manage
these activities and implement these strategies successfully to
expand to meet any increased demand, our operating results could
suffer.
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Our operating results are expected to fluctuate and
quarter-to-quarter comparisons of our results may not indicate
future performance. |
Our operating results have fluctuated significantly from
quarter-to-quarter and are expected to continue to fluctuate
significantly from quarter-to-quarter in future periods. We
believe that quarter-to-quarter comparisons of our operating
results are not a good indication of our future performance. Due
to the emerging nature of the markets in which we compete,
forecasting operating results is difficult and unreliable. It is
likely or possible that our operating results for a future
quarter will fall below the expectations of public market
analysts that may cover our stock and investors. When this
occurred in the past, the price of our common stock fell
substantially, and if this occurs in the future, the price of
our common stock may fall again, perhaps substantially.
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Our common stock is listed on the OTC Bulletin Board
which may have an unfavorable impact on our stock price and
liquidity. |
Effective April 3, 2003 our common stock was delisted from
The Nasdaq SmallCap Market and became quoted on the OTC
Bulletin Board on the same day. The OTC Bulletin Board
is a significantly more limited market in comparison to the
Nasdaq system. The listing of our shares on the OTC
Bulletin Board may result in a less liquid market available
for existing and potential stockholders to trade shares of our
common stock, could ultimately further depress the trading price
of our common stock and could have a long-term adverse impact on
our ability to raise capital in the future.
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The trading prices of many high technology companies, and
in particular medical device companies, have been volatile which
may result in large fluctuations in the price of our common
stock. |
The stock market has experienced significant price and volume
fluctuations that have particularly affected the trading prices
of equity securities of many high technology companies. These
fluctuations have often been unrelated or disproportionate to
the operating performance of many of these companies. Any
negative change in the publics perception of medical
device companies could depress our stock price regardless of our
operating results.
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The price of our common stock may fluctuate significantly,
which may result in losses for investors. |
The market price of our common stock has been and may continue
to be volatile. For example, during the 52-week period ended
March 11, 2005, the closing prices of our common stock as
reported on the OTC Bulletin Board ranged from a high of
$1.16 per share to a low of $0.35 per share. We expect
our stock price to be subject to fluctuations as a result of a
variety of factors, including factors beyond our control. These
factors include:
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actual or anticipated variations in our quarterly operating
results; |
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the timing and amount of conversions and subsequent sales of
common stock issuable upon conversion of outstanding convertible
promissory notes and warrants; |
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announcements of technological innovations or new products or
services by us or our competitors; |
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announcements relating to strategic relationships or
acquisitions; |
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additions or terminations of coverage of our common stock by
securities analysts; |
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statements by securities analysts regarding us or our industry; |
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conditions or trends in the medical device industry; and |
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changes in the economic performance and/or market valuations of
other medical device companies. |
The prices at which our common stock trades will affect our
ability to raise capital, which may have an adverse affect on
our ability to fund our operations.
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We face competition from products of our competitors which
could limit market acceptance of our products and render our
products obsolete. |
The market for TMR laser systems is competitive. We currently
compete with PLC Systems, a publicly traded company which uses a
CO2 laser and an articulated mechanical arm in its
TMR products. Edwards Lifesciences, a well known, publicly
traded provider of products and technologies to treat
cardiovascular disease, has assumed full sales and marketing
responsibility in the U.S. for PLCs TMR Heart Laser 2
System and associated kits pursuant to a co-marketing agreement
between the two companies executed in January 2001. Through its
significantly greater financial and human resources, including a
well-established and extensive sales representative network, we
believe Edwards has the potential to market to a greater number
of hospitals and doctors that we currently can. If PLC, or any
new competitor, is more effective than we are in developing new
products and procedures and marketing existing and future
products similar to ours, our business will suffer.
The market for TMR laser systems is characterized by rapid
technical innovation. Our current or future competitors may
succeed in developing TMR products or procedures that:
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are more effective than our products; |
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are more effectively marketed than our products; or |
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may render our products or technology obsolete. |
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If we obtain the FDAs approval for our PMC laser system,
we will face competition for market acceptance and market share
for that product. Our ability to compete may depend in
significant part on the timing of introduction of competitive
products into the market, and will be affected by the pace,
relative to competitors, at which we are able to:
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develop products; |
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complete clinical testing and regulatory approval processes; |
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obtain third party reimbursement acceptance; and |
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supply adequate quantities of the product to the market. |
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Third party intellectual property rights may limit the
development and protection of our intellectual property, which
could adversely affect our competitive position. |
Our success is dependent in large part on our ability to:
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obtain patent protection for our products and processes; |
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preserve our trade secrets and proprietary technology; and |
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operate without infringing upon the patents or proprietary
rights of third parties. |
The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property
rights. Companies in the medical device industry have employed
intellectual property litigation to gain a competitive
advantage. Certain competitors and potential competitors of ours
have obtained United States patents covering technology that
could be used for certain TMR and PMC procedures. We do not know
if such competitors, potential competitors or others have filed
and hold international patents covering other TMR or PMC
technology. In addition, international patents may not be
interpreted the same as any counterpart United States patents.
While we periodically review the scope of our patents and other
relevant patents of which we are aware, the question of patent
infringement involves complex legal and factual issues. Any
conclusion regarding infringement may not be consistent with the
resolution of any such issues by a court.
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Costly litigation may be necessary to protect intellectual
property rights. |
We may have to engage in time consuming and costly litigation to
protect our intellectual property rights or to determine the
proprietary rights of others. In addition, we may 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.
Defending and prosecuting intellectual property suits, United
States Patent and Trademark Office interference proceedings and
related legal and administrative proceedings are both costly and
time-consuming. We may be required to litigate further to:
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enforce our issued patents; |
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protect our trade secrets or know-how; or |
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determine the enforceability, scope and validity of the
proprietary rights of others. |
Any litigation or interference proceedings will result in
substantial expense and significant diversion of effort by
technical and management personnel. If the results of such
litigation or interference proceedings are adverse to us, then
the results may:
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subject us to significant liabilities to third parties; |
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require us to seek licenses from third parties; |
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prevent us from selling our products in certain markets or at
all; or |
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require us to modify our products. |
Although patent and intellectual property disputes regarding
medical devices are often settled through licensing and similar
arrangements, costs associated with such arrangements may be
substantial and could include ongoing royalties. Furthermore, we
may not be able to obtain the necessary licenses on satisfactory
terms, if at all.
Adverse determinations in a judicial or administrative
proceeding or failure to obtain necessary licenses could prevent
us from manufacturing and selling our products. This would harm
our business.
The United States patent laws have been amended to exempt
physicians, other health care professionals, and affiliated
entities from infringement liability for medical and surgical
procedures performed on patients. We are not able to predict if
this exemption will materially affect our ability to protect our
proprietary methods and procedures.
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We rely on patent and trade secret laws, which are complex
and may be difficult to enforce. |
The validity and breadth of claims in medical technology patents
involve complex legal and factual questions and, therefore, may
be highly uncertain. Issued patent or patents based on pending
patent applications or any future patent application may not
exclude competitors or may not provide a competitive advantage
to us. In addition, patents issued or licensed to us may not be
held valid if subsequently challenged and others may claim
rights in or ownership of such patents.
Furthermore, we cannot assure you that our competitors:
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have not developed or will not develop similar products; |
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will not duplicate our products; or |
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will not design around any patents issued to or licensed by us. |
Because patent applications in the United States were
historically maintained in secrecy until the patents are issued,
we cannot be certain that:
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others did not first file applications for inventions covered by
our pending patent applications; or |
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we will not infringe any patents that may issue to others on
such applications |
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We may suffer losses from product liability claims if our
products cause harm to patients. |
We are exposed to potential product liability claims and product
recalls. These risks are inherent in the design, development,
manufacture and marketing of medical devices. We could be
subject to product liability claims if the use of our TMR or PMC
laser systems is alleged to have caused adverse effects on a
patient or such products are believed to be defective. Our
products are designed to be used in life-threatening situations
where there is a high risk of serious injury or death. We are
not aware of any material side effects or adverse events arising
from the use of our TMR product. Though we are in the process of
responding to the FDAs Circulatory Devices Panels
recent recommendation against approval of our PMC product
because of concerns over the safety of the device and the data
regarding adverse events in the clinical trials, we believe
there are no material side effects or adverse events arising
from the use of our PMC product. When being clinically
investigated, it is not uncommon for new surgical or
interventional procedures to result in a higher rate of
complications in the treated population of patients as opposed
to those reported in the control group. In light of this, we
believe that the difference in the rates of complications
between the treated groups and the control groups in the
clinical trials for our PMC product are not statistically
significant, which is why we believe that there are no material
side effects or material adverse events arising from the use of
our PMC product.
Any regulatory clearance for commercial sale of these products
will not remove these risks. Any failure to comply with the
FDAs good manufacturing practices or other regulations
could hurt our ability to defend against product liability
lawsuits.
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Our insurance may be insufficient to cover product
liability claims against us. |
Our product liability insurance may not be adequate for any
future product liability problems or continue to be available on
commercially reasonable terms, or at all.
If we were held liable for a product liability claim or series
of claims in excess of our insurance coverage, such liability
could harm our business and financial condition. We maintain
insurance against product liability claims in the amount of
$10 million per occurrence and $10 million in the
aggregate.
We may require increased product liability coverage as sales of
approved products increase and as additional products are
commercialized. Product liability insurance is expensive and in
the future may not be available on acceptable terms, if at all.
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We depend heavily on key personnel and turnover of key
employees and senior management could harm our business. |
Our future business and results of operations depend in
significant part upon the continued contributions of our key
technical and senior management personnel. They also depend in
significant part upon our ability to attract and retain
additional qualified management, technical, marketing and sales
and support personnel for our operations. If we lose a key
employee or if a key employee fails to perform in his or her
current position, or if we are not able to attract and retain
skilled employees as needed, our business could suffer.
Significant turnover in our senior management could
significantly deplete our institutional knowledge held by our
existing senior management team. For example, in November 2003,
our employment relationship with Darrell Eckstein, our former
President, Chief Operating Officer, Acting Chief Financial
Officer, Chief Accounting Officer, Treasurer and Secretary was
terminated. We depend on the skills and abilities of these key
employees in managing the manufacturing, technical, marketing
and sales aspects of our business, any part of which could be
harmed by further turnover.
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We sell our products internationally which subjects us to
specific risks of transacting business in foreign
countries. |
In future quarters, international sales may become a significant
portion of our revenue if our products become more widely used
outside of the United States. Our international revenue is
subject to the following risks, the occurrence of any of which
could harm our business:
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foreign currency fluctuations; |
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economic or political instability; |
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foreign tax laws; |
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shipping delays; |
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various tariffs and trade regulations; |
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restrictions and foreign medical regulations; |
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customs duties, export quotas or other trade
restrictions; and |
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difficulty in protecting intellectual property rights. |
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If an Event of Default Occurs Under the Convertible
Note Issued to Laurus, It Could Seriously Harm Our
Operations. |
On October 26, 2004, we issued a $6,000,000 secured
convertible term note to Laurus. The note and related agreements
contain numerous events of default which include:
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A failure to pay interest and principal payments when due; |
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a breach by us of any material covenant or term or condition of
the note or any agreement made in connection therewith; |
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a breach by us of any material representation or warranty made
in the note or in any agreement made in connection therewith; |
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if we make an assignment for the benefit of our creditors, or a
receiver or trustee is appointed for us; |
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any form of bankruptcy or insolvency proceeding is instituted by
or against us and is not dismissed within 60 days; |
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any money judgment entered or filed against us for more than
$50,000 and remains unresolved for 30 days; |
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our failure to timely deliver shares of common stock when due
upon conversions of the note; |
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our common stock is suspended for 5 consecutive days or
5 days during any 10 consecutive days from a principal
market; |
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we experience an event of default under any other debt
obligations; and |
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we experience a loss, damage or encumbrance upon collateral
securing the Laurus debt which is valued at more than $100,000
and is not timely mitigated. |
If we default on the note and the holder demands all payments
due and payable, the cash required to pay such amounts would
most likely come out of working capital and non current assets,
which may not be sufficient to repay the amounts due. In
addition, since we rely on our working capital for our day to
day operations, such a default on the note could materially
adversely effect our business, operating results or financial
condition to such extent that we are forced to restructure, file
for bankruptcy, sell assets or cease operations. Further, our
obligations under the note are secured by all of our assets.
Failure to fulfill our obligations under the note and related
agreements could lead to loss of these assets, which would be
detrimental to our operations.
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We may incur significant non-operating, non-cash charges
resulting from changes in the fair value of warrants and
derivatives. |
In October 2004, we entered into a Secured Convertible Term Note
agreement with Laurus Funds. Pursuant to the Note agreement, a
warrant totaling 2.6 million was issued to Laurus. This
warrant, along with multiple embedded derivatives in the
agreement, have been recorded at their relative fair value at
the inception date of the agreement, October 27, 2004, and
will be recorded at fair value at each subsequent balance sheet
date. Any change in value between reporting periods will be
recorded as a non-operating, non-cash charge at each reporting
date. The impact of these non-operating, non-cash charges could
have an adverse effect on our stock price in the future.
The fair value of the warrant and derivatives is tied in large
part to our stock price. If our stock price increases between
reporting periods, the warrant and derivatives become more
valuable. As such, there is no way to forecast what the
non-operating, non-cash charges will be in the future or what
the future impact will be on our financial statements.
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The restrictions on our activities contained in the Laurus
financing documents could negatively impact our ability to
obtain financing from other sources. |
The Laurus financing documents restrict us from obtaining
additional debt financing, subject to certain specified
exceptions. To the extent that Laurus declined to approve a debt
financing that does not otherwise qualify for an exception to
the consent requirement, we would be unable to obtain such debt
financing. In addition, subject to certain exceptions, we have
granted to Laurus a right of first refusal to provide additional
financing to us in the event that we propose to engage in
additional debt financing or to sell any of our equity
securities. Lauruss right of first refusal could act as a
deterrent to third parties which may be interested in providing
us with debt financing or purchasing our equity securities. To
the extent that such a financing is required for us to conduct
our operations, these restrictions could materially adversely
impact our ability to achieve our operational objectives.
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Low market prices for our common stock would result in
greater dilution to our shareholders, and could negatively
impact our ability to convert the Laurus debt into equity |
The market price of our common stock significantly impacts the
extent to which we are permitted to convert the unrestricted and
restricted portions of the Laurus debt into shares of our common
stock. The lower the market price of our common stock as of the
respective times of conversion, the more shares we will need to
issue to Laurus to convert the principal and interest payments
then due on the unrestricted portion of the debt. If the market
price of our common stock falls below certain thresholds, we
will be unable to convert any such repayments of principal and
interest into equity, and we will be forced to make such
repayments in cash, which we currently forecast will be required
to sustain our operations. Our operations could be materially
adversely impacted if we are forced to make repeated cash
payments on the unrestricted portion of the Laurus debt.
Further, prior to the full repayment of the unrestricted portion
of the Laurus debt, we will only be able to require conversions
of the $3,000,000 restricted cash amount to the extent the
market price of our common stock exceeds certain levels. To the
extent that the market price of our common stock does not reach
such specified levels, we will be not be entitled to take
possession of any of the restricted cash during the term of the
Laurus note. Our inability to access such cash could limit our
ability to achieve our operational objectives. The restricted
portion of the debt will continue to accrue interest during the
entire period that we are unable to require conversion. In
addition, to the extent that conversions of the restricted
portion of the debt are not effected during the term of the
note, we have only a limited ability to convert a specified
amount of the restricted debt (subject to meeting certain
minimum market price thresholds and volume requirements), and we
will be required to repay the remaining restricted principal and
interest in cash. The cash required to pay such amounts would
most likely come out of working capital and restricted cash,
which may not be sufficient to repay the amounts due.
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Future sales of our common stock could lower our stock
price. |
The sale of our common stock by the holders of the Laurus debt
upon conversion of all or any portion of the Laurus debt could
cause the market price of our common stock to decline. In
addition, if our shareholders sell substantial amounts of our
common stock, including shares issuable upon exercise of options
or warrants or shares issued in previous financings, in the
public market, the market price of our common stock could
decline. If these sales were to occur, we may also find it more
difficult to sell equity or equity-related securities in the
future at a time and price that we deem appropriate and
desirable.
In the future, we may issue additional shares in public or
private offerings. We cannot predict the size of future
issuances of our common stock or the effect, if any, that future
issuances and sales of our common stock would have on the market
price of our common stock. We expect that Laurus will generally
promptly sell any shares into which the Laurus indebtedness is
converted, and that the market price of our common stock could
decline as a result of such sales.
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Provisions of our certificate of incorporation as well as
our rights agreement could discourage potential acquisition
proposals and could deter or prevent a change of control. |
Our articles of incorporation authorize our board of directors,
subject to any limitations prescribed by law, to issue shares of
preferred stock in one or more series without shareholder
approval. On August 17, 2001 we adopted a shareholder
rights plan, as amended, and under the rights plan, our board of
directors declared a dividend distribution of one right for each
outstanding share of common stock to shareholders of record at
the close of business on August 30, 2001. Pursuant to the
Rights Agreement, in the event (a) any person or group
acquires 15% or more of our then outstanding shares of voting
stock (or 21% or more of our then outstanding shares of voting
stock in the case of State of Wisconsin Investment Board),
(b) a tender offer or exchange offer is commenced that
would result in a person or group acquiring 15% or more of our
then outstanding voting stock, (c) we are acquired in a
merger or other business combination in which we are not the
surviving corporation or (d) 50% or more of our
consolidated assets or earning power are sold, then the holders
of our common stock are entitled to exercise the rights under
the Rights Plan, which include, based on the type of event which
has occurred, (i) rights to purchase preferred shares from
us, (ii) rights to purchase common shares from us having a
value twice that of the underlying exercise price, and
(iii) rights to acquire common
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stock of the surviving corporation or purchaser having a market
value of twice that of the exercise price. The rights expire on
August 17, 2011, and may be redeemed prior thereto at
$.001 per right under certain circumstances. The
Boards ability to issue preferred stock without
shareholder approval while providing desirable flexibility in
connection with financings, acquisitions and other corporate
purposes, and the existence of the rights plan might discourage,
delay or prevent a change in the ownership of our company or a
change in our management. In addition, these provisions could
limit the price that investors would be willing to pay in the
future for shares of our common stock.
