Computer Motion, Inc. Period Ending Sept. 30, 2002
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER
30, 2002
Commission File Number 000-22755
COMPUTER MOTION, INC.
(Exact name of registrant as specified on in its charter)
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Delaware
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77-0458805
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification Number)
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130-B Cremona Drive
Goleta, CA 93117
(Address of principal executive offices)
(805) 968-9600
(Registrants telephone number, including area code)
Indicate by check /X/ whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety
(90) days.
Yes /X/
No / /
As of November 7, 2002 there were 17,456,405 shares of the Registrants Common Stock outstanding.
TABLE OF CONTENTS
COMPUTER MOTION, INC.
INDEX TO FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2002
INDEX
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PAGE
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PART I. - FINANCIAL INFORMATION
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Item 1.
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Financial Statements
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Condensed Consolidated Statements of Operations
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3
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Condensed Consolidated Balance Sheets
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4
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Condensed Consolidated Statements of Cash Flows
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5
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Notes to Condensed Consolidated Financial Statements
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6
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Item 2.
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Managements Discussion and Analysis of
Financial Condition and Results of Operations
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13
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Item 3.
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Quantitative and Qualitative Disclosures About
Market Risk
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30
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Item 4.
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Controls and Procedures
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30
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PART II. - OTHER INFORMATION
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Item 1.
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Litigation
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31
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Item 2.
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Changes in Securities and Use of Proceeds
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32
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Item 4.
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Submissions of Matters to Vote of Security Holders
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33
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Item 6.
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Exhibits and Reports on Form 8-K
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34
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SIGNATURES
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34
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2
COMPUTER
MOTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts
in thousands, except per share amounts)
(unaudited)
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
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2002
|
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2001
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2002
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2001
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|
|
|
|
|
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Revenue
|
|
$
|
4,534
|
|
|
|
|
$
|
7,158
|
|
|
|
|
$
|
15,289
|
|
|
|
|
$
|
16,877
|
|
|
Cost of revenue
|
|
|
1,997
|
|
|
|
|
|
2,939
|
|
|
|
|
|
6,859
|
|
|
|
|
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7,261
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|
|
|
|
|
|
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|
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|
|
|
|
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|
|
|
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|
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Gross profit
|
|
|
2,537
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|
|
|
|
|
4,219
|
|
|
|
|
|
8,430
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|
|
|
|
|
9,616
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|
|
|
|
|
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|
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|
|
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Gross profit %
|
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|
56
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%
|
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|
|
59
|
%
|
|
|
|
|
55
|
%
|
|
|
|
|
57
|
%
|
|
Research & development expense
|
|
|
2,943
|
|
|
|
|
|
2,744
|
|
|
|
|
|
8,454
|
|
|
|
|
|
8,384
|
|
|
Selling, general & administrative expense
|
|
|
5,138
|
|
|
|
|
|
4,390
|
|
|
|
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|
14,887
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|
|
|
|
|
13,728
|
|
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|
|
|
|
|
|
|
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|
|
|
|
|
|
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|
|
|
|
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Total operating expense
|
|
|
8,081
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|
|
|
|
|
7,134
|
|
|
|
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|
23,341
|
|
|
|
|
|
22,112
|
|
|
|
|
|
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|
|
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|
|
|
|
|
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|
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|
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Loss from operations
|
|
|
(5,544
|
)
|
|
|
|
|
(2,915
|
)
|
|
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|
(14,911
|
)
|
|
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|
(12,496
|
)
|
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Interest income
|
|
|
8
|
|
|
|
|
|
11
|
|
|
|
|
|
51
|
|
|
|
|
|
87
|
|
|
Interest expense
|
|
|
(12
|
)
|
|
|
|
|
(28
|
)
|
|
|
|
|
(31
|
)
|
|
|
|
|
(78
|
)
|
|
Foreign currency translation gain/(loss)
|
|
|
32
|
|
|
|
|
|
1
|
|
|
|
|
|
3
|
|
|
|
|
|
87
|
|
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
(19
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)
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|
|
|
|
|
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|
|
|
|
|
|
|
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|
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|
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|
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Total other income/(expense)
|
|
|
28
|
|
|
|
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|
(16
|
)
|
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15
|
|
|
|
|
|
77
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Loss before income tax provision
|
|
|
(5,516
|
)
|
|
|
|
|
(2,931
|
)
|
|
|
|
|
(14,896
|
)
|
|
|
|
|
(12,419
|
)
|
|
Income tax provision
|
|
|
10
|
|
|
|
|
|
6
|
|
|
|
|
|
22
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net loss
|
|
|
(5,526
|
)
|
|
|
|
|
(2,937
|
)
|
|
|
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|
(14,918
|
)
|
|
|
|
|
(12,437
|
)
|
|
Dividend to Series B preferred shareholders
|
|
|
|
|
|
|
|
|
307
|
|
|
|
|
|
4,978
|
|
|
|
|
|
3,001
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common shareholders
|
|
$
|
(5,526
|
)
|
|
|
|
$
|
(3,244
|
)
|
|
|
|
$
|
(19,896
|
)
|
|
|
|
$
|
(15,438
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common
shares outstanding used to compute net loss per share - basic and diluted
|
|
|
17,395
|
|
|
|
|
|
10,367
|
|
|
|
|
|
16,382
|
|
|
|
|
|
10,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted
|
|
$
|
(0.32
|
)
|
|
|
|
$
|
(0.31
|
)
|
|
|
|
$
|
(1.21
|
)
|
|
|
|
$
|
(1.51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
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See accompanying
notes to condensed consolidated financial statements
3
COMPUTER MOTION, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except par value)
ASSETS
|
September 30, 2002 (unaudited)
|
|
December 31, 2001 (1)
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,151
|
|
|
|
|
$
|
987
|
|
|
Restricted cash
|
|
|
173
|
|
|
|
|
|
80
|
|
|
Accounts receivable, net of allowance for doubtful
accounts and returns of $466 at September 30, 2002; and $1,184
at December 31, 2001
|
|
|
2,510
|
|
|
|
|
|
8,594
|
|
|
Inventories
|
|
|
7,022
|
|
|
|
|
|
5,853
|
|
|
Other current assets
|
|
|
872
|
|
|
|
|
|
811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
12,728
|
|
|
|
|
|
16,325
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
|
1,896
|
|
|
|
|
|
2,020
|
|
|
Computer equipment
|
|
|
2,943
|
|
|
|
|
|
2,889
|
|
|
Machinery and equipment
|
|
|
5,911
|
|
|
|
|
|
5,381
|
|
|
Accumulated depreciation
|
|
|
(6,869
|
)
|
|
|
|
|
(5,492
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
3,881
|
|
|
|
|
|
4,798
|
|
|
Other assets
|
|
|
57
|
|
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
16,666
|
|
|
|
|
$
|
21,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to shareholder
|
|
$
|
1,000
|
|
|
|
|
$
|
900
|
|
|
Accounts payable
|
|
|
4,855
|
|
|
|
|
|
6,497
|
|
|
Accrued expenses
|
|
|
4,361
|
|
|
|
|
|
4,551
|
|
|
Deferred revenue
|
|
|
2,568
|
|
|
|
|
|
3,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
12,784
|
|
|
|
|
|
15,576
|
|
|
Deferred revenue
|
|
|
1,404
|
|
|
|
|
|
1,711
|
|
|
Other liabilities
|
|
|
11
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
14,199
|
|
|
|
|
|
17,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
Mandatorily redeemable Series B convertible
preferred stock, $.001 par value, authorized 5,000 shares, outstanding at 9/30/02-None;
12/31/01- 8.5 shares
|
|
|
|
|
|
|
|
|
8,674
|
|
|
Common stock, $.001 par value, authorized - 50,000 shares;
Outstanding 09/30/02 - 17,420 shares; 12/31/01- 11,439 shares
|
|
|
18
|
|
|
|
|
|
11
|
|
|
Additional paid-in capital
|
|
|
107,309
|
|
|
|
|
|
80,343
|
|
|
Deferred compensation
|
|
|
(287
|
)
|
|
|
|
|
(326
|
)
|
|
Accumulated deficit
|
|
|
(104,491
|
)
|
|
|
|
|
(84,594
|
)
|
|
Other comprehensive loss
|
|
|
(82
|
)
|
|
|
|
|
(246
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,467
|
|
|
|
|
|
3,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities & shareholders equity
|
|
$
|
16,666
|
|
|
|
|
$
|
21,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Derived from audited
financial statements as of December 31, 2001
See accompanying
notes to condensed consolidated financial statements
4
COMPUTER MOTION INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
Nine Months Ended September 30,
|
|
|
|
2002
|
|
2001
|
|
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(14,918
|
)
|
|
|
|
$
|
(12,437
|
)
|
|
Adjustments to reconcile net loss
to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,502
|
|
|
|
|
|
1,243
|
|
|
Provision for doubtful accounts and
sales allowances
|
|
|
|
|
|
|
|
|
250
|
|
|
Common stock issued for services
|
|
|
1,395
|
|
|
|
|
|
|
|
|
Stock options issued for services
|
|
|
631
|
|
|
|
|
|
|
|
|
Amortization of deferred compensation
|
|
|
39
|
|
|
|
|
|
128
|
|
|
Other
|
|
|
1
|
|
|
|
|
|
(22
|
)
|
|
Decrease (Increase) in:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
6,084
|
|
|
|
|
|
4,688
|
|
|
Inventories
|
|
|
(1,169
|
)
|
|
|
|
|
(2,432
|
)
|
|
Other current assets
|
|
|
(61
|
)
|
|
|
|
|
(469
|
)
|
|
Increase (Decrease) in:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(1,642
|
)
|
|
|
|
|
821
|
|
|
Accrued expenses
|
|
|
(190
|
)
|
|
|
|
|
53
|
|
|
Other liabilities
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
Deferred revenue
|
|
|
(1,367
|
)
|
|
|
|
|
790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(9,721
|
)
|
|
|
|
|
(7,387
|
)
|
|
Cash flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(581
|
)
|
|
|
|
|
(1,425
|
)
|
|
Increase in restricted deposits
|
|
|
|
|
|
|
|
|
(80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(581
|
)
|
|
|
|
|
(1,505
|
)
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of note payable to shareholder
|
|
|
(900
|
)
|
|
|
|
|
(3,000
|
)
|
|
Proceeds from note payable to shareholder
|
|
|
1,000
|
|
|
|
|
|
900
|
|
|
Proceeds from preferred stock issuance
|
|
|
|
|
|
|
|
|
9,610
|
|
|
Proceeds from common stock issued and warrants
exercised, net of repurchases
|
|
|
10,494
|
|
|
|
|
|
2,020
|
|
|
Proceeds from common stock - Societe
Generale (Equity Line)
|
|
|
508
|
|
|
|
|
|
|
|
|
Proceeds from common stock - ESPP plan
|
|
|
61
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
232
|
|
|
|
|
|
|
|
|
Comprehensive loss and other
|
|
|
164
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
11,559
|
|
|
|
|
|
9,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash, cash equivalents
and restricted cash
|
|
|
1,257
|
|
|
|
|
|
651
|
|
|
Cash, cash equivalents and restricted
cash at beginning of period
|
|
|
1,067
|
|
|
|
|
|
1,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted
cash at end of period
|
|
$
|
2,324
|
|
|
|
|
$
|
2,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes
to condensed consolidated financial statements
5
COMPUTER MOTION, INC.
Notes to Condensed Consolidated Financial Statements
Note 1. Basis
of Presentation
The accompanying
unaudited condensed consolidated financial statements of Computer Motion, Inc.
(the Company) have been prepared in accordance with generally accepted accounting
principles for interim financial information and in accordance with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the financial information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary for a
fair presentation have been included.
The
operating results of the interim periods presented are not necessarily indicative
of the results expected for the entire fiscal year ending December 31, 2002 or
for any other interim period. The accompanying Condensed Consolidated
Financial Statements should be read in conjunction with the audited financial statements
and notes thereto for the fiscal year ended December 31, 2001 included in the Companys
Annual Report on Form 10-K, filed with the Securities and Exchange Commission (SEC) on
April 1, 2002. As shown in the accompanying Condensed Consolidated Financial Statements, the
Company continues to incur losses and negative cash flows from operations. At September 30, 2002, the
Company had cash and cash equivalents of approximately $2.3 million. Management believes
that its current cash and proceeds from the recent private placement of preferred stock, which
closed on October 31, 2002, will allow the Company to continue its
operations, fund working capital and capital expenditures through September 30, 2003. The
Companys need for additional financing will depend upon numerous factors, including, but
not limited to, net cash used in operating activities, including the progress and
scope of ongoing research and development projects, the costs of training physicians to
become proficient in the use of the Companys products and procedures, the
ability to obtain additional FDA approvals, the ability to successfully defend
itself in any current or future patent litigation and the ability of the Companys customers
to obtain medical reimbursement from third party payors.
The Company
applies the provisions of Staff Accounting Bulletin No. 101 (SAB 101) when recognizing revenue.
