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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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 0-20991

CAMBRIDGE HEART, INC.

(Exact name of Registrant as specified in its charter)

781-271-1200
(Registrant's telephone number, including area code)

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

        Number of shares outstanding of each of the issuer's classes of common stock as of November 14, 2002:

CAMBRIDGE HEART, INC.

INDEX

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PART I—FINANCIAL INFORMATION

ITEM 1

FINANCIAL STATEMENTS


CAMBRIDGE HEART, INC.

BALANCE SHEET

(UNAUDITED)

See accompanying notes to condensed financial statements.

3

CAMBRIDGE HEART, INC.

STATEMENT OF OPERATIONS

(UNAUDITED)

See accompanying notes to condensed financial statements.

4

CAMBRIDGE HEART, INC.

STATEMENT OF CASH FLOWS

(UNAUDITED)

See accompanying notes to condensed financial statements.

Supplemental Disclosure of Cash Flow Information

        The Company paid $8,448 and $13,771 in interest expense for the nine month periods ended September 30, 2001 and September 30, 2002, respectively.

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CAMBRIDGE HEART, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

1. NATURE OF BUSINESS

        Cambridge Heart, Inc. (the "Company"), was incorporated in Delaware on January 16, 1990 and is engaged in the research, development and commercialization of products for the non-invasive diagnosis of cardiac disease. The Company sells its products primarily to hospitals, research institutions and cardiology specialists.

2. BASIS OF PRESENTATION

        The condensed financial statements have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. These condensed financial statements should be read in conjunction with the audited financial statements dated December 31, 2001 and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company as of September 30, 2002, and the results of its operations and its cash flows for the three and nine month periods ended September 30, 2001 and 2002, have been made. The results of operations for such interim periods are not necessarily indicative of the results for the full year or any future period.

3. NET LOSS PER SHARE

        Consistent with Statement of Financial Accounting Standards No. 128, "Earnings Per Share," basic loss per share amounts are based on the weighted average number of shares of common stock outstanding during the period. Diluted loss per share amounts are based on the weighted average number of shares of common stock and potential common stock outstanding during the period. Options to purchase 2,818,130 and 3,104,624 shares of common stock and warrants for the purchase of 1,455,345 and 1,365,262 shares of common stock have been excluded from the calculation of diluted weighted average share amounts as their inclusion would have been anti-dilutive for the three month period ending September 30, 2001 and 2002, respectively. Options to purchase 2,819,000 and 3,155,950 shares of common stock and warrants for the purchase of 1,455,345 and 1,385,400 shares of common stock have been excluded from the calculation of diluted weighted average share amounts as their inclusion would have been anti-dilutive for the nine month period ending September 30, 2001 and 2002, respectively.

4. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK

        For the nine months ended September 30, 2002, two customers of the Company accounted for 10% and 16%, respectively, of total revenues. These customers accounted for 12% and 7%, respectively, of the accounts receivable balance at September 30, 2002. The Company does not anticipate any problems in collecting these outstanding balances.

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5. INVENTORY

        Inventories consisted of the following at December 31, 2001 and September 30, 2002:

6. LINE OF CREDIT

        In September, we entered into a new $1.2 million Loan and Security Agreement with Silicon Valley Bank. This facility replaces the recently expired Loan and Security Agreement in the amount of $500,000 and an additional $500,000 equipment line we previously had with Silicon Valley Bank. Borrowings under the new agreement are secured, as before, by all of our assets with the exception of our intellectual property. Under the terms of the new agreement, up to $300,000 is available as a term loan that matures over 24 months, for financing the purchase of eligible capital equipment. We cannot increase the balance of this loan after December 31, 2002. As of September 30, 2002, approximately $158,100 was available for financing the acquisition of new capital equipment purchases. The interest rate associated with this credit facility is equal to the prime rate plus 2% per annum. The new credit facility matures on September 25, 2003. As of September 30, 2002, we have borrowed $598,400 under this agreement which was the maximum allowable. We issued a warrant for the purchase of 21,053 shares of our common stock expiring September 26, 2007 with an exercise price of $2.28 per share as part of the agreement.

7. RECENT ACCOUNTING PRONOUNCEMENTS

        In July 2002, the Financial Accounting Standards Board issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized at its fair market value when the liability is incurred, rather than at the date of an entity's commitment to an exit plan. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS 146 is not expected to have a material effect on the Company's financial statements.

