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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

x

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

For the quarterly period ended June 30, 2014

OR

¨

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

For the transition period from              to             

Commission File Number: 001-36419

 

TRIVASCULAR TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

87-0807313

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

3910 Brickway Blvd.

Santa Rosa, CA 95403

(Address of principal executive offices)

(707) 573-8800

(Registrant’s telephone number, including area code)

 

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

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  x    No  ¨

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

 

¨

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

x  (do not check if a smaller reporting company)

  

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  ¨    No   x

As of July 31, 2014, the registrant had 20,273,938 shares of common stock, $0.01 par value per share, outstanding.

 

 

 

 

 


 

TABLE OF CONTENTS

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

Item 1.

  

 

Consolidated Financial Statements (Unaudited):

3

 

  

 

  Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013

3

 

  

 

  Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2014 and 2013

4

 

  

 

  Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013

5

 

  

 

  Notes to Consolidated Financial Statements

6

 

Item 2.

  

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

 

Item 3.

  

 

Quantitative and Qualitative Disclosures About Market Risk

27

 

Item 4.

  

 

Controls and Procedures

27

 

PART II. OTHER INFORMATION

 

 

Item 1.

  

 

Legal Proceedings

28

 

Item 1A.

  

 

Risk Factors

28

 

Item 2.

  

 

Unregistered Sales of Equity Securities and Use of Proceeds

28

 

Item 6.

  

 

Exhibits

28

 

Signatures

29

 

 

 

2


 

Part 1 Financial Information

 

Item 1.  CONSOLIDATED FINANCIAL STATEMENTS

TRIVASCULAR TECHNOLOGIES, INC.

Consolidated Balance Sheets

(unaudited)

(in thousands, except par value and share data)

 

 

June 30,

 

 

December 31,

 

 

2014

 

 

2013 1

 

 

 

 

 

 

 

 

 

Assets

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

95,657

 

 

$

38,108

 

Accounts receivable

 

5,660

 

 

 

4,741

 

Inventories, net

 

7,584

 

 

 

7,042

 

Prepaid expenses and other current assets

 

2,440

 

 

 

2,435

 

Total current assets

 

111,341

 

 

 

52,326

 

Property and equipment, net

 

1,383

 

 

 

1,505

 

Goodwill

 

8,259

 

 

 

8,259

 

Other intangible assets

 

1,182

 

 

 

1,182

 

Other assets

 

597

 

 

 

1,428

 

Total assets

$

122,762

 

 

$

64,700

 

 

 

 

 

 

 

 

 

Liabilities, Convertible Preferred Stock and Stockholders’ Equity (Deficit)

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

$

1,960

 

 

$

1,678

 

Accrued liabilities and other

 

6,756

 

 

 

6,129

 

Total current liabilities

 

8,716

 

 

 

7,807

 

Notes payable

 

44,237

 

 

 

44,288

 

Other long term liabilities

 

3,876

 

 

 

1,413

 

Total liabilities

 

56,829

 

 

 

53,508

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

Convertible preferred stock

 

 

 

 

239,990

 

Stockholders’ equity (deficit)

 

 

 

 

 

 

 

Common stock, $0.01 par value -100,000,000 shares authorized, 19,966,098 and 580,458

   shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively

 

200

 

 

 

6

 

Additional paid-in capital

 

333,130

 

 

 

9,551

 

Accumulated other comprehensive income

 

119

 

 

 

166

 

Accumulated deficit

 

(267,516

)

 

 

(238,521

)

Total stockholders’ equity (deficit)

 

65,933

 

 

 

(228,798

)

Total liabilities, convertible preferred stock and stockholders' equity (deficit)

$

122,762

 

 

$

64,700

 

 

1 

The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United Stated of America.

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

3


 

TRIVASCULAR TECHNOLOGIES, INC.

Consolidated Statements of Comprehensive Loss

(unaudited)

(in thousands, except share and per share data)

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

7,798

 

 

$

4,826

 

 

$

14,832

 

 

$

7,768

 

Cost of goods sold

 

3,463

 

 

 

3,158

 

 

 

7,128

 

 

 

5,146

 

Gross profit

 

4,335

 

 

 

1,668

 

 

 

7,704

 

 

 

2,622

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales, general and administrative

 

13,008

 

 

 

9,695

 

 

 

25,200

 

 

 

17,200

 

Research and development

 

4,066

 

 

 

3,145

 

 

 

7,872

 

 

 

6,314

 

Total operating expenses

 

17,074

 

 

 

12,840

 

 

 

33,072

 

 

 

23,514

 

Loss from operations

 

(12,739

)

 

 

(11,172

)

 

 

(25,368

)

 

 

(20,892

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(2,454

)

 

 

(1,586

)

 

 

(4,143

)

 

 

(3,141

)

Interest income and other income (expense), net

 

698

 

 

 

(55

)

 

 

616

 

 

 

(36

)

Loss before income tax expense

 

(14,495

)

 

 

(12,813

)

 

 

(28,895

)

 

 

(24,069

)

Provision for income tax

 

77

 

 

 

20

 

 

 

100

 

 

 

47

 

Net loss

$

(14,572

)

 

$

(12,833

)

 

$

(28,995

)

 

$

(24,116

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

(27

)

 

 

37

 

 

 

(47

)

 

 

(39

)

Other comprehensive (loss) income

 

(27

)

 

 

37

 

 

 

(47

)

 

 

(39

)

Comprehensive loss

$

(14,599

)

 

$

(12,796

)

 

$

(29,042

)

 

$

(24,155

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share, basic and diluted

$

(0.87

)

 

$

(22.33

)

 

$

(3.30

)

 

$

(41.99

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used to compute net loss per share, basic and diluted

 

16,810,098

 

 

 

574,720

 

 

 

8,788,843

 

 

 

574,392

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

4


 

TRIVASCULAR TECHNOLOGIES, INC.

Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(28,995

)

 

$

(24,116

)

Adjustments to reconcile net loss to net cash used in operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization of property and equipment

 

 

273

 

 

 

640

 

Amortization of debt issuance costs and debt discount

 

 

336

 

 

 

219

 

Provision for excess and obsolete inventory

 

 

471

 

 

 

81

 

Changes in fair value of warrants

 

 

(633

)

 

 

10

 

Amortization of intangibles acquired in business combination

 

 

 

 

 

35

 

Stock-based compensation expense

 

 

1,135

 

 

 

531

 

Non-cash interest expense on notes payable

 

 

1,295

 

 

 

591

 

Changes in assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(917

)

 

 

(2,280

)

Inventories

 

 

(1,014

)

 

 

143

 

Prepaid expenses and other current assets

 

 

664

 

 

 

(265

)

Accounts payable

 

 

199

 

 

 

529

 

Accrued liabilities and other

 

 

540

 

 

 

1,180

 

Net cash used in operating activities

 

 

(26,646

)

 

 

(22,702

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(67

)

 

 

(191

)

Net cash used in investing activities

 

 

(67

)

 

 

(191

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from initial public offering, net

 

 

81,361

 

 

 

 

Repayments of existing notes payable

 

 

(4,599

)

 

 

 

Proceeds from notes payable

 

 

6,000

 

 

 

 

Proceeds from issuance of common stock

 

 

1,508

 

 

 

23

 

Net cash provided by financing activities

 

 

84,270

 

 

 

23

 

 

 

 

 

 

 

 

 

 

Effects of exchange rate changes on cash

 

 

(8

)

 

 

4

 

Net increase (decrease) in cash and cash equivalents

 

 

57,549

 

 

 

(22,866

)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

Beginning of period

 

 

38,108

 

 

 

45,393

 

 

 

 

 

 

 

 

 

 

End of period

 

$

95,657

 

 

$

22,527

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Interest paid on notes payable

 

$

2,513

 

 

$

2,320

 

Cash paid for income taxes

 

 

32

 

 

 

21

 

Significant non-cash transactions

 

 

 

 

 

 

 

 

Conversion of convertible preferred stock into common stock

 

 

239,990

 

 

 

 

Conversion of convertible preferred stock warrants into common stock

warrants

 

 

648

 

 

 

 

Increase in deferred revenue related to distributor agreement

 

 

3,017

 

 

 

 

Unvested portion of early exercised stock options

 

 

901

 

 

 

 

Unpaid deferred offering costs

 

 

56

 

 

 

 

Vesting of early exercised stock options

 

 

153

 

 

 

4

 

Purchases of property and equipment included in accounts payable

 

 

84

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

5


 

TRIVASCULAR TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1.

The Company

TriVascular Technologies, Inc. (the “Company”) was incorporated in the state of Delaware in July 2007 and began operations on March 28, 2008. The Company is a medical device company developing and commercializing innovative technologies to significantly advance minimally invasive treatment of abdominal aortic aneurysms (“AAA”). The Ovation® System, the Company’s solution for the treatment of AAA through minimally invasive endovascular aortic repair (“EVAR”) is a new stent graft platform, providing an innovative and effective alternative to conventional devices. It is designed specifically to address many of the limitations associated with conventional EVAR devices and expand the pool of patients eligible for EVAR. The Company received CE Mark clearance in August 2010 and began commercial sales of its Ovation System in Europe in September 2010. In October 2012, the Company received approval from the U.S. Food and Drug Administration for the Ovation System for the treatment of AAA and began commercial sales in the United States in November 2012.

As a medical device company with little commercial operating history, the Company is subject to all of the risks and expenses associated with a growing company. The Company must, among other things, respond to competitive developments, attract, retain and motivate qualified personnel, and support the expense of developing and marketing new products based on innovative technology. In the course of its development activities, the Company has sustained significant operating losses. Even if development and marketing efforts are successful, substantial time may pass before significant revenues will be realized, and during this period, the Company will require additional funds, the availability of which cannot be reasonably assured.

