Attached files
file | filename |
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EX-31.1 - EXHIBIT 31.1 - Dex Liquidating Co. | c11808exv31w1.htm |
EX-32.1 - EXHIBIT 32.1 - Dex Liquidating Co. | c11808exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - Dex Liquidating Co. | c11808exv31w2.htm |
EX-10.34 - EXHIBIT 10.34 - Dex Liquidating Co. | c11808exv10w34.htm |
EX-10.35 - EXHIBIT 10.35 - Dex Liquidating Co. | c11808exv10w35.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2010
OR
o | 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: 000-51772
Cardica, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware | 94-3287832 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
900 Saginaw Drive | ||
Redwood City, California | 94063 | |
(Address of Principal Executive Offices) | (Zip Code) |
(650) 364-9975
(Registrants Telephone Number, Including Area Code)
(Registrants 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act.): Yes o No þ
On February 1, 2011, there were 25,693,340 shares of common stock, par value $0.001 per share,
of Cardica, Inc. outstanding.
CARDICA, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2010
INDEX
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2010
INDEX
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
13 | ||||||||
21 | ||||||||
21 | ||||||||
21 | ||||||||
40 | ||||||||
41 | ||||||||
Exhibit 10.34 | ||||||||
Exhibit 10.35 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 |
2
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
CARDICA, INC.
CONDENSED BALANCE SHEETS
(In thousands, except share and per share data)
December 31, 2010 | June 30, 2010 | |||||||
(unaudited) | (Note 1) | |||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 12,593 | $ | 6,561 | ||||
Accounts receivable |
444 | 376 | ||||||
Inventories |
655 | 1,131 | ||||||
Prepaid expenses and other current assets |
131 | 231 | ||||||
Total current assets |
13,823 | 8,299 | ||||||
Property and equipment, net |
1,026 | 1,338 | ||||||
Restricted cash |
154 | 154 | ||||||
Other non-current assets |
1,100 | | ||||||
Total assets |
$ | 16,103 | $ | 9,791 | ||||
Liabilities and stockholders equity |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 796 | $ | 496 | ||||
Accrued compensation |
475 | 440 | ||||||
Other accrued liabilities |
563 | 517 | ||||||
Deferred revenue |
1,282 | 403 | ||||||
Deferred rent |
21 | 27 | ||||||
Note payable |
| 1,400 | ||||||
Total current liabilities |
3,137 | 3,283 | ||||||
Other non-current liabilities |
26 | 31 | ||||||
Total liabilities |
3,163 | 3,314 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity |
||||||||
Common stock, $0.001 par value, 65,000,000 shares authorized 25,689,640
and 24,005,813 shares issued and outstanding at December 31, 2010 and June
30, 2010, respectively |
26 | 24 | ||||||
Additional paid-in capital |
130,952 | 127,381 | ||||||
Treasury stock at cost 66,227 shares at December 31, 2010 and June 30, 2010 |
(596 | ) | (596 | ) | ||||
Accumulated deficit |
(117,442 | ) | (120,332 | ) | ||||
Total stockholders equity |
12,940 | 6,477 | ||||||
Total liabilities and stockholders equity |
$ | 16,103 | $ | 9,791 | ||||
See accompanying notes to the condensed financial statements.
3
Table of Contents
CARDICA, INC.
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
Three months ended | Six months ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net revenue |
||||||||||||||||
Product sales, net |
$ | 1094 | $ | 1,023 | $ | 2,089 | $ | 1,840 | ||||||||
License and development revenue |
84 | 19 | 9,109 | 124 | ||||||||||||
Royalty revenue |
16 | 22 | 38 | 47 | ||||||||||||
Total net revenue |
1,194 | 1,064 | 11,236 | 2,011 | ||||||||||||
Operating costs and expenses |
||||||||||||||||
Cost of product sales |
961 | 699 | 1,905 | 1,539 | ||||||||||||
Research and development |
1,972 | 1,221 | 3,347 | 2,364 | ||||||||||||
Selling, general and administrative |
1,611 | 1,361 | 3,106 | 2,965 | ||||||||||||
Total operating costs and expenses |
4,544 | 3,281 | 8,358 | 6,868 | ||||||||||||
Income (loss) from operations |
(3,350 | ) | (2,217 | ) | 2,878 | (4,857 | ) | |||||||||
Interest income |
7 | 14 | 15 | 19 | ||||||||||||
Interest expense |
| (30 | ) | (11 | ) | (60 | ) | |||||||||
Other income (expense) |
10 | 7 | 8 | 8 | ||||||||||||
Net income (loss) |
$ | (3,333 | ) | $ | (2,226 | ) | $ | 2,890 | $ | (4,890 | ) | |||||
Basic net income (loss) per common share |
$ | (0.13 | ) | $ | (0.09 | ) | $ | 0.12 | $ | (0.25 | ) | |||||
Diluted net income (loss) per common share |
$ | (0.13 | ) | $ | (0.09 | ) | $ | 0.11 | $ | (0.25 | ) | |||||
Shares used in computing net income
(loss) per common share |
||||||||||||||||
Basic |
25,396 | 23,947 | 25,009 | 19,874 | ||||||||||||
Diluted |
25,396 | 23,947 | 27,183 | 19,874 | ||||||||||||
See accompanying notes to the condensed financial statements.
4
Table of Contents
CARDICA, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Six months ended | ||||||||
December 31, | ||||||||
2010 | 2009 | |||||||
Operating activities: |
||||||||
Net income (loss) |
$ | 2,890 | $ | (4,890 | ) | |||
Adjustments to reconcile net cash provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
381 | 431 | ||||||
Loss on disposal of property and equipment |
| 53 | ||||||
Stock-based compensation expenses |
382 | 791 | ||||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
(68 | ) | 36 | |||||
Prepaid expenses and other current assets |
100 | 99 | ||||||
Inventories |
476 | (70 | ) | |||||
Restricted cash |
| 156 | ||||||
Accounts payable and other accrued liabilities |
212 | (425 | ) | |||||
Accrued compensation |
35 | 103 | ||||||
Deferred revenue |
879 | (124 | ) | |||||
Deferred rent |
(11 | ) | 6 | |||||
Net cash provided by (used in) operating activities |
5,276 | (3,834 | ) | |||||
Investing activities: |
||||||||
Purchases of property and equipment |
(69 | ) | (323 | ) | ||||
Net cash used in investing activities |
(69 | ) | (323 | ) | ||||
Financing activities: |
||||||||
Net proceeds from issuance of common stock |
2,225 | 9,918 | ||||||
Payment of note payable |
(1,400 | ) | | |||||
Net cash provided by financing activities |
825 | 9,918 | ||||||
Net increase in cash and cash equivalents |
6,032 | 5,761 | ||||||
Cash and cash equivalents at beginning of period |
6,561 | 5,328 | ||||||
Cash and cash equivalents at end of period |
$ | 12,593 | $ | 11,089 | ||||
Supplemental disclosure of noncash investing and financing activities: |
||||||||
Common stock issued in connection with entering into a common stock purchase
agreement |
$ | 966 | $ | | ||||
See accompanying notes to the condensed financial statements.
5
Table of Contents
CARDICA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 2010
(unaudited)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Cardica, Inc. (Cardica, the Company, we, our or us) was incorporated in
the state of Delaware on October 15, 1997, as Vascular Innovations, Inc. On November 26, 2001, the
Company changed its name to Cardica, Inc. The Company designs, manufactures and markets proprietary
automated anastomotic systems used in surgical procedures. The Company also has re-focused its
business on the development of an endoscopic microcutter product line intended for use by general,
thoracic, gynecologic, bariatric and urologic surgeons. The Company is developing the Microcutter
XPRESS 30 (formerly referred to as the Cardica Microcutter ES8), a multi-fire endolinear
microcutter device based on the Companys proprietary staple-on-a-strip technology, which would
expand the Companys commercial opportunity into additional surgical markets.
Basis of Presentation
The accompanying unaudited condensed financial statements of Cardica have been
prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by GAAP for complete
financial statements. The unaudited interim financial statements have been prepared on the same
basis as the annual financial statements. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments necessary for the fair statement of balances and results have
been included. The results of operations of any interim period are not necessarily indicative of
the results of operations for the full year or any other interim period.
The accompanying condensed financial statements should be read in conjunction with
the audited financial statements and notes thereto for the fiscal year ended June 30, 2010 included
in the Companys Form 10-K filed with the Securities and Exchange Commission on September 24, 2010.
Use of Estimates
The preparation of financial statements in conformity with GAAP generally requires
management to make estimates and assumptions that affect the amounts reported in the financial
statements. Actual results could differ from these estimates.
Revenue Recognition
The Company recognizes revenue when four basic criteria are met: (1) persuasive
evidence of an arrangement exists; (2) title or rights have transferred; (3) the fee is fixed or
determinable; and (4) collectability is reasonably assured. The Company uses contracts and customer
purchase orders to determine the existence of an arrangement. The Company uses contractual terms,
shipping documents and third-party proof of delivery to verify that title or rights have
transferred. The Company assesses whether the fee is fixed or determinable based upon the terms of
the agreement associated with the transaction. To determine whether collection is probable, the
Company assesses a number of factors, including past transaction history with the customer and the
creditworthiness of the customer. If the Company determines that collection is not reasonably
assured, then the recognition of revenue is deferred until collection becomes reasonably assured,
which is generally upon receipt of payment.
The Company records product sales net of estimated product returns and discounts from the list
prices for its products. The amounts of product returns and the discount amounts have not been
material to date. The Company includes shipping and handling costs in cost of product sales.
The Company adopted Accounting Standards Update (ASU) No. 2010-17, which addresses the
milestone method of revenue recognition on July 1, 2010, as required. Payments that are contingent
upon the achievement of a substantive milestone are recognized in their entirety in the period in
which the milestone is achieved subject to satisfaction of all revenue recognition criteria at that
time. Revenue generated from license fees and performing development services are recognized when
they are earned and non-refundable upon receipt or upon incurrence of the related development
expenses in accordance with contractual terms, based on the actual costs incurred to date plus
overhead costs for certain project activities. Amounts paid but not yet
earned on a project are recorded as deferred revenue until such time as the related development
expenses, plus overhead costs for certain project activities, are incurred.
6
Table of Contents
The Company adopted ASU No. 2009-13 which addresses the accounting for multiple-element
arrangements on July 1, 2010, as required. The guidance was adopted on a prospective basis and so
is effective for all new or materially modified multiple-element arrangements that the Company
enters into subsequent to July 1, 2010 including the arrangement with Intuitive Surgical
Operations, Inc. (Intuitive Surgical) that the Company entered into on August 16, 2010. This
guidance removes the requirement for objective and reliable evidence of fair value of the
undelivered items in order to separate a deliverable into a separate unit of accounting. It also
changes the allocation method such that the relative-selling-price method must be used to allocate
arrangement consideration to the units of accounting in an arrangement. The adoption of this
guidance has had a material effect upon the revenue recognized for the three and six months ended
December 31, 2010 and will have a material effect upon the revenue recognized in future periods
related to the arrangement with Intuitive Surgical.
Inventories
Inventories are recorded at the lower of cost or market on a first-in, first-out
basis. The Company periodically assesses the recoverability of all inventories, including
materials, work-in-process and finished goods, to determine whether adjustments for impairment are
required. Inventory that is obsolete or in excess of forecasted usage is written down to its
estimated net realizable value based on assumptions about future demand and market conditions.
Reduced demand may result in the need for inventory write-downs in the near term. Inventory
write-downs are charged to cost of product sales and establish a lower cost basis for the
inventory.
NOTE 2 STOCKHOLDERS EQUITY
Common Stock
On August 16, 2010, the Company entered into a Stock Purchase Agreement with Intuitive
Surgical pursuant to which Intuitive Surgical paid $3.0 million to purchase from the Company an
aggregate of 1,249,541 newly-issued shares of the Companys common stock (the Stock Issuance).
The net proceeds recorded to stockholders equity based upon the fair value of the common stock on
August 16, 2010 were approximately $2.0 million after offering expenses. See Note 7, License,
Development and Commercialization Agreements, for a discussion of the accounting treatment of the
premium paid of $1.0 million, which is the amount Intuitive Surgical paid above the fair market
value of the Companys stock on the date of the agreement. There were no underwriters or placement
agents involved with the Stock Issuance, and no underwriting discounts or commissions or similar
fees were payable in connection with the Stock Issuance. Under the associated Registration Rights
Agreement between the Company and Intuitive Surgical, the Company is required to meet certain
obligations with respect to (1) filing a registration statement with the Securities and Exchange
Commission pertaining to all common stock issued to Intuitive Surgical, and (2) using its
reasonable best efforts to cause the registration statement to be declared effective within a
specified number of days after filing the registration statement. If these requirements are not
met or if, after its effective date, such registration statement ceases for any reason to be
effective for a specified number of days within a given period of time, the Company is required to
pay to Intuitive Surgical (or the holder of the shares subject to the rights, if such rights have
been transferred), as liquidated damages and not as a penalty, an amount in cash equal to 1% of the
aggregate purchase price paid pursuant to the Stock Purchase Agreement for the shares then held by
Intuitive Surgical or holder, as applicable. Such amount must be paid within a specified period of
time following the occurrence of an event triggering the requirement to make a payment and on each
monthly anniversary thereafter until such event is cured. There is no specified maximum amount to
be paid under these provisions. The Company has assessed the likelihood of making any such
liquidated damages payments as remote and has not recorded any contingent liability related to
these potential payments.
On December 14, 2010, the Company entered into a common stock purchase agreement (the
Purchase Agreement) with Aspire Capital Fund, LLC, an Illinois limited liability company (Aspire
Capital), which provides that, upon the terms and subject to the conditions and limitations set
forth therein, Aspire Capital is committed
to purchase up to an aggregate of $10.0 million of shares of the Companys common stock (the
Purchase Shares) over the term of the Purchase Agreement at purchase prices determined in
accordance with the Purchase Agreement. Pursuant to the Purchase Agreement, on any trading day
on which the closing sale price of the Companys common stock exceeds $1.00 per
share, the Company has the right, in its sole discretion, to present Aspire Capital with a purchase
notice, directing Aspire Capital to purchase up to (i) 100,000 shares of the Companys common stock
per trading day if the closing sale price of the Companys common stock is above $1.00 per share,
(ii) 200,000 shares of the Companys common stock per trading day if the closing sale price of the
Companys common stock is above $2.25 per share and (iii) 300,000 shares of the Companys common
stock per trading day if the closing sale price of the Companys common stock is above $3.50 per
share. The purchase price per Purchase
Share will be equal to the lesser of (i) the lowest sale price of the Companys common stock on the
purchase date or (ii) the arithmetic average of the three lowest closing sale prices for the
Companys common stock during the twelve consecutive trading days ending on the trading day
immediately preceding the purchase date.
7
Table of Contents
====================================================================================================================================
In consideration for entering into the Purchase Agreement, concurrently with the execution of
the Purchase Agreement, the Company issued to Aspire Capital 295,567 shares of our common stock as
a commitment fee (the Commitment Shares). The value of the Commitment Shares of $966,000 has
been recorded as a deferred financing cost and is included in other non-current assets. Other
costs related to entering into the Purchase Agreement of $134,000 are also included in other
non-current assets. The deferred financing costs will be recorded as a cost of raising capital
when Aspire Capital purchases Purchase Shares under the Purchase Agreement. The Purchase Agreement
provides that the Company may not issue and sell more than 4,930,747 shares of the Companys common
stock, including the Commitment Shares.
Stock-Based Compensation
Stock-based compensation expenses related to employee and director share-based
compensation plans, including stock options and restricted stock units, or RSUs, are calculated
pursuant to Accounting Standards Codification, or ASC, 718 Compensation-Stock Compensation.
Stock-based compensation cost is measured on the grant date, based on the fair value-based
measurement of the award and is recognized as an expense over the requisite service period.