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Changes in, or interpretations of, accounting rules and
regulations could result in unfavorable accounting
charges. |
We prepare our consolidated financial statements in conformity
with generally accepted accounting principles. These principles
are subject to interpretation by the SEC and various bodies
formed to interpret and create appropriate accounting policies.
A change in these policies can have a significant effect on our
reported results and may even retroactively affect previously
reported transactions. To the extent that such interpretations
or changes in policies negatively impact our reported financial
results, our results of stock price could be adversely affected.
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Recent rulemaking by the Financial Accounting Standards
Board will require us to expense equity compensation given to
our employees and could significantly harm our operating results
and may reduce our ability to effectively utilize equity
compensation to attract and retain employees. |
We historically have used stock options as a component of our
employee compensation program in order to align employees
interests with the interests of our stockholders, encourage
employee retention, and provide competitive compensation
packages. The Financial Accounting Standards Board has adopted
changes that will require companies to record a charge to
earnings for employee stock option grants and other equity
incentives beginning July 1, 2005. This accounting change
will reduce our reported earnings and may require us to reduce
the availability and amount of equity incentives provided to
employees, which may make it more difficult for us to attract,
retain and motivate key personnel. Each of these results could
materially and adversely affect our business.
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While we believe that we currently have adequate internal
controls over financial reporting, we are exposed to risks from
recent legislation requiring companies to evaluate those
internal controls. |
Section 404 of the Sarbanes-Oxley Act of 2002 requires our
management to report on, and our independent registered public
accounting firm to attest to, the effectiveness of our internal
control structure and procedures for financial reporting. We are
developing a program to perform the system and process
evaluation and testing necessary to comply with these
requirements on a sustained basis. Companies do not have
significant experience in complying with these requirements on
an ongoing and sustained basis. As a result, we expect to
continue to incur increased expense and to devote management
resources to Section 404 compliance. In the event that our
chief executive officer, chief financial officer or our
independent registered public accounting firm determine that our
internal controls over financial reporting are not effective as
defined under Section 404, investor perceptions of
CardioGenesis may be adversely affected and could cause a
decline in the market price of our stock.
Our headquarters, located in Foothill Ranch, California, are
comprised of 12,533 square feet of leased space. The lease
expires in October 2006. We believe our facilities are adequate
to meet our foreseeable requirements. There can be no assurance
that additional facilities will be available to us, if and when
needed, thereafter.
24
|
|
Item 3. |
Legal Proceedings. |
In November 2003, our employment relationship with Darrell
Eckstein, our former President, Chief Operating Officer, Acting
Chief Financial Officer, Chief Accounting Officer, Treasurer and
Secretary was terminated. In connection with his departure,
Mr. Eckstein has made certain breach of contract claims
arising out of his employment agreement with us, as well as
certain tort claims and is seeking unspecified monetary damages.
Pursuant to the terms of Mr. Ecksteins employment
agreement, the matter has been submitted to binding arbitration.
We believe Mr. Ecksteins claims are without merit and
we are vigorously defending against these claims. However, if
Mr. Eckstein were to prevail on some or all of his claims,
we cannot assure you that such claims would not have a material
adverse effect on our financial condition, results of operations
or cash flows. Because of the preliminary stage of this case, an
estimate of potential damages, if any, would be premature and
speculative. As a result, we have not made any such estimate.
|
|
Item 4. |
Submission of Matters to a Vote of Security
Holders. |
None.
PART II
|
|
Item 5. |
Market for Registrants Common Equity, Related Shareholder
Matters and Issuer Purchases of Equity Securities. |
Our common stock is traded on the OTC Bulletin Board under
the symbol CGCP.OB. In 2002, our common stock was listed on the
Nasdaq SmallCap Market and Nasdaq National Market. For the
periods indicated, the following table presents the range of
high and low sale prices for the common stock as reported by the
OTC Bulletin Board, Nasdaq National Market and Nasdaq
SmallCap Market for the respective market on which our common
stock was listed during the quarter being reported.
|
|
|
|
|
|
|
|
|
2003 |
|
High | |
|
Low | |
|
|
| |
|
| |
First Quarter
|
|
$ |
0.66 |
|
|
$ |
0.22 |
|
Second Quarter
|
|
$ |
0.85 |
|
|
$ |
0.24 |
|
Third Quarter
|
|
$ |
1.49 |
|
|
$ |
0.72 |
|
Fourth Quarter
|
|
$ |
1.92 |
|
|
$ |
0.70 |
|
|
|
|
|
|
|
|
|
|
2004 |
|
High | |
|
Low | |
|
|
| |
|
| |
First Quarter
|
|
$ |
1.40 |
|
|
$ |
0.59 |
|
Second Quarter
|
|
$ |
0.87 |
|
|
$ |
0.44 |
|
Third Quarter
|
|
$ |
0.75 |
|
|
$ |
0.47 |
|
Fourth Quarter
|
|
$ |
0.70 |
|
|
$ |
0.35 |
|
As of March 11, 2005, shares of our common stock were held
by 242 shareholders of record.
We have never paid a cash dividend on our common stock and do
not anticipate paying any cash dividends in the foreseeable
future, as we intend to retain our earnings, if any, to generate
increased growth and for general corporate purposes. Moreover,
certain restrictions contained in the terms of our financing
transaction with Laurus (described below) prohibit us from
paying dividends or redeeming shares while the obligations to
Laurus remain outstanding.
In October 2004, we completed a financing transaction with
Laurus Master Fund, Ltd, a Cayman Islands corporation
(Laurus), pursuant to which we issued a Secured
Convertible Term Note (the Note) in the aggregate
principal amount of $6.0 million and a warrant to purchase
an aggregate of 2,640,000 shares of our common stock to
Laurus in a private offering.
From January 1, 2005 through March 11, 2005, Laurus
elected to convert an aggregate of $355,140 of principal and
interest under the Note into an aggregate of 710,281 shares
of our common stock at a conversion
25
price of $.50 per share. Each of such issuance was made
pursuant to Section 4(2) of the Securities Act of 1933, as
amended.
Securities Authorized for Issuance Under Equity Compensation
Plans
The following table gives information about our common stock
that may be issued upon the exercise of options, warrants and
rights under all of our equity compensation plans as of
December 31, 2004. The table includes the following plans:
The Cardiogenesis Corporation Stock Option Plan, the
Cardiogenesis Corporation Director Stock Option Plan, and the
Cardiogenesis Corporation 1996 Stock Purchase Plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities | |
|
|
Number of Securities | |
|
|
|
Remaining Available for | |
|
|
to be Issued upon | |
|
Weighted-Average Exercise | |
|
Future Issuance under Equity | |
|
|
Exercise of | |
|
Price of Outstanding | |
|
Compensation Plans | |
|
|
Outstanding Options, | |
|
Options, Warrants and | |
|
(Excluding Securities Related | |
|
|
Warrants and Rights | |
|
Rights | |
|
in Column (a)) | |
Plan Category |
|
(a) | |
|
(b) | |
|
(c) | |
|
|
| |
|
| |
|
| |
Equity compensations plans approved by security holders(1)
|
|
|
4,177,000 |
|
|
$ |
1.28 |
|
|
|
2,996,000 |
|
Employee stock purchase plan approved by security holders(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensations plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,177,000 |
|
|
$ |
1.28 |
|
|
|
2,996,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Consists of the Cardiogenesis Corporation Stock Option Plan and
the Cardiogenesis Director Stock Option Plan. |
|
(2) |
The Cardiogenesis Corporation 1996 Stock Purchase Plan enables
employees to purchase our common stock at an 85% percent
discount to market value at the beginning or end of each
offering period. As such, the number of shares that may be
issued during a given period and the purchase price of such
shares cannot be determined in advance. However, as of
December 31, 2004, an aggregate of 138,001 shares
remain available for issuance under the 1996 Stock Purchase
Plan. See Note 9 to our Consolidated Financial Statements. |
|
|
Item 6. |
Selected Consolidated Financial Data. |
The following selected consolidated statement of operations data
for fiscal years ended 2004, 2003 and 2002 and the consolidated
balance sheet data for 2004 and 2003 set forth below are derived
from our consolidated financial statements and are qualified by
reference to our consolidated financial statements included
herein.
The selected consolidated statement of operations data for
fiscal year ended 2001 and 2000 and the consolidated balance
sheet data for 2002, 2001 and 2000 have been derived from our
audited consolidated financial statements not included herein.
These historical results are not necessarily indicative of the
results of operations to be expected for any future period.
26
Selected Consolidated Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$ |
15,454 |
|
|
$ |
13,518 |
|
|
$ |
13,048 |
|
|
$ |
14,153 |
|
|
$ |
22,210 |
|
Cost of revenues
|
|
|
2,193 |
|
|
|
2,295 |
|
|
|
2,935 |
|
|
|
5,777 |
|
|
|
10,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
13,261 |
|
|
|
11,223 |
|
|
|
10,113 |
|
|
|
8,376 |
|
|
|
12,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
1,442 |
|
|
|
1,944 |
|
|
|
657 |
|
|
|
1,863 |
|
|
|
5,065 |
|
Sales, general and administrative
|
|
|
11,322 |
|
|
|
9,590 |
|
|
|
12,297 |
|
|
|
15,119 |
|
|
|
22,009 |
|
Restructuring and merger-related costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
12,764 |
|
|
|
11,534 |
|
|
|
12,954 |
|
|
|
18,015 |
|
|
|
27,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
497 |
|
|
|
(311 |
) |
|
|
(2,841 |
) |
|
|
(9,639 |
) |
|
|
(14,919 |
) |
Interest and other (expense) income, net
|
|
|
(1,816 |
) |
|
|
(37 |
) |
|
|
2,311 |
|
|
|
(608 |
) |
|
|
310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(1,319 |
) |
|
$ |
(348 |
) |
|
$ |
(530 |
) |
|
$ |
(10,247 |
) |
|
$ |
(14,609 |
) |
Net loss per share basic and diluted
|
|
$ |
(0.03 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.31 |
) |
|
$ |
(0.48 |
) |
Shares used in per share calculation
|
|
|
41,152 |
|
|
|
37,303 |
|
|
|
36,911 |
|
|
|
33,311 |
|
|
|
30,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and marketable securities
|
|
$ |
4,740 |
|
|
$ |
1,013 |
|
|
$ |
1,490 |
|
|
$ |
2,629 |
|
|
$ |
3,357 |
|
Working capital
|
|
|
6,994 |
|
|
|
2,001 |
|
|
|
1,614 |
|
|
|
1,048 |
|
|
|
4,662 |
|
Total assets
|
|
|
15,683 |
|
|
|
6,460 |
|
|
|
7,755 |
|
|
|
11,309 |
|
|
|
16,965 |
|
Long-term debt, less current portion
|
|
|
7,329 |
|
|
|
6 |
|
|
|
1 |
|
|
|
32 |
|
|
|
405 |
|
Accumulated deficit
|
|
|
(166,277 |
) |
|
|
(164,958 |
) |
|
|
(164,610 |
) |
|
|
(164,080 |
) |
|
|
(153,833 |
) |
Total shareholders equity
|
|
|
4,735 |
|
|
|
3,820 |
|
|
|
3,711 |
|
|
|
3,582 |
|
|
|
7,974 |
|
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations. |
This Managements Discussion and Analysis of Financial
Condition and Results of Operations contains descriptions of our
expectations regarding future trends affecting our business.
These forward-looking statements and other forward-looking
statements made elsewhere in this document are made in reliance
upon the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Please read the section below
titled Factors Affecting Future Results to review
conditions which we believe could cause actual results to differ
materially from those contemplated by the forward-looking
statements. Forward-looking statements are identified by words
such as believes, anticipates,
expects, intends, plans,
will, may and similar expressions. In
addition, any statements that refer to our plans, expectations,
strategies or other characterizations of future events or
circumstances are forward-looking statements. Our business may
have changed since the date hereof and we undertake no
obligation to update these forward looking statements.
The following discussion should be read in conjunction with
financial statements and notes thereto included in this Annual
Report on Form 10-K.
Overview
Cardiogenesis Corporation, formerly known as Eclipse Surgical
Technologies, Inc., incorporated in California in 1989, designs,
develops and distributes laser-based surgical products and
disposable fiber-optic
27
accessories for the treatment of advanced cardiovascular disease
through transmyocardial revascularization (TMR) and
percutaneous myocardial channeling (PMC). PMC was
formerly referred to as percutaneous myocardial
revascularization (PMR). The new name PMC more
literally depicts the immediate physiologic tissue effect of the
Cardiogenesis PMC system to ablate precise, partial thickness
channels into the heart muscle from the inside of the left
ventricle.
In February 1999, we received final approval from the FDA for
our TMR products for certain indications, and we are permitted
to sell those products in the U.S. on a commercial basis.
We have also received the European Conforming Mark (CE
Mark) allowing the commercial sale of our TMR laser
systems and our PMC catheter system to customers in the European
Community. Effective July 1999, the Centers for Medicare and
Medicaid Services (CMS) began providing Medicare
coverage for TMR. As a result, hospitals and physicians are now
eligible to receive Medicare reimbursement for TMR equipment and
procedures performed on Medicare recipients.
We have completed pivotal clinical trials involving PMC, and
study results were submitted to the FDA in a Pre Market Approval
(PMA application) in December 1999 along with
subsequent amendments. In July 2001, the FDA Advisory Panel
recommended against approval of PMC for public sale and use in
the United States. In February 2003, the FDA granted an
independent panel review of our pending PMA application for PMC
by the Medical Devices Dispute Resolution Panel
(MDDRP). In July 2003, the FDA agreed to review
additional data in support of our PMA supplement for PMC under
the structure of an interactive review process between us and
the FDA review team The independent panel review by the MDDRP
was cancelled in lieu of the interactive review, but the FDA has
agreed to reschedule the MDDRP hearing in the future, if the
dispute cannot be resolved. In August 2004, we met with the FDA
and agreed on the steps needed to design and initiate a new
clinical trial to confirm the safety and efficacy of PMC. In
January 2005, we again met with the agency and agreed on major
trial parameters. We are working closely with the FDA in
finalizing the clinical trial protocol to be formally agreed
upon. Once the agreement is achieved and the related costs are
clearly understood, we expect to move forward, either on our own
or with a corporate partner in the interventional cardiology
arena. There can be no assurance, however, that we will receive
a favorable determination from the FDA.
As of December 31, 2004, we had an accumulated deficit of
$166,277,000. We may continue to incur operating losses. The
timing and amounts of our expenditures will depend upon a number
of factors, including the efforts required to develop our sales
and marketing organization, the timing of market acceptance of
our products and the status and timing of regulatory approvals.
Results of Operations
|
|
|
Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003 |
We generate our revenues primarily through the sale of our TMR
laser base units and related handpieces, and related services.
Net revenues of $15,454,000 for the year ended December 31,
2004 increased $1,936,000, or 14%, when compared to net revenues
of $13,518,000 for the year ended December 31, 2003. The
increase in net revenues was primarily due to an increase in
domestic handpiece and laser revenues of $1,113,000 and
$692,000, respectively, as well as an increase in international
handpiece and laser sales of $3,000 and $65,000, respectively.
In addition, service and other revenue of $1,034,000 increased
by $63,000 for the year ended December 31, 2004 when
compared to $971,000 for the year ended December 31, 2003.
The increase in handpiece revenue is primarily related to a
higher average per unit selling price and a higher quantity sold
in 2004 as compared to 2003. In the year ended December 31,
2004, domestic handpiece revenue consisted of $2,214,000 in
sales to customers operating under our loaned laser program, of
which $699,000 was attributed to premiums associated with such
sales. In the year ended December 31, 2003, domestic
handpiece revenue consisted of $2,649,000 in sales of product to
customers operating under our loaned laser program, of which
$781,000 was attributed to premiums associated with such sales.
In the years
28
ended December 31, 2004 and 2003, sales of product to
customers not operating under our loaned laser program were
$7,936,000 and $6,387,000, respectively.
For the year ended December 31, 2004, domestic laser sales
increased by $692,000 compared to the year ended
December 31, 2003 primarily from a moderate increase in the
conversion of loaned lasers to outright sales. International
sales, accounting for approximately 3% of total sales for the
year ended December 31, 2004, increased $67,000 from the
prior year when international sales also accounted for 3% of
total sales. The increase in international sales occurred
primarily as a result of a higher average selling price of
lasers sold abroad.
Gross profit increased to 86% of net revenues for the year ended
December 31, 2004 as compared to 83% of net revenues for
the year ended December 31, 2003. Gross profit in absolute
dollars increased by $2,038,000 to $13,261,000 for the year
ended December 31, 2004, as compared to $11,223,000 for the
year ended December 31, 2003. The increase in gross profit
as a percent of sales, and in absolute terms, resulted from an
increase in margins due to a more favorable product mix as
higher-margin laser sales accounted for a greater portion of
revenues than in prior periods. In addition, margins on
disposable handpieces increased due to improvements in
manufacturing which resulted in higher yields.
Research and development expenditures of $1,442,000 decreased
$502,000 or 26% for the year ended December 31, 2004 when
compared to $1,944,000 for the year ended December 31,
2003. The decrease resulted from decreases in the costs
associated with our efforts to obtain FDA clearance for PMC.
Such costs were $1.4 million in 2003 compared to $288,000
in 2004 , with the decrease being partially offset by increased
spending on research and development activity for our minimally
invasive TMR platform in 2004.
For the years ended December 31, 2004 and 2003, research
and development expense included a credit of $152,000 and
$601,000, respectively, due to the reversal each year of amounts
recorded in accrued liabilities in prior years for estimated
clinical trial obligations subsequently determined no to be
needed.
|
|
|
Sales, General and Administrative |
Sales, general and administrative expenditures of $11,322,000
increased $1,732,000 or 18% for the year ended December 31,
2004 when compared to $9,590,000 for the year ended
December 31, 2003. The increase in expenses resulted
primarily from an increase in employee expenses of $1,504,000
primarily related to an increase in our sales force, as well as
higher sales commissions paid out associated with an increase in
sales revenue. Additionally, advertising and marketing, and
training and clinical research expense increased $202,000 and
$214,000 respectively, due to the promotion of new products.