 

2.

Summary of Significant Accounting Policies

Basis of Presentation

The accompanying Consolidated Financial Statements in this Quarterly Report on Form 10-Q have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). These financial statements include the financial position, results of operations, and cash flows of the Company, including its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.

The interim financial data as of June 30, 2014, is unaudited and is not necessarily indicative of the results for a full year or any interim period. In the opinion of the Company’s management, the interim data includes all normal and recurring adjustments necessary for a fair statement of the Company’s financial results for the three and six months ended June 30, 2014. The December 31, 2013 consolidated balance sheet data was derived from audited financial statements. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to SEC rules and regulations relating to interim financial statements.

The accompanying Consolidated Financial Statements should be read in conjunction with the Company’s audited Consolidated Financial Statements and Notes thereto included in the Company’s final prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, relating to the Company’s Registration Statement on Form S-1 (File No. 333-194466), filed with the SEC on April 17, 2014.

On April 22, 2014, the Company completed its initial public offering (“IPO”) of 7,475,000 shares of common stock, which included the exercise in full by the underwriters in the offering of their option to purchase 975,000 additional shares of common stock, at an offering price of $12.00 per share. The Company received net proceeds of approximately $81.1 million, after deducting underwriting discounts and commissions and offering expenses. In connection with the IPO, the Company’s outstanding shares of convertible preferred stock were automatically converted into 11,601,860 shares of common stock and warrants exercisable for convertible preferred stock were automatically converted into warrants exercisable for 192,472 shares of common stock, resulting in the reclassification of the related redeemable convertible preferred stock warrant liability of $0.6 million to additional paid-in capital.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates and such differences could be material.

6


 

Segment Information

The Company considers operating segments to be components of the Company in which separate financial information is available that is evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance. The chief operating decision maker for the Company is the Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a consolidated basis, accompanied by information about revenue by geographic region, for purposes of allocating resources and evaluating financial performance. The Company has one business activity and there are no segment managers who are held accountable for operations, operating results or plans for levels or components below the consolidated unit level. Accordingly, the Company has determined that it has a single reportable and operating segment structure. The Company and its Chief Executive Officer evaluate performance based primarily on revenue in the geographic locations in which the Company operates.

Revenues by geography are based on the billing address of the customer. The following table sets forth revenue by geographic area (in thousands):

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

United States (U.S.)

$

5,176

 

 

$

2,574

 

 

$

9,778

 

 

$

3,515

 

International

 

2,622

 

 

 

2,252

 

 

 

5,054

 

 

 

4,253

 

Total

$

7,798

 

 

$

4,826

 

 

$

14,832

 

 

$

7,768

 

  

The following table summarizes countries with revenues accounting for more than 10% of the total:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Germany

 

< 10

%

 

 

11

%

 

< 10

%

 

 

14

%

Italy

 

< 10

%

 

 

14

%

 

< 10

%

 

 

16

%

U.S.

 

 

66

%  

 

 

53

%

 

 

66

%

 

 

45

%

 

Long-lived assets and operating income outside the U.S. are not material; therefore disclosures have been limited to revenue.

Cash and Cash Equivalents

Cash and cash equivalents consist of demand deposit accounts and institutional money market funds held in U.S. and foreign banks. Cash equivalents consist of highly liquid investment securities with original maturities at the date of purchase of three months or less.

Accounts Receivable

Trade accounts receivable are recorded at the invoice amount and do not include interest. The Company regularly reviews accounts for collectability and establishes an allowance for probable credit losses and writes off uncollectible accounts as necessary. The Company has determined that no allowance was required at either of the periods presented.

Inventories

The Company values inventory at the lower of cost to purchase or manufacture the inventory or the market value for such inventory. Cost is determined using the standard cost method which approximates the first-in first-out method. The Company regularly reviews inventory quantities in consideration of actual loss experiences, projected future demand, and remaining shelf life to record a provision for excess and obsolete inventory when appropriate.

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets.

7


 

The depreciation and amortization periods for the Company’s property and equipment are as follows:

 

Equipment and software

3 years

Laboratory machinery and equipment

3–5 years

Furniture and fixtures

5 years

 

Leasehold improvements are amortized over the lesser of their useful lives or the remaining life of the lease. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation and amortization are removed from the consolidated balance sheet and the resulting gain or loss is reflected in operations in the period realized. Cost of maintenance and repairs are charged to expense as incurred, and improvements and betterments are capitalized.

Goodwill and Indefinite Lived Intangible Assets

The Company has recorded goodwill and intangible assets on the consolidated balance sheets. The Company classifies intangible assets into three categories: (1) goodwill; (2) intangible assets with indefinite lives not subject to amortization; and (3) intangible assets with definite lives subject to amortization.

Goodwill and intangible assets with indefinite lives are not amortized. The Company assesses goodwill and intangible assets with indefinite lives for impairment on an annual basis in the fourth quarter of each year or more frequently if indicators of impairment exist. For the purpose of testing goodwill for impairment, the Company has determined that it has one reporting unit.

Deferred Offering Costs

Deferred offering costs, consisting of legal, accounting and other fees and costs relating to the IPO, were capitalized until the successful completion of the Company’s IPO. The deferred offering costs were offset against the IPO proceeds upon the closing of the offering in April 2014. There were $0 and $0.7 million of deferred offering costs capitalized as of June 30, 2014 and December 31, 2013, respectively, in other assets on the consolidated balance sheets.

Convertible Preferred Stock Warrant Liability

Freestanding warrants related to convertible preferred stock shares that are contingently redeemable were classified as a liability on the Company’s accompanying consolidated balance sheet at December 31, 2013. The convertible preferred stock warrants were subject to re-measurement at each balance sheet date, and any change in fair value was recognized as a component of interest income and other income (expense), net. The Company continued to adjust the liability for changes in fair value until the completion of the IPO in April 2014, at which time all redeemable convertible preferred stock warrants were converted into warrants to purchase common stock and the liability was reclassified to additional paid-in capital. See Note 5.

Revenue

The Company recognizes revenue when all of the following criteria are met:

·

persuasive evidence of an arrangement exists;

·

the sales price is fixed or determinable;

·

collection of the relevant receivable is probable at the time of sale; and

·

delivery has occurred or services have been rendered.

For sales directly to hospitals or medical facilities, the Company recognizes revenue upon completion of a procedure, which is when the product is implanted in a patient, and a valid purchase order has been received. For distributor sales, the Company recognizes revenue at the time of shipment of product, as this represents the point that the customer has taken ownership and assumed risk of loss. The Company does not offer rights of return or price protection and has no post-delivery obligations. The Company offers rights of exchange in limited circumstances for products with a short shelf life at the time of shipment, and has established a $69,000 and $0 reserve for such exchanges included in accrued liabilities and other in the consolidated balance sheets at June 30, 2014 and December 31, 2013, respectively.

Income Taxes

The Company records income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s consolidated financial statements or income tax returns. In estimating future tax consequences, expected future events other than enactments or changes in

8


 

the tax law or rates are considered. Valuation allowances are provided when necessary to reduce deferred tax assets to the amount expected to be realized.

The Company operates in various tax jurisdictions and is subject to audit by various tax authorities. The Company provides for tax contingencies whenever it is deemed probable that a tax asset has been impaired or a tax liability has been incurred for events such as tax claims or changes in tax laws. Tax contingencies are based upon their technical merits, relative tax law, and the specific facts and circumstances as of each reporting period. Changes in facts and circumstances could result in material changes to the amounts recorded for such tax contingencies.

The Company records uncertain tax positions on the basis of a two-step process whereby (1) a determination is made as to whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold the Company recognizes the largest amount of tax benefit that is greater than 50% likely to be realized upon ultimate settlement with the related tax authority.

Other Comprehensive (Loss) Income

Other comprehensive (loss) income represents all changes in stockholders’ equity (deficit) except those resulting from investments or contributions by stockholders. The Company’s other comprehensive (loss) income consists of its net loss and changes in accumulated other comprehensive income, which represents foreign currency translation adjustments.

Currency Translation

The Euro is the functional currency of the Company’s wholly-owned subsidiaries in Italy and Germany and the Swiss Franc is the functional currency of the Company’s wholly-owned subsidiary in Switzerland. Accordingly, the assets and liabilities of these subsidiaries are translated into United States dollars using the current exchange rate in effect at the balance sheet date and equity accounts are translated into United States dollars using historical rates. Revenues and expenses are translated using the average exchanges rates in effect when the transactions occur. Foreign currency translation adjustments are recorded within accumulated other comprehensive loss, a separate component of stockholders’ equity (deficit), on the consolidated balance sheets. Foreign exchange transaction gains and losses have not been material to the Company’s consolidated financial statements for all periods presented.

Stock-Based Compensation

The Company’s determination of the fair value of stock options on the date of grant and shares to be issued to employees under the Employee Stock Purchase Plan (“ESPP”) utilizes the Black-Scholes option-pricing model, and is impacted by its common stock price as well as changes in assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, expected common stock price volatility, expected term, risk-free interest rates and expected dividends.  

The fair value is recognized over the period during which services are rendered, known as the requisite service period on a straight-line basis for awards that vest based on service conditions. Stock-based compensation expense recognized at fair value includes the impact of estimated forfeitures. The Company estimates future forfeitures at the date of grant and revises the estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Equity instruments issued to non-employees are recorded at their fair value on the measurement date and are subject to periodic adjustments as the underlying equity instruments vest. The fair value of options granted to consultants is expensed when vested. The non-employee stock-based compensation expense was not material for all periods presented.

Cash flows resulting from the tax benefits for tax deductions resulting from the exercise of stock options in excess of the compensation expense recorded for those options (excess tax benefits) are classified as cash flows from financing activities in the consolidated statements of cash flows.