The Company selected the Black-Scholes option pricing model for determining the estimated fair
value-based measurements of share-based awards. The use of the Black-Scholes model requires the use
of assumptions including expected term, expected volatility, risk-free interest rate and expected
dividends. The Company used the following assumptions in its fair value-based measurements:
Three months ended | Six months ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Risk-free interest rate |
0.89% 1.14 | % | 1.74% 2.08 | % | 0.89% 1.60 | % | 1.70% 2.25 | %% | ||||||||
Dividend yield |
| | | | ||||||||||||
Weighted-average expected term (in years) |
3.77 4.58 | 3.77 4.52 | 3.77 4.58 | 3.5 4.52 | ||||||||||||
Expected volatility |
76.0% 79.7 | % | 64.5% 65.1 | % | 72.9% 79.7 | % | 64.5% 81.2 | % |
Since the Company has limited historical data on volatility of its stock, the expected
volatility used in fiscal years 2010 and 2009 is based on volatility of similar entities (referred
to as guideline companies). In evaluating similarity, the Company considered factors such as
industry, stage of life cycle, size, and financial leverage.
The expected term of options granted is determined using the simplified method.
Under this approach, the expected term is presumed to be the mid-point between the vesting date and
the end of the contractual term. The risk-free interest rate for the expected term of each option
is based on a risk-free zero-coupon spot interest rate at the time of grant. The Company has never
declared or paid any cash dividends and does not presently plan to pay cash dividends in the
foreseeable future. The Company recognizes the stock compensation expense for option awards using
the accelerated method over the requisite service period of the award, which generally equals the
vesting period of each grant. The Company estimates forfeitures in calculating the expense related
to stock-based compensation. Total compensation expense related to unvested awards not yet
recognized is approximately $0.8 million at December 31, 2010 and is expected to be recognized over
a weighted average period of 2.3 years.
8
Table of Contents
Included in the statement of operations are the following non-cash stock-based
compensation amounts for the periods reported, including non-employee stock based compensation
expense and the amortization of deferred compensation (in thousands):
Three months ended | Six months ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Cost of product sales |
$ | 17 | $ | 48 | $ | 35 | $ | 152 | ||||||||
Research and development |
49 | 81 | 103 | 249 | ||||||||||||
Selling, general and administrative |
72 | 95 | 244 | 390 | ||||||||||||
Total |
$ | 138 | $ | 224 | $ | 382 | $ | 791 | ||||||||
As of December 31, 2010, 1.6 million shares of options were exercisable at a weighted-average
price of $5.40 per share.
Restricted Stock Units
The following table summarizes restricted stock activity for the six months ended December 31,
2010:
Non-vested restricted stock at June 30, 2010 |
46,425 | |||
Forfeited |
(250 | ) | ||
Non-vested restricted stock at December 31, 2010 |
46,175 | |||
The fair value of each restricted stock unit is estimated based upon the closing
price of the Companys common stock on the grant date. Share-based compensation expense related to
restricted stock units is recognized over the requisite service period adjusted for estimated
forfeitures.
NOTE 3 NET INCOME (LOSS) PER SHARE
Basic net income (loss) per common share is calculated by dividing the net income (loss) by
the weighted-average number of common shares outstanding for the period without consideration of
potentially dilutive common shares. Diluted net income (loss) per common share is computed by
dividing the net income (loss) by the weighted-average number of common shares outstanding for the
period plus the weighted average potentially dilutive common shares for the period determined using
the treasury-stock method. For purposes of this calculation, options and warrants to purchase
stock and non-vested restricted stock awards are considered to be potentially dilutive common
shares and are only included in the calculation of diluted net income (loss) per common share when
their effect is dilutive.
The following table sets forth the computation of basic and diluted net income (loss) per share (in
thousands, except per share data):
Three months ended | Six months ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Numerator: |
||||||||||||||||
Net income (loss) |
$ | (3,333 | ) | $ | (2,226 | ) | $ | 2,890 | $ | (4,890 | ) | |||||
Denominator: |
||||||||||||||||
Weighted-average common shares outstanding |
25,396 | 23,950 | 25,009 | 19,888 | ||||||||||||
Less: Weighted-average non-vested
restricted stock |
| (3 | ) | | (14 | ) | ||||||||||
Denominator for basic net income (loss)
per common share |
25,396 | 23,947 | 25,009 | 19,874 | ||||||||||||
Dilutive effect of stock options |
| | 634 | | ||||||||||||
Dilutive effect of non-vested restricted
stock awards |
| | 46 | | ||||||||||||
Dilutive effect of warrants |
| | 1,494 | | ||||||||||||
Denominator for diluted net income (loss)
per common share |
25,396 | 23,947 | 27,183 | 19,874 | ||||||||||||
Basic net income (loss) per common share |
$ | (0.13 | ) | $ | (0.09 | ) | $ | 0.12 | $ | (0.25 | ) | |||||
Diluted net income (loss) per common share |
$ | (0.13 | ) | $ | (0.09 | ) | $ | 0.11 | $ | (0.25 | ) | |||||
9
Table of Contents
The following table sets forth the outstanding securities not included in the diluted net income
(loss) per common share calculation for the six months ended December 31, 2010 and 2009 because
their effect would be anitdilutive (in thousands):
December 31, | ||||||||
2010 | 2009 | |||||||
Options to purchase common stock |
1,020 | 3,160 | ||||||
Non-vested restricted stock awards |
| 148 | ||||||
Warrants |
575 | 4,719 | ||||||
Total |
1,595 | 8,027 | ||||||
NOTE 4 COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of net income (loss) and unrealized
gains/losses on available-for-sale securities. As there were no changes in unrealized gains/losses
in the three and six months ended December 31, 2010 and 2009, comprehensive income (loss) was the
same as net income (loss) in each of those periods.
NOTE 5 FAIR VALUE MEASUREMENTS
ASC 820, Fair Value Measurements and Disclosures, defines fair value as the
exchange price that would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants at the measurement date. ASC 820 establishes a three-level fair value
hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used
to measure fair value are as follows:
Level 1
|
Quoted prices in active markets for identical assets or liabilities. | |
Level 2
|
Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. | |
Level 3
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The Company does not have any liabilities that are measured at fair value. All assets that are
measured at fair value have been segregated into the most appropriate level within the fair value
hierarchy based on the inputs used to determine the fair value at the measurement date. These
assets measured at fair value are summarized below (in thousands):
As of December 31, 2010 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Cash equivalents: |
||||||||||||||||
Money market funds |
$ | 511 | $ | | $ | | $ | 511 | ||||||||
Total assets at fair value |
$ | 511 | $ | | $ | | $ | 511 | ||||||||
As of June 30, 2010 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Cash equivalents: |
||||||||||||||||
Money market funds |
$ | 511 | $ | | $ | | $ | 511 | ||||||||
Total assets at fair value |
$ | 511 | $ | | $ | | $ | 511 | ||||||||
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Cash equivalents, consisting of funds held in money market instruments, are
included in Level 1 as their fair value is based on market prices/quotes for identical assets in
active markets.
As of December 31, 2010, the Companys material financial assets and liabilities
not carried at fair value, including its trade accounts receivable and accounts payable are
reported at their current carrying values which approximate fair value given the short term nature
of these instruments.
NOTE 6 INVENTORIES
Inventories consisted of the following (in thousands):
December 31, | June 30, | |||||||
2010 | 2010 | |||||||
Raw materials |
$ | 232 | $ | 250 | ||||
Work in progress |
121 | 62 | ||||||
Finished goods |
302 | 819 | ||||||
$ | 655 | $ | 1,131 | |||||
NOTE 7 LICENSE, DEVELOPMENT AND COMMERCIALIZATION AGREEMENTS
Cook Incorporated
In June 2007, the Company entered into, and in September 2007 and in June 2009 amended, a
license, development and commercialization agreement with Cook to develop and commercialize a
specialized device, referred to as the PFO device, designed to close holes in the heart from
genetic heart defects known as patent foramen ovales, or PFOs. Under the agreement, Cook funded
certain development activities and the Company and Cook jointly developed the device. The
Companys significant deliverables under the arrangement were the license rights and the associated
development activities. These deliverables were determined to represent one unit of accounting as
there was no stand-alone value to the license rights. If developed, Cook would receive an
exclusive, worldwide, royalty-bearing license, with the right to grant sublicenses, to make, have
made, use, sell, offer for sale and import the PFO device. Under this agreement, the
Company received payments of $1.0 million and $1.7 million in fiscal years ended June 30, 2009 and
2008, respectively. The Company received no payments in the fiscal year ended June 30, 2010. The
Company recorded as license and development revenue under the agreement a total of $0 and $19,000
for the three months ended December 31, 2010 and 2009, respectively, and $0 and $124,000 for the
six months ended December 31, 2010 and 2009, respectively. Amounts paid but not yet earned on the
project are recorded as deferred revenue until such time as the related development expenses for
certain project activities are incurred. A total of $403,000 under this agreement has been
recorded as deferred revenue as of December 31, 2010. The Company is entitled to receive from Cook
up to a total of an additional $275,000 in future payments if development milestones under the
agreement are achieved. The Company is also entitled to receive a royalty based on Cooks annual
worldwide sales of the PFO device, if any. On January 6, 2010, the Company and Cook mutually
agreed to suspend work on the PFO project and, accordingly, the Company does not anticipate
receiving any additional payments or recording any additional revenue related to this agreement in
the foreseeable future.
Intuitive Surgical
On August 16, 2010, the Company entered into a license agreement with Intuitive Surgical (the
License Agreement) pursuant to which the Company granted to Intuitive Surgical a worldwide,
sublicenseable, exclusive license to use the Companys intellectual property in the robotics field
in diagnostic or therapeutic medical procedures, but excluding vascular anastomosis applications,
for an upfront license fee of $9.0 million. The Company is also eligible to receive a milestone
payment if sales of any products incorporating the Companys patent rights achieve a specified
level of net sales within a specified period after the date of the License Agreement as well as
single-digit royalties on sales by Intuitive Surgical, its affiliates or its sublicensees of
specified stapler and clip applier products covered by the Companys patent rights as well as on
sales of certain other products covered by the Companys patent rights that may be developed in the
future. The milestone is considered substantive given the uncertainties surrounding the
development and sale of any products incorporating the Companys patent rights. Each party has the
right to terminate the License Agreement in the event of the other partys uncured material breach
or bankruptcy. Following any termination of the License Agreement, the licenses granted to
Intuitive Surgical will continue, and except in the case of termination for the Companys uncured
material breach or insolvency, Intuitive
Surgicals payment obligations will continue as well. Under the License Agreement, Intuitive
Surgical has rights to improvements in the Companys technology and intellectual property over a
specified period of time.
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The Company adopted ASU No. 2009-13 which addresses the accounting for multiple-element
arrangements on July 1, 2010 on a prospective basis. Under this guidance, the Company determined
that there were two substantive deliverables under the License Agreement representing separate
units of accounting: license rights to technology that existed as of August 16, 2010 and license
rights to technology that may be developed over the following three years. The $9.0 million
upfront license payment and $1.0 million premium on the stock purchase by Intuitive Surgical (see
Note 2, Stockholders Equity) were aggregated and allocated to the two units of accounting based
upon the relative estimated selling prices of the deliverables. The relative estimated selling
prices of the deliverables were determined using a probability weighted expected return model with
significant inputs relating to the nature of potential future outcomes and the probability of
occurrence of future outcomes. Based upon the relative estimated selling prices of the
deliverables, $9.0 million of the total consideration of $10.0 million was allocated to the license
rights to technology that existed as of August 16, 2010 that has been recognized as revenue in the
three months ended September 30, 2010 and $1.0 million was allocated to technology that may be
developed over the following three years that is being recognized as revenue ratably over that
three year period. In total, the revenue recognized for the three and six months ended December
31, 2010 related to this arrangement was $84,000 and $9.1 million, respectively, and, as of
December 31, 2010, $0.9 million of deferred revenue related to this arrangement.
Prior to the adoption of ASU 2009-13, the Company would have assessed that there was one unit
of accounting under the arrangement with Intuitive Surgical as there was no objective and reliable
evidence of fair value of the license rights to technology that may be developed in the future.
Therefore, under the former guidance of Subtopic 605-25 of the Accounting Standards Codification
(formerly known as EITF 00-21), the total consideration of $10.0 million would have been recognized
ratably over the substantive performance period in which rights are being made available to
Intuitive Surgical under the License Agreement. Under the former guidance the license and
development revenue recognized for the three and six months ended December 31, 2010 related to this
arrangement would have been $0.8 million and $1.3 million, respectively and the net loss for the
three and six months ended December 31, 2010 would have been $2.4 million ($0.09 per diluted share)
and $5.0 million ($0.18 per diluted share), respectively.
NOTE 8 NOTE PAYABLE
On April 1, 2010, the Company entered into an amendment (Note Agreement Amendment), to its
subordinated convertible note agreement, dated June 16, 2003 and as amended to date, with Century
Medical, Inc. (Century Medical), the Companys distributor in Japan. Under the terms of the Note
Agreement Amendment, the Company made a principal payment of $600,000 to Century Medical in April
2010, with the remaining $1.4 million principal amount owed to Century Medical becoming due on June
17, 2011, which is one year later than the maturity date prior to the Note Agreement Amendment. On
August 17, 2010, the Company repaid the remaining $1.4 million principal balance and interest due
to Century Medical.
NOTE 9 AMENDED LEASE AGREEMENT
On November 11, 2010, the Company entered into an amendment to its facility lease, which is
effective as of November 11, 2010 (the Lease Amendment). Pursuant to the Lease Amendment, the
term of the lease was extended by four years, through August 31, 2015, and the Company was granted
an improvement allowance of $148,070 to be used in connection with the construction of alterations
and refurbishment of improvements in the premises. The base rent during the extended term is
$51,824 per month from January 1, 2011 through December 31, 2011, $53,305 per month from
January 1, 2012 through December 31, 2012, $55,378 per month from January 1, 2013 through
December 31, 2013, $59,228 per month from January 1, 2014 through December 31, 2014, and
$62,189 per month from January 1, 2015 through August 31, 2015. In addition, under the Lease
Amendment, the Company was granted an option to further extend the lease for a period of two years
beyond August 31, 2015 (the Option Term) and the method of determination of the annual rent
payable by the Company during the Option Term was set forth in the Amendment. Under the operating
lease, the Company is required to maintain a letter of credit with a restricted cash balance at the
Companys bank. A certificate of deposit of $150,000 has been recorded as restricted cash in the
Condensed Balance Sheet at December 31, 2010 related to the letter of credit. Further, effective
as of January 1, 2011, the amount of the letter of credit was reduced from $150,000 to $100,000.
Future minimum lease payments under the non-cancelable operating leases having initial terms
of a year or more as of December 31, 2010 including the Amendment, are as follows (in thousands):
Operating | ||||
Leases | ||||
2011 |
622 | |||
2012 |
640 | |||
2013 |
665 | |||
2014 |
710 | |||
2015 |
497 | |||
Total |
3,134 |
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This report includes forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of
1934, as amended. All statements other than statements of historical facts are forward-looking
statements for purposes of these provisions, including any projections of earnings, revenue,
sufficiency of cash resources or other financial items, any statement of the plans and objectives
of management for future operations, any statements concerning proposed new products or licensing
or collaborative arrangements, any statements regarding future economic conditions or performance,
and any statement of assumptions underlying any of the foregoing. In some cases, forward-looking
statements can be identified by the use of terminology such as may, will, expects, plans,
anticipates, estimates, potential, or continue or the negative thereof or other comparable
terminology. Although we believe that the expectations reflected in the forward-looking statements
contained herein are reasonable, there can be no assurance that such expectations or any of the
forward-looking statements will prove to be correct, and actual results could differ materially
from those projected or assumed in the forward-looking statements. Our future financial condition
and results of operations, as well as any forward-looking statements, are subject to inherent risks
and uncertainties, including but not limited to the risk factors set forth in Item 1A below, and
for the reasons described elsewhere in this report. All forward-looking statements and reasons why
results may differ included in this report are made as of the date hereof, and we assume no
obligation to update these forward-looking statements or reasons why actual results might differ.