This was offset by a decrease in facilities and office expense
of $137,000 related to operational cost reduction efforts.
|
|
|
Non-Operating Expense (Income) |
Total non-operating expense of $1,816,000 increased $1,779,000
or 4808% for the year ended December 31, 2004 when compared
to $37,000 for the year ended December 31, 2003. This
increase is primarily due to non-operating, non-cash charges
recorded in 2004 in relation to the Secured Convertible Term
Note (Note) issued in October 2004. These
non-operating, non-cash charges resulted from mark to market
charges on derivatives and warrants and interest and debt
issuance costs associated with the Note. Since the fair value of
the warrants and derivatives is tied in large part to our stock
price, in the future, if our stock price increases between
reporting periods, the warrants and derivatives become more
valuable. As such, there is no
29
way to forecast what the non-operating, non-cash charges will be
in the future or what the future impact will be on our financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
|
|
|
|
| |
|
| |
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
|
|
Change | |
|
|
|
|
| |
|
|
) In thousands | |
|
|
($ | |
Interest expense Secured Convertible Term Note
|
|
$ |
77 |
|
|
$ |
|
|
|
$ |
77 |
|
|
|
100 |
% |
Interest expense other
|
|
|
58 |
|
|
|
44 |
|
|
|
14 |
|
|
|
32 |
% |
Non-cash interest expense Change in derivative
value
|
|
|
1,263 |
|
|
|
|
|
|
|
1,263 |
|
|
|
100 |
% |
Non-cash interest expense Accretion of discount
on Note
|
|
|
141 |
|
|
|
|
|
|
|
141 |
|
|
|
100 |
% |
Non-cash interest expense Amortization of debt
issuance costs relating to the Note
|
|
|
35 |
|
|
|
|
|
|
|
35 |
|
|
|
100 |
% |
Other non-cash expense- Change in fair value of warrants
|
|
|
290 |
|
|
|
|
|
|
|
290 |
|
|
|
100 |
% |
Interest income
|
|
|
(48 |
) |
|
|
(7 |
) |
|
|
(41 |
) |
|
|
586 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense, net
|
|
$ |
1,816 |
|
|
$ |
37 |
|
|
$ |
1,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2003 Compared to Year Ended
December 31, 2002 |
We generate our revenues primarily through the sale of our TMR
laser base units and related handpieces, and related services .
Net revenues of $13,518,000 for the year ended December 31,
2003 increased $470,000, or 4%, when compared to net revenues of
$13,048,000 for the year ended December 31, 2002. The
increase in net revenues was due to an increase in domestic
handpiece and laser revenues of $268,000 and $286,000,
respectively, offset by a decrease in international handpiece
and laser sales of $9,000 and $69,000, respectively.
The increase in handpiece revenue is primarily related to a
higher average per unit selling price in 2003 as compared to
2002. In an effort to accelerate market adoption of the TMR
procedure, we developed a program pursuant to which we loan
lasers to hospitals in return for the hospital purchasing a
minimum number of handpieces at a premium over the list price.
In the year ended December 31, 2003, domestic handpiece
revenue consisted of $2,649,000 in sales to customers operating
under our loaned laser program, of which $781,000 was attributed
to premiums associated with such sales. In the year ended
December 31, 2002, domestic handpiece revenue consisted of
$2,832,000 in sales of product to customers operating under our
loaned laser program, of which $756,000 was attributed to
premiums associated with such sales. In the years ended
December 31, 2003 and 2002, sales of product to customers
not operating under our loaned laser program were $6,387,000 and
$5,937,000, respectively.
For the year ended December 31, 2003, domestic laser sales
increased by $286,000 compared to the year ended
December 31, 2002 primarily from a moderate increase in the
conversion of loaned lasers to outright sales. International
sales, accounting for approximately 3% of total sales for the
year ended December 31, 2003, decreased $78,000 from the
prior year when international sales accounted for 4% of total
sales. The decrease in international sales occurred primarily as
a result of fewer handpiece sales resulting from decreased sales
and marketing efforts in the international market compared to
2002. Service and other revenue of $971,000 slightly decreased
by $6,000 for the year ended December 31, 2003 when
compared to $977,000 for the year ended December 31, 2002.
Gross profit increased to 83% of net revenues for the year ended
December 31, 2003 as compared to 78% of net revenues for
the year ended December 31, 2002. Gross profit in absolute
dollars increased by $1,110,000 to $11,223,000 for the year
ended December 31, 2003, as compared to $10,113,000 for the
year ended December 31, 2002. The increase in gross profit
as a percent of sales, and in absolute terms, resulted from
improved margins on lasers sold. These margins improved
primarily due to sales of lasers originally placed
30
under our laser loan program that were converted to outright
sales. In addition, margins on disposable handpieces increased
due to improvements in manufacturing which resulted in higher
yields.
Research and development expenditures of $1,944,000 increased
$1,287,000 or 196% for the year ended December 31, 2003
when compared to $657,000 for the year ended December 31,
2002. The increase in overall research and development expense
resulted primarily from an increase in costs for outside
services of $463,000 related to the PMC approval process. For
the year ended December 31, 2003, a reduction of $601,000
was recorded on accrued liabilities recorded in prior years for
estimated clinical trial obligations. This reduction of accrued
liabilities decreased $828,000 for the year ended
December 31, 2002 and contributed to the overall increase
in research and development expenditures.
|
|
|
Sales, General and Administrative |
Sales, general and administrative expenditures of $9,590,000
decreased $2,707,000 or 22% for the year ended December 31,
2003 when compared to $12,297,000 for the year ended
December 31, 2002. The decrease in expenses resulted
primarily from a decrease in employee expenses of $1,077,000
primarily related to reductions in our workforce. Additionally,
outside services, advertising and marketing, training and
clinical research, and facilities and office expense decreased
$564,000, $396,000, $152,000, $118,000, respectively, due to
overall cost cutting efforts.
|
|
|
Interest and Other Income (Expense), Net |
Interest and other income (expense), net is comprised of
interest income, interest expense and our former ownership
interest in Microheart, Inc., a privately-held company
(Microheart).
Interest income of $7,000 decreased $32,000 or 82% for the year
ended December 31, 2003 when compared to $39,000 for the
year ended December 31, 2002. This decrease was due to
lower interest rates and lower investments in cash equivalents.
Interest expense of $44,000 increased $31,000 or 238% for the
year ended December 31, 2003 when compared to $13,000 for
the year ended December 31, 2002. This increase is
primarily due to a higher level of financing for equipment under
capital lease and amortization of debt issue costs.
A gain on the sale of an investee of $2,285,000 for the year
ended December 31, 2002 resulted from the sale of our
ownership interest in Microheart in April 2002.
Liquidity and Capital Resources
Cash and cash equivalents were $4,740,000 at December 31,
2004 compared to $1,013,000 at December 31, 2003, an
increase of $3,727,000. Net cash used in operating activities
was $967,000 for the twelve months ended December 31, 2004
primarily due to increased accounts receivable balances from
increased sales. Cash and cash equivalents were $1,013,000 at
December 31, 2003 compared to $1,490,000 at
December 31, 2002, a decrease of $477,000. We used $680,000
of cash for operating activities in the twelve months ended
December 31, 2003 primarily to pay down accounts payable
and accrued liabilities. During the year ended December 31,
2002, we incurred operating losses of $2,841,000, which, when
coupled with the payment of current liabilities partially offset
by non-cash operating expenses, resulted in the use of
$3,196,000 to support operating activities.
Cash used in investing activities during the twelve months ended
December 31, 2004 was $401,000 related to the acquisition
of property and equipment. Cash used in investing activities
during the twelve months ended December 31, 2003 was
$80,000 and was attributed to the acquisition of property and
equipment. Cash provided by investing activities during the
twelve months ended December 31, 2002 was $2,223,000
primarily consisting of the net proceeds obtained from the sale
of our ownership interest in Microheart.
31
Cash provided by financing activities during the twelve months
ended December 31, 2004 was $5,095,000 due primarily to
proceeds from the sale of common stock to private entities and
the proceeds from the Secured Convertible Term Note agreement
with Laurus Funds. In January 2004, we sold
3,100,000 shares of common stock to private investors for a
total price of $2,700,000. We also issued a warrant to
purchase 3,100,000 additional shares of common stock at a
price of $1.37 per share. The warrant is immediately
exercisable and has a term of five years.
In October 2004, we completed a financing transaction with
Laurus Master Fund, Ltd, a Cayman Islands corporation
(Laurus), pursuant to which we issued a Secured
Convertible Term Note in the aggregate principal amount of
$6.0 million and a warrant to purchase an aggregate of
2,640,000 shares of our common stock at a price of
$0.50 per share to Laurus in a private offering. Net
proceeds to us from the financing, after payment of fees and
expenses to Laurus and its affiliates, were $5,752,500. Of this
amount, we received $2,875,250 shown in net cash provided by
financing activities and $2,877,250 which was deposited in a
restricted cash account and is shown in the Supplemental
schedule of non-cash investing and financing activities. Funds
deposited in the restricted cash account will only be released
to us, if at all, upon satisfaction of certain conditions, such
as: 1) voluntary conversion of the restricted funds by
Laurus, and 2) conversion rights of the restricted funds by
us subject to certain stock price levels and trading volume
limitations.
The Note matures in October 2007, absent earlier redemption by
us or earlier conversion by Laurus. Annual interest on the Note
is equal to the prime rate published in The Wall
Street Journal from time to time, plus two percent (2.0%),
provided that such annual rate of interest may not be less than
six and one-half percent (6.5%), subject to certain downward
adjustments resulting from certain increases in the market price
of our common stock. Interest on the Note is payable monthly in
arrears on the first day of each month during the term of the
Note, commencing November 2004. In addition, commencing May
2005, we are required to make monthly principal payments of
$100,000 per month. To the extent that funds are released
from the restricted cash account prior to repayment in full of
the unrestricted portion of the Note proceeds, the monthly
payment amount may be increased by an amount equal to the amount
released from the restricted cash account divided by the
remaining number of monthly principal payments due on or prior
to the maturity date. The Note is convertible into shares of our
common stock at the option of Laurus and, in certain
circumstances, at our option.
The $6,000,000 Note includes embedded derivative financial
instruments. In conjunction with the Note, we issued a warrant
to purchase 2,640,000 shares of common stock. The
accounting treatment of the derivatives and warrant requires
that we record the derivatives and warrant at their relative
fair value as of the inception date of the agreement, and at
fair value as of each subsequent balance sheet date. Any change
in fair value will be recorded as non-operating, non-cash income
or expense at each reporting date. If the fair value of the
derivatives and warrant is higher at the subsequent balance
sheet date, we will record a non-operating, non-cash charge. If
the fair value of the derivatives and warrant is lower at the
subsequent balance sheet date, we will record non-operating,
non-cash income. As of December 31, 2004, the derivatives
were valued at $2,337,777. Conversion related derivatives were
valued using the Binomial Option Pricing Model with the
following assumptions: dividend yield of 0%; annual volatility
of 70.5%; and risk free interest rate of 3.25% as well as
probability analysis related to trading volume restrictions. The
remaining derivatives were valued using discounted cash flows
and probability analysis. The warrant was valued at $766,020 at
December 31, 2004 using the Binomial Option Pricing model
with the following assumptions: dividend yield of 0%; annual
volatility of 70.5%; risk-free interest rate of 3.94%; and
exercise factor of 2. Both the derivatives and warrant were
classified as long-term liabilities.
Cash provided by financing activities during the twelve months
ended December 31, 2003 was $283,000 primarily due to
proceeds from employee stock option exercises and common stock
purchased under the Employee Stock Purchase Plan. Cash used in
financing activities during the twelve months ended
December 31, 2002 was $254,000 resulting from payments on
short term borrowings of $825,000. This was offset by net
proceeds of $486,000 obtained from the sale of our common stock
to the State of Wisconsin Investment Board in April 2002 and
proceeds of $85,000 received from the sale of stock under the
Employee Stock Purchase Plan.
32
We have incurred significant losses for the last several years
and at December 31, 2004 we had an accumulated deficit of
$166,277,000. Our ability to maintain current operations is
dependent upon maintaining our sales at least at the same levels
achieved this year.
We also plan to continue our cost containment efforts by
focusing on sales, general and administrative expenses. We have
significantly reduced our cost of revenues, primarily due to the
outsourcing of a significant portion of our manufacturing which
allows us to purchase products at lower costs. To reduce
operating expenses, we have focused our efforts on reducing
headcount and overall expenses in functions that are not
essential to core and critical activities.
Currently, our primary goal is to maintain profitability at the
operating level. Our actions have been guided by this
initiative, and the resulting cost containment measures have
helped to conserve our cash. Our focus is upon core and critical
activities, thus operating expenses that are nonessential to our
core operations have been eliminated.
We believe our cash balance as of December 31, 2004 will be
sufficient to meet our capital, debt and operating requirements
through the next 12 months. We believe that if revenues
from sales or new funds from debt or equity instruments are
insufficient to maintain the current expenditure rate, it will
be necessary to significantly reduce our operations until an
appropriate solution is implemented.
We will have a continuing need for new infusions of cash if we
incur losses in the future. We plan to increase our sales
through increased direct sales and marketing efforts on existing
products and achieving regulatory approval for other products.
If our direct sales and marketing efforts are unsuccessful or we
are unable to achieve regulatory approval for our products, we
will be unable to significantly increase our revenues. We
believe that if we are unable to generate sufficient funds from
sales or from debt or equity issuances to maintain our current
expenditure rate, it will be necessary to significantly reduce
our operations. We may be required to seek additional sources of
financing, which could include short-term debt, long-term debt
or equity. There is a risk that we may be unsuccessful in
obtaining such financing and that we will not have sufficient
cash to fund our operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less than | |
|
1-3 | |
|
3-5 | |
|
More than |
Contractual Obligations |
|
Total | |
|
1 Year | |
|
Years | |
|
Years | |
|
5 Years |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(In thousands) |
Secured Convertible Term Note, net of restricted cash
|
|
$ |
3,000 |
|
|
$ |
800 |
|
|
$ |
2,200 |
|
|
|
|
|
|
|
|
|
Secured Convertible Term Note Interest(1)
|
|
$ |
203 |
|
|
$ |
54 |
|
|
$ |
149 |
|
|
|
|
|
|
|
|
|
Capital Lease Obligations
|
|
$ |
23 |
|
|
$ |
5 |
|
|
$ |
12 |
|
|
$ |
6 |
|
|
|
|
|
Operating Leases
|
|
$ |
686 |
|
|
$ |
366 |
|
|
$ |
320 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
3,912 |
|
|
$ |
1,225 |
|
|
$ |
2,681 |
|
|
$ |
6 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Assumes 6.75% effective interest rate. |
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires our management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
The following presents a summary of our critical accounting
policies and estimates, defined as those policies and estimates
we believe are: (i) the most important to the portrayal of
our financial condition and results of operations, and
(ii) that require our most difficult, subjective or complex
judgments, often as a result of the need to make estimates about
the effects of matters that are inherently uncertain. Our most
significant estimates relate to the determination of the
allowance for bad debt, inventory reserves, valuation allowance
33
relating to deferred tax asset, warranty reserve, the assessment
of future cash flows in evaluating intangible assets for
impairment and assumptions used in fair value determination of
warrants and derivatives.
We recognize revenue on product sales upon receipt of a purchase
order upon shipment of the products when the price is fixed or
determinable and when collection of sales proceeds is reasonably
assured. Where purchase orders allow customers an acceptance
period or other contingencies, revenue is recognized upon the
earlier of acceptance or removal of the contingency.
Revenues from sales to distributors and agents are recognized
upon shipment when there is evidence that an arrangement exists,
delivery has occurred under the Companys standard FOB
shipping point terms, the sales price is fixed or determinable
and the ability to collect sales proceeds is reasonably assured.
The contracts regarding these sales do not include any rights of
return or price protection clauses.
We frequently loan lasers to hospitals in return for the
hospital purchasing a minimum number of handpieces at a premium
over the list price. The loaned lasers are depreciated to cost
of revenues over a useful life of 24 months. The revenue on
the handpieces is recognized upon shipment at an amount equal to
the list price. The premium over the list price represents
revenue related to the use of the laser unit and is recognized
ratably, generally over the 24-month useful life of the placed
lasers.
Revenues from service contracts, rentals, and per procedure fees
are recognized upon performance or over the terms of the
contract as appropriate.
Accounts receivable consist of trade receivables recorded upon
recognition of revenue for product sales, reduced by reserves
for the estimated amount deemed uncollectible due to bad debt.
The allowance for doubtful accounts is our best estimate of the
amount of probable credit losses in our existing accounts
receivable. We review the allowance for doubtful accounts
quarterly with the corresponding provision included in general
and administrative expenses. Past due balances over 90 days
and over a specified amount are reviewed individually for
collectibility. All other balances are reviewed on a pooled
basis by type of receivable. Account balances are charged off
against the allowance when we feel it is probable the receivable
will not be recovered. We do not have any off-balance-sheet
credit exposure related to our customers.
Inventories are stated at the lower of cost (principally
standard cost, which approximates actual cost on a first-in,
first-out basis) or market value. We regularly monitor potential
excess, or obsolete, inventory by analyzing the usage for parts
on hand and comparing the market value to cost. When necessary,
we reduce the carrying amount of our inventory to its market
value.
|
|
|
Valuation of Long-lived Assets: |
We assess potential impairment of our finite lived, intangible
assets and other long-lived assets when there is evidence that
recent events or changes in circumstances indicate that their
carrying value may not be recoverable. Reviews are performed to
determine whether the carrying value of assets is impaired based
on comparison to the undiscounted estimated future cash flows.
