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UNITED
STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D. C. 20549





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FORM 10-Q





|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- |  | ----------------------------------------------------------------------------------------




For the quarterly period ended March 31, 2002





OR





| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- |  | -----------------------------------------------------------------------------------------




For the transition period from 
to .





Commission File Number: 0-22419





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CARDIMA, INC.


(Exact name of registrant as specified in its charter)





Delaware

94-3177883(State or Other Jurisdiction of Incorporation or
Organization)

(I.R.S. Employer Identification No.)





47266 Benicia Street, Fremont, CA

94538-7330(Address of Principal Executive Offices)

(Zip Code)





Registrants telephone number, including area code: (510) 354-0300





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Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) had been subject to such filing
requirements for the past 90 days.  x  Yes  ̈ No





As of April 25, 2002, there were 42,699,875 shares of Registrants Common Stock outstanding.





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CARDIMA, INC.





INDEX





PART I.

3Item 1.

FINANCIAL STATEMENTS

3Condensed Balance Sheets

3Condensed Statements Of Operations

4Condensed Statements Of Cash Flows

5Notes To Condensed Financial Statements

6Item 2.

Managements Discussion And Analysis Of Financial Condition And Results Of Operations

8Results Of OperationsThree Months Ended March 31, 2002 and 2001

11Liquidity And Capital Resources

12PART II.    OTHER INFORMATION

29Item 2.

Changes in Securities and Use of Proceeds

29Item 4.

Submission of Matters to a Vote of Security Holders

29Item 6.

Exhibits and Reports on Form 8-K

30SIGNATURES

31




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PART I.





Item 1.Financial Statements





CARDIMA, INC.





CONDENSED BALANCE SHEETS


(In thousands, except share and per share amounts)





March 31, 2002 (Unaudited)


December 31, 2001 (See Note 1)ASSETSCurrent assets:Cash and cash equivalents

$
4,011


$
7,542Accounts receivable, net of allowances for doubtful accounts of $81 at March 31, 2002 and $75 at December 31, 2001


531



301Inventories


1,585



1,564Other current assets


324



327Total current assets


6,451



9,734Property and equipment, net


1,460



1,323Notes receivable from officers


572



565Other assets


91



196$
8,574


$
11,818LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
1,334


$
1,563Accrued compensation


820



1,094Capital lease obligationcurrent portion


174



279Other current liabilities


46



42Total current liabilities


2,374



2,978Deferred rent


13



19Capital lease obligationnoncurrent portion


55



64CommitmentsStockholders equity:Common stock, $0.001 par value; 75,000,000 shares authorized, 42,699,875 shares issued and outstanding at March 31, 2002; 42,528,143
as of December 31, 2001; at amount paid in


86,528



86,583Deferred compensation






Accumulated deficit


(80,396
)


(77,826
)Total stockholders equity


6,132



8,757$
8,574


$
11,818





See accompanying notes to condensed financial statements




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CARDIMA, INC.





CONDENSED STATEMENTS OF OPERATIONS


(In thousands, except per share amounts)


(Unaudited)





Three months ended March 31, (Unaudited)2002


2001Net sales

$
766


$
539Cost of goods sold


890



974Gross profit (loss)


(124
)


(435
)Operating expenses:Research and development


833



1,357Selling, general and administrative


1,633



1,509Total operating expenses


2,466



2,866Operating loss


(2,590
)


(3,301
)Interest and other income


28



12Interest expense


(8
)


(19
)Gain on sale of intellectual property (1)






4,000Net income (loss)

$
(2,570
)

$
692Basic net income and diluted loss per share

$
(0.06
)

$
0.03Diluted net income (loss) per share

$
(0.06
)

$
0.03Shares used in computing basic and diluted net loss per share


42,641



21,620


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|(1) |  | In January 2001, we received $4,000,000 from Medtronic, Inc., representing the final payment on the transaction initiated in December 2000, whereby we sold a portion of our
patent portfolio and related intellectual property pertaining to intravascular sensing and signal detection and certain guiding catheters. See our Annual Report on Form 10-K filed with the SEC on April 1, 2002 for more information.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







See accompanying notes to financial statements




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CARDIMA, INC.





STATEMENTS OF CASH FLOWS


(In thousands)





Three months ended March 31, (Unaudited)2002


2001CASH FLOWS FROM OPERATING ACTIVITIESNet loss

$
(2,570
)

$
692Adjustments to reconcile net loss to net cash provided by operations:Depreciation and amortization


247



224Stock-based compensation


(122
)


25Loss on disposal of assets


6



0Changes in operating assets and liabilities:Accounts receivable


(230
)


(32
)Inventories


(21
)


310Other current assets


3



29Other assets


105



26Accounts payable


(229
)


(382
)Accrued employee compensation


(274
)


(370
)Other current liabilities


4



14Deferred rent


(6
)


0Net cash provided by (used in) operating activities


(3,087
)


536CASH FLOWS FROM INVESTING ACTIVITIESCapital expenditures


(390
)


(30
)Proceeds from disposal of assets


0



0Net cash used in investing activities


(390
)


(30
)CASH FLOWS FROM FINANCING ACTIVITIESPrincipal payments under capital leases


(114
)


(133
)Notes receivable from officers


(7
)


(18
)Net proceeds from sale of common stock


67



20Proceeds from sale/leaseback of capital equipment


0



0Net cash used in financing activities


(54
)


(131
)NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

$
(3,531
)

$
375CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

$
7,542


$
1,324CASH AND CASH EQUIVALENTS, END OF PERIOD

$
4,011


$
1,699





See accompanying notes to condensed financial statements




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CARDIMA, INC.





NOTES TO CONDENSED FINANCIAL STATEMENTS


March 31, 2002


(Unaudited)





1.    BASIS OF PRESENTATION





The accompanying unaudited condensed financial statements have been prepared by the Company according to the rules and regulations of the Securities and Exchange Commission 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 accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included.





The operating results for the three month period ended March 31, 2002 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2002 or
for future operating results. The accompanying financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the fiscal year ended December
31, 2001. The accompanying balance sheet at December 31, 2001 has been derived from these audited financial statements.





2.    MANAGEMENTS PLANS





As of March 31, 2002 the Company has approximately $4,011,000
in cash and cash equivalents, working capital of $4,077,000 and an accumulated deficit of $80,396,000. Assuming the Company has adequate funding to continue the course of its development activities, the Company expects such losses to continue for at
least the next two years. Management is seeking to continue to finance operations with a combination of funds from equity or debt offerings, revenue from product sales, funds from potential corporate alliances and technology licenses. The Company
expects its existing capital resources will permit it to meet its capital and operational requirements through at least July 2002. The Company is currently in discussions with investment bankers to raise additional equity capital.





The Company has added new distributors in France and Italy during the quarter ended March 31, 2002. The Company is currently
seeking registration approval of all its therapeutic products in China, but cannot predict if its products will ultimately be approved for sale or whether or not the Company will be successful in marketing and selling its products in China and other
Asian countries.




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CARDIMA, INC.





NOTES TO CONDENSED FINANCIAL STATEMENTS(Continued)







In order to commercialize its products and continue operations, the Company is
currently in the process of raising additional capital. Failure to raise additional capital will cause the Companys business to suffer and could cause it to cease operations.





3.    INVENTORY





Inventories consist of the following (in thousands):





March 30, 2002

December 31, 2001(Unaudited)

(Unaudited)Inventories:Raw materials

$
634

$
653Work-in-process


114


50Finished goods


837


861$
1,585

$
1,564





Inventory amounts shown above are net of reserves for excess and obsolete
inventory of $214,000 and $141,000 at March 31, 2002 and December 31, 2001, respectively. The Company reserves for inventory amounts by considering the potential excess inventory in relation to sales forecasts and the obsolescence of inventory as a
result of technological advancements and shelf life expirations. Inventories are stated at the lower of cost or market. Cost is based on actual costs computed on a first-in, first-out basis.