SAB 101 states that revenue generally is realized or realizable and earned when all of
the following criteria are met: a) persuasive evidence of an arrangement exists, b) delivery
has occurred or the services have been rendered, c) the sellers price to the buyer is
fixed or determinable, and d) collectibility is reasonably assured.
The
Company recognizes revenue from the sale of products, including supplies and accessories, to
end-users once shipment has occurred (as the Companys general terms are FOB shipping point).
In those few cases where the terms are FOB customers plant, revenue
is not recognized until the Company receives a signed delivery and acceptance certificate, and
all of the conditions of SAB 101 (items a. through d., as
identified above) have been met. Revenue is recognized from the performance of services
as the services are performed.
The
Company recognizes revenue from the sale of products, including supplies and
accessories, to distributors once shipment has occurred (as the Companys general terms
are FOB shipping point), and all of the conditions of SAB 101 have been met.
The Companys distributors do not have rights of return or cancellation. Revenues
from distributors that do not meet all of the requirements of SAB 101 are deferred and
recognized upon the sale of the product to the end-user.
Revenues
from product sales to customers, which are financed by third party financing
institutions, are recognized by the Company when a purchase order is received, the product
has been shipped and the funding by the financing institution has been approved.
6
Revenues
for transactions that include multiple elements such as systems, training, product warranties,
instruments, accessory kits and service contracts are allocated to each element based on its
relative fair value (or in the absence of fair value, the residual method) and recognized when
the revenue recognition criteria have been met for each element. The Company recognizes revenue
for delivered elements only when the following criteria are satisfied: (1) undelivered elements
are not essential to the functionality of delivered elements, (2) uncertainties regarding
customer acceptance are resolved and (3) the fair value for all undelivered elements is
known.
The
Company defers revenue from the sale of extended warranties, product upgrades, procedure training
contracts and other contractual items and recognizes them over the life of the contract or upon
shipment to the customer, as applicable.
Shipments
of products to be used for demonstration purposes or prototype products used in development
programs are reflected as consigned inventory and are included in the property and equipment
balance in the accompanying consolidated balance sheets. Revenue recognized on the rental of this
equipment is recognized as development revenue over the term of the agreement.
The
Company records revenue, net of commissions paid to agents, in accordance with Emerging Issues
Task Force (EITF) No.
99-19, Reporting Revenue Gross as a Principal versus Net as an Agent.
The
Company believes that Statement of Position 97-2, Software Revenue Recognition (SOP
97-2), is not applicable to the sale of the Companys products in accordance with the guidance in
paragraphs 2 and 4 of SOP 97-2. The Company considers the software that it sells incidental to
its products sold. In addition, such software is not a significant focus of the Companys
marketing efforts nor is the software sold separately. Also, post contract customer support is
not sold by the Company in conjunction with the software. As a result, the Company does not
separately account for the sale of the software.
Note 2. Net
Loss Per Share
Statement
of Financial Accounting Standard (SFAS) No. 128, Earnings Per Share, requires
that the Company present both basic and diluted net loss per share in its financial
statements. The Companys basic net loss per share is the same as its diluted net loss per share
because inclusion of outstanding stock options and warrants in the calculation is antidilutive.
Basic and diluted loss per share is calculated by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding for the
period.
The net
loss per share for the nine months ended September 30, 2002 has been adjusted to include the
present value of the dividends paid on the shares of the Companys Series B Convertible Preferred
Stock of $1,193,000 and the write off of the beneficial conversion feature of such shares of
$3,785,000. The Company is required to recognize these items as a dividend in the net loss
computation for loss per share (See Note 4 as all of the remaining shares of Series B Convertible
Preferred Stock were converted into shares of common stock on February 13, 2002).
7
|
|
(Amounts in thousands, except per share amounts)
|
|
|
(unaudited)
|
|
|
For the three months ended
|
|
For the nine months ended
|
|
|
September 30,
|
|
September 30,
|
|
|
|
|
|
|
|
2002
|
|
2001
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Per share
|
|
Amount
|
|
Per share
|
|
Amount
|
|
Per share
|
|
Amount
|
|
Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited per share data - basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss and net loss per share--(Unaudited)
|
|
$
|
(5,526
|
)
|
|
$
|
(0.32
|
)
|
|
$
|
(2,937
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(14,918
|
)
|
|
$
|
(0.91
|
)
|
|
$
|
(12,437
|
)
|
|
$
|
(1.22
|
)
|
Fair Value of warrants issued in connection with
the Series B Convertible Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,536
|
)
|
|
$
|
(0.15
|
)
|
Cumulative dividend on the Series B Convertible Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
(61
|
)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
(153
|
)
|
|
$
|
(0.02
|
)
|
Additional shares issued due to a reset provision of the
Series B Convertible Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
(246
|
)
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
(246
|
)
|
|
$
|
(0.02
|
)
|
Present Value of dividend on the
Series B Convertible Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,193
|
)
|
|
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
Beneficial Conversion feature of the Series
B Convertible Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,785
|
)
|
|
|
(0.23
|
)
|
|
|
(1,066
|
)
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common shareholders and net loss per share
|
|
$
|
(5,526
|
)
|
|
$
|
(0.32
|
)
|
|
$
|
(3,244
|
)
|
|
|
(0.31
|
)
|
|
$
|
(19,896
|
)
|
|
$
|
(1.21
|
)
|
|
$
|
(15,438
|
)
|
|
$
|
(1.51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 3. Inventories
Inventories, which include materials,
labor and overhead, are stated at the lower of cost or market. The Company uses the first-in, first-out
(FIFO) method to value inventories. The components of inventories are as follows:
|
|
(Amounts in thousands)
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
September 30, 2002
|
|
December 31, 2001
|
|
|
|
|
|
Raw materials
|
|
$
|
3,251
|
|
|
$
|
3,200
|
|
Work in process
|
|
|
892
|
|
|
|
470
|
|
Finished goods
|
|
|
2,879
|
|
|
|
2,183
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
7,022
|
|
|
$
|
5,853
|
|
|
|
|
|
|
|
|
|
|
8
Note 4. Private
Placement of Common Stock and Conversion of Series B Convertible Preferred
Stock
On February
13, 2002, the Company raised net proceeds of approximately $10,527,000 through the
sale and issuance of shares of its common stock to certain institutional and accredited
investors, including approximately $100,000 from Robert W. Duggan, the Companys
Chief Executive Officer and Chairman. The proceeds from the sale of the Companys
common stock were used to retire approximately $2,360,000 in debt (including
the remaining principal and accrued interest of $968,000 under a promissory note
payable to Mr. Duggan) and the remainder of the proceeds were used to fund working
capital needs due to investments in clinical trials, research and development, sales
and marketing programs and for other general operating requirements. In February
2002, the Company issued 328,689 additional shares of its common stock to certain
vendors who agreed to cancel approximately $1,395,000 of accounts payable owed to
these vendors as consideration for their shares.
On February
13, 2002, the holders of the Companys Series B Convertible Preferred Stock
entered into agreements with the Company whereby they agreed to convert all of their
remaining shares of Series B Convertible Preferred Stock into shares of common stock.
The Company issued 2,196,341 shares of its common stock upon conversion of the
Series B Convertible Preferred Stock. In connection with this conversion, the Company
agreed to pay to the holders the present value of the future dividends payable on
their shares of Series B Convertible Preferred Stock. This dividend payment was
made by the issuance of 312,869 shares of the Companys common stock. The
Company also agreed to reduce the exercise price of certain warrants issued to the
holders of its Series B Convertible Preferred Stock from $8.12 to $5.00 per share.
Note 5. Note
Payable - Accounts Receivable Financing
In January
2002, the Company entered into a secured, revolving line of credit (or factoring
agreement) with a third party financing company. This line of credit provided for
borrowings up to $2,000,000 based on eligible domestic trade receivables at a factoring
fee of 2%, plus a financing fee of prime rate plus 3% and was secured by all the
assets of the Company. The six-month term of this revolving line of credit expired
in July 2002 and was not renewed. As of September 30, 2002, no amounts were outstanding
under the accounts receivable financing agreement.
Note 6. Equity-based Line
of Credit
On March 30,
2001, the Company entered into an Equity Line Financing Agreement with Société Générale,
under which the Company was entitled to issue and sell, from time to time, shares
of its common stock for cash consideration up to an aggregate of $12 million. In
February 2002, the Company terminated the Equity Line Financing Agreement. In connection
with this termination, the Company paid a one-time settlement fee of $135,000 to
Société Générale. Prior to terminating the Equity Line Financing Agreement, the
Company raised approximately $508,000 by issuing 111,615 shares of its common stock
to Société Générale pursuant to the terms of the Equity Line Financing Agreement.
Note
7. Note Payable to
Shareholder
During the
quarter ended September 30, 2002, the Company received a bridge loan advance in
the aggregate amount of $1,000,000 from Robert W. Duggan, the Companys Chairman
and Chief Executive Officer. Subsequent to September 30, 2002, the Company negotiated
final terms of the bridge loan with another investor and, in connection therewith,
the Company issued unsecured, 180-day promissory notes for
9
$1,000,000 to Robert
W. Duggan and the other bridge lender. The notes then were converted into shares
of Series C Preferred Stock issued in the Companys recent private placement,
except that the conversion of Mr. Duggans note is subject to stockholder
approval. Interest accrues at 8.5% per annum on the promissory notes and is convertible
into shares of the Companys Series C Convertible Preferred Stock, subject
to stockholder approval at a special meeting to be held early next year (See Note
12 Subsequent Event).
Note 8. Segments
of Business
The Company
adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS 131 establishes standards for reporting information regarding
operating segments in annual financial statements and requires selected information
for those segments to be presented in interim financial reports issued to stockholders.
SFAS 131 also establishes standards for related disclosures about products and services
and geographic areas. Operating segments are identified as components of an enterprise
about which separate discrete financial information is available for evaluation
by the chief operating decision maker, or decision-making group, in making decisions
how to allocate resources and assess performance. The Companys chief decision-making
group, as defined under SFAS 131, is the Executive Staff, which is comprised of
the President, Chief Executive Officer, Chief Technology Officer, Chief Financial
Officer and Chief Accounting Officer. To date, the Executive Staff has viewed the
Companys operations as principally one segment (For consistent presentation
certain amounts have been reclassified in prior periods in order to conform to the
current year presentation): proprietary robotic and computerized surgical systems
for the medical device industry. Sales by product lines within this segment are
as follows:
Revenue by product line for the three months
ended
|
(Amounts in thousands)
|
|
Sep. 30, 2002
|
|
Jun. 30, 2002
|
|
Sep. 30, 2001
|
|
|
|
|
|
|
ZEUS surgical systems
|
$
|
601
|
|
|
$
|
983
|
|
|
$
|
2,631
|
|
AESOP surgical systems
|
|
1,455
|
|
|
|
1,860
|
|
|
|
2,414
|
|
SOCRATES telementoring systems
|
|
96
|
|
|
|
408
|
|
|
|
305
|
|
HERMES (systems, development, and supplies)
|
|
1,230
|
|
|
|
685
|
|
|
|
903
|
|
Grant revenue
|
|
132
|
|
|
|
101
|
|
|
|
|
|
Development revenue
|
|
|
|
|
|
|
|
|
|
268
|
|
Recurring revenue
|
|
1,020
|
|
|
|
1,027
|
|
|
|
637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,534
|
|
|
$
|
5,064
|
|
|
$
|
7,158
|
|
Units sold by product line for the three
months ended
|
|
Sep. 30, 2002
|
|
Jun. 30, 2002
|
|
Sep. 30, 2001
|
|
|
|
|
|
|
ZEUS surgical systems
|
|
1
|
|
|
|
1
|
|
|
|
4
|
|
ZEUS surgical systems upgrades
|
|
2
|
|
|
|
3
|
|
|
|
3
|
|
AESOP surgical systems
|
|
22
|
|
|
|
26
|
|
|
|
34
|
|
SOCRATES telementoring systems
|
|
1
|
|
|
|
5
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Export sales are made by the
United States operations to the following geographic locations:
|
For the three months ended (Amounts in thousands)
|
|
Sep. 30, 2002
|
|
Jun. 30, 2002
|
|
Sep. 30, 2001
|
|
|
|
|
|
|
Canada
|
$
|
571
|
|
|
$
|
766
|
|
|
$
|
|
|
Europe and the Middle East
|
|
492
|
|
|
|
756
|
|
|
|
3,240
|
|
Asia
|
|
275
|
|
|
|
743
|
|
|
|
367
|
|
South America & Mexico
|
|
7
|
|
|
|
320
|
|
|
|
172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,345
|
|
|
$
|
2,585
|
|
|
$
|
3,779
|
|
10
Note 9.
Concentration
of Risk
For the quarter
ended September 30, 2002, the Company had no single customer that accounted for
more than 10% of revenue or accounts receivable. For the same period in 2001, the
Company had one customer that accounted for approximately 10% of both revenue and
accounts receivables. For the nine months ended September 30, 2002 and 2001, no
single customer accounted for more than 10% of revenue or accounts receivable.