Estimating the fair value of equity-settled awards as of the grant date using valuation models, such as the Black-Scholes option pricing model, is affected by assumptions regarding a number of complex variables. Changes in the assumptions can materially affect the fair value and ultimately how much stock-based compensation expense is recognized. These inputs are subjective and generally require significant analysis and judgment to develop. For valuations of all equity awards utilizing the Black-Scholes option-pricing model to date, we estimated the expected term and the volatility data based on a study of publicly traded industry peer companies. For purposes of identifying these peer companies, we considered the industry, stage of development, size and financial leverage of potential comparable companies. The risk-free interest rate is based on the yield available on U.S. Treasury zero-coupon issues similar in duration to the expected term of the equity-settled award.

9


 

Net Loss per Share

Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares that were outstanding for the period, without consideration for potential common shares. Prior to April 22, 2014, the Company had convertible preferred stock, all of which converted into common stock at the closing of the IPO.  Because the holders of the Company’s convertible preferred stock and its restricted common shares were entitled to participate in dividends and earnings of the Company when dividends are paid on common stock, the Company applies the two-class method in calculating its earnings per share for periods when the Company generates net income. The two-class method requires net income to be allocated between the common and preferred stockholders based on their respective rights to receive dividends, whether or not declared. Because the convertible preferred stock and restricted common stock were not contractually obligated to share in the Company’s losses, no such allocation was made for any period presented given the Company’s net losses. Diluted net loss per share is calculated by dividing the net loss by the sum of the weighted-average number of dilutive potential common shares outstanding for the period determined using the treasury-stock method or the as-converted method. Potentially dilutive shares are comprised of convertible preferred stock, convertible preferred stock and common stock warrants, shares purchased with nonrecourse loans and options outstanding under our equity incentive plans. Purchase rights granted pursuant to the Company’s ESPP are excluded from the basic net loss per share calculation because the employee’s participation in the Plan is revocable, and such rights will not be included until the shares subject to the purchase rights are purchased by the employee.  For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to our net loss and potentially dilutive shares being anti-dilutive.

The following equity shares were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive for the periods presented (shares for the convertible preferred stock and convertible preferred stock warrants were determined based on the applicable conversion ratios):

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible preferred stock

 

 

1,912,395

 

 

 

9,071,203

 

 

 

6,703,297

 

 

 

9,071,203

 

Employee stock options

 

 

2,192,423

 

 

 

1,525,531

 

 

 

1,849,739

 

 

 

1,497,082

 

Convertible preferred stock warrants

 

 

27,015

 

 

 

192,472

 

 

 

124,159

 

 

 

192,472

 

Common stock warrants

 

 

391,152

 

 

 

426,878

 

 

 

408,367

 

 

 

426,878

 

Total

 

 

4,522,985

 

 

 

11,216,084

 

 

 

9,085,562

 

 

 

11,187,635

 

 

 

3.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update (“ASU”) No. 2014-09.  ASU 2014-09 provided guidance related to revenue from contracts with customers. Under this guidance, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The updated standard will replace most existing revenue recognition guidance under GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The updated standard will be effective for the Company in the first quarter of 2017. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

 

 

4.

Stock-Based Compensation

The Company classifies stock-based compensation expense in the accompanying Consolidated Statements of Comprehensive Loss based on the department to which a recipient belongs. The following table sets forth stock-based compensation expense related to options granted to employees for all periods presented, as well as stock-based compensation expense estimated for the discount applicable to projected ESPP purchase rights in the three and six months ended June 30, 2014 (in thousands):  

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

$

65

 

 

$

16

 

 

$

86

 

 

$

33

 

Research and development

 

91

 

 

 

55

 

 

 

153

 

 

 

111

 

Sales, general and administrative

 

517

 

 

 

205

 

 

 

896

 

 

 

387

 

Total

$

673

 

 

$

276

 

 

$

1,135

 

 

$

531

 

 

 

 

10


 

 

5.

Fair Value Measurements

The carrying amount of certain financial instruments, including accounts receivable, accounts payable, and accrued liabilities approximate fair value due to their relatively short maturities.

The Company discloses and recognizes the fair value of its assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). The guidance establishes three levels of the fair value hierarchy as follows:

 

Level 1

  

Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date;

 

Level 2

  

 

Inputs other than quoted prices that are observable for the assets or liability either directly or indirectly, including inputs in markets that are not considered to be active;

 

Level 3

  

 

Inputs that are unobservable.

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.

Based upon Level 2 inputs and the borrowing rates currently available for loans with similar terms, the Company believes that the fair value of its notes payable approximates its carrying value for all periods presented.

At June 30, 2014, the Company had no financial instruments measured at fair value on a recurring basis by level, as all such financial instruments were converted to additional paid-in capital upon the completion of the IPO in April 2014.

The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis at December 31, 2013 by level within the fair value hierarchy (in thousands):

 

 

Assets or Liabilities at Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series C convertible preferred stock warrant liability

$

 

 

$

 

 

$

72

 

 

$

72

 

Series D convertible preferred stock warrant liability

 

 

 

 

 

 

 

1,208

 

 

 

1,208

 

Total

$

 

 

$

 

 

$

1,280

 

 

$

1,280

 

 

The fair value of the Company’s Series C and D convertible preferred stock warrant liabilities was based on Level 3 inputs. The Company valued the Series C convertible preferred stock warrant liabilities and the Series D convertible preferred stock warrant liabilities using the Black-Scholes model as well as the residual value approach.

The table below presents the activity of Level 3 liabilities during the periods indicated (in thousands):

 

 

June 30,

 

 

December 31,

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

Warrant liabilities balance at the beginning of the period

$

1,280

 

 

$

1,424

 

Change in fair value of warrant liabilities

 

(633

)

 

 

(144

)

Transfer of warrant liabilities to additional paid-in capital

 

(647

)

 

 

 

Warrant liabilities balance at the end of the period

$

 

 

$

1,280

 

 

 

 

11


 

6.

Balance Sheet Components

Inventories

Inventories consisted of the following (in thousands):

 

 

June 30,

 

 

December 31,

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

Raw material

$

3,498

 

 

$

2,394

 

Work-in-process and sub-assemblies

 

3,898

 

 

 

1,951

 

Finished goods

 

188

 

 

 

2,697

 

Total

$

7,584

 

 

$

7,042

 

 

Property and equipment

Property and equipment consist of the following (in thousands):

 

 

June 30,

 

 

December 31,

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

Laboratory, machinery and equipment

$

7,129

 

 

$

7,024

 

Equipment and software

 

2,152

 

 

 

2,150

 

Leasehold improvements

 

5,657

 

 

 

5,657

 

Furniture and fixtures

 

317

 

 

 

317

 

 

 

15,255

 

 

 

15,148

 

Less: Accumulated depreciation and amortization

 

(13,872

)

 

 

(13,643

)

Total

$

1,383

 

 

$

1,505

 

 

The Company recognized depreciation and amortization expense on property and equipment during the periods indicated as follows (in thousands):

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expense

$

132

 

 

$

262

 

 

$

273

 

 

$

640

 

 

Goodwill and other intangible assets, net

The goodwill on the consolidated balance sheets was $8.3 million for all periods presented.

The gross carrying amount of the intangible assets on the accompanying consolidated balance sheets was $1.2 million for all periods presented. Amortization expense for the six months ended June 30, 2014 and 2013 was $0 and $35,000, respectively.

Accrued liabilities and other

Accrued liabilities and other consist of the following on the accompanying consolidated balance sheets (in thousands):

 

 

June 30,

 

 

December 31,

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

Accrued compensation and related expenses

$

5,232

 

 

$

4,263

 

Other accrued expenses

 

1,524

 

 

 

1,866

 

Total

$

6,756

 

 

$

6,129

 

 

 

12


 

7.

Distribution Agreement

On January 1, 2014, the Company entered into a distribution agreement (the “Distribution Agreement”) with Century Medical, Inc. (“Century”) with respect to the anticipated distribution of the Company’s Ovation and Ovation Prime medical devices in Japan. Under the terms of a secured note purchase agreement, Century agreed to loan the Company an aggregate of up to $6.0 million, with principal due in January 2019, under the agreement, subject to certain conditions. Under this facility, the Company received $4.0 million on January 10, 2014 and received the remaining $2.0 million on March 18, 2014 as the Company had achieved trailing 12-month revenues of $20 million and no material adverse event had occurred. The notes bear 5% annual interest which is payable quarterly in arrears through January 9, 2019, the maturity date when the entire principal balance becomes due. In return for the loan commitment, the Company granted Century distribution rights to the Company’s planned Ovation and Ovation Prime product line in Japan, and a right of first negotiation for distribution rights in Japan to future products. Century will be responsible for securing regulatory approval from the Ministry of Health in Japan for the Ovation and Ovation Prime product line.

Proceeds from the note and granting the distribution rights were allocated to the note based on its aggregate fair value of $3.0 million at the dates of receipt. This fair value was determined by discounting cash flows using a discount rate of 15%, which the Company estimated as market rate of borrowing that could be obtained by companies with credit risk similar to the Company’s. The remainder of the proceeds of $3.0 million was recognized as debt issuance discount and allocated to the value of the distribution rights granted to Century under the Distribution Agreement. It is included in deferred revenue in other long term liabilities on the consolidated balance sheets. The deferred revenue will be recognized on a straight-line basis over the term of the Distribution Agreement, beginning upon the first sale by Century of the Ovation and Ovation Prime products in Japan.

 

8.

Commitments and Contingencies

Operating Leases

The Company’s headquarters’ facility lease expires on February 28, 2018. The Company also has small office leases in its subsidiary locations. Total lease expense for the periods indicated was as follows (in thousands):

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease expense

$

287

 

 

$

276

 

 

$

568

 

 

$

541

 

 

The Company recognizes lease expense on a straight-line basis over the life of the lease. In addition to the lease obligation, the Company pays for common area maintenance and insurance for the facility. The Company also has various office equipment leases for copiers and postage machines.