4.    REVENUE RECOGNITION





The Company recognizes revenue
from two types of customers, end-users and distributors. Revenue is recognized upon the shipment of product, provided the title of products has been transferred at the point of shipment, there is persuasive evidence of an agreement, the payment for
the product is reasonably assured, and no substantive obligations to the customer remain. Customers are not entitled to rights of product return.





5.    STOCK OPTION RE-PRICING





On March 20, 2000, the Companys Board of Directors
approved a reduction, effective June 2, 2000, in the exercise price of 462,576 outstanding stock options held by executive officers and employees of the Company to the fair market value of the Companys common stock on June 2, 2000, which was
$1.16 per share. These options were granted between July 29, 1997 and July 6, 1999 at exercise prices ranging from $1.91 to $5.88 per share.





Of the initial 462,576 shares that were re-priced, 25,011 shares have been cancelled, 28,700 shares have been exercised and 408,865 shares remain outstanding as of March 31, 2002. The cumulative non-cash compensation
expense from the date of re-pricing in 2000, for the re-valuation of these re-priced options is $308,000, as of quarter ended March 31, 2002. For the




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CARDIMA, INC.





NOTES TO CONDENSED FINANCIAL STATEMENTS(Continued)




quarter ended March 31, 2002, a credit of $149,000 was recorded as a result of the decreased close price of the Companys common stock from
$2.26 per share at December 31, 2001, to $1.85 per share on March 31, 2002.





6.    NET LOSS PER SHARE





Net loss per share has been computed using the weighted average number of shares of common stock outstanding during the period. The Company has excluded
all warrants and stock options from the computation of basic and diluted earnings per share because all such securities are anti-dilutive for all periods presented.





7.    COMPREHENSIVE INCOME (LOSS)





Comprehensive loss equaled net
loss for all periods presented.





8.    RECENT ACCOUNTING PRONOUNCEMENTS





On June 29, 2001, the Financial Accounting Standards Board (FASB), approved the final standards resulting from its deliberations on the business combinations project. The FASB
issued statement of financial accounting SFAS No.141, Business Combinations and SFAS No.142 Goodwill and Other Intangible Assets. SFAS 141 was effective for any business combinations initiated after June 30, 2001 and also
includes the criteria for recognition of intangible assets separately from goodwill. SFAS 142 was effective for fiscal years beginning after December 15, 2001 and requires that goodwill not be amortized, but rather be subject to an impairment test
at least annually. The Company adopted SFAS No. 141 and SFAS No. 142 on January 1, 2002. The adoption of SFAS No. 141 and No. 142 did not have an impact on the Companys financial position or result of operations.





Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations





This Form 10-Q, including managements discussion and analysis of financial condition and results of operations, contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements regarding regulatory approvals, operating results and capital requirements.
Except for historical information, the matters discussed in this Form 10-Q, are forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Such factors
include our ability to obtain adequate funding, conduct successful clinical trials, obtain timely regulatory approvals and gain acceptance from the marketplace for our products, as well as the risk factors discussed below in Factors Affecting
Future Results and those listed from time to time in our SEC reports. We assume no obligation to update the forward-looking statements included in this Form 10-Q. This discussion and analysis should be read in conjunction with the Financial
Statements and related Notes thereto included elsewhere in this Form 10-Q and in our Annual Report on Form 10-K.




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Overview





Since our incorporation in November 1992, Cardima has been engaged in the design, research, development, manufacturing and testing of microcatheter systems for the mapping (diagnosis) and ablation (treatment) of the
two most common forms of cardiac arrhythmias: atrial fibrillation and ventricular tachycardia. Arrhythmias are abnormal electrical heart rhythms that adversely affect the mechanical activities of the heart and can significantly affect a
persons quality of life and be potentially fatal. We develop microcatheter systems designed (1) to locate and provide more extensive and less traumatic access to arrhythmia-causing tissue for diagnosing the arrhythmia, referred to as mapping,
and (2) to restore normal heart rhythms by isolating and destroying the arrhythmia-causing tissue using radio frequency energy, referred to as ablation. Our microcatheters incorporate multiple electrodes at the distal end to record electrical
signals for mapping and, with certain microcatheters, to emit radio frequency energy for ablation, allowing physicians to both map and ablate arrhythmias using the same microcatheter. Our microcatheters are also designed with variable stiffness
guidewire technology and a highly flexible distal tip to allow more extensive and less traumatic access to the chambers and vasculature of the heart. In addition, all of our microcatheters are disposable, single-use products that can be adapted to
and used with all existing signal display systems and radiofrequency generators, eliminating the need for significant new investment in capital equipment by hospitals.





We have generated revenues of approximately $13.5 million from inception to March 31, 2002. Prior to 1997, these revenues were generated primarily in Europe and Japan from sales of our
PATHFINDER and TRACER microcatheter systems for diagnosing ventricular tachycardia and our REVELATION microcatheter system for diagnosing atrial fibrillation, as well as ancillary products such as the VENAPORT guiding catheters. Since 1997 and the
regulatory clearance by the FDA of certain of our products, sales in the United States consist primarily of our PATHFINDER and REVELATION lines of microcatheters for diagnosising ventricular tachycardia and atrial fibrillation, respectively. We plan
to market and distribute our products in the United States with a small direct sales force and plan to market and distribute products internationally through distributors and a small direct sales force in Europe in selected countries who will sell
the our products to physicians and hospitals. European sales consist primarily of the PATHFINDER microcatheter lines for diagnosis of ventricular tachycardia and REVELATION lines of microcatheters for diagnosis and treating of atrial fibrillation.





We have obtained the right to affix the CE Mark to our REVELATION, REVELATION Tx, REVELATION T-Flex, REVELATION Helix and
REVELATION Helix ST microcatheter systems for both mapping and ablation of atrial fibrillation and for our PATHFINDER, PATHFINDER mini and TRACER microcatheter systems for mapping ventricular tachycardia, permitting us to market these
products in the member countries of the Europe Union. We received 510(k) clearances for our (1) REVELATION microcatheter for mapping atrial fibrillation; (2) PATHFINDER, PATHFINDER mini and TRACER microcatheters for mapping ventricular
tachycardia; (3) VUEPORT balloon guiding catheter and (4) NAVIPORT deflectable tip guiding catheter.





We will be required to
conduct clinical trials, demonstrate safety and effectiveness and obtain PMA approval from the FDA in order to sell any of our products for treating atrial fibrillation or ventricular tachycardia in




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the United States. Specifically, PMA approval will be required prior to the introduction in the United States of the REVELATION Tx, REVELATION T-Flex and
REVELATION Helix microcatheter systems for treating atrial fibrillation.





While we produce and sell microcatheters for the
diagnosis of ventricular tachycardia, our current efforts focus on the development of microcatheters to diagnose and treat atrial fibrillation. During 2001, management decided to conserve and concentrate our resources on the clinical trials for our
atrial fibrillation products with the objective of completing the regulatory approval process in both the United States and Europe. Since the refocus on the Phase III clinical trial, we have completed four of the five necessary modules required for
completing the Pre-Market Approval (PMA) application process necessary to sell the REVELATION Tx in the United States. As of April 25, 2002, two of the four completed modules were accepted and closed by the FDA and the other two modules have been
reviewed with supplemental data furnished to the FDA during the first quarter of 2002.