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ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

OVERVIEW

        We are engaged in the research, development and commercialization of products for the non-invasive diagnosis of cardiac disease. Using innovative technologies, we are addressing the key problem of identification of those at risk of sudden cardiac death. Our proprietary technology and products are the only diagnostic tools approved by the U.S. Food and Drug Administration to non-invasively measure microvolt levels of T-Wave Alternans, an extremely subtle beat-to-beat fluctuation in a patient's heartbeat and proven to be predictive of an individuals risk of sudden cardiac death. We sell our core Microvolt T-Wave Alternans products, the Heartwave System and Micro-V Alternans Sensors, through a direct sales force in the U.S. and through independent distributors outside the U.S. Our Microvolt T-Wave Alternans technology is also available through our distribution partner Spacelabs Medical on their Burdick Quest® Stress Test System. Our standard stress test system, the CH 2000 Stress Test System, is sold by Philips Medical Systems on an exclusive basis in the U.S. and on a non-exclusive basis in most other major markets outside the U.S.

        Sudden Cardiac Death (which we call SCD) has received increased attention in the medical community as a result of the MADIT II clinical study. The U.S. Food and Drug Administration has recently given clearance to expand the indication for patients eligible to receive an implantable cardioverter defibrillator (which we call an ICD) to include patients with MADIT II indications (previous myocardial infarction and a left ventricular ejection fraction less than 0.30). At this point in time, the Centers for Medicare and Medicaid Services (which we call CMS) is still reviewing this issue and consequently has not determined if they will reimburse providers for implanting an ICD in Medicare patients with the expanded MADIT II indications.

        The sponsors of the MADIT II study have represented that the study results increase the number of patients eligible to receive an ICD in the U.S. from the current level of 300,000 to 600,000. We believe that this group of patients represents a small fraction of the approximately 10 million people at risk of sudden cardiac death in the U.S of which approximately 80,000 patients annually receive an ICD.

        Some physicians have expressed the opinion that all patients meeting the MADIT II profile should receive an ICD without any additional testing to identify their degree of risk of having an arrhythmic event. Other medical professionals believe that additional risk stratification testing should be performed on MADIT II patients to better identify those patients that would gain the most benefit from receiving an ICD.

        At the present time, all of the 50 states, except for Montana, Utah and Rhode Island, have either issued a formal coverage policy, or have indicated a formal policy is not required, for the payment of Medicare claims for our Microvolt T-Wave Alternans Test. This represents 94% of the states now covering Medicare claims at a national average reimbursement of approximately $267.00 per test. Payment for a Microvolt T-Wave Alternans Test by private insurers is not as widespread but does include some national, as well as, several regional insurers that have issued coverage policies. We are continuing our efforts to establish Microvolt T-Wave Alternans as an important, reimbursed modality with all of the private insurers as the benefits can be significant to both the patient and the insurer. Our reimbursement taskforce staffed by both company and outside reimbursement experts, continue to find success in identifying and resolving coverage and payment issues across the country. They work closely with our customers and third party insurers to resolve payment and coverage issues in order to increase the probability of all providers receiving payment for performance of a Microvolt T-Wave Alternans Test.

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        Our revenue for the quarter ended September 30, 2002 was $1,273,600 representing an increase of 21% from the previous quarter and an increase of 52% over the quarter ended September 30, 2001. Revenue from Microvolt T-Wave Alternans products sold in the U.S. during the quarter ended September 30, 2002 increased 38% over the previous quarter and increased 114% over the quarter ended September 30, 2001 and represents 70% of total revenues for the quarter ended September 30, 2002 and 67% of total revenues for the nine months ended September 30, 2002. Our net loss for the quarter ended September 30, 2002 was $1,251,000, or $0.06 per share, an improvement of 24% from the previous quarter. Our gross profit on sales for the quarter ended September 30, 2002 increased 11 percentage points over the last quarter to 38%, which reflects the favorable impact of higher sales volumes on our manufacturing costs per unit and the sales performance of our higher margin Microvolt T-Wave Alternans products

        During the quarter ended September 30, 2002, we announced that we had engaged the services of the investment banking firm of Adams, Harkness and Hill to assist us in identifying and evaluating strategic alternatives in the cardiology marketplace to allow us to continue the market expansion and penetration of our life saving Microvolt T-Wave Alternans technology. Additionally, they are working to evaluate our various funding options.