Contingencies

From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of business activities. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. There were no contingent liabilities requiring accrual at June 30, 2014.

Employment Agreements

The Company enters into employment agreements with its executive officers. The contracts do not have a fixed term and are constructed on an at-will basis. Some of these contracts provide executives with the right to receive certain additional payments and benefits after a change in control, as defined in such agreements.

Indemnification

The Company enters into standard indemnification arrangements in the ordinary course of business. Pursuant to these arrangements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified parties for losses suffered or incurred by the indemnified party, in connection with any trade secret, copyright, patent or other intellectual property infringement claim by any third party with respect to the Company’s technology. The term of these indemnification agreements is generally perpetual. The maximum potential amount of future payments the Company could be required to make under these agreements is not determinable because it involves claims that may be made against the Company in the future, but have not yet been made.

13


 

The Company has entered into indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct of the individual.

The Company has not incurred costs to defend lawsuits or settle claims related to these indemnification agreements. No liability associated with such indemnifications has been recorded to date.

 

9.

Notes Payable

Century Medical, Inc. Subordinated Loan

In connection with the Distribution Agreement with Century (see Note 7), the Company entered into a secured note purchase agreement and a related security agreement, pursuant to which Century agreed to loan to the Company up to an aggregate of $6.0 million, which amount was received in the first quarter ended March 31, 2014. Under this facility, the Company received $4.0 million on January 10, 2014, and the remaining $2.0 million on March 18, 2014. This note bears 5% annual interest which is payable quarterly in arrears on the last business day of March, June, September and December of each year through January 9, 2019, the maturity date when the total $6.0 million of principal becomes due. The debt issuance discount of approximately $3.0 million is reflected as a reduction in long-term debt and is being amortized as interest expense over the term of the note using the effective interest method. The loan contains various affirmative and negative covenants and customary events of default, including if a material adverse change occurs with respect to the Company’s business, operations or financial condition, and is subordinated to the Company’s term loan with Capital Royalty.

The Company made interest payments of $75,000 and $123,000 in the three and six months ended June 30, 2014, respectively.

Capital Royalty Term Loan

On October 12, 2012, the Company executed a Term Loan Agreement with Capital Royalty Partners II L.P. and its affiliate Parallel Investment Opportunities Partners II L.P. (collectively “Capital Royalty”) for up to a $50 million term loan to be used to pay off the Company’s then existing senior notes held by a previous lender and to fund operations. The first tranche of $40 million was drawn prior to March 31, 2013, and an additional amount up to $10 million could have been available upon achievement of a revenue-based milestone, if notice of that achievement was issued by May 31, 2014. While the Company timely achieved the revenue-based milestone, it elected not to draw down additional funds.  No further drawdowns are available as of June 30, 2014. The loan bears interest at a rate of 14.0%, based upon a year of 360 days and actual days elapsed. Prior to September 30, 2017, the Company may at its election pay the interest as follows: 11.5% per annum paid in cash and 2.5% per annum paid in-kind in the form of additional term loans, or PIK Loans. Payments under the loan are made on a quarterly basis with payment dates fixed at the end of each calendar quarter (“Payment Dates”). The notes are interest-only through the 14th Payment Date (March 31, 2016) following funding. Following the interest-only period principal payments are made in equal installments at the end of the six subsequent calendar quarters. The notes mature on the 20th Payment Date (September 30, 2017).  In connection with the loan, the Company paid a loan origination fee of 1% and issued warrants to purchase 167,611 shares of common stock at $0.41 per share. The initial fair value of the warrants was $496,000 and resulted in a discount to the notes payable, which is being accreted to interest income and other income (expense), net in the statements of comprehensive loss over the life of the loan. The notes had a prepayment premium of 5% of the aggregate outstanding principal, including PIK Loans, if the loan was prepaid prior to the end of the fourth Payment Date (September 30, 2013). The amount of the prepayment premium decreases by 1% during each subsequent 12-month period thereafter.

The term loan is collateralized by a first priority security interest on all of the Company’s assets excluding property not assignable without consent by a third party, trademarks that would be invalid by reason of including it in the collateral and 35% of the ownership interest in a foreign subsidiary.

14


 

The loan and security agreement contains customary representations and warranties, covenants, events of defaults and termination provisions. The affirmative covenants include, among other things, that the Company timely file taxes, maintain good standing and government compliance, achieve minimum annual revenue thresholds, maintain liability and other insurance, and provide security interests to Capital Royalty in the collateral of any subsidiary formed or acquired by the Company in the future. The negative covenants provide, among other things, that without the prior consent of Capital Royalty (subject to certain exceptions), the Company may not dispose of certain assets, engage in certain business combinations or acquisitions, incur additional indebtedness or encumber any of the Company’s property, pay dividends on the Company’s capital stock or make prohibited investments. The loan and security agreement provides that an event of default will occur if, among other triggers, (1) the Company defaults in the payment of any amount payable under the agreement when due, (2) there occurs any circumstance or circumstances that could reasonably be expected to result in a material adverse effect on the Company’s business, operations or condition, or on the Company’s ability to perform its obligations under the agreement, (3) the Company becomes insolvent, (4) the Company undergoes a change in control or (5) the Company breaches any negative covenants or certain affirmative covenants in the agreement or, subject to a cure period, otherwise neglects to perform or observe any material item in the agreement. The repayment of the term loan may be accelerated, at the option of Capital Royalty, following the occurrence of an event of default, which would require the Company to pay to Capital Royalty an amount equal to the sum of: (i) all outstanding principal plus accrued interest, (ii) the final payment, plus (iii) all other sums, that shall have become due and payable but have not been paid, including interest at the default rate with respect to any past due amounts plus the prepayment premium.

The first measurement date for the minimum annual revenue covenant was April 30, 2014, with subsequent measurement dates at the end of subsequent twelve-month periods.

As of June 30, 2014, the Company was in compliance with all of the covenants.

Boston Scientific Corporation Note Payable

In March 2008, in conjunction with the acquisition of Boston Scientific Santa Rosa, or BSSR, the Company issued a promissory note in the amount of approximately $3.5 million to the prior owners of BSSR as part of the purchase consideration. The note bore an interest rate of 5.25% per annum and would have matured on March 28, 2018 per the original terms. The note (along with unpaid accrued interest) was repayable upon the earlier of (a) the date upon which initial public offering is consummated, or (b) the sale of the Company, including liquidation, dissolution or winding up. The Company repaid the note in full, including all accrued interest and the unamortized debt discount, subsequent to the closing of the IPO in April 2014.  Warrants to purchase up to 223,487 shares of common stock expired unexercised upon the IPO in April 2014.

 

10.

Stockholders’ Equity (Deficit)

In February 2014, the Company’s board of directors and stockholders approved an amendment to the amended and restated certificate of incorporation effecting a reverse stock split within a specified range with the final ratio to be determined by a committee of the board of directors. In March 2014, the committee of the board of directors approved a 1-for-40.57 reverse stock split of the Company’s issued and outstanding shares of common stock and the corresponding adjustments to the conversion ratio of the convertible preferred stock. The reverse split was implemented on April 1, 2014. The par value of the common and convertible preferred stock was not adjusted as a result of the reverse stock split. Except as otherwise indicated, all issued and outstanding share and per share amounts included in the accompanying consolidated financial statements have been adjusted to reflect this reverse stock split for all periods presented.

Conversion

The shares of Series A, Series B, Series C, Series D and Series E preferred stock were convertible into an equal number of shares of common stock, at the option of the holder, subject to certain anti-dilution adjustments, such as in the event of a private placement at an offering price below the price of our Series E convertible preferred stock offering. The Series D convertible preferred stock was issued at a price per share lower than the issuance price per share of the Series A, Series B and Series C convertible preferred stock, triggering the anti-dilution adjustment of the conversion ratios into common stock of Series A, Series B and Series C convertible preferred stock. The issuance price triggering the anti-dilution adjustments was reset to the Series D issuance price at the time of the Series D financing and to the Series E issuance price at the time of the Series E financing.

The conversion ratios were as follows:

 

Series A and B convertible preferred stock

1 to 26.00

  

Series C convertible preferred stock

1 to 25.64

  

Series D convertible preferred stock

1 to 40.57

  

Series E convertible preferred stock

1 to 40.57

  

15


 

 

Each share of Series A, Series B, Series C, Series D and Series E convertible preferred stock were automatically converted into common stock immediately upon the completion of the Company’s initial public offering on April 22, 2014.

Warrants

All of the Company’s warrants remained outstanding as of June 30, 2014, except the BSC common stock warrants that expired upon the IPO as discussed in Note 9. The Company’s convertible preferred stock warrants all converted to warrants to purchase common stock at the above conversion ratios in April 2014.

 

11.

Equity Incentive Plans

In April 2014, the Company adopted the ESPP. A total of 500,000 shares of common stock were initially reserved for issuance under the ESPP, subject to certain annual adjustments.  The first purchase period began on the IPO date and ends on October 31, 2014 when the shares will be purchased at a specified discount.  The Company recorded amounts that had been withheld from employees for that purchase of $226,000 in accrued liabilities and other at June 30, 2014.  

In April 2014, the Company adopted the 2014 Equity Incentive Plan (the “2014 Plan”).  A total of 2,750,000 shares of common stock were initially reserved for issuance under the 2014 Plan, subject to certain annual adjustments. The 2014 Plan provides for the granting of stock options and other equity awards to employees, directors and consultants of the Company. Options granted under the 2014 Plan may be either incentive stock options (“ISOs”) or nonqualified stock options (“NSOs”). ISOs may be granted only to Company employees while NSOs may be granted to all eligible recipients.  At June 30, 2014, there were 721,050 shares of common stock subject to outstanding options under the 2014 Plan.

