e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended March 31, 2006 |
OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to |
Commission file number: 000-51323
Micrus Endovascular Corporation
(Exact name of registrant as specified in its charter)
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Delaware
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23-2853441 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
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821 Fox Lane
San Jose, California
(Address of principal executive offices) |
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95131
(Zip Code) |
(408) 433-1400
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $0.01 par value per share
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K is
not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any
amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2 of the
Exchange Act.
Large accelerated
filer o Accelerated
filer o Non-accelerated
filer þ
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2 of the
Exchange
Act). Yes o No þ
As of September 30, 2005, the aggregate market value of the
registrants common stock held by non-affiliates of the
registrant was $79,565,218 based on the closing sale price of
such stock as reported on the National Association of Securities
Dealers Automated Quotation System National Market System.
Shares of common stock held by each officer and director as of
that date and by each person who owned 5% or more of the
registrants outstanding common stock as of March 31,
2005 have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of June 1, 2006 registrant had outstanding 14,220,891
shares of common stock, $0.01 par value per share.
MICRUS ENDOVASCULAR CORPORATION
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
Certain information contained in or incorporated by reference
in this Report contains forward-looking statements that involve
risks and uncertainties. The statements contained in this Report
that are not purely historical are forward-looking statements
within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding
our expectations, beliefs, intentions or strategies regarding
the future. All forward-looking statements included in this
Report are based on information available to us on the date
hereof, and we assume no obligation to update any such
forward-looking statements. Our actual results could differ
materially from those discussed herein. Factors that could cause
or contribute to such differences include, but are not limited
to, those discussed in Item 1A, Risk Factors, and elsewhere
in this Report. References herein to Micrus,
the Company, we, our,
us and similar words or phrases are references to
Micrus Endovascular Corporation and its subsidiaries, unless the
context otherwise requires. Unless otherwise provided in this
Report, trademarks identified by
®
and
TM
are registered trademarks or trademarks, respectively, of Micrus
Endovascular Corporation or its subsidiaries. All other
trademarks are the properties of their respective owners.
PART I
The Company
We develop, manufacture and market both implantable and
disposable medical devices used in the treatment of cerebral
vascular diseases. Our products are used by interventional
neuroradiologists and neurosurgeons primarily to treat cerebral
aneurysms responsible for hemorrhagic stroke. We recently
launched the first of our line of products designed to treat
ischemic disease. Hemorrhagic and ischemic stroke are both
significant causes of death and disability worldwide.
Our product lines consist of endovascular systems that enable a
physician to gain access to the brain in a minimally invasive
manner through the vessels of the arterial system. We believe
our products provide a safe and reliable alternative to more
invasive neurosurgical procedures for treating aneurysms. Our
proprietary three-dimensional, embolic coils are unique in that
they anatomically and rapidly deploy within an aneurysm, forming
a scaffold that conforms to a wide diversity of aneurysm shapes
and sizes. In addition, our
Cerecyte®
microcoil product line incorporates an absorbable material
called polyglycolic acid (PGA), bioactive filaments which reside
within the central lumen our microcoils. Our
Cerecyte®
line of microcoils, introduced in fiscal 2005, incorporates
bioactive filaments that we believe based on limited data may
promote faster aneurysm healing and may reduce the risk of
recanalization or retreatment.
We are expanding our product line beyond microcoils and access
systems, and in January 2006, we entered into a license,
development and distribution agreement with Biotronik AG which
provides us with exclusive access to certain stent technologies
for neurovascular applications. In February 2006, Biotronik
received CE Mark clearances for the
Pharostm
stent for both the treatment of cerebral aneurysms and the
treatment of ischemic disease. In March 2006 we launched our
Pharos stent in certain countries that recognize the CE Mark,
providing us with our first commercial product for the treatment
of ischemic disease. We plan to pursue regulatory clearance in
the United States for our Pharos stent, which we believe
represents a significant market opportunity for us.
We recently launched an access system, which includes
microcatheters and guidewires used primarily to deliver
microcoils and stents for the treatment of cerebral vascular
disease.
We have substantially increased the size of our sales and
marketing organization in the past 12 months, and currently
market our products through a direct sales force in the United
States, Canada, England, Germany, Austria, France and
Switzerland. We market through a network of distributors
covering the major markets in the rest of Europe, Latin America,
Asia and the Middle East, and entered an exclusive distribution
agreement with Goodman to market our products in the Japanese
market. We are
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currently seeking regulatory clearance to enter the Chinese
market and are evaluating potential distribution partners to
commercialize our products in China.
We have executive offices in San Jose, California and sales
offices in Switzerland and the United Kingdom. We were
incorporated under the laws of the State of Delaware in 1996.
Industry Overview
Stroke is a condition resulting from a sudden disruption of
blood flow to the brain. If deprived of oxygen the brain tissue
soon becomes injured, often resulting in irreversible
neurological impairment or death. Strokes consist of either
ruptures (hemorrhagic stroke) or blockages (ischemic stroke) of
vessels within or leading to the brain. According to the
American Heart Association, stroke is the third leading cause of
death in the United States. Patients who survive a stroke are
often left with disabilities, including paralysis, coma,
impaired cognition, decreased coordination, loss of visual
acuity, loss of speech, loss of sensation or some combination of
these conditions. A significant need for effective prevention of
stroke exists because of the severity of the disorder, its
prevalence in society, the shortcomings of current therapies and
the high cost of treatment and care.
One cause of hemorrhagic stroke is the rupture of cerebral
aneurysms. A cerebral aneurysm is an outward bulging of an
artery in the brain that can develop at weak points in the
arterial wall. In some cases, the patient will experience
symptoms such as headache, blurred vision or dizziness as the
aneurysm grows, but in many cases patients will have no
symptoms. The most devastating complication of a cerebral
aneurysm occurs when the aneurysm ruptures, decreasing blood
flow to brain tissue and leading to increased pressure on the
brain. Rupture of a cerebral aneurysm typically occurs suddenly
and without warning, often leading to catastrophic brain injury
or death.
Historically, patients diagnosed with a cerebral aneurysm
underwent a craniotomy and aneurysmal clipping, a
highly-invasive surgical procedure in which a neurosurgeon
creates an opening in the skull, dissects or retracts brain
tissue to gain access to the aneurysm, and places a metal clip
at the base of the aneurysm to stop further blood flow into the
aneurysm, halting its growth and preventing future rupture. This
procedure is typically performed by a neurosurgeon at a
specialized hospital or medical center. Aneurysmal clipping
requires a lengthy recovery time, and has the significant
expense, morbidity and complication risks associated with a
major neurosurgical procedure.
In the 1990s interventional neuroradiologists and to a lesser
extent neurosurgeons, who collectively are referred to in the
industry as neurointerventionalists, started using
an alternative procedure to clipping, known as embolic coiling,
to treat cerebral aneurysms. Rather than reaching the aneurysm
by opening the skull and moving aside the brain tissue, access
to the aneurysm in an embolic coiling procedure is obtained
through a catheterization procedure in which the physician
inserts a catheter into the femoral artery of the upper leg and
threads it under fluoroscopy through the arterial system to the
brain and ultimately into the opening of the aneurysm. The
neurointerventionalist then uses guidewires and catheters to
access the aneurysm, then advances embolic coils through the
microcatheter to fill the aneurysm. Embolic coils are small
platinum coils that range in size from 2 mm to 20 mm
and once released into the aneurysm assume complex shapes
filling the aneurysm. The coils decrease or stop blood flow into
the aneurysm, enabling formation of a clot and scar tissue which
prevent further growth or rupture of the aneurysm. Since the
mid-1990s, embolic coiling has become a more widely accepted
treatment for cerebral aneurysms because it is a less invasive
procedure that results in lower overall treatment cost, shorter
recovery times, and less traumatic effect on the patient.
In 2002, The Lancet, a leading medical journal, published
the results of the International Subarachnoid Aneurysm Trial, an
independent, randomized clinical trial involving
2,143 patients in Europe, North America and Australia that
compared aneurysm clipping with embolic coiling as a method of
treating cerebral aneurysms. Known as ISAT, this trial
concluded, based on survey of patients published in The
Lancet in October 2002, that among the patients
participating in the trial, endovascular intervention with
detachable platinum coils resulted in a 22.6% relative and 7.4%
absolute reduction in the risk of
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major brain injury or death compared with neurosurgical clipping
of the aneurysm at one year follow up. The seven-year follow up
data published in The Lancet in September 2005 indicated
a continued clinical advantage for patients whom underwent
coiling versus clipping procedures.
Market Opportunity
According to the American Heart Association, approximately
700,000 strokes occur annually in the United States. Ischemic
stroke affects approximately 615,000 patients annually while
hemorrhagic stroke affects approximately 85,000 patients per
year in the United States. We believe that a majority of the
hemorrhagic strokes are caused by cerebral aneurysms. We believe
embolic coiling is being used to treat over 30% of the patients
diagnosed with cerebral aneurysms in the United States. Industry
sources also indicate that approximately 60-65% of patients
diagnosed with cerebral aneurysms in European countries are
treated using embolic coiling procedures. We believe that
embolic coiling procedures can be used to treat a similar
percentage of patients with cerebral aneurysms in the United
States as awareness grows among patients and physicians of the
advantages of embolic coiling. Industry sources estimate that in
Asia approximately 15% of patients are treated with embolic
coiling. Industry sources further estimate that the worldwide
endovascular device market for treatment of hemorrhagic stroke
was approximately $400 million to $475 million in 2005.
We believe that growth drivers in the market for embolic coiling
products include the overall trend towards less invasive
procedures, an increased number of neurointerventionalists
trained to perform embolic coiling procedures, and the aging
population in whom aneurysms occur with greater frequency.
The key challenges of embolic coiling procedures are the
following:
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Access to the Aneurysm Site. Specialized products are
required to access the complex vasculature of the brain,
properly access the aneurysm site and perform a coiling
procedure. These access products include microcatheters and
guidewires. In order to navigate the complex vascular anatomy of
the brain, access products must have enough column strength to
be pushed significant distances through this vasculature, yet
flexible enough to travel to distal portions of the brain
without injuring blood vessels. |
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Framing and Filling the Aneurysm. In order to effectively
treat an aneurysm, the interventionalist must fill the aneurysm
with a sufficient volume of coils to disrupt blood flow and
occlude the aneurysm. Aneurysms vary in shape and size and,
consequently, neurointerventionalists seek an embolic coiling
solution that enables coils to conform to the aneurysms
shape without requiring extensive manipulation of the coil.
Coils that frame, or conform to, the aneurysm wall reduce the
risk of rupture and facilitate the retention of additional coils
in the aneurysm. |
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Coverage of the Neck of the Aneurysm. It is important to
effectively cover the neck of the aneurysm to help reduce
recanalization and ensure a better clinical outcome. Embolic
coils that deploy in a random manner are less likely to
adequately cover the neck of the aneurysm. |
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Deployment. Once embolic coils are placed in the
aneurysm, the interventionalist must be able to quickly and
reliably deploy the coils from the device positioning unit
within the microcatheter. Unreliable detachment mechanisms can
lead to inadvertent movement of the embolic coil out of optimal
position as the interventionalist withdraws the positioning unit
only to discover that the coil is still attached. Further,
increased time for deployment increases procedure time and its
attendant risks. |
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Recanalization. Industry sources estimate that
recanalization, or the continued or renewed growth of the
aneurysm, occurs in approximately 20 to 35% of aneurysms treated
with embolic coiling. Experts believe that recanalization occurs
due to incomplete filling of the aneurysm or disruption of the
blood clot that fills the aneurysm following an embolic coiling
procedure. Studies have shown that the recanalization rate is
higher for patients treated with embolic coiling procedures
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to aneurysm clipping. Therefore, embolic coiling solutions that
decrease recanalization rates are highly desirable. |
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Risk of Rupture. Embolic coiling solutions that enhance
safety and limit the risk of rupture or re-rupture in treatment
of aneurysms are also essential. Successful framing and filling
of the aneurysm requires precise placement of the embolic coil.