We began a left-sided atrial clinical
trial in Germany with the REVELATION Helix microcatheter system for the treatment of atrial fibrillation originating in the pulmonary veins. To date, 37 patients have been treated at four sites. The purpose of this study is to gain data that will be
important to future marketing efforts of the REVELATION Helix in Europe and potentially used as initial data for our planned REVELATION Helix clinical trial in the United States. We received CE Mark approval for the REVELATION Helix in the European
Union in December 2001 and for the REVELATION Helix ST in May 2002





We have a limited history of operations and has experienced
significant operating losses since inception. We expect that our operating losses will continue for the foreseeable future as we continue to invest substantial resources in product development, clinical trials, obtaining regulatory approval, sales
and marketing and manufacturing.





Critical Accounting Policies





Use of Estimates





We have prepared our financial statement in
conformity with generally accepted accounting principles in the United States, which requires management to make estimates and assumptions that effect the amounts reported in financial statement and accompanying notes. Actual results could differ
from these estimates.





Revenue Recognition





We recognize revenue from two types of customersend users and distributors. Revenue is recognized upon the shipment of product, provided the title of products has been transferred
at the point of shipment, there is persuasive evidence of an agreement, the payment for the product is reasonably assured, and no substantive obligations to the customer remain. Customers are not entitled to rights of product return.





Inventories





Our inventories are stated at the lower of cost or market. Cost is based on actual costs computed on a first-in, first-out basis. Inventory amounts are shown net of reserves for excess and obsolete inventory at the lower of cost or market.
We reserve for inventory amounts by considering the potential excess inventory in relation to sales forecasts and the obsolescence of inventory as a result of technological advancements and shelf life expirations.




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Results of OperationsThree Month Ended March 31, 2002 and 2001





Net Sales





Net sales for the quarter ended March 31, 2002 increased 42% to $766,000 from $539,000 for the same period in 2001. This increase was
primarily due to a 103% increase in international sales to $582,000 for the quarter ended March 31, 2002, from $286,000 for the same period in 2001, led by initial therapeutic product sales of the REVELATION Helix in Europe and strong diagnostic
product sales in Japan. U.S. sales for the quarter ended March 31, 2002 decreased 27% to $184,000 from $253,000 for the same period in 2001. The decrease in domestic revenue was primarily due to us no longer having a distribution arrangement in the
United States and having to develop our own direct sales force. Due to the sharp increase in international sales in the quarter ended March 31, 2002, accounts receivable increased 76% to $531,000 at March 31, 2002 from $301,000 at December 31, 2001
while the related allowance for doubtful accounts increased 9% or $6,000 over the same period.





We have decided to focus our
resources and efforts on the completion of our Phase III clinical trials to treat atrial fibrillation with the REVELATION Tx microcatheter system, while building a sales foundation on which to grow future revenue opportunities.





Cost of Goods Sold





Cost of goods sold primarily includes raw materials costs, catheter fabrication costs, system assembly, test costs and manufacturing overhead. Cost of goods sold for the quarter ended March 31, 2002 decreased 9% to $890,000, from $974,000
for the same period in 2001. This decrease was primarily due to the effect of increased sales and number of units shipped by fixed costs being allocated over higher manufacturing volume. Inventory reserves for excess and obsolete inventory increased
$73,000 from December 31, 2001 to March 31, 2002. This increase was primarily due to a higher volume of units in finished goods with shelf life expiration dates within six months of quarter end date, March 31, 2002. We reserve for inventory amounts
by considering the potential excess inventory in relation to sales forecasts and the obsolescence of inventory as a result of technological advancements and shelf life expirations. When we write off specific inventory or have determined that
inventory is obsolete, the inventory is subsequently disposed of.





Research and Development Expenses





Research and development expenses include product development, clinical testing and regulatory expenses. Research and development expenses,
including regulatory and clinical functions for the quarter ended March 31, 2002 decreased 39% to $833,000 from $1,357,000 for the same period in 2001. Our investment in research and development for the quarter ended March 31, 2002 decreased 36% to
$404,000 from $628,000 for the same period in 2001, as all programs not related to the atrial fibrillation clinical trial have been postponed. Regulatory and




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clinical expenses for the quarter ended March 31, 2002 also decreased 41% to $429,000 from $729,000 for the same period
in 2001. The decrease was primarily due to lower patient enrollment costs associated with the Phase III clinical trial, the postponement of the TheraStream regulatory approval process and our focus on the REVELATION family of microcatheters.





Selling, General and Administrative Expenses





Selling, general and administrative expenses for the quarter ended March 31, 2002 increased 8% to $1,633,000 from $1,509,000 for the same period in 2001. Selling expenses for the quarter
ended March 31, 2002 increased 23% to $763,000 from $619,000 for the same period in 2001. Selling expenses increased during this period due to the ramp up of sales efforts to support the REVELATION Helix launch in Europe. General and administrative
expenses for the quarter ended March 31, 2002 decreased 2% to $870,000 from $890,000 for the same period in 2001. The slight decrease in general and administrative expenses in this period was due to decreased spending for public and investor
relations activities.





Interest and Other Income





Interest and other income for the quarter ended March 31, 2002 increased to $28,000 from $12,000 for the same period in 2001. The increase was primarily due to higher average cash
balances during the first quarter of 2002 compared to the same period in 2001.





Interest Expense





Interest expense for the quarter ended March 31, 2002 decreased to $8,000 from $19,000 for the same period in 2001. This decrease was primarily due to
the expiration and payoff of certain capital equipment leases.





Gain on the Sale of Intellectual Property





The gain on the sale of certain intellectual property is due to the final $4,000,000 payment received from Medtronic in January 2001. The
total purchase price of the intellectual property was $8,000,000, of which $4,000,000 was received in December 2000. The intellectual property was carried at virtually no value on our balance sheets.





Liquidity and Capital Resources





We have financed our operations to date, principally through (1)
private placements of equity securities, which have yielded net proceeds of $86,600,000 through March 31, 2002, (2) our initial public offering of Common Stock in June 1997, which resulted in net proceeds of approximately $13,600,000, together with
interest income on such proceeds, (3) borrowings under a $3,000,000 line of credit, (4) sale of certain of our non-core patents to Medtronic for $8,000,000 and (5) equipment leases to finance certain capital equipment, which have provided




12




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proceeds in the amount of $4,700,000. As of March 31, 2002, the Company had approximately $4,011,000 in cash and cash equivalents.





Net cash used in operating activities was approximately $2,842,000 compared to the net cash provided of $536,000 for the quarter ended March 31, 2002
and 2001, respectively. The change is related to the $4,000,000 gain on the sale of certain intellectual property received in January 2001. Net cash used by financing and investing activities was approximately $299,000 compared to $131,000 for the
quarter ended March 31, 2002 and 2001, respectively. This change was primarily due to the expiration and payoff of certain capital leases and the variable accounting adjustment for certain options that were re-priced in 2000.





Our future liquidity and capital requirements will depend upon numerous factors, including receipt of adequate funding, sales and marketing
activities, the progress of our product development efforts, the progress of our clinical trials, actions relating to regulatory matters, the costs and timing of expansion of product development, manufacturing, the extent to which our products gain
market acceptance and competitive developments. Since inception, we have an accumulated deficit of approximately $80.4 million. Management expects to continue to incur additional losses in the foreseeable future as it completes new product
development and product commercialization. We believe that available cash will be sufficient to meet our cash requirements through at least July 2002. We are currently in discussions with investment bankers to raise additional equity capital but
there can be no assurance however, that such additional financing will be available on terms acceptable to us, if at all. We must seek to raise additional funds through public or private financing, collaborative relationships or other arrangements.
Furthermore, any additional equity financing is expected to be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Collaborative arrangements, if necessary to raise additional funds, may require us to
relinquish its rights to certain of its technologies, products or marketing territories. Our failure to raise capital when needed will have a material adverse effect on our business, financial condition and would cause us to cease operations.