A sub-assembly
of the robotic arms, which are a major component of the Companys AESOP and
ZEUS products, is purchased from a single supplier. The Company believes that other
suppliers would be available for the sub-assembly if necessary.
Note 10.
Litigation
On May 10,
2000, the Company filed a lawsuit in United States District Court alleging that
Intuitive Surgicals da Vinci surgical robot system infringes on its United
States Patent Nos. 5,524,180, 5,878,193, 5,762,458, 6,001,108, 5,815,640, 5,907,664,
5,855,583 and 6,063,095. Subsequently, Computer Motions complaint was amended
to add allegations that Intuitives da Vinci surgical robot infringed two additional
Computer Motion patents United States Patent Nos. 6,244,809 and 6,102,850. These
patents concern methods and devices for conducting various aspects of robotic surgery.
Intuitive has served an Answer and Counterclaim alleging non-infringement of each
patent-in-suit, patent invalidity and unenforceability. Discovery is still underway.
The parties have filed cross motions for summary judgment on the issue of patent
infringement relating to the 108, 664, 809, and 850 patents
which have not been ruled upon by the Court at the present time. Trial is set for
April 2003.
On or about
December 7 and 8, 2000, the United States Patent and Trademark Office (USPTO) granted
three of Intuitives petitions for a declaration of an interference relating
to the Companys 5,878,193, 5,907,664, and 5,855,583 patents. On March 30,
2002, the three judge panel of the Board of Patent Interferences issued decision
orders on the parties preliminary motions. The Board granted the Companys
motion on Interference No. 104,643 and issued an order for Intuitive to show cause
why judgment should not be entered against Intuitive on this interference. The
Board denied the Companys motion on the Interference No. 104,644 and entered
judgment against the Company. The Board denied the Companys motions on the
Interference No. 104,645, deferred decision on two of Intuitives motions,
and granted-in-part, denied-in-part and deferred-in-part on one of Intuitives
motions. The Boards decision on Interference No. 104,645 invalidated some
of the parties claims, affirmed some of Intuitives claims and provided
for further proceedings related to two of our claims and is therefore not final.
On July 25, 2002, Computer Motion filed a civil action seeking review of the two
adverse decisions in the United States District Court for the District of California.
On February
21, 2001, Brookhill-Wilk filed suit against the Company alleging that its ZEUS surgical
system infringed upon Brookhill-Wilks United States Patent Nos. 5,217,003
and 5,368,015. Brookhill-Wilks complaint sought damages, attorneys
fees and increased damages alleging willful patent infringement. On March 21, 2001,
the Company served its Answer and Counterclaim alleging non-infringement of each
patent-in-suit, patent invalidity and unenforceability. On November 8, 2001, the
United States District Court for the Southern District of New York in the co-pending
Brookhill-Wilk v. Intuitive Surgical, Inc., Civil Action No. 00-CV-6599 (NRB), issued
an order interpreting the claims of Brookhill-Wilks Patent No. 5,217,003 in
a way that the Company believed excluded current applications of its ZEUS surgical
system. In light of this decision, on November 13, 2001, the parties to Brookhill
Wilk v. Computer Motion, Inc. agreed to dismiss the case without prejudice.
11
On March 30,
2001, Intuitive and IBM Corporation filed suit alleging that the Companys
AESOP, ZEUS and HERMES products infringe United States Patent No. 6,201,984 which
was issued on March 13, 2001. The complaint seeks damages, a permanent injunction,
and costs and attorneys fees. Each of the asserted claims is limited to a
surgical system employing voice recognition for control of a surgical instrument
and literally read on Computer Motions current AESOP product and Computer
Motions ZEUS and HERMES products to the extent they are used with AESOP. A
jury trial has been held on the issues of patent invalidity due to lack of enablement
and failure to disclose the best mode in addition to damages. The Companys
defense of unenforceability due to prosecution laches was tried before the District
Court Judge. The jury returned a verdict finding IBMs United States Patent
No. 6,201,984 valid, and finding Intuitive was damaged in an amount of $4.4 million.
Prior to the jurys verdict, the court ruled that the Company had not willfully
infringed the patent. The court has not, at this time, given its verdict
on the Companys prosecution laches defense. A verdict in the Companys
favor on the prosecution laches defense could result in a finding that the patent
is not enforceable and negate the damages verdict.
On September
20, 2002, a lawsuit was filed against the Company by Endoscopic Technologies, Inc.,
alleging breach of contract and related claims arising out of an agreement entered
into between the two companies pursuant to which Endoscopic purchased equipment
from the Company and was to become a distributor for the Companys products.
The lawsuit, which is currently pending in the Superior Court of California for
the City and County of San Francisco, was recently served on the Company and no
answer has been filed. The Company contends that the action is without merit and
plans to vigorously defend this action. In addition, the Company will likely be
filing a cross-complaint against Endoscopic seeking payment of more than $100,000
in outstanding invoices.
Note 11.
Recent Accounting Pronouncements
In August
2001, the Financial Accounting Standards Board issued SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, (SFAS 144). SFAS 144
supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of and the accounting and
reporting provisions of APB Opinion No. 30, Reporting the Results of Operations
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions,, for the disposal
of a segment of a business (as previously defined in that Opinion). SFAS No. 144
also resolves significant implementation issues related to Statement 121.
The FASB recently
approved two pronouncements: SFAS No 141, Business Combinations and SFAS No. 142,
Goodwill and Other Intangible Assets, which provide guidance on the accounting
for business combinations to be accounted for using the purchase method. Under
the new rules, goodwill will no longer be subject to amortization over its useful
life. Rather, goodwill will be subject to at least an annual impairment assessment.
This assessment is a fundamentally different two-step approach and is based on
a comparison between a reporting units fair value and its carrying value.
Intangible assets have newly defined criteria and will be accounted for separately
from goodwill and will continue to be amortized over their useful lives.
The Company
adopted these three pronouncements on January 1, 2002. The adoption of these three
standards did not have any impact on its results of operations or its financial
position.
Note 12. Subsequent
Event
On October
31, 2002, the Company completed a private placement to issue 7,726 shares of Series
C-1 Convertible Preferred Stock and 1,071 shares of Series C-2 Convertible Preferred
Stock at a purchase price of $1,400 per share for an aggregate amount of $12,315,400
with certain institutional and accredited investors,
12
including members of management.
This offering will result in net cash to the Company of approximately $11,500,000.
To date, the Company has received approximately $9,000,000 (including $1,000,000
of proceeds from a note payable to stockholder, see Note 7) and expects to receive
$1,500,000 from one investor on or about November 15, 2002, and an additional $1,000,000
from Robert W. Duggan, (or his affiliates or designees), Chairman
and Chief Executive Officer, upon the stockholders approval
of this equity offering at a special meeting to be held early next
year. Concurrently
with the private placement, the Company issued warrants for the purchase of up to
3,518,690 shares of the Companys common stock.
The Series
C-1 Convertible Preferred Stock and the Series C-2 Convertible Preferred stock (the
Preferred Stock) have identical rights, preferences and privileges except
with respect to the manner in which the Company may pay accrued dividends as described
below. The Preferred Stock is convertible into shares of the Companys common
stock at an initial conversion price of $1.40 per share. The holders of Preferred
Stock shall receive a preferred annual dividend at a rate of 12.0% per annum, decreasing
to 8.0% upon stockholder approval of the transaction and increasing to 12.0% on
the second anniversary of the initial issuance date. Dividends on the Series C-1
Convertible Preferred Stock may be paid by the Company, at its option, through the
issuance of shares of common stock or cash, and dividends on the Series C-2 Convertible
Preferred Stock may only be paid in cash. In addition, the investors were granted
two series (Series C-1 and C-2 Warrants) of 5-year warrants to purchase an aggregate
of approximately 3,518,690 shares of the Companys common stock. The Series
C-1 Warrants to purchase 1,759,345 shares of common stock are exercisable at a price
of $1.80 per share and the Series C-2 Warrants to purchase 1,759,345 shares of common
stock are exercisable at a price of $2.20 per share. The Series C-1 Warrants are
redeemable if the Companys common stock trades at or above $3.00 per share
for ten consecutive trading days and the Series C-2 Warrants are redeemable if the
Company common stock trades at or above $4.40 per share for ten consecutive
trading days. The Securities and Exchange Commission (SEC) and National Association
of Stock Dealers and Automated Quotation (NASDAQ) rules require shareholder approval
for private financing in excess of 20% of the total shares outstanding. The Company
will be seeking stockholder approval for the conversion of the Preferred Stock in
an amount that exceeds 19.99% of the total outstanding common stock on the date
of issuance at a special stockholders meeting to be held early next year. Please
see the Companys Current Report on Form 8-K, as filed on November 4, 2002,
for a description of the terms.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report
contains forward-looking statements that involve risks and uncertainties. The Companys
actual results may differ materially due to factors that include, but are
not limited to, the risks discussed herein under Risk Factors That May Affect
Future Results as well as those discussed in the Risk Factors That May
Affect Future Results section of the Companys Annual Report on Form
10-K for the year ended December 31, 2001.
OVERVIEW
Computer Motion
is a high-tech medical device and training company developing surgical practices
with the goal of ushering in a new era of patient and physician friendly surgery.
This new era is expected to significantly reduce patient trauma, recovery time and
dramatically reduce the learning curve of surgeons adapting these new, less invasive
techniques. The Companys products automate operating room tasks and simplify
various aspects of surgical procedures, reducing operating cost and time. Computer
Motions products, including surgeon training and education services, play
a significant role in transitioning the surgical community from open procedures
to less invasive procedures increasingly demanded by patients. As the leader in
computer-enhanced surgical systems for minimally invasive procedures, Computer Motion
holds 27
13
patents, with over 50 additional patents pending.
Computer Motions
products have been successfully used across a broad range of surgical disciplines
including cardiac, urology, pediatrics, bariatrics and general surgery.
The Company
develops and markets robotic and computerized surgical systems that are upgradeable
and based on an open system platform, which allows for networking of the entire
operating room. These systems enhance a surgeons performance and centralize
and simplify a surgeons control of the operating room. Computer Motions
products provide surgeons with the natural functionality necessary to perform complex,
minimally invasive surgery (MIS) procedures, as well as enable surgeons to control
critical devices in the operating room through simple verbal commands. The Company
believes its products will broaden the scope and increase the effectiveness of MIS,
improve patient outcomes, and create a safer, more efficient and cost-effective
operating room.
Computer
Motions suite of products includes the ZEUS® Surgical System, AESOP® Robotic
Endoscope Positioner, HERMES® Control Center and SOCRATES Telecollaboration
System, all of which are FDA cleared for various indications.
In addition, the Companys products have been approved for Class III (General
Surgery) and Class IV (Cardiac) licenses in Canada, and have received the CE mark
for sale in Europe.
The ZEUS
Surgical System is designed to fundamentally improve a surgeons ability
to perform complex MIS procedures. The Company expects to enable new MIS procedures
involving a range of surgical disciplines, including fully endoscopic coronary artery
bypass grafts or E-CABG grafts on a beating heart. ZEUS augments surgeon performance
by providing 3-D visualization of the operating area, filtering out hand tremor
and scaling human motion. A recent addition to ZEUS is the new MicroWrist surgeon
interface, which has a natural feel similar to an open procedure to improve dexterity
and reduce the learning curve in using the system.
ZEUS
systems three compact, portable arms hold and position reusable microsurgical
instruments and an endoscope. Each arm is individually mounted on the operating
room table using the standard table rails. Because the arms are attached to the
table, the table can be adjusted during a surgical procedure without removing the
instruments. The surgeon sits near the operating room table at an open, comfortable
and portable console. The open design of the console provides the surgeon with an
unobstructed view of the patient and allows clear communication with the operating
room staff. At the console, the surgeon controls the instrument handles and views
the operative site on a video monitor. ZEUS senses the surgeons hand movements
through the new MicroWrist surgeon interface. It then scales the surgeons
hand movements into precise, tremor-free micro movements at the operative site.
ZEUS is FDA
cleared for sale in general laparoscopic surgery. This clearance allows clinical
use of the ZEUS system for a broad set of general surgery applications such as laparoscopic
cholecystectomy and laparoscopic nissen fundoplication. The Company is also seeking
additional FDA clearances for thoracic surgery, laparoscopic radical prostatectomy
and cardiac procedures, with clinical trials ongoing.
AESOP,
the first of Computer Motions revolutionary line of robotic surgical devices,
enables endoscopic visualization with stability and clarity. It was FDA cleared
in 1993. AESOP is an integral part of the ZEUS system. AESOP is a voice-controlled
robotic arm (one of the three arms in ZEUS) that positions and holds an endoscope
with steadiness and precision during MIS procedures. It mimics the human arm in
form, function and expanded range of motion. AESOPs voice-activation system,
created specifically for the operating room, recognizes only the surgeons
authorized commands. Powered by the HERMES Control Center, AESOP can also be networked
with a wide variety of other voice-controlled surgical and operating room devices.
The Company believes that AESOP is the worlds first FDA-cleared robot and
first voice controlled interface for a surgical device. The Company has sold over
700 AESOP units worldwide, which the Company believes have been used to perform
over 175,000 procedures.