Neurointerventionalists seek embolic coiling solutions that
minimize stress on the aneurysm wall in the course of placing or
repositioning the coil in order to reduce the risk of rupture. |
The Micrus Solution
We are focused on a broad range of cerebral vascular treatments
and have developed a proprietary embolic coiling solution,
stents and access products that are designed to effectively
access and treat cerebral aneurysms and ischemic disease. In
addition, we have also developed a line of microcoils that
incorporate bioactive materials which we believe may result in
improved healing due to induced tissue response.
Our solutions have the following key features:
Self-Deploying Anatomically Conforming Coils. Our
proprietary spherical
MicruSphere®
and
Presidiotm
microcoils deploy into a three-dimensional configuration that
assumes an aneurysms shape upon deployment and are
designed to provide uniform framing of the aneurysm. Our
self-deploying microcoils require very little manipulation for
effective placement, thereby reducing the need for microcoil
manipulation and attendant stress on the aneurysm wall.
Enhanced Coverage of the Neck of the Aneurysm. We
believe effective neck coverage reduces the rate of
recanalization. Our microcoils are designed to facilitate
coverage of the neck of the aneurysm in two ways. First, the
three dimensional configuration of our spherical MicruSphere and
Presidio microcoils provide the framework to stabilize the neck
of the aneurysm. Second, our
UltiPaq®
finishing coils are soft and flexible, permitting coverage
across the neck of the aneurysm.
Unique Framing and Filling Technology. Our
Presidio Microcoil is a single, stretch resistant Cerecyte
microcoil designed to deliver stable, predictable aneurysm
framing and filling to increase coverage of the aneurysm wall
and neck with a single coil deployment. As the Presidio is also
a Cerecyte microcoil, its bioactive filament may also induce a
beneficial tissue response. We believe that effective neck
coverage may reduce the rate of recanalization and need for
retreatment.
Deployment Technology. Our proprietary electronic
microcoil deployment system employs a resistive heating fiber
deployment mechanism that enables a consistent five second
deployment cycle, allowing neurointerventionalists to quickly
and reliably deploy the microcoil. Our electronic microcoil
deployment system has been designed so that microcoil deployment
time remains consistent regardless of the number of coils used
in the procedure. We believe that our electronic microcoil
deployment system enables neurointerventionalists to more
rapidly deploy microcoils and generally reduce procedure time.
Bioactive Technology. Cerecyte is our proprietary
microcoil product line that incorporates filaments comprised of
polyglycolic acid
(PGA)®
within the lumen of our microcoils MicruSphere,
Presidio,
HeliPaq®
and UltiPaq. Initial data from single center studies presented
at major scientific meetings suggest that Cerecyte may promote
faster aneurysm healing and may reduce the risk of
recanalization or retreatment. To improve on the scientific
rigor of these early data points, we have initiated two post
market studies, a prospective randomized trial and a registry,
which will provide additional data regarding the potential
benefits of Cerecyte.
Stent Platform. Our
Pharostm
stent is a balloon-delivered device which enables the
neurointerventionalist to deliver and deploy a stent in one
step, eliminating the need for pre-dilation of the constricted
vasculature. We believe this feature may reduce overall
procedural time and cost. We believe the balloon catheter marker
bands combined with the radiopacity of the stainless steel stent
provide for excellent visibility resulting in improved accuracy
of deployment. We also believe that the combination of
PharosTM
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Rapid Exchange
Technologytm
and trackable tip will enable a physician to effectively access
the tortuous and distal anatomy of the brain. In March 2006, we
launched the Pharos stent in certain countries outside of the
United States that recognize the CE Mark.
Improved Access Products. We launched an access
product line which includes the Courier line of Microcatheters
and the Watusi line of guidewires in 2006. We believe that our
Courier microcatheters and Watusi guidewires will address the
need of neurointerventionalists for more predictable and secure
access to the complex and distal anatomy of the cerebral
vasculature. In addition, we expect to launch a steerable
microcatheter system in late fiscal 2007.
Micrus Strategy
Our objective is to develop and commercialize innovative,
minimally invasive medical devices that provide a comprehensive
solution to physicians for the treatment of cerebral vascular
diseases. The key elements of our strategy to achieve our
objective include:
Expand Market Share of Our Microcoils through Continued
Product Innovation. We believe our line of microcoils
offers a safer, more effective and less technically demanding
embolic coiling system to neurointerventionalists which has
resulted in the rapid growth of our revenues. We believe
continued product innovations such as the introductions of our
Cerecyte line of bioactive microcoils and the Presidio microcoil
will allow us to grow market share. We are continuing to develop
new technologies which we believe may further enhance aneurysm
occlusion and reduce the rate of recanalization.
Increase Our Per-Procedure Revenues. Since June
2005 we have launched seven new products. This product line
expansion includes new microcoils, as well as stents,
microcatheters and guidewires that we believe increased our
per-procedure revenue opportunity from approximately 40% to 80%
of every procedure dollar.
Leverage Our Sales and Marketing Expansion. Over
the past 12 months we have more than doubled our sales and
marketing group worldwide and anticipate continuing to expand
our sales and marketing group in Europe and, as needed, in other
geographic territories. This expansion should provide us access
to more hospitals, garner more per-procedure revenues and expand
our market share.
Continue to Penetrate Asian Market. We believe
that Asia represents approximately one-third of the global
neurointerventional market. In particular, we believe that Japan
and China represent a significant potential market for our
products and in March 2006 we launched our sales and marketing
efforts in Japan through our distribution partner Goodman. We
intend to launch our product line in China in fiscal 2007.
License or Acquire Complementary Products and
Technologies. In addition to growing our business
through internal product development efforts, we will continue
to look for opportunities to license and/or acquire technologies
in order to provide solutions for the treatment of a variety of
cerebral vascular conditions. In July 2005, we acquired
certain steerable catheter technology from Vascular FX. In
January 2006, we entered into a license, development and
distribution agreement with Biotronik, a company with stent
design and manufacturing expertise, pursuant to which we
collaborate with Biotronik to develop certain neurovascular
stent products and that provides us with the exclusive worldwide
right to market stent products developed jointly by Biotronik
and us. By continuing to acquire complementary products, we
believe we can address a broader range of physician and patient
needs.
Enter the Ischemic Stroke Market. Through our
agreement with Biotronik, we recently launched our first product
addressing the ischemic stroke market, our Pharos stent. We
intend to continue developing additional stent platforms for
this market and intend to explore other in-licensing,
acquisition and internal research efforts to develop and
introduce other ischemic stroke products.
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Products
The following table shows our principal products and indicates
significant applications for these products. Most of our
products are intended for single use and are either disposed of
or, in the case of microcoils, remain in the patient after the
procedure. All of our products set forth in the following table
have received CE Mark clearance and, except for our Pharos
stent, are covered by the FDAs 510(k) process.
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Product Line |
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Sizes |
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Product Description |
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2-18 mm diameter |
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Three-dimensional framing microcoil; stabilizes the aneurysm.
Available in bare platinum and Cerecyte. |
MicruSphere®
Microcoil
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HeliPaq: 2-20 mm diameter HeliPaq SR: 2-10 mm diameter |
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Filling microcoil;
occludes aneurysm
following framing. Available in bare platinum and Cerecyte. |
HeliPaq® &
HeliPaq
SR®
Microcoil
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4 and 6 mm
diameter |
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Filling microcoil; occludes aneurysm following framing.
Available in bare platinum. |
InterPaq®
Microcoil
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Product Line |
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Sizes |
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Product Description |
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Framing and filling coil to |
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4-8 mm
diameter |
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deliver more neck and wall coverage in a single deployment.
Available in Cerecyte. |
Presidio
Microcoil
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Finishing microcoil; soft, stretch resistant,
pliable |
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2-4 mm
diameter |
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microcoil designed to complete filling of the aneurysm.
Available in bare platinum and Cerecyte. |
UltiPaq®
Microcoil
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Available in MicruSphere, |
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2-18 mm
diameter |
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HeliPaq SR, UltiPaq and Presidio. Includes filaments comprised
of PGA, a bioactive material. |
Cerecyte®
Microcoil
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Product Line |
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Sizes |
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Product Description |
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.0170 and .0190 inner diameter and 150 cm length |
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Device used to deliver microcoils into the aneurysm. |
Courier
Microcatheter
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.014 diameter and 205 cm length |
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Device used to guide microcatheters and other devices to the
aneurysm or stenosis site. |
Watusi
Guidewire
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Product Line |
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Sizes |
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Product Description |
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2.5 mm 4.0 mm outer diameter and
8 mm 20 mm length |
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For use as scaffolding of wide-neck aneurysms to ensure that the
microcoil is not dislodged and for use in opening intracranial
arteries that have narrowed. |
Pharos
Stent System
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Electronic control that activates our proprietary microcoil
deployment mechanism. |
Device Control Box and Connecting Cable
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Microcoil Products
We offer a range of microcoils designed to enable
neurointerventionalists to treat a wide variety of aneurysms.
These include our MicruSphere, Helipaq and Ultipaq microcoil
systems which are available in bare platinum and Cerecyte and
the Presidio line of microcoils which incorporates our
proprietary Cerecyte technology. All of our microcoils utilize
our rapid deployment system and perform certain specific
functions:
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Frame. Our MicruSphere microcoils are typically the first
microcoils used by the interventionalist to frame the aneurysm.
The MicruSphere microcoil folds automatically into a spherical
three-dimensional shape that conforms to the shape of the
aneurysm. This conforming shape reduces the need for the
clinician to manipulate and reposition the coil multiple times,
shortens procedure time, and reduces the potential for
complications. Additional microcoils may then be placed within
the first microcoil in smaller sizes in an approach known as the
Russian doll technique, sequentially filling the
aneurysm. |
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Frame and Fill. Our Presidio Microcoil features longer
lengths and the unique MicruSphere shape to frame and fill the
aneurysm. This can allow for more platinum to be deployed at the
neck of the aneurysm, as well as greater packing density to be
achieved with a single coil. |
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Fill. Our proprietary HeliPaq and HeliPaq SR products are
filling microcoils used to fill gaps which may remain in the
center of the aneurysm after placement of one or more of our
MicruSphere microcoils. Both the HeliPaq and the HeliPaq SR
automatically form a helical shape upon deployment, which allows
filling of complex gaps in the aneurysm. The HeliPaq SR employs
a stretch-resistant system designed to prevent the microcoil
from stretching in an unwanted manner while being positioned in
the aneurysm. InterPaq microcoils are filling coils used in
larger size aneurysms requiring a greater volume of coil mass in
order to be adequately filled. |
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Finish. Our UltiPaq microcoil is an extra-soft,
stretch-resistant finishing coil, used to fill any final gaps in
the aneurysm after placement of one or more MicruSphere,
Presidio and/or HeliPaq microcoils. |
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Cerecyte. Our proprietary Cerecyte microcoil product line
incorporates filaments comprised of PGA into most of our current
line of microcoils MicruSphere, Presidio, HeliPaq,
SR and UltiPaq. Because the PGA filaments run through the center
of our microcoils, our Cerecyte microcoils possess the same
handling characteristics as our standard platinum microcoils.