Overview
Historically, our business focused on the design, manufacture and marketing of
proprietary automated anastomotic systems used by cardiac surgeons to perform coronary bypass
surgery. We have re-focused our business on the development of an endoscopic microcutter product
line intended for use by general, thoracic, gynecologic, bariatric and urologic surgeons. Unless
and until a microcutter product is developed and cleared for marketing in the United States or
elsewhere, or we enter into an arrangement with a development and commercialization partner that
provides us with development revenue, we will have ongoing costs related to the development of this
potential product line without related revenue, other than the revenue related to a license
agreement with Intuitive Surgical Operations, Inc., or Intuitive Surgical.
Our C-Port® Distal Anastomosis Systems, or C-Port systems, are sold in the United States and
Europe. The C-Port systems are used to perform a distal anastomosis, which is the connection
between a bypass graft vessel and the target artery. As of December 31, 2010, more than 11,500
C-Port systems have been sold in the United States and Europe. We also currently sell our PAS-Port®
Proximal Anastomosis System, or PAS-Port system, in the United States, Europe and Japan. The
PAS-Port system is used to perform a proximal anastomosis, which is the connection of a bypass
graft vessel to the aorta or other source of blood. As of December 31, 2010, more than 21,800
PAS-Port systems had been sold in the United States, Europe and Japan.
In addition to our commercialized cardiac surgery products, we are developing the Microcutter
XPRESS 30, a multi-fire endolinear microcutter device based on our proprietary staple-on-a-strip
technology, which would expand our commercial opportunity into additional surgical markets. In
addition to recently completing tooling of the Microcutter XPRESS 30, we launched tooling of the
Microcutter XPRESS 45 (formerly referred to as the Cardica Microcutter ES8) and XCHANGE 30
(formerly referred to as the Cardica Microcutter MES5), and initiated development of the
Microcutter FLEXCHANGE 30, a planned device with a flexible shaft to facilitate endoscopic
procedures requiring cutting and stapling, and the Microcutter XPRESS 60, a planned cutting and
stapling device specifically designed for the bariatric and thoracic surgery markets.
We use independent distributors and manufacturers representatives to support a small core
direct sales team for our C-Port systems and PAS-Port system in the United States to contain sales
costs while continuing to serve our customers and potential customers for our automated anastomosis
product line. We have shifted our development efforts to focus on the Microcutter XPRESS 30 and
other potential products in this anticipated product line.
We manufacture our C-Port and PAS-Port systems with parts we manufacture and components
supplied by vendors, which we then assemble, test and package. For the three and six months ended
December 31 2010, we generated net revenue of $1.2 million and $11.2 million, including the license
and development revenue of $9.0 million related to the License Agreement with Intuitive Surgical,
respectively, and recorded a net loss of $3.3 million and a net income of $2.9 million,
respectively.
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Since our inception, except for the three months ended September 30, 2010 and the six months
ended December 31, 2010, in which we recorded net income due to the license rights granted to
Intuitive Surgical, we have incurred significant net losses, and we expect to continue to incur net
losses for the foreseeable future. To date, our C-Port and PAS-Port systems have had limited
commercial adoption, and sales have not met the levels that we had anticipated. Revenues from
product sales and milestone payments were not sufficient to support the operation of our business
as we had planned. If revenue does not increase, we may be required to delay, further reduce the
scope of or eliminate our commercialization efforts with respect to one or more of our products or
one or more of our research and development programs.
On April 1, 2010, we entered into an amendment, or Note Agreement Amendment, to our
subordinated convertible note agreement, dated June 16, 2003 and as amended to date, with Century
Medical, Inc., or Century Medical, our distributor in Japan (referred to as the Note Agreement).
Under the terms of the Note Agreement Amendment, we made a principal payment of $600,000 to Century
Medical in April 2010, with the remaining $1.4 million principal amount owed to Century Medical
becoming due on June 17, 2011, which is one year later than the maturity date prior to the Note
Agreement Amendment. On August 17, 2010, we repaid the remaining $1.4 million principal balance and
interest due to Century Medical.
As of December 31, 2010, we had cash and cash equivalents of $12.6 million. We
believe that our existing cash and cash equivalents, together with the cash that we expect to
generate from operations, will be sufficient to meet our anticipated cash needs to enable us to
conduct our business substantially as currently conducted through December 31, 2011. We would extend this time period to the extent that we access additional capital under
the common stock purchase agreement, or Purchase Agreement, we
entered into on December 14, 2010 with Aspire Capital Fund, LLC, an Illinois limited liability
company, referred to as Aspire Capital. The sufficiency of our current cash resources and our need
for additional capital, and the timing thereof, will depend on many factors, including the extent
of our ongoing research and development programs and related costs, including costs related to the
development of the Microcutter XPRESS 30 and additional potential products in our anticipated
microcutter product line, our ability to enter into additional license, development and/or
collaboration agreements with respect to our technology, and the terms thereof, market acceptance
and adoption of our current products or future products that we may commercialize, our level of
revenues, costs associated with our sales and marketing initiatives and manufacturing activities,
costs and timing of obtaining and maintaining FDA and other regulatory clearances and approvals for
our products and potential additional products, securing, maintaining and enforcing intellectual
property rights and the costs thereof, the extent that we access capital under the Purchase
Agreement, and the effects of competing technological and market developments.
We may seek to sell additional equity or debt securities, obtain a credit facility, enter into
product development, license or distribution agreements with third parties or divest one or more of
our commercialized products or products in development. The sale of additional equity or
convertible debt securities could result in significant dilution to our stockholders. If additional
funds are raised through the issuance of debt securities, these securities could have rights senior
to those associated with our common stock and could contain covenants that would restrict our
operations. Any product development, licensing, distribution or sale agreements that we enter into
may require us to relinquish valuable rights, including with respect to commercialized products or
products in development that we would otherwise seek to commercialize or develop ourselves. We may
not be able to obtain sufficient additional financing or enter into a strategic transaction in a
timely manner. Our need to raise capital may require us to accept terms that may harm our business
or be disadvantageous to our current stockholders.
Subject to the terms and conditions of the Purchase
Agreement with Aspire Capital, we have a right to sell to Aspire Capital pursuant to the Purchase Agreement
up to $10.0 million of our common stock at a maximum of 300,000 shares per day based on the
trading price of our common stock. In consideration for entering into the Purchase Agreement, concurrently with the execution of the
Purchase Agreement, the Company issued to Aspire Capital 295,567 shares of our common stock as a
commitment fee, or the Commitment Shares. The extent to which we rely on Aspire Capital as a
source of funding will depend on a number of factors, including the prevailing market price of our
common stock and the extent to which we are able to secure working capital from other sources. The
Purchase Agreement provides that we may not issue and sell more than 4,930,747 shares of our common
stock, including the Commitment Shares.
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Agreements with Intuitive Surgical
On August 16, 2010, we entered into a license agreement, or License Agreement, with Intuitive
Surgical, pursuant to which we granted to Intuitive Surgical a worldwide, sublicenseable, exclusive
license to use our intellectual property in the robotics field in diagnostic or therapeutic medical
procedures, but excluding vascular anastomosis applications for an upfront license fee of $9.0
million. We are also eligible to receive a milestone payment if sales of any products incorporating
our patent rights achieve a specified level of net sales within a specified period after the date
of the License Agreement as well as single-digit
royalties on sales by Intuitive Surgical, its affiliates or its sublicensees of specified stapler
and clip applier products covered by our patent rights as well as on sales of certain other
products covered by our patent rights that may be developed in the future. Each party has the
right to terminate the License Agreement in the event of the other partys uncured material breach
or bankruptcy. Following any termination of the License Agreement, the licenses granted to
Intuitive Surgical will continue, and, except in the case of termination for our uncured material
breach or insolvency, Intuitive Surgicals payment obligations will continue as well. Under the
License Agreement, Intuitive Surgical has rights to improvements in our technology and intellectual
property over a specified period of time.
In addition, on the same date, we entered into a Stock Purchase Agreement with Intuitive
Surgical pursuant to which Intuitive Surgical paid $3.0 million to purchase from us an aggregate of
1,249,541 newly-issued shares of the Companys common stock, referred to as the Stock Issuance.
The net proceeds recorded to stockholders equity based upon the fair value of our common stock on
August 16, 2010 were approximately $2.0 million after offering expenses. From the premium paid of
$1.0 million and the upfront license fee payment of $9.0 million, $84,000 and $9.1 million were
recorded as license and development revenue for the three and six months ended December 31, 2010,
respectively, and $0.9 million were recorded as deferred revenue as of December 31, 2010. There
were no underwriters or placement agents involved with the Stock Issuance, and no underwriting
discounts or commissions or similar fees were payable in connection with the Stock Issuance.
Agreements with Cook Incorporated
In June 2007, we entered into, and in September 2007 and in June 2009 amended, a
license, development and commercialization agreement with Cook to develop and commercialize a
specialized device, referred to as the PFO device, designed to close holes in the heart from
genetic heart defects known as patent foramen ovales, or PFOs. Under the agreement, Cook funded
certain development activities and we and Cook jointly developed the device. Our significant
deliverables under the arrangement were the license rights and the associated development
activities. If developed, Cook would receive an exclusive, worldwide, royalty-bearing license,
with the right to grant sublicenses, to make, have made, use, sell, offer for sale and import the
PFO device. Under this agreement, we received payments of $1.0 million and $1.7 million
in fiscal years ended June 30, 2009 and 2008, respectively. We received no payments in the fiscal
year ended June 30, 2010. The Company recorded as license and development revenue under the
agreement a total of $0 and $19,000 for the three months ended December 31, 2010 and 2009,
respectively, and $0 and $124,000 for the six months ended December 31, 2010 and 2009,
respectively. Amounts paid but not yet earned on the project are recorded as deferred revenue
until such time as the related development expenses for certain project activities are incurred. A
total of $403,000 under this agreement has been recorded as deferred revenue as of December 31,
2010. We are entitled to receive from Cook up to a total of an additional $275,000 in future
payments if development milestones under the agreement are achieved. We are also entitled to
receive a royalty based on Cooks annual worldwide sales of the PFO device, if any. On January 6,
2010, we and Cook mutually agreed to suspend work on the PFO project and, accordingly, we do not
anticipate receiving any additional payments or recording any additional revenue related to this
agreement in the foreseeable future.
Critical Accounting Policies and Significant Judgments and Estimates
Our managements discussion and analysis of our financial condition and results of
operations are based on our financial statements which have been prepared in accordance with
accounting principles generally accepted in the United States, or GAAP. The preparation of our
financial statements requires management to make estimates and assumptions that affect the amounts
reported in our financial statements and accompanying notes. Actual results could differ materially
from those estimates.
We believe that the following critical accounting policies are the most critical to an
understanding of our financial statements because they require us to make significant judgments and
estimates that are used in the preparation of our financial statements.
Revenue Recognition. We recognize revenue when four basic criteria are met: (1) persuasive
evidence of an arrangement exists; (2) title or rights have transferred; (3) the fee is fixed or
determinable; and (4) collectability is reasonably assured. We generally use contracts and customer
purchase orders to determine the existence of an arrangement. We use contractual terms, shipping
documents and third-party proof of delivery to verify that title or rights have transferred. We
assess whether the fee is fixed or determinable based upon the terms of the agreement associated
with the transaction. To determine whether collection is probable, we assess a number of factors,
including past transaction history with the customer and the creditworthiness of the customer. If
we determine that collection is not reasonably assured, then the recognition of revenue is deferred
until collection becomes reasonably assured, which is generally upon receipt of payment.
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We record product sales net of estimated product returns and discounts from the list prices
for our products. The amounts of product returns and the discount amounts have not been material to
date.
Payments that are contingent upon the achievement of a substantive milestone are recognized in
their entirety in the period in which the milestone is achieved subject to satisfaction of all
revenue recognition criteria at that time. Revenue generated from license fees and performing
development services are recognized when they are earned and non-refundable upon receipt or upon
incurrence of the related development expenses in accordance with contractual terms, based on the
actual costs incurred to date plus overhead costs for certain project activities. Amounts paid but
not yet earned on the project are recorded as deferred revenue until such time as the related
development expenses are incurred.
We adopted Accounting Standards Update, or ASU No. 2009-13, which addresses the accounting for
multiple-element arrangements on July 1, 2010. The guidance was adopted on a prospective basis and
so is effective for all new or materially modified multiple-element arrangements that we enter into
subsequent to July 1, 2010 including the arrangement with Intuitive Surgical that we entered into
on August 16, 2010. This guidance removes the requirement for objective and reliable evidence of
fair value of the undelivered items in order to separate a deliverable into a separate unit of
accounting. It also changes the allocation method such that the relative-selling-price method must
be used to allocate arrangement consideration to the units of accounting in an arrangement. The
adoption of this guidance has had a material effect upon the revenue recognized for the six months
ended December 31, 2010 and will have a material effect upon the revenue recognized in future
periods related to the arrangement with Intuitive Surgical.
Inventories. We state our inventories at the lower of cost or market on a first-in, first-out
basis. Inventory write-downs are established when conditions indicate that the net realizable value
could be less than cost due to physical deterioration, usage, obsolescence, reductions in estimated
future demand or reductions in selling prices. Inventory write-downs are measured as the difference
between the cost of inventory and estimated net realizable value. Inventory write-downs are charged
to cost of product sales and establish a lower cost basis for the inventory. We balance the need to
maintain strategic inventory levels with the risk of obsolescence due to changing technology and
the risk of lower customer demand levels. While we believe the current value of inventories
reflects all known and estimated changes in demand, we have experienced reduced demand for our
C-Port systems and further unfavorable changes in market conditions may result in a need for
additional inventory write-downs that could adversely impact our financial results.
Stock-Based Compensation. We account for employee and director share-based compensation plans,
including stock options and restricted stock units, or RSUs, pursuant to Accounting Standards
Codification, or ASC, 718 Compensation Stock Compensation. Stock-based compensation cost is
measured on the grant date, based on fair value-based measurement of the award, and is recognized
as an expense over the requisite service period.
The Company selected the Black-Scholes option pricing model for determining the estimated fair
value-based measurements of share-based awards. The use of the Black-Scholes model requires the use
of assumptions including expected term, expected volatility, risk-free interest rate and expected
dividends. The expected term of options granted is determined using the simplified method. Under
this approach, the expected term is presumed to be the mid-point between the vesting date and the
end of the contractual term. Since the Company has limited historical data on volatility of its
stock, the expected volatility is based on the volatility of similar entities (referred to as
guideline companies). In evaluating similarity, we considered factors such as industry, stage of
life cycle, size, and financial leverage. The risk-free interest rate for the expected term of each
option is based on a risk-free zero-coupon spot interest rate at the time of grant. We have never
declared or paid any cash dividends and do not presently plan to pay cash dividends in the
foreseeable future. We estimate forfeitures in calculating the expense related to stock-based
compensation. We recognize stock-based compensation expense for options and restricted stock awards
using the accelerated method over the requisite service period of the award, which generally equals
the vesting period of each grant. We recorded total stock-based compensation expenses related to
employee and director stock awards of $138,000, or $0.01 per diluted share and $224,000, or $0.01
per diluted share for three months ended December 31, 2010 and 2009, respectively and $360,000, or
$0.01 per diluted share and $791,000, or $0.04 per diluted share for six months ended December 31,
2010 and 2009, respectively.
Results of Operations
Comparison of the three month periods ended December 31, 2010 and 2009
Net Revenue. Total net revenue increased by $130,000, or 12%, to $1.2 million for
the three months ended December 31, 2010 compared to $1.1 million for the same period in 2009.
Product sales increased by $71,000, or 7%, to $1.1 million for the three months ended December 31,
2010 compared to $1.0 million for the same period in 2009. The increase of $71,000 in product sales
for the three months ended December 31, 2010 was primarily attributable to both higher PAS-Port and
C-Port
systems sales in the United States. The increase in license and development revenue of $65,000
related to the License Agreement with Intuitive Surgical that we entered into in August 2010.
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For both the three months ended December 31, 2010 and 2009, sales to Century
Medical accounted for approximately 20% of our product sales.