        In September 2002, we received a patent for the latest enhancement to our Microvolt T-Wave Alternans software. This modification provides an automated aide to physicians for the interpretation of a Microvolt T-Wave Alternans Test. We expect that this enhancement to our FDA approved technology will contribute to improved ease of use and market adoption of our Microvolt T-Wave Alternans technology.

        Recently we submitted an application to transfer the listing of our common stock from the Nasdaq National Market to the Nasdaq Small Cap Market. We anticipate that the transfer will become effective in mid November. After the transfer, our stock will continue to trade under the symbol CAMH.

        In September, we entered into a $1.2 million Loan and Security Agreement with Silicon Valley Bank. This facility replaces the recently expired Loan and Security Agreement in the amount of $500,000 and an additional $500,000 equipment line we previously had with Silicon Valley Bank. Borrowings under the new agreement are secured, as before, by all of our assets with the exception of our intellectual property. A portion of the new agreement is available as a term loan for financing the purchase of capital assets up to a maximum of $300,000. As of September, we had utilized $598,400 of the available credit line compared to utilization of $563,600 at September 30, 2001 under the old agreement. The new credit facility matures on September 25, 2003.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        The preparation of financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to incentives, product returns, bad debts, inventories, investments, intangible assets, income taxes, financing operations, warranty obligations, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

        We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

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Revenue Recognition

        Our revenue is recognized upon shipment of goods provided that risk of loss has passed to the customer, all of our obligations have been fulfilled, persuasive evidence of an arrangement exists, the fee is fixed or determinable, and collectibility is probable. Revenue from maintenance contracts and license agreements is recorded over the term of the underlying agreement. Payments received in advance of services being performed is recorded as deferred revenue.

Allowance for Doubtful Accounts

        We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Inventory Obsolescence

        We write down our 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 market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

Long-Lived Assets

        Property, plant and equipment are stated at cost less accumulated depreciation. Major renewals and improvements are capitalized; minor replacements, maintenance and repairs are charged to current operations. Depreciation is computed by applying the straight-line method over the estimated useful lives of machinery and equipment (three to seven years). Leasehold improvements are amortized over the shorter of the useful life of the improvement or the life of the related lease. We perform reviews for the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Intangible Assets

        Intangible assets primarily relate to the value of capitalized software. The cost of capitalized software is amortized on a straight-line basis over the estimated lives of up to three years. At each balance sheet date, these costs are evaluated for impairment by comparing the net realizable value of the product containing the software to the unamortized capitalized costs of that software. The amount by which the unamortized capitalized costs of the software exceeds the net realizable value of the software is written off. The net realizable value is the determined as the estimated future gross revenues from that product containing the software reduced by the estimated future costs of completing and disposing of that product.

Stock-Based Compensation

        The Company accounts for employee awards under its stock plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. The Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), for disclosure purposes only (Note 7). All stock based awards to non-employees are accounted for at their fair value as prescribed by SFAS 123 and EITF 96-18, "Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services."

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RESULTS OF OPERATIONS

Three and Nine Month Periods ended September 30, 2001 and 2002

        Total revenue for the three month periods ended September 30, 2001 and 2002 was $836,900 and $1,273,600, respectively, an increase of 52%. During the three months ended September 30, 2002, revenue from our core business, Microvolt T-Wave Alternans products sold in the U.S., increased 114% and represented 70% of total revenue for the quarter versus 50% of total revenue for the three months ended September 30, 2001. The increase in core business revenue for the three month period ended September 30, 2002 as compared to the same period in 2001 is due to a 83% increase in sales volume and an 17% increase in average unit price. Microvolt T-Wave Alternans systems accounted for 73% of our core business revenue during the most recent quarter end with revenue from sales of our Micro-V Alternans Sensors making up the balance. The increase in core business revenue was offset by a 17% decrease in sales of all products to non-U.S. customers, which accounted for 11% of our total revenue for the three months ended September 30, 2002.

        Total revenue for the nine month periods ended September 30, 2001 and September 30, 2002 was $2,253,800 and $3,233,000, respectively, an increase of 43%. Revenue from our core business increased 124% to 67% of total revenue for the nine months ended September 30, 2002 from 43% for the nine months ended September 30, 2001. The increase in core business revenue for the nine month period ended September 30, 2002 as compared to the same period in 2001 is due to a 91% increase in sales volume and an 9% increase in average unit price. Microvolt T-Wave Alternans systems accounted for 71% of core business revenue for the nine months ended September 30, 2002 compared to 75% of core business revenue for the nine months ended September 30, 2001, with revenue from the sale of Micro-V Alternans Sensors making up the balance. The increase in core business revenue was offset by a 52% decrease in revenue from sales to non-U.S. customers. Revenue from sales to non-U.S. customers decreased to 11% of total revenue for the nine months ended September 30, 2002 from 33% of total revenue for the nine months ended September 30, 2001. Revenue for the nine months ended September 30, 2001 included a larger volume of CH 2000 Alternans System purchases by our distributor in the U.K. due primarily to above normal demand fueled by the availability of special government funding for capital equipment purchases.