Initial data from single center studies presented at major
scientific meetings suggest that Cerecyte may improve clinical
outcomes compared to bare platinum coils. We have initiated two
post-market clearance studies in order to collect human clinical
data for the purpose of demonstrating accelerated healing by our
Cerecyte microcoil product line. |
Our Cerecyte Microcoil Trial is a randomized trial which will
directly compare Micrus Cerecyte bioactive coils to Micrus bare
platinum coils for the treatment of intracranial aneurysms. Up
to 23 multinational enrolling centers and will enroll
250 patients in each study arm. Our planned Cerecyte
Registry is planned to be a non-randomized United States
multi-center registry designed to document the clinical and
angiographic outcomes of intracranial aneurysms treated with our
bioactive Cerecyte microcoils. We have begun to enroll patients
in our Cerecyte Registry and plan to enroll a total of
250 patients to assess patient outcomes one year after
treatment.
Pharos Balloon-Expandable Stent
Our Pharos stent is a balloon-delivered device which can be used
both to treat ischemic disease and for scaffolding of wide-neck
aneurysms to ensure that the microcoil is not dislodged. For the
treatment of ischemic disease, our Pharos stent dilates
intracranial arteries that have narrowed and allows the
neurointerventionalist to deliver and deploy a stent in one
step. We believe this feature will help reduce overall
procedural time and cost. We believe the balloon catheter marker
bands combined with the radiopacity of the stent provide for
excellent visibility resulting in improved accuracy of
deployment. We
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believe that Pharos Rapid Exchange Technology and
trackable tip will enable a physician to access tortuous and
distal anatomy. In March 2006, we launched the Pharos stent in
certain countries outside the United States that recognize the
CE Mark, and plan to pursue regulatory clearance for the Pharos
stent in the United States.
Access Products
We recently introduced the following guidewire and microcatheter
products:
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Couriertm
Microcatheter. Our Courier Microcatheter is a device used to
deliver microcoils to the aneurysm. Our Courier microcatheter
features our proprietary
Endurancetm
technology designed to enhance both tip shaping and tip shape
retention, both of which are vital to optimal coil delivery. It
will be available in straight and pre-shaped models. Our Courier
Microcatheter has been designed to provide the
neurointerventionalist with the ability to navigate the tortuous
vasculature of the brain. The microcatheters design and
hydrophilic coating enable a high level of pushability, tip
shape retention and overall tracking. |
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Watusitm
Guidewire. Our Watusi Guidewire is used to guide the
microcatheter or other delivery system to the aneurysm. Our
Watusi Guidewire features excellent visualization as well as our
proprietary Response
Tiptm
technology, which results in the unique ability to effectively
shape and re-shape the guidewire tip. |
Microcoil Delivery System and Deployment Mechanism
Our microcoil delivery system is comprised of a device
positioning unit (DPU), a connecting cable and a deployment
control box. Our DPU is a flexible catheter to which a Micrus
microcoil is attached. The DPU allows transport of the microcoil
through the vasculature to the brain and final positioning
within the aneurysm. The DPU also incorporates a polyethylene
fiber at its tip, which attaches to the microcoil. Deployment of
the microcoil occurs when the neurointerventionalist activates a
resistive heater at the tip of the DPU, shearing the
polyethylene fiber that holds the microcoil onto the DPU. Our
deployment mechanism results in deployment of the microcoil from
the DPU generally within five seconds.
Products Under Development
Our product development efforts are focused on designing
products for the interventional neurology field, expanding our
line of microcoils, guidewires, microcatheters and stents. We
are working to develop a steerable microcatheter and next
generation microcoils utilize drugs that stimulate cells and/or
cell adhesion in order to promote more rapid healing.
Sales and Marketing
We market our products to interventional neuroradiologists and
neurosurgeons who generally practice at centers located in major
metropolitan areas. There are currently approximately
300 neurointerventionalists in the United States who
perform embolic coiling procedures. We believe less than
one-third of these
physicians perform a substantial majority of the total number of
embolic coiling procedures performed in the U.S. each year.
We have developed relationships with a number of these
neurointerventionalists who perform a large number of cerebral
vascular procedures. In fiscal 2006, a substantial portion of
our product sales were to approximately 65 hospitals in the
United States. In order to encourage the continued adoption of
our products, we believe that we need to continue to build and
maintain relationships with these neurointerventionalists. We
believe these relationships are enhanced by the presence of a
direct sales organization. Sales of embolic coiling products
involve a long-term relationship between the sales
representative and interventionalist where the sales
representative must initially be present for product
demonstrations and to monitor procedures. We recruit our sales
representatives based on their experience
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with minimally invasive devices and prior success in the medical
device industry. We provide ongoing sales and product training
to our employees and distributors and continually monitor their
performance. We also market our products at various industry
trade shows and conferences.
In the United States and Canada we market our products through
our direct sales force to neurointerventionalists who greatly
influence the buying decision of the ultimate purchaser, the
hospitals. Currently our direct sales force in the United States
and Canada consists of a director of sales, four regional
managers, 23 sales representatives and eight clinical
specialists. We have more than doubled the size of our North
American sales and marketing group in the past 12 months.
We have also expanded our sales and marketing effort in Europe,
where we rely on both a direct sales force and distribution
network. Our European direct sales force consists of a director
of sales and marketing, three country managers and ten sales
representatives. We also employ three clinical specialists in
Europe. We plan to continue to expand our direct sales force in
Europe substantially over the next few years.
We have entered into agreements with distributors in Italy,
Spain and other European countries, as well as portions of the
Middle East and Asia. Our distributors are experienced in the
interventional device markets and have relationships with
leading neurointerventionalists and institutions in those
countries. Our standard distribution agreement generally
(i) provides our distributors with an exclusive right to
distribute our products in a certain territory;
(ii) restricts them from selling products that are
competitive with our products for the limited duration of our
agreement with them; (iii) obligates them to obtain the
necessary authorizations, licenses and approvals to import,
market and distribute our products within the applicable
territory; and (iv) obligates them to promote and
distribute our products within the applicable territory.
We believe that Japan represents a significant market for our
products. On September 30, 2005, we entered into a
five-year, exclusive distribution agreement with Goodman. Under
the terms of the distribution agreement, Goodman will promote
and market our products in Japan. In February 2006, we received
the requisite local regulatory approvals to sell certain of our
products in Japan through Goodman, and the sale of such products
in Japan commenced in March 2006.
Information on our revenues from sales to unaffiliated customers
is included in Note 10 of Notes to Consolidated
Financial Statements.
Research and Development
Our product development efforts are focused on designing
products for the interventional neurology field, expanding our
line of microcoils, guidewires, microcatheters and stents. We
currently are working to develop a steerable microcatheter and
next generation microcoils that have surface modifications
and/or utilize drugs that may stimulate cells and/or cell
adhesion in order to promote more rapid healing.
In addition, we are developing stent technologies for use in the
endovascular treatment of aneurysms. Aneurysms with wide necks
pose particular challenges to treatment with embolic coils, due
to the possibility of the coil dislodging into the blood stream.
We are designing a self-expanding stent to produce a scaffold,
which covers the opening of wide-neck aneurysms and holds
embolic coils in place within the aneurysm, providing the
interventionalist the opportunity to treat aneurysms which would
previously have required open surgical treatment.
As of March 31, 2006, we had 14 full-time employees
engaged in research and development activities. Research and
development expenses for the fiscal years ended March 31,
2006, March 31, 2005 and March 31, 2004 were
$6.6 million, $2.4 million and $2.9 million,
respectively. We plan on increasing our research and development
expenditures in future periods.
Biotronik Collaboration
In January 2006, we entered into a license, development and
distribution agreement with Biotronik, pursuant to which we will
collaborate with Biotronik to develop certain neurovascular
products and we will
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be the exclusive worldwide distributor for jointly developed
neurovascular products. Biotronik granted us an exclusive
license to certain patents, know-how and other proprietary
technology in the neurovascular field.
Under the terms of our agreement, we paid an upfront licensing
fee of approximately $0.6 million to Biotronik and were
required to make milestone payments to Biotronik upon receipt of
approvals to market stent products we jointly developed for the
treatment of neurovascular disease and royalty payments on the
products sold. In February 2006, Biotronik received CE Mark
clearance for the Pharos stent intended for both the treatment
of aneurysms and the treatment of ischemic diseases. As a
consequence we paid milestone payments to Biotronik of
approximately $0.7 million in both March and April 2006. We
will make royalty payments to Biotronik when we start selling
the Pharos product in the first quarter of fiscal 2007. Under
the terms of this agreement, there are no future milestone
payments to Biotronik related to the Pharos stent. Additionally,
we will continue to fund ongoing project development based on
the terms of this agreement.
Physician Advisors
We rely extensively on our physician advisors to advise on our
research and development efforts and to provide feedback on the
clinical use of our products. Our advisors are experts in
interventional neuroradiology and cerebral vascular diseases. We
regularly consult with our physician advisors regarding our
research and development efforts, preclinical trials and
clinical trials.
The physicians who currently serve as our advisors are:
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L. Nelson Hopkins, M.D., Professor and Chair,
Department of Neurosurgery/ Professor, Department of Radiology,
State University of New York, Buffalo, member of the Micrus
Board of Directors. |
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Joseph Horton, M.D., Professor and Chief, Interventional
Neuroradiology, Department of Radiology, University of Alabama
at Birmingham, Micrus co-founder. |
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Andrew Molyneux, M.D., Frenchay Hospital, North Bristol NHS
Trust, United Kingdom, Micrus Medical Director. |
Some of our physician advisors have been granted options to
purchase shares of our common stock and/or receive a consulting
honorarium. All of our physician advisors are reimbursed for
reasonable expenses. In addition our medical advisors receive
compensation for clinical studies they conduct for us. All of
our medical advisors are employed by other organizations and may
have commitments to or have consulting arrangements with other
companies, including our competitors, that may limit their
availability to consult with us. Although these advisors may
contribute significantly to our business, we generally do not
expect them to devote more than a small portion of their time to
us.
Manufacturing
We manufacture and/or assemble our proprietary microcoils,
guidewires and microcatheters in a cleanroom and, inspect, test
and package all components into finished products. Our
manufacturing facility is located in our headquarters in
San Jose, California. As of March 31, 2006, we had 77
employees in manufacturing, quality control, engineering and
shipping and receiving.
We have substantial design, manufacturing and applications
engineering expertise in the development of small vessel access
and delivery systems and intend to continue to leverage this
expertise to develop new products. By designing and
manufacturing most of the components of our products, we have
been able to maintain greater control of quality and
manufacturing process changes. Our microcoils are very small in
size, ranging from 2 mm to 20 mm in diameter and are
manufactured using microfabrication techniques. We have
developed proprietary manufacturing technologies and processes
in the areas of platinum memory shaping, metal fabrication and
microcatheter and stent fabrication.
Trained product personnel assemble and test each of our
components and products in a controlled cleanroom. At various
assembly stages each lot of product undergoes thorough testing
to ensure
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compliance with applicable regulations, including ISO9001
standards in the United States and EN46001 certification in
Europe. These standards specify the requirements necessary for a
quality management system to consistently provide product that
meets or exceeds customer requirements and to include processes
for continual improvement of the system and that are required in
order to obtain a CE Mark to sell medical devices within the
European Union. Our quality assurance group verifies that
product fabrication and inspection process steps meet our
stringent quality specifications and applicable regulatory
requirements. Upon successful completion of these steps, the
products are sterilized, packaged and prepared for shipment. We
typically ship products as orders are received.
We have implemented quality control systems as part of our
manufacturing processes, which we believe are in substantial
compliance with U.S. Good Manufacturing Practices
(GMP) or Quality System Regulations
(QSR) requirements. We have also been inspected by the
California Department of Health Services on behalf of the State
of California and under contract with the FDA, and are
registered with the State of California to manufacture our
products. We believe we are in compliance with FDA GMP for
medical devices and have been inspected biennially by the FDA.