Included within license and development revenue was $0 and $19,000 for the three
months ended December 31, 2010 and 2009, respectively, related to development activities for the
PFO project under our arrangement with Cook. On January 6, 2010, we and Cook mutually agreed to
suspend work on the PFO project and, accordingly, we do not anticipate receiving any additional
payments or recording any additional revenue related to this arrangement in the foreseeable future.
Cost of Product Sales. Cost of product sales consists primarily of material, labor
and overhead costs. Cost of product sales increased $262,000, or 37%, to $1.0 million for the three
months ended December 31, 2010 compared to $0.7 million for the same period in 2009. The increase
in cost of product sales resulted primarily from increased unit sales. We recorded a lower of cost
or market inventory write-down of $0 in the three months ended December 31, 2010 compared to
$384,000 for the same period in 2009 primarily on our PAS-Port system inventory due to higher
product cost of units manufactured. The higher cost per unit manufactured resulted from decreased
volumes of manufactured products. We sold inventory upon which we had recorded $34,000 of
write-offs related to excess and obsolete inventory in the three months ended December 31, 2010.
Research and Development Expense. Research and development expense consists
primarily of personnel costs within our product development, regulatory and clinical groups and the
costs for tooling. Research and development expense increased by $751,000, or 62%, to $2.0 million
for the three months ended December 31, 2010 compared to $1.2 million for the same period in 2009.
The increase in expenses for the three months ended December 31, 2010 was attributable to an
increase in salaries and benefits of $93,000, increased professional services for the microcutter
project of $46,000, increased prototype project materials for the microcutter project of $52,000
and higher molds and tooling expenses of $566,000 related to the microcutter program development
activities, partially offset by lower stock-based compensation of $31,000.
We anticipate that research and development expense will increase slightly in
absolute terms in future periods as we seek to develop new applications of our technology,
including the Microcutter XPRESS 30 and develop additional microcutter products.
Selling, General and Administrative Expense. Selling, general and administrative expense
increased $250,000, or 18%, to $1.6 million for the three months ended December 31, 2010 compared
to $1.4 million for the same period in 2009. The increase in selling, general and administrative
expense in the three months ended December 31, 2010 was primarily attributable to an increase in
salaries and benefits of $119,000 and an increase in professional services expenses of $130,000,
partially offset by lower stock-based compensation charges of $23,000.
We expect selling, general and administrative expense to increase slightly in
absolute terms in future periods as we increase the number of sales representatives that sell our
products.
Interest Income. Interest income decreased $7,000, or 50%, to $7,000 for the three
months ended December 31, 2010 compared to $14,000 for the same period in 2009. The decrease in
interest income for the three month period ended December 31, 2010 was primarily due to lower
overall market interest rates.
Interest Expense. Interest expense for the three months ended December 31, 2009
reflected a 6% per annum interest rate payable on our debt then outstanding to Century Medical.
This debt was fully repaid on August 17, 2010.
Comparison of the six month periods ended December 31, 2010 and 2009
Net Revenue. Total net revenue increased by $9.2 million, or 459%, to $11.2 million
for the six months ended December 31, 2010 compared to $2.0 million for the same period in 2009.
Product sales increased by $249,000, or 14%, to $2.1 million for the six months ended December 31,
2010 compared to $1.8 million for the same period in 2009. The increase of $249,000 in product
sales for the six months ended December 31, 2010 was primarily attributable to both higher PAS-Port
and C-Port systems sales in the United States. The increase in license and development revenue of
$9.0 million related to the License Agreement with Intuitive Surgical that we entered into in
August 2010.
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For the six months ended December 31, 2010 and 2009, sales to Century Medical
accounted for approximately 21% and 24%, respectively, of our product sales.
Included within license and development revenue was $0 and $124,000 for the six
months ended December 31, 2010 and 2009, respectively, related to development activities for the
PFO project under our arrangement with Cook. On January 6, 2010, we and Cook mutually agreed to
suspend work on the PFO project and, accordingly, we do not anticipate receiving any additional
payments or recording any additional revenue related to this arrangement in the foreseeable future.
Cost of Product Sales. Cost of product sales increased $366,000, or 24%, to $1.9
million for the six months ended December 31, 2010 compared to $1.5 million for the same period in
2009. The increase in cost of product sales resulted primarily from increased unit sales. We
recorded a lower of cost or market inventory write-down of $0 in the six months ended December 31,
2010 compared to $384,000 for the same period in 2009 primarily on our PAS-Port system inventory
due to higher product cost of units manufactured. The higher cost per unit manufactured resulted
from decreased volumes of manufactured products. We sold inventory upon which we had recorded
$68,000 of write-offs related to excess and obsolete inventory in the six months ended December 31,
2010.
Research and Development Expense. Research and development expense increased by
$983,000, or 42%, to $3.3 million for the six months ended December 31, 2010 compared to $2.4
million for the same period in 2009. The increase in expenses for the six months ended December 31,
2010 was attributable to an increase in salaries and benefits of $138,000, increased professional
services incurred in relation to the microcutter project of $122,000, increased prototype project
materials for the microcutter project of $96,000 and higher molds and tooling expenses of $835,000
related to the microcutter program development activities, partially offset by lower stock-based
compensation of $146,000 and lower clinical trial expense of $80,000 as a result of completing the
PAS-Port trials and European trials.
Selling, General and Administrative Expense. Selling, general and administrative
expense increased $141,000, or 5%, to $3.1 million for the six months ended December 31, 2010
compared to $3.0 million for the same period in 2009. The increase in selling, general and
administrative expense in the six months ended December 31, 2010 was primarily attributable to an
increase in salaries and benefits of $105,000 and an increase in professional services expenses of
$145,000, partially offset by lower stock-based compensation charges of $147,000.
Interest Income. Interest income decreased $4,000, or 21%, to $15,000 for the six
months ended December 31, 2010 compared to $19,000 for the same period in 2009. The decrease in
interest income for the six month period ended December 31, 2010 was primarily due to lower overall
market interest rates.
Interest Expense. Interest expense for the six months ended December 31, 2010 and
2009 reflected a 6% per annum interest rate payable on our debt outstanding to Century Medical
during the applicable periods. This debt was fully repaid on August 17, 2010.
Off Balance Sheet Arrangements
As of December 31, 2010, except for a real estate operating lease for our
headquarters in Redwood City, California expiring in August 2015, we did not have any off-balance
sheet arrangements.
Liquidity and Capital Resources
As of December 31, 2010, our accumulated deficit was $117.4 million, and we had
cash and cash equivalents of $12.6 million. We currently invest some of our cash and cash
equivalents in money market funds. Since inception, we have financed our operations primarily
through private sales of convertible preferred stock, long-term notes payable, public and private
sales of common stock and warrants to purchase common stock and license or collaboration
agreements.
In August 2010, we received $3.0 million from the sale of 1,249,541 shares of our
common stock to Intuitive Surgical.
On December 14, 2010, we entered into the Purchase Agreement with Aspire Capital,
which provides that, upon the terms and subject to the conditions and limitations set forth
therein, Aspire Capital is committed
to purchase up to an aggregate of $10.0 million of shares of the Companys common stock, or the
Purchase Shares, over the term of the Purchase Agreement at purchase prices determined in
accordance with the Purchase
Agreement. In consideration for entering into the Purchase Agreement, we issued to Aspire Capital
the Commitment Shares. The Purchase Agreement provides that we may not issue and sell more than
4,930,747 shares of our common stock, including the Commitment Shares.
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On April 1, 2010, we entered into the Note Agreement Amendment, under which we made a
principal payment of $600,000 to Century Medical in April 2010, with the remaining $1.4 million
principal amount owed to Century Medical becoming due on June 17, 2011, which is one year later
than the maturity date prior to the Note Agreement Amendment. The note bore interest at 5% per
annum through June 2008 and then increased to 6% per annum until maturity, and all interest due
under our note to Century Medical was payable quarterly. On August 17, 2010, we paid off the
remaining $1.4 million principal balance and interest due through August 17, 2010, and we currently
do not have any outstanding notes payable.
On November 11, 2010, we entered into an amendment, or Lease Amendment, to our facility lease,
which is effective as of November 11, 2010. Pursuant to the Lease Amendment, the term of the lease
is extended four years, through August 31, 2015 and we were granted an improvement allowance of
$148,070 to be used in connection with the construction of alterations and refurbishment of
improvements in the premises. The base rent during the extended term is $51,824 per month from
January 1, 2011 through December 31, 2011, $53,305 per month from January 1, 2012 through
December 31, 2012, $55,378 per month from January 1, 2013 through December 31, 2013, $59,228
per month from January 1, 2014 through December 31, 2014, and $62,189 per month from January 1,
2015 through August 31, 2015. In addition, under the Lease Amendment, we were granted an option to
further extend the lease for a period of two years beyond August 31, 2015 (the Option Term) and
the method of determination of the annual rent payable by us during the Option Term was set forth
in the Amendment. Under the operating lease we were required to maintain a letter of credit with a
restricted cash balance at our bank. A certificate of deposit of $150,000 was recorded as
restricted cash in the Condensed Balance Sheet at December 31, 2010 related to the letter of
credit. Further, effective as of January 1, 2011, the amount of the letter of credit was reduced
from $150,000 to $100,000.
Future minimum lease payments under the non-cancelable operating leases having initial terms
of a year or more as of December 31, 2010 including the Amendment, are as follows (in thousands):
Operating | ||||
Leases | ||||
2011 |
622 | |||
2012 |
640 | |||
2013 |
665 | |||
2014 |
710 | |||
2015 |
497 | |||
Total |
3,134 |
Summary cash flow data is as follows (in thousands):
Six months ended | ||||||||
December 31, | ||||||||
2010 | 2009 | |||||||
Net cash provided by (used in) operating activities |
$ | 5,276 | $ | (3,834 | ) | |||
Net cash used in investing activities |
(69 | ) | (323 | ) | ||||
Net cash provided by financing activities |
825 | 9,918 |
Net cash provided by operating activities for the six months ended December 31,
2010 was $5.3 million and net cash used in operating activities for the six months ended December
31, 2009 was $3.8 million. The cash provided in the six months ended December 31, 2010 was
primarily attributable to our net income adjusted for non-cash stock-based compensation charges and
depreciation, an increase in deferred revenue due to the Intuitive Surgical arrangement, a decrease
in inventories and an increase in accounts payable and other accrued liabilities due to the
microcutter project. The use of cash for the six months ended December 31, 2009 was primarily
attributable to our net loss adjusted for non-cash stock-based compensation charges and
depreciation offset in part by a decrease in accounts payable and other accrued liabilities
resulting from payments made during the period.
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Net cash used in investing activities for the six months ended December 31, 2010
and 2009 was $69,000 and $323,000, respectively. Net cash used in investing activities reflects
purchases of property and equipment.
Net cash provided by financing activities for the six months ended December 31,
2010 and 2009 was $0.8 million and $9.9 million, respectively. Net cash provided by financing
activities for the six months ended December 31, 2010 consisted of the net proceeds recorded to
stockholders equity from the sale of shares of common stock to Intuitive Surgical of $2.0 million
and proceeds from the exercise of options of $233,000, offset in part by the $1.4 million repayment
of notes payable to Century Medical. The net cash provided by financing activities for the six
months ended December 31, 2009 consisted of proceeds received from a private placement of our
common stock and warrants.
On August 16, 2010, we entered into the License Agreement with Intuitive Surgical pursuant to
which we granted to Intuitive Surgical a worldwide, sublicenseable, exclusive license to use our
intellectual property in the robotics field in diagnostic or therapeutic medical procedures, but
excluding vascular anastomosis applications for a nonrefundable upfront license fee of $9.0
million. We are also eligible to receive a milestone payment if sales of any products incorporating
our patent rights achieve a specified level of net sales within a specified period after the date
of the License Agreement as well as single-digit royalties on sales by Intuitive Surgical, its
affiliates or its sublicensees of products covered by our patent rights.
We believe that our existing cash and cash equivalents, together with the cash that we expect
to generate from operations, will be sufficient to meet our anticipated cash needs to enable us to
conduct our business substantially as currently conducted through December 31, 2011. We would be
able to extend this time period to the extent that we access additional capital under
the Purchase Agreement with Aspire Capital. We have based our estimate on
assumptions that may prove to be wrong, including assumptions with respect to the level of revenues
from product sales, and we could exhaust our available financial resources sooner than we currently
expect.
The sufficiency of our current cash resources and our need for additional capital, and the
timing thereof, will depend upon numerous factors. These factors include, but are not limited to,
the following:
| the extent of our ongoing research and development programs and related costs, including costs related to the development of the Microcutter XPRESS 30 and additional potential products in our anticipated microcutter product line; | ||
| our ability to enter into additional license, development and/or collaboration agreements with respect to our technology, and the terms thereof; | ||
| market acceptance and adoption of our current products or future products that we may commercialize; | ||
| our level of revenues; | ||
| costs associated with our sales and marketing initiatives and manufacturing activities; | ||
| costs and timing of obtaining and maintaining FDA and other regulatory clearances and approvals for our products and potential additional products; | ||
| securing, maintaining and enforcing intellectual property rights and the costs thereof; | ||
| the extent to which we access capital under the Purchase Agreement with Aspire Capital; and | ||
| the effects of competing technological and market developments. |
Until we can generate significant continuing revenue, if ever, we expect to satisfy
our future cash needs through our Purchase Agreement with Aspire Capital public or private equity offerings, debt financings or corporate collaboration
and licensing arrangements, as well as through interest income earned on cash balances. We cannot
be certain that additional funding of any kind will be available on acceptable terms, or at all.
The sale of additional equity or convertible debt securities could result in significant dilution
to our stockholders. If additional funds are raised through the issuance of debt securities, these
securities could have rights senior to those associated with our common stock and could contain
covenants that would restrict our operations. Any product development, licensing, distribution or
sale agreements that we enter into may require us to relinquish valuable rights, including with
respect to commercialized products or products in development that we would otherwise seek to
commercialize or develop ourselves. If adequate funds are not available or revenues from product
sales do not increase, we would be required to further reduce our workforce, delay, reduce the
scope of or eliminate our commercialization efforts with respect to one or more of our products or
one or more of our research and development programs in advance of
the date on which we exhaust our cash resources to ensure that we
have sufficient capital to meet our obligations and continue on a path designed to preserve stockholder value.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
During the six months ended December 31, 2010, there were no material changes to
our market risk disclosures as set forth in Item 7A. Quantitative and Qualitative Disclosures
about Market Risk in our Annual Report on Form 10-K for the fiscal year ended June 30, 2010, filed
with the Securities and Exchange Commission, or SEC, on September 24, 2010.
ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Effectiveness of Disclosure Controls and Procedures
Based on their evaluation, our Chief Executive Officer and Chief Financial Officer
have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934, as amended) were effective as of December 31,
2010.
Changes in Internal Control over Financial Reporting.
There were no changes in our internal control over financial reporting during the
quarter ended December 31, 2010 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. Because of
inherent limitations in all control systems, no evaluation of controls can provide absolute
assurance that all control issues, if any, within an organization have been detected. Accordingly,
our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance
that the objectives of our disclosure control system are met and, as set forth above, our principal
executive officer and principal financial officer have concluded, based on their evaluation as of
the end of the period covered by this report, that our disclosure controls and procedures were
effective to provide reasonable assurance that the objectives of our disclosure control system were
met. We continue to implement, improve and refine our disclosure controls and procedures and our
internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1A. | RISK FACTORS |
We have identified the following additional risks and uncertainties that may have a
material adverse effect on our business, financial condition or results of operations. The risks
described below are not the only ones we face. Additional risks not presently known to us or that
we currently believe are immaterial may also significantly impair our business operations. The
risks described below that are marked with an asterisk (*) are those risks that contain substantive
changes from the risks described in our Annual Report on Form 10-K for the fiscal year ended June
30, 2010.
Risks Related to Our Finances and Capital Requirements
*We need to generate higher product sales to become and remain profitable.