        Gross margin on products sold for the three month periods ended September 30, 2001 and 2002 was 21% and 38% of revenue, respectively. The improvement in the margin percentage to sales primarily reflects the effect of increased capital equipment volume on the utilization of manufacturing labor and overhead costs and the revenue increases in higher margin equipment and disposable sensors. Gross margin for the nine month periods ended September 30, 2001 and 2002 was 21% and 30%, respectively for similar reasons.

        Research and development expenses decreased from $354,000 for the three month period ended September 30, 2001 to $296,200 for the three month period ended September 30, 2002, a decrease of

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16%. This decrease was due primarily to lower costs associated with the timing of support of ongoing clinical trials. Research and development expenses for the nine month periods ended September 30, 2001 and 2002 were $1,379,300 and $1,084,200, respectively, a decrease of 21%. Research and development expenses for the nine months ended September 30, 2001 included software development costs for the Windows® 2000 version of our CH 2000 stress test system released to the market in the second half of the year, distributed exclusively in the U.S. by Philips Medical. Research and development expenses for the nine months ended September 30, 2001 also included non-recurring costs associated with the development of the interface between our Microvolt T-Wave Alternans software and the software on the Quest® Stress Test System sold by our strategic partner Spacelabs Medical. We anticipate that costs for the fourth quarter of 2002 will increase somewhat to support the programs started earlier this year aimed at enhancing the functionality and performance of our Microvolt T-Wave Alternans technology and products.

        Selling, general and administrative expenses increased from $1,360,900 for the three month period ended September 30, 2001 to $1,459,300 for the three month period ended September 30, 2002, an increase of 7%. For the nine month periods ended September 30, 2001 and 2002, selling, general and administrative expenses were $4,347,300 and $4,491,900, respectively, an increase of 3%. Both the three month and nine month increases reflect the effect of costs associated with our expanded direct U.S. sales force and added costs associated with maintaining our public company insurance coverage and other administrative fees. We anticipate that these costs will increase in the fourth quarter of 2002 associated with sales rep compensation from increased U.S. sales.

        Interest income was $79,341 for the three month period ended September 30, 2001, compared to $22,283 for the three month period ended September 30, 2002. For the nine month periods ended September 30, 2001 and 2002, interest income was $373,662 and $91,373, respectively. The decline in both short and long term interest rates during the last twelve month period along with the decrease in invested cash account for the reduction in interest income. Interest expense was $3,662 and $3,639 for the three month periods ended September 30, 2001 and September 30, 2002, respectively. The Company paid $8,448 and $13,771 in interest expense for the nine month periods ended September 30, 2001 and September 30, 2002, respectively. Interest expense is related to the company's credit facility with Silicon Valley Bank. As of September 30, 2002, the utilization on the credit line was approximately $598,400, the maximum available to borrow under the terms of the agreement.

LIQUIDITY AND CAPITAL RESOURCES

        As of September 30, 2002, we had cash, cash equivalents and marketable securities of $4,131,800. During the three month period ended September 30, 2002, our cash, cash equivalents and marketable securities decreased by $1,621,300, or 28%, consistent with our net loss for the three month period ended September 30, 2002 of $1,242,100 in addition to a $358,000 increase in our accounts receivable due to increased customer sales for the three month period ended September 30, 2002.

        In September 2002, we entered into a new one year Loan and Security Agreement for a $1,200,000 line of credit, replacing the existing agreement which expired in July 2002. Under the terms of the new agreement, up to $300,000 is available as a term loan that matures over 24 months, for financing the purchase of eligible capital equipment. We cannot increase the balance of this loan after December 31, 2002. As of September 30, 2002 approximately $158,100 was available for financing the acquisition of new capital equipment purchases. The remaining unused portion of the $1,200,000 facility is available to finance eligible customer receivable balances as defined in the agreement. All borrowings are subject to interest charges at a rate equal to the prime rate plus 2% per annum. The entire outstanding balance is secured by all of our tangible assets excluding intellectual property. The new line of credit matures on September 25, 2003. We issued a warrant for the purchase of 21,053 shares of our common stock expiring September 26, 2007 with an exercise price of $2.28 per share as part of the agreement.