The most recent of such inspections occurred in April 2006.
However, we cannot assure you that we will remain in compliance
with GMP and our failure to do so could have a material adverse
effect on our business, operating results and financial
condition.
We purchase the raw materials required for production from
various qualified outside vendors. In addition, the deployment
control box is manufactured by an outside supplier. We rely on
single sources for some of our critical components, including
the deployment control box, the platinum used to manufacture the
microcoils and certain custom hypodermic tubing material. In
addition, we have a sole source subcontract arrangement for
sterilization services. We believe we have alternative sources
for most of the components purchased from single sources
currently and generally maintain adequate supply of products to
avoid production interruptions. Where we do not have a qualified
second source vendor for a product component and depending on
the exact component, we believe it would take us from two days
to a month to either manufacture the product component ourselves
or have a readily available new supply of the product component.
Any unanticipated interruption in the supply of these components
and services could have a material adverse effect on us.
Patents and Proprietary Rights
Our success depends in part on our ability to obtain and
maintain proprietary protection for our products, technology and
know-how, to operate without infringing on the proprietary
rights of others and to prevent others from infringing our
proprietary rights. Our policy is to seek protection of our
proprietary position by filing U.S. and foreign patent
applications to protect technology, inventions and improvements
that are important to our business. We also rely on trade
secrets, know-how and continuing technological innovation to
develop and maintain our proprietary position. We hold 53 issued
U.S. patents and 42 issued foreign patents expiring between
2014 and 2022. In addition, we have 21 U.S. and 58 foreign
patent applications pending covering various aspects of our
products and technology.
The issued patents relate, among other things, to subject matter
in the following areas:
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vasoocclusive microcoils and devices and methods for
manufacturing such coils and devices; |
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microcoil deployment systems; |
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bioactive microcoils; |
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intracranial vascular stents; |
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catheters for neurovascular intervention; |
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embolic clot retrieval devices; and |
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bioactive material placement systems and methods. |
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In addition to developing our own technology, we have obtained
licenses to certain patents and other intellectual property,
including for materials used as coating on our guidewires and
for certain type of coils. These licenses grant us the right to
use the licensed patents to make, use and sell products that
contain the licensed technology. We pay for these licenses
through a combination of fixed payments and royalties on sales
of covered products. Each of these licenses continues until
expiration of the licensed patents. Payments under these license
arrangements currently do not account for a material portion of
our expenses.
Although we work aggressively to protect our technology, there
is no assurance that any patents will be issued from current
pending patent applications or from future patent applications.
We also cannot assure you that the scope of any patent
protection will exclude competitors or provide competitive
advantages to us, that any of our patents will be held valid if
subsequently challenged, or others will not claim rights in or
ownership of our patents and proprietary rights. Furthermore,
there can be no assurance that others have not developed or will
develop similar products, duplicate any of our products or
design around our patents.
The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property
rights, and many companies in the industry have employed
intellectual property litigation to gain a competitive
advantage. In September 2004, Boston Scientific Corporation and
Target Therapeutics, Inc., a division of Boston Scientific
Corporation, (collectively, Boston Scientific
Corporation) filed a patent infringement suit against us,
as described in greater detail in the section below entitled
Legal Proceedings. We may in the future be subject
to further litigation from other companies in our industry. The
defense and prosecution of patent suits, U.S. Patent and
Trademark Office interference proceedings and related
administrative proceedings can be costly and time consuming. An
adverse determination in our litigation with Boston Scientific
Corporation or in any other litigation or administrative
proceedings with any other third party could subject us to
significant liabilities or require us to seek licenses. There is
no assurance that any such licenses will be available on
satisfactory terms, if at all. Adverse determinations in a
judicial or administrative proceeding or failure to obtain
necessary licenses could prevent us from manufacturing and
selling our products, which would have a material adverse effect
on our business, operating results and financial condition.
In addition to patents, we rely on trademark, trade secret and
other intellectual property laws, nondisclosure agreements and
other measures to protect our intellectual property rights. We
believe that in order to have a competitive advantage, we must
develop and maintain the proprietary aspects of our
technologies. We require our employees, consultants and advisors
to execute confidentiality agreements in connection with their
employment, consulting or advisory relationships with us. We
also require our employees, consultants and advisors who we
expect to work on our products to agree to disclose and assign
to us all inventions conceived while working for us, using our
property or which relate to our business. Despite any measures
taken to protect our intellectual property, unauthorized parties
may attempt to copy aspects of our products or to obtain and use
information that we regard as proprietary.
Competition
We compete primarily with the Target Therapeutics division of
Boston Scientific Corporation, the Cordis division of
Johnson & Johnson, ev3/ Micro Therapeutics and Terumo/
MicroVention. Target Therapeutics, ev3/ Micro Therapeutics and
Cordis offer broad product lines consisting of embolic
microcoils, microcatheters and guidewires, although Cordis has
curtailed worldwide shipment of microcoils. Target Therapeutics,
Cordis and ev3/ Micro Therapeutics currently market a variety
of microcatheters which are compatible with .001 and
..0018 in. size coil systems.
Both Target Therapeutics and ev3/ Micro Therapeutics sell
bioactive microcoils. Cordis markets a bare platinum line of
microcoils but does not market bioactive or stretch resistant
microcoils. Terumo/ MicroVention markets a
HydroCoil®
which is an embolic microcoil that swells in the presence of
fluid to provide greater volumetric occlusion to an aneurysm.
Through its acquisition by Terumo, MicroVention now has access
to microcatheter and wire technology as well. Target
Therapeutics is currently the only
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company which has received U.S. regulatory clearance for
the sale of stents for the treatment of hemorrhagic and ischemic
stoke.
Target Therapeutics, MicroVention, Micro Therapeutics and Cordis
are divisions of large publicly traded companies, and enjoy
several competitive advantages over us, including: greater
financial and personnel resources; significantly greater name
recognition; established relationships with
neurointerventionalists; established distribution networks;
greater resources for product research and development; greater
experience in, and resources for, launching, marketing,
distributing and selling products; and more broad-based and
deeper product lines.
We believe the principal competitive factors in the market for
medical devices used in the treatment of cerebral vascular
diseases include:
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improved patient outcomes as a result of physician use of the
device; |
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access to and acceptance by leading physicians; |
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depth of product line; |
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product quality and reliability; |
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ease of use for physicians; |
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sales and marketing capability; and |
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brand recognition and reputation. |
Our current or potential competitors may succeed in developing
technologies and products that are more effective than those
developed by us or that would render our products obsolete or
noncompetitive. Additionally, there can be no assurance that we
will be able to effectively compete with such competitors in the
manufacturing, marketing and sale of our products. At any time,
other companies may develop alternative treatments, products or
procedures for the treatment of cerebral aneurysms that compete
directly or indirectly with our products. If alternative
treatments prove to be superior to our products, adoption of our
products could be negatively affected and our future revenues
could suffer.
Our ability to develop safe, effective and reliable products in
a timely manner is key to our competitive position.
Consequently, our success will depend on how quickly we are able
to respond to medical and technological changes through the
development, clinical evaluation and commercialization of new
products. Product development involves a high degree of risk and
there can be no assurance that our research and development
efforts will result in commercially successful products.
Government Regulation
United States
The research, development, manufacture, labeling, distribution
and marketing of our products are subject to extensive
regulation by the FDA and other regulatory bodies. Our current
products are regulated by the FDA as medical devices and we are
required to obtain review and clearance or approval from the FDA
prior to commercializing our devices.
FDAs Premarket
Clearance and Approval Requirements
Unless an exemption applies, each medical device we wish to
commercially distribute in the United States will require either
prior 510(k) clearance or prior premarket approval
(PMA) from the FDA. The FDA classifies medical devices into
one of three classes. Class I devices are subject to only
general controls (e.g. establishment registration and device
listing, labeling, medical devices reporting (MDR), and
prohibitions against adulteration and misbranding).
Class II medical devices require prior 510(k) clearance
before they may be commercially marketed. The FDA will clear
marketing of a medical device through the 510(k) process if it
is demonstrated that the new product has the same intended use,
is substantially equivalent to another legally marketed device,
including a 510(k)-cleared product, and otherwise meets the
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FDAs requirements. Class II devices are also subject
to general controls and may be subject to established standards
and other special controls. Devices deemed by the FDA to pose a
great risk, such as life-sustaining, life-supporting or
implantable devices, or devices deemed not substantially
equivalent to a legally marketed device are placed in
Class III, most of which require premarket approval. Both
premarket clearance and premarket approval applications are
subject to the payment of user fees, paid at the time of
submission for FDA review. For our microcoil products we have
obtained multiple 510(k) clearances, despite their
Class III regulatory categorization. The clearances that we
have received are consistent with the FDAs practices since
the 1998 recommendation of the Neurological Devices Panel to
reclassify neurovascular embolization devices from
Class III to Class II special controls. The FDA
officially reclassified neurovascular embolization devices as
Class II medical devices effective January 28, 2005.
510(k) Clearance
To obtain 510(k) clearance, we must submit a premarket
notification demonstrating that the proposed device is
substantially equivalent to a previously cleared 510(k) device
or a device that was in commercial distribution before
May 28, 1976 for which the FDA has not yet called for the
submission of premarket approval applications. The FDAs
510(k) clearance pathway usually takes from three to twelve
months from the date the application is submitted, but it can
take significantly longer.
After a device receives 510(k) clearance, any modification that
could significantly affect its safety or effectiveness, or that
would constitute a significant change in its intended use, will
require a new 510(k) clearance or could require premarket
approval. The FDA requires each manufacturer to make this
determination initially, but the FDA can review any such
decision and can disagree with a manufacturers
determination. If the FDA disagrees with a manufacturers
determination, the FDA can require the manufacturer to cease
marketing and/or recall the modified device until 510(k)
clearance or premarket approval is obtained. If the FDA requires
us to seek 510(k) clearance or premarket approval for any
modifications to a previously cleared product, we may be
required to cease marketing or recall the modified device until
we obtain this clearance or approval. Also, in these
circumstances, we may be subject to significant regulatory fines
or penalties.
Premarket Approval
A PMA application must be submitted if the device cannot be
cleared through the 510(k) process. A PMA application must be
supported by extensive data including, but not limited to,
technical, preclinical, clinical trials, manufacturing and
labeling to demonstrate to the FDAs satisfaction the
safety and effectiveness of the device for its intended use.
After a PMA application is complete, the FDA begins an in-depth
review of the submitted information, which generally takes
between one and three years, but may take significantly longer.
During this review period, the FDA may request additional
information or clarification of information already provided.
Also during the review period, an advisory panel of experts from
outside the FDA may be convened to review and evaluate the
application and provide recommendations to the FDA as to the
approvability of the device. In addition, the FDA will conduct a
preapproval inspection of the manufacturing facility to ensure
compliance with quality system regulations. New PMA applications
or PMA supplements are required for significant modifications to
the manufacturing process, labeling or design of an approved
device. PMA supplements often require submission of the same
type of information as a PMA application, except that the
supplement is limited to information needed to support any
changes from the device covered by the original PMA application,
and may not require as extensive clinical data or the convening
of an advisory panel.