If the comparison indicates that there is impairment, the
impaired asset is written down to fair value, which is typically
calculated using discounted estimated future cash flows. The
amount of impairment would be recognized as the excess of the
assets carrying value over its fair value. Events or changes in
circumstances which may cause impairment include: significant
changes in the manner of use of the acquired asset, negative
industry or economic trends, and underperformance relative to
historic or projected future operating results.
34
We account for income taxes using the liability method under
which deferred tax assets or liabilities are calculated at the
balance sheet date using current tax laws and rates in effect
for the year in which the differences are expected to affect
taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amounts expected
to be realized.
Item 7A. Quantitative
and Qualitative Disclosures About Market Risk.
We are exposed to market risks inherent in our operations,
primarily related to interest rate risk and currency risk. These
risks arise from transactions and operations entered into in the
normal course of business. We do not use derivatives to alter
the interest characteristics of our marketable securities.
However, we do have multiple embedded derivatives included in
the Secured Convertible Term Note (the Note) entered
into with Laurus Master Fund in October 2004. Pursuant to the
Note agreement, a warrant totaling 2.6 million was issued
to Laurus. This warrant, along with multiple embedded
derivatives in the agreement, have been recorded at their
relative fair value at the inception date of the agreement,
October 27, 2004, and will be recorded at fair value at
each subsequent balance sheet date. Any change in value between
reporting periods will be recorded as a non-operating, non-cash
charge at each reporting date. The impact of these
non-operating, non-cash charges could have an adverse effect on
our stock price in the future.
The fair value of the warrant and derivatives is tied in a large
part to our stock price. If our stock price increases between
reporting periods, the warrant and derivatives become more
valuable. As such, there is no way to forecast what the
non-operating, non-cash charges will be in the future or what
the future impact will be on our financial statements.
We are subject to interest rate risks on cash and cash
equivalents and any future financing requirements. Our primary
interest rate risk exposures relate to the impact of interest
rate movements on our ability to obtain adequate financing to
fund future operations. We are also exposed to interest rate
risk on our note payable obligation resulting from the Secured
Convertible Term Note. This Note bears an interest rate of prime
plus 2%, and as such, is exposed to variability. In the future,
the interest rate could be increased to levels that would have a
material affect on our financial statements.
The following table presents the future principal cash flows or
amounts and related weighted average effective interest rates
expected by year for our existing cash and cash equivalents and
long-term debt instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 |
|
Total Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
| |
|
|
In Thousands | |
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents
|
|
$ |
4,740 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,740 |
|
Weighted average interest rate
|
|
|
1.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.1 |
% |
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate debt lease obligation
|
|
$ |
5 |
|
|
$ |
6 |
|
|
$ |
6 |
|
|
$ |
6 |
|
|
$ |
|
|
|
$ |
23 |
|
Weighted average interest rate
|
|
|
6.8 |
% |
|
|
6.8 |
% |
|
|
6.8 |
% |
|
|
6.8 |
% |
|
|
|
|
|
|
6.8 |
% |
Variable rate note payable, net of restricted cash
|
|
$ |
800 |
|
|
$ |
1,200 |
|
|
$ |
1,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,000 |
|
Weighted average effective interest rate(1)
|
|
|
25 |
% |
|
|
25 |
% |
|
|
25 |
% |
|
|
|
|
|
|
|
|
|
|
25 |
% |
|
|
(1) |
Includes interest expense at 6.75%, accretion of the debt
discount, and amortization of debt issuance costs relating to
the Secured Convertible Term Note. |
35
Interest Rate Risk. We do not hedge any balance sheet
exposures and intercompany balances against future movements in
foreign exchange rates. Given the relatively small number of
foreign currency transactions, we do not believe that our
potential exposure related to currency rate movements would have
a material impact on future net income or cash flows.
|
|
Item 8. |
Consolidated Financial Statements and Supplementary
Data. |
Quarterly Results of Operations
The following table sets forth certain quarterly financial
information for the periods indicated. This information has been
derived from unaudited financial statements that, in the opinion
of management, have been prepared on the same basis as the
audited information, and includes all normal recurring
adjustments necessary for a fair presentation of such
information. The results of operations for any quarter are not
necessarily indicative of the results to be expected for any
future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
March 31 | |
|
June 30 | |
|
Sept. 30 | |
|
Dec. 31 | |
|
March 31 | |
|
June 30 | |
|
Sept. 30 | |
|
Dec. 31 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
Net revenues
|
|
$ |
4,041 |
|
|
$ |
3,376 |
|
|
$ |
2,837 |
|
|
$ |
5,200 |
|
|
$ |
3,422 |
|
|
$ |
3,090 |
|
|
$ |
3,594 |
|
|
$ |
3,412 |
|
Gross profit
|
|
|
3,488 |
|
|
|
2,858 |
|
|
|
2,338 |
|
|
|
4,577 |
|
|
|
2,800 |
|
|
|
2,588 |
|
|
|
2,973 |
|
|
|
2,862 |
|
Operating income (loss)
|
|
|
269 |
|
|
|
(244 |
) |
|
|
(928 |
) |
|
|
1,400 |
|
|
|
119 |
|
|
|
(879 |
) |
|
|
(121 |
) |
|
|
570 |
|
Net income/ (loss)
|
|
|
267 |
|
|
|
(264 |
) |
|
|
(924 |
) |
|
|
(398 |
) |
|
|
121 |
|
|
|
(878 |
) |
|
|
(129 |
) |
|
|
538 |
|
Net income/ (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
0.01 |
|
|
|
(0.01 |
) |
|
|
(0.02 |
) |
|
|
(.01 |
) |
|
|
0.00 |
|
|
|
(0.02 |
) |
|
|
0.00 |
|
|
|
0.01 |
|
Weighted average shares outstanding Basic
|
|
|
40,490 |
|
|
|
41,279 |
|
|
|
41,338 |
|
|
|
41,446 |
|
|
|
37,121 |
|
|
|
37,136 |
|
|
|
37,351 |
|
|
|
37,597 |
|
Weighted average shares outstanding Diluted
|
|
|
41,204 |
|
|
|
41,279 |
|
|
|
41,338 |
|
|
|
41,446 |
|
|
|
37,145 |
|
|
|
37,136 |
|
|
|
37,351 |
|
|
|
38,446 |
|
See Item 15 below and the Index therein for a listing of
the consolidated financial statements and supplementary data
filed as part of this report.
Recently Issued Accounting Standards
In September 2004, the Emerging Issues Task Force finalized its
consensus on EITF Issue No. 04-8, The Effect of
Contingently Convertible Debt on Diluted Earnings Per
Share (EITF 04-8). EITF 04-8 addresses when the
dilutive effect of contingently convertible debt with a market
price trigger should be included in diluted earnings per share
(EPS). Under EITF 04-8, the market price contingency should
be ignored and these securities should be treated as
non-contingent, convertible securities and always included in
the diluted EPS computation unless their inclusion would be
anti-dilutive. EITF 04-8 requires these securities be
included in diluted EPS using either the if-converted method or
the net share settlement method, depending on the conversion
terms of the security. EITF 04-8 is effective for all
periods ending after December 15, 2004 and is to be applied
by retrospectively restating previously reported EPS. The
adoption of EITF 04-8 will have an effect on our diluted
EPS computation if, in future periods, the inclusion of
contingently convertible debt becomes dilutive.
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs An Amendment of ARB
No. 43, Chapter 4 (SFAS No. 151).
SFAS No. 151 amends the guidance in ARB No. 43,
Chapter 4, Inventory Pricing, to clarify the
accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). Among
other provisions, the new rule requires that items such as idle
facility expense, excessive spoilage, double freight, and
rehandling costs be recognized as current-period charges
regardless of whether they meet the criterion of so
abnormal as stated in ARB No. 43. Additionally,
36
SFAS No. 151 requires that the allocation of fixed
production overheads to the costs of conversion be based on the
normal capacity of the production facilities.
SFAS No. 151 is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. We are
currently evaluating the effect that the adoption of
SFAS No. 151 will have on our consolidated results of
operations and financial position, but we do not expect the
adoption of this Statement to have a material impact.
In December 2004, the FASB issued SFAS No. 123
(revised 2004), Share-Based Payment
(SFAS No. 123R), which replaces SFAS No. 123
and supersedes APB Opinion No. 25. SFAS No. 123R
addresses the accounting for transactions in which an enterprise
receives employee services in exchange for (a) equity
instruments of the enterprise or (b) liabilities that are
based on the fair value of the enterprises equity
instruments or that may be settled by the issuance of such
equity instruments. SFAS No. 123R requires all
share-based payments to employees, including grants of employee
stock options and restrictive stock grants and units, to be
recognized as a compensation cost based on their fair values.
The pro forma disclosures previously permitted under
SFAS No. 123 no longer will be an alternative to
financial statement recognition. We are required to adopt
SFAS No. 123R no later than July 3, 2005. Under
SFAS No. 123R, we must determine the appropriate fair
value model to be used for valuing share-based payments, the
amortization method for compensation cost and the transition
method to be used at the date of adoption. The transition
methods include prospective and retroactive adoption options.
Under the retroactive option, prior periods may be restated
either as of the beginning of the year of adoption or for all
periods presented. The prospective method requires that
compensation expense be recorded for all unvested stock options
and restricted stock at the beginning of the first quarter of
adoption of SFAS No. 123R, while the retroactive
methods would record compensation expense for all unvested stock
options and restricted stock beginning with the first period
restated. We are currently assessing the impact that adoption of
this Standard will have on our consolidated result of
operations, financial position and cash flows. However, we
believe that adoption of this standard will result in a charge
to reported earnings.
|
|
Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. |
None.
|
|
Item 9A. |
Controls and Procedures |
Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief
Financial Officer, we have evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended as of the end of the period covered by
this report, which we refer to as the Evaluation
Date. Based on such evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that, as of
the Evaluation Date, our disclosure controls and procedures are
effective to provide reasonable assurance that information
required to be disclosed by us in our periodic reports under the
Exchange Act is recorded, processed, summarized and reported
within the time periods specified by the Securities and Exchange
Commission rules and forms, and that such information is
accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure.
During the fiscal quarter ended December 31, 2004, no
change in our internal control over financial reporting occurred
that materially affected, or is reasonably likely to materially
affect, our internal controls over financial reporting.
|
|
Item 9B. |
Other Information |
None.
37
PART III
|
|
Item 10. |
Directors and Executive Officers of the Registrant. |
Certain information required by Part III, Item 10 is
omitted from this Annual Report on Form 10-K because we
will file a definitive proxy statement within 120 days
after the end of our fiscal year pursuant to Regulation 14A
for our 2005 Annual Meeting of Shareholders, and the information
included in the proxy statement is incorporated herein by
reference.
Item 11. Executive
Compensation.
Certain of the information concerning our executive officers
required by this Item is contained in the section of Part I
of this Annual Report on Form 10-K entitled
Item 1. Business Employees.
The information concerning our directors and the remaining
information concerning our executive officers required by this
item is incorporated by reference to the information set forth
under the similarly titled caption contained in the proxy
statement to be used by us in connection with our 2005 Annual
Meeting of Shareholders.
Item 12. Security
Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters.
The information required by this item is incorporated by
reference to the information set forth under the similarly
titled caption contained in the proxy statement to be used by us
in connection with our 2005 Annual Meeting of Shareholders.
Item 13. Certain
Relationships and Related Transactions.
The information required by this item is incorporated by
reference to the information set forth under the similarly
titled caption contained in the proxy statement to be used by us
in connection with our 2005 Annual Meeting of Shareholders.
Item 14. Principal
Accountant Fees and Services.
The information required by this item is incorporated by
reference to the information set forth under the similarly
titled caption contained in the proxy statement to be used by us
in connection with our 2005 Annual Meeting of Shareholders.
38
PART IV
|
|
Item 15. |
Exhibits and Financial Statement Schedule. |
(a)(1) Financial Statements. The financial
statements required to be filed by Item 8 herewith are as
follows:
(b) Exhibits.
The exhibits below are filed or incorporated herein by reference.
|
|
|
|
|
Exhibit No. | |
|
Description |
| |
|
|
|
3 |
.1.1(1) |
|
Restated Articles of Incorporation, as filed with the California
Secretary of State on May 1, 1996 |
|
|
3 |
.1.2(2) |
|
Certificate of Amendment of Restated Articles of Incorporation,
as filed with California Secretary of State on July 18, 2001 |
|
|
3 |
.1.3(3) |
|
Certificate of Determination of Preferences of Series A
Preferred Stock, as filed with the California Secretary of State
on August 23, 2001 |
|
|
3 |
.1.4(4) |
|
Certificate of Amendment of Restated Articles of Incorporation,
as filed with the California Secretary of State on
January 23, 2004 |
|
|
3 |
.2(5) |
|
Amended and Restated Bylaws |
|
|
4 |
.1(6) |
|
Form of Common Stock Purchase Warrant issued in connection with
Facilities Lease for 26632 Towne Center Drive, Suite 320,
Foothill Ranch, California |
|
|
4 |
.2(7) |
|
Third Amendment to Rights Agreement, dated October 26,
2004, between the Company and Equiserve Trust Company N.A |
|
|
4 |
.3(8) |
|
Second Amendment to Rights Agreement, dated as of
January 21, 2004, between Cardiogenesis Corporation and
EquiServe Trust Company, N.A., as Rights Agent |
|
|
4 |
.4(9) |
|
First Amendment to Rights Agreement, dated as of
January 17, 2002, between Cardiogenesis Corporation and
EquiServe Trust Company, N.A., as Rights Agent |
|
|
4 |
.5(10) |
|
Rights Agreement, dated as of August 17, 2001, between
Cardiogenesis Corporation and EquiServe Trust Company, N.A., as
Rights Agent |
|
|
4 |
.6(11) |
|
Securities Purchase Agreement, dated as of January 21,
2004, by and among Cardiogenesis Corporation and each of the
investors identified therein |
|
|
4 |
.7(12) |
|
Registration Rights Agreement, dated as of January 21,
2004, by and among Cardiogenesis Corporation and the investors
identified therein |
39
|
|
|
|
|
Exhibit No. | |
|
Description |
| |
|
|
|
4 |
.8(13) |
|
Form of Common Stock Purchase Warrant, dated January 21,
2004, having an exercise price of $1.37 per share |
|
|
4 |
.9(14) |
|
Form of Common Stock Purchase Warrant, dated January 21,
2004, having an exercise price of $1.00 per share |
|
|
4 |
.10(15) |
|
Securities Purchase Agreement, dated October 26, 2004,
between the Company and Laurus Master Fund, Ltd. |
|
|
4 |
.11(16) |
|
Secured Convertible Term Note, dated October 26, 2004, in
favor of Laurus Master Fund, Ltd. |
|
|
4 |
.12(17) |
|
Registration Rights Agreement, dated October 26, 2004,
between the Company and Laurus Master Fund, Ltd. |
|
|
4 |
.13(18) |
|
Common Stock Purchase Warrant, dated October 26, 2004, in
favor of Laurus Master Fund, Ltd. |
|
|
4 |
.14(19) |
|
Security Agreement, dated October 26, 2004, in favor of
Laurus Master Fund, Ltd. |
|
|
10 |
.1(20) |
|
Form of Indemnification Agreement by and between the Company and
each of its officers and directors |
|
|
10 |
.2(21) |
|
Stock Option Plan, as restated June, 2004 |
|
|
10 |
.3(22) |
|
Directors Stock Option Plan, as restated June, 2004 |
|
|
10 |
.4(23) |
|
1996 Employee Stock Purchase Plan, as restated June, 2004 |
|
|
10 |
.5(24) |
|
Facilities Lease for 26632 Towne Center Dr., Suite 320,
Foothill Ranch, California |
|
|
10 |
.6(29) |
|
401(k) Plan, as restated January 1, 2005 |
|
|
10 |
.8(25) |
|
1996 Equity Incentive Plan of the former Cardiogenesis
Corporation |
|
|
10 |
.10(26) |
|
Employment Agreement, dated as of September 27, 2001,
between the Company and Michael J. Quinn |
|
|
10 |
.11(27) |
|
Amendment No. 1 to Employment Agreement, dated July 3,
2002, between the Company and Michael J. Quinn |
|
|
10 |
.11(29) |
|
Amendment No. 2 to Employment Agreement, dated May 19,
2003, between the Company and Michael J. Quinn |
|
|
10 |
.11(29) |
|
Amendment No. 3 to Employment Agreement, dated
March 16, 2005, between the Company and Michael J. Quinn |
|
|
21 |
.1(28) |
|
List of Subsidiaries |
|
|
23 |
.1(29) |
|
Consent of PricewaterhouseCoopers LLP |
|
|
31 |
.1(29) |
|
Certification of the Chief Executive Officer pursuant to
Rule 13a-14(a) of Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 |
|
|
31 |
.2(29) |
|
Certification of the Chief Financial Officer pursuant to
Rule 13a-14(a) of Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 |
|
|
32 |
.1(29) |
|
Certifications of the Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 |
|
|
|
|
|
Management contract, compensatory plan or arrangement |
|
|
(1) |
Incorporated by reference to Exhibit 3.1 to the
Registrants Registration Statement on Form S-1/
A(File No. 33-03770), filed on May 21, 1996 |
|
(2) |
Incorporated by reference to Exhibit 3.2 to the
Registrants Quarterly Report on Form 10-Q filed on
August 14, 2001 |
|
(3) |
Incorporated by reference to Exhibit 4.2 to the
Registrants Current Report on Form 8-K filed on
August 14, 2001 |
|
(4) |
Incorporated by reference to Exhibit 3.1.4 to the
Registrants Annual Report on Form 10-K filed on
March 10, 2004 |
|
(5) |
Incorporated by reference to Exhibit 3.1.5 to the
Registrants Annual Report on Form 10-K filed on
March 10, 2004 |
40
|
|
(6) |
Incorporated by reference to Exhibit 10.1 to the
Registrants Quarterly Report on Form 10-Q/ A filed on
August 16, 2001 |
|
(7) |
Incorporated by reference to Exhibit 4.1 to the
Registrants Current Report on Form 8-K filed
October 28, 2004 |
|
(8) |
Incorporated by reference to Exhibit 4.1 to the
Registrants Current Report on Form 8-K filed
January 22, 2004 |
|
(9) |
Incorporated by reference to Exhibit 4.1 to the
Registrants Current Report on Form 8-K filed
January 18, 2002 |
|
|
(10) |
Incorporated by reference to Exhibit 4.1 to the
Registrants Current Report on Form 8-K filed
August 20, 2001 |
|
(11) |
Incorporated by reference to Exhibit 4.4 to the
Registrants Current Report on Form 8-K filed
January 22, 2004 |
|
(12) |
Incorporated by reference to Exhibit 4.5 to the
Registrants Current Report on Form 8-K filed
January 22, 2004 |
|
(13) |
Incorporated by reference to Exhibit 4.6 to the
Registrants Current Report on Form 8-K filed
January 22, 2004 |
|
(14) |
Incorporated by reference to Exhibit 4.7 to the
Registrants Current Report on Form 8-K filed
January 22, 2004 |
|
(15) |
Incorporated by reference to Exhibit 4.2 to the
Registrants Current Report on Form 8-K filed
October 28, 2004 |
|
(16) |
Incorporated by reference to Exhibit 4.3 to the
Registrants Current Report on Form 8-K filed
October 28, 2004 |
|
(17) |
Incorporated by reference to Exhibit 4.4 to the
Registrants Current Report on Form 8-K filed
October 28, 2004 |
|
(18) |
Incorporated by reference to Exhibit 4.5 to the
Registrants Current Report on Form 8-K filed
October 28, 2004 |
|
(19) |
Incorporated by reference to Exhibit 4.6 to the
Registrants Current Report on Form 8-K filed
October 28, 2004 |
|
(20) |
Incorporated by reference to the Companys Registration
Statement on Form S-1 (File No. 333-03770), as
amended, filed on April 18, 1996 |
|
(21) |
Incorporated by reference to Exhibit 4.1 to the
Registrants Registration Statement on Form S-8 (File
No. 333-122021) filed January 13, 2005 |
|
(22) |
Incorporated by reference to Exhibit 4.2 to the
Registrants Registration Statement on Form S-8 (File
No. 333-122021) filed January 13, 2005 |
|
(23) |
Incorporated by reference to Exhibit 4.3 to the
Registrants Registration Statement on Form S-8 (File
No. 333-122021) filed January 13, 2005 |
|
(24) |
Incorporated by reference to Exhibit 10.1 to the
Registrants Quarterly Report on Form 10-Q/ A filed on
August 16, 2001 |
|
(25) |
Incorporated by reference to Exhibit 4.1 to the former
Cardiogenesis Corporations Registration Statement on
Form S-8 (File No. 333-35095), filed on
September 8, 1997 |
|
(26) |
Incorporated by reference to Exhibit 10.11 to the
Registrants Annual Report on Form 10-K filed on
April 16, 2002 |
|
(27) |
Incorporated by reference to Exhibit 10.13 to the
Registrants Quarterly Report on Form 10-Q filed on
August 14, 2002 |
|
(28) |
Incorporated by reference to Exhibit 21.1 to the
Registrants Annual Report on Form 10-K filed on
March 10, 2004 |
|
(29) |
Filed herewith |
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
|
|
CARDIOGENESIS CORPORATION
|
|
|
|
Michael J. Quinn |
|
President, Chief Executive Officer |
|
Chairman of the Board and Director |
|
(Principal Executive Officer) |
Date: March 31, 2005
Pursuant to the requirements of the Securities Exchange Act
of 1934, this Report has been signed below by the following
persons on behalf of the Registrant in the capacities and on the
date indicated.