Factors Affecting Future Results





We have sold a limited number of our microcatheter products, and we will continue to incur substantial costs in bringing our microcatheter products to market.





We have sold only a limited number of our microcatheter systems. In addition, we will continue to incur substantial losses into the foreseeable future because of research and product
development, clinical trials, manufacturing, sales, marketing and other expenses as we seek to bring our microcatheters to market. Since our inception, we have experienced losses, and we expect to experience substantial net losses into the
foreseeable future.





Our net losses were approximately $9.3 million, $7.8 million and $14.0 million for 2001, 2000 and 1999,
respectively. As of March 31, 2002, our accumulated deficit was approximately $80.4 million. Our limited sales history makes it difficult to assess our future results. We cannot be




13




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certain that we will ever generate substantial revenue or achieve profitability. Our failure to generate substantial revenues would harm our business.





Our needs to raise additional capital in the future could have a dilutive effect on your investment.





In order to commercialize our products, we will need to raise additional capital. One possibility for raising additional capital would be the
public or private sale of our common stock. In May 2001, we received net proceeds of approximately $6.2 million from a private placement of 11,746,916 shares of our common stock. As part of this private placement, we also issued redeemable warrants
to purchase up to an aggregate of 5,873,465 shares of our common stock at an exercise price per share of $0.87. In addition, in August 2001, we received net proceeds of approximately $3.5 million from a private placement of 2,822,471 shares of our
common stock, along with the issuance of redeemable warrants to purchase up to an aggregate of 1,411,234 shares of our common stock at exercise prices between $1.91 and $2.07. In September 2001, we announced that we had elected to redeem the
warrants issued in the May 2001 private placement for $0.001 per warrant share; all of the May 2001 warrants were exercised by the redemption date, and we received net proceeds of approximately $4.6 million. Any sale by us of additional shares of
our common stock will further dilute your ownership percentage in Cardima.





If we fail to raise additional capital to develop
and market our microcatheter systems, our business will fail.





We will need to raise additional capital through public or
private financings or other arrangements in order to complete our clinical trials and market our microcatheter systems. In addition, we may be required to expend greater than anticipated funds if unforeseen difficulties arise in the course of
completing the development and marketing of our products or in other aspects of our business. We cannot assure you that additional capital will be available to us when needed, if at all, or, if available, on terms attractive to us. If we cannot
obtain sufficient capital, we may be forced to delay, scale back or eliminate some or all of our product research and development programs, to limit the marketing of our products, or to license to third parties the rights to commercialize our
products or technologies that we would otherwise develop and market ourselves. Furthermore, debt financing, if available, may involve restrictive covenants that could affect our ability to raise additional capital. Our failure to raise capital when
needed could cause us to cease our operations.





We have financed our operations since inception primarily through the private
placement of equity securities, proceeds from our initial public offering in June 1997, loan facilities and the sale of certain of our patents and other intellectual property. As of March 31, 2002, our cash and cash equivalents totaled approximately
$4,011,000. We believe that our existing cash and cash equivalents and short-term investments, as well as sales of our products, will be sufficient to fund our operations through July 2002 and we are currently in discussions with investment bankers
to raise additional equity capital. However, there can be no assurance that we can obtain additional funding after such date.




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Our independent auditors believe that there is substantial doubt as to our ability to
continue as a going concern.





As a result of our losses to date, working capital deficiency and accumulated deficit, our
independent auditors have concluded that there is substantial doubt as to our ability to continue as a going concern for a reasonable period of time, and have modified their report in the form of an explanatory paragraph describing the events that
have given rise to this uncertainty. Our continuation is based on our ability to generate or obtain sufficient cash to meet our obligations on a timely basis and ultimately to attain profitable operations. Our independent auditors going
concern qualification may make it more difficult for us to obtain additional funding to meet our obligations. We anticipate that we will continue to incur significant losses until successful commercialization of one or more of our products. There
can be no assurance that we can be operated profitably in the future.





We rely on multiple third-parties to conduct and
collect data for the clinical trials of our products. If we are unable to access this data or the FDA refuses to accept the data in a filing, the commercialization of our products will be delayed and our business will be harmed.





We often rely on multiple third-parties, such as hospital and universities, to conduct and collect data for our clinical trials. We depend on
these third parties to provide access to data and cooperate with us in completing regulatory filings for the approval or clearance of our products. In order for the FDA and other regulatory agencies to accept and rely on the data of a filing, the
data collection, analysis and summarization must meet certain standards. We cannot be certain that the clinical data collected by the third-parties meet the standards of the FDA or other regulatory agencies. If we are unable to rely on the clinical
data collected by third-parties, or if these third-parties do not perform their contractual obligations, the FDA or other regulatory agencies may require us to gather additional clinical data. This could significantly delay commercialization of our
products, require us to spend additional capital on our clinical trials and harm our business.





We are in an early stage of
our product development and cannot assure the safety or effectiveness of our products.





To date, we have received 510(k)
pre-market clearances from the FDA with respect to our PATHFINDER and PATHFINDER mini microcatheter systems for venous mapping of ventricular tachycardia, and our REVELATION microcatheter system for mapping the atria of the heart. We also
received FDA 510(k) clearance for our VENAPORT, VUEPORT and NAVIPORT guiding catheters and our TRACER microcatheter for mapping ventricular tachycardia.





We are in the final stages of developing, testing and obtaining regulatory approval for our REVELATION Tx microcatheter systems designed for ablation of atrial fibrillation. We completed the mapping phase of this
feasibility study in August 1997 and the atrial fibrillation ablation feasibility study in December 1998. We received approval of an IDE supplement in December 1998 allowing us to expand the atrial fibrillation study. In October 2000, we received




15




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permission to expand the clinical trial to Phase III. The Phase III clinical trial requires 80 patients to be treated in up to 20 centers. Additionally, in
August 2001, we began a clinical trial in Germany involving our REVELATION Helix microcatheter in the treatment of atrial fibrillation originating from the pulmonary veins.





We also received approval for an IDE to begin clinical testing of our TheraStream microcatheter system for ablation of ventricular tachycardia in December 1999 and approval to expand
that trial in 2000, however, we have postponed the clinical feasibility trial for the TheraStream microcatheter system for ablation of ventricular tachycardia to focus on completing our atrial fibrillation Phase III clinical trial. We have no
estimate as to when, or if, we will resume the clinical trial for our TheraStream microcatheter system.





We must complete the
atrial fibrillation Phase III clinical trial in order to gather data for the completion of our pre-market approval, or PMA, application to the FDA for our atrial fibrillation ablation product. Currently, we are targeting approval for our REVELATION
Tx before the end of 2002. We must receive PMA approval before marketing our products for ablation in the United States. Clinical trials of our microcatheter systems will require substantial financial and management resources. In addition, if we
resume the clinical trial for our TheraStream microcatheter system, the completion of this clinical trial could take several years.





In addition, the clinical trials may identify significant technical or other obstacles that we will have to overcome before obtaining the necessary regulatory approvals or market acceptance. Our failure to complete our clinical trials,
demonstrate product safety and clinical effectiveness, and obtain regulatory approval for the use of our microcatheter system for the ablation of atrial fibrillation would have a material adverse effect on our business, financial condition and
results of operations.