In April 2008, the Company adopted the 2008 Equity Incentive Plan (the “2008 Plan”). The 2008 Plan provided for the granting of stock options to employees, directors and consultants of the Company. In connection with the IPO, the 2008 Plan terminated in April 2014, and no further grants may be made from the 2008 Plan, while previously granted options continue in accordance with their respective terms.  As of June 30, 2014, there were 1,471,373 shares of common stock subject to remaining outstanding options under the 2008 Plan.

Options under the 2014 and 2008 Plans have terms of up to ten years. The exercise price of an ISO may not be less than 100% of the fair market value of the shares on the date of grant; the exercise price for an NSO may not be less than 100% of the fair market value of the shares on the date of grant and the exercise price of an ISO or an NSO granted to a more than 10% shareholder may not be less than 110% of the fair market value of the shares on the date of grant. Options become exercisable as determined by the board of directors. Options expire as determined by the board of directors but not more than ten years after the date of grant.

 

12.

Income Tax Expense

The Company applied an estimated annual effective tax rate (“ETR”) approach for calculating a tax provision for interim periods, as required under U.S. GAAP. The Company recorded a provision for income taxes of the following amounts (in thousands):

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

$

77

 

 

$

20

 

 

$

100

 

 

$

47

 

Effective tax rate

 

(0.53

%)

 

 

(0.16

%)

 

 

(0.34

%)

 

 

(0.19

%)

 

The Company’s ETR for the periods shown differs from the U.S. federal statutory tax rate of 35% primarily as a result of nondeductible expenses, state income taxes, foreign income taxes, and the impact of a full valuation allowance on its deferred tax assets.

The Company has evaluated the available evidence supporting the realization of its deferred tax assets, including the amount and timing of future taxable income, and has determined that it is more likely than not that its net deferred tax assets will not be realized in the U.S. and certain foreign jurisdictions. Due to uncertainties surrounding the realization of the deferred tax assets, the Company maintains a full valuation allowance against substantially all deferred tax assets. If/when the Company determines that it will be able to realize some portion or all of its deferred tax assets, an adjustment to its valuation allowance on its deferred tax assets would have the effect of increasing net income, or decreasing net loss, in the period that such determination is made.

 

16


 

13.

Related Party Transactions

In February and March 2014, certain loans to executive officers were satisfied and extinguished. The April 2010 and September 2012 notes along with accrued interest were repaid in cash resulting in aggregate proceeds of $1,497,435 inclusive of accrued interest of $6,238. The January 2011 note was extinguished with the surrender of the underlying collateral shares to satisfy the loan. The difference between the carrying amount of the loan and the value of the collateral shares was recorded as a loss on extinguishment of the note and the underlying shares were kept in treasury until retired to authorized, unissued by resolution of the board of directors in April 2014.

 

 

 

17


 

Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include statements that may relate to our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs and other information that is not historical information. Forward-looking statements can often be identified by the use of terminology such as “subject to,” “believe,” “anticipate,” “plan,” “expect,” “intend,” “estimate,” “project,” “may,” “will,” “should,” “would,” “could,” “can,” the negatives thereof, variations thereon and similar expressions, or by discussions of strategy. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, are discussed in a registration statement on Form S-1 and a related prospectus that we had filed in connection with our initial public offering completed on April 22, 2014, and our previously filed Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, which are on file with the SEC.  We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. You should read the following Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the unaudited consolidated financial statements and the related notes that appear elsewhere in this report, as well as our consolidated financial statements and related notes included in our final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act on April 17, 2014.

When we refer to “we,” “our,” “us” or ““TriVascular”” in this Quarterly Report on Form 10-Q, we mean TriVascular Technologies, Inc., as well as all of our consolidated subsidiaries, unless otherwise expressly stated or the context otherwise requires. References to the “Ovation System” refer to our “Ovation” and “Ovation Prime” Systems and their related components.

Overview

We are a medical device company developing and commercializing innovative technologies to significantly advance minimally invasive treatment of abdominal aortic aneurysms, or AAA. Our mission is to help physicians improve the lives of patients suffering from aortic disease through excellence in research, product development, manufacturing, sales and service. We developed our technology platform leveraging engineering principles utilized in many other industries and applied these concepts with the goal of designing an optimal solution for AAA therapy to address unmet clinical needs. The Ovation System, our solution for the treatment of AAA through minimally invasive endovascular aortic repair, or EVAR, is a new stent graft platform. It is designed to specifically address many of the limitations associated with conventional EVAR devices and expand the pool of patients eligible for EVAR by virtue of its low profile, flexible delivery system and novel sealing mechanism. The Ovation System consists of a main aortic body, injected with a conformable polymer, and typically two iliac limbs. These components allow the devices to be customized to a patient’s unique anatomy to effectively seal the aneurysm.

We received CE Mark clearance in August 2010 and began commercial sales of our Ovation System in Europe in September 2010. In October 2012, we received approval from the U.S. Food and Drug Administration for the Ovation System for the treatment of AAA and began commercial sales in the United States in November 2012. We sell our products through our direct U.S. and European sales forces and through third-party distributors in Europe, Canada, and in other parts of the world.

We manufacture and package all of the components of our implantable products at our headquarters in Santa Rosa, California. We also engage third-party contractors and suppliers to perform sterilization and accessory component assembly.

In April 2014, we completed the IPO of our common stock, which resulted in the sale of 7,475,000 shares at a price of $12.00 per share. We received net proceeds from the IPO of approximately $81.1 million, after deducting underwriting discounts and commissions and offering expenses.

In May 2014, we initiated the launch of our CustomSeal™ short cure fill polymer in Europe, further enhancing the implant experience for physicians.

Important Factors Affecting our Results of Operations

We believe there are several important factors that have impacted and that we expect to continue to impact our results of operations.

18


 

Our Ability to Recruit and Train our Sales Representatives and their Productivity

We only recently began building our sales organization in the United States and have made, and intend to continue to make, a significant investment in recruiting and training our sales representatives. This process is lengthy because it requires significant education and training for our sales representatives to achieve the level of clinical competency with our products that is expected by implanting physicians. Upon completion of the training, our sales representatives typically require lead time in the field to grow their network of accounts and achieve the productivity levels we expect them to reach. Successfully recruiting and training a sufficient number of productive sales representatives is required to achieve growth at the rate we expect.

Physician Awareness and Acceptance of our Ovation System

We continue to invest in programs to educate physicians who treat AAA disease about the advantages of our Ovation System. This requires significant commitment by our marketing team and sales organization, and can vary depending upon the physician’s practice specialization, personal preferences and geographic location. We are competing with well-established companies in our industry that have strong existing relationships with many of these physicians. Educating physicians about the advantages of our Ovation System, and influencing these physicians to use our Ovation System to treat AAA disease, is required to grow our revenue.

Access to Hospital Facilities

In order for physicians to use our Ovation System, most hospital facilities where these physicians treat patients typically require us to enter into purchasing contracts with them. This process can be lengthy and time-consuming and require extensive negotiations and management time. In some cases, contract bidding processes are only open at certain periods of time and we may not be successful in bidding. In many hospitals, we are not able to sell our products unless and until a purchasing contract has been executed.

Leveraging our Manufacturing Capacity

With our current operating model and infrastructure, we have the capacity to significantly increase our manufacturing production. We intend to use our design, engineering and manufacturing capabilities to increase manufacturing efficiency and to continue to develop new products with lower manufacturing costs. In addition, if we grow our revenue and sell more units, our fixed manufacturing costs will be spread over more units, which we believe will further reduce our manufacturing costs on a per-unit basis. Improving our gross margin, which is dependent upon further increasing our manufacturing efficiency and growing our U.S. revenue, among other factors, is critical to our ability to reach profitability.

Investment in Research and Clinical Trials

We are continuously investing in research and development of new products and product enhancements to improve outcomes and enhance the physician experience with our products, while reducing the invasiveness of AAA therapy and expanding the pool of patients eligible for EVAR. We believe that these efforts will continue to drive adoption of our Ovation platform and further validate the advantages of our innovative technology. While research and development and clinical testing are time consuming and costly, we believe that clinical data demonstrating efficacy, safety and cost effectiveness is critical to increasing the adoption of our Ovation System.

For additional information about the risks and uncertainties associated with our business, see the section entitled “Risk Factors” in a registration statement on Form S-1 and a related prospectus that we had filed in connection with our initial public offering completed on April 22, 2014, and our previous Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, which are on file with the SEC.  

Components of Results of Operations

Revenue

Our Ovation System consists of an aortic body preloaded into a catheter, at least two iliac limbs preloaded into catheters, a fill polymer kit and an autoinjector. In some cases, extra iliac limbs or iliac extensions may be required. Most of our sales are on a per-component basis; however, a small minority of our direct customers have total system pricing.

19


 

We derive revenue from sales of our Ovation System and related components and accessories to two types of customers: hospitals and distributors. We recognize revenue from sales to hospitals when we are notified that the product has been used or implanted and we have received a valid purchase order. Product sales to hospitals are billed to and paid by the hospitals as part of their normal payment processes, with payment received by us in the form of an electronic transfer, check or credit card. We recognize revenue from our distributors at the time the product is shipped to the distributor. Product sales to distributors are billed to and paid by the distributors as part of their normal payment processes, with payment received by us in the form of an electronic transfer. Our average sales prices are significantly higher in the United States than they are internationally. Our revenue from international sales can also be significantly impacted by fluctuations in foreign currency exchange rates.

We expect our revenue to increase as we expand our sales and marketing infrastructure and increase awareness of our products. We also expect our revenue to fluctuate from quarter to quarter due to a variety of factors, including seasonality and the impact of the buying patterns and implant volumes of our distributors and hospitals. We have historically experienced lower sales in the summer months and around the holidays.