|
|
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
/s/ MICHAEL J. QUINN
Michael
J. Quinn |
|
President, Chief Executive Officer, Chairman of the Board and
Director (Principal Executive Officer) |
|
March 31, 2005 |
|
/s/ CHRISTINE G. OCAMPO
Christine
G. Ocampo |
|
Vice President, Chief Financial Officer, Secretary and
Treasurer
(Principal Accounting and Financial Officer) |
|
March 31, 2005 |
|
/s/ JOSEPH R.
KLETZEL, II
Joseph
R. Kletzel, II |
|
Senior Vice President, General Manager of Pacific Division,
Director |
|
March 31, 2005 |
|
/s/ ROBERT L. MORTENSEN
Robert
L. Mortensen |
|
Director |
|
March 31, 2005 |
|
/s/ MARVIN J.
SLEPIAN, M.D.
Marvin
J. Slepian, M.D. |
|
Director |
|
March 31, 2005 |
|
/s/ ROBERT C. STRAUSS
Robert
C. Strauss |
|
Director |
|
March 31, 2005 |
|
/s/ KURT E.
WEHBERG, M.D.
Kurt
E. Wehberg, M.D. |
|
Director |
|
March 31, 2005 |
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Cardiogenesis Corporation
In our opinion, the accompanying consolidated financial
statements listed in the index appearing under
Item 15(a)(1) present fairly, in all material respects, the
financial position of Cardiogenesis Corporation and its
subsidiaries (the Company) at December 31, 2004
and December 31, 2003, and the results of their operations
and their cash flows for each of the three years in the period
ended December 31, 2004 in conformity with accounting
principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 15(a)(2) presents
fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated
financial statements. These financial statements and the
financial statement schedule are the responsibility of the
Companys management; our responsibility is to express an
opinion on these financial statements and the financial
statement schedule based on our audits. We conducted our audits
of these statements in accordance with the Standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
|
|
|
PricewaterhouseCoopers LLP |
Orange County, California
March 16, 2005
43
CARDIOGENESIS CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(In thousands) | |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
4,740 |
|
|
$ |
1,013 |
|
|
Accounts receivable, net
|
|
|
3,578 |
|
|
|
1,830 |
|
|
Inventories, net
|
|
|
1,782 |
|
|
|
1,339 |
|
|
Prepaids and other current assets
|
|
|
513 |
|
|
|
453 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
10,613 |
|
|
|
4,635 |
|
Property and equipment, net
|
|
|
601 |
|
|
|
408 |
|
Restricted cash
|
|
|
2,884 |
|
|
|
|
|
Other assets
|
|
|
1,585 |
|
|
|
1,417 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
15,683 |
|
|
$ |
6,460 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
893 |
|
|
$ |
876 |
|
|
Accrued liabilities
|
|
|
1,263 |
|
|
|
1,159 |
|
|
Customer deposits
|
|
|
|
|
|
|
25 |
|
|
Deferred revenue
|
|
|
658 |
|
|
|
573 |
|
|
Current portion of capital lease obligation
|
|
|
5 |
|
|
|
1 |
|
|
Current portion of Secured Convertible Term Note
|
|
|
800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
3,619 |
|
|
|
2,634 |
|
Capital lease obligation, less current portion
|
|
|
18 |
|
|
|
6 |
|
Other long-term liability
|
|
|
496 |
|
|
|
|
|
Secured Convertible Term Note and related obligations
|
|
|
6,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
10,948 |
|
|
|
2,640 |
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 8)
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock:
|
|
|
|
|
|
|
|
|
|
|
no par value; 5,000 shares authorized; none issued and
outstanding;
|
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
no par value; 75,000 shares authorized; 41,500 and
37,859 shares issued and outstanding at December 31,
2004 and 2003, respectively
|
|
|
171,012 |
|
|
|
168,778 |
|
|
Accumulated deficit
|
|
|
(166,277 |
) |
|
|
(164,958 |
) |
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
4,735 |
|
|
|
3,820 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$ |
15,683 |
|
|
$ |
6,460 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements
44
CARDIOGENESIS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS
For the Years Ended December 31, 2004, 2003 and 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except per share | |
|
|
amounts) | |
Net revenues
|
|
$ |
15,454 |
|
|
$ |
13,518 |
|
|
$ |
13,048 |
|
Cost of revenues
|
|
|
2,193 |
|
|
|
2,295 |
|
|
|
2,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
13,261 |
|
|
|
11,223 |
|
|
|
10,113 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
1,442 |
|
|
|
1,944 |
|
|
|
657 |
|
|
Sales, general and administrative
|
|
|
11,322 |
|
|
|
9,590 |
|
|
|
12,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
12,764 |
|
|
|
11,534 |
|
|
|
12,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
497 |
|
|
|
(311 |
) |
|
|
(2,841 |
) |
Interest expense
|
|
|
(135 |
) |
|
|
(44 |
) |
|
|
(13 |
) |
Interest income
|
|
|
48 |
|
|
|
7 |
|
|
|
39 |
|
Non-cash interest expense
|
|
|
(1,439 |
) |
|
|
|
|
|
|
|
|
Other non-cash expense
|
|
|
(290 |
) |
|
|
|
|
|
|
|
|
Gain on sale of investee
|
|
|
|
|
|
|
|
|
|
|
2,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,319 |
) |
|
|
(348 |
) |
|
|
(530 |
) |
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$ |
(1,319 |
) |
|
$ |
(348 |
) |
|
$ |
(442 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$ |
(0.03 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
41,152 |
|
|
|
37,303 |
|
|
|
36,911 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements
45
CARDIOGENESIS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
For the Years Ended December 31, 2004, 2003 and 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
|
|
Other | |
|
|
|
|
|
|
Common Stock | |
|
Comprehensive | |
|
|
|
|
|
|
| |
|
Income | |
|
Accumulated | |
|
|
|
|
Shares | |
|
Amount | |
|
(Loss) | |
|
Deficit | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Balances, December 31, 2001
|
|
|
36,507 |
|
|
$ |
167,750 |
|
|
$ |
(88 |
) |
|
$ |
(164,080 |
) |
|
$ |
3,582 |
|
|
Issuance of common stock pursuant to stock purchased under the
Employee Stock Purchase Plan
|
|
|
114 |
|
|
|
85 |
|
|
|
|
|
|
|
|
|
|
|
85 |
|
|
Issuance of common stock for cash
|
|
|
500 |
|
|
|
486 |
|
|
|
|
|
|
|
|
|
|
|
486 |
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
88 |
|
|
|
|
|
|
|
88 |
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(530 |
) |
|
|
(530 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2002
|
|
|
37,121 |
|
|
|
168,321 |
|
|
|
|
|
|
|
(164,610 |
) |
|
|
3,711 |
|
|
Issuance of common stock pursuant to exercise of options
|
|
|
607 |
|
|
|
294 |
|
|
|
|
|
|
|
|
|
|
|
294 |
|
|
Issuance of common stock pursuant to stock purchased under the
Employee Stock Purchase Plan
|
|
|
131 |
|
|
|
88 |
|
|
|
|
|
|
|
|
|
|
|
88 |
|
|
Issuance of common stock purchase warrants
|
|
|
|
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
75 |
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(348 |
) |
|
|
(348 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2003
|
|
|
37,859 |
|
|
|
168,778 |
|
|
|
|
|
|
|
(164,958 |
) |
|
|
3,820 |
|
Issuance of common stock pursuant to exercise of options
|
|
|
317 |
|
|
|
184 |
|
|
|
|
|
|
|
|
|
|
|
184 |
|
Issuance of common stock pursuant to stock purchased under the
Employee Stock Purchase Plan
|
|
|
184 |
|
|
|
87 |
|
|
|
|
|
|
|
|
|
|
|
87 |
|
Issuance of common stock for cash
|
|
|
3,140 |
|
|
|
2,304 |
|
|
|
|
|
|
|
|
|
|
|
2,304 |
|
Reclassification of stock purchase warrants to long-term
liabilities
|
|
|
|
|
|
|
(341 |
) |
|
|
|
|
|
|
|
|
|
|
(341 |
) |
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,319 |
) |
|
|
(1,319 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2004
|
|
|
41,500 |
|
|
$ |
171,012 |
|
|
$ |
|
|
|
$ |
(166,277 |
) |
|
$ |
4,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements
46
CARDIOGENESIS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2004, 2003 and 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(1,319 |
) |
|
$ |
(348 |
) |
|
$ |
(530 |
) |
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative and warrant fair value adjustments
|
|
|
1,553 |
|
|
|
|
|
|
|
|
|
|
|
Accretion related to discount on notes payable
|
|
|
141 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
228 |
|
|
|
261 |
|
|
|
308 |
|
|
|
Gain from sale of equity investee
|
|
|
|
|
|
|
|
|
|
|
(2,285 |
) |
|
|
Provision for doubtful accounts
|
|
|
19 |
|
|
|
26 |
|
|
|
335 |
|
|
|
Inventory reserves
|
|
|
32 |
|
|
|
198 |
|
|
|
854 |
|
|
|
Interest expense accrued on note payable
|
|
|
77 |
|
|
|
|
|
|
|
|
|
|
|
Amortization of other assets
|
|
|
195 |
|
|
|
195 |
|
|
|
194 |
|
|
|
Amortization of debt issuance costs
|
|
|
66 |
|
|
|
44 |
|
|
|
|
|
|
|
Loss on disposal of property and equipment
|
|
|
|
|
|
|
|
|
|
|
28 |
|
|
|
Reduction of clinical trial accrual
|
|
|
(152 |
) |
|
|
(601 |
) |
|
|
(1,282 |
) |
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,767 |
) |
|
|
105 |
|
|
|
34 |
|
|
|
|
Inventories
|
|
|
(475 |
) |
|
|
95 |
|
|
|
729 |
|
|
|
|
Prepaids and other current assets
|
|
|
259 |
|
|
|
202 |
|
|
|
619 |
|
|
|
|
Other assets
|
|
|
(157 |
) |
|
|
(103 |
) |
|
|
|
|
|
|
|
Accounts payable
|
|
|
17 |
|
|
|
(365 |
) |
|
|
(307 |
) |
|
|
|
Accrued liabilities
|
|
|
256 |
|
|
|
(316 |
) |
|
|
(1,084 |
) |
|
|
|
Current portion of long term liabilities
|
|
|
|
|
|
|
|
|
|
|
(495 |
) |
|
|
|
Customer deposits
|
|
|
(25 |
) |
|
|
(25 |
) |
|
|
(4 |
) |
|
|
|
Deferred revenue
|
|
|
85 |
|
|
|
(48 |
) |
|
|
(310 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(967 |
) |
|
|
(680 |
) |
|
|
(3,196 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of equity in investee
|
|
|
|
|
|
|
|
|
|
|
2,285 |
|
|
Acquisition of property and equipment
|
|
|
(401 |
) |
|
|
(80 |
) |
|
|
(62 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(401 |
) |
|
|
(80 |
) |
|
|
2,223 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock from exercise of
options and from stock purchased under the Employee Stock
Purchase Plan
|
|
|
271 |
|
|
|
307 |
|
|
|
85 |
|
|
Net proceeds from sale of common stock to private entities
|
|
|
2,304 |
|
|
|
|
|
|
|
486 |
|
|
Payments on short term borrowings
|
|
|
(351 |
) |
|
|
|
|
|
|
(794 |
) |
|
Net proceeds from issuance of long-term debt
|
|
|
2,875 |
|
|
|
|
|
|
|
|
|
|
Repayments of capital lease obligations
|
|
|
(4 |
) |
|
|
(24 |
) |
|
|
(31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
5,095 |
|
|
|
283 |
|
|
|
(254 |
) |
|
|
|
|
Effect of exchange rates on cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
3,727 |
|
|
|
(477 |
) |
|
|
(1,139 |
) |
Cash and cash equivalents at beginning of year
|
|
|
1,013 |
|
|
|
1,490 |
|
|
|
2,629 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$ |
4,740 |
|
|
$ |
1,013 |
|
|
$ |
1,490 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$ |
10 |
|
|
$ |
19 |
|
|
$ |
13 |
|
|
|
|
|
|
|
|
|
|
|
|
Taxes paid
|
|
$ |
41 |
|
|
$ |
23 |
|
|
$ |
60 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of noncash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock purchase warrants
|
|
$ |
|
|
|
$ |
75 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Legally restricted proceeds from issuance of long-term debt
|
|
$ |
2,877 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements
47
CARDIOGENESIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature
of Operations:
Cardiogenesis Corporation (Cardiogenesis or the
Company), formerly known as Eclipse Surgical
Technologies, Inc., was founded in 1989 to develop, manufacture
and market surgical lasers and accessories for the treatment of
disease. Currently, Cardiogenesis emphasis is on the
development and manufacture of products used for transmyocardial
revascularization (TMR) and percutaneous myocardial
channeling (PMC), which are cardiovascular
procedures. PMC was formerly referred to as percutaneous
myocardial revascularization (PMR). The new name PMC
more literally depicts the immediate physiologic tissue effect
of the Cardiogenesis PMC system to ablate precise, partial
thickness channels into the heart muscle from the inside of the
left ventricle.
Cardiogenesis markets its products for sale primarily in the
U.S., Europe and Asia. Cardiogenesis operates in a single
segment.
These financial statements contemplate the realization of assets
and the satisfaction of liabilities in the normal course of
business. Cardiogenesis has sustained significant operating
losses for the last several years and may continue to incur
losses through 2005. Management believes its cash and cash
equivalents balance as of December 31, 2004 is sufficient
to meet the Companys capital and operating requirements
for the next 12 months.
Cardiogenesis may require additional financing in the future.
There can be no assurance that Cardiogenesis will be able to
obtain additional debt or equity financing, if and when needed,
on terms acceptable to the Company. Any additional equity or
debt financing may involve substantial dilution to
Cardiogenesis stockholders, restrictive covenants or high
interest costs. The failure to raise needed funds on
sufficiently favorable terms could have a material adverse
effect on the execution of the Companys business plan,
operating results or financial condition. Cardiogenesis
long term liquidity also depends upon its ability to increase
revenues from the sale of its products and achieve
profitability. The failure to achieve these goals could have a
material adverse effect on the execution of the Companys
business plan, operating results or financial condition.
2. Summary of Significant
Accounting Policies:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
|
|
|
Cash and Cash Equivalents: |
All highly liquid instruments purchased with a maturity of three
months or less at the time of purchase are considered cash
equivalents.
Accounts receivable consist of trade receivables recorded upon
recognition of revenue for product sales, reduced by reserves
for the estimated amount deemed uncollectible due to bad debt.