Our ability to become and remain profitable depends upon our ability to generate
higher product sales. Our ability to generate significant continuing revenue depends upon a number
of factors, including:
| achievement of broad acceptance for our current products or future products that we may commercialize; | ||
| achievement of U.S. regulatory clearance or approval for additional products; and | ||
| successful sales, manufacturing, marketing and distribution of our products. |
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Sales of our products and license and development activities generated $11.2
million and $2.0 million of revenue for the six months ended December 31, 2010 and 2009,
respectively. For fiscal years 2010, 2009, and 2008, sales of our products and license and
development activities generated only $4.0 million, $9.9 million and $7.6 million of revenue,
respectively. We do not anticipate that we will generate significantly higher product sales for the
foreseeable future. Sales of our C-Port and PAS-Port systems have not met the levels that we had
anticipated, and to date our systems have had limited commercial adoption. Failure to obtain
broader commercial adoption of our systems will continue to negatively impact our financial results
and financial position and may require us to delay, further reduce the scope of or eliminate our
commercialization efforts with respect to one or more of our products or one or more of our
research and development projects.
*We require substantial additional capital and may be unable to raise capital, which would force us
to delay, reduce or eliminate our research and development programs or commercialization efforts
and could cause us to cease operations. We cannot be certain that funds will be available and, if
they are not available, we may not be able to continue as a going concern which may result in
actions that could adversely impact our stockholders.
Our development efforts have consumed substantial capital to date. We believe that
our existing cash and cash equivalents, together with the cash that we expect to generate from
operations, will be sufficient to meet our anticipated cash needs to enable us to conduct our
business substantially as currently conducted through December 31, 2011. We would be able to
extend this time period to the extent that we access additional
capital under the Purchase Agreement with Aspire Capital. We have based our estimate on assumptions
that may prove to be wrong, including assumptions with respect to the level of revenue from product
sales, and we could exhaust our available financial resources sooner than we currently expect.
The sufficiency of our current cash resources and our need for additional capital,
and the timing thereof, will depend upon numerous factors. These factors include, but are not
limited to, the following:
| the extent of our ongoing research and development programs and related costs, including costs related to the development of the Microcutter XPRESS 30 and additional potential products in our anticipated microcutter product line; | ||
| our ability to enter into additional license, development and/or collaboration agreements with respect to our technology, and the terms thereof; | ||
| market acceptance and adoption of our current products or future products that we may commercialize; | ||
| our level of revenues; | ||
| costs associated with our sales and marketing initiatives and manufacturing activities; | ||
| costs and timing of obtaining and maintaining FDA and other regulatory clearances and approvals for our products and potential additional products; | ||
| securing, maintaining and enforcing intellectual property rights and the costs thereof; | ||
| the extent to which we access capital under the Purchase Agreement with Aspire Capital; and | ||
| the effects of competing technological and market developments. |
Because we do not anticipate that we will generate sufficient product sales to
achieve profitability for the foreseeable future, if at all, we need to raise substantial
additional capital to finance our operations in the future. To raise capital, we may seek to sell
additional equity or debt securities, obtain a credit facility or enter into product development,
license or distribution agreements with third parties or divest one or more of our commercialized
products or products in development. The sale of additional equity or convertible debt securities
could result in significant dilution to our stockholders. If additional funds are raised through
the issuance of debt securities, these securities could have rights senior to those associated with
our common stock and could contain covenants that would restrict our operations. Any product
development, licensing, distribution or sale
agreements that we enter into may require us to
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relinquish valuable rights, including with respect
to commercialized products or products in development that we would otherwise seek to commercialize
or develop ourselves. We may not be able to obtain sufficient additional funding or enter into a
strategic transaction in a timely manner. Our need to raise capital may require us to accept terms
that may harm our business or be disadvantageous to our current stockholders. If adequate funds are
not available or revenues from product sales do not increase, we would be required to further
reduce our workforce, delay, reduce the scope of or eliminate our commercialization efforts with
respect to one or more of our products or one or more of our research and development programs in
advance of the date on which we exhaust our cash resources to ensure that we have sufficient capital to meet our obligations and
continue on a path designed to preserve stockholder value.
Subject to the terms and conditions of the Purchase Agreement, we have a right to sell to Aspire Capital pursuant to the Purchase
Agreement up to $10.0 million of our common stock at a maximum of 300,000 shares per day based on
the trading price of our common stock. The extent to which we rely on Aspire Capital as a source of
funding will depend on a number of factors, including the prevailing market price of our common
stock and the extent to which we are able to secure working capital from other sources. The
Purchase Agreement provides that we may not issue and sell more than 4,930,747 shares of our common
stock, including the Commitment Shares.
Sufficient additional financing through future public or private financings, strategic
alliance and other arrangements or financing sources may not be available on acceptable terms, or
at all. Additional equity financings, would likely result in significant dilution or other adverse
effects on the rights of existing stockholders. Failure to raise additional capital may result in
our ceasing to be publicly traded or ceasing operations.
*The sale of our common stock to Aspire Capital may cause substantial dilution to our existing
stockholders and the sale of the shares of common stock acquired by Aspire Capital could cause the
price of our common stock to decline.
Under the Purchase Agreement, we have issued to Aspire Capital the Commitment Shares, and may
sell to Aspire Capital up to an additional $10.0 million of our common stock. It is anticipated
that these additional shares will be sold to Aspire Capital over a period of up to 24 months from
February 2011. The number of shares ultimately
offered for sale by Aspire Capital is dependent upon the number of shares that we elect to sell to
Aspire Capital under the Purchase Agreement. Depending upon market liquidity at the time, sales of
shares of our common stock to Aspire Capital under the Purchase Agreement may cause the trading
price of our common stock to decline.
Aspire Capital may ultimately purchase all, some or none of the $10.0 million of our common
stock. After Aspire Capital has acquired shares under the Purchase Agreement, it may sell all, some
or none of those shares, together with the Commitment Shares that have been issued to Aspire
Capital. Sales by Aspire Capital of shares acquired pursuant to the Purchase Agreement may result
in substantial dilution to the interests of other holders of our common stock. The sale of a
substantial number of shares of our common stock to Aspire Capital pursuant to the Purchase
Agreement, or anticipation of such sales, could make it more difficult for us to sell equity or
equity-related securities in the future at a time and at a price that we might otherwise wish to
effect sales. However, we have the right to control the timing and amount of any sales of our
shares to Aspire Capital, and the Purchase Agreement may be terminated by us at any time at our
discretion without any further cost to us.
*We have a history of net losses, which we expect to continue for the foreseeable future, and we
are unable to predict the extent of future losses or when we will become profitable, if at all.
Except for the six months ended December 31, 2010, in which we recorded net income
due to entering into the License Agreement with Intuitive Surgical, we have incurred net losses
since our inception in October 1997. As of December 31, 2010, our accumulated deficit was
approximately $117.4 million. We expect to incur substantial additional losses until we can achieve
significant commercial sales of our products, which depend upon a number of factors, including
increased commercial sales of our C-Port and PAS-Port systems in the United States and receipt of
regulatory clearance or approval and market adoption of additional proposed products in the United
States, including the Microcutter XPRESS 30 in particular. We commenced commercial sales of the
C-Port system in Europe in 2004 and in the United States in 2006 and of the PAS-Port system in
Europe in 2003, in Japan in 2004 and in the United States in September 2008.
Our cost of product sales was 91% and 84% of our net product sales for the six
months ended December 31, 2010 and 2009, respectively. Our cost of product sales was 98% and 79% of
our net product sales for fiscal years 2010 and 2009, respectively. We expect high cost of product
sales to continue for the foreseeable future. If, over the long term, we are unable to reduce our
cost of producing goods and expenses relative to our net revenue, we may not achieve profitability
even if we are
able to generate significant sales of the C-Port and PAS-Port systems and our additional proposed
products. Our failure to achieve and sustain profitability would negatively impact the market price
of our common stock.
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Creditors may have rights to our assets that are senior to our stockholders.
On August 17, 2010, we paid off the remaining $1.4 million principal balance of our
note payable to Century Medical, Inc. and, therefore, no longer have any outstanding debt
obligations. However, any future arrangements with creditors may allow these creditors to liquidate
our assets, which may include our intellectual property rights, if we are in default or breach of
our debt obligations for a continued period of time. The proceeds of any sale or liquidation of our
assets under these circumstances would be applied first to any of our debt obligations that would
have priority over any of our capital stock. After satisfaction of our debt obligations, we may
have little or no proceeds left under these circumstances to distribute to the holders of our
capital stock.
*Our quarterly operating results and stock price may fluctuate significantly.
We expect our operating results to be subject to quarterly fluctuations. The
revenue we generate, if any, and our operating results will be affected by numerous factors, many
of which are beyond our control, including:
| the extent of our ongoing research and development programs and related costs, including costs related to the development of the Microcutter XPRESS 30 and additional potential products in our anticipated microcutter product line; | ||
| our ability to enter into additional license, development and/or collaboration agreements with respect to our technology, and the terms thereof; | ||
| market acceptance and adoption of our current products or future products that we may commercialize; | ||
| our level of revenues; | ||
| costs associated with our sales and marketing initiatives and manufacturing activities; | ||
| costs and timing of obtaining and maintaining FDA and other regulatory clearances and approvals for our products and potential additional products; | ||
| securing, maintaining and enforcing intellectual property rights and the costs thereof; | ||
| the extent to which we access capital under the Purchase Agreement with Aspire Capital; and | ||
| the effects of competing technological and market developments. |
Quarterly fluctuations in our operating results may, in turn, cause the price of
our stock to fluctuate substantially.
Risks Related to Our Business
We are dependent upon the success of our current products to generate revenue in the near term, and
we have U.S. regulatory clearance for our C-Port and PAS-Port systems only. We cannot be certain
that the C-Port and PAS-Port systems will be successfully commercialized in the United States. If
we are unable to successfully commercialize our products in the United States, our ability to
generate higher revenue will be significantly delayed or halted, and our business will be harmed.
We have expended significant time, money and effort in the development of our
current commercial products, the C-Port systems and the PAS-Port system. If we are not successful
in commercializing our C-Port and PAS-Port systems, we may never generate substantial revenue, our
business, financial condition and results of operations would be materially and adversely affected,
and we may be forced to cease operations. We commenced sales of our C-Port xA system in December
2006 (after introduction of our original C-Port system in January 2006), our C-Port Flex A in April
2007 and our C-Port X-CHANGE in December 2007. We commenced U.S. sales of our PAS-Port system in
September 2008. We anticipate that our ability to
increase our revenue significantly will depend on the continued adoption of our current PAS-Port
and C-Port systems in the United States and commercialization of additional products, including the
Microcutter XPRESS 30 in particular.
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We may not be successful in our efforts to expand our product portfolio, and our failure to do so
could cause our business and prospects to suffer.
We intend to use our knowledge and expertise in anastomotic technologies to
discover, develop and commercialize new applications in additional markets. In particular, we are
developing the Microcutter XPRESS 30, an endoscopic microcutter intended for use by general,
thoracic, gynecologic, bariatric and urologic surgeons, and other potential products in our
anticipated microcutter product line. We have not yet commenced human testing of this device.
Significant additional research and development and financial resources will be required to develop
the Microcutter XPRESS 30 into a commercially viable product and to obtain necessary regulatory
approvals to commercialize the device. We cannot assure you that our development efforts will be
successful or that they will be completed within our publicly stated anticipated timelines, and we
may never be successful in developing a viable product for the markets intended to be addressed by
the Microcutter XPRESS 30 or other potential microcutter products. Our failure to successfully
develop the Microcutter XPRESS 30 and/or other microcutter products would have a material adverse
effect on our business, growth prospects and ability to raise additional capital.
Our products may never gain any significant degree of market acceptance, and a lack of market
acceptance would have a material adverse effect on our business.
To date, our anastomoses products have not gained, and we cannot assure you that
our anastomoses products or any other products that we may develop will gain, any significant
degree of market acceptance among physicians or patients. We believe that recommendations by
physicians will be essential for market acceptance of our products; however, we cannot assure you
that significant recommendations will be obtained. Physicians will not recommend our products
unless they conclude, based on clinical data and other factors, that the products represent a safe
and acceptable alternative to other available options. In particular, physicians may elect not to
recommend using our anastomoses products in surgical procedures until such time, if ever, as we
successfully demonstrate with long-term data that our products result in patency rates comparable
to or better than those achieved with hand-sewn anastomoses, and we resolve any technical
limitations that may arise.
Assuming that we receive FDA clearance for one or more of our microcutter products, a number
of factors will influence our ability to gain clinical adoption. In many surgical specialties, the
use of laparoscopic and open surgical stapling devices is routine in clinical practice and an
accepted standard of care. Two large companies, Johnson & Johnson and Covidien, dominate the market
for surgical stapling devices. For our products to be clinically adopted, they must show benefits
that are significant enough for surgeons to communicate their preference and to overcome any
constraints on their hospitals ability to purchase competing products, such as purchasing
contracts, to buy one of our stapling products to replace a competing device. In addition to this
obstacle, our microcutter products must demonstrate the degree of reliability that surgeons have
experienced with products that they have been using for years. Market acceptance of our products
also depends on our ability to demonstrate consistent quality and safety of our products. Our
anticipated initial lack of human clinical data with respect to the use of any microcutter products
that we may commercialize is likely to negatively impact the rate and extent of clinical adoption
of the products. Any future recalls may impact physicians and hospitals perception of our
products.
Widespread use of our products will require the training of numerous physicians, and the time
required to complete training could result in a delay or dampening of market acceptance. Even if
the safety and efficacy of our products is established, physicians may elect not to use our
products for a number of reasons beyond our control, including inadequate or no reimbursement from
health care payors, physicians reluctance to use products that have not been proven through time
in the market, the introduction of competing devices by our competitors and pricing for our
products. Failure of our products to achieve any significant market acceptance would have a
material adverse effect on our business, financial condition and results of operations.
*Our PAS-Port and C-Port systems and future products may face future development and regulatory
difficulties.
Even though the current generations of the C-Port and PAS-Port systems have
received U.S. regulatory clearance, the FDA may still impose significant restrictions on the
indicated uses or marketing of these products or ongoing requirements for potentially costly
post-clearance studies. Any of our future products, including the Microcutter XPRESS 30, other
potential microcutter products and any future generations of the C-Port systems, may not obtain
regulatory clearances or approvals required for marketing or may face certain types of restrictions
or requirements, particularly as the FDA is in the process of revising its 510(k) clearance system
to, in certain cases, require human clinical data and to prohibit the combination of multiple
predicate devices as the basis for a 510(k). The process of obtaining regulatory clearances or
approvals to market a medical device, particularly from the FDA, can be costly and time consuming,
and there can be no assurance that such clearances or approvals will be granted on a timely basis,
if at all. The FDA permits commercial distribution of most new medical devices
only after the device has received 510(k) clearance or is the subject of
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an approved pre-market
approval application, or PMA. The FDA will clear the marketing of a medical device through the
510(k) process if it is demonstrated that the new product has the same intended use, is
substantially equivalent to another legally marketed device, including a 510(k)-cleared product,
and otherwise meets the FDAs requirements. We intend to seek 510(k) clearance for the Microcutter
XPRESS 30. The PMA approval process is more costly, lengthy and uncertain than the 510(k) clearance
process and requires the development and submission of clinical studies supporting the safety and
effectiveness of the device. Product modifications may also require the submission of a new 510(k)
clearance or the approval of a PMA before the modified product can be marketed. Any products that
we develop that require regulatory clearance or approval, including the Microcutter XPRESS 30, may
not be approved on the timelines that we currently anticipate, if approved at all. We cannot assure
that any new products or any product enhancements that we develop will be subject to the shorter
510(k) clearance process instead of the more lengthy PMA requirements. Additionally, even if 510(k)
or other regulatory clearance is granted for the XPRESS 30 or any other potential product, the
approved indications for use may be limited, and the FDA may require additional animal or human
clinical data prior to any potential approval of additional indications.