Our microcatheter products and their related procedures are novel to the market and will require the
special training of physicians. If the market does not accept our products and procedures, our revenues will decline.





Our
microcatheter systems represent a novel approach to diagnosing and treating atrial fibrillation and ventricular tachycardia. Acceptance of our products and procedures by physicians, patients and health care payors will be necessary in order for us
to be successful. If the market does not accept our products and the procedures involved in their use, our business could be harmed and our revenues would decline.





Our microcatheter products must be safe, effective and cost efficient in order for them to effectively compete against more established treatments. If we cannot compete with these
treatments, our revenues will decline.





The market for catheters to diagnose or treat atrial fibrillation and ventricular
tachycardia is highly competitive. Our microcatheter systems for the mapping and ablation of atrial fibrillation and ventricular tachycardia are new technologies. Safety, cost efficiency and effectiveness are the primary competitive factors in our
market. Other competitive factors include the length of time




16




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required for products to be developed and to receive regulatory approval and, in some cases, reimbursement approval are important competitive factors. Existing
treatments with which we must compete include:





| |  |  | conventional catheters using the drag and burn technique,
| | - |  | -----------------------------------------------------------




| |  |  | drugs,
| | - |  | ------




| |  |  | external electrical shock to restore normal heart rhythms and defibrillation,
| | - |  | -----------------------------------------------------------------------------




| |  |  | implantable defibrillators,
| | - |  | ---------------------------




| |  |  | purposeful destruction of the atrio-ventricular node followed by implantation of a pacemaker, and
| | - |  | -------------------------------------------------------------------------------------------------




| |  |  | open-heart surgery known as the maze procedure.
| | - |  | -------------------------------------------------




Physicians will not recommend the use of our microcatheter systems unless they can conclude that our systems provide a safe, effective and cost-efficient alternative to current technologies for the mapping and
ablation of atrial fibrillation or ventricular tachycardia. If our clinical data and other studies do not show that our products are safe and effective, the FDA will not approve our products for sale. If our products are not approved, we will not be
able to enter the market and our revenues will decline.





None of our ablation products have received regulatory approval in
the United States. Our failure to receive these approvals will harm our business.





None of our products in development for
the ablation of atrial fibrillation or ventricular tachycardia has received regulatory approval in the United States. If we cannot gain U.S. regulatory approval, our business will be harmed. Even if our ablation products are successfully developed
and we obtain the required regulatory approvals, we cannot be certain that our ablation products and their associated procedures will ultimately gain market acceptance. Since our sole product focus is to design and market microcatheter systems to
map and ablate atrial fibrillation and ventricular tachycardia, our failure to successfully commercialize these systems would harm our business.





Reuse of our single-use products could cause our revenues to decline.





Although we label
all of our microcatheter systems for single-use only, we are aware that some physicians potentially may reuse these products. Reuse of our microcatheter systems could reduce revenues from product sales and could cause our revenues to decline. In
addition, such misuse of our products could result in personal injury and death. See Risk FactorWe may face product liability claims related to the use or misuse of our products.





We must obtain governmental approvals or clearances before we can sell our products.





Our products are considered to be medical devices and are subject to extensive regulation in the United States and internationally. These regulations are wide ranging and govern, among
other things:





| |  |  | product design and development,
| | - |  | -------------------------------




| |  |  | product testing,
| | - |  | ----------------



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| |  |  | product labeling,
| | - |  | -----------------




| |  |  | product storage,
| | - |  | ----------------




| |  |  | premarket clearance and approval,
| | - |  | ---------------------------------




| |  |  | advertising and promotion, and
| | - |  | ------------------------------




| |  |  | product sales and distribution.
| | - |  | -------------------------------




Before we can market any of our products in the United States or Europe, we must demonstrate that our products are safe and effective and obtain approval or clearance from the applicable governmental authorities. In the United States, we
must obtain 510(k) pre-market notification clearance or a PMA from the FDA in order to market a product. We have received 510(k) pre-market notification clearances for our PATHFINDER, PATHFINDER mini and TRACER microcatheter systems for mapping
ventricular tachycardia and for the REVELATION microcatheter system for mapping atrial fibrillation. Currently, the process for 510(k) clearance is approximately 120 days and PMA approval is six to 12 months. However, the timing of such process can
be uncertain and may be significantly longer. We cannot guarantee either the timing or receipt of approval or clearance for any of our products in development. These products may require a PMA, and the FDA may request extensive clinical data to
support either 510(k) clearance or a PMA.





We are required to seek a PMA for our ablation products, including the REVELATION Tx
microcatheter. The process of obtaining a PMA is much more expensive, lengthy and uncertain than the 510(k) pre-market notification clearance process. In order to complete our PMA application, we will be required to complete clinical trials to
demonstrate the safety and effectiveness of these products. In December 1997, the FDA approved a 10-patient atrial fibrillation feasibility study for mapping and ablation with the REVELATION Tx. In June 2000, we received conditional approval from
the FDA and full approval in August 2000 for our Phase III clinical trial. We filed an additional feasibility IDE application for the TheraStream microcatheter system in December 1998 and received permission to expand that trial in July 2000. We
have postponed the TheraStream clinical trial, while we focus on completing our atrial fibrillation Phase III clinical trial. There can be no assurance that any additional clinical studies that we may propose will be permitted by the FDA, will be
completed or, if completed, will provide data and information that supports a PMA. Furthermore, we cannot assure you that our Phase III clinical trial for ablation of atrial fibrillation will provide us with data and information that supports a PMA.





In March 2001, the FDA allowed us to file a modular PMA for our REVELATION Tx in Phase III clinical trial. Under the modular
PMA submission, we will file five separate segments of the PMA with the FDA, all of which together will comprise our PMA application. At this time, we have filed the first four modules, two of which have been accepted and closed by the FDA and the
other two currently under review. The modular PMA submission process generally reduces the time for FDA approval by allowing an applicant to submit data required for completion of the trial to the FDA on an ongoing basis. Instead of waiting until
the last patient is treated and then submitting all the necessary modules in one complete submission, we can submit sections or modules required for the PMA filing as we go. In addition, dialogue with the FDA during the modular submission process
allows us to modify and improve our submission. Closure and




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acceptance of any one module does not allow marketing of any part of the product. We are restricted from selling the product until the entire PMA process is
complete and approved by the FDA. No assurance can be given that we will ever be able to obtain a PMA for any of our ablation products. Our failure to complete clinical testing or to obtain timely a PMA would have a material adverse effect on our
business, financial condition and results of operations.





Regulatory agencies may limit the indications for which they approve
or clear any of our products. Further, the FDA may restrict or withdraw approval or clearance of a product if additional information becomes available to support such action. Delays in the approval or clearance process, limitation of our labeling
claims or denial of our applications or notifications would cause our business to be materially and adversely affected.





Pre-clinical and clinical trials are inherently unpredictable. If we do not successfully conduct these trials, we may be unable to market our products and our revenues may decline.





Through pre-clinical studies and clinical trials, we must demonstrate that our products are safe and effective for their indicated uses. Results from
pre-clinical studies and early clinical trials may not allow us to predict results in later-stage testing. No assurance can be given that our future clinical trials will demonstrate the safety and effectiveness of any of our products or will result
in regulatory approval to market our products. As a result, if we are unable to commence and complete our clinical trials as planned, or demonstrate the safety and effectiveness of our products, our business will be harmed. In addition, no assurance
can be given that we can begin any future clinical trials or successfully complete these trials once started. We may never meet our development schedule for any of our products in development. Even if a product is successfully developed and
clinically tested, we cannot be certain that it will be approved by the FDA on a timely basis or at all. If the FDA does not approve our products for commercial sales, our business will be harmed.