The allowance for doubtful accounts is the Companys best
estimate of the amount of probable credit losses in its existing
accounts receivable. The Company reviews the allowance for
doubtful accounts quarterly with the corresponding provision
included in general and administrative expenses. Past due
balances over 90 days and over a specified amount are
reviewed individually for collectibility. All other balances are
reviewed on a pooled basis
48
CARDIOGENESIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
by type of receivable. Account balances are charged off against
the allowance when the Company feels it is probable the
receivable will not be recovered. The Company does not have any
off-balance-sheet credit exposure related to its customers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at | |
|
|
|
|
|
Balance at | |
|
|
Beginning | |
|
|
|
|
|
End of | |
|
|
of Period | |
|
Additions (1) | |
|
Deductions (2) | |
|
Period | |
|
|
| |
|
| |
|
| |
|
| |
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
1,354 |
|
|
$ |
335 |
|
|
$ |
1,240 |
|
|
$ |
449 |
|
Year ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
449 |
|
|
$ |
26 |
|
|
$ |
449 |
|
|
$ |
26 |
|
Year ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
26 |
|
|
$ |
19 |
|
|
$ |
34 |
|
|
$ |
11 |
|
|
|
(1) |
Charged to costs and expenses. |
|
(2) |
Amounts written off against the reserve. |
Inventories are stated at the lower of cost (principally
standard cost, which approximates actual cost on a first-in,
first-out basis) or market value. The Company regularly monitors
potential excess, or obsolete, inventory by analyzing the usage
for parts on hand and comparing the market value to cost. When
necessary, the Company reduces the carrying amount of inventory
to its market value.
Patent and patent related expenditures are expensed as general
and administrative expenses as incurred.
In conjunction with the Secured Convertible Term Note,
$2,877,250 of the amounts received by the Company was deposited
in a restricted cash account. As of December 31, 2004, the
Company has received $7,000 of interest income related to this
balance, which is also restricted. Funds deposited in the
restricted cash account will only be released to the Company, if
at all, upon satisfaction of certain conditions, such as:
1) voluntary conversion of the restricted funds by Laurus,
and 2) conversion rights of the restricted funds by
Cardiogenesis subject to certain stock price requirements and
trading volume limitations. See Note 7.
Property and equipment are stated at cost and depreciated on a
straight-line basis over their estimated useful lives of two to
seven years. Assets acquired under capital leases are amortized
over the shorter of their estimated useful lives or the term of
the related lease (generally three to five years). Amortization
of leasehold improvements is based on the straight-line method
over the shorter of the estimated useful life or the lease term.
|
|
|
Accounting for the Impairment or Disposal of Long-Lived
Assets: |
The Company assesses potential impairment of finite lived,
intangible assets and other long-lived assets when there is
evidence that recent events or changes in circumstances indicate
that their carrying value may not be recoverable. Reviews are
performed to determine whether the carrying value of assets is
impaired based
49
CARDIOGENESIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
on comparison to the undiscounted estimated future cash flows.
If the comparison indicates that there is impairment, the
impaired asset is written down to fair value, which is typically
calculated using discounted estimated future cash flows. The
amount of impairment would be recognized as the excess of the
assets carrying value over its fair value. Events or
changes in circumstances which may cause impairment include:
significant changes in the manner of use of the acquired asset,
negative industry or economic trends, and underperformance
relative to historic or projected future operating results.
|
|
|
Fair Value of Other Financial Instruments: |
The Companys financial instruments consist primarily of
cash equivalents, accounts receivables, trade accounts payable,
accrued liabilities and the Secured Convertible Term Note and
related embedded derivatives. The carrying amounts of certain of
Cardiogenesis financial instruments including cash
equivalents, accounts receivable, accounts payable, and accrued
liabilities approximate fair value due to their short
maturities. The fair value of the embedded derivatives related
to the Secured Convertible Term Note and related obligations was
determined using the Binomial Option Pricing Model.
|
|
|
Derivative financial instruments |
The Companys derivative financial instruments consist of
embedded derivatives related to the $6,000,000 Secured
Convertible Term Note (Note). These embedded
derivatives include certain conversion features and variable
interest features. The accounting treatment of derivatives
requires that the Company record the derivatives at their
relative fair values as of the inception date of the agreement,
and at fair value as of each subsequent balance sheet date. Any
change in fair value will be recorded as non-operating, non-cash
income or expense at each reporting date. If the fair value of
the derivatives is higher at the subsequent balance sheet date,
the Company will record a non-operating, non-cash charge. If the
fair value of the derivatives is lower at the subsequent balance
sheet date, the Company will record non-operating, non-cash
income. As of December 31, 2004, the derivatives were
valued at $2,337,777. Conversion related derivatives were valued
using the Binomial Option Pricing Model with the following
assumptions: dividend yield of 0%; annual volatility of 70.5%;
and risk free interest rate of 3.25% as well as probablility
analysis related to trading volume restrictions. The remaining
derivatives were valued using discounted cash flows and
probability analysis. The derivatives are classified as
long-term liabilities. See Note 7.
Cardiogenesis recognizes revenue on product sales upon receipt
of a purchase order, shipment of the products, the price is
fixed or determinable and collection of sales proceeds is
reasonably assured. Where purchase orders allow customers an
acceptance period or other contingencies, revenue is recognized
upon the earlier of acceptance or removal of the contingency.
Revenues from sales to distributors and agents are recognized
upon shipment when there is evidence that an arrangement exists,
delivery has occurred under the Companys standard FOB
shipping point terms, the sales price is fixed or determinable
and the ability to collect sales proceeds is reasonably assured.
The contracts regarding these sales do not include any rights of
return or price protection clauses.
Cardiogenesis frequently loans lasers to hospitals in return for
the hospital purchasing a minimum number of handpieces at a
premium over the list price. The loaned lasers are depreciated
to cost of revenues over a useful life of 24 months. The
revenue on the handpieces is recognized upon shipment at an
amount equal to the list price. The premium over the list price
represents revenue related to the use of the laser unit and is
recognized ratably, generally over the 24-month useful life of
the placed lasers.
Revenues from service contracts, rentals, and per procedure fees
are recognized upon performance or over the terms of the
contract as appropriate.
50
CARDIOGENESIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Shipping and Handling Costs and Revenues: |
All shipping and handling costs are expensed as incurred and are
recorded as a component of cost of sales. Amounts billed to
customers for shipping and handling are included as a component
of revenue.
|
|
|
Research and Development: |
Research and development costs are charged to operations as
incurred.
Cardiogenesis laser products are generally sold with a one
year warranty. Cardiogenesis provides for estimated future costs
of repair or replacement which are reflected in accrued
liabilities in the accompanying financial statements.
Cardiogenesis expenses all advertising as incurred.
Cardiogenesis advertising expenses were $573,000, $80,000
and $221,000 for 2004, 2003, and 2002, respectively. Advertising
expenses include fees for website design and hosting, reprints
from medical journals, promotional materials and sales sheets.
Cardiogenesis accounts for income taxes using the liability
method under which deferred tax assets or liabilities are
calculated at the balance sheet date using current tax laws and
rates in effect for the year in which the differences are
expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to
the amounts expected to be realized.
|
|
|
Foreign Currency Translation: |
In 2002, there were translation adjustments recorded in
Cardiogenesis financial statements attributed to an
international subsidiary, a foreign sales corporation
(FSC). The FSC used its local currency as its
functional currency. Assets and liabilities were translated at
exchange rates in effect at the balance sheet date and income
and expense accounts at average exchange rates during the year.
Resulting translation adjustments were recorded in accumulated
other comprehensive income (loss) in shareholders equity.
In 2003, the Company decided to discontinue this FSC and at
December 31, 2003 and 2004 the only remaining asset is a
nominal cash balance.
|
|
|
Stock-Based Compensation: |
Cardiogenesis accounts for its stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees
(APB 25). Cardiogenesis has elected to adopt
the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123),
which requires pro forma disclosures in the financial statements
as if the measurement provisions of SFAS 123 had been
adopted. In addition, the Company has made the appropriate
disclosures as required under the Statement of Financial
Accounting Standards No. 148, Accounting for
Stock-Based Compensation Transition and
Disclosure.
Had compensation cost for the Stock Option Plan, the
Directors Stock Option Plan and the ESPP been determined
based on the fair value of the options at the grant date for
awards consistent with the provisions of
51
CARDIOGENESIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
SFAS 123, Cardiogenesis net loss and net loss per
share would have increased to the pro forma amounts indicated
below (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Net loss as reported
|
|
$ |
(1,319 |
) |
|
$ |
(348 |
) |
|
$ |
(530 |
) |
Stock-based employee compensation, net of related tax effects
|
|
$ |
(482 |
) |
|
$ |
(1,135 |
) |
|
$ |
(1,404 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$ |
(1,801 |
) |
|
$ |
(1,483 |
) |
|
$ |
(1,934 |
) |
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share as reported
|
|
$ |
(0.03 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
Pro forma basic and diluted net loss per share
|
|
$ |
(0.04 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.05 |
) |
Weighted average basic and diluted shares outstanding
|
|
|
41,152 |
|
|
|
37,303 |
|
|
|
36,911 |
|
The above pro-forma disclosures are not necessarily
representative of the effects on reported net income or loss for
future years. The aggregate fair value and weighted average fair
value per share of options granted in the years ended
December 31, 2004, 2003 and 2002 were $593,000, $651,000,
and $646,000, and $0.63, $0.33, and $0.58, respectively. The
fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the
following weighted-average assumptions for grants in 2004, 2003
and 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Expected life of option
|
|
|
7 years |
|
|
|
7 years |
|
|
|
7 years |
|
Risk-free interest rate
|
|
|
3.7 |
% |
|
|
3.68 |
% |
|
|
4.04 |
% |
Expected dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
79 |
% |
|
|
151 |
% |
|
|
75 |
% |
The aggregate fair value and weighted average fair value per
share of purchase rights under the ESPP in fiscal years 2004,
2003 and 2002 were $45,000, $55,000 and $56,000, and $0.34,
$0.43 and $0.59, respectively. The fair value for the purchase
rights under the ESPP is estimated using the Black-Scholes
option pricing model, with the following assumptions for the
rights granted in 2004, 2003 and 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Expected life
|
|
|
0.5 years |
|
|
|
0.5 years |
|
|
|
0.5 years |
|
Risk-free interest rate
|
|
|
3.7 |
% |
|
|
3.68 |
% |
|
|
4.04 |
% |
Expected dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
79 |
% |
|
|
151 |
% |
|
|
75 |
% |
Cardiogenesis accounts for non-employee stock-based awards, in
which goods or services are the consideration received for the
stock options issued, in accordance with the provisions of
SFAS No. 123 and related interpretations. Compensation
expense for non-employee stock-based awards is recognized in
accordance with FASB Interpretation 28, Accounting
for Stock Appreciation Rights and Other Variable Stock Options
or Award Plans, an Interpretation of APB Opinions No. 15,
and 25 (FIN 28). Under SFAS No. 123 and
FIN 28, the Company records compensation expense based on
the then-current fair values of the stock options at each
financial date. Compensation recorded during the service period
is adjusted in subsequent periods for changes in the stock
options fair value.
52
CARDIOGENESIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Basic earnings per share (EPS) is computed by
dividing the net loss by the weighted average number of common
shares outstanding for the period. Diluted EPS is computed
giving effect to all dilutive potential common shares that were
outstanding during the period. Dilutive potential common shares
consist of incremental shares issuable upon the exercise of
stock options, warrants and convertible notes payable using the
treasury stock method.
Options to purchase 4,177,000, 4,070,000, and
3,477,000 shares of common stock were outstanding at
December 31, 2004, 2003 and 2002, respectively. The range
of per share exercise prices for these options was
$0.32-$12.6875 for 2004, 2003 and 2002. Warrants to
purchase 75,000 shares of common stock at
$1.63 per share were outstanding as of December 31,
2004 and 2003. Warrants to purchase 275,000 shares of
common stock at prices ranging from $.35 to $.44 per share
were outstanding as of December 31, 2004 and 2003. Warrants
to purchase 3,100,000 and 2,640,000 shares of common
stock at $1.37 and $0.50, respectively, per share were also
outstanding at December 31, 2004. A $6,000,000 convertible
note payable, convertible at $0.50 per share subject to
certain downward adjustments due to decreases in the
Companys stock price, was outstanding at December 31,
2004. None of the options, warrants or convertible notes were
included in the calculation of diluted EPS because their
inclusion would have been anti-dilutive.
|
|
|
Recently Issued Accounting Standards: |
In September 2004, the Emerging Issues Task Force finalized its
consensus on EITF Issue No. 04-8, The Effect of
Contingently Convertible Debt on Diluted Earnings Per
Share (EITF 04-8). EITF 04-8 addresses when the
dilutive effect of contingently convertible debt with a market
price trigger should be included in diluted earnings per share
(EPS). Under EITF 04-8, the market price contingency should
be ignored and these securities should be treated as
non-contingent, convertible securities and always included in
the diluted EPS computation unless their inclusion would be
anti-dilutive. EITF 04-8 requires these securities be
included in diluted EPS using either the if-converted method or
the net share settlement method, depending on the conversion
terms of the security. EITF 04-8 is effective for all
periods ending after December 15, 2004 and is to be applied
by retrospectively restating previously reported EPS. The
adoption of EITF 04-8 will have an effect on the
Companys diluted EPS computation if, in future periods,
the inclusion of contingently convertible debt becomes dilutive.
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs An Amendment of ARB
No. 43, Chapter 4 (SFAS No. 151).
SFAS No. 151 amends the guidance in ARB No. 43,
Chapter 4, Inventory Pricing, to clarify the
accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). Among
other provisions, the new rule requires that items such as idle
facility expense, excessive spoilage, double freight, and
rehandling costs be recognized as current-period charges
regardless of whether they meet the criterion of so
abnormal as stated in ARB No. 43. Additionally,
SFAS No. 151 requires that the allocation of fixed
production overheads to the costs of conversion be based on the
normal capacity of the production facilities.
SFAS No. 151 is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. The
Company is currently evaluating the effect that the adoption of
SFAS No. 151 will have on its consolidated results of
operations and financial position, but does not expect the
adoption of this Statement to have a material impact.
In December 2004, the FASB issued SFAS No. 123
(revised 2004), Share-Based Payment
(SFAS No. 123R), which replaces SFAS No. 123
and supercedes APB Opinion No. 25. SFAS No. 123R
addresses the accounting for transactions in which an enterprise
receives employee services in exchange for (a) equity
instruments of the enterprise or (b) liabilities that are
based on the fair value of the enterprises equity
instruments or that may be settled by the issuance of such
equity instruments. SFAS No. 123R requires all
share-based payments to employees, including grants of employee
stock options and restrictive stock grants and units, to be
recognized as a compensation cost based on their fair values.
The pro forma disclosures
53
CARDIOGENESIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
previously permitted under SFAS No. 123 no longer will
be an alternative to financial statement recognition. The
Company is required to adopt SFAS No. 123R no later
than July 1, 2005. Under SFAS No. 123R, the
Company must determine the appropriate fair value model to be
used for valuing share-based payments, the amortization method
for compensation cost and the transition method to be used at
the date of adoption. The transition methods include prospective
and retroactive adoption options. Under the retroactive option,
prior periods may be restated either as of the beginning of the
year of adoption or for all periods presented. The prospective
method requires that compensation expense be recorded for all
unvested stock options and restricted stock at the beginning of
the first quarter of adoption of SFAS No. 123R, while
the retroactive methods would record compensation expense for
all unvested stock options and restricted stock beginning with
the first period restated. The Company is currently assessing
the impact that adoption of this Standard will have on its
consolidated result of operations, financial position and cash
flows. However, the Company believes that adoption of this
standard will result in a charge to reported earnings.
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Raw materials
|
|
$ |
1,085 |
|
|
$ |
1,042 |
|
Work in process
|
|
|
210 |
|
|
|
159 |
|
Finished goods
|
|
|
889 |
|
|
|
511 |
|
|
|
|
|
|
|
|
|
|
|
2,184 |
|
|
|
1,712 |
|
Less reserves
|
|
|
(402 |
) |
|
|
(373 |
) |
|
|
|
|
|
|
|
|
|
$ |
1,782 |
|
|
$ |
1,339 |
|
|
|
|
|
|
|
|
|
|
4. |
Property and Equipment: |
Property and equipment consists of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Computers and equipment
|
|
$ |
3,031 |
|
|
$ |
2,732 |
|
Manufacturing and demonstration equipment
|
|
|
2,240 |
|
|
|
2,181 |
|
Leasehold improvements
|
|
|
193 |
|
|
|
193 |
|
|
|
|
|
|
|
|
|
|
|
5,464 |
|
|
|
5,106 |
|
Less accumulated depreciation and amortization
|
|
|
(4,863 |
) |
|
|
(4,698 |
) |
|
|
|
|
|
|
|
|
|
$ |
601 |
|
|
$ |
408 |
|
|
|
|
|
|
|
|
Equipment under capital lease of $28,000, net of accumulated
amortization of $7,000 at December 31, 2004, is included in
computers and equipment.
54
CARDIOGENESIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Debt issuance costs
|
|
$ |
381 |
|
|
$ |
|
|
Licensing fee for PMC, net
|
|
|
1,119 |
|
|
|
1,314 |
|
Rental security deposit
|
|
|
85 |
|
|
|
103 |
|
|
|
|
|
|
|
|
|
|
$ |
1,585 |
|
|
$ |
1,417 |
|
|
|
|
|
|
|
|
On January 5, 1999, Cardiogenesis entered into an Agreement
(the PLC agreement) with PLC Medical Systems, Inc.
(PLC), which granted Cardiogenesis a non-exclusive
worldwide use of certain PLC patents. In return, Cardiogenesis
agreed to pay PLC a fee totaling $2,500,000 over an
approximately forty-month period. The present value of these
payments of $2,300,000 was recorded as a prepaid asset, included
in other assets, and is being amortized over the life of the
underlying patents. The Company has included the related
amortization expense in sales, general and administrative
expenses in the accompanying Consolidated Statements of
Operations. The Company has recorded related accumulated
amortization of $1,168,000 and $973,000 as of December 31,
2004 and 2003, respectively. The patent is being amortized
straight-line at a rate of approximately $195,000 per year
through 2010.