Regulatory agencies subject a product, its manufacturer and the manufacturers facilities to
continual review, regulation and periodic inspections. If a regulatory agency discovers previously
unknown problems with a product, including adverse events of unanticipated severity or frequency,
or problems with the facility where the product is manufactured, a regulatory agency may impose
restrictions on that product, our collaborators or us, including requiring withdrawal of the
product from the market. Our products will also be subject to ongoing FDA requirements for the
labeling, packaging, storage, advertising, promotion, record-keeping and submission of safety and
other post-market information on the product. If our products fail to comply with applicable
regulatory requirements, a regulatory agency may impose any of the following sanctions:
| warning letters, fines, injunctions, consent decrees and civil penalties; | ||
| customer notifications, repair, replacement, refunds, recall or seizure of our products; | ||
| operating restrictions, partial suspension or total shutdown of production; | ||
| delay in processing marketing applications for new products or modifications to existing products; | ||
| withdrawing approvals that have already been granted; and | ||
| criminal prosecution. |
To market any products internationally, we must establish and comply with numerous
and varying regulatory requirements of other countries regarding safety and efficacy. Approval
procedures vary among countries and can involve additional product testing and additional
administrative review periods. The time required to obtain approval in other countries might differ
from that required to obtain FDA clearance or approval. The regulatory approval process in other
countries may include all of the risks detailed above regarding FDA clearance or approval in the
United States. Regulatory approval in one country does not ensure regulatory approval in another,
but a failure or delay in obtaining regulatory approval in one country may negatively impact the
regulatory process in others. Failure to obtain regulatory approval in other countries or any delay
or setback in obtaining such approval could have the same adverse effects detailed above regarding
FDA clearance or approval in the United States, including the risk that our products may not be
approved for use under all of the circumstances requested, which could limit the uses of our
products and adversely impact potential product sales, and that such clearance or approval may
require costly, post-marketing follow-up studies. If we fail to comply with applicable foreign
regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory
approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.
*If we do not achieve our projected development goals in the time frames we announce and expect,
the commercialization of our product candidates may be delayed and, as a result, our stock price
may decline.
From time to time, we may estimate and publicly announce the timing anticipated for
the accomplishment of various clinical, regulatory and other product development goals, which we
sometimes refer to as milestones. These milestones may include an Investigational Device Exemption
application to commence our enrollment of patients in our clinical trials, the release of data from
our clinical trials, receipt of clearances or approvals from regulatory authorities, other clinical
and regulatory events or the launch of new products. These estimates are based on a variety of
assumptions. The actual timing of these milestones can vary dramatically compared to our estimates,
in some cases for reasons beyond our control. If we do not meet these milestones as publicly
announced, the commercialization of our products may be delayed and, as a result, our stock
price may decline.
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Our manufacturing facilities, and those of our suppliers, must comply with applicable regulatory
requirements. Failure of our manufacturing facilities to comply with quality requirements would
harm our business and our results of operations.
Our manufacturing facilities and processes are subject to periodic inspections and
audits by various U.S. federal, U.S. state and foreign regulatory agencies. For example, our
facilities have been inspected by State of California regulatory authorities pursuant to granting a
California Device Manufacturing License and by the FDA. Additionally, to market products in Europe,
we are required to maintain ISO 13485:2003 certification and are subject to periodic surveillance
audits. We are currently ISO 13485:2003 certified; however, our failure to maintain necessary
regulatory approvals for our manufacturing facilities could prevent us from manufacturing and
selling our products.
Additionally, our manufacturing processes and, in some cases, those of our
suppliers are required to comply with FDAs Quality System Regulation, or QSR, which covers the
procedures and documentation of the design, testing, production, control, quality assurance,
labeling, packaging, storage and shipping of our products, including the PAS-Port and C-Port
systems. We are also subject to similar state requirements and licenses. In addition, we must
engage in extensive record keeping and reporting and must make available our manufacturing
facilities and records for periodic inspections by governmental agencies, including FDA, state
authorities and comparable agencies in other countries. If we fail a QSR inspection, our operations
could be disrupted and our manufacturing interrupted. Failure to take adequate corrective action in
response to an adverse QSR inspection could result in, among other things, a shut-down of our
manufacturing operations, significant fines, suspension of product distribution or other operating
restrictions, seizures or recalls of our devices and criminal prosecutions, any of which would
cause our business to suffer. Furthermore, our key component suppliers may not currently be or may
not continue to be in compliance with applicable regulatory requirements, which may result in
manufacturing delays for our products and cause our revenue to decline.
We may also be required to recall our products due to manufacturing supply defects.
If we issue recalls of our products in the future, our revenue and business could be harmed.
If we are unable to establish sales and marketing capabilities or enter into and maintain
arrangements with third parties to market and sell our products, our business may be harmed.
We have limited experience as a company in the sale, marketing and distribution of
our products. Century Medical is responsible for marketing and commercialization of the PAS-Port
system in Japan. To promote our current and future products in the United States and Europe, we
must develop our sales, marketing and distribution capabilities or make arrangements with third
parties to perform these services. Competition for qualified sales personnel is intense. Developing
a sales force is expensive and time consuming and could delay any product launch. We may be unable
to establish and manage an effective sales force in a timely or cost-effective manner, if at all,
and any sales force we do establish may not be capable of generating sufficient demand for our
products. We have entered into arrangements with third parties to perform sales and marketing
services, which may result in lower product sales than if we directly marketed and sold our
products. We expect to rely on third-party distributors for substantially all of our international
sales. If we are unable to establish adequate sales and marketing capabilities, independently or
with others, we may not be able to generate significant revenue and may not become profitable. For
our microcutter products, we will have to compete for sales and acceptance of our products against
two large companies, Johnson & Johnson and Covidien, with large sales forces and dominant market
positions.
Lack of third-party coverage and reimbursement for our products could delay or limit their
adoption.
We may experience limited sales growth resulting from limitations on reimbursements
made to purchasers of our products by third-party payors, and we cannot assure you that our sales
will not be impeded and our business harmed if third-party payors fail to provide reimbursement
that hospitals view as adequate.
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In the United States, our products will be purchased primarily by medical
institutions, which then bill various third-party payors, such as the Centers for Medicare &
Medicaid Services, or CMS, which administer the Medicare program, and other government programs and
private insurance plans, for the health care services provided to their patients. The process
involved in applying for coverage and incremental reimbursement from CMS is lengthy and expensive.
Under current CMS reimbursement policies, CMS offers a process to obtain add-on payment for a new
medical technology when the existing Diagnosis-Related Group, or DRG, prospective payment rate is
inadequate. To obtain add-on payment, a technology must be
considered new, demonstrate substantial improvement in care and exceed certain payment
thresholds. Add-on payments are made for no less than two years and no more than three years. We
must demonstrate the safety and effectiveness of our technology to the FDA in addition to CMS
requirements before add-on payments can be made. Further, Medicare coverage is based on our ability
to demonstrate the treatment is reasonable and necessary for Medicare beneficiaries. In November
2006, CMS denied our request for an add-on payment with respect to our C-Port systems. According to
CMS, we met the new criteria and exceeded the payment threshold but did not in their view
demonstrate substantial improvement in care. Even if our products receive FDA and other regulatory
clearance or approval, they may not be granted coverage and reimbursement in the foreseeable
future, if at all. Moreover, many private payors look to CMS in setting their reimbursement
policies and amounts. If CMS or other agencies limit coverage or decrease or limit reimbursement
payments for doctors and hospitals, this may affect coverage and reimbursement determinations by
many private payors.
We cannot assure you that CMS will provide coverage and reimbursement for our
products. If a medical device does not receive incremental reimbursement from CMS, then a medical
institution would have to absorb the cost of our products as part of the cost of the procedure in
which the products are used. Acute care hospitals are now generally reimbursed by CMS for inpatient
operating costs under a Medicare hospital inpatient prospective payment system. Under the Medicare
hospital inpatient prospective payment system, acute care hospitals receive a fixed payment amount
for each covered hospitalized patient based upon the DRG to which the inpatient stay is assigned,
regardless of the actual cost of the services provided. At this time, we do not know the extent to
which medical institutions would consider insurers payment levels adequate to cover the cost of
our products. Failure by hospitals and physicians to receive an amount that they consider to be
adequate reimbursement for procedures in which our products are used could deter them from
purchasing our products and limit our revenue growth. In addition, pre-determined DRG payments may
decline over time, which could deter medical institutions from purchasing our products. If medical
institutions are unable to justify the costs of our products, they may refuse to purchase them,
which would significantly harm our business.
We have limited data regarding the safety and efficacy of the PAS-Port and C-Port systems. Any data
that is generated in the future may not be positive or consistent with our existing data, which
would affect market acceptance and the rate at which our devices are adopted.
The C-Port and PAS-Port systems are innovative products, and our success in the
near-term depends upon their acceptance by the medical community as safe and effective. An
important factor upon which the efficacy of the C-Port and PAS-Port systems will be measured is
long-term data regarding the duration of patency, or openness, of the artery or the graft vessel.
Equally important will be physicians perceptions of the safety of our products. Our technology is
relatively new in cardiac bypass surgery, and the results of short-term clinical experience of the
C-Port and PAS-Port systems do not necessarily predict long-term clinical benefit. We believe that
physicians will compare long-term patency for the C-Port and PAS-Port devices against alternative
procedures, such as hand-sewn anastomoses. If the long-term rates of patency do not meet
physicians expectations, or if physicians find our devices unsafe, the C-Port and PAS-Port systems
may not become widely adopted and physicians may recommend alternative treatments for their
patients. In addition, we have recently commenced U.S. commercialization of our C-Port and PAS-Port
systems. Any adverse experiences of physicians using the C-Port and PAS-Port systems, or adverse
outcomes to patients, may deter physicians from using our products and negatively impact product
adoption.
Our C-Port and PAS-Port systems were designed for use with venous grafts.
Additionally, while our indications for use of the C-Port system cleared by the FDA refer broadly
to grafts, we have studied the use of the C-Port systems only with venous grafts and not with
arterial grafts. Using the C-Port systems with arterial grafts may not yield patency rates or
material adverse cardiac event rates comparable to those found in our clinical trials using venous
grafts, which could negatively affect market acceptance of our C-Port systems. In addition, the
clips and staples deployed by our products are made of 316L medical-grade stainless steel, to which
some patients are allergic. These allergies, especially if unknown or not previously diagnosed, may
result in adverse reactions that negatively affect the patency of the anastomoses or the healing of
the implants and may therefore adversely affect outcomes, particularly when compared to anastomoses
performed with other materials, such as sutures. Additionally, in the event a surgeon, during the
course of surgery, determines that it is necessary to convert to a hand-sewn anastomosis and to
remove an anastomosis created by one of our products, the removal of the implants may result in
more damage to the target vessel (such as the aorta or coronary artery) than would typically be
encountered during removal of a hand-sewn anastomosis. Moreover, the removal may damage the target
vessel to an extent that could further complicate construction of a replacement hand-sewn or
automated anastomosis, which could be detrimental to patient outcome. These or other issues, if
experienced, could limit physician adoption of our products.
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Even if the data collected from future clinical studies or clinical experience
indicates positive results, each physicians actual experience with our devices outside the
clinical study setting may vary. Clinical studies conducted with the C-Port and PAS-Port systems
have involved procedures performed by physicians who are technically proficient, high-volume users
of the C-Port and PAS-Port systems. Consequently, both short- and long-term results reported in
these studies may be significantly more favorable than typical results of practicing physicians,
which could negatively impact rates of adoption of the C-Port and PAS-Port systems.
Any clinical trials that we may conduct may not begin on time, or at all, and may not be completed
on schedule, or at all.
The commencement or completion of any of our clinical trials may be delayed or
halted for numerous reasons, including, but not limited to, the following:
| the FDA or other regulatory authorities suspend or place on hold a clinical trial, or do not approve a clinical trial protocol or a clinical trial; | ||
| the data and safety monitoring committee of a clinical trial recommends that a trial be placed on hold or suspended; | ||
| patients do not enroll in clinical trials at the rate we expect; | ||
| patients are not followed-up at the rate we expect; | ||
| clinical trial sites decide not to participate or cease participation in a clinical trial; | ||
| patients experience adverse side effects or events related to our products; | ||
| patients die or suffer adverse medical effects during a clinical trial for a variety of reasons, which may not be related to our product candidates, including the advanced stage of their disease and other medical problems; | ||
| third-party clinical investigators do not perform our clinical trials on our anticipated schedule or consistent with the clinical trial protocol and good clinical practices, or other third-party organizations do not perform data collection and analysis in a timely or accurate manner; | ||
| regulatory inspections of our clinical trials or manufacturing facilities may, among other things, require us to undertake corrective action or suspend or terminate our clinical trials if investigators find us not to be in compliance with regulatory requirements; | ||
| third-party suppliers fail to provide us with critical components that conform to design and performance specifications; | ||
| the failure of our manufacturing processes to produce finished products that conform to design and performance specifications; | ||
| changes in governmental regulations or administrative actions; | ||
| the interim results of the clinical trial are inconclusive or negative; | ||
| pre-clinical or clinical data is interpreted by third parties in different ways; or | ||
| our trial design, although approved, is inadequate to demonstrate safety and/or efficacy. |
Clinical trials sometimes experience delays related to outcomes experienced during
the course of the trials. For example, in our PAS-Port pivotal trial, we had an administrative hold
of the trial related to an adverse event, which lasted approximately 72 hours while the adverse
event was investigated. The data safety monitoring board subsequently concluded that there was no
clear evidence that our device had caused the adverse event, and enrollment continued. While this
event was resolved in a timely manner and did not result in any material delay in the trial, future
similar or other types of events could lead to more significant delays or other effects in future
trials.
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Clinical trials may require the enrollment of large numbers of patients, and suitable patients
may be difficult to identify and recruit. Patient enrollment in clinical trials and completion of
patient follow-up in clinical trials depend on many factors, including the size of the patient
population, the nature of the trial protocol, the proximity of patients to clinical sites and the
eligibility criteria for the study and patient compliance. For example, patients may be discouraged
from enrolling in our clinical trials if the trial protocol requires them to undergo extensive
post-treatment procedures to assess the safety and effectiveness of our product candidates, or they
may be persuaded to participate in contemporaneous trials of competitive products. Delays in
patient enrollment or failure of patients to continue to participate in a study may cause an
increase in costs and delays or result in the failure of the trial.
Our clinical trial costs will increase if we have material delays in our clinical
trials or if we need to perform more or larger clinical trials than planned. Adverse events during
a clinical trial could cause us to repeat a trial, terminate a trial or cancel an entire program.
If the third parties on whom we rely to conduct our clinical trials do not perform as contractually
required or expected, we may not be able to obtain regulatory approval for or commercialize our
product candidates.
We do not have the ability to independently conduct clinical trials for our product
candidates, and we must rely on third parties, such as contract research organizations, medical
institutions, clinical investigators and contract laboratories, to conduct our clinical trials. In
addition, we rely on third parties to assist with our pre-clinical development of product
candidates. Furthermore, our third-party clinical trial investigators may be delayed in conducting
our clinical trials for reasons outside of their control, such as changes in regulations, delays in
enrollment, and the like. If these third parties do not successfully carry out their contractual
duties or regulatory obligations or meet expected deadlines, if these third parties need to be
replaced or if the quality or accuracy of the data they obtain is compromised due to the failure to
adhere to our clinical protocols or regulatory requirements or for other reasons, our clinical
trials may be extended, delayed, suspended or terminated, and we may not be able to obtain
regulatory approval for or successfully commercialize our product candidates on a timely basis, if
at all.
*Because one customer accounts for a substantial portion of our product sales, the loss of this
significant customer would cause a substantial decline in our revenue.
We derive a substantial portion of our revenue from sales to Century Medical, our
distributor in Japan. The loss of Century Medical as a customer would cause a decrease in revenue
and, consequently, an increase in net loss. For the six months ended December 31, 2010 and 2009,
sales to Century Medical accounted for approximately 21% and 24%, respectively, of our total
product sales. For fiscal years 2010 and 2009 sales to Century Medical accounted for approximately
23% and 15%, respectively, of our total product sales. We expect that Century Medical will continue
to account for a substantial portion of our sales in the near term. As a result, if we lose Century
Medical as a customer, our revenue and net loss would be adversely affected. In addition, other
customers that have accounted for significant revenue in the past may not generate revenue in any
future period. The failure to obtain new significant customers or additional orders from existing
customers will materially affect our operating results.