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The amount the available balance utilized to finance capital equipment and accounts receivable at September 30, 2002 was approximately $598,400.

        Inventory decreased $65,600 from $646,113 for the three month period ended June 30, 2002 to $580,500 for the three month period ended September 30, 2002. This decrease is the result of increased customer demand and improved inventory management techniques to better forecast purchasing requirements to meet anticipated customer demand.

        There were no significant fixed asset additions for the three month period ended September 30, 2002. As of September 30, 2002, we had fixed assets with a net book value of $473,900. We do not expect capital expenditures to exceed an aggregate of $1,000,000 over the next year.

        Under the terms of certain license, consulting and technology agreements, we are required to pay royalties on sales of our products. Minimum license maintenance fees under the license agreement, which can be credited against royalties otherwise payable for each year, are $10,000 per year through 2008. We are committed to pay an aggregate of $60,000 of such minimum license maintenance fees subsequent to September 30, 2002 as the technology is used.

        We anticipate that our existing capital resources will be adequate to satisfy our capital requirements through at least the next nine to twelve months.

        During the quarter ended September 30, 2002, Cambridge Heart does have operating leases, however, it did not engage in:

•

material off-balance sheet activities, including the use of structured finance or special purpose entities;



•

material trading activities in non-exchange traded commodity contracts; or



•

transactions with persons or entities that benefit from their non-independent relationship with Cambridge Heart.

Factors Which May Affect Future Results

        This Quarterly Report on Form 10-Q contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes", "anticipates", "plans", "expects", "intends" and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause our actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth below and elsewhere in this Quarterly Report.

Risks Related to our Operations

We have a history of net losses, we expect to continue to incur net losses and may not achieve or maintain profitability

        We are engaged primarily in the commercialization, manufacture, research and development of products for the non-invasive diagnosis of heart disease. We have incurred substantial and increasing net losses through September 30, 2002. We may never generate substantial revenues or achieve profitability on a quarterly or annual basis. We expect that our selling, general and administrative expenses will increase significantly in connection with the expansion of our sales and marketing activities. Revenues generated from the sale of our products will depend upon numerous factors, including:

•

the extent to which our products gain market acceptance;

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•

varying pricing promotions and volume discounts to customers;



•

competition; and



•

the availability and amount of third-party reimbursement.

We have not been able to fund our operations from cash generated by our business, and if we cannot meet our future capital requirements, we may not be able to develop or enhance our technology, take advantage of business opportunities and respond to competitive pressures

        We have principally financed our operations over the past three years through the private placement of shares of our common stock. If we do not generate sufficient cash from our business to fund operations, or if we cannot obtain additional capital through equity or debt financings, we will be unable to grow as planned and may not be able to take advantage of business opportunities, develop new technology or respond to competitive pressures. This could limit our growth and have a material adverse effect on the market price of our common stock. In the current economic environment, financing for technology and medical device companies has become increasingly difficult to obtain. Any additional financing we may need in the future may not be available on terms favorable to us, if at all. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of Cambridge Heart by our stockholders would be reduced and the securities issued could have rights, preferences and privileges more favorable than those of our current stockholders.

If we are unable to comply with NASDAQ's continued listing requirements, our common stock could be delisted from the NASDAQ National Market or Nasdaq Small Cap Market

        Our common stock is currently listed on the NASDAQ National Market. We have received a notice from Nasdaq indicating that we fail to comply with certain requirements for continued inclusion in the National Market System. We have applied to transfer the listing of our common stock from the Nasdaq National Market to the Nasdaq Small Cap Market. If our application is successful, we will be given until February 18, 2003, to obtain compliance with the $1.00 per share minimum bid price requirement for continued inclusion in the Small Cap Market System. We may also be eligible for an additional 180-day grace period, or until August 14, 2003, if we meet the initial listing requirements for the Small Cap Market. There can be no assurance that we will satisfy all requirements for continued listing of our common stock on the Nasdaq National Market or the NASDAQ Small Cap Market. If we are unable to meet the continued listing requirements in the future, our common stock will be subject to delisting, which may have a material adverse effect on the price of our common stock and the levels of liquidity currently available to our stockholders and may restrict our ability to raise additional capital.