The patents covered in the PLC agreement are valuable to the
Companys Percutaneous Myocardial Channeling
(PMC) product line. The PMC product line is not
approved for sale in the United States but is sold
internationally. If PMC product sales are not substantial and
consistent in the future, the Company may suffer an impairment
of the assets value on the balance sheet.
In association with the October 2004 financing transaction
discussed in Note 7, the Company capitalized debt issuance
costs of $417,000. The costs are classified in other assets. The
costs are being amortized over the life of the note using the
effective interest method. In 2004, the total amortization
expense related to the debt issuance costs was $35,000 and is
included in non-cash interest expense on the accompanying 2004
Consolidated Statement of Operations.
Accrued liabilities consists of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Accrued research support
|
|
$ |
|
|
|
$ |
152 |
|
Accrued accounts payable and related expenses
|
|
|
200 |
|
|
|
327 |
|
Accrued vacation
|
|
|
206 |
|
|
|
203 |
|
Accrued commissions
|
|
|
602 |
|
|
|
234 |
|
Accrued other
|
|
|
255 |
|
|
|
243 |
|
|
|
|
|
|
|
|
|
|
$ |
1,263 |
|
|
$ |
1,159 |
|
|
|
|
|
|
|
|
|
|
7. |
Long-term Liabilities: |
In October 2004, the Company completed a financing transaction
with Laurus Master Fund, Ltd, a Cayman Islands corporation
(Laurus), pursuant to which the Company issued a
Secured Convertible Term Note (the Note) in the
aggregate principal amount of $6.0 million and a warrant to
purchase an aggregate
55
CARDIOGENESIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of 2,640,000 shares of the Companys common stock to Laurus
in a private offering. Net proceeds to the Company from the
financing, after payment of fees and expenses to Laurus, were
$5,752,500, $2,875,250 of which was received by the Company and
$2,877,250 of which was deposited in a restricted cash account.
Additional debt issuance costs of $170,000 were incurred in
conjunction with the transaction and are included in accrued
liabilities on the accompanying balance sheet. Funds deposited
in the restricted cash account will only be released to the
Company, if at all, upon satisfaction of certain conditions,
such as: 1) voluntary conversion of the restricted funds by
Laurus, and 2) conversion rights of the restricted funds by
Cardiogenesis subject to certain stock price levels and trading
volume limitations.
The Note matures in October 2007, absent earlier redemption by
the Company or earlier conversion by Laurus. The Note is
convertible into shares of the Companys common stock at
the option of Laurus and, in certain circumstances, at the
Companys option and subject to certain trading volume
limitations and certain limitations on Laurus ownership
percentage. The Laurus financing documents restrict the Company
from obtaining additional debt financing, subject to certain
specified exceptions. In addition, subject to certain
exceptions, the Company has granted to Laurus a right of first
refusal to provide additional financing in the event that the
Company proposes to engage in additional debt financing or to
sell any equity securities. The Note is collateralized by all of
the Companys assets.
Under certain rare circumstances, the Note agreement could
result in conversion of the Companys common stock at
conversion prices that are low enough that the shares required
would be in excess of the shares currently authorized by the
Company. Although it is unlikely, if the Company was in a
situation where the current shares authorized were not
sufficient to cover the conversion amount, a cash payment would
be required. Since there is a possibility that a cash payment
would be required, certain features of the Note as well as other
equity related instruments have been recorded as liabilities on
the Companys balance sheet.
The $6,000,000 Note includes certain features that are
considered embedded derivative financial instruments, such as a
variety of conversion options, a variable interest rate feature,
events of default and a variable liquidated damages clause.
These features are described below, as follows:
|
|
|
|
|
The Note is convertible at the holders option at any time
at the fixed conversion price of $.50 per share. This conversion
feature has been identified as an embedded derivative and has
been bifurcated and recorded on the Companys balance sheet
at its fair value; |
|
|
|
Beginning May 2005, the Company is required to make monthly
principal payments of $100,000 per month. The monthly payment as
well as related accrued interest must be converted to common
stock at the fixed conversion price of $.50 if the fair value of
the Companys common stock is greater than $0.55 per share
for the 5 days preceding the payment due date. This
conversion feature has been identified as an embedded derivative
and has been bifurcated and recorded on the Companys
balance sheet at its fair value; |
|
|
|
Restricted cash must be converted at a fixed conversion price of
$.50 per share if the fair value of the Companys common
stock is greater than 125%, 150% or 175% (each threshold must
meet higher trading volume limits) of the initial fixed
conversion price of $.50 per share. This conversion feature has
been identified as an embedded derivative and has been
bifurcated and recorded on the Companys balance sheet at
its fair value; |
|
|
|
Annual interest on the Note is equal to the prime
rate published in The Wall Street Journal from time to
time, plus two percent (2.0%), provided that such annual rate of
interest may not be less than six and one-half percent (6.5%).
For every 25% increase in the Companys common stock fair
value above $.50 per share, the interest rate will be reduced by
2%. The interest rate may never be reduced below 0%. Interest on
the Note is payable monthly in arrears on the first day of each
month during the term of the Note, beginning November 2004. The
potential interest rate reduction due to future |
56
CARDIOGENESIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
possible increases in the Companys stock price has been
identified as an embedded derivative and has been bifurcated and
recorded on the Companys balance sheet at its fair value; |
|
|
|
The Note agreement includes a liquidated damages provision based
on any failure to meet registration requirements for shares
issuable under the conversion of the note or exercise of the
warrants by February 2005. This liquidated damages feature
represents an embedded derivative. However, based on the de
minimus value associated with this feature, no value has been
assigned at issuance and at December 31, 2004; |
|
|
|
The Note agreement contains certain events of default including
delinquency, bankruptcy, change in control and stop trade or
trade suspension. In the event of default, Laurus has the right
to call the debt at a 30% premium, increase the note rate to the
stated rate, increase the note rate by an additional 12%,
foreclose on the collateral, and/or seek other remedies.
Laurus right to increase the interest rate on the debt in
the event of default represents an embedded derivative. However,
based on the de minimus value associated with this feature, no
value has been assigned at issuance and at December 31,
2004. |
In conjunction with the Note, the Company issued a warrant to
purchase 2,640,000 shares of common stock. The accounting
treatment of the derivatives and warrant requires that the
Company record the derivatives and the warrant at their relative
fair value as of the inception date of the agreement, and at
fair value as of each subsequent balance sheet date. Any change
in fair value will be recorded as non-operating, non-cash income
or expense at each reporting date. If the fair value of the
derivatives and warrants is higher at the subsequent balance
sheet date, the Company will record a non-operating, non-cash
charge. If the fair value of the derivatives and warrants is
lower at the subsequent balance sheet date, the Company will
record non-operating, non-cash income. As of December 31,
2004, the derivatives were valued at $2,338,000. Conversion
related derivatives were valued using the Binomial Option
Pricing Model with the following assumptions: dividend yield of
0%; annual volatility of 70.5%; and risk free interest rate of
3.25% as well as probablility analysis related to trading volume
restrictions. The remaining derivatives were valued using
discounted cash flows and probability analysis. Warrants were
valued at $766,000 at December 31, 2004 using the Binomial
Option Pricing model with the following assumptions: dividend
yield of 0%; annual volatility of 70.5%; risk-free interest rate
of 3.94%; and exercise factor of 2. Both the derivatives and
warrants were classified as long-term liabilities.
The initial relative fair value assigned to the embedded
derivative was $1,075,000 and the initial relative fair value
assigned to the warrant was $631,000, both of which were
recorded as discounts to the Note and are being amortized to
interest expense over the expected term of the debt, using the
effective interest method. At December 31, 2004, the
unamortized discount on the Note was $1,565,000. The effective
interest rate on the Note for the period ended December 31,
2004 was 152%.
Future principal obligations, net of restricted cash, due under
the note are as follows:
|
|
|
|
|
2005
|
|
$ |
800,000 |
|
2006
|
|
|
1,200,000 |
|
2007
|
|
|
1,000,000 |
|
|
|
|
|
Total
|
|
$ |
3,000,000 |
|
|
|
|
|
The market price of the Companys common stock
significantly impacts the extent to which the Company is
permitted to convert the unrestricted and restricted portions of
the Laurus debt into shares of the Companys common stock.
The lower the market price of the Companys common stock as
of the respective times of conversion, the more shares the
Company will need to issue to Laurus to convert the principal
and interest payments then due on the unrestricted portion of
the debt. If the market price of the Companys common stock
falls below certain thresholds, the Company will be unable to
convert any such repayments of
57
CARDIOGENESIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
principal and interest into equity, and the Company will be
forced to make such repayments in cash. The Companys
operations could be materially adversely impacted if the Company
is forced to make repeated cash payments on the unrestricted
portion of the Laurus debt.
Further, prior to the full repayment of the unrestricted portion
of the Laurus debt, the Company will only be able to require
conversions of the $3,000,000 restricted cash amount to the
extent the market price of the Companys common stock
exceeds certain levels. To the extent that the market price of
the Companys common stock does not reach such specified
levels, the Company will be not be entitled to take possession
of any of the restricted cash during the term of the Laurus
note. The restricted portion of the debt will continue to accrue
interest during the entire period that the Company is unable to
require conversion. In addition, to the extent that conversions
of the restricted portion of the debt are not effected during
the term of the Note, the Company has only a limited ability to
convert a specified amount of the restricted debt (subject to
meeting certain minimum market price thresholds and volume
requirements), and the Company will be required to repay the
remaining restricted principal and interest in cash. The cash
required to pay such principal amounts payable would come from
the restricted cash and any such interest amounts payable would
most likely be paid from available cash, which may not be
sufficient to repay the amounts due.
|
|
8. |
Commitments and Contingencies: |
Cardiogenesis has entered into an operating lease for an office
facility with terms extending through October 2006. The minimum
future rental payments are as follows (in thousands):
|
|
|
|
|
Year Ending December 31, |
|
|
|
|
|
2005
|
|
$ |
350 |
|
2006
|
|
|
306 |
|
|
|
|
|
|
|
$ |
656 |
|
|
|
|
|
Rent expense was approximately $359,000, $547,000 and $504,000
for the years ended December 31, 2004, 2003 and 2002,
respectively.
In November 2003, the Companys employment relationship
with Darrell Eckstein, Cardiogenesis former President,
Chief Operating Officer, Acting Chief Financial Officer, Chief
Accounting Officer, Treasurer and Secretary was terminated. In
connection with his departure, Mr. Eckstein has made
certain breach of contract claims arising out of his employment
agreement with the Company, as well as certain tort claims and
is seeking unspecified monetary damages. Pursuant to the terms
of Mr. Eckstein s employment agreement, the matter has been
submitted to binding arbitration. The Company believes
Mr. Ecksteins claims are without merit and is
vigorously defending against these claims. However, if
Mr. Eckstein were to prevail on some or all of his claims,
the Company cannot give any assurances that such claims would
not have a material adverse effect on the Company s financial
condition, results of operations or cash flows. Because of the
preliminary stage of this case, an estimate of potential
damages, if any, would be premature and speculative. As a
result, the Company has not made any such estimate. Any legal
costs in connection with this case are being expensed as
incurred and are included in selling, general and administrative
on the accompanying Statement of Operations.
|
|
|
Issuances of Common Stock: |
In April 2002, the Company sold 500,000 shares, of common
stock at a purchase price of $1.00 per share to a
governmental entity. Certain bylaws were amended as a condition
of these sales.
58
CARDIOGENESIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In January 2004, Cardiogenesis sold approximately
3,100,000 shares of common stock to private investors for a
total price of $2,700,000.
During the year ended December 31, 2001, the Company issued
warrants to purchase 75,000 shares of common stock at
a price of $1.63 per share in connection with a facilities
lease agreement executed in 2001. The warrants were fair valued
at $94,000 using the Black-Scholes pricing model and are being
amortized over the five-year lease term. For the years ended
December 31, 2004, 2003 and 2002, the Company recorded
amortization charges to rent expense of $19,000 per year in
connection with these warrants. The warrants expire in May 2006
and were outstanding at December 31, 2004.
During the year ended December 31, 2003, the Company issued
five-year warrants to purchase 275,000 shares of
common stock at exercise prices ranging from $.35 to
$.44 per share in connection with a credit facility that
was executed in March 2003 and canceled in March 2004. The
warrants were fair valued at $75,000 using the Black-Scholes
pricing model. For the years ended December 31, 2004 and
2003, the Company recorded amortization of $31,000 and $44,000,
respectively, in connection with these warrants. The warrants
were fully amortized in 2004 when the credit facility was
cancelled. The warrants expire in March 2008 and were
outstanding at December 31, 2004.
In January 2004, in conjunction with a private equity offering,
Cardiogenesis issued a warrant to purchase approximately
3,100,000 shares of common stock at a price of
$1.37 per share. The warrants are immediately exercisable
and have a term of five years.
In October 2004, Cardiogenesis issued a warrant to purchase an
aggregate of 2,640,000 shares of the Companys common
stock at a price of $0.50 per share, with a term of
7 years, to Laurus Master Fund in connection with the
secured convertible note agreement. (See Note 7).
During the years ended December 31, 2004, 2003 and 2002, no
warrants were exercised.
|
|
|
Options Granted to Consultants: |
At December 31, 2004, 2003, 2002, options for consultants
to purchase a total of 70,000, 57,000, and 47,000 shares of
common stock, respectively, at exercise prices ranging from $.78
to $1.40 per share were outstanding. The terms under which
stock options are exercised are the same as Cardiogenesis
Stock Option Plan which is described below. Substantially all of
these options were exercisable at the date of grant. These
options are included in the Stock Option Plan disclosures below.
The Companys articles of incorporation authorize the board
of directors, subject to any limitations prescribed by law, to
issue shares of preferred stock in one or more series without
shareholder approval. On August 17, 2001 the Company
adopted a shareholder rights plan, as amended, and under the
rights plan, the board of directors declared a dividend
distribution of one right for each outstanding share of common
stock to shareholders of record at the close of business on
August 30, 2001. Pursuant to the Rights Agreement, in the
event (a) any person or group acquires 15% or more of the
Companys then outstanding shares of voting stock (or 21%
or more of the Companys then outstanding shares of voting
stock in the case of State of Wisconsin Investment Board),
(b) a tender offer or exchange offer is commenced that
would result in a person or group acquiring 15% or more of the
Companys then outstanding voting stock, (c) the
Company is acquired in a merger or other business combination in
which the Company is not the surviving corporation or
(d) 50% or more of the Companys consolidated assets
or earning power are sold, then the holders of the
Companys common stock are entitled to exercise the rights
under the Rights Plan, which include, based on the type of event
which has occurred, (i) rights to purchase preferred shares
from the Company, (ii) rights to purchase
59
CARDIOGENESIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
common shares from the Company having a value twice that of the
underlying exercise price, and (iii) rights to acquire
common stock of the surviving corporation or purchaser having a
market value of twice that of the exercise price. The rights
expire on August 17, 2011, and may be redeemed prior
thereto at $.001 per right under certain circumstances.
Cardiogenesis maintains a Stock Option Plan, which includes the
Employee Program under which incentive and nonstatutory options
may be granted to employees and the Consultants Program, under
which nonstatutory options may be granted to consultants of the
Company. As of December 31, 2004, Cardiogenesis had
reserved a total of 10,100,000 shares of common stock for
issuance under this plan. Under the plan, options may be granted
at not less than fair market value, as determined by the Board
of Directors. Options generally vest over a period of three
years and expire ten years from date of grant. No shares of
common stock issued under the plan are subject to repurchase.
|
|
|
Directors Stock Option Plan: |
Cardiogenesis maintains a Directors Stock Option Plan
which provides for the grant of nonstatutory options to
directors who are not officers or employees of the Company. As
of December 31, 2004, Cardiogenesis had reserved
875,000 shares of common stock for issuance under this
plan. Under this plan, options are granted at the trading price
of the common stock at the date of grant. Options generally vest
over twelve to thirty-six months and expire ten years from date
of grant. No shares of common stock issued under the plan are
subject to repurchase.
|
|
|
Employee Stock Purchase Plan: |
Cardiogenesis maintains an Employee Stock Purchase Plan
(ESPP), under which 1,178,400 shares of common
stock have been reserved for issuance. Cardiogenesis adopted the
ESPP in April 1996. The purpose of the ESPP is to provide
eligible employees of Cardiogenesis with a means of acquiring
common stock of Cardiogenesis through payroll deductions.
Eligible employees are permitted to purchase common stock at 85%
of the fair market value through payroll deductions of up to 15%
of an employees compensation, subject to certain
limitations. During fiscal years 2004, 2003 and 2002,
approximately 184,000, 131,000 and 114,000 shares,
respectively, were sold through the ESPP.