14
The HERMES
Control Center is designed to integrate all the devices in the operating room
and provide the surgeon and the operating room staff with a consistent and unified
interface to control all devices. The primary input for the surgeon using the Hermes
Control Center is through the use of simple speech commands. The HERMES system
was designed as an open architecture platform simplifying the process for medical
device manufacturers to create HERMES-ready devices. The HERMES Control Center
is a platform to provide surgeons and operating room staff with quicker access to
information and increased control over their environment. Todays offices include
computers that are networked to printers, fax machines, modems, scanners and other
enabling tools. Similarly, HERMES allows the operating room to be networked with
OR-specific equipment, such as tables, lights, cameras and surgical equipment. These
HERMES-Ready devices can be controlled by surgeon voice commands or by way of a
hand-held touch-screen pendant.
The 27 FDA-cleared
devices controlled by the HERMES system include endoscopic cameras, overhead cameras,
light sources, insufflators, arthroscopic shavers, fluid pumps, VCRs, printers,
video frame grabbers, digital image capture devices, OR lights, surgical tables,
electrosurgical units, telephones and the Companys port expander, and the
AESOP and ZEUS systems. The HERMES compatible, or HERMES -Ready interfaces
for these devices were created in collaboration with various HERMES alliance partners,
including Stryker Endoscopy, Berchtold, Steris, Valley Lab (TYCO), and Smith &
Nephew Endoscopy.
SOCRATES
links surgeons in the operating room with colleagues anywhere in the world.
It is the first and only device in a newly created FDA category of Robotic Telemedicine
Devices. It promotes peer-to-peer and mentor-trainee collaboration and makes it
possible for specially trained surgeons to become interactively telepresent wherever
and whenever needed. SOCRATES creates surgical telepresence through the remote
surgeons graphical annotation of the operating field and shared control of
the endoscope, as well as through two-way video and audio communication. The Company
believes that by facilitating truly interactive dialogue between geographically
separated colleagues, SOCRATES provides the foundation for a new era of surgical
teamwork and training.
RESULTS OF OPERATIONS
The Company
has sustained significant losses since inception and, as of September 30, 2002,
has an accumulated deficit of $104,491,000. The Company expects to incur additional
losses as it continues to fund research and development efforts, clinical trials,
and seeks to expand its manufacturing capacity and sales force. As a result, the
Company will need to generate significant revenues in order to achieve and maintain
profitability. The Company is not certain that it will ever achieve significant
commercial revenues, particularly from sales of its ZEUS product line, which is
still under development and awaiting additional FDA clearances for certain applications
and procedures, or that the Company will ever become profitable. It is possible
that the Company may encounter substantial delays or incur unexpected expenses related
to, among other things, additional clinical trials, market introduction and acceptance
of the ZEUS platform or any future products and litigation required to protect its
intellectual property portfolio. If the time required to generate significant revenues
and achieve profitability is longer than anticipated, the Company may not be able
to continue its operations.
The Company
is penetrating only a small fraction of the total potential market for its products.
Although many medical conditions that are treatable using the Companys products
are also treatable using pharmaceuticals and other medical devices, the Company
does not believe that it encounters direct competition for its AESOP, HERMES or
SOCRATES products. The Company believes that it has only one direct competitor
for its ZEUS product. Its AESOP, HERMES, SOCRATES and ZEUS products are comprised
of relatively new technologies, and the current customer profiles are made up of
healthcare organizations that share the Companys pioneering vision for these
new technologies. Thus, the Company does not believe that there is any statistical
significance to its quarterly increase or decrease variations in business levels.
However,
15
the Company believes that its products acceptance
and adoption will
be positively influenced by the recent FDA clearance for sale in general laparoscopic
surgery for the Companys ZEUS product. The challenges the Company faces in
its attempt to increase market share today include market acceptance, regulatory
clearance, surgical procedure adoption (such as Endoscopic Atraumatic Coronary Artery
Bypass or Endo-ACAB surgery) and adoption of robotic technologies In addition,
the Company believes that the sales cycle for capital medical equipment is approximately
three to six months, especially for innovative technologies like the Companys
AESOP, HERMES, SOCRATES and ZEUS products. Thus, sales in the first quarter originate
in the fourth quarter of the prior year. The Company also believes that prospecting
for new sales tends to fall off in the fourth quarter since its sales focus is on
closing sales for the current calendar year and because there are fewer working
days available due to the holiday season.
With the above
understanding, the analysis of the Companys quarterly revenue changes is as
follows:
Three months ended September 30, 2002 compared
to the three months ended September 30, 2001.
Revenue.
Revenue decreased $2,624,000, or 37%, to $4,534,000 for the quarter ended
September 30, 2002 from $7,158,000 for the quarter ended September 30, 2001. ZEUS
revenue of $601,000 for the quarter decreased $2,030,000 over last years second
quarter of $2,631,000 due to a decrease in the number of units shipped which we
believe was, in part, due to the delay in the Companys receipt of FDA approval.
AESOP revenue of $1,455,000 for the quarter decreased $959,000 over last years
second quarter of $2,414,000 due to fewer systems being shipped. HERMES revenue
of $1,230,000 for the quarter increased $327,000 over last years second quarter
of $903,000 due to an increase in the number of units shipped as well as an increase
in supplies and accessories sales. SOCRATES revenue of $96,000 for the quarter
decreased $209,000 over last years second quarter of $305,000 due to fewer
units being shipped. Grant revenue of $132,000 for the quarter ended September
30, 2002 resulted from a 3-year NIST grant the Company received in the fourth quarter
of 2001. Development revenue of $268,000 for the quarter ended September 30, 2001
was attributable to the Lindberg Telesurgery project, which was a onetime event.
Recurring revenues of $1,020,000 for the quarter increased $383,000 over last years
third quarter of $637,000 as the installed base of robotic systems increased,
leading to more sales of parts, accessories, supplies and service.
Gross Profit.
Gross profit decreased $1,682,000, or 40%, to $2,537,000 for the quarter ended
September 30, 2002 from $4,219,000 for the quarter ended September 30, 2001. Gross
margin decreased to 56% for the quarter ending September 30, 2002 compared to 59%
for the same quarter last year. The decrease in gross profit is primarily a result
of lower overall revenues.
Research
and Development. Research and development expense increased $199,000 or 7%,
to $2,943,000 for the quarter ended September 30, 2002 from $2,744,000 for the quarter
ended September 30, 2001. The increase in research and development expense was
primarily the result of obtaining regulatory clearance for the ZEUS system.
Selling,
General and Administrative. Selling, general and administrative expense increased
$748,000, or 17%, to $5,138,000 for the quarter ended September 30, 2002 from $4,390,000
for the quarter ended September 30, 2001. This increase in selling, general and
administrative expenses was primarily the result of increased legal fees related
to the Companys patent litigation lawsuit.
Other Expense
(Income). Other income was $28,000 for the quarter ended September 30, 2002
compared to other expense of $16,000 for the quarter ended September 30, 2001.
A decrease in interest expense as well as an increase in foreign currency translation
gain accounted for this change.
Income
Taxes. Minimal provisions for state franchise taxes have been recorded on the
Companys pre-tax losses to date. As of December 31, 2001, the Company had
federal and state net operating loss (NOL)
16
carryforwards of approximately
$64,808,000 and $9,527,000, respectively, that are available to offset future federal
and state taxable income. Federal carryforwards expire between fifteen and twenty
years after the year of loss and state carryforwards expire between five and seven
years after the year of loss. The Company has provided a full valuation allowance
on the deferred tax asset because of the uncertainty regarding its realization.
Net Loss.
The net loss for the quarter ended September 30, 2002 was $5,526,000, or $.32
per share (before dividend to preferred stockholders), compared to $2,937,000 or
$.28 per share (before dividend to preferred stockholders), for the quarter ended
September 30, 2001 as decreased revenue resulted in an increase in the Companys
net loss. The fully diluted loss per share for the quarter ended September 30,
2002 was $.32, compared to $.31 for the quarter ended September 30, 2001. Weighted
average shares increased from 10,367,000 to 17,395,000 primarily due to the issuance
of shares in February 2002, related to the conversion of all outstanding shares
of Series B Convertible Preferred Stock and a private placement of the Companys
common stock.
Nine months ended September 30, 2002 compared
to the nine months ended September 30, 2001.
Revenue.
Revenue decreased $1,588,000, or 9%, to $15,289,000, for the nine months ended
September 30, 2002 from $16,877,000 for the same period in 2001. For the nine months
ended September 30, 2002, SOCRATES revenue increased $376,000, or 84%, HERMES revenue
increased $405,000, or 32%, and recurring revenue increased $940,000, or 27%, over
the same period in 2001. ZEUS and AESOP revenue decreased $1,517,000, or 28%, and
$1,488,000, or 26%, respectively, over the same period in 2001. Development revenue
decreased $268,000 for the nine months ended September 30, 2002 compared to the
same period in 2001. The development revenue for the nine months ended September
30, 2001 was attributable to the Lindberg Telesurgery project, which was a onetime
event.
Gross Profit.
Gross profit decreased $1,186,000, or 12%, to $8,430,000 for the nine months
ended September 30, 2002 from $9,616,000 for the same period in 2001. Gross profit
as a percentage of sales decreased slightly to 55% for the nine months ended September
30, 2002 from 57% for the same period in 2001. The decrease in gross profit is
primarily a result of lower overall revenue.
Research
and Development. Research and development expense increased $70,000, or 1%,
to $8,454,000 for the nine months ended September 30, 2002 from $8,384,000 for the
same period in 2001. The increase in research and development expense was the result
of obtaining regulatory clearance for the ZEUS system.
Selling,
General and Administrative. Selling, general and administrative expense increased
$1,159,000, or 8%, to $14,887,000 for the nine months ended September 30, 2002 from
$13,728,000 for the same period in 2001. This increase in selling, general and
administrative expenses was primarily the result of increased legal fees related
to the Companys patent litigation lawsuit. Additionally, marketing expenses
increased as the Company participated in additional trade shows.
Other Expense
(Income). Other income was $15,000 for the nine months ended September 30,
2002 compared to other income of $77,000 for the same period in 2001. A decrease
in interest income as well as a decrease in foreign currency translation gain accounted
for this change
Income
Taxes. Minimal provisions for state franchise taxes have been recorded on the
Companys pre-tax losses to date. As of December 31, 2001, the Company had
federal and state net operating loss (NOL) carryforwards of approximately
$64,808,000 and $9,527,000, respectively that are available to offset future federal
and state taxable income. Federal carryforwards expire between fifteen and twenty
years after the year of loss and state carryforwards expire between five and seven
years after the year of loss. The Company has
17
provided a full valuation allowance
on the deferred tax asset because of the uncertainty regarding its realization.
Net Loss.
The net loss for the nine months ended September 30, 2002 was $14,918,000,
or $.91 per share (before dividend to preferred stockholders), compared to $12,437,000,
or $1.22 per share (before dividend to preferred stockholders), for the same period
in 2001 as decreased revenue combined with an increase in operating expenses resulted
in an increase in the Companys net loss. The fully diluted loss per share
for the nine months ended September 30, 2002 was $1.21, compared to $1.51 for the
same period in 2001. Weighted average shares increased from 10,206,000 to 16,382,000
primarily due to the issuance of shares in February 2002 in connection with the
conversion of all outstanding shares of Series B Convertible Preferred Stock and
a private placement of the Companys common stock
Three months ended September 30, 2002 compared
to the three months ended June 30, 2002.
Revenue.
Revenue decreased $530,000, or 10%, to $4,534,000, for the quarter ended September
30, 2002 from $5,064,000 for the quarter ended June 30, 2002. HERMES revenue of
$1,230,000 for the quarter increased $545,000, or 77%, over the prior quarter of
$685,000 as shipments to the Companys OEM partners increased. ZEUS, AESOP,
and SOCRATES revenues decreased $382,000, $405,000 and $312,000 respectively, over
the prior quarter due to a reduction in the number of units shipped. Recurring
revenue for the quarter ended September 30, 2002 of $1,020,000 was comparable to
the prior quarter of $1,027,000.
Gross Profit.
Gross profit decreased $310,000, or 11%, to $2,537,000 for the quarter ended
September 30, 2002 from $2,847,000 for the quarter ended June 30, 2002. Gross profit
as a percentage of sales remained at 56% for both quarters. The decrease in gross
profit was a result of lower overall revenues.
Research
and Development. Research and development expense increased $84,000, or 3%,
to $2,943,000 for the quarter ended September 30, 2002 from $2,859,000 for the quarter
ended June 30, 2002. The increase in was the result of additional expenses associated
with the Company obtaining the first in a series of FDA 510(k) approvals for ZEUS.
Selling,
General and Administrative. Selling, general and administrative expense increased
$205,000, or 4%, to $5,138,000 for the quarter ended September 30, 2002 from $4,933,000
for the quarter ended June 30, 2002. The increase was due primarily to an increase
in legal expenses related to the patent infringement lawsuit the Company has filed
against a competitor and certain claims filed against the Company also related to
patent infringement.