We depend on our Microvolt T-Wave Alternans technology for a significant portion of our revenues and if it does not achieve broad market acceptance, our growth will be limited

        We believe that our future success will depend, in large part, upon the successful commercialization and market acceptance of our Microvolt T-Wave Alternans technology. Market acceptance will depend upon our ability to demonstrate the diagnostic advantages and cost-effectiveness of this technology. The failure of our Microvolt T-Wave Alternans technology to achieve broad market acceptance, the failure of the market for our products to grow or to grow at the rate we anticipate, or a decline in the price of our products would reduce our revenues and limit our growth. This could have a material adverse effect on the market price of our common stock. We can give no assurance that we will be able to successfully commercialize or achieve market acceptance of our Microvolt T-Wave Alternans technology or that our competitors will not develop competing technologies that are superior to our technology.

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The results of future clinical studies may not support the usefulness of our technology

        We have sponsored and are continuing to sponsor clinical studies relating to our Microvolt T-Wave Alternans technology and Micro-V Alternans Sensors to more firmly establish the predictive value of such technology. Although studies on high risk patients to date have indicated that the measurement of Microvolt T-Wave Alternans to predict the vulnerability to ventricular arrhythmia is comparable to electrophysiology testing, we do not know whether the results of such studies will continue to be favorable. Any clinical studies or trials which fail to demonstrate that the measurement of Microvolt T-Wave Alternans is at least comparable in accuracy to alternative diagnostic tests, or which otherwise call into question the cost-effectiveness, efficacy or safety of our technology, would have a material adverse effect on our business, financial condition and results of operations.

We may have difficulty responding to changing technology

        The medical device market is characterized by rapidly advancing technology. Our future success will depend, in large part, upon our ability to anticipate and keep pace with advancing technology and competitive innovations. However, we may not be successful in identifying, developing and marketing new products or enhancing our existing products. In addition, we can give no assurance that new products or alternative diagnostic techniques may be developed that will render our current or planned products obsolete or inferior. Rapid technological development by competitors may result in our products becoming obsolete before we recover a significant portion of the research, development and commercialization expenses incurred with respect to such products.

We depend exclusively on third parties to support the commercialization of our products internationally

        We market our products internationally through independent distributors. These distributors also distribute competing products under certain circumstances. The loss of a significant international distributor could have a material adverse effect on our business if a new distributor, sales representative or other suitable sales organization could not be found on a timely basis in the relevant geographic market. To the extent that we rely on sales in certain territories through distributors, any revenues we receive in those territories will depend upon the efforts of our distributors. Furthermore, we cannot be sure that a distributor will market our products successfully or that the terms of any future distribution arrangements will be acceptable to us.

We face substantial competition, which may result in others discovering, developing or commercializing competing products before or more successfully than we do

        Competition from competitors' medical devices that diagnose cardiac disease is intense and likely to increase. Our success will depend on our ability to develop products and apply our technology and our ability to establish and maintain a market for our products. We compete with manufacturers of electrocardiogram stress tests, the conventional method of diagnosing ischemic heart disease, as well as with manufacturers of other invasive and non-invasive tests, including EP testing, electrocardiograms, Holter monitors, ultrasound tests and systems of measuring cardiac late potentials. Many of our competitors and prospective competitors have substantially greater capital resources, name recognition, research and development experience and regulatory, manufacturing and marketing capabilities. Many of these competitors offer broad, well-established product lines and ancillary services not offered by Cambridge Heart. Some of our competitors have long-term or preferential supply arrangements with physicians and hospitals which may act as a barrier to market entry.

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We obtain critical components and subassemblies for the manufacture of our products from a limited group of suppliers, and if our suppliers fail to meet our requirements, we may be unable to meet customer demand and our customer relationships would suffer

        We do not have long-term contracts with our suppliers. Our dependence on a single supplier or limited group of smaller suppliers for critical components and subassemblies exposes us to several risks, including:

•

a potential for interruption, or inconsistency in the supply of components or subassemblies, leading to backorders and product shortages;



•

a potential for inconsistent quality of components or subassemblies supplied, leading to reduced customer satisfaction or increased product costs and delays in shipments of our products to customers and distributors; and



•

inconsistent pricing.

        Disruption or termination of the supply of these components and subassemblies could cause delays in the shipment of our products, resulting in potential damage to our customer relations and reduced revenue. From time to time in the past, we have experienced temporary difficulties in receiving timely shipment of key components from our suppliers. We can give no assurance that we would be able to identify and qualify additional suppliers of critical components and subassemblies in a timely manner. Further, a significant increase in the price of one or more key components or subassemblies included in our products could seriously harm our results of operations.