60
CARDIOGENESIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Option activity under the Stock Option Plan and the Directors
Stock Option Plan is as follows (in thousands, except per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options | |
|
|
|
|
| |
|
|
|
|
|
|
Weighted | |
|
|
Shares | |
|
|
|
Average | |
|
|
Available | |
|
Number | |
|
Price per | |
|
|
for Grant | |
|
of Shares | |
|
Share | |
|
|
| |
|
| |
|
| |
Balance, December 31, 2001
|
|
|
510 |
|
|
|
2,787 |
|
|
$ |
2.42 |
|
|
Additional shares reserved
|
|
|
1,500 |
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(1,105 |
) |
|
|
1,105 |
|
|
$ |
0.82 |
|
|
Options forfeited
|
|
|
415 |
|
|
|
(415 |
) |
|
$ |
3.86 |
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2002
|
|
|
1,320 |
|
|
|
3,477 |
|
|
$ |
1.74 |
|
|
Additional shares reserved
|
|
|
1,500 |
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(2,034 |
) |
|
|
2,034 |
|
|
$ |
0.52 |
|
|
Options forfeited
|
|
|
834 |
|
|
|
(834 |
) |
|
$ |
1.46 |
|
|
Options exercised
|
|
|
|
|
|
|
(607 |
) |
|
$ |
0.48 |
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
1,620 |
|
|
|
4,070 |
|
|
$ |
1.37 |
|
|
Additional shares reserved
|
|
|
1,800 |
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(941 |
) |
|
|
941 |
|
|
$ |
.87 |
|
|
Options forfeited
|
|
|
487 |
|
|
|
(487 |
) |
|
$ |
1.72 |
|
|
Options expired
|
|
|
30 |
|
|
|
(30 |
) |
|
$ |
1.44 |
|
|
Options exercised
|
|
|
|
|
|
|
(317 |
) |
|
$ |
.58 |
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
2,996 |
|
|
|
4,177 |
|
|
$ |
1.28 |
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about the
Companys stock options outstanding and exercisable under
the Stock Option Plan and the Directors Stock Option Plan
at December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
Options Exercisable | |
|
|
| |
|
| |
|
|
|
|
Weighted | |
|
|
|
|
|
|
|
|
Average | |
|
Weighted | |
|
|
|
Weighted | |
|
|
|
|
Remaining | |
|
Average | |
|
|
|
Average | |
|
|
Number | |
|
Contractual Life | |
|
Exercise | |
|
Number | |
|
Exercise | |
Exercise Prices |
|
Outstanding | |
|
(In Years) | |
|
Price | |
|
Exercisable | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
|
|
|
(In thousands) | |
|
|
$0.32 - $ 0.37
|
|
|
694 |
|
|
|
8.72 |
|
|
$ |
0.35 |
|
|
|
684 |
|
|
$ |
0.35 |
|
$0.43 - $ 0.54
|
|
|
55 |
|
|
|
9.75 |
|
|
$ |
0.49 |
|
|
|
16 |
|
|
$ |
0.51 |
|
$0.56 - $ 0.83
|
|
|
993 |
|
|
|
8.48 |
|
|
$ |
0.73 |
|
|
|
583 |
|
|
$ |
0.73 |
|
$0.84 - $ 0.91
|
|
|
307 |
|
|
|
7.67 |
|
|
$ |
0.87 |
|
|
|
303 |
|
|
$ |
0.87 |
|
$1.01 - $ 1.16
|
|
|
771 |
|
|
|
8.28 |
|
|
$ |
1.10 |
|
|
|
480 |
|
|
$ |
1.10 |
|
$1.17 - $ 1.40
|
|
|
376 |
|
|
|
7.98 |
|
|
$ |
1.30 |
|
|
|
360 |
|
|
$ |
1.30 |
|
$1.67 - $ 1.75
|
|
|
714 |
|
|
|
4.17 |
|
|
$ |
1.70 |
|
|
|
714 |
|
|
$ |
1.70 |
|
$2.57 - $ 6.06
|
|
|
147 |
|
|
|
5.74 |
|
|
$ |
3.88 |
|
|
|
147 |
|
|
$ |
3.88 |
|
$6.38 - $12.69
|
|
|
120 |
|
|
|
3.42 |
|
|
$ |
8.81 |
|
|
|
120 |
|
|
$ |
8.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,177 |
|
|
|
7.54 |
|
|
$ |
1.28 |
|
|
|
3,407 |
|
|
$ |
1.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys stock options exercisable under the Stock
Option Plan and the Directors Stock Option Plan at
December 31, 2004 and 2003 were 3,407,000 and
3,335,000 shares, respectively.
61
CARDIOGENESIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
10. |
Employee Retirement Plan: |
Cardiogenesis maintains a 401(k) plan for its employees. The
plan allows eligible employees to defer up to 15% of their
earnings, not to exceed the statutory amount per year on a
pretax basis through contributions to the plan. The plan
provides for employer contributions at the discretion of the
Board of Directors. For the years ended December 31, 2004,
2003 and 2002, $115,000, $85,000 and $93,000 of employer
contributions were made to the plan, respectively.
The Company operates in one segment. The principal markets for
the Companys products are in the United States.
International sales occur in Europe, Canada and Asia and
amounted to $483,000, $415,000 and $494,000 for the years ended
December 31, 2004, 2003 and 2002, respectively. The
international sales represent 3%, 3% and 4% of total sales for
the years ended December 31, 2004, 2003 and 2002,
respectively. The majority of international sales are
denominated in Euros.
Significant components of Cardiogenesis deferred tax
assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31 | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Net operating losses
|
|
$ |
53,751 |
|
|
$ |
54,420 |
|
Credits
|
|
|
3,627 |
|
|
|
3,750 |
|
Research and development
|
|
|
748 |
|
|
|
525 |
|
Reserves
|
|
|
355 |
|
|
|
321 |
|
Accrued liabilities
|
|
|
1,099 |
|
|
|
511 |
|
Depreciation/ Amortization
|
|
|
195 |
|
|
|
109 |
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
|
59,775 |
|
|
|
59,636 |
|
Less valuation allowance
|
|
|
(59,775 |
) |
|
|
(59,636 |
) |
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
The Company has established a valuation allowance to the extent
of its deferred tax assets because it was determined by
management that it was more likely than not at the balance sheet
date that such deferred tax assets would not be realized. At
such time as it is determined that it is more likely than not
that the deferred tax assets are realizable, the valuation
allowance will be reduced.
As of December 31, 2004, the Company had federal and state
net operating loss carryforwards of approximately $150,640,000
and $43,424,000, respectively, to offset future taxable income.
In addition, the Company had federal and state credit
carryforwards of approximately $2,512,000 and $968,000 available
to offset future tax liabilities. The Companys net
operating loss carryforwards, as well as federal credit
carryforwards, will expire at various dates beginning in 2008
through 2024, if not utilized. Research and experimentation
credits carry forward indefinitely for state purposes. The
Company also has a manufacturers investment credit for state
purposes of approximately $147,000.
The Internal Revenue Code limits the use of net operating loss
and tax credit carryforwards in certain situations where changes
occur in the stock ownership of a company. The Company believes
that the sale of common stock in its initial public offering and
the merger with Cardiogenesis resulted in changes in ownership
which could restrict the utilization of the carryforwards.
Income tax expense for each of the three years ended
December 31, 2004 was $800 per year.
62
CARDIOGENESIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
13. |
Risks and Concentrations: |
Cardiogenesis sells its products primarily to hospitals and
other healthcare providers in North America, Europe and Asia.
Cardiogenesis performs ongoing credit evaluations of its
customers and generally does not require collateral. Although
Cardiogenesis maintains allowances for potential credit losses
that it believes to be adequate, a payment default on a
significant sale could materially and adversely affect its
operating results and financial condition. At December 31,
2004, three customers individually accounted for 11%, 12%, and
15% of gross accounts receivable. For the years ended
December 31, 2004, 2003 and 2002, no customer individually
accounted for 10% or more of net revenues.
At December 31, 2004 and 2003, the Company had amounts on
deposit with financial institutions in excess of the federally
insured limits of $100,000.
Certain components of laser units and fiber-optic handpieces are
generally acquired from multiple sources. Other laser and
fiber-optic components and subassemblies are purchased from
single sources. Although the Company has identified alternative
vendors, the qualification of additional or replacement vendors
for certain components or services is a lengthy process. Any
significant supply interruption would have a material adverse
effect on the Companys ability to manufacture its products
and, therefore, would harm its business. The Company intends to
continue to qualify multiple sources for components that are
presently single sourced.
From January 1, 2005 through March 11, 2005, Laurus
elected to convert an aggregate of $355,140 of principal and
interest under the Note into an aggregate of 710,281 shares
of Cardiogenesis common stock at a conversion price of
$.50 per share. See Note 7. Of this amount, $275,000 in
principal was converted into shares of common stock and a
corresponding amount was released from restricted cash as
available for use by the Company in the first quarter of 2005.
63
CARDIOGENESIS CORPORATION
SCHEDULE II VALUATION AND QUALIFYING
ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at | |
|
|
|
|
|
Balance at | |
|
|
Beginning | |
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|
|
|
|
End of | |
|
|
of Period | |
|
Additions(1) | |
|
Deductions(2) | |
|
Period | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Inventory reserve:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory reserve
|
|
$ |
1,246 |
|
|
$ |
854 |
|
|
$ |
1,739 |
|
|
$ |
361 |
|
Year ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory reserve
|
|
$ |
361 |
|
|
$ |
198 |
|
|
$ |
186 |
|
|
$ |
373 |
|
Year ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory reserve
|
|
$ |
373 |
|
|
$ |
32 |
|
|
$ |
3 |
|
|
$ |
402 |
|
Valuation allowance relating to deferred tax asset:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
$ |
63,931 |
|
|
$ |
|
|
|
$ |
1,471 |
|
|
$ |
62,460 |
|
Year ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
$ |
62,460 |
|
|
$ |
|
|
|
$ |
2,824 |
|
|
$ |
59,636 |
|
Year ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
$ |
59,636 |
|
|
$ |
139 |
|
|
|
|
|
|
$ |
59,775 |
|
|
|
(1) |
Charged to costs and expenses. |
|
(2) |
Amounts written off against the reserve. |
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
64
EXHIBIT INDEX
|
|
|
|
|
Exhibit No. |
|
Description |
|
|
|
|
3 |
.1.1(1) |
|
Restated Articles of Incorporation, as filed with the California
Secretary of State on May 1, 1996 |
|
3 |
.1.2(2) |
|
Certificate of Amendment of Restated Articles of Incorporation,
as filed with California Secretary of State on July 18, 2001 |
|
|
3 |
.1.3(3) |
|
Certificate of Determination of Preferences of Series A
Preferred Stock, as filed with the California Secretary of State
on August 23, 2001 |
|
|
3 |
.1.4(4) |
|
Certificate of Amendment of Restated Articles of Incorporation,
as filed with the California Secretary of State on
January 23, 2004 |
|
|
3 |
.2(5) |
|
Amended and Restated Bylaws |
|
|
4 |
.1(6) |
|
Form of Common Stock Purchase Warrant issued in connection with
Facilities Lease for 26632 Towne Center Drive, Suite 320,
Foothill Ranch, California |
|
|
4 |
.2(7) |
|
Third Amendment to Rights Agreement, dated October 26,
2004, between the Company and Equiserve Trust Company N.A |
|
|
4 |
.3(8) |
|
Second Amendment to Rights Agreement, dated as of
January 21, 2004, between Cardiogenesis Corporation and
EquiServe Trust Company, N.A., as Rights Agent |
|
|
4 |
.4(9) |
|
First Amendment to Rights Agreement, dated as of
January 17, 2002, between Cardiogenesis Corporation and
EquiServe Trust Company, N.A., as Rights Agent |
|
|
4 |
.5(10) |
|
Rights Agreement, dated as of August 17, 2001, between
Cardiogenesis Corporation and EquiServe Trust Company, N.A., as
Rights Agent |
|
|
4 |
.6(11) |
|
Securities Purchase Agreement, dated as of January 21,
2004, by and among Cardiogenesis Corporation and each of the
investors identified therein |
|
|
4 |
.7(12) |
|
Registration Rights Agreement, dated as of January 21,
2004, by and among Cardiogenesis Corporation and the investors
identified therein |
|
|
4 |
.8(13) |
|
Form of Common Stock Purchase Warrant, dated January 21,
2004, having an exercise price of $1.37 per share |
|
|
4 |
.9(14) |
|
Form of Common Stock Purchase Warrant, dated January 21,
2004, having an exercise price of $1.00 per share |
|
|
4 |
.10(15) |
|
Securities Purchase Agreement, dated October 26, 2004,
between the Company and Laurus Master Fund, Ltd. |
|
|
4 |
.11(16) |
|
Secured Convertible Term Note, dated October 26, 2004, in
favor of Laurus Master Fund, Ltd. |
|
|
4 |
.12(17) |
|
Registration Rights Agreement, dated October 26, 2004,
between the Company and Laurus Master Fund, Ltd. |
|
|
4 |
.13(18) |
|
Common Stock Purchase Warrant, dated October 26, 2004, in
favor of Laurus Master Fund, Ltd. |
|
|
4 |
.14(19) |
|
Security Agreement, dated October 26, 2004, in favor of
Laurus Master Fund, Ltd. |
|
|
10 |
.1(20) |
|
Form of Indemnification Agreement by and between the Company and
each of its officers and directors |
|
|
10 |
.2(21) |
|
Stock Option Plan, as restated June, 2004 |
|
|
10 |
.3(22) |
|
Directors Stock Option Plan, as restated June, 2004 |
|
|
10 |
.4(23) |
|
1996 Employee Stock Purchase Plan, as restated June, 2004 |
|
|
10 |
.5(24) |
|
Facilities Lease for 26632 Towne Center Dr., Suite 320,
Foothill Ranch, California |
|
|
10 |
.6(29) |
|
401(k) Plan, as restated January 1, 2005 |
|
|
10 |
.8(25) |
|
1996 Equity Incentive Plan of the former Cardiogenesis
Corporation |
|
|
10 |
.10(26) |
|
Employment Agreement, dated as of September 27, 2001,
between the Company and Michael J. Quinn |
|
|
10 |
.11(27) |
|
Amendment No. 1 to Employment Agreement, dated July 3,
2002, between the Company and Michael J. Quinn |
65
|
|
|
|
|
Exhibit No. | |
|
Description |
| |
|
|
|
|
10 |
.11(29) |
|
Amendment No. 2 to Employment Agreement, dated May 19,
2003, between the Company and Michael J. Quinn |
|
|
10 |
.11(29) |
|
Amendment No. 3 to Employment Agreement, dated
March 16, 2005, between the Company and Michael J. Quinn |
|
|
21 |
.1(28) |
|
List of Subsidiaries |
|
|
23 |
.1(29) |
|
Consent of PricewaterhouseCoopers LLP |
|
|
31 |
.1(29) |
|
Certification of the Chief Executive Officer pursuant to
Rule 13a-14(a) of Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 |
|
|
31 |
.2(29) |
|
Certification of the Chief Financial Officer pursuant to
Rule 13a-14(a) of Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 |
|
32 |
.1(29) |
|
Certifications of the Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 |
|
|
|
|
|
Management contract, compensatory plan or arrangement |
|
|
|
|
(1) |
Incorporated by reference to Exhibit 3.1 to the
Registrants Registration Statement on Form S-1/ A
(File No. 33-03770), filed on May 21, 1996 |
|
|
(2) |
Incorporated by reference to Exhibit 3.2 to the
Registrants Quarterly Report on Form 10-Q filed on
August 14, 2001 |
|
|
(3) |
Incorporated by reference to Exhibit 4.2 to the
Registrants Current Report on Form 8-K filed on
August 14, 2001 |
|
|
(4) |
Incorporated by reference to Exhibit 3.1.4 to the
Registrants Annual Report on Form 10-K filed on
March 10, 2004 |
|
|
(5) |
Incorporated by reference to Exhibit 3.1.5 to the
Registrants Annual Report on Form 10-K filed on
March 10, 2004 |
|
|
(6) |
Incorporated by reference to Exhibit 10.1 to the
Registrants Quarterly Report on Form 10-Q/ A filed on
August 16, 2001 |
|
|
(7) |
Incorporated by reference to Exhibit 4.1 to the
Registrants Current Report on Form 8-K filed
October 28, 2004 |
|
|
(8) |
Incorporated by reference to Exhibit 4.1 to the
Registrants Current Report on Form 8-K filed
January 22, 2004 |
|
|
(9) |
Incorporated by reference to Exhibit 4.1 to the
Registrants Current Report on Form 8-K filed
January 18, 2002 |
|
|
(10) |
Incorporated by reference to Exhibit 4.1 to the
Registrants Current Report on Form 8-K filed
August 20, 2001 |
|
(11) |
Incorporated by reference to Exhibit 4.4 to the
Registrants Current Report on Form 8-K filed
January 22, 2004 |
|
(12) |
Incorporated by reference to Exhibit 4.5 to the
Registrants Current Report on Form 8-K filed
January 22, 2004 |
|
(13) |
Incorporated by reference to Exhibit 4.6 to the
Registrants Current Report on Form 8-K filed
January 22, 2004 |
|
(14) |
Incorporated by reference to Exhibit 4.7 to the
Registrants Current Report on Form 8-K filed
January 22, 2004 |
|
(15) |
Incorporated by reference to Exhibit 4.2 to the
Registrants Current Report on Form 8-K filed
October 28, 2004 |
|
(16) |
Incorporated by reference to Exhibit 4.3 to the
Registrants Current Report on Form 8-K filed
October 28, 2004 |
66
|
|
(17) |
Incorporated by reference to Exhibit 4.4 to the
Registrants Current Report on Form 8-K filed
October 28, 2004 |
|
(18) |
Incorporated by reference to Exhibit 4.5 to the
Registrants Current Report on Form 8-K filed
October 28, 2004 |
|
(19) |
Incorporated by reference to Exhibit 4.6 to the
Registrants Current Report on Form 8-K filed
October 28, 2004 |
|
(20) |
Incorporated by reference to the Companys Registration
Statement on Form S-1 (File No. 333-03770), as
amended, filed on April 18, 1996 |
|
(21) |
Incorporated by reference to Exhibit 4.1 to the
Registrants Registration Statement on Form S-8 (File
No. 333-122021) filed January 13, 2005 |
|
(22) |
Incorporated by reference to Exhibit 4.2 to the
Registrants Registration Statement on Form S-8 (File
No. 333-122021) filed January 13, 2005 |
|
(23) |
Incorporated by reference to Exhibit 4.3 to the
Registrants Registration Statement on Form S-8 (File
No. 333-122021) filed January 13, 2005 |
|
(24) |
Incorporated by reference to Exhibit 10.1 to the
Registrants Quarterly Report on Form 10-Q/ A filed on
August 16, 2001 (25) Incorporated by reference to
Exhibit 4.1 to the former Cardiogenesis Corporations
Registration Statement on Form S-8 (File
No. 333-35095), filed on September 8, 1997 |
|
(26) |
Incorporated by reference to Exhibit 10.11 to the
Registrants Annual Report on Form 10-K filed on
April 16, 2002 |
|
(27) |
Incorporated by reference to Exhibit 10.13 to the
Registrants Quarterly Report on Form 10-Q filed on
August 14, 2002 |
|
(28) |
Incorporated by reference to Exhibit 21.1 to the
Registrants Annual Report on Form 10-K filed on
March 10, 2004 |
|
(29) |
Filed herewith |
67