Delays in enrolling patients in our clinical trials could increase our expenses and harm our business.





The rate at which we may complete our pre-clinical and clinical trials is dependent upon the rate of patient enrollment. Patient enrollment depends on
many factors, including the size of the patient population, the nature of the procedure, the proximity of patients residences to clinical sites and the eligibility criteria for the study and impact of other clinical studies competing for the
same patient population and/or the same physicians time and research efforts. Delays in planned patient enrollment may result in increased costs and delays, which could cause our business results to suffer.





If we do not comply with applicable domestic laws and regulations after obtaining approvals or clearances, our business results may suffer.





After the approval or clearance of our products, we will continue to be subject to extensive domestic regulatory
requirements. Our failure to comply with applicable regulatory requirements can result in enforcement actions by the FDA, including, but not limited to:




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| |  |  | fines,
| | - |  | ------




| |  |  | injunctions,
| | - |  | ------------




| |  |  | recall or seizure of products,
| | - |  | ------------------------------




| |  |  | withdrawal of marketing approvals or clearances,
| | - |  | ------------------------------------------------




| |  |  | refusal of the FDA to grant clearances or approvals, and
| | - |  | --------------------------------------------------------




| |  |  | civil and criminal penalties.
| | - |  | -----------------------------




We
also are required to demonstrate and maintain compliance with the Quality System Regulations for all of our products. The FDA enforces the Quality System Regulations through periodic inspections, including a pre-approval inspection for PMA products.
The Quality System Regulations relates to product testing and quality assurance, as well as the maintenance of records and documentation. If we or any third-party manufacturer of our products does not comply with the Quality System Regulations and
cannot be brought into compliance, we will be required to find alternative manufacturers. Identifying and qualifying alternative manufacturers may be a long and difficult process. We also are required to provide information to the FDA on deaths or
serious injuries alleged to have been associated with the use of our medical devices, as well as product malfunctions that could contribute to death or serious injury. If we fail to comply with these applicable regulations, our business results may
suffer.





If we do not comply with foreign regulatory requirements to market our products outside the United States, our
business will be harmed.





Sales of medical devices outside the United States are subject to international regulatory
requirements that vary from country to country. The time required for approval varies from country to country and may be longer or shorter than the time required in the United States. In order to market any of our products in the member countries of
the European Union, we are required to obtain CE Mark certification. CE Mark certification is an international symbol of adherence to quality assurance standards and compliance with the European Medical Device Directives. We have received CE Mark
certification to sell our PATHFINDER, PATHFINDER mini, REVELATION, REVELATION Tx and TRACER for mapping in the European Union.We have received CE Mark certification to sell our VENAPORT, VUEPORT and NAVIPORT guiding catheters in the European
Union.





We also received approval to sell our PATHFINDER, PATHFINDER mini, REVELATION, and TRACER in Japan and Australia,
and to sell our PATHFINDER, TRACER, VENAPORT, VUEPORT and NAVIPORT in Canada. We also received CE Mark certification to sell our REVELATION, REVELATION Tx, REVELATION T-Flex, REVELATION Helix and REVELATION Helix ST microcatheters for ablation of
atrial fibrillation in the European Union. We intend to submit data in support of additional CE Mark applications. However, there can be no assurance we will be successful in obtaining or maintaining the CE Mark for these products, as the case may
be. Failure to receive or maintain approval to affix the CE Mark would prohibit us from selling these products in member countries of the European Union, and would require significant delays in obtaining individual country approvals. No assurance
can be given that we will ever obtain or maintain such approvals. If we do not receive or maintain these approvals, our business could be harmed.




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Difficulties presented by international factors could negatively affect our business.





A component of our strategy is to expand our international sales revenues. We believe that we will face risks in doing
business abroad that we do not face domestically. Among the international risks we believe are most likely to affect us are:





| |  |  | export license requirements for our products,
| | - |  | ---------------------------------------------




| |  |  | exchange rate fluctuations or currency controls,
| | - |  | ------------------------------------------------




| |  |  | changes in the regulation of medical products by the European Union or other international regulatory agencies,
| | - |  | ---------------------------------------------------------------------------------------------------------------




| |  |  | the difficulty in managing a direct sales force from abroad,
| | - |  | ------------------------------------------------------------




| |  |  | the financial condition, expertise and performance of our international distributors and any future international distributors,
| | - |  | -------------------------------------------------------------------------------------------------------------------------------




| |  |  | domestic or international trade restrictions, or
| | - |  | ------------------------------------------------




| |  |  | changes in tariffs.
| | - |  | -------------------




Any of these factors could damage our
business results.





We derive a portion of our revenues from the sale of our products in the European Union. The adoption of
the Euro presents uncertainties for our international business.





All European countries that are part of the European
Monetary Union, or EMU, began operating with the new Euro currency in 2002. A significant amount of uncertainty exists as to the effect the Euro will have on the marketplace in general. In particular, as a portion of our sales revenue is
derived from sales to EMU countries, these participating countries adoption of a single currency may likely result in greater price transparency, making the EMU a more competitive environment for our products. In addition, the EMU has not yet
defined and/or finalized some of the rules and regulations relating to the governance of the currency. As a result, companies operating in or conducting business in Europe will need to ensure that their financial and other software systems are
capable of processing transactions and properly handling the Euro.





We are currently assessing the effect the introduction of
the Euro will have on our internal accounting systems and the potential sales of our products. We will take appropriate corrective actions based on the results of such assessment. We have not yet determined the costs related to addressing this
issue. This issue and its related costs could have a material adverse effect on our business, financial condition and results of operations.





We may be unable to successfully commercialize our microcatheter products, as the industry for them is highly competitive.





The market for catheters to map and/or ablate atrial fibrillation and ventricular tachycardia is highly competitive. Several of our competitors are developing different approaches and
products for these procedures. These approaches include mapping systems using contact mapping, single-point spatial mapping and non-contact, multi-site electrical mapping technologies, and ablation systems using radio frequency, ultrasound,
microwave, laser and cryoblation technologies. Other




21




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companies are also developing surgical procedures that could allow physicians to perform the open-heart surgical maze procedure for the treatment of atrial
fibrillation in a minimally invasive manner. If any of these new approaches or products proves to be safe, effective and cost effective, our products could be rendered non-competitive or obsolete, which would harm our business.





Many of our competitors have an established presence in the field of interventional cardiology and electrophysiology, or the study of the
electrical system of the heart. These competitors include Boston Scientific, through its EP Technologies and Cardiac Pathways divisions, C.R. Bard, Inc., Johnson & Johnson, through its Biosense-Webster division, St. Jude Medical, Inc., through
its Daig division, and Medtronic, Inc. These competitors have substantially greater financial and other resources than we do, including larger research and development staffs and greater experience and capabilities in conducting clinical trials,
obtaining regulatory approvals, and manufacturing, marketing and distributing products. In addition, other companies are developing proprietary systems for the diagnosis and treatment of cardiac arrhythmias, including Biosense-Webster, a division of
Johnson & Johnson, and Endocardial Solutions, Inc. Other companies are also developing, marketing and selling alternative approaches for the treatment of atrial fibrillation and ventricular tachycardia, including manufacturers of implantable
defibrillators such as Guidant Corporation, Medtronic, Inc. and St. Jude Medical, Inc. We cannot be certain that we will succeed in developing and marketing technologies and products that are safer, more clinically effective and cost-effective than
the more established treatments or the new approaches and products being developed and marketed by our competitors. Furthermore, there can be no assurance that we will succeed in developing new technologies and products that will be available before
those of our competitors. Our failure to demonstrate the competitive advantages and achieve market acceptance of our products would harm our business.