Cost of Goods Sold, Gross Profit and Gross Margin

We manufacture the Ovation System at our manufacturing facility in Santa Rosa, California. Cost of goods sold includes the cost of raw materials, labor costs, manufacturing overhead expenses, reserves for expected scrap and inventory obsolescence as well as distribution-related expenses. Due to our relatively low production volumes compared to our current potential manufacturing capacity, a significant portion of our cost of goods sold consists of manufacturing overhead expenses. These expenses include the cost of quality assurance, material procurement, inventory control, facilities, equipment and operations supervision and management. Cost of goods sold also includes depreciation expense for production equipment, changes to our excess and obsolete inventory reserves, and certain direct costs such as shipping costs, net of costs charged to customers.

We calculate gross margin as revenue less cost of goods sold divided by revenue. Our gross margin has been and will continue to be affected by a variety of factors, primarily by our manufacturing costs and, to a lesser extent, the percentage of products we sell in the United States versus internationally and the percentage of products we sell to distributors versus directly to hospitals. Our gross margin is significantly higher on products we sell in the United States, as compared to products we sell internationally, due to significantly higher average selling prices in the United States. Our gross margin is typically higher on products we sell directly to hospitals as compared to products we sell through distributors.

We expect our gross margin to increase over the long term because we expect to increase our manufacturing efficiency and, as our production volume increases, we will spread our fixed manufacturing costs over a larger number of units, thereby significantly reducing our per-unit manufacturing costs. However, our gross margin may fluctuate from period to period depending on the interplay of all of these factors.

Sales, General and Administrative

Sales, general and administrative, or SG&A, expenses primarily consist of compensation, including salary, employee benefits and stock-based compensation expenses for our sales and marketing personnel, and for administrative personnel that support our general operations such as information technology, executive management, financial accounting, customer service, and human resources personnel. SG&A expenses also includes costs attributable to marketing our products to our customers and prospective customers, patent and legal fees, financial audit fees, insurance costs, recruiting fees, fees for other consulting services, and allocated facilities-related expenses. We expect to incur additional SG&A expenses in connection with our becoming a public company, which may increase further when we are no longer able to rely on the “emerging growth company” exemption we are afforded under the JOBS Act of 2012.

We expect our SG&A expenses to continue to increase in absolute dollars for the foreseeable future as our business grows and we continue to invest in our sales, marketing, clinical education, training and general administration resources to build our direct sales, distribution and administrative infrastructure in the United States. However, we expect our SG&A expenses to decrease as a percentage of our revenue over the long term, although our SG&A expenses may fluctuate from period to period due to the seasonality of our revenue and the timing and extent of our SG&A expenses.

Research and Development

Our research and development, or R&D, activities primarily consist of engineering and research programs associated with our products under development, as well as R&D activities associated with our core technologies. Our R&D expenses primarily consist of compensation, including salary, employee benefits and stock-based compensation expenses for our R&D and clinical personnel. We also incur significant expenses for supplies, development prototypes, design and testing, clinical study costs and product regulatory expenses. We expect our R&D expenses to increase as we initiate and advance our development projects and conduct additional clinical studies.

20


 

We expect our R&D expenses to continue to increase in absolute dollars for the foreseeable future as we continue to advance our products under development, as well as initiate and prepare for additional clinical studies. However, we expect our R&D expenses to decrease as a percentage of our revenue over the long term, although our R&D expenses may fluctuate from period to period due to the seasonality of our revenue and the timing and extent of our R&D expenses.

Interest Expense

Our interest expense primarily consists of interest expense and amortization of debt discount associated with our term loan agreement with Capital Royalty. At June 30, 2014, there was $40.0 million outstanding principal under the term loan, which accrued interest at a rate of 14.0% per annum. Additionally, we had a note payable to Boston Scientific Corporation, which accrued interest at a rate of 5.25% per annum and which was paid in full in April 2014. We also entered into a subordinated loan with Century in January 2014. At June 30, 2014, there was $6.0 million outstanding principal under that loan, which accrued interest at a rate of 5.0% per annum.

Interest Income and Other Income (Expense), Net and Income Tax Expense

Interest income and other income (expense), net primarily consists of changes in the fair value of then outstanding convertible preferred stock warrants.  Prior to our IPO, the convertible preferred stock warrants were subject to re-measurement at each balance sheet date, and any change in fair value was recognized as a component of interest income and other income (expense), net.  We continued to adjust the liability for changes in fair value until the completion of the IPO in April 2014, at which time all convertible preferred stock warrants were converted into warrants to purchase common stock and a final valuation was performed.  We recognize interest and, if applicable, penalties related to income tax matters in income tax expense.

Critical Accounting Policies and Estimates

Our consolidated financial statements included in this Form 10-Q have been prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. To prepare our financial statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities, sales, costs and expenses. We base our estimates on historical expenses and on various other assumptions that we believe to be reasonable under the circumstances. Changes in the accounting estimates are likely to occur from period to period. Actual results could be significantly different from these estimates. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgment and estimates.

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update (“ASU”) No. 2014-09.  ASU 2014-09 provided guidance related to revenue from contracts with customers. Under this guidance, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The updated standard will replace most existing revenue recognition guidance under GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The updated standard will be effective for us in the first quarter of 2017. We have not yet selected a transition method and are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.

Our critical accounting policies and estimates are more fully described in Note 2, “Summary of Significant Accounting Policies”, of our consolidated financial statements in this Form 10-Q, and in our final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act on April 17, 2014.

Revenue Recognition

Our revenue is generated from sales to two types of customers: hospitals and third-party distributors. Sales to hospitals represent the majority of our revenue. We utilize a network of direct sales representatives for sales in the United States and a combination of direct sales representatives, independent sales agencies and distributors for sales outside the United States. We recognize revenue when persuasive evidence of an arrangement exists, product delivery has occurred, pricing is fixed or determinable and collection is reasonably assured. In direct markets, we provide products for a specific implant procedure and recognize revenue at the time that we are notified that the product has been used or implanted and a valid purchase order has been received. For all other transactions, we recognize revenue when title to the goods and risk of loss transfer to customers, provided that there are no remaining performance obligations that will affect the customer’s final acceptance of the sale. We recognize revenue from sales to distributors at the time the product is shipped to the distributor. Distributors, who sell the products to their customers, take title to the products and assume all risks of ownership at time of shipment. Our distributors are obligated to pay within specified terms regardless of when or if they ever they sell the products. Our policy is to classify shipping and handling costs, net of costs charged to customers, as cost of goods sold. In general, we do not offer rights of return or price protection to our customers and have no post-delivery obligations. We offer rights of exchange in limited circumstances for products that have a short shelf life at the time of shipment. One of our distributor customers represented 18.7% of our net accounts receivable and less than 5.0% of our sales for the quarter ended June 30, 2014.

21


 

Excess and Obsolete Inventory

We state inventories at the lower of cost or market. We determine cost on a standard cost method, which approximates the first-in, first-out method. We evaluate the carrying value of our inventories in relation to our estimated forecast of product demand, which takes into consideration the estimated life cycle of our products. A significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. When quantities on hand exceed estimated sales forecasts, we record a write-down for excess inventories, which results in a corresponding charge to cost of goods sold. Charges incurred for excess and obsolete inventory were $0.2 million and $0.0 million for the quarters ended June 30, 2014 and 2013, respectively, and $0.5 and $0.1 million for the six months ended June 30, 2014 and 2013, respectively.

Our industry is characterized by ongoing product innovation that could result in an increase in the amount of obsolete inventory quantities on hand. For example, as we introduce new products or next generation products, we may be required to take charges for excess and obsolete inventory that could have a significant impact on the value of our inventory or our operating results

For discussion of our other accounting policies, refer to Note 2, “Summary of Significant Accounting Policies,” of our consolidated financial statements included in this Form 10-Q.

Results of Operations

The following table presents our results of continuing operations and the related percentage of the period’s revenue (dollars in thousands):

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

7,798

 

 

 

100.0

%

 

$

4,826

 

 

 

100.0

%

 

$

14,832

 

 

 

100.0

%

 

$

7,768

 

 

 

100.0

%

Cost of goods sold

 

3,463

 

 

 

44.4

%

 

 

3,158

 

 

 

65.4

%

 

 

7,128

 

 

 

48.1

%

 

 

5,146

 

 

 

66.2

%

Gross profit

 

4,335

 

 

 

55.6

%

 

 

1,668

 

 

 

34.6

%

 

 

7,704

 

 

 

51.9

%

 

 

2,622

 

 

 

33.8

%

Gross margin

 

55.6

%

 

 

 

 

 

 

34.6

%

 

 

 

 

 

 

51.9

%

 

 

 

 

 

 

33.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales, general and administrative

 

13,008

 

 

 

166.8

%

 

 

9,695

 

 

 

200.9

%

 

 

25,200

 

 

 

169.9

%

 

 

17,200

 

 

 

221.4

%

Research and development

 

4,066

 

 

 

52.1

%

 

 

3,145

 

 

 

65.2

%

 

 

7,872

 

 

 

53.1

%

 

 

6,314

 

 

 

81.3

%

Total operating expenses

 

17,074

 

 

 

219.0

%

 

 

12,840

 

 

 

266.1

%

 

 

33,072

 

 

 

223.0

%

 

 

23,514

 

 

 

302.7

%

Loss from operations

 

(12,739

)

 

 

(163.4

%)

 

 

(11,172

)

 

 

(231.5

%)

 

 

(25,368

)

 

 

(171.0

%)

 

 

(20,892

)

 

 

(268.9

%)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(2,454

)

 

 

(31.5

%)

 

 

(1,586

)

 

 

(32.9

%)

 

 

(4,143

)