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Continuing FDA
Regulation
After a device is placed on the market, numerous regulatory
requirements apply. These include:
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quality system regulation (QSR), which requires manufacturers to
follow design, testing, control, documentation and other quality
assurance procedures during the manufacturing process (otherwise
known as Good Manufacturing Practices or GMPs); |
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labeling regulations, which prohibit the promotion of products
for unapproved or off-label uses and impose other
restrictions on labeling; and |
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medical device reporting regulations, which require that
manufacturers report to the FDA if their device may have caused
or contributed to a death or serious injury or malfunctioned in
a way that would likely cause or contribute to a death or
serious injury if it were to recur. |
Failure to comply with applicable regulatory requirements can
result in enforcement action by the FDA, which may include any
of the following sanctions:
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fines, injunctions, and civil penalties; |
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recall or seizure of our products; |
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operating restrictions, partial suspension or total shutdown of
production; |
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refusing our request for 510(k) clearance or premarket approval
of new products; |
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withdrawing 510(k) clearance or premarket approvals that are
already granted; and |
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criminal prosecution. |
We are also subject to unannounced inspections by the FDA and
the Food and Drug Branch of the California Department of Health
Services, and these inspections may include the manufacturing
facilities of our subcontractors.
International
International sales of medical devices are subject to foreign
government regulations, which vary substantially from country to
country. The time required to obtain approval by a foreign
country may be longer or shorter than that required for FDA
approval, and the requirements may differ.
The primary regulatory environment in Europe is that of the
European Union, which consists of countries encompassing most of
the major countries in Europe. The European Union has adopted
numerous directives and standards regulating the design,
manufacture, clinical trials, labeling, and adverse event
reporting for medical devices. Devices that comply with the
requirements of a relevant directive will be entitled to bear CE
conformity marking, indicating that the device conforms with the
essential requirements of the applicable directives and,
accordingly, can be commercially distributed throughout Europe.
The method of assessing conformity varies depending on the class
of the product, but normally involves a combination of
self-assessment by the manufacturer and a third-party assessment
by a Notified Body. This third-party assessment may
consist of an audit of the manufacturers quality system
and specific testing of the manufacturers product. An
assessment by a Notified Body in one country within the European
Union is required in order for a manufacturer to commercially
distribute the product throughout the European Union.
In Japan, medical devices must be approved prior to importation
and commercial sale by the Ministry of Health, Labor and Welfare
(MHLW). Manufacturers of medical devices outside of Japan must
utilize a contractually bound Japanese entity to submit an
application for device approval to the MHLW. The MHLW evaluates
each device for safety and efficacy. As part of its approval
process, the MHLW may require that the product be tested in
Japanese laboratories. The approval process for products such as
our existing microcoil products is typically
13-14 months.
Other medical devices may require a longer review
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period for approval. Once approved, the manufacturer may import
the device into Japan for sale by the manufacturers
contractually bound importer or distributor.
After a device is approved for importation and commercial sale
in Japan, the MHLW continues to monitor sales of approved
products for compliance with labeling regulations, which
prohibit promotion of devices for unapproved uses and reporting
regulations, which require reporting of product malfunctions,
including serious injury or death caused by any approved device.
Failure to comply with applicable regulatory requirements can
result in enforcement action by the MHLW, which may include
fines, injunctions, and civil penalties, recall or seizure of
our products, operating restrictions, partial suspension or
total shutdown of sales in Japan, or criminal prosecution.
In addition to MHLW oversight, the regulation of medical devices
in Japan is also governed by the Japanese Pharmaceutical Affairs
Law (PAL). PAL was substantially revised in July 2002, and the
new provisions were implemented in stages through April 2005.
Revised provisions of the approval and licensing system of
medical devices in Japan, which constitutes the core of import
regulations, came into effect on April 1, 2005. The revised
law changes class categorizations of medical devices in relation
to risk, introduces a third party certification system,
strengthens safety countermeasures for biologically derived
products, and reinforces safety countermeasures at the time of
resale or rental. The revised law also abolishes the ICC system
and replaces it with the primary distributor system.
Under the revised PAL, manufacturers outside of Japan must now
appoint a primary distributor located in Japan that
holds a primary distributor license for medical devices to
provide primary distribution services, including conducting
quality assurance and safety control tasks, for each product at
the time an application for the approval of each such product is
submitted to the MHLW. We are unable at this time to determine
the impact of such changes on our approved products, products
for which we have already applied for approval in Japan or
future products. We do not anticipate that these changes will
have a material impact on our existing level of third-party
reimbursement for sales of our products in Japan.
Third-Party Reimbursement
We believe that substantially all of the procedures conducted in
the U.S. with our products have been reimbursed to date and
that substantially all commercial procedures in Europe have been
reimbursed. We believe that the procedures performed using our
products are generally already reimbursable under government
programs and most private plans. Accordingly, we believe
providers in the U.S. will generally not be required to
obtain new billing authorizations or codes in order to be
compensated for performing medically necessary procedures using
our products on insured patients or patients covered under
government programs such as Medicare and Medicaid. We also
believe that our procedures will be generally reimbursable under
governmental programs and private plans in Japan. In Japan, we
are required to obtain regulatory clearance for our products to
be eligible for reimbursements by third party payors, even
though reimbursement for embolic coiling procedure is already in
place.
We cannot assure you that reimbursement polices of third party
payors will not change in the future with respect to some or all
of the procedures using our products and systems. See Risk
Factors If neurointerventionalists are unable to
obtain sufficient reimbursement for procedures performed with
our products, it is unlikely that our products will be widely
used for a discussion of various risks associated with
reimbursement from third party payors.
Product Liability and Insurance
We maintain general liability insurance, product liability
insurance, directors and officers liability insurance, workers
compensation insurance and other insurance coverage that we
believe are customary in type and amounts for the business of
the type we operate. Medical device companies are subject to an
inherent risk of product liability and other liability claims in
the event that the use of their products results in personal
injury claims. Any such claims could have an adverse impact on
us. There can be no assurance that product liability or other
claims will not exceed such insurance coverage limits or that
such insurance will continue to be available on commercially
acceptable terms, if at all.
19
Employees
As of March 31, 2006, in the United States we had 158 full
time employees, including 43 in sales and marketing, 77 in
operations and manufacturing, 14 in research and development,
seven in quality assurance and regulatory compliance, and 17 in
general and administrative functions. As of March 31, 2006,
we had 23 employees in Europe, including 14 in sales and
marketing and nine in general and administrative functions. None
of our employees is represented by a collective bargaining
agreement and we have never experienced a work stoppage. We
believe our employee relations are good.
Product Liability and Insurance
We maintain general liability insurance, product liability
insurance, directors and officers liability insurance, workers
compensation insurance and other insurance coverage that we
believe are customary in type and amounts for the business of
the type we operate. Medical device companies are subject to an
inherent risk of product liability and other liability claims in
the event that the use of their products results in personal
injury claims. Any such claims could have an adverse impact on
us. There can be no assurance that product liability or other
claims will not exceed such insurance coverage limits or that
such insurance will continue to be available on commercially
acceptable terms, if at all.
Employees
As of March 31, 2006, in the United States we had 158
full-time employees,
including 43 in sales and marketing, 77 in operations and
manufacturing, 14 in engineering and research and development, 7
in quality assurance and regulatory compliance, and 17 in
general and administrative functions. As of March 31, 2006,
we had 24 employees in Europe, including 15 in sales and
marketing and 9 in general and administrative functions. None of
our employees is represented by a collective bargaining
agreement and we have never experienced a work stoppage. We
believe our employee relations are good.
Certain Factors that May Affect Our Business and Future
Results
Some of the information included herein contains forward-looking
statements as defined in Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking
statements are based on the beliefs of, estimates made by and
information currently available to our management and are
subject to certain risks, uncertainties and assumptions. Any
statements contained herein (including, without limitation,
statements to the effect that the Company, we, or management
may, will, expects,
anticipates, estimates,
continues, plans, believes,
or projects, or statements concerning
potential or opportunity, and any
variations thereof, comparable terminology or the negative
thereof) that are not statements of historical fact should be
construed as forward-looking statements. Our actual results may
vary materially from those expected in these forward-looking
statements. The realization of such forward-looking statements
may be impaired by risks including, but not limited to the
following:
Our future success is dependent on the continued growth in
embolic coiling procedures and our ability to convince a
concentrated customer base of neurointerventionalists to use our
products as an alternative to other available products.
Our future success and revenue growth are significantly
dependent upon an increase in the use of embolic coiling as a
procedure to treat cerebral aneurysms. If the number of embolic
coiling procedures does not increase or if a new procedure that
does not employ our products becomes a more acceptable
alternative among neurointerventionalists, our business would be
seriously harmed.
The number of interventional neuroradiologists and neurosurgeons
trained to conduct embolic coiling procedures is relatively
small, both in the United States and abroad. There are currently
approximately
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300 neurointerventionalists in the United States who
perform embolic coiling procedures. We believe less than
one-third of these physicians perform a substantial majority of
the total number of embolic coiling procedures per year. In the
three months ended March 31, 2006, a substantial portion of
our product sales were to approximately 65 hospitals in the
United States. The growth in the number of interventional
neuroradiologists and neurosurgeons in the United States is
constrained by the lengthy training programs required to educate
these physicians. Accordingly, our revenue growth will be
primarily dependent on our ability to increase sales of our
products to our existing customers and to increase sales of
products to trained neurointerventionalists that currently use
products offered by our competitors. We believe that
neurointerventionalists who do not currently use our products
will not widely adopt our products unless they determine, based
on experience, clinical data and published peer reviewed journal
articles, that our products provide benefits or an attractive
alternative to the clipping of aneurysms or the use of
competitors products. We believe neurointerventionalists
base their decision to use an alternative procedure or product
on the following criteria, among others:
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extent of clinical evidence supporting patient benefits; |
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their level of experience with the alternative product; |
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perceived liability risks generally associated with the use of
new products and procedures; |
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availability of reimbursement within healthcare payment
systems; and |
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costs associated with the purchase of new products and equipment. |
In addition, we believe that recommendations and support of our
products by influential physicians are essential for market
acceptance and adoption. If we do not receive continued support
from such influential physicians, neurointerventionalists and
hospitals may not use our products. In such circumstances, we
may not achieve expected revenue levels and our business will
suffer.
We are currently involved in a patent litigation action
involving Boston Scientific Corporation and, if we do not
prevail in this action, we could be liable for past damages and
be prevented from making, using, selling, offering to sell,
importing into the U.S. or exporting from the U.S., our
microcoils, our primary product line.
In September 2004, Boston Scientific Corporation and Target
Therapeutics, Inc., a subsidiary of Boston Scientific
Corporation, (collectively Boston Scientific), filed
a patent infringement suit in the United States District Court
for the Northern District of California, alleging that our
microcoil devices infringe two patents held by Boston Scientific
and that this infringement is willful. Sales of our microcoil
devices currently represent virtually all of our revenues.
Boston Scientific is a large, publicly-traded corporation with
significantly greater financial resources than us. In November
2004, we answered Boston Scientifics complaint and
counterclaimed, alleging that Boston Scientifics occlusive
products, and their use, infringe three of our patents. Each
party seeks an injunction preventing the making, using, selling,
offering to sell, importing into the U.S. or exporting from
the U.S., of the others detachable coil devices in the
United States, damages for past infringement, which may be
trebled, and payment of its legal fees and costs. In addition,
each party seeks a declaration that the patents of the other are
invalid and not infringed and has alleged that certain of the
asserted patents of the other are unenforceable due to
inequitable conduct.
Boston Scientific is also a party in two other lawsuits against
Cordis, a division of Johnson & Johnson
(Cordis) and ev3/ Micro Therapeutics, Inc. in which
the Boston Scientific patents, which are the basis of Boston
Scientifics suit against us, are also at issue. An outcome
of either of these lawsuits adverse to Cordis or ev3/ Micro
Therapeutics, Inc., and related to the same patent claims Boston
Scientific asserts against us, could have an adverse impact on
certain of our defenses in our litigation with Boston Scientific.