We license portions of our product technology from potential competitors, and the termination of any of these licenses would harm our business.





We rely on license agreements for some of our product technology from potential competitors. A license from Target Therapeutics, Inc., a subsidiary of Boston Scientific Corporation, is
the technological basis for our microcatheter systems for mapping and ablation. Boston Scientific currently has research efforts in the field of electrophysiology that may compete with our products. Under the Target Therapeutics license agreement,
we have an exclusive license under specific issued U.S. patents. The exclusive license from Target Therapeutics covers the diagnosis and treatment of electrophysiological disorders in areas other than the central nervous system. In addition, we have
obtained a non-exclusive license to use Target Therapeutics technology, provided we have made a substantial improvement of such technology, for the diagnosis or treatment of diseases of the heart, other than by balloon angioplasty. The license
will terminate upon the expiration or invalidation of all claims under the underlying patents. In addition, Target Therapeutics has the right to terminate the license earlier if we fail to comply with various commercialization, sublicensing,
insurance, royalty, product liability, indemnification, non-competition and other obligations. Furthermore, either party can terminate the license if a material breach remains uncured for thirty days or if either party ceases to be actively engaged
in




22




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its present business for a period of twelve months. The loss of our exclusive rights to the Target Therapeutics-based microcatheter technology would harm our
business.





In December 2000, we sold certain patents and related intellectual property pertaining to intravascular sensing and
signal detection to Medtronic, Inc., for $8,000,000 in cash, which currently has research efforts in the field of electrophysiology that may compete with our products. We received a perpetual, worldwide license at no cost from Medtronic to use these
patents and related intellectual property in our products for mapping and ablation of arrhythmia-causing tissue. In addition, Medtronic agreed not to sublicense the patents within our field of use to any non-affiliated party. We have also licensed a
proprietary surface-coating material from another vendor used on certain of our microcatheters.





We cannot be certain that these
licenses will continue to be available to us or will be available to us on reasonable terms. The loss of or inability to maintain any of these licenses could result in delays in commercial shipments until we could internally develop or identify,
license and integrate equivalent technology. These delays would have a material adverse effect on our business, financial condition and results of operations.





We may not be able to commercialize our products under development if they infringe existing patents or patents that have not yet issued.





We have conducted searches to determine whether our patent applications interfere with existing patents. Based upon these searches, we believe that our patent applications and products
do not interfere with existing patents. However, we cannot be sure that relevant patents have not been issued that could block our ability to obtain patents or commercialize our products. Moreover, since U.S. patent applications are not a matter of
public record, a patent application could currently be on file that would prevent us from obtaining a patent issuance. In addition, Congress recently amended the U.S. patent laws to exempt physicians, other health care professionals and affiliated
entities from infringement liability for medical and surgical procedures performed on patients. The issuance of any potentially competing patent could harm our business.





Although we have not received any letters from others threatening to enforce intellectual property rights against us, we cannot be certain that we will not become subject to patent
infringement claims or litigation, interference proceedings in the U.S. Patent and Trademark Office to determine the priority of inventions, or oppositions to patent grants in foreign countries. An adverse determination in litigation, interference
or opposition proceedings could subject us to significant liabilities to third parties, require us to cease using such technology, or require us to license disputed rights from third parties. However, we cannot be certain that at such time any
licenses will be available, or if available, on commercially reasonable terms. Our inability to license any disputed technology could delay the commercialization of our products and harm our business. Under our license with Target Therapeutics,
Target Therapeutics does not indemnify us against claims brought by third parties alleging infringement of patent rights. Consequently, we could bear the liability resulting from such claims. We cannot be certain that we will have the financial
resources to protect and defend our intellectual property, as such defense is often costly




23




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and time-consuming. Our failure to protect our patent rights, trade secrets, know-how or other intellectual property would harm our business.





If healthcare providers do not receive adequate reimbursement for procedures using our products, the market may not accept our products
and our revenues may decline.





U. S. healthcare providers, including hospitals and physicians, that purchase microcatheter
products generally rely on third-party payors, principally federal Medicare, state Medicaid and private health insurance plans, to reimburse all or a part of the costs and fees associated with the procedures performed using our products. The success
of our products will depend upon the ability of health care providers to obtain satisfactory reimbursement for medical procedures in which our microcatheter systems are used. If these health care providers are unable to obtain reimbursement from
third-party payors, the market may not accept our products and our revenues may decline.





Third-party payors may deny
reimbursement if they determine that a prescribed device (1) has not received appropriate regulatory clearances or approvals, (2) is not used in accordance with cost-effective treatment methods as determined by the payor, or (3) is experimental,
unnecessary or inappropriate. If we receive FDA clearance or approval, third-party reimbursement would also depend upon decisions by the United States Health Care Financing Administration for Medicare, as well as by individual health maintenance
organizations, private insurers and other payors. Reimbursement systems in international markets vary significantly by country and by region within some countries, and reimbursement approvals may be obtained on a country-by-country basis. Many
international markets have government-managed health care systems that control reimbursement for new devices and procedures. In most markets, there are private insurance systems as well as government-managed systems. There can be no assurance that
(1) reimbursement for our products will be available domestically or internationally, (2) if available, that such reimbursement will be available in sufficient amounts in the United States or in international markets under either government or
private reimbursement systems, or (3) that physicians will support and advocate reimbursement for procedures using our products. Failure by hospitals and other users of our products to obtain reimbursement from third-party payors or changes in
government and private third-party payor policies toward reimbursement for procedures employing our products would harm our business. Moreover, we are unable to predict what additional legislation or regulation, if any, relating to the heath care
industry or third-party coverage and reimbursement may be enacted in the future, or what effect such legislation or regulation would have on our business.





We cannot be certain that we will be able to manufacture our products in high volumes at commercially reasonable costs.





We currently manufacture our microcatheter systems in limited quantities for U.S. and international sales and for pre-clinical and clinical trials. However, we have limited experience manufacturing our products in the
amounts necessary to achieve significant commercial sales. We currently believe that our manufacturing capacity will be sufficient through December 2002. We expect that, if U.S. sales for the PATHFINDER and REVELATION microcatheter systems




24




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increase or if we receive FDA clearance or approvals for other products, we will need to expend significant capital resources and develop additional
manufacturing expertise to establish large-scale manufacturing capabilities. However, we could encounter problems related to:





| |  |  | capacity constraints,
| | - |  | ---------------------




| |  |  | production yields,
| | - |  | ------------------




| |  |  | quality control, and
| | - |  | --------------------




| |  |  | shortages of qualified personnel.
| | - |  | ---------------------------------




Such problems could affect our ability to adequately scale-up production of our products and fulfill customer orders on a timely basis, which could harm our business.





Our manufacturing facilities are subject to periodic inspection by regulatory authorities. Our operations must either undergo Quality System Regulations compliance inspections conducted
by the FDA or receive an FDA exemption from such compliance inspections in order for the FDA to permit us to produce products for sale in the United States. Our facilities and manufacturing processes are subject to inspections from time to time by
the FDA, State of California and European Notified Bodies. We have demonstrated compliance with ISO 9001 (EN 46001) quality standards, as well as compliance with 93/42/EEC, the Medical Device Directive. We comply with procedures to produce products
for sale in Europe. Any failure by us to comply with the Quality System Regulations or to maintain our compliance with ISO 9001 (EN 46001) standards and 93/42/EEC, the Medical Device Directive, will require us to take corrective actions, such as
modification of our policies and procedures. In addition, we may be required to cease all or part of our operations for some period of time until we can demonstrate that appropriate steps have been taken to comply with Quality System Regulations or
ISO 9001 (EN 46001) standards. There can be no assurance that we will be found in compliance with the Quality System Regulations by regulatory authorities, or that we will maintain compliance with ISO 9001 (EN 46001) standards in future audits. Our
failure to comply with state or FDA Quality System Regulations, maintain compliance with ISO 9001 (EN 46001) standards, or develop our manufacturing capability in compliance with such standards, would have a material adverse effect on our business,
financial condition and results of operations.