We depend heavily on a third parties, to support the commercialization of our CH 2000 stress test system

        We rely solely on Philips Medical to commercialize our CH 2000 stress test system in the United States. Third parties may not perform their obligations as expected. The amount and timing of resources that third parties devote to commercializing our products may not be within our control. The third parties on which we rely may not be able to recruit and retain skilled sales representatives. Furthermore, our interests may differ from those of third parties that commercialize our products. Disagreements that may arise with third parties could limit the commercialization of our products, or result in litigation or arbitration, which would be time-consuming, distracting and expensive. If any third party that supports the commercialization of our products breaches or terminates its agreement with us, or fails to conduct its activities in a timely manner, such breach, termination or failure could:

•

limit the continued commercialization of our CH 2000 product,



•

require us to undertake unforeseen additional responsibilities or devote unforeseen additional resources to the commercialization of our products, or



•

result in the termination of the commercialization of our CH 2000 product,

and the resulting disruption of our business could have a material adverse effect on our results of operations.

Risks Related to the Market for Cardiac Diagnostic Equipment

We may not be able to maintain adequate levels of third-party reimbursement

        Our revenues currently depend and will continue to depend, to a significant extent, on sales of our Heartwave and CH 2000 systems and Micro-V Alternans Sensors. Our ability to successfully commercialize these systems depends in part on maintaining adequate levels of third-party reimbursement for use of these systems by our customers. The amount of reimbursement in the United States that is available for clinical use of the Microvolt T-Wave Alternans Test may vary. In the United

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States, the cost of medical care is funded, in substantial part, by government insurance programs, such as Medicare and Medicaid, and private and corporate health insurance plans. Third-party payers may deny reimbursement if they determine that a prescribed device has not received appropriate FDA or other governmental regulatory clearances, is not used in accordance with cost-effective treatment methods as determined by the payer, or is experimental, unnecessary or inappropriate. Our ability to commercialize the Heartwave and CH 2000 systems successfully will depend, in large part, on the extent to which appropriate reimbursement levels for the cost of performing a Microvolt T-Wave Alternans Test continue to be available from government authorities, private health insurers and other organizations, such as health maintenance organizations. We do not know whether the reimbursement level in the United States for the Microvolt T-Wave Alternans Test will increase in the future or that reimbursement amounts will not reduce the demand for, or the price of, the Heartwave and CH 2000 systems. Difficulties in obtaining reimbursement, or the inadequacy of the reimbursement obtained, for Microvolt T-Wave Alternans Tests using the Heartwave and CH 2000 systems could have a material adverse effect on our business.

We could be exposed to significant liability claims if we are unable to obtain insurance at acceptable costs and adequate levels or otherwise protect ourselves against potential product liability claims

        The testing, manufacture, marketing and sale of medical devices entails the inherent risk of liability claims or product recalls. Although we maintain product liability insurance in the United States and in other countries in which we conduct business, including clinical trials and product marketing and sales, such coverage may not be adequate. Product liability insurance is expensive and in the future may not be available on acceptable terms, if at all. A successful product liability claim or product recall could inhibit or prevent commercialization of the CH 2000 and the Heartwave systems, or cause a significant financial burden on Cambridge Heart, or both, and could have a material adverse effect on our business, financial condition, and ability to market the both systems as currently contemplated.

We may not be able to obtain or maintain patent protection for our products

        Our success will depend, in large part, on our ability to develop patentable products, enforce our patents and obtain patent protection for our products both in the United States and in other countries. However, the patent positions of medical device companies, including Cambridge Heart, are generally uncertain and involve complex legal and factual questions. We can give no assurance that patents will issue from any patent applications we own or license or that, if patents do issue, the claims allowed will be sufficiently broad to protect our proprietary technology. In addition, any issued patents we own or license may be challenged, invalidated or circumvented, and the rights granted under issued patents may not provide us with competitive advantages. We also rely on unpatented trade secrets to protect our proprietary technology, and we can give no assurance that others will not independently develop or otherwise acquire substantially equivalent techniques, or otherwise gain access to our proprietary technology, or disclose such technology or that we can ultimately protect meaningful rights to such unpatented proprietary technology.