In October 2004, Cordis requested ex parte reexamination
of certain claims in those patents. In February 2005, the court
granted a stay of the Boston Scientific lawsuit against Micrus
until the earlier of 12 months or the outcome of the
reexamination by the U.S. Patent and Trademark Office
(USPTO) in
21
the Cordis case. In February 2006, the USPTO issued a Notice of
Intent to Issue Ex Parte Reexamination Certificate for one of
the two patents, apparently confirming all of the claims of that
patent. In February 2006, the USPTO also issued an Office Action
in which it apparently confirmed the patentability of certain of
the claims in the second patent, but rejected the remainder.
Boston Scientific has stated to the USPTO and to the court that
the rejected claims from the second patent can be reissued and
certified as patentable upon reexamination if a correction is
made to the priority chain for the second patent. In March 2006,
the court lifted the stay with respect to any claims that were
confirmed as patentable in the reexamination proceedings and has
permitted discovery in the case to commence with respect to
those claims. The parties have since exchanged preliminary
infringement contentions in which Boston Scientific asserted
only claims from the first patent. Boston Scientific has stated
that it would supplement its preliminary infringement
contentions to include claims from the second Boston Scientific
patent still under reexamination upon completion of the
reexamination, and that these asserted claims would be from the
set of claims which has not yet been deemed in condition to be
confirmed by the USPTO. Based on our current understanding of
the reexamination, we believe that the claims of the second
Boston Scientific patent also will be confirmed. The
confirmation of asserted claims in one, and potentially both, of
Boston Scientifics asserted patents may negatively impact
our chances of mounting a successful invalidity defense against
this patent.
We are unable at this time to determine the likely outcome of
the patent litigation. Patent lawsuits involve complex legal and
factual issues which can take a number of years and a great deal
of expense and management attention to resolve. We may also be
subject to negative publicity due to the litigation. In the
event it is determined that we infringe patent claims asserted
by Boston Scientific and that those claims are not invalid and
not unenforceable we may, among other things, be required to do
one or more of the following:
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pay damages, including up to treble damages and Boston
Scientifics attorneys fees and costs, which may be
substantial; |
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cease, because of an injunction, the making, using, selling,
offering to sell, importing into the U.S. or exporting from the
U.S. of our microcoil devices, which currently represent
virtually all of our revenues, found to infringe the patent
claims asserted by Boston Scientific; |
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expend significant resources to redesign our technology so that
it does not infringe the patent claims asserted by Boston
Scientific, which may not be possible; |
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discontinue manufacturing or other processes that incorporate
technology that infringes the patent claims asserted by Boston
Scientific; |
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become subject to a compulsory license order under which we
would be required to pay Boston Scientific a royalty on future
sales of our products; and/or |
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obtain a license from Boston Scientific to use the relevant
patents, which may not be available to us on acceptable terms,
or at all. |
If our microcoil devices were found to infringe, any development
or acquisition of products or technologies that do not infringe
the patent claims asserted by Boston Scientific could require
the expenditure of substantial time and other resources and
could have a material adverse effect on our business and
financial results. If we were required to but could not obtain a
license under the patent claims asserted by Boston Scientific,
we would likely be prevented from commercializing or further
commercializing the relevant products. We believe that it is
unlikely that we would be able to obtain a license under the
patent claims being asserted by Boston Scientific. If we need to
redesign our products to avoid the patent claims being asserted
by Boston Scientific, we may suffer significant regulatory
delays associated with conducting additional studies or
submitting technical, manufacturing or other information related
to the redesigned product and, ultimately, in obtaining approval.
22
As a result of Boston Scientifics answer to our
counterclaim that Boston Scientific infringes three of our
patents, the validity of those patents is now at issue in the
lawsuit. The court could find that those patents are invalid,
which would prevent us from asserting those patents against
third parties.
An unfavorable outcome for us in this patent litigation would
significantly harm our business and may cause us to materially
change our business model.
We have a limited operating history, have incurred
significant operating losses since inception, and expect to
continue to incur losses, and we cannot assure you that we will
achieve profitability.
We were incorporated in the State of Delaware in 1996, and began
commercial sales of our microcoil products in 2000. We have yet
to demonstrate that we can generate sufficient sales of our
products to become profitable. The extent of our future
operating losses and the timing of profitability are highly
uncertain, and we may never achieve profitability. We have
incurred significant net losses since our inception, including
losses of approximately $8.3 million in fiscal 2006,
$6.7 million in fiscal 2005 and $2.0 million in fiscal
2004. At March 31, 2006, we had an accumulated deficit of
$49.6 million. It is possible that we will never generate
sufficient revenues from product sales to achieve profitability.
Even if we do achieve significant revenues from our product
sales, we expect that increased operating expenses will result
in significant operating losses in the near term as we, among
other things:
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grow our internal and third-party sales and marketing forces to
expand the sales of our products in the United States and
internationally; |
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increase our research and development efforts to improve upon
our existing products and develop new products; |
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perform clinical research and trials on our existing products
and product candidates; |
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expand our regulatory resources in order to obtain governmental
approvals for our existing product enhancements and new products; |
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acquire and/or license new technologies; and |
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expand manufacturing. |
As a result of these activities, we may never become profitable.
Even if we do achieve profitability, we may not be able to
sustain or increase profitability on an ongoing basis.
Our quarterly operating and financial results and our gross
margins are likely to fluctuate significantly in future
periods.
Our quarterly operating and financial results are difficult to
predict and may fluctuate significantly from period to period.
The level of our revenues, gross margins and results of
operations at any given time will be based primarily on the
following factors:
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neurointerventionalist and patient acceptance of our products; |
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changes in the number of embolic coiling procedures performed to
treat cerebral aneurysms; |
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the seasonality of our product sales; |
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the mix of our products sold; |
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stocking patterns for distributors; |
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the development of new procedures to treat cerebral aneurysms; |
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results of clinical research and trials on our existing products
and products in development; |
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demand for, and pricing of, our products; |
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levels of third-party reimbursement for our products; |
23
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timing of new product offerings, acquisitions, licenses or other
significant events involving us or our competitors; |
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increases in the costs of manufacturing and selling our products; |
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the amount and timing of our operating expenses; |
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litigation expenses; |
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fluctuations in foreign currency exchange rates; |
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regulatory approvals and legislative changes affecting the
products we may offer or those of our competitors; |
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the effect of competing technological and market developments; |
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changes in our ability to obtain and maintain FDA approval or
clearance for our products. |
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inventory adjustments we may have to make in any quarter; |
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interruption in the manufacturing or distribution of our
products; |
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our ability to maintain and expand our sales force and
operational personnel; |
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the ability of our suppliers to timely provide us with an
adequate supply of materials and components; and |
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amount and timing of capital expenditures and other costs
relating to any potential expansion of our operations. |
Many of the products we may seek to develop and introduce in the
future will require FDA approval or clearance and meet similar
regulatory requirements in other countries where we seek to
market our products, without which we cannot begin to
commercialize them. Forecasting the timing of sales of our
products is difficult due to the delay inherent in seeking FDA
and other clearance or approval, or the failure to obtain such
clearance or approval. In addition, we will be increasing our
operating expenses as we build our commercial capabilities.
Accordingly, we may experience significant, unanticipated
quarterly losses. Because of these factors, our operating
results in one or more future quarters may fail to meet the
expectations of securities analysts or investors, which could
cause our stock price to decline significantly.
We may not be able to develop new products or product
enhancements that will be accepted by the market.
Our success will depend in part on our ability to develop and
introduce new products and enhancements to our existing
products. We cannot assure you that we will be able to
successfully develop or market new products or that any of our
future products will be accepted by the neurointerventionalists
who use our products or the payors who reimburse for many of the
procedures performed with our products. The success of any new
product offering or enhancement to an existing product will
depend on several factors, including our ability to:
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properly identify and anticipate interventionalist and patient
needs; |
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develop new products or enhancements in a timely manner; |
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obtain the necessary regulatory approvals for new products or
product enhancements; |
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provide adequate training to potential users of our products; |
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receive adequate reimbursement for our procedures; and |
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develop an effective marketing and distribution network. |
24
If we do not develop new products or product enhancements in
time to meet market demand or if there is insufficient demand
for our products or enhancements, we may not achieve expected
revenue levels and our business will suffer.
Our international operations and our relationships with
physicians and other consultants require us to comply with a
number of U.S. and international regulations.
We are required to comply with a number of international
regulations related to sales of medical devices and contractual
relationships with physicians in countries outside of the United
States. In addition, we must comply with the Foreign Corrupt
Practices Act (FCPA) which prohibits
U.S. companies or their agents and employees from providing
anything of value to a foreign official for the purposes of
influencing him or her to help obtain or retain business, direct
business to any person or corporate entity, or obtain any unfair
advantage.
In August 2004 while reviewing our sales and payment procedures,
we identified certain payments we made to physicians outside the
United States that may have violated the FCPA and the laws of
certain foreign countries. Following an internal investigation,
we voluntarily disclosed to the United States Department of
Justice (DOJ) the factual information obtained in our
internal investigation of potential violations of the FCPA.
After reviewing the results of the internal investigation and
the compliance procedures implemented by us, the DOJ entered
into an agreement (the DOJ Agreement) with us in
February 2005. Pursuant to that agreement, the DOJ will not
prosecute us for the conduct disclosed to the DOJ, and we agreed
to various conditions, including establishing policies and
procedures to assure compliance with the FCPA and other relevant
anti-bribery laws, retaining an independent law firm to act as a
monitor for purposes of reporting to the DOJ for a period of
three years as to our compliance with the DOJ Agreement and to
monitor our implementation of and adherence to FCPA compliance
policies and procedures, and fully cooperating with the DOJ, the
independent monitor, and the SEC. We must remain in complete
compliance with these conditions for a period of two years, or
face the filing of a criminal complaint against us. The terms of
the DOJ Agreement will bind our successors, or any merger
partners, as long as the DOJ Agreement is in effect.
The payments we made to physicians in France, Germany, Spain and
Turkey also may have likely violated the applicable laws in
those foreign jurisdictions and may possibly have violated laws
in Switzerland, where our Swiss subsidiary is located. We are
not able to determine at this time what penalties or other
sanctions, if any, authorities in France, Germany, Spain, Turkey
or Switzerland may impose on us as a result of such violations.
Though we have adopted a number of compliance procedures,
including adoption of a Foreign Corrupt Practices Act Policy and
related procedures, and appointed a Compliance Officer, we
cannot assure you that we will be able to comply with the
various regulations in foreign jurisdictions, which vary from
country to country. Implementing and monitoring such compliance
procedures in a number of foreign jurisdictions can be very
expensive and time-consuming. Any failure by us to adopt
appropriate compliance procedures and ensure that our employees
and agents comply with applicable laws and regulations in
foreign jurisdictions could result in substantial penalties
and/or restrictions in our ability to sell products in certain
foreign jurisdictions.
We are in a highly competitive market segment, face
competition from large, well-established medical device
manufacturers with significant resources, and may not be able to
increase penetration in our markets or otherwise compete
effectively.
The market for medical devices for treatment of cerebral
vascular diseases is intensely competitive, subject to rapid
change and significantly affected by new product introductions
and other market activities of industry participants. We compete
primarily with the Target Therapeutics division of Boston
Scientific Corporation, the market leader, as well as the Cordis
division of Johnson & Johnson, ev3/ Micro Therapeutics
and Terumo/ MicroVention. At any time, other companies may
develop alternative
25
treatments, products or procedures for the treatment of cerebral
aneurysms that compete directly or indirectly with our products.