 

 

(27.9

%)

 

 

(3,141

)

 

 

(40.4

%)

Interest income and other income

   (expense), net and income tax

   expense

 

621

 

 

 

8.0

%

 

 

(75

)

 

 

(1.6

%)

 

 

516

 

 

 

3.5

%

 

 

(83

)

 

 

(1.1

%)

Net loss

$

(14,572

)

 

 

(186.9

%)

 

$

(12,833

)

 

 

(265.9

%)

 

$

(28,995

)

 

 

(195.5

%)

 

$

(24,116

)

 

 

(310.5

%)

 

Comparison of the Three Months Ended June 30, 2014 and 2013 (all dollars in thousands)

Revenue

 

 

Three Months Ended June 30,

 

 

 

 

 

 

Percent

 

 

2014

 

 

2013

 

 

Variance

 

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

7,798

 

 

$

4,826

 

 

$

2,972

 

 

 

61.6

%

Revenue. Revenue for the three months ended June 30, 2014 and 2013 was $7.8 million and $4.8 million, respectively, an increase of 61.6%. For the three months ended June 30, 2014 and 2013, international revenue was $2.6 million and $2.3 million, respectively, and represented 33.6% and 46.7%, respectively, of our revenue in the respective periods. Our international revenue growth of $0.3 million was driven primarily by sales to new geographies. For the three months ended June 30, 2014, our distributor revenue represented 22.7% of our revenue, compared to 34.3% during the three months ended June 30, 2013. Since we initiated sales of our Ovation System in the U.S. in November 2012, our U.S. revenue has grown significantly as we increased the size of our U.S. sales force resulting in increased adoption of our products.

22


 

Cost of Goods Sold, Gross Profit and Gross Margin

 

 

Three Months Ended June 30,

 

 

 

 

 

 

Percent

 

 

2014

 

 

2013

 

 

Variance

 

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

$

3,463

 

 

$

3,158

 

 

$

305

 

 

 

9.7

%

Gross profit

 

4,335

 

 

 

1,668

 

 

 

2,667

 

 

 

159.9

%

Gross margin

 

55.6

%

 

 

34.6

%

 

 

 

 

 

 

 

 

 

Cost of Goods Sold, Gross Profit and Gross Margin. Our cost of goods sold for the three months ended June 30, 2014 was $3.5 million, resulting in a gross profit of $4.3 million, compared to $3.2 million in cost of goods sold and gross profit of $1.7 million in the three months ended June 30, 2013. Our gross margin for the three months ended June 30, 2014 was 55.6%, compared to 34.6% for the three months ended June 30, 2013. The increase in gross margin was primarily due to a reduction in our per-unit manufacturing costs resulting from the absorption of fixed manufacturing costs over substantially more units.

Operating Expenses

 

 

Three Months Ended June 30,

 

 

 

 

 

 

Percent

 

 

2014

 

 

2013

 

 

Variance

 

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales, general and administrative

$

13,008

 

 

$

9,695

 

 

$

3,313

 

 

 

34.2

%

Research and development

 

4,066

 

 

 

3,145

 

 

 

921

 

 

 

29.3

%

 

Sales, General and Administrative. Our SG&A expenses for the three months ended June 30, 2014 were $13.0 million, compared to $9.7 million for the three months ended June 30, 2013, an increase of 34.2%. The increase in SG&A expenses was primarily associated with our initiation of Ovation System sales in the U.S. in November 2012 and the continued expansion of our U.S. commercial operations. Employee-related compensation expenses for our SG&A functions increased by $1.9 million for the three months ended June 30, 2014 compared to the same period in 2013. Sales and marketing-related expenses, such as travel and tradeshows, increased by $0.9 million.  SG&A expenses also increased by $0.4 million due to increased costs associated with becoming a public company in April 2014.  

Research and Development. Our R&D expenses for the three months ended June 30, 2014 were $4.1 million compared to $3.1 million for the three months ended June 30, 2013, an increase of 29.3%. The increase in R&D expenses for the three months ended June 30, 2014 consisted primarily of employee-related salary expenses of $0.3 million and $0.6 million in product development costs including clinical study costs.

Interest Expense

 

 

Three Months Ended June 30,

 

 

 

 

 

 

Percent

 

 

2014

 

 

2013

 

 

Variance

 

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

$

(2,454

)

 

$

(1,586

)

 

$

(868

)

 

 

54.7

%

 

Interest Expense. Our interest expense for the three months ended June 30, 2014 was $2.5 million, compared to $1.6 million for the three months ended June 30, 2013. The increase in interest expense was primarily attributable to the repayment of the BSC note upon completion of our IPO in April 2014, which included unamortized debt discount of $0.7 million, as well as the higher principal balance of the Capital Royalty term loan as a result of PIK notes and the addition of the subordinated loan agreement with Century in January 2014.

Comparison of the Six Months Ended June 30, 2014 and 2013 (all dollars in thousands)

Revenue

 

 

Six Months Ended June 30,

 

 

 

 

 

 

Percent

 

 

2014

 

 

2013

 

 

Variance

 

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

14,832

 

 

$

7,768

 

 

$

7,064

 

 

 

90.9

%

 

23


 

Revenue. Revenue for the six months ended June 30, 2014 and 2013 was $14.8 million and $7.8 million, respectively, an increase of 90.9%. For the six months ended June 30, 2014 and 2013, international revenue was $5.1 million and $4.3 million, respectively, and represented 34.1% and 54.8%, respectively, of our revenue in the respective periods. Our international revenue growth of $0.8 million was driven primarily by sales to new geographies. For the six months ended June 30, 2014, our distributor revenue represented 23.7% of our revenue, compared to 39.8% during the six months ended June 30, 2013. Since we initiated sales of our Ovation System in the U.S. in November 2012, our U.S. revenue has grown significantly as we increased the size of our U.S. sales force resulting in increased adoption of our products.

Cost of Goods Sold, Gross Profit and Gross Margin

 

 

Six Months Ended June 30,

 

 

 

 

 

 

Percent

 

 

2014

 

 

2013

 

 

Variance

 

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

$

7,128

 

 

$

5,146

 

 

$

1,982

 

 

 

38.5

%

Gross profit

 

7,704

 

 

 

2,622

 

 

 

5,082

 

 

 

193.8

%

Gross margin

 

51.9

%

 

 

33.8

%

 

 

 

 

 

 

 

 

 

Cost of Goods Sold, Gross Profit and Gross Margin. Our cost of goods sold for the six months ended June 30, 2014 was $7.1 million, resulting in a gross profit of $7.7 million, compared to $5.1 million in cost of goods sold and gross profit of $2.6 million in the six months ended June 30, 2013. Our gross margin for the six months ended June 30, 2014 was 51.9%, compared to 33.8% for the six months ended June 30, 2013. The increase in gross margin was primarily due to a reduction in our per-unit manufacturing costs resulting from the absorption of fixed manufacturing costs over substantially more units.

Operating Expenses

 

 

Six Months Ended June 30,

 

 

 

 

 

 

Percent

 

 

2014

 

 

2013

 

 

Variance

 

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales, general and administrative

$

25,200

 

 

$

17,200

 

 

$

8,000

 

 

 

46.5

%

Research and development

 

7,872

 

 

 

6,314

 

 

 

1,558

 

 

 

24.7

%

 

Sales, General and Administrative. Our SG&A expenses for the six months ended June 30, 2014 were $25.2 million, compared to $17.2 million for the six months ended June 30, 2013, an increase of 46.5%. The increase in SG&A expenses was primarily associated with our initiation of Ovation System sales in the U.S. in November 2012 and the continued expansion of our U.S. commercial operations. Employee-related compensation expenses for our SG&A functions increased by $5.6 million for the six months ended June 30, 2014 compared to the same period in 2013. Sales and marketing-related expenses, such as travel and tradeshows, increased by $1.5 million.  SG&A expenses also increased by $0.7 million due to increased costs associated with becoming a public company in April 2014.

Research and Development. Our R&D expenses for the six months ended June 30, 2014 were $7.9 million compared to $6.3 million for the six months ended June 30, 2013, an increase of 24.7%. The increase in R&D expenses for the six months ended June 30, 2014 consisted primarily of employee-related salary expenses and product development costs including clinical study costs.

Interest Expense

 

 

Six Months Ended June 30,

 

 

 

 

 

 

Percent

 

 

2014

 

 

2013

 

 

Variance

 

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

$

(4,143

)

 

$

(3,141

)

 

$

(1,002

)

 

 

31.9

%

 

Interest Expense. Our interest expense for the six months ended June 30, 2014 was $4.1 million, compared to $3.1 million for the six months ended June 30, 2013. The increase in interest expense was primarily attributable to the repayment of the BSC note upon completion of our IPO in April 2014, which included unamortized debt discount of $0.7 million, as well as the higher principal balance of the Capital Royalty term loan as a result of PIK notes and the addition of the subordinated loan agreement with Century in January 2014.

24


 

Liquidity and Capital Resources

Since our inception, we have generated significant losses and expect to continue to generate losses for the foreseeable future. Our independent registered public accounting firm has expressed in its auditors’ report on our consolidated financial statements for the year ended December 31, 2013 a “going concern” opinion, meaning that we have suffered recurring losses from operations and negative cash flows from operations that raise substantial doubt regarding our ability to continue as a going concern. In January 2014, we entered into a term loan agreement with Century for an aggregate amount of $6.0 million, $4.0 million of which we drew down in January 2014 and the remaining $2.0 million of which we drew down in March 2014. In April 2014, we completed our IPO of 7,475,000 shares of common stock, which included the exercise in full by the underwriters in the offering of their option to purchase 975,000 additional shares of common stock, at an offering price of $12.00 per share. We received net proceeds of approximately $81.1 million, after deducting underwriting discounts and commissions and offering expenses. At June 30, 2014, we had $95.7 million in cash and cash equivalents.