Others could claim that we infringe their intellectual property rights

        Our commercial success will depend in part on our neither infringing patents issued to others nor breaching the licenses upon which our products might be based. We have licensed significant technology and patents from third parties, including patents and technology relating to Microvolt T-Wave Alternans licensed from The Massachusetts Institute of Technology. Our license of patents and patent applications impose various commercialization, sublicensing, insurance, royalty and other obligations on our part. If we fail to comply with these requirements, licenses could convert from being exclusive to nonexclusive in nature or could terminate.

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We could become involved in litigation over intellectual property rights

        The medical device industry has been characterized by extensive litigation regarding patents and other intellectual property rights. Litigation, which would likely result in substantial cost to us, may be necessary to enforce any patents issued or licensed to us and/or to determine the scope and validity of others' proprietary rights. In particular, our competitors and other third parties hold issued patents and are assumed to hold pending patent applications, which may result in claims of infringement against us or other patent litigation. We also may have to participate in interference proceedings declared by the United States Patent and Trademark Office, which could result in substantial cost, to determine the priority of inventions. Furthermore, we may have to participate at substantial cost in International Trade Commission proceedings to abate importation of products, which would compete unfairly with our products.

If we are not able to keep our trade secrets confidential, our technology and information may be used by others to compete against us

        We rely on unpatented trade secrets to protect our proprietary technology. We can give no assurance that others will not independently develop or acquire substantially equivalent technologies or otherwise gain access to our proprietary technology or disclose such technology or that we can ultimately protect meaningful rights to such unpatented proprietary technology. We rely on confidentiality agreements with our collaborators, employees, advisors, vendors and consultants. We may not have adequate remedies for any breach by a party to these confidentiality agreements. Failure to obtain or maintain patent and trade secret protection, for any reason, could have a material adverse effect on us.

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ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

        We own financial instruments that are sensitive to market risk as part of our investment portfolio. The investment portfolio is used to preserve our capital until it is used to fund operations, including research and development activities. None of these market-risk sensitive instruments is held for trading purposes. We invest our cash primarily in money market mutual funds and U.S. government and other investment grade debt securities. These investments are evaluated quarterly to determine the fair value of the portfolio. Our investment portfolio includes only marketable securities with active secondary or resale markets to help assure liquidity. We have implemented policies regarding the amount and credit ratings of investments. Due to the conservative nature of these policies, we do not believe we have a material exposure due to market risk. In addition, we do not believe that a 10% increase or decrease in interest rates in effect at September 30, 2002 would have a material impact on our results of operations or cash flows.

        We carry the amounts reflected in the balance sheet of cash and cash equivalents, trade receivables, trade payables, and line of credit at fair value at September 30, 2002 due to the short maturities of these instruments.

ITEM 4. CONTROLS AND PROCEDURES

1.

Evaluation of disclosure controls and procedures. Based on their evaluation of the our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a date within 90 days of the filing date of this Quarterly Report on Form 10-Q, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are designed to ensure that information that we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and are operating in an effective manner.

2.

Changes in internal controls. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation.

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PART II—OTHER INFORMATION

Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

        On September 26, 2002, we issued to Silicon Valley Bank a warrant to purchase 21,053 shares of our common stock at a purchase price per share of $2.28 in connection with the execution of a Loan and Security Agreement. The warrant was issued without registration under the Securities Act in reliance on the exemption provided by Section 4(2) of the Securities Act.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)

Exhibits

        The exhibits listed in the Exhibit Index filed as part of this report are filed as part of or are included in this report.

EXHIBIT INDEX

*

Confidential treatment has been requested as to certain portions.

(b)

Reports on Form 8-K

        We filed a Current Report on Form 8-K with the Securities and Exchange Commission on August 26, 2002 reporting under Item 5 the issuance of a press release on August 23, 2002 announcing that we had received a notice from Nasdaq indicating that we failed to comply with the $1.00 per share minimum bid price requirement for continued inclusion in the National Market System, and that we had been provided with 90 calendar days, or until November 18, 2002, to regain compliance.

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SIGNATURES

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

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CERTIFICATIONS

        I, David A. Chazanovitz, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Cambridge Heart, 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;

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 of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) 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 registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's 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 registrant's ability to record, process, summarize and report financial data and have identified for the registrant's 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 registrant's internal controls; and

6.

The registrant's 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.

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        I, Robert B. Palardy, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Cambridge Heart, 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;

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 of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) 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 registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's 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 registrant's ability to record, process, summarize and report financial data and have identified for the registrant's 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 registrant's internal controls; and

6.

The registrant's 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.

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