Our facilities and manufacturing processes have recently undergone a successful
annual recertification inspection by the European Notified Body in November 2001. In November 2000, the FDA conducted a QSIT-Audit of our quality system, which we successfully passed. There is no assurance that our manufacturing facilities will
continue to meet such compliance audits and will maintain such compliance standards.





If our sole-source suppliers are unable
to meet our demands, our business results will suffer.





We purchase certain key components for some of our products, from
sole, single or limited source suppliers. For some of these components, there are relatively few alternative sources of supply. Establishing additional or replacement suppliers for any of the numerous components used in our products, if required,
may not be accomplished quickly and could involve significant additional costs. Any supply interruption from vendors or failure to obtain alternative vendors for any of the numerous components used to manufacture our products would limit our ability
to




25




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manufacture our products. Any such limitation on our ability to manufacture our products would cause our business results to suffer.





We have limited sales and limited experience in the sale, marketing and distribution of our products. Our failure to establish an effective direct or
indirect sales and marketing force will cause our revenues to decline.





We have only limited experience marketing and
selling our products in commercial quantities. In January 2000, we signed an exclusive three-year distribution agreement with St. Jude Medical Corporation whereby St. Jude was to distribute our diagnostic products in the United States. St. Jude did
not meet its minimum annual sales quota for the first year under the distribution agreement. In June 2001, we mutually agreed with St. Jude to terminate the agreement and to allow for a transition period to transfer customer accounts by the
termination date of September 1, 2001. As a result, we plan to expand our own small sales force in the United States. Therefore, we will be solely responsible for marketing and distributing our products in the United States. Expanding our marketing
and sales capability to support sales in commercial quantities adequately will require substantial effort and require significant management and financial resources. Our failure to establish an effective sales and marketing force will cause our
revenues to decline.





We also have terminated several distribution arrangements in Europe because of the distributors
failure to meet minimum sales levels under those agreements. Our ability to operate a remote sales force effectively will require additional resources, time and expense, which could have a material adverse effect on our business, financial condition
and results of operations. We cannot be certain that we will be able to build a European direct business, that it will be cost-effective or that its efforts will be successful. Failure to establish an adequate business in Europe would harm our
business.





Currently, sales and marketing of our PATHFINDER, PATHFINDER mini, REVELATION and TRACER microcatheter systems
are conducted through a number of exclusive distributors in certain European countries and Japan and a small direct sales force in Europe. We have sold only a limited number of PATHFINDER, PATHFINDER mini, REVELATION, and TRACER microcatheter
systems through these distributors. We also have approval to sell the REVELATION, REVELATION Tx, REVELATION T-Flex, REVELATION Helix and REVELATION Helix ST in the European Union. Because we do not have written agreements with certain of our
exclusive distributors, the terms of such arrangements, such as length of arrangements and minimum purchase obligations, are uncertain. In addition, the laws in certain international jurisdictions may make it difficult and costly for us to terminate
such distribution arrangements without specific written termination terms. We cannot be certain that we will be able to enter into written distribution agreements with these distributors or that these distributors will be able to effectively market
and sell our products in these markets. In addition, we cannot assure you that we will be able to enter into additional agreements with desired distributors on a timely basis or at all, or that these distributors will devote adequate resources to
selling our products. Our failure to establish and maintain appropriate distribution relationships would harm our business.




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We are dependent upon our key personnel and will need to hire additional key personnel in
the future.





Our ability to operate successfully depends in significant part upon the continued service of certain key
scientific, technical, clinical, regulatory and managerial personnel, and our continuing ability to attract and retain additional highly qualified personnel in these areas. Competition for such personnel is intense, especially in the San Francisco
Bay Area. We cannot be certain that we can retain such personnel or that we can attract or retain other highly qualified scientific, technical, clinical, regulatory and managerial personnel in the future, including key sales and marketing personnel.





We may face product liability claims related to the use or misuse of our products.





We face an inherent business risk of product liability claims in the event that the use or misuse of our products results in personal injury or death.
We cannot be certain, in particular after commercial introduction of our products, that we will not experience losses due to product liability claims. We currently have general liability insurance with coverage in the amount of $1.0 million per
occurrence, subject to a $2.0 million annual limitation. We have product liability insurance with coverage in the amount of $5.0 million per occurrence, subject to a $5.0 million annual limitation. We cannot be certain that such coverage will be
adequate or continue to be available to us on reasonable terms, if at all. In addition, there can be no assurance that all of the activities encompassed within our business are or will be covered under our policies. Although we label our
microcatheter products for single-use only, we are aware that some physicians are reusing such products. Moreover, despite labeling our microcatheters for diagnostic use only, we believe that physicians are using such mapping microcatheters for
ablation. Multiple use or off-label use of our microcatheters could subject us to increased exposure to product liability claims, which could have a material adverse effect on our business, financial condition and results of operations.
We may require additional product liability coverage if we significantly expand commercialization of our products. Such additional coverage is expensive, difficult to obtain and may not be available in the future on acceptable terms, if at all. Any
claims or series of claims against us, regardless of their merit or eventual outcome, could have a material adverse effect on our business, financial condition and results of operations.





We do not intend to pay cash dividends on our stock.





We
have never paid cash dividends on our capital stock and do not anticipate paying cash dividends in the foreseeable future. Instead, we intend to retain future earnings for reinvestment in our business.





Our stock may become subject to penny stock rules, which may make it more difficult for you to sell your shares.





Currently, our common stock trades on the Nasdaq SmallCap Market. During the past year, our stock, at times, traded below $1.00 per share and the NASD
advised us that beginning on April 9,




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2001, our common stock would no longer be listed on the Nasdaq SmallCap Market. We appealed the NASDs decision, met the continued listing requirements and
on June 7, 2001, the NASD notified us that our common stock would continue to trade on the Nasdaq SmallCap Market.





If we were
to be delisted from the Nasdaq SmallCap Market, our common stock would be considered a penny stock under regulations of the Securities and Exchange Commission and would therefore be subject to rules that impose additional sales practice requirements
on broker-dealers who sell our securities. The additional burdens imposed upon broker-dealers by these requirements could discourage broker-dealers from effecting transactions in our common stock, which could severely limit the market liquidity of
the common stock and your ability to sell our securities in the secondary market. We cannot assure you that we will be able to maintain our listing on the Nasdaq SmallCap Market.




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PART II.    OTHER INFORMATION





Item 1.Legal Proceedings





None.





Item 2.Changes in Securities and Use of Proceeds





None.





Item 3.Default Upon Senior Securities





None.





Item 4.Submission of Matters to a Vote of Security Holders





None.





Item 5.Other Information





None.





Item 6.Exhibits and Reports on Form 8-K





None.




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CARDIMA, INC.





SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





DATE:    May 15, 2002



CARDIMA, INC./s/    GABRIEL B.
VEGHGabriel B. Vegh Chairman, Chief Executive Officer and Director/s/         RONALD E.
BOURQUINRonald E. Bourquin Senior Vice President, Chief Financial Officer and Secretary




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