We believe that our available cash will be sufficient to satisfy our liquidity requirements for at least the next 18 months. We have utilized, and may continue to utilize, debt arrangements with debt providers and financial institutions to finance our operations. Factors such as interest rates and available cash will impact our decision to continue to utilize debt arrangements as a source of cash.

Historically, our sources of cash have primarily included private placements of equity securities and debt arrangements, and, to a much lesser extent, cash generated from operations, primarily from the collection of accounts receivable resulting from sales. Our historical cash outflows have primarily been associated with cash used for operating activities such as expansion of our sales and marketing infrastructure, investing in inventory, R&D activities and other working capital needs.

The following presents a discussion of our cash flows for the six months ended June 30, 2014 and 2013 (in thousands):

 

 

 

Six Months Ended June 30,

 

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$

38,108

 

 

$

45,393

 

Net cash used in operating activities

 

 

(26,646

)

 

 

(22,702

)

Net cash used in investing activities

 

 

(67

)

 

 

(191

)

Net cash provided by financing activities

 

 

84,270

 

 

 

23

 

Effect of exchange rate on cash

 

 

(8

)

 

 

4

 

Cash and cash equivalents at end of period

 

$

95,657

 

 

$

22,527

 

 

Operating activities. The increase in net cash used in operating activities during the six months ended June 30, 2014 compared to the six months ended June 30, 2013 was primarily related to our increased expenditures, including higher employee headcount, employee-related expenses and working capital needs, as a result of our deeper commercial penetration in the United States.

Investing activities. Net cash used in investing activities in the six months ended June 30, 2014 and 2013 was related to the purchase of capital equipment.

Financing activities. The net cash provided by financing activities in the six months ended June 30, 2014 was primarily related to the execution and draw-down of our subordinated loan agreement with Century, proceeds from the issuance of common stock and payments for deferred offering costs related to our IPO.

Indebtedness

For discussion of our indebtedness, refer to Note 9, “Notes Payable”, of our consolidated financial statements included in this Form 10-Q.

Future Capital Requirements

Our liquidity position and capital requirements are subject to a number of factors. For example, our cash inflow and outflow may be impacted by the following:

·

our ability to generate revenues;

·

fluctuations in gross margins and net losses; and

·

fluctuations in working capital.

25


 

Our primary short-term capital needs, which are subject to change, include expenditures related to:

·

support of our commercialization efforts related to our current and future products;

·

improvements in our manufacturing capacity and efficiency;

·

new research and product development efforts; and

·

payment of interest due under our loan agreements with Capital Royalty and Century.

Additionally, as a public company, we will incur significant audit, legal, and other expenses that we did not incur as a private company.

Although we believe the foregoing items reflect our most likely uses of cash in the short term, we cannot predict with certainty all of our particular short-term cash uses or the timing or amount of cash used. If cash generated from operations is insufficient to satisfy our working capital and capital expenditure requirements, we may be required to sell additional equity or debt securities or obtain additional credit facilities. This capital may not be available on satisfactory terms, if at all. Furthermore, any additional equity financing may be dilutive to our stockholders, and debt financing, if available, may include restrictive covenants. For a discussion of other factors that may impact our future liquidity and capital funding requirements, see “Risk Factors.”

Credit Risk

We had receivable balances from customers in Europe of approximately $2.4 million as of June 30, 2014 and $2.4 million as of December 31, 2013. Our accounts receivable outside of the United States are primarily due from third-party distributors, and to a lesser extent, public government-owned and private hospitals. Our accounts receivable in the United States are primarily due from for-profit and not-for-profit private hospitals. Our historical write-offs of accounts receivable have not been significant.

We monitor the financial performance and credit worthiness of our customers, so that we can properly assess and respond to changes in their credit profile. Our third-party distributors operate in certain countries, such as Greece, Italy, Spain and Turkey, where economic conditions continue to present challenges to their businesses, and thus, could place at risk the amounts due to us from them. These distributors are owed certain amounts from public hospitals that are funded by their governments. Adverse financial conditions in these countries may continue, thus negatively affecting the length of time that it will take us to collect associated accounts receivable, or impact the likelihood of ultimate collection.

Off Balance Sheet Arrangements

We do not maintain any off balance sheet partnerships, arrangements, or other relationships with unconsolidated entities or others, often referred to as structured finance or special-purpose entities, which are established for the purpose of facilitating off balance sheet arrangements or other contractually narrow or limited purposes.

 

 

 

26


 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We do not believe that we currently have material exposure to interest rate, foreign currency exchange rate or other relevant market risks.

Interest Rate Risk

We are exposed to market risks in the ordinary course of our business. Our cash and cash equivalents include cash in readily available checking and money market accounts. These securities are not dependent on interest rate fluctuations that may cause the principal amount of these assets to fluctuate. Additionally, the interest rate on our Capital Royalty and Century term loans are fixed and not subject to changes in market interest rates.

Foreign Currency Exchange Risk

A significant portion of our business is located outside the United States and, as a result, we generate revenue and incur expenses denominated in currencies other than the U.S. dollar, a majority of which is denominated in Euros. For the quarter ended June 30, 2014 and 2013, approximately 22.7% and 28.9%, respectively, of our sales were denominated in foreign currencies. As a result, our revenue can be significantly impacted by fluctuations in foreign currency exchange rates. We expect that foreign currencies will represent a lower percentage of our sales in the future due to the recent and anticipated future growth of our U.S. business. Our international selling, marketing and administrative costs related to these sales are largely denominated in the same foreign currencies, which mitigated our foreign currency exchange risk exposure.

 

Item 4.  CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

Prior to our IPO, we were a private company with limited accounting personnel and other resources with which to address our controls and procedures. However, we are committed to maintaining disclosure controls and procedures designed to ensure that information required to be disclosed in our periodic reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. 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. Management necessarily applies its judgment in assessing the benefits of controls relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within our company have been detected. Based on the evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act) required by Rules 13a-15(b) or 15d-15(b) under the Exchange Act, our Chief Executive Officer and our Chief Financial Officer have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective at the reasonable assurance level.

(b) Changes in internal controls.

There were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

27


 

Part II Other Information

 

Item 1.  LEGAL PROCEEDINGS

We may from time to time be involved in various claims and legal proceedings of a nature we believe are normal and incidental to a medical device business. These matters may include product liability, intellectual property, employment, and other general claims. We accrue for contingent liabilities when it is probable that a liability has been incurred and the amount can be reasonably estimated. We are not presently a party to any legal proceedings that, in the opinion of our management, are likely to have a material adverse effect on our business. Regardless of outcome, litigation can have an adverse impact on us because defense and settlement costs, diversion of management resources and other factors.

 

Item 1A.  RISK FACTORS

There have been no material changes from the risk factors set forth in Part II, Item IA, “Risk Factors” in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2014, filed with the SEC on May 15, 2014.

 

Item 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sales of Equity Securities

None.

Use of Proceeds from the Sale of Registered Securities

On April 22, 2014, we closed our IPO of 7,475,000 shares of common stock, including 975,000 shares of common stock from the full exercise of the overallotment option of shares granted to the underwriters, at a price to the public of $12.00 per share. The offer and sale of all of the shares in the IPO were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-194466), which was declared effective by the SEC on April 15, 2014. The offering commenced on April 16, 2014, closed on April 22, 2014, and did not terminate before all of the shares in the IPO that were registered in the registration statement were sold. J.P. Morgan Securities LLC and Credit Suisse Securities (USA) LLC acted as managing underwriters. We raised approximately $81.1 million in net proceeds from the offering, after deducting underwriter discounts and commissions of approximately $6.3 million and other offering expenses of approximately $2.3 million.

No offering expenses were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning ten percent or more of any class of our equity securities or to any other affiliates. There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act on April 17, 2014. We estimate that, as of June 30, 2014, we have used approximately $21.8 million of the net proceeds from the offering to repay our promissory note to Boston Scientific Corporation, to expand our sales and marketing infrastructure, to fund additional research and development, and for working capital and other general corporate purposes. The remainder of the net proceeds from the offering has been invested in cash and cash equivalents.

 

Item 6.  EXHIBITS

The exhibits listed in the Exhibit Index to this Quarterly Report on Form 10-Q are incorporated herein by reference.

 

 

 

28


 

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 in the city of Santa Rosa, State of California, on August 8, 2014.

 

 

TRIVASCULAR TECHNOLOGIES, INC.

 

By:

 

/s/ Michael R. Kramer 

 

Michael R. Kramer

 

Chief Financial Officer

 

(Principal Financial Officer and Duly Authorized Officer)

 

 

 

29


 

Exhibit Index

 

Exhibit
Number

  

Exhibit Description

 

10.1+

 

 

Amendment No. 1, dated June 30, 2014, to the Amended and Restated Employment Agreement by and between Christopher G. Chavez and the Company (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-36419), filed on July 3, 2014)

 

31.1

 

 

Certification of principal executive officer pursuant to Rule 13a 14(a)/15d 14(a) of the Securities Exchange Act of 1934, as amended

 

31.2

 

 

Certification of principal financial officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.

 

32.1

 

 

Certification of principal executive officer and principal financial officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101.INS

 

 

XBRL Instance Document*

 

101.SCH

 

 

XBRL Taxonomy Extension Schema Document*

 

101.CAL

 

 

XBRL Taxonomy Calculation Linkbase Document*

 

101.DEF

 

 

XBRL Taxonomy Extension Definition Linkbase Document*

 

101.LAB

 

 

XBRL Taxonomy Label Linkbase Document*

 

101.PRE

 

 

XBRL Taxonomy Presentation Linkbase Document*

+

Indicates management contract or compensatory plan.

*

In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not “filed”.

30