If alternative treatments prove to be superior to our microcoil
or other products, continued use or adoption of our products
could be negatively affected and our future revenues could
suffer.
In addition, most of our current and potential competitors are
either large publicly traded or divisions or subsidiaries of
large publicly traded companies, and enjoy several competitive
advantages over us, including:
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greater financial and personnel resources; |
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significantly greater name recognition; |
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established relationships with neurointerventionalists; |
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established distribution networks; |
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greater experience in obtaining and maintaining FDA, and other
regulatory approvals for products and product enhancements, and
greater experience in developing compliance programs for
compliance with numerous federal, state, local and similar laws
in non-U.S.
jurisdictions; |
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greater resources for product research and development; |
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greater experience in, and resources for, launching, marketing,
distributing and selling products; and |
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broader product lines. |
Except for our distribution agreement with Goodman, none of our
customers has long-term purchase agreements with us and may at
any time switch to the use of our competitors products.
For these reasons, we may not be able to compete successfully
against our current or potential future competitors and sales of
our products and our revenues may decline.
Our sales in international markets subject us to foreign
currency exchange and other risks and costs that could harm our
business.
A substantial portion of our revenues are derived from outside
the U.S. For the fiscal years ended March 31, 2004,
2005 and 2006, revenues from customers outside the
U.S. represented approximately 50%, 48% and 53%
respectively, of our revenues. We anticipate that revenues from
international customers will continue to represent a substantial
portion of our revenues as we expand in new international
markets including China and Japan. Because we generate revenues
in foreign currencies, we are subject to the effects of exchange
rate fluctuations. For the fiscal year ended March 31,
2006, approximately 42% of our revenues were denominated in
currencies other than the U.S. dollar. The functional
currency of our Swiss subsidiary is the Swiss franc. In Europe,
our revenues are denominated in Swiss francs, euros, pounds
sterling and U.S. dollars. Accordingly, we are exposed to
market risk related to changes between the Swiss franc and these
other currencies in which we conduct business. If the Swiss
franc appreciates against the currencies in which our
receivables are denominated, we will recognize foreign currency
losses. For the preparation of our consolidated financial
statements, the financial results of our Swiss and UK
subsidiaries are translated into U.S. dollars based on
average exchange rates during the applicable period. If the
U.S. dollar appreciates against the Swiss franc and pounds
sterling, the revenues we recognize from sales by our European
subsidiaries will be adversely impacted. Historically, we have
also been exposed to risks from fluctuations in currency
exchange rates due to intercompany loans made to Micrus SA, our
Swiss subsidiary, in 2001 in connection with its incorporation.
These loans are denominated in Swiss francs and will fluctuate
in value against the U.S. dollar, causing us to recognize
foreign exchange gains and losses. Foreign exchange gains or
losses as a result of exchange rate fluctuations in any given
period could harm our operating results and negatively impact
our revenues. Additionally, if the effective price of our
products were to increase as a result of fluctuations in foreign
currency exchange rates, demand for our products could decline
and adversely affect our results of operations and financial
condition.
26
We are subject to various additional risks as a consequence of
doing business internationally, and, in particular in Argentina,
Brazil, Chile, Columbia, Costa Rica, Mexico, Peru, Venezuela,
Greece and Turkey, each of which could harm our business,
including the following:
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local economic and political instability or other potentially
adverse conditions; |
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lack of experience in certain geographical markets; |
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unexpected delays or changes in regulatory requirements; |
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increased difficulty in collecting accounts receivables in
certain foreign countries; |
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delays and expenses associated with tariffs and other trade
barriers; |
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difficulties and costs associated with attracting and
maintaining third party distributors; |
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compliance with foreign laws and regulations; and |
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adverse tax consequences or overlapping tax structures. |
If we fail to increase our direct sales force in a timely
manner, our business could suffer.
We have a limited domestic and international direct sales force.
We also have a distribution network for sales in the major
markets in Europe, Latin America, Asia and the Middle East. As
we launch new products and increase our marketing efforts with
respect to existing products, we will need to significantly
expand the number of our direct sales personnel on a worldwide
basis. The establishment and development of a more extensive
sales force will be expensive and time consuming. There is
significant competition for sales personnel experienced in
interventional medical device sales. If we are unable to
attract, motivate and retain qualified sales personnel and
thereby increase our sales force, we may not be able to increase
our revenues.
If we fail to properly manage our anticipated growth, our
business could suffer.
We have experienced, and may continue to experience, periods of
rapid growth and expansion, which have placed, and will likely
continue to place, a significant strain on our limited personnel
and other resources. In particular, the expansion of our
fabrication facility and the continuing expansion of our direct
sales force will require significant management, technical and
administrative resources. Any failure by us to manage our growth
effectively, could have an adverse effect on our ability to
achieve our development and commercialization goals.
To achieve our revenue goals, we must successfully increase
production in our fabrication facility as required by customer
demand. We may in the future experience difficulties in
increasing production, including problems with production yields
and quality control and assurance and in satisfying and
maintaining compliance with regulatory requirements. These
problems could result in delays in product availability and
increases in expenses. Any such delay or increased expense could
adversely affect our ability to generate revenues.
Future growth will also impose significant added
responsibilities on management, including the need to identify,
recruit, train and integrate additional employees. In addition,
rapid and significant growth will place a strain on our
administrative and operational infrastructure. In order to
manage our operations and growth we will need to continue to
improve our operational, financial and management controls,
reporting systems and procedures. If we are unable to manage our
growth effectively, it may be difficult for us to execute our
business strategy and our operating results and business could
suffer.
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We can provide no assurance regarding our, or our independent
registered public accounting firms, conclusions at
March 31, 2007 with respect to the effectiveness of our
internal controls over financial reporting.
Section 404 of the Sarbanes-Oxley Act of 2002 (the
Act) will require us to include an internal controls
report from management in our Annual Report on
Form 10-K for the
fiscal year ended March 31, 2007 and in subsequent Annual
Reports. The internal control report must include a statement:
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about managements responsibility for establishing and
maintaining adequate internal controls over financial reporting; |
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identifying the framework used by management to conduct the
required evaluation of the effectiveness of our internal control
over financial reporting; |
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concerning managements assessment of the effectiveness of
our internal control over financial reporting as of
March 31, 2007, including a statement as to whether or not
internal control over financial reporting is effective; and |
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that our independent registered public accounting firm has
issued an attestation report on managements assessment and
the effectiveness of internal control over financial reporting. |
We have and will be required to continue to expend significant
resources in developing the necessary documentation and testing
procedures required by Section 404. We have not completed
our assessment as required by Section 404, and our
independent registered accounting firm has not been engaged to
express and has not expressed, an opinion on our internal
controls over financial reporting. However, in connection with
its audit of our 2006 fiscal year our independent registered
accounting firm identified significant deficiencies in our
internal controls. A significant deficiency is a control
deficiency, or a combination of control deficiencies, that
results in more than a remote likelihood that a misstatement of
the Companys financial statements that is more than
inconsequential will not be prevented or detected. We are in the
process of hiring additional accounting personnel, and
management believes that the identified significant deficiencies
will be remedied by the hiring of such personnel.
Through fiscal 2007 we anticipate significant growth in our
business, including international expansion. As a result, given
the risks inherent in the design and operation of internal
controls over financial reporting, we can provide no assurance
as to our, or our independent registered public accounting
firms, conclusions at March 31, 2007 with respect to
the effectiveness of our internal controls over financial
reporting. If our internal controls are not designed or
operating effectively, we would be required to disclose at such
time that our internal control over financial reporting is not
effective. In addition, our registered public accounting firm
may either disclaim an opinion as it relates to
managements assessment of the effectiveness of our
internal controls or may issue an adverse opinion on the
effectiveness of our internal controls over financial reporting.
Investors may lose confidence in the reliability of our
financial statements, which could cause the market price of our
common stock to decline and which could affect our ability to
run our business as we otherwise would like to.
Our future capital needs are uncertain and we may need to
raise additional funds in the future, and such funds may not be
available on acceptable terms or at all.
We believe that our current cash position, together with the
cash to be generated from expected product sales will be
sufficient to meet our projected operating requirements for at
least the next 12 months. However, after such period we may
be required to seek additional funds from public and private
stock offerings, borrowings under lease lines or other sources.
Our capital requirements will depend on many factors, including:
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the costs associated with expanding our sales and marketing
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the expenses we incur in manufacturing and selling our products; |
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the costs of developing and or acquiring new products or
technologies; |
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the cost of obtaining and maintaining U.S Food and Drug
Administration (FDA) approval or clearance of our
products and products in development; |
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costs associated with our litigation with Boston Scientific; |
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the expenses we incur related to compliance with the
U.S. Foreign Corrupt Practices Act (FCPA) and
laws and regulations in
non-U.S. jurisdictions; |
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costs associated with compliance with the Sarbanes-Oxley Act of
2002 and rules and regulations affecting public companies
recently promulgated by the Securities and Exchange Commission
and the Nasdaq National Market; |
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the costs associated with our facilities expansion, if
any; and |
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As a result of these factors, we may need to raise additional
funds, and such funds may not be available on favorable terms,
or at all. Furthermore, if we issue equity or debt securities to
raise additional funds, our existing stockholders may experience
dilution, and the new equity or debt securities may have rights,
preferences and privileges senior to those of our existing
stockholders. In addition, if we raise additional funds through
collaboration, licensing or other similar arrangements, it may
be necessary to relinquish valuable rights to our potential
products or proprietary technologies, or grant licenses on terms
that are not favorable to us. If we cannot raise funds on
acceptable terms, we may not be able to develop or enhance our
products, execute our business plan, take advantage of future
opportunities, or respond to competitive pressures or
unanticipated customer requirements. In these events, our
ability to achieve our development and commercialization goals
would be adversely affected.
If we choose to acquire new and complementary businesses,
products or technologies instead of developing them ourselves,
we may be unable to complete these acquisitions or to
successfully integrate them in a cost effective and
non-disruptive manner.
Our success depends on our ability to continually enhance and
broaden our product offerings in response to changing customer
demands, competitive pressures and technologies. We may in the
future pursue the acquisition of additional complementary
businesses, products or technologies instead of developing them
ourselves. We do not know if we will be able to successfully
complete any such acquisitions, or whether we will be able to
successfully integrate any acquired business, product or
technology or retain any key employees. Integrating any
business, product or technology we acquire could be expensive
and time consuming, disrupt our ongoing business and distract
our management. If we are unable to integrate any acquired
businesses, products or technologies effectively, our business
will suffer. In addition, any amortization or charges resulting
from the costs of acquisitions could harm our business and
operating results.
We are dependent on single source suppliers for components
and materials used in our devices, and the loss of any of these
suppliers, or their inability to supply us with an adequate
supply of materials, could harm our business.
We rely on third-party suppliers for components and materials
used in our products and rely on single sources for many of the
microcoil and delivery system components, including tubing,
connectors and sterilization services. Our dependence on
third-party suppliers involves several risks, including limited
control over pricing, availability, quality, delivery schedules
and supplier compliance with regulatory requirements. Any delays
in delivery of such components or provision of such services or
shortages of such components could cause delays in the shipment
of our products, which could significantly harm our business. We
generally acquire our single source components pursuant to
purchase orders placed in the ordinary course of business, and
we have no guaranteed supply arrangements with any of our single
source suppliers. Because of our reliance on these vendors, we
may also be subject to increases in component
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costs. These increases could significantly harm our business.