Other Expense
(Income). Other income was $28,000 for the quarter ended September 30, 2002,
compared to other income of $17,000 for the quarter ended June 30, 2002. The increase
was a result of an increase in foreign currency translation gain offset by a decrease
in interest income as well as an increase in interest expense.
Net Loss.
The net loss for the quarter ended September 30, 2002 was $5,526,000, or $.32
per share (before dividend to preferred shareholder), compared to $4,934,000, or
$.29 per share (before dividend to preferred shareholder), for the quarter ended
June 30, 2002, as decreased revenue combined with increased operating expenses resulted
in a greater net loss. The fully diluted loss per share for the quarter ended September
30, 2002 was $.32, compared to $.29 for the quarter ended June 30, 2002. Weighted
average shares increased from 17,260,000 at June 30, 2002 to 17,395,000 at September
30, 2002, due primarily to the issuance of shares under the Companys employee
stock purchase plan as well as stock being issued for compensation.
18
LIQUIDITY AND CAPITAL RESOURCES
Since its
inception, the Companys expenses have exceeded its revenues, resulting in
an accumulated deficit of $104,491,000 as of September 30, 2002. The Company has
primarily relied on proceeds from the sale and issuance of equity securities to
fund its operations.
At September
30, 2002, the Companys current ratio (current assets divided by current liabilities)
was 1.00 to 1 compared to 1.05 to 1 at December 31, 2001, reflecting a decrease
of approximately $3,597,000 to current assets and a decrease of approximately $2,792,000
to current liabilities. The decrease in accounts receivable was offset by the increase
in inventory as well as decreases in accounts payable and deferred revenue.
For the nine
months ended September 30, 2002, the Companys use of cash in operating activities
was $9,721,000. This was primarily attributable to the Companys net loss
combined with decreases in accounts payable and accrued expenses of $1,642,000 and
$1,367,000, respectively, partially offset by the decrease in accounts receivable
of $6,084,000.
Cash outflows
for the purchases of plant and equipment were $581,000 for the nine months ended
September 30, 2002. The Company currently has no material commitments for capital
expenditures. For the nine months ended September 30, 2002, net cash provided by
financing activities of $11,559,000 was primarily the result of the private placement
of its common stock in February 2002.
The Companys
operations to date have consumed substantial amounts of cash, and the Company
expects its capital and total costs and expenditures (including cost of revenue)
to exceed cash receipts from revenue for at least the next 6 months. In February
2002, the Company raised net proceeds of approximately $10,527,000 through the sale
and issuance of shares of common stock to certain institutional and accredited investors,
including Robert W. Duggan, the Companys Chief Executive Officer and Chairman.
An additional $1,395,000 of accounts payable owed to certain vendors was cancelled
in exchange for 328,689 shares of the Company common stock. The proceeds from the
sale of the Companys common stock were used to retire approximately $2,360,000
in debt (including the remaining principal and accrued interest of $968,000 under
a promissory note payable to Mr. Duggan) and the remainder of the proceeds was used
to fund working capital needs due to investments in clinical trials, research and
development, sales and marketing programs and for other general operating requirements.
In addition, in February 2002, the Company paid a one time dividend in common stock
valued at $1,193,000 to the holders of its Series B Convertible Preferred Stock
who converted such shares into common stock on or prior to February 13, 2002.
On October
31, 2002, the Company raised net proceeds of approximately $11,500,000 through the
sale and issuance of preferred stock to certain institutional and accredited investors.
This amount includes $1,000,000 of Preferred Shares to be purchased
upon conversion of a promissory note issued to Robert W. Duggan, the
Companys Chairman and Chief Executive Officer, as well as an
additional $1,000,000 of Preferred Shares to be purchased by Robert
W. Duggan (or his affiliates of designees). Both are subject to
stockholder approval. The proceeds from the sale of the Companys preferred stock will
be used to fund working capital needs and for other general operating requirements,
including sales and marketing programs.
The Company
believes that it will be able to fund its operations for at least twelve months
with its current cash and proceeds received from the preferred stock offering which
closed on October 31, 2002. However, the Company may require additional working
capital to fund its operations after September 30, 2003, and will need to raise
additional capital. It is anticipated that additional funding, as needed, to support
operations through and after September 30, 2003 will be obtained from the following
sources: current cash balances and the issuance of additional debt and equity securities.
The Company cannot be certain that
19
additional capital will be available on terms
favorable to it, or at all. The various elements of the Companys business
and growth strategies, including its introduction of new products, the expansion
of its marketing and distribution activities and its efforts to obtain regulatory
approval or market acceptance, will require additional capital. If adequate funds
are not available or are not available on acceptable terms, the Companys ability
to fund those business activities essential to its ability to operate profitably,
including further research and development, clinical trials, and sales and marketing
activities, would be significantly limited.
APPLICATION OF CRITICAL ACCOUNTING
POLICIES
The preparation
of the Companys consolidated financial statements in accordance with generally
accepted accounting principles requires that management make certain estimates and
assumptions in certain circumstances that affect amounts reported in the accompanying
financial statements and related footnotes. In preparing these financial statements,
management has made its best estimates and judgments of certain amounts included
in the financial statements, giving consideration to materiality.
The Company does not believe there is a great likelihood that materially different amounts would be reported
related to the accounting policies described below. However, application of these
accounting policies involves exercise of judgment and use of assumptions as to future
uncertainties; as a result, actual results could differ from these estimates.
In accordance
with recent Securities and Exchange Commission guidance, those material accounting
policies that the Company believes are the most critical to an investors understanding
of the financial results and condition and require complex management judgment have
been expanded and are discussed below. Information regarding other accounting
policies is included in our Annual Report on Form 10-K for the year ended December
31, 2001.
The Company
believes the following represent its critical accounting policies:
Revenue
Recognition. In certain cases, revenue from direct system sales is generated
from multiple components, which require judgments regarding delivery, customer acceptance,
installation and collectibility. Revenue is recognized as specific elements indicated
in sales contracts are executed. If an element is essential to the functionality
of the system, revenue is deferred until that essential element is delivered. The
fair value of each undelivered element that is not essential to the functionality
of the system is deferred until performance occurs. The fair value of an undelivered
element is based upon an estimate made by management. Amounts billed in excess of
revenue recognized are recorded as deferred revenue on the balance sheet.
Warranties.
The Company provides for the estimated costs of product warranties at the time revenue
is recognized. The Companys estimate of costs to service its warranty obligations
is based upon historical experience and expectation of future conditions. Should
warranty claim activity and the costs associated with servicing those claims differ
from the Companys estimates, revisions to the estimated warranty liability
may be required.
Allowance
for Doubtful Accounts. The allowance for doubtful accounts is based upon managements
estimates. Factors underlying these estimates include analysis of days
outstanding, customer payment history and management judgments. The allowance is
adjusted regularly to reflect current data and activity.
Inventory
Reserves. The Company reduces the carrying value of inventory for estimated obsolescence
or unmarketable inventory equal to the difference between the cost of inventory
and the estimated market value based upon assumptions about future demand and market
conditions. If actual future demand or market conditions are less favorable than
those projected by management, additional inventory write-downs may be required.
Contingencies.
The Company is subject to proceedings, lawsuits and other claims
related to its products,
patents and other matters. The Company is required to assess the likelihood of any adverse
judgments or outcomes to
20
these matters as well as potential ranges of probable losses.
A determination of the amount of reserves required, if any, for these contingencies
is made after careful analysis of each individual issue. The required reserves may
change in the future due to new developments in each matter or changes in approach
such as a change in settlement strategy in dealing with these matters.
RISK FACTORS THAT MAY AFFECT FUTURE
RESULTS
The Company
operates in a rapidly changing environment that involves a number of risks, some
of which are beyond its control. A number of these risks are listed below. These
risks could affect actual future results and could cause them to differ materially
from any forward-looking statements the Company has made.
The Company has a history of losses, and
expects to incur losses in the future so the Company may never achieve profitability.
The Company
has incurred significant losses since its formation. For the three years ended
December 31, 2001, 2000, and 1999, the Company has incurred net losses of $16,413,000,
$16,349,000 and $13,375,000, respectively. In addition, the Company has incurred
net losses from operations since inception and as of September 30, 2002 has an accumulated
deficit of $104,491,000. The Company expects to incur additional losses as it continues
to spend for research and development efforts, clinical trials, manufacturing capacity
and sales force expansion. As a result, the Company will need to generate significant
revenues to achieve and maintain profitability. The Company cannot assure its stockholders
that it will ever achieve significant commercial revenues, particularly from sales
of its ZEUS product line, which is still under development and awaiting additional
FDA clearances for certain significant applications and procedures, or that the
Company will become profitable. It is possible that the Company may encounter substantial
delays or incur unexpected expenses related to the clinical trials, market introduction
and acceptance of the ZEUS platform, or any future products. If the time required
to generate significant revenues and achieve profitability is longer than anticipated,
the Company may not be able to continue its operations.
Since the Companys capital and total
costs and expenditures (including cost of revenue) currently exceed its revenue,
any failure to raise additional capital or generate required working capital could
affect the Companys ability to continue as a going concern.
Management
is in the process of pursuing financing arrangements in order to meet the Companys
cash flow needs and fund its operations beyond September 30, 2003. There
are no assurances that Management will be able to successfully complete any such
financing arrangement or that the amount raised will meet the Companys cash
flow needs. The failure of the Company to achieve either of these items could affect
the Companys ability to continue as a going concern and may have a material
impact on the Companys financial position and results of operations. Further,
while the Company has eleven years of uninterrupted growth there is no assurance
that the Company will be able to successfully grow its business.
Since the Companys operating expenditures
currently exceed its revenue, any failure to raise additional capital or generate
required working capital could reduce the Companys ability to compete and
prevent it from taking advantage of market opportunities.
The Companys
operations to date have consumed substantial amounts of cash, and it expects
its capital and total costs and expenditures (including cost of revenue) to exceed
cash receipts from revenue for at least the next 6 months. Management is in the
process of pursuing financing arrangements in order to meet the Companys cash
flow needs and fund its operations beyond September 30, 2003. There are no assurances
that Management will be able to successfully complete any such financing arrangement
or that the amounts raised will meet the Companys cash flow needs. In addition,
the Company may require substantial working capital to fund its operations after
September 30, 2003 and will need to raise additional capital. It is anticipated
that additional funding, as needed, to support operations through and after September
30, 2003 will be obtained
21
from the following sources: current cash balances and
the issuance of additional debt and equity securities. The Company cannot assure
its stockholders that additional capital will be available on terms favorable to
it, or at all. The various elements of the Companys business and growth strategies,
including its introduction of new products, the expansion of its marketing and distribution
activities and obtaining regulatory approval or market acceptance will require additional
capital. If adequate funds are not available or are not available on acceptable
terms, the Companys ability to fund those business activities essential to
its ability to operate profitably, including further research and development, clinical
trials, and sales and marketing activities, would be significantly limited.
If the Companys products do not achieve
market acceptance, the Company will not be able to generate the revenue necessary
to support its business.
The Company
anticipates that ZEUS will comprise a substantial majority of its sales in the future
and its future success therefore depends on the successful development, commercialization
and market acceptance of this product. Even if the Company is successful in obtaining
the necessary regulatory clearances or approvals for ZEUS, its successful commercialization
will depend upon the Companys ability to demonstrate the clinical safety and
effectiveness, ease-of-use, reliability and cost-effectiveness of this product in
a clinical setting. The Company cannot assure its investors that the FDA will allow
it to conduct further clinical trials or that ZEUS will prove to be safe and effective
in clinical trials under United States or international regulatory requirements.
It is also possible that the Company may encounter problems in clinical testing
that cause a delay in or prohibits commercialization of ZEUS. Moreover, the clinical
trials may identify significant technical or other obstacles to overcome prior to
the commercial deployment of ZEUS, resulting in significant additional product development
expense and delays. Even if the safety and effectiveness of procedures using ZEUS
are established, surgeons may elect not to recommend the use of these products for
any number of reasons. Broad use of the Companys products will require significant
surgeon training and practice, and the time and expense required to complete such
training and practice could adversely affect market acceptance. Successful commercialization
of the Companys products will also require that the Company satisfactorily
address the needs of various decision makers in the hospitals that constitute the
target market for its products and to address potential resistance to change in
existing surgical methods. If the Company is unable to gain market acceptance of
its products, the Company will not be able to sell enough of its products to be
profitable, and the Company may be required to obtain additional funding to develop
and bring to market alternative products.
If the Company does not obtain and maintain
necessary domestic regulatory approvals and comply with ongoing regulations, the
Company will not be able to market and sell its products in the United States.
The Companys
products in the United States are regulated as medical devices by the FDA.
The FDA strictly prohibits the marketing of FDA-cleared or approved medical devices
for unapproved uses. Failure to receive or delays in receipt of FDA clearances
or approvals, including any resulting need for additional clinical trials or data
as a prerequisite to approval or clearance, or any FDA conditions that limit the
Companys ability to market its products for particular uses or indications,
could impair the Companys ability to effectively develop a market for its
products and impair its ability to operate profitably in the future.