If our competitors have products that are approved in advance of ours, marketed more effectively or
demonstrated to be more effective than ours, our commercial opportunity will be reduced or
eliminated and our business will be harmed.
The market for anastomotic solutions and cardiac bypass products is competitive.
Competitors include a variety of public and private companies that currently offer or are
developing cardiac surgery products generally and automated anastomotic systems specifically that
would compete directly with ours.
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We believe that the primary competitive factors in the market for medical devices
used in the treatment of coronary artery disease include:
| improved patient outcomes; | ||
| access to and acceptance by leading physicians; | ||
| product quality and reliability; | ||
| ease of use; | ||
| device cost-effectiveness; | ||
| training and support; | ||
| novelty; | ||
| physician relationships; and | ||
| sales and marketing capabilities. |
We may be unable to compete successfully on the basis of any one or more of these
factors, which could have a material adverse affect on our business, financial condition and
results of operations.
A number of different technologies exist or are under development for performing
anastomoses, including sutures, mechanical anastomotic devices, suture-based anastomotic devices
and shunting devices. Currently, substantially all anastomoses are performed with sutures and, for
the foreseeable future we believe that sutures will continue to be the principal alternative to our
anastomotic products. Sutures are far less expensive than our automated anastomotic products, and
other anastomotic devices may be less expensive than our own. Surgeons, who have been using sutures
for their entire careers, may be reluctant to consider alternative technologies, despite potential
advantages. Any resistance to change among practitioners could delay or hinder market acceptance of
our products, which would have a material adverse effect on our business.
Cardiovascular diseases may also be treated by other methods that do not require
anastomoses, including, interventional techniques such as balloon angioplasty with or without the
use of stents, pharmaceuticals, atherectomy catheters and lasers. Several of these alternative
treatments are widely accepted in the medical community and have a long history of use. In
addition, technological advances with other therapies for cardiovascular disease, such as drugs, or
future innovations in cardiac surgery techniques could make other methods of treating these
diseases more effective or lower cost than bypass procedures. For example, the number of bypass
procedures in the United States and other major markets has declined in recent years and is
expected to decline in the years ahead because competing treatments are, in many cases, far less
invasive and provide acceptable clinical outcomes. Many companies working on treatments that do not
require anastomoses may have significantly greater financial, manufacturing, marketing,
distribution and technical resources and experience than we have. Many of our competitors have
significantly greater financial resources and expertise in research and development, manufacturing,
pre-clinical testing, clinical trials, obtaining regulatory clearance or approval and marketing
approved products than we do. Smaller or early-stage companies may also prove to be significant
competitors, particularly through collaborative arrangements with large and established companies.
Our competitors may succeed in developing technologies and therapies that are more effective,
better tolerated or less costly than any that we are developing or that would render our product
candidates obsolete and noncompetitive. Our competitors may succeed in obtaining clearance or
approval from the FDA and foreign regulatory authorities for their products sooner than we do for
ours. We will also face competition from these third parties in recruiting and retaining qualified
scientific and management personnel, establishing clinical trial sites and patient enrollment for
clinical trials and in acquiring and in-licensing technologies and products complementary to our
programs or advantageous to our business.
The Microcutter XPRESS 30, if it receives FDA clearance and is successfully
launched, would compete in the market for laparoscopic stapling and cutting devices in the United
States. We believe the principal competitive factors in the market for laparascopic staplers
include:
| reduced product size; | ||
| ease of use; | ||
| product quality and reliability; | ||
| multi-fire capability; | ||
| device cost-effectiveness; | ||
| degree of articulation; | ||
| physician relationships; and | ||
| sales and marketing capabilities. |
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Two large competitors, Ethicon Endo-Surgery, part of Johnson & Johnson, and
Covidien currently control over 80% of this market. Other large competitors in the laparoscopic
device market include Stryker Endoscopy and Olympus which acquired another competitor, Gyrus
Medical. Ethicon Endo-Surgery and Covidien, which recently acquired a small competitor, Power
Medical, each have large direct sales forces in the U.S. and have been the largest participants in
the market for single use disposable laparoscopic stapling devices for many years. Competing
against large established competitors with significant resources may make establishing a market for
our products difficult.
We are dependent upon a number of key suppliers, including single source suppliers, the loss of
which would materially harm our business.
We use or rely upon sole source suppliers for certain components and services used
in manufacturing our products, and we utilize materials and components supplied by third parties
with which we do not have any long-term contracts. In recent years, many suppliers have ceased
supplying materials for use in implantable medical devices. We cannot assure you that materials
required by us will not be restricted or that we will be able to obtain sufficient quantities of
such materials or services in the future. Moreover, the continued use by us of materials
manufactured by third parties could subject us to liability exposure. Because we do not have
long-term contracts, none of our suppliers is required to provide us with any guaranteed minimum
production levels.
We cannot quickly replace suppliers or establish additional new suppliers for some
of our components, particularly due to both the complex nature of the manufacturing process used by
our suppliers and the time and effort that may be required to obtain FDA clearance or approval or
other regulatory approval to use materials from alternative suppliers. Any significant supply
interruption or capacity constraints affecting our facilities or those of our suppliers would have
a material adverse effect on our ability to manufacture our products and, therefore, a material
adverse effect on our business, financial condition and results of operations.
We have limited manufacturing experience and may encounter difficulties in increasing production to
provide an adequate supply to customers.
To date, our manufacturing activities have consisted primarily of producing
moderate quantities of our marketed products for commercial sales in Japan, Europe and the United
States. Production in increased commercial quantities will require us to expand our manufacturing
capabilities and to hire and train additional personnel. We may encounter difficulties in
increasing our manufacturing capacity and in manufacturing larger commercial quantities, including:
| maintaining product yields; | ||
| maintaining quality control and assurance; | ||
| providing component and service availability; | ||
| maintaining adequate control policies and procedures; and | ||
| hiring and retaining qualified personnel. |
Difficulties encountered in increasing our manufacturing could have a material
adverse effect on our business, financial condition and results of operations.
The manufacture of our products is a complex and costly operation involving a
number of separate processes and components. Shipment delays may negatively impact physicians and
hospitals perception of our products and have a material
adverse impact on our results of operations.
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In addition, the current unit costs for our products, based on limited
manufacturing volumes, are very high, and it will be necessary to achieve economies of scale to
become profitable. Certain of our manufacturing processes are labor intensive, and achieving
significant cost reductions will depend in part upon reducing the time required to complete these
processes. We cannot assure you that we will be able to achieve cost reductions in the manufacture
of our products and, without these cost reductions, our business may never achieve profitability.
We have considered, and will continue to consider as appropriate, manufacturing
in-house certain components currently provided by third parties, as well as implementing new
production processes. Manufacturing yields or costs may be adversely affected by the transition to
in-house production or to new production processes, when and if these efforts are undertaken, which
would materially and adversely affect our business, financial condition and results of operations.
*If we fail to retain key personnel, including our executive management team, we may be unable to
successfully develop or commercialize our products.
Our business and future operating results depend significantly on the continued
contributions of our key technical personnel and senior management, including those of our
co-founder, CEO and President, Bernard Hausen, M.D., Ph.D. These services and individuals would be
difficult or impossible to replace and none of these individuals is subject to a post-employment
non-competition agreement. While we are subject to certain severance obligations to Dr. Hausen,
either he or we may terminate his employment at any time and for any lawful reason or for no
reason. Additionally, although we have key-person life insurance in the amount of $3.0 million on
the life of Dr. Hausen, we cannot assure you that this amount would fully compensate us for the
loss of Dr. Hausens services. The loss of key employees, the failure of any key employee to
perform or our inability to attract and retain skilled employees, as needed, could materially
adversely affect our business, financial condition and results of operations.
As of December 31, 2010, we had 41 employees. Our business and future operating
results depend significantly on our ability to attract and retain qualified management,
manufacturing, technical, marketing, sales and support personnel for our operations. Competition
for such personnel is intense, and there can be no assurance that we will be successful in
attracting or retaining such personnel. We will need to maintain an appropriate level of
managerial, operational, financial and other resources to manage and fund our operations and
clinical trials, continue our research and development activities and commercialize our products,
and we expect our past reductions in force will impair our ability to maintain or increase our
product sales. It is possible that our management and scientific personnel, systems and facilities
currently in place may not be adequate to maintain future operating activities, and we may be
required to effect additional reductions in force.
We may in the future be a party to patent litigation and administrative proceedings that could be
costly and could interfere with our ability to sell our products.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and companies in the industry have used
intellectual property litigation to gain a competitive advantage. We may become a party to patent
infringement claims and litigation or interference proceedings declared by the U.S. Patent and
Trademark Office to determine the priority of inventions. The defense and prosecution of these
matters are both costly and time consuming. Additionally, we may need to commence proceedings
against others to enforce our patents, to protect our trade secrets or know-how or to determine the
enforceability, scope and validity of the proprietary rights of others. These proceedings would
result in substantial expense to us and significant diversion of effort by our technical and
management personnel.
We are aware of patents issued to third parties that contain subject matter related
to our technology. We cannot assure you that these or other third parties will not assert that our
products and systems infringe the claims in their patents or seek to expand their patent claims to
cover aspects of our products and systems. An adverse determination in litigation or interference
proceedings to which we may become a party could subject us to significant liabilities or require
us to seek licenses. In addition, if we are found to willfully infringe third-party patents, we
could be required to pay treble damages in addition to other penalties. Although patent and
intellectual property disputes in the medical device area have often been settled through licensing
or similar arrangements, costs associated with these arrangements may be substantial and could
include ongoing royalties. We may be unable to obtain necessary licenses on satisfactory terms, if
at all. If we do not obtain necessary licenses, we may be required to redesign our products to
avoid infringement, and it may not be possible to do so effectively. Adverse determinations in a
judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from
manufacturing and
selling the C-Port or PAS-Port systems or any other product we may develop, which would have a
significant adverse impact on our business.
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Intellectual property rights may not provide adequate protection, which may permit third parties to
compete against us more effectively.
We rely upon patents, trade secret laws and confidentiality agreements to protect
our technology and products. Our pending patent applications may not issue as patents or, if
issued, may not issue in a form that will be advantageous to us. Any patents we have obtained or
will obtain in the future might be invalidated or circumvented by third parties. If any challenges
are successful, competitors might be able to market products and use manufacturing processes that
are substantially similar to ours. We may not be able to prevent the unauthorized disclosure or use
of our technical knowledge or other trade secrets by consultants, vendors or former or current
employees, despite the existence generally of confidentiality agreements and other contractual
restrictions. Monitoring unauthorized use and disclosure of our intellectual property is difficult,
and we do not know whether the steps we have taken to protect our intellectual property will be
adequate. In addition, the laws of many foreign countries may not protect our intellectual property
rights to the same extent as the laws of the United States. To the extent that our intellectual
property protection is inadequate, we are exposed to a greater risk of direct competition. In
addition, competitors could purchase any of our products and attempt to replicate some or all of
the competitive advantages we derive from our development efforts or design around our protected
technology. If our intellectual property is not adequately protected against competitors products
and methods, our competitive position could be adversely affected, as could our business.
We also rely upon trade secrets, technical know-how and continuing technological
innovation to develop and maintain our competitive position. We require our employees, consultants
and advisors to execute appropriate confidentiality and assignment-of-inventions agreements with
us. These agreements typically provide that all materials and confidential information developed or
made known to the individual during the course of the individuals relationship with us be kept
confidential and not disclosed to third parties except in specific circumstances and that all
inventions arising out of the individuals relationship with us shall be our exclusive property.
These agreements may be breached, and in some instances, we may not have an appropriate remedy
available for breach of the agreements. Furthermore, our competitors may independently develop
substantially equivalent proprietary information and techniques, reverse engineer our information
and techniques, or otherwise gain access to our proprietary technology.
Our products face the risk of technological obsolescence, which, if realized, could have a material
adverse effect on our business.
The medical device industry is characterized by rapid and significant technological
change. There can be no assurance that third parties will not succeed in developing or marketing
technologies and products that are more effective than ours or that would render our technology and
products obsolete or noncompetitive. Additionally, new, less invasive surgical procedures and
medications could be developed that replace or reduce the importance of current procedures that use
our products. Accordingly, our success will depend in part upon our ability to respond quickly to
medical and technological changes through the development and introduction of new products. The
relative speed with which we can develop products, complete clinical testing and regulatory
clearance or approval processes, train physicians in the use of our products, gain reimbursement
acceptance, and supply commercial quantities of products to the market are expected to be important
competitive factors. Product development involves a high degree of risk, and we cannot assure you
that our new product development efforts will result in any commercially successful products. We
have experienced delays in completing the development and commercialization of our planned
products, and there can be no assurance that these delays will not continue or recur in the future.
Any delays could result in a loss of market acceptance and market share.
We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws and
regulations and, if we are unable to fully comply with such laws, could face substantial penalties.
Our operations may be directly or indirectly affected by various broad state and
federal healthcare fraud and abuse laws, including the federal healthcare program Anti-Kickback
Statute, which prohibits any person from knowingly and willfully offering, paying, soliciting or
receiving remuneration, directly or indirectly, to induce or reward either the referral of an
individual, or the furnishing or arranging for an item or service, for which payment may be made
under federal healthcare programs, such as the Medicare and Medicaid programs. Foreign sales of our
products are also subject to similar fraud and abuse laws, including application of the U.S.
Foreign Corrupt Practices Act. If our operations, including any consulting arrangements we may
enter into with physicians who use our products, are found to be in violation of these laws, we or
our
officers may be subject to civil or criminal penalties, including large monetary penalties,
damages, fines, imprisonment and exclusion from Medicare and Medicaid program participation. If
enforcement action were to occur, our business and financial condition would be harmed.
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We could be exposed to significant product liability claims, which could be time consuming and
costly to defend, divert management attention, and adversely impact our ability to obtain and
maintain insurance coverage. The expense and potential unavailability of insurance coverage for our
company or our customers could adversely affect our ability to sell our products, which would
adversely affect our business.
The testing, manufacture, marketing, and sale of our products involve an inherent
risk that product liability claims will be asserted against us. Additionally, we are currently
training physicians in the United States on the use of our C-Port and PAS-Port systems. During
training, patients may be harmed, which could also lead to product liability claims. Product
liability claims or other claims related to our products, or their off-label use, regardless of
their merits or outcomes, could harm our reputation in the industry, reduce our product sales, lead
to significant legal fees, and result in the diversion of managements attention from managing our
business.
Although we maintain product liability insurance in the amount of $5,000,000, we
may not have sufficient insurance coverage to fully cover the costs of any claim or any ultimate
damages we might be required to pay. We may not be able to obtain insurance in amounts or scope
sufficient to provide us with adequate coverage against all potential liabilities. Any product
liability claims brought against us, with or without merit, could increase our product liability
insurance rates or prevent us from securing continuing coverage. Product liability claims in excess
of our insurance coverage would be paid out of cash reserves, harming our financial condition and
adversely affecting our operating results.
Some of our customers and prospective customers may have difficulty in procuring or
maintaining liability insurance to cover their operations and use of the C-Port or PAS-Port
systems. Medical malpractice carriers are withdrawing coverage in certain states or substantially
increasing premiums. If this trend continues or worsens, our customers may discontinue using the
C-Port or PAS-Port systems and potential customers may opt against purchasing the C-Port or
PAS-Port systems due to the cost or inability to procure insurance coverage.
We sell our systems internationally and are subject to various risks relating to these
international activities, which could adversely affect our revenue.
To date, a substantial portion of our product sales has been attributable to sales
in international markets. By doing business in international markets, we are exposed to risks
separate and distinct from those we face in our domestic operations. Our international business may
be adversely affected by changing economic conditions in foreign countries. Because most of our
sales are currently denominated in U.S. dollars, if the value of the U.S. dollar increases relative
to foreign currencies, our products could become more costly to the international customer and,
therefore, less competitive in international markets, which could affect our results of operations.