The Companys
operations are subject to the FDAs Quality System Regulation (a federal
regulation governing medical devices) and ISO-9001 (a global standard for quality
systems) and similar regulations in other countries, including EN-46001 Standards
(the European standard for quality systems), regarding the design, manufacture,
testing, labeling, record keeping and storage of devices. Ongoing compliance with
FDAs Quality System Regulation requirements and other applicable regulatory
requirements will be monitored through periodic inspection by federal and state
agencies, including the FDA, and comparable agencies in other countries. The Companys
manufacturing processes are subject to stringent federal, state and local
regulations governing the use, generation, manufacture, storage, handling and disposal
of certain materials and wastes. Failure to comply with applicable regulatory requirements
can result in, among other things, suspensions or withdrawals of approvals, product
seizures, injunctions, recalls of products, operating
22
restrictions, and civil fines
and criminal prosecution. Delays or failure to receive approvals or clearances
for the Companys current submissions, or loss of previously received approvals
or clearances, would have a material adverse effect on the marketing and sales of
its products and impair its ability to operate profitably in the future.
The Companys products are subject
to various international regulatory processes and approval requirements. If the
Company does not maintain the necessary international regulatory approvals, the
Company will not be able to market and sell its products in foreign countries.
To be able
to market and sell the Companys products in other countries, it must obtain
regulatory approvals and comply with the regulations of those countries. For instance,
the European Union requires that manufacturers of medical products obtain the right
to affix the CE mark to their products before selling them in member countries of
the European Union. The CE mark is an international symbol of adherence to quality
assurance standards and compliance with applicable European medical device directives.
In order to obtain the right to affix the CE mark to products, a manufacturer must
obtain certification that its processes meet certain European quality standards.
The Company has obtained the CE mark for all of its products, which means that
these products may currently be sold in all of the member countries of the European
Union.
If the Company
modifies existing products or develops new products in the future, including new
instruments, the Company will need to apply for permission to affix the CE mark
to such products. In addition, the Company will be subject to annual regulatory
audits in order to maintain the CE mark permissions it has already obtained. If
the Company is unable to maintain permission to affix the CE mark to its products,
it will no longer be able to sell its products in member countries of the European
Union.
International sales of the Companys
products account for a significant portion of its revenues and the Companys
growth may be limited if it is unable to successfully manage these international
activities
The
Companys business currently depends in large part on its activities in Europe and
Asia, and the Company intends to expand its presence into additional foreign markets.
Sales to markets outside of the United States accounted for approximately 30% of
the Companys sales for the three months ended September 30, 2002. The Company
is subject to a number of challenges that relate to its international business activities.
These challenges include:
the risks associated with foreign currency exchange rate fluctuations;
failure of local laws to provide the same degree of protection
against infringement of the Companys intellectual property;
certain laws and business practices that could favor local competitors;
building an organization capable of supporting geographically dispersed
operations; and
the expense of establishing facilities and operations in new foreign
markets.
Currently,
the majority of the Companys international sales are denominated in U.S. dollars.
As a result, an increase in the value of the U.S. dollar relative to foreign currencies
could make the Companys products less competitive in international markets.
If the Company is unable to meet and overcome these challenges, its international
operations may not be successful, which would limit the growth of the Companys
business.
The Company may never sell enough products
to be profitable because the Companys customers may choose to purchase its
competitors products or may not accept the Companys products
23
The Minimally
Invasive Surgery (MIS) market has been, and will likely continue to
be, highly competitive. Many competitors in this market have significantly greater
financial resources and experience than the Company. In addition, some of our competitors,
including Intuitive Surgical, have been, and may continue to be able to market their
products sooner than the Company if they are able to achieve regulatory approval
before the Company. Many medical conditions that can be treated using the
Companys products can also be treated by pharmaceuticals or other medical devices
and procedures. Many of these alternative treatments are widely accepted in the
medical community and have a long history of use. In addition, technological advances
with other procedures could make such therapies more effective or less expensive
than using the Companys products and could render the Companys products
obsolete or unmarketable. As a result, the Company cannot be certain that physicians
will use the Companys products to replace or supplement established treatments
or that its products will be competitive with current or future technologies.
If surgeons or institutions are unable to
obtain reimbursement from third-party payors for procedures using the Companys
products, or if reimbursement is insufficient to cover the costs of purchasing the
Companys products, the Company may be unable to generate sufficient sales
to support its business.
In the United
States, the Companys products are primarily acquired by medical institutions
that bill various third-party payors, such as Medicare, Medicaid and other government
programs, and private insurance plans for the healthcare services they provide their
patients. Third-party payors are increasingly scrutinizing whether to cover new
products and the level of reimbursement. There can be no assurance that third-party
reimbursement and coverage for the Companys products will be available or
adequate, that current reimbursement amounts will not be decreased in the future,
or that future legislation, regulation or reimbursement policies of third-party
payors will not otherwise affect the demand for the Companys products or the
Companys ability to sell its products on a profitable basis, particularly
if the Companys products are more expensive than competing surgical or other
procedures. If third-party payor coverage or reimbursement is unavailable or inadequate,
those who purchase the Companys products would lose their ability to pay for
the Companys products, and the Companys ability to make future sales
and collect on outstanding accounts would be significantly impaired, which would
limit the Companys ability to operate profitably.
If the Company is unable to protect the
intellectual property contained in its products from use by third parties, the
Companys ability to compete in the market will be harmed.
The
Companys success depends, in part, on its ability to obtain and maintain patent protection
for its products by filing United States and foreign patent applications related
to its technology, inventions and improvements. However, there can be no assurance
that third parties will not seek to assert that the Companys devices and systems
infringe their patents or seek to expand their patent claims to cover aspects of
the Companys technology. As a result, there can be no assurance that the
Company will not become subject to future patent infringement claims or litigation
in a court of law, interference proceedings, or opposition to a patent granted in
a foreign jurisdiction. The defense and prosecution of such intellectual property
claims are costly, time-consuming, divert the attention of management and technical
personnel and could result in substantial cost and uncertainty regarding the
Companys future viability. Future litigation or regulatory proceedings, which could
result in substantial cost and uncertainty, may also be necessary to enforce the
Companys patent or other intellectual property rights or to determine the
scope and validity of other parties proprietary rights. Any public
announcements related to such litigation or regulatory proceedings initiated by
the Company, or initiated or threatened against the Company by its competitors,
could adversely affect the price of the Companys stock.
The Company
also relies upon trade secrets, technical know-how and continuing technological
innovation to develop and maintain its competitive position, and the Company typically
requires its employees, consultants and advisors to execute confidentiality and
assignment of inventions agreements in connection with their employment, consulting
or advisory relationships. There can be no assurance, however, that these agreements
will not be breached or that the Company will have adequate remedies for any breach.
Failure to
24
protect the Companys intellectual property
would limit its ability to produce and/or market its products in the future that would adversely
affect the Companys revenues generated by the sale of such products.
The Company is involved in intellectual
property litigation with Intuitive Surgical, Inc. and Brookhill-Wilk which may hurt
the Companys competitive position, may be costly to the Company and may prevent
the Company from selling its products.
On May 10,
2000, the Company filed a lawsuit in United States District Court alleging that
Intuitive Surgicals da Vinci surgical robot system infringes on its United
States Patent Nos. 5,524,180, 5,878,193, 5,762,458, 6,001,108, 5,815,640, 5,907,664,
5,855,583 and 6,063,095. Subsequently, Computer Motions complaint was amended
to add allegations that Intuitives da Vinci surgical robot infringed two additional
Computer Motion patents United States Patent Nos. 6,244,809 and 6,102,850. These
patents concern methods and devices for conducting various aspects of robotic surgery.
Intuitive has served an Answer and Counterclaim alleging non-infringement of each
patent-in-suit, patent invalidity and unenforceability. Discovery is still underway.
The parties have filed cross motions for summary judgment on the issue of patent
infringement relating to the 108, 664, 809, and 850 patents
which have not been ruled upon by the Court at the present time. Trial is set for
April 2003.
On or about
December 7 and 8, 2000, the United States Patent and Trademark Office (USPTO) granted
three of Intuitives petitions for a declaration of an interference relating
to the Companys 5,878,193, 5,907,664, and 5,855,583 patents. On March 30,
2002, the three judge panel of the Board of Patent Interferences issued decision
orders on the parties preliminary motions. The Board granted the Companys
motion on Interference No. 104,643 and issued an order for Intuitive to show cause
why judgment should not be entered against Intuitive on this interference. The
Board denied the Companys motion on the Interference No. 104,644 and entered
judgment against the Company. The Board denied the Companys motions on the
Interference No. 104,645, deferred decision on two of Intuitives motions,
and granted-in-part, denied-in-part and deferred-in-part on one of Intuitives
motions. The Boards decision on Interference No. 104,645 invalidated some
of the parties claims, affirmed some of Intuitives claims and provided
for further proceedings related to two of our claims and is therefore not final.
On July 25, 2002, Computer Motion filed a civil action seeking review of the two
adverse decisions in the United States District Court for the District of California.
On February
21, 2001, Brookhill-Wilk filed suit against the Company alleging that its ZEUS surgical
system infringed upon Brookhill-Wilks United States Patent Nos. 5,217,003
and 5,368,015. Brookhill-Wilks complaint seeks damages, attorneys fees
and increased damages alleging willful patent infringement. On March 21, 2001,
the Company served its Answer and Counterclaim alleging non-infringement of each
patent-in-suit, patent invalidity and unenforceability. On November 8, 2001, the
United States District Court for the Southern District of New York in the co-pending
Brookhill-Wilk v. Intuitive Surgical, Inc., Civil Action No. 00-CV-6599 (NRB), issued
an order interpreting the claims of Brookhill-Wilks Patent No. 5,217,003 in
a way that the Company believes excludes current applications of its ZEUS surgical system. In light of this decision, on November 13, 2001, the parties
to Brookhill Wilk v. Computer Motion, Inc. agreed to dismiss the case without prejudice.
On March 25, 2002, Judge Alvin K. Hellerstein dismissed the case without prejudice.
25
On March 30,
2001, Intuitive and IBM Corporation filed suit alleging that the Companys
AESOP, ZEUS and HERMES products infringe United States Patent No. 6,201,984 which
was issued on March 13, 2001. The complaint seeks damages, a preliminary injunction,
a permanent injunction, and costs and attorneys fees. The claims are directed
to a surgical system employing voice recognition for control of a surgical instrument.
Each of the asserted claims are limited to a surgical system employing voice recognition
for control of a surgical robot and literally read on the Companys current
AESOP product and the Companys ZEUS and HERMES products to the extent they
are used with AESOP. A jury trial has been held on the issues of patent invalidity
due to lack of enablement and failure to disclose the best mode in addition to damages.
The Companys defense of unenforceability due to prosecution laches was tried
before the District Court Judge. The jury returned a verdict finding IBMs
United States Patent No. 6,201,984 valid, and finding Intuitive was damaged in an
amount of $4.4 million. Prior to the jurys verdict, the court ruled that
the Company had not willfully infringed the patent. The court has not,
at this time, given its verdict on the Companys prosecution laches defense.
A verdict in the Companys favor on the prosecution laches defense could result
in a finding that the patent is not enforceable and negate the damages verdict.
On September
20, 2002, a lawsuit was filed against the Company by Endoscopic Technologies, Inc.,
alleging breach of contract and related claims arising out of an agreement entered
into between the two companies pursuant to which Endoscopic purchased equipment
from the Company and was to become a distributor for the Companys products.
The lawsuit, which is currently pending in the Superior Court of California for
the City and County of San Francisco, was recently served on the Company and no
answer has been filed. The Company contends that the action is without merit and
plans to vigorously defend this action. In addition, the Company will likely be
filing a cross-complaint against Endoscopic seeking payment of more than $100,000
in outstanding invoices.
The Company
believes that all of its major product lines could be affected by this litigation.
The patents subject to this litigation are an integral part of the technology incorporated
in the Companys AESOP, ZEUS and HERMES product lines which together accounted
for approximately 70% of its revenues for the quarter ended June 30, 2002. If the
Company loses the counterclaim on the patent suit brought by Intuitive or the patent
infringement claims by Intuitive or IBM or if the decision in Brookhill-Wilk v.
Intuitive Surgical, Inc. is reversed, the Company may be prevented from selling
its products as currently configured without first obtaining a license to the disputed
technology from the successful party or modifying the product. Obtaining a license
could be expensive, or could require that the Company license to the successful
party some of its own proprietary technology, either of which result could seriously
harm the Companys business. In the event that a successful party is unwilling
to grant the Company a license, the Company will be required to stop selling its
products that are found to infringe the successful partys patents unless the
Company can redesign them so they do not infringe these patents, which the Company
may be unable to do. Whether or not the Company is successful in these lawsuits,
the litigation could consume substantial amounts of the Companys financial
and managerial resources. Further, because of the substantial amount of discovery
often involved in connection with this type of litigation, there is a risk that
some of the Companys confidential information could be compromised by disclosure
during the discovery process.
Because the Companys industry is subject
to rapid technological change and new product development, the Companys future
success will depend upon its ability to expand the applications of the Companys
products.
The
Companys success will depend, to a significant extent, upon its ability to enhance
and expand the utility of its products so that they gain market acceptance. Failure
to develop or introduce new products or product enhancements on a timely basis that
achieve market acceptance could have a material adverse effect on the Companys
business, financial condition and results of operations. In the past, some of the
Companys competitors have been able to develop desirable product features
(such as articulation of certain instruments and three dimensional visualization
of their products) earlier than the Company. The Companys inability to rapidly
develop these features may have led to lower sales of some of the Companys
products. In addition,
26
technological advances with other therapies could make such
therapies less expensive or more effective than using the Companys products
and could render its technology obsolete or unmarketable. There can be no assurance
that physicians will use the Companys products to replace or supplement established
treatments or that the Companys products will be competitive with current
or future technologies
The Company may not be able to expand its
marketing distribution activities in order to market its products competitively.
The Company
anticipates significantly increasing the number of sales personnel to more fully
cover its target markets, particularly as the Company expands its product offerings.
It is possible the Company will be unable to compete effectively in attracting,
motivating and retaining qualified sales personnel. Additionally, the Company currently
intends to market and sell its products outside the United States and Europe, principally
through distributors. In order to accomplish this, the Company will be required
to expand its distributor network. The Company may not be able to identify suitable
distributors or negotiate acceptable distribution agreements and any such distribution
agreements may not result in significant sales. If the Company is unable to identify,
attract, motivate and retain qualified sales personnel, suitable distributors or
negotiate acceptable distribution agreements, the Company may not be successful
in expanding the market for its products outside of the United States and Europe.
Concentration of ownership among the
Companys existing executive officers, directors and principal stockholders may prevent
new investors from influencing significant corporate decisions.
The
Companys current directors and executive officers beneficially own approximately 20.8%
of its outstanding common stock. These stockholders, acting together, have the
ability to significantly influence the election of the Companys directors
and the outcomes of other stockholder actions and, as a result, direct the operation
of its business, including delaying or preventing a proposed acquisition of the
Company.
If the Company loses its key personnel or
is unable to attract and retain additional personnel, the Companys ability
to compete will be harmed.
The
Companys future business and operating results depend in significant part on its key
management, scientific, technical and sales personnel, many of whom would be difficult
to replace, and future success will depend partially upon the Companys ability
to retain these persons and recruit additional qualified management, technical,
marketing, sales, regulatory, clinical and manufacturing personnel. Competition
for such personnel is intense and the Company may have difficulty attracting or
retaining such personnel. In addition, the Company does not have employment agreements
with most of the Companys key personnel and also does not maintain life insurance
on any of its employees which may make it more difficult to retain its key personnel
in the future.
The Companys future operating results
may fall below securities analysts or investors expectations, which
could cause the Companys stock price to decline and diminish the value of
its investors holdings.
The
Companys results of operations may vary significantly from quarter to quarter depending
upon numerous factors, including but not limited to, the following:
delays
associated with the FDA and other regulatory clearance and approval processes;
healthcare
reimbursement policies;
timing
and results of clinical trials;
demand
for its products;
changes
in pricing policies by the Company or its competitors;
the number,
timing and significance of its competitors product enhancements and new products;
27
product
quality issues; and
component
availability and supplier delivery performance.
In addition,
the Companys operating results in any particular period may not be a reliable
indication of its future performance. It is likely that in some future quarters,
the Companys operating results will be below the expectations of securities
analysts or investors. If this occurs, the price of the Companys common stock,
and the value of its investors holdings, will likely decline.
The Company may incur substantial costs
defending securities class action litigation due to its stock price volatility.
The market
price of the Companys common stock is likely to be volatile and may be affected
by a number factors, including but not limited to, the following:
actual
or anticipated decisions by the FDA with respect to approvals or clearances of its
competitors products;
actual
or anticipated fluctuations in its operating results;
announcements
of technological innovations;
new commercial
products announced or introduced by the Company or its competitors;
changes
in third party reimbursement policies;
developments
concerning the Companys or its competitors proprietary rights;
conditions
and trends in the medical device industry;
governmental
regulation;
changes
in financial estimates by securities analysts; and
general
stock market conditions.
Securities
class action litigation has often been brought against companies when the market
price of their securities declines. The Company could be especially prone to such
risk because technology companies have experienced greater than average stock price
volatility in recent years. If the Company is subject to securities litigation,
the Company would incur substantial costs and divert managements attention
defending any such claims.
The Companys reliance on sole or single
source suppliers could harm its ability to meet demand for the Companys products
in a timely manner or within its projected budget.
The Company
relies on independent contract manufacturers, some of which are single source suppliers,
for the manufacture of the principal components of its products. In some instances,
the Company relies on companies that are sole suppliers of key components of its
products. If one of these sole suppliers goes out of business, the Company could
face significant production delays until an alternate supplier is found, or until
the product could be redesigned and revalidated to accommodate a new suppliers
replacement component. In addition, the Company generally submits purchase orders
based upon its suppliers current price lists. Since the Company generally
does not have written contracts for future purchase orders with its suppliers, these
suppliers may increase the cost of the parts the Company purchases in the future.
The
Companys manufacturing experience to date has been focused primarily on assembling
components produced by third-party manufacturers. In scaling up manufacturing of
new products, the Company may encounter difficulties involving quality control and
assurance, component availability, adequacy of control policies and procedures,
lack of qualified personnel and compliance with the FDAs Quality System Regulations
requirements. The Company may elect to internally manufacture components currently
provided by third parties or to implement new production processes. The Company
cannot assure its stockholders that manufacturing yields or costs will not be adversely
affected by a transition to in-house production or to new production processes if
such efforts are undertaken. If necessary, this expansion will
28
require the commitment of capital resources
for facilities, tooling and equipment and for leasehold improvements. Further,
the Companys delay or inability to expand its manufacturing capacity or to
obtain the commitment of such resources could result in its inability to meet demand
for its products, which could harm the Companys ability to generate revenues,
lead to customer dissatisfaction and damage its reputation.
The use of the Companys products could
result in product liability claims that could be expensive and harm its business.
As a medical device manufacturer, the Company
faces an inherent business risk of financial exposure to product liability claims
in the event that the use of its products results in personal injury or death.
The Company also faces the possibility that defects in the design or manufacture
of its products might necessitate a product recall. It is possible that the Company
will experience losses due to product liability claims or recalls in the future.
The Company currently maintains product liability insurance with coverage limits
of $5,000,000, but future claims may exceed these coverage limits. The Company
may also require increased product liability coverage as additional potential products
are successfully commercialized. Such insurance is expensive, difficult to obtain
and may not be available in the future on acceptable terms, or at all. While the
Company has not had any material product liability claims to date, its defense of
any future product liability claim, regardless of its merit or eventual outcome,
would divert managements attention and result in significant legal costs.
In addition, a product liability claim or any product recalls could also harm its
reputation or result in a decline in revenues.
The Companys continued growth will
significantly strain its resources and, if the Company fails to manage this growth,
its ability to market, sell and develop its products may be harmed.
The Companys growth will continue
to place significant demands on its management and resources. In order to compete
effectively against current and future competitors, prepare products for clinical
trials and develop future products, the Company believes it must continue to expand
its operations, particularly in the areas of research and development and sales
and marketing. It is likely that the Company will be required to implement additional
operating and financial controls, hire and train additional personnel, install additional
reporting and management information systems and expand its physical operations.
The Companys future success will depend, in part, on its ability to manage
future growth and the Company cannot assure its investors that it will be successful.
Future Sales of the Companys Stock
Could Depress the Market Price of its Common Stock
Future sales of the Companys common
stock could depress the market price of its common stock. On February 28, 2002
the Company filed a Registration Statement on Form S-3 (File No. 333-83552) covering
the resale of 5,075,771 shares of its common stock by certain selling stockholders.
In addition, on or prior to February 13, 2002, the Company issued 2,911,039 shares
of common stock upon conversion of all the shares of its Series B Convertible Preferred
Stock. The Company filed a registration statement on Form S-3 (File No. 333-58962)
covering the shares of common stock issued to holders upon the conversion of the
Series B Convertible Preferred Stock and issuable upon exercise of certain warrants
issued to the former holder of its Series B Convertible Preferred Stock. This registration
statement was declared effective by the Securities Exchange Commission on September
24, 2001. In the future, the Company may issue additional options, warrants or
other derivative securities convertible into its common stock. The public sale
of the Companys common stock by the selling stockholders who control large
blocks of its common stock could depress the market price of its common stock.
Failure to Satisfy NASDAQ National Market
listing requirements may result in the Companys stock being delisted from
the NASDAQ National Market and being subject to restrictions on Penny
Stock
The Companys common stock is currently
listed on the Nasdaq National Market under the symbol RBOT. For continued
inclusion on the Nasdaq National Market, the Company must maintain, among other
29
requirements, $10.0 million in stockholders equity, a minimum bid price of
$1.00 per share, and a market value of its public float of at least $5.0 million.
On October 31, 2002, with the proceeds from the private placement of preferred stock,
the Company has achieved compliance with the new minimum stockholders equity
standard. In the event that the Company fails to maintain the minimum stockholders
equity standard or other listing standards on a continuous basis, the Companys
common stock may be removed from listing on the Nasdaq National Market.
If the Companys common stock is delisted from the Nasdaq National Market,
and the Company is not able to list the shares on the Nasdaq Small Cap Market or
another exchange, trading of its common stock, if any, would be conducted in the
over-the-counter market in the so-called pink sheets or, if available,
the NASDAQs Electronic Bulletin Board. As a result, stockholders
could find it more difficult to dispose of, or to obtain accurate quotations as
to the value of the Companys common stock, and the trading price per share
could decline.
If the Companys shares are not listed
on any exchange or on the Nasdaq National Market, they are also subject to the regulations
regarding trading in penny stocks, which are those securities trading
for less than $5.00 per share. The following is a list of the restrictions on the
sale of penny stocks:
Prior
to the sale of penny stock by a broker-dealer to a new purchaser, the broker-dealer must determine
whether the purchaser is suitable to invest in penny stocks. To make that determination, a
broker-dealer must obtain, from a prospective investor, information regarding the
purchasers financial condition and investment experience and objectives. Subsequently,
the broker-dealer must deliver to the purchaser a written statement setting forth the basis
of the suitability finding. A broker-dealer must obtain from the purchaser a written agreement
to purchase the securities. This agreement must be obtained for every purchase until the
purchaser becomes an established customer.
The
Exchange Act requires that prior to effecting any transaction in any penny stock,
a broker-dealer must provide the purchaser with a risk disclosure
document that contains, among other things, a description of the penny
stock market and how it functions and the risks associated with such investment.
These disclosure rules are applicable to both purchases and sales by investors.
A dealer that sells penny stock must send
to the purchaser, within ten days after the end of each calendar month, a written
account statement including prescribed information relating to the security. As
a result of a failure to maintain the trading of the Companys stock on the
Nasdaq National Market and the rules regarding penny stock transactions, the investors
ability to sell to a third party may be limited. The Company makes no guarantee
that its current market-makers will continue to make a market in its securities,
or that any market for its securities will continue.
ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Companys financial instruments
include cash and short-term investment grade debt securities. At September 30,
2002 the carrying values of the Companys financial instruments approximated
their fair values based on current market prices and rates.
It is the Companys policy not to enter
into derivative financial instruments. The Company does not currently have material
foreign currency exposure as the majority of its international transactions are
denominated in U.S. currency. Accordingly, the Company does not believe that it
has a significant currency exposure at September 30, 2002.
ITEM 4. CONTROLS AND PROCEDURES
(1) Evaluation
of Disclosure Controls and Procedures.
30
The Companys principal executive officer
and its chief accounting officer, based on their evaluation of the Companys
disclosure controls and procedures (as defined in Exchange Act Rules 13a -14 (c))
as of a date within 90 days prior to the filing of this Quarterly Report on Form
10-Q, have concluded that the Companys disclosure controls and procedures
are adequate and effective for the purposes set forth in the definition in Exchange
Act rules.
(2) Changes
in Internal Controls and Procedures.
There were no significant changes in the
Companys internal controls or in other factors that could significantly affect
the Companys internal controls subsequent to the date of their evaluation.
PART II. OTHER
INFORMATION
ITEM 1. LITIGATION
On May 10, 2000, the Company filed a lawsuit
in United States District Court alleging that Intuitive Surgicals da Vinci
surgical robot system infringes on its United States Patent Nos. 5,524,180, 5,878,193,
5,762,458, 6,001,108, 5,815,640, 5,907,664, 5,855,583 and 6,063,095. Subsequently,
Computer Motions complaint was amended to add allegations that Intuitives
da Vinci surgical robot infringed two additional Computer Motion patents United
States Patent Nos. 6,244,809 and 6,102,850. These patents concern methods and devices
for conducting various aspects of robotic surgery. Intuitive has served an Answer
and Counterclaim alleging non-infringement of each patent-in-suit, patent invalidity
and unenforceability. Discovery is still underway. The parties have filed cross
motions for summary judgment on the issue of patent infringement relating to the
108, 664, 809, and 850 patents which have not been ruled
upon by the Court at the present time. Trial is set for April 2003.