Engaging in international business inherently involves a number of other difficulties and risks,
including:
| export restrictions and controls relating to technology; | ||
| the availability and level of reimbursement within prevailing foreign healthcare payment systems; | ||
| pricing pressure that we may experience internationally; | ||
| required compliance with existing and changing foreign regulatory requirements and laws; | ||
| laws and business practices favoring local companies; | ||
| longer payment cycles; | ||
| difficulties in enforcing agreements and collecting receivables through certain foreign legal systems; | ||
| political and economic instability; | ||
| potentially adverse tax consequences, tariffs and other trade barriers; | ||
| international terrorism and anti-American sentiment; | ||
| difficulties and costs of staffing and managing foreign operations; and | ||
| difficulties in enforcing intellectual property rights. |
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Our exposure to each of these risks may increase our costs, impair our ability to
market and sell our products and require significant management attention. We cannot assure you
that one or more of these factors will not harm our business.
Our operations are currently conducted at a single location that may be at risk from earthquakes,
terror attacks or other disasters.
We currently conduct all of our manufacturing, development and management
activities at a single location in Redwood City, California, near known earthquake fault zones. We
have taken precautions to safeguard our facilities, including insurance, health and safety
protocols, and off-site storage of computer data. However, any future natural disaster, such as an
earthquake, or a terrorist attack, could cause substantial delays in our operations, damage or
destroy our equipment or inventory and cause us to incur additional expenses. A disaster could
seriously harm our business and results of operations. Our insurance does not cover earthquakes and
floods and may not be adequate to cover our losses in any particular case.
If we use hazardous materials in a manner that causes injury, we may be liable for damages.
Our research and development and manufacturing activities involve the use of
hazardous materials. Although we believe that our safety procedures for handling and disposing of
these materials comply with federal, state and local laws and regulations, we cannot entirely
eliminate the risk of accidental injury or contamination from the use, storage, handling or
disposal of these materials. We do not carry specific hazardous waste insurance coverage, and our
property and casualty and general liability insurance policies specifically exclude coverage for
damages and fines arising from hazardous waste exposure or contamination. Accordingly, in the event
of contamination or injury, we could be held liable for damages or penalized with fines in an
amount exceeding our resources, and our clinical trials or regulatory clearances or approvals could
be suspended or terminated.
We may be subject to fines, penalties or injunctions if we are determined to be promoting the use
of our products for unapproved or off-label uses.
In relation to our products that have received FDA clearance or approval, our
promotional materials and training methods regarding physicians will need to comply with FDA and
other applicable laws and regulations. If the FDA determines that our promotional materials or
training constitutes promotion of an unapproved use, it could request that we modify our training
or promotional materials or subject us to regulatory enforcement actions, including the issuance of
a warning letter, injunction, seizure, civil fine and/or criminal penalties. It is also possible
that other federal, state or foreign enforcement authorities might take action if they consider our
promotional or training materials to constitute promotion of an unapproved use, which could result
in significant fines or penalties under other statutory authorities, such as laws prohibiting false
claims for reimbursement. In that event, our reputation could be damaged and adoption of our
products would be impaired.
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Risks Related to Our Common Stock
The price of our common stock may continue to be volatile, and the value of an investment in our
common stock may decline.
An active and liquid trading market for our common stock may not develop or be
sustained. Factors that could cause volatility in the market price of our common stock include, but
are not limited to:
| completion of development of our microcutter products, and the timing thereof; | ||
| market acceptance and adoption of our products; | ||
| regulatory clearance or approvals of or other regulatory developments with respect to our products; | ||
| volume and timing of orders for our products; | ||
| changes in earnings estimates, investors perceptions, recommendations by securities analysts or our failure to achieve analysts earning estimates; | ||
| quarterly variations in our or our competitors results of operations; | ||
| general market conditions and other factors unrelated to our operating performance or the operating performance of our competitors; | ||
| the announcement of new products or product enhancements by us or our competitors; | ||
| announcements related to patents issued to us or our competitors and to litigation; and | ||
| developments in our industry. |
In addition, the stock prices of many companies in the medical device industry have
experienced wide fluctuations that have often been unrelated to the operating performance of those
companies. These factors may materially and adversely affect the market price of our common stock.
*The ownership of our common stock is highly concentrated, and your interests may conflict with the
interests of our existing stockholders.
Our executive officers and directors and their affiliates, together with other
stockholders that own 5% or more of our outstanding common stock, beneficially owned approximately
26% of our outstanding common stock as of December 31, 2010. Accordingly, these stockholders have
significant influence over the outcome of corporate actions requiring stockholder approval and
continue to have significant influence over our operations. The interests of these stockholders may
be different than the interests of other stockholders on these matters. This concentration of
ownership could also have the effect of delaying or preventing a change in our control or otherwise
discouraging a potential acquirer from attempting to obtain control of us, which in turn could
reduce the price of our common stock.
Evolving regulation of corporate governance and public disclosure will result in additional
expenses and continuing uncertainty.
Changing laws, regulations and standards relating to corporate governance and
public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and The Nasdaq
Stock Market rules are creating uncertainty for public companies. We are presently evaluating and
monitoring developments with respect to new and proposed rules and cannot predict or estimate the
amount of the additional compliance costs we may incur or the timing of such costs. These new or
changed laws, regulations and standards are subject to varying interpretations, in many cases due
to their lack of specificity, and as a result, their application in practice may evolve over time
as new guidance is provided by courts and regulatory and governing bodies. This could result in
continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing
revisions to disclosure and governance practices. Maintaining appropriate standards of corporate
governance and public disclosure will result in increased general and administrative expenses and a
diversion of management time and attention from product-generating and revenue-generating
activities to compliance activities. In addition, if we fail to comply with new or changed laws,
regulations and standards, regulatory authorities may initiate legal proceedings against us and our
business and reputation may be harmed.
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Our future operating results may be below securities analysts or investors expectations, which
could cause our stock price to decline.
The revenue and income potential of our products and our business model are
unproven, and we may be unable to generate significant revenue or grow at the rate expected by
securities analysts or investors. In addition, our costs may be higher than we,
securities analysts or investors expect. If we fail to generate sufficient revenue or our costs are
higher than we expect, our results of operations will suffer, which in turn could cause our stock
price to decline. Our results of operations will depend upon numerous factors, including:
| completion of development of our microcutter products, and the timing thereof; | ||
| FDA or other regulatory clearance or approval of our products; | ||
| demand for our products; | ||
| the performance of third-party contract manufacturers and component suppliers; | ||
| our ability to develop sales and marketing capabilities; | ||
| our ability to develop, introduce and market new or enhanced versions of our products on a timely basis; and | ||
| our ability to obtain and protect proprietary rights. |
Our operating results in any particular period may not be a reliable indication of
our future performance. In some future quarters, our operating results may be below the
expectations of securities analysts or investors. If this occurs, the price of our common stock
will likely decline.
Anti-takeover defenses that we have in place could prevent or frustrate attempts to change our
direction or management.
Provisions of our certificate of incorporation and bylaws and applicable provisions
of Delaware law may make it more difficult for or prevent a third party from acquiring control of
us without the approval of our board of directors. These provisions:
| limit who may call a special meeting of stockholders; | ||
| establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon at stockholder meetings; | ||
| prohibit cumulative voting in the election of our directors, which would otherwise permit less than a majority of stockholders to elect directors; | ||
| prohibit stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders; and | ||
| provide our board of directors with the ability to designate the terms of and issue a new series of preferred stock without stockholder approval. |
In addition, Section 203 of the Delaware General Corporation Law generally
prohibits us from engaging in any business combination with certain persons who own 15% or more of
our outstanding voting stock or any of our associates or affiliates who at any time in the past
three years have owned 15% or more of our outstanding voting stock. These provisions may have the
effect of entrenching our management team and may deprive you of the opportunity to sell your
shares to potential acquirors at a premium over prevailing prices. This potential inability to
obtain a control premium could reduce the price of our common stock.
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We may become involved in securities class action litigation that could divert managements
attention and harm our business.
The stock market in general, the Nasdaq Global Market and the market for medical
device companies in particular, has experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating
performance of those companies. Further, the market prices of securities of medical device
companies have been particularly volatile. These broad market and industry factors may materially
harm the market price of our common stock, regardless of our operating performance. In the past,
following periods of volatility in the market price of a particular companys securities,
securities class action litigation has often been brought against that company. We may become
involved in this type of litigation in the future. Litigation often is expensive and diverts
managements attention and resources, which could materially harm our financial condition and
results of operations.
We have never paid dividends on our capital stock, and we do not anticipate paying any cash
dividends in the foreseeable future.
We have paid no cash dividends on any of our classes of capital stock to date, and
we currently intend to retain our future earnings to fund the development and growth of our
business. As a result, capital appreciation, if any, of our common stock will be the sole source of
gain to our stockholders for the foreseeable future.
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ITEM 6. EXHIBITS
Exhibit | ||||
No. | Description. | |||
3.1 | Amended and Restated Certificate of Incorporation of Cardica, Inc. |
|||
3.2 | Amended and Restated Bylaws of Cardica, Inc. (1) |
|||
3.3 | Certificate of Amendment of Amended and Restated Certificate of Incorporation of Cardica, Inc. (2) |
|||
3.4 | Certificate of Correction of Certificate of Amendment of Amended and Restated Certificate of
Incorporation of Cardica, Inc. (3) |
|||
4.1 | Warrant dated March 17, 2000 exercisable for 12,270 shares of common stock. |
|||
4.2 | Warrant dated October 31, 2002 exercisable for 60,017 shares of common stock. |
|||
4.3 | Form of Warrant dated June 2007. (4) |
|||
4.4 | Form of Warrant dated September 2009. (5) |
|||
10.2 | Cardica, Inc. 2005 Equity Incentive Plan, as amended effective November 9, 2010. + (3) |
|||
10.30 | Fourth Amendment to Lease dated November 11, 2010. (3) |
|||
10.31 | Common Stock Purchase Agreement, dated as of December 14, 2010, by and between the Company and
Aspire Capital Fund, LLC. (6) |
|||
10.31.1 | Disclosure Schedule to Common Stock Purchase Agreement, dated as of December 14, 2010. (7) |
|||
10.32 | Registration Rights Agreement, dated as of December 14, 2010, by and between the Company and
Aspire Capital Fund, LLC. (6) |
|||
10.33 | Additional Compensation Information for Named Executive Officers.+ (8) |
|||
10.34 | Additional Compensation Information for Named Executive Officer.+ |
|||
10.35 | Consent Under Registration Rights Agreement by Intuitive Surgical Operations, Inc., dated as of
December 13, 2010. |
|||
31.1 | Certification required by Rule 13a-14(a) or Rule 15d-14(a). |
|||
31.2 | Certification required by Rule 13a-14(a) or Rule 15d-14(a). |
|||
32.1 | * | Certification required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United
States Code (18 U.S.C. 1350). |
| Filed as exhibits to the Companys Registration Statement on Form S-1 (No. 333-129497) filed with the Securities and Exchange Commission on November 4, 2005, as amended, and incorporated herein by reference. | |
* | The certification attached as Exhibit 32.1 accompanying this Quarterly Report on Form 10-Q is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Cardica, Inc., under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q and irrespective of any general incorporation language contained in any such filing. | |
+ | Indicates management contract or compensatory plan. | |
(1) | Filed pursuant to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on August 19, 2008, and incorporated herein by reference. | |
(2) | Filed as an exhibit to the Companys Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 15, 2010 and incorporated herein by reference. | |
(3) | Filed as an exhibit to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on November 16, 2010 and incorporated herein by reference. | |
(4) | Filed as an exhibit to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on June 13, 2007, excluding Item 3.02 and incorporated herein by reference. | |
(5) | Filed as an exhibit to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on September 29, 2009 and incorporated herein by reference. | |
(6) | Filed as an exhibit to the Companys Registration Statement on Form S-3 (No. 333-171195) filed with the Securities and Exchange Commission on December 15, 2010 and incorporated herein by reference. | |
(7) | Filed as an exhibit to the Companys Amendment No. 1 to Registration Statement on Form S-3/A (No. 333-171195) filed with the Securities and Exchange Commission on January 13, 2011 and incorporated herein by reference. | |
(8) | Filed pursuant to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on August 20, 2010 and incorporated herein by reference. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Cardica, Inc. |
||||
Date: February 10, 2011 | /s/ Bernard A. Hausen | |||
Bernard A. Hausen, M.D., Ph.D. | ||||
President, Chief Executive Officer,
Chief Medical Officer and Director (Principal Executive Officer) |
||||
Date: February 10, 2011 | /s/ Robert Y. Newell | |||
Robert Y. Newell | ||||
Vice President, Finance,
Chief Financial Officer
and Secretary (Principal Financial and Accounting Officer) |
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Exhibit Index
Exhibit | ||||
No. | Description. | |||
3.1 | Amended and Restated Certificate of Incorporation of Cardica, Inc. |
|||
3.2 | Amended and Restated Bylaws of Cardica, Inc. (1) |
|||
3.3 | Certificate of Amendment of Amended and Restated Certificate of Incorporation of Cardica, Inc. (2) |
|||
3.4 | Certificate of Correction of Certificate of Amendment of Amended and Restated Certificate of
Incorporation of Cardica, Inc. (3) |
|||
4.1 | Warrant dated March 17, 2000 exercisable for 12,270 shares of common stock. |
|||
4.2 | Warrant dated October 31, 2002 exercisable for 60,017 shares of common stock. |
|||
4.3 | Form of Warrant dated June 2007. (4) |
|||
4.4 | Form of Warrant dated September 2009. (5) |
|||
10.2 | Cardica, Inc. 2005 Equity Incentive Plan, as amended effective November 9, 2010. + (3) |
|||
10.30 | Fourth Amendment to Lease dated November 11, 2010. (3) |
|||
10.31 | Common Stock Purchase Agreement, dated as of December 14, 2010, by and between the Company and
Aspire Capital Fund, LLC. (6) |
|||
10.31.1 | Disclosure Schedule to Common Stock Purchase Agreement, dated as of December 14, 2010. (7) |
|||
10.32 | Registration Rights Agreement, dated as of December 14, 2010, by and between the Company and
Aspire Capital Fund, LLC. (6) |
|||
10.33 | Additional Compensation Information for Named Executive Officers.+ (8) |
|||
10.34 | Additional Compensation Information for Named Executive Officer.+ |
|||
10.35 | Consent Under Registration Rights Agreement by Intuitive Surgical Operations, Inc., dated as of
December 13, 2010. |
|||
31.1 | Certification required by Rule 13a-14(a) or Rule 15d-14(a). |
|||
31.2 | Certification required by Rule 13a-14(a) or Rule 15d-14(a). |
|||
32.1 | * | Certification required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United
States Code (18 U.S.C. 1350). |
| Filed as exhibits to the Companys Registration Statement on Form S-1 (No. 333-129497) filed with the Securities and Exchange Commission on November 4, 2005, as amended, and incorporated herein by reference. | |
* | The certification attached as Exhibit 32.1 accompanying this Quarterly Report on Form 10-Q is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Cardica, Inc., under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q and irrespective of any general incorporation language contained in any such filing. | |
+ | Indicates management contract or compensatory plan. | |
(1) | Filed pursuant to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on August 19, 2008, and incorporated herein by reference. | |
(2) | Filed as an exhibit to the Companys Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 15, 2010 and incorporated herein by reference. | |
(3) | Filed as an exhibit to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on November 16, 2010 and incorporated herein by reference. | |
(4) | Filed as an exhibit to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on June 13, 2007, excluding Item 3.02 and incorporated herein by reference. | |
(5) | Filed as an exhibit to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on September 29, 2009 and incorporated herein by reference. | |
(6) | Filed as an exhibit to the Companys Registration Statement on Form S-3 (No. 333-171195) filed with the Securities and Exchange Commission on December 15, 2010 and incorporated herein by reference. | |
(7) | Filed as an exhibit to the Companys Amendment No. 1 to Registration Statement on Form S-3/A (No. 333-171195) filed with the Securities and Exchange Commission on January 13, 2011 and incorporated herein by reference. | |
(8) | Filed pursuant to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on August 20, 2010 and incorporated herein by reference. |
42