On or about December 7 and 8, 2000, the
United States Patent and Trademark Office (USPTO) granted three of Intuitives
petitions for a declaration of an interference relating to the Companys 5,878,193,
5,907,664, and 5,855,583 patents. On March 30, 2002, the three judge panel of the
Board of Patent Interferences issued decision orders on the parties preliminary
motions. The Board granted the Companys motion on Interference No. 104,643
and issued an order for Intuitive to show cause why judgment should not be entered
against Intuitive on this interference. The Board denied the Companys motion
on the Interference No. 104,644 and entered judgment against the Company. The Board
denied the Companys motions on the Interference No. 104,645, deferred decision
on two of Intuitives motions, and granted-in-part, denied-in-part and deferred-in-part
on one of Intuitives motions. The Boards decision on Interference No.
104,645 invalidated some of the parties claims, affirmed some of Intuitives
claims and provided for further proceedings related to two of our claims
and is therefore not final. On July 25, 2002, Computer Motion filed a civil action
seeking review of the two adverse decisions in the United States District Court
for the District of California.
On February 21, 2001, Brookhill-Wilk filed suit
against the Company alleging that its ZEUS surgical system infringed upon Brookhill-Wilks
United States Patent Nos. 5,217,003 and 5,368,015. Brookhill-Wilks
complaint sought damages, attorneys fees and increased damages alleging willful
patent infringement. On March 21, 2001, the Company served its Answer and Counterclaim
alleging non-infringement of each patent-in-suit, patent invalidity and unenforceability.
On November 8, 2001, the United States District Court for the Southern District
of New York in the co-pending Brookhill-Wilk v. Intuitive Surgical, Inc., Civil
Action No. 00-CV-6599 (NRB), issued an order interpreting the claims of Brookhill-Wilks
Patent No. 5,217,003 in a way that the Company believed excluded current
applications of its ZEUS surgical system. In light of this decision, on November
13, 2001, the parties to Brookhill Wilk v. Computer Motion, Inc. agreed to dismiss
the case without prejudice.
On March 30, 2001, Intuitive and IBM Corporation
filed suit alleging that the Companys AESOP, ZEUS and HERMES products infringe
United States Patent No. 6,201,984 which was issued on March 13, 2001. The complaint
seeks damages, a permanent injunction, and costs and attorneys fees. Each of the
31
asserted claims is limited to a surgical system employing voice recognition for
control of a surgical instrument and literally read on Computer Motions current
AESOP product and Computer Motions ZEUS and HERMES products to the extent
they are used with AESOP. A jury trial has been held on the issues of patent invalidity
due to lack of enablement and failure to disclose the best mode in addition to damages.
The Companys defense of unenforceability due to prosecution laches was tried
before the District Court Judge. The jury returned a verdict finding IBMs
United States Patent No. 6,201,984 valid, and finding Intuitive was damaged in an
amount of $4.4 million. Prior to the jurys verdict, the court ruled that
the Company had not willfully infringed the patent. The court has not,
at this time, given its verdict on the Companys prosecution laches defense.
A verdict in the Companys favor on the prosecution laches defense could result
in a finding that the patent is not enforceable and negate the damages verdict.
On September 20, 2002, a lawsuit was filed
against the Company by Endoscopic Technologies, Inc., alleging breach of contract
and related claims arising out of an agreement entered into between the two companies
pursuant to which Endoscopic purchased equipment from the Company and was to become
a distributor for the Companys products. The lawsuit, which is currently
pending in the Superior Court of California for the City and County of San Francisco,
was recently served on the Company and no answer has been filed. The Company contends
that the action is without merit and plans to vigorously defend this action. In
addition, the Company will likely be filing a cross-complaint against Endoscopic
seeking payment of more than $100,000 in outstanding invoices.
ITEM 2. CHANGES IN SECURITIES AND
USE OF PROCEEDS
Note Payable Shareholder
During the quarter ended September 30, 2002,
the Company received a bridge loan advance in the aggregate amount of $1,000,000
from Robert W. Duggan, the Companys Chairman and Chief Executive Officer.
Subsequent to September 30, 2002, the Company negotiated final terms of the bridge
loan with another investor and, in connection therewith, the Company issued unsecured,
180-day promissory notes for $1,000,000 to Robert W. Duggan and the other bridge
lender. The notes then were converted into shares of Series C Preferred Stock issued
in the Companys recent private placement, except that the conversion of Mr.
Duggans note is subject to the stockholder approval. Interest accrues at
8.5% per annum on the promissory notes and is convertible into shares of the Companys
Series C Convertible Preferred Stock, subject to stockholder approval at
a special meeting to be held early next year (See Note 12 Subsequent
Event)
Accounts Receivable Financing
In January 2002, the Company entered into
a secured, revolving line of credit (or factoring agreement) with a third party
financing company. This line of credit provides for borrowings up to $2,000,000
based on eligible domestic trade receivables at a factoring fee of 2%, plus a financing
fee of prime rate plus 3%, and is secured by all of the assets of the Company.
The six-month term of this revolving line of credit expired in July 2002 and was
not renewed. As of September 30, 2002 no amounts were outstanding under the accounts
receivable financing agreement.
Private Placement of Common Stock
On February 13, 2002, the Company raised
net proceeds of approximately $10,527,000 through the sale and issuance of shares
of its common stock to certain institutional and accredited investors, including
Robert W. Duggan, the Companys Chief Executive Officer and Chairman. The
proceeds from the sale of the
32
Companys common stock was used to retire approximately
$2,360,000 in debt (including the remaining principal and accrued interest of $968,000
under a promissory note payable to Mr. Duggan) and the remainder of the proceeds
were used to fund working capital needs due to investments in clinical trials,
research and development, sales and marketing programs and for other general operating
requirements. In February 2002, the Company issued 328,689 additional shares of
its common stock to certain vendors who agreed to cancel $1,395,000 of accounts
payable owed to these vendors as consideration for their shares.
Mandatorily Redeemable Series B Convertible
Preferred Stock
On February 13, 2002, the holders of the
Companys Series B Convertible Preferred Stock entered into agreements with
the Company whereby they agreed to convert all of their remaining shares of Mandatorily
Redeemable Series B Convertible Preferred Stock into shares of common stock. The
Company issued 2,196,341 shares of common stock upon conversion of the Series B
Convertible Preferred Stock. In connection with this conversion, the Company agreed
to pay to the holders the present value of the future dividends payable on their
shares of Series B Convertible Preferred Stock. This dividend payment was made
by the issuance of 312,869 shares of the Companys common stock. The Company
also agreed to lower the exercise price of certain warrants issued to the holders
of its Series B Convertible Preferred Stock from $8.12 to $5.00 per share.
Equity Line of Credit
On March 30, 2001, the Company entered into
an Equity Line Financing Agreement with Société Générale, under which the Company
was entitled to issue and sell, from time to time, shares of its common stock for
cash consideration up to an aggregate of $12 million. In February 2002, the Company
terminated the Equity Line Financing Agreement. In connection with this termination,
the Company paid a one-time settlement fee of $135,000 to Société Générale. Prior
to terminating the Equity Line Financing Agreement, the Company raised approximately
$508,000 by issuing 111,615 shares of its common stock to Société Générale.
ITEM 4. SUBMISSIONS
OF MATTERS TO VOTE OF SECURITY HOLDERS.
On July 16, 2002, the Company held its annual
meeting of the stockholders with stockholders holding 14,329,035 shares of Common
Stock (representing (83.2%) of the total number of shares outstanding and entitled
to vote) present in person or by proxy at the meeting. Proxies for the meeting
were solicited pursuant to Regulation 14A of the Securities Exchange Act of 1934.
Daniel R. Doiron, Robert W. Duggan, Jeffrey O. Henley, and Yulun Wang were listed
as managements nominees in the proxy statement and were elected as directors
at the meeting. The votes for each nominee were as follows:
Name
|
|
Number
of Affirmative Votes
|
|
Number
of Negative Votes
|
Daniel R.
Doiron
|
|
13,882,324
|
|
446,711
|
Robert W.
Duggan
|
|
13,814,845
|
|
514,190
|
Jeffrey O.
Henley
|
|
13,882,324
|
|
446,711
|
Yulun Wang
|
|
13,884,984
|
|
444,051
|
Also at the meeting, the Company sought
an amendment to the Computer Motion Stock Purchase Plan to increase the total number
of shares issuable thereunder. The proposal was approved with 13,903,001 affirmative
votes, 287,441 negative votes and 138,593 abstentions.
In addition, at the meeting, the Company
sought approval of the issuance of shares of the Companys Common Stock upon
exercise of certain warrants if the exercise price of such warrants is ever adjusted upon
33
certain dilutive issuances. The proposal was approved with 5,777,120 affirmative
votes, 706,522 negative votes and 980,384 abstentions.
In addition, at the meeting, the Company
sought approval for the ratification of Ernst & Young LLP as its independent
public accountants for the fiscal year ending December 31, 2002. This proposal
was approved with 14,289,025 affirmative votes, 10,350 negative votes and 29,660
abstentions.
ITEM 6. EXHIBITS AND
REPORTS ON FORM 8-K
a.)
|
Exhibits
|
|
|
|
99.1
Certification of Periodic Report by Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
|
|
|
|
99.2
Certification of Periodic Report by Chief Accounting Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
|
|
|
b)
|
Reports on
Form 8-K.
|
|
|
|
Report on
Form 8-K, dated April 3, 2002, filed by the Company to report on the status of its
intellectual property litigation proceedings with Intuitive Surgical, Inc.
|
|
|
|
Report on
Form 8-K, dated June 7, 2002, filed by the Company to report the appointment of
Ernst & Young LLP as its new independent accountants.
|
SIGNATURE
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: November 14,
2002
|
COMPUTER
MOTION, INC.
|
|
|
|
|
By:
|
/s/
Robert W. Duggan
|
|
|
|
|
|
Robert
W. Duggan
|
|
|
Chairman
of the Board of Directors
|
|
|
and Chief
Executive Officer
|
|
|
|
|
By:
|
/s/
Larry Redfern
|
|
|
|
|
|
Larry
Redfern
|
|
|
Controller
and Chief Accounting Officer
|
34
CERTIFICATIONS
I, Robert W. Duggan, certify that:
1. I have reviewed this quarterly report
on Form 10-Q of Computer Motion, Inc.;
2. Based on my knowledge, this quarterly
report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period
covered by this quarterly report; and
3. Based on my knowledge, the financial
statements, and other financial information included in this quarterly report, fairly
present in all material respects the financial condition, results or operations
and cash flows of the registrant as of, and for, the periods presented in this quarterly
report.
4. The registrants other certifying
officers and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Rules 13a-14 and 15d-14 of the Exchange Act) for the
registrant and we have:
a) designed such disclosure controls and
procedures to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and
c) presented in this quarterly report our
conclusions about the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The
registrants other certifying officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit committee of registrants
board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the
design or operation of internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material,
that involves management or other employees who have a significant role in the registrants
internal controls; and
6. The
registrants other certifying officers and I have indicated in this quarterly report whether
or not there were significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and material weaknesses.
Dated: November 14,
2002
|
COMPUTER
MOTION, INC.
|
|
|
|
|
By:
|
/s/
Robert W. Duggan
|
|
|
|
|
|
Robert
W. Duggan
|
|
|
Chairman
of the Board of Directors
|
|
|
and Chief
Executive Officer
|
35
I, Larry Redfern, certify that:
1. I have reviewed this quarterly report
on Form 10-Q of Computer Motion, Inc.;
2. Based on my knowledge, this quarterly
report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period
covered by this quarterly report; and
3. Based on my knowledge, the financial
statements, and other financial information included in this quarterly report, fairly
present in all material respects the financial condition, results or operations
and cash flows of the registrant as of, and for, the periods presented in this quarterly
report.
4. The registrants other certifying
officers and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Rules 13a-14 and 15d-14 of the Exchange Act) for the
registrant and we have:
a) designed such disclosure controls and
procedures to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant
s disclosure controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and
c) presented in this quarterly report our
conclusions about the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The
registrants other certifying officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit committee of registrants
board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the
design or operation of internal controls which could adversely affect the
registrants ability to record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material,
that involves management or other employees who have a significant role in the registrants
internal controls; and
6. The
registrants other certifying officers and I have indicated in this quarterly report whether
or not there were significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant deficiencies
and material weaknesses.
Dated: November 14,
2002
|
COMPUTER
MOTION, INC.
|
|
|
|
|
By:
|
/s/ Larry
Redfern
|
|
|
|
|
|
Larry
Redfern
|
|
|
Controller
and Chief Accounting Officer
|
36
EXHIBIT INDEX
Exhibit
|
Description
|
|
|
|
99.1
|
Certification of Periodic Report by Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
|
|
|
|
|
99.2
|
Certification
of Periodic Report by Chief Accounting Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
|
37