For us to be successful, our third-party suppliers must also be
able to provide us with the materials and components of our
products in substantial quantities, in compliance with
regulatory requirements, in accordance with agreed upon
specifications, at acceptable cost and on a timely basis. Our
anticipated growth may strain the ability of suppliers to
deliver an increasingly large supply of materials and
components. If we are unable to obtain sufficient quantities of
high quality components and materials to meet customer demand on
a timely basis, we could lose customers, our reputation may be
harmed and our business could suffer. If any one or more of our
third-party suppliers cease to provide us with sufficient
quantities of our materials or components in a timely manner or
on terms acceptable to us, we would have to seek alternative
sources of supply. We could incur delays while we locate and
engage alternative qualified suppliers and we might be unable to
engage alternative suppliers on favorable terms. Any such
disruption or increased expenses could harm our
commercialization efforts and adversely affect our ability to
generate revenues.
We rely on independent contract manufacturers for the
manufacture and assembly of certain of our products and
components. Reliance on independent contract manufacturers
involves several risks, including the potential inadequacy of
capacity, the unavailability of or interruptions in access to
certain process technologies and reduced control over product
quality, compliance with regulatory requirements, delivery
schedules, manufacturing yields and costs. Such manufacturers
have possession of and at times title to molds for certain
manufactured components of our products. Shortages of raw
materials, production capacity constraints or delays by our
contract manufacturers could negatively affect our ability to
meet our production obligations and result in increased prices
for affected parts. Any such reduction, constraint or delay may
result in delays in shipments of our products or increases in
the prices of components, either of which could have a material
adverse effect on our business, operating results and financial
condition. We have no supply agreements with our current
contract manufacturers and utilize purchase orders which are
subject to supplier acceptance. The unanticipated loss of any of
our contract manufacturers could cause delays in our ability to
deliver product while we identify and qualify a replacement
manufacturer. If our current or future independent contract
manufacturers are unable to meet our requirements for
manufactured components, our business could suffer.
Our operations are currently conducted at a single location
that may be at risk from earthquakes or other natural
disasters.
We currently conduct all of our manufacturing, development and
management activities at a single location in Silicon Valley,
California, near known earthquake fault zones. We have taken
precautions to safeguard our facilities, including insurance,
health and safety protocols, and off-site storage of computer
data. However, any future natural disaster, such as an
earthquake, could cause substantial delays in our operations,
damage or destroy our equipment or inventory, and cause us to
incur additional expenses. A disaster could seriously harm our
business and results of operations.
If we are unable to effectively manage our inventory held on
consignment by our intended customers, we will not achieve our
expected results.
A significant portion of our inventory is held on consignment by
hospitals that purchase the inventory as they use it. In these
consignment locations, we do not have physical possession of the
consigned inventory. We therefore have to rely on information
from our customers as well as periodic inspections by our sales
personnel to determine when our products have been used. We have
in the past experienced problems managing appropriate consigned
inventory levels and as a result we recorded an impairment of
inventory for anticipated obsolescence in fiscal 2004 and an
impairment of excess inventory in both fiscal 2004 and 2005. If
we are not able to effectively manage appropriate consigned
inventory levels, we may suffer inventory losses that will
reduce our gross profit levels. There can be no assurance that
any efforts to strengthen our monitoring and management of
consigned inventory will be adequate to meaningfully reduce the
risk of inventory loss.
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We are dependent on our senior management team, key clinical
advisors and scientific personnel, and the loss of any of them
could harm our business.
Our continued success depends in part upon the continued
availability and contributions of our senior management team and
the continued participation of our key clinical advisors. We
have entered into letter agreements with certain members of our
senior management team, but none of these agreements guaranty
the services of the individual for a specified period of time.
We also rely on the skills and talents of our scientific
personnel because of the complexity of our products. The loss of
members of our senior management, key clinical advisors or
scientific personnel, or our inability to attract or retain
other qualified personnel or advisors could have a material
adverse effect on our results of operations and financial
condition.
The medical device industry is characterized by patent
litigation, which could be costly, result in the diversion of
managements time and efforts and require us to pay
damages.
The medical device industry is characterized by extensive
litigation and administrative proceedings over patent and other
intellectual property rights. Accordingly, we may in the future
be subject to further litigation and administrative proceedings
over such rights with other companies in our industry. As we
have discussed above with respect to our current litigation with
Boston Scientific, whether a product or method infringes a
patent involves complex legal and factual issues rendering the
outcome of any patent dispute largely unpredictable. In the
future, other competitors may assert that at least one of our
products, its components, or the methods we employ in the use or
manufacture of our products are covered by and infringe the
competitors U.S. or foreign patents held by them. In
addition, should our patents or applications have claims that
encompass the same scope as claims pending or issued to a third
party competitor, that third party may claim that its claims
have priority over ours because they invented the claimed
subject matter first. Because patent applications generally take
many years to issue, there may be third party applications
presently pending of which we are unaware, that may in the
future result in issued patents that at least one of our
products, its components, or the methods we employ in the use or
manufacture of our product(s) may infringe. There could also be
issued patents that one or more components of our products may
inadvertently be infringing, of which we are unaware. As the
number of participants in the market for cerebral vascular
treatments and the number of issued patents in this technology
area grows, the possibility of being charged with patent
infringement increases.
As we have discussed above with respect to our litigation with
Boston Scientific, any infringement claims against us may cause
us to incur substantial costs, could place a significant strain
on our financial resources, divert the attention of management
from our core business and harm our reputation. If the relevant
patent claims are upheld as valid and enforceable and we are
found to infringe, we could be required to pay substantial
damages and/or royalties and could be prevented from selling our
products unless we could obtain a license or were able to
redesign our products to avoid infringement. Any such license
may not be available on reasonable terms, if at all. If we fail
to obtain any required licenses or make any necessary changes to
our products or technologies, we may be unable to commercialize
one or more of our products or practice the methods we employ in
the use or manufacture of our products.
Our ability to protect our intellectual property and
proprietary technology through patents and other means is
uncertain.
Our success depends significantly on our ability to procure
proprietary rights to the technologies used in our products. We
rely on patent protection, as well as a combination of
copyright, trade secret and trademark laws, and nondisclosure,
confidentiality and other contractual restrictions to protect
our proprietary technology. However, these legal means afford
only limited protection and may not be sufficient to adequately
protect our intellectual property or permit us to gain or keep
any competitive advantage. For example, any of our pending
U.S. or foreign patent applications may ultimately not
issue as a patent or, alternatively, may issue with claims that
are of little or no value to us. In addition, once issued, a
valuable patent may be challenged successfully by third parties
and invalidated, such as is being attempted by Boston Scientific
in our presently ongoing litigation. In addition, our patent
protection for
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material aspects of our products and methods is presently being
pursued with applications that have been filed but not issued,
such that these material aspects are not presently protected by
patents. Competitors may further be able to get around having to
license our technology in order to avoid infringement by
designing around our issued and published patent claims, thereby
staying clear of our proprietary rights. Similarly, competitors
may develop products and methods that are equivalent or superior
to ours. Our confidentiality agreements and intellectual
property assignment agreements with our employees, consultants
and advisors may not be enforceable or may not provide
meaningful protection for our trade secrets or other proprietary
information in the event of unauthorized use or disclosure or
other breaches of the agreements. Furthermore, the laws of some
foreign countries may not protect our intellectual property
rights to the same extent as do the laws of the United States.
Both the process of procuring patent rights and the process of
managing patent disputes can be time consuming and expensive.
In the event a competitor infringes upon our patent or other
intellectual property rights, enforcing those rights may be
difficult and time consuming. Even if successful, litigation to
enforce our intellectual property rights or to defend our
patents against challenge could be prolonged, costly and could
divert our managements attention. We may not have
sufficient resources to enforce our intellectual property rights
or to defend our patents against a challenge.
If we fail to obtain, or experience significant delays in
obtaining, FDA clearances or approvals for our future products
or product enhancements, or to comply with similar regulatory
requirements in other countries where we market our products,
our ability to commercially distribute and market our products
could suffer.
Our medical devices are subject to rigorous regulation by the
FDA and numerous other federal, state and foreign governmental
authorities. Our failure to comply with such regulations could
lead to the imposition of injunctions, suspensions or loss of
regulatory clearances or approvals, product recalls, termination
of distribution or product seizures or the need to invest
substantial resources to comply with various existing or new
requirements. In the more egregious cases, criminal sanctions,
civil penalties, disgorgement of profits or closure of our
manufacturing facilities are possible. The process of obtaining
regulatory clearances or approvals to market a medical device,
particularly from the FDA, can be costly and time consuming, and
there can be no assurance that such clearances or approvals will
be granted on a timely basis, if at all. In particular, the FDA
permits commercial distribution of most new medical devices only
after the device has received 510(k) clearance or is the subject
of an approved pre-market approval application, or PMA. The FDA
will clear marketing of a medical device through the 510(k)
process if it is demonstrated that the new product has the same
intended use, is substantially equivalent to another legally
marketed device, including a 510(k)-cleared product, and
otherwise meets the FDAs requirements. The PMA approval
process is more costly, lengthy and uncertain than the 510(k)
clearance process and requires the development and submission of
clinical studies supporting the safety and effectiveness of the
device. Product modifications may also require the submission of
a new 510(k) clearance, or the approval of a PMA before the
modified product can be marketed. Changes in labeling and
manufacturing site for a PMA approved device may require the
submission and approval of a PMA supplement. Any products we
develop that require regulatory clearance or approval may be
delayed, if approved at all. In addition, we believe that some
of our new products will require an approved PMA before we can
commercially distribute the device and we cannot assure you that
any new products or any product enhancements we develop will be
subject to the shorter 510(k) clearance process instead of the
more lengthy PMA requirements. Additionally, certain of our
products under development may involve both device and drug or
biologic regulation and we will need to comply with drug and
biologic regulations in addition to medical device requirements.
Accordingly, we anticipate that the regulatory review and
approval process for some of our future products or product
enhancements may take significantly longer than anticipated or
that we have experienced in the past. We will also be required
to pay a medical device user fee and may also be required to pay
a drug or biologic user fee. There is no assurance that the FDA
will not require that a certain new product or product
enhancement go through the lengthy and expensive PMA approval
process. We have no experience in obtaining PMA approval. We
also have no experience in obtaining drug or
32
biologic approval, and will need to rely on third party
assistance in navigating the regulatory approval pathway for
future combination products.
Further, pursuant to FDA regulations, we can only market our
products for cleared or approved uses. Certain of our products
may be used by physicians for indications other than those
cleared or approved by the FDA, but we cannot promote the
products for such off-label uses.
Modifications to our marketed products may require new 510(k)
clearances or pre-market approvals, or may require us to cease
marketing or recall the modified products until clearances are
obtained.
Any modification to a 510(k)-cleared device that could
significantly affect its safety or effectiveness, or that would
constitute a change in its intended use, requires a new 510(k)
clearance or, possibly, PMA approval. The FDA requires every
manufacturer to make this determination in the first instance,
but the FDA may review a manufacturers decision. The FDA
may not agree with any of our past or future decisions regarding
whether new clearances or approvals are necessary. If the FDA
requires us to seek 510(k) clearance or PMA approval for any
modification to a previously cleared product, we may be required
to cease marketing and/or to recall the modified product until
we obtain clearance or approval, and we may be subject to
significant regulatory fines or penalties. Further, our products
could be subject to recall if the FDA determines, for any
reason, that our products are not safe, including but not
limited to new safety data from use of the product, or
manufacturing defects. Any recall or FDA requirement that we
seek additional approvals or clearances could result in delays,
fines, costs associated with modification of a product, loss of
revenue and potential operating restrictions imposed by the FDA
If we or our suppliers fail to comply with the FDAs
quality system regulations, the manufacture of our products
could be delayed.
We and our suppliers are required to comply with the FDAs
quality system regulations, which cover the methods and
documentation of the design, testing, production, control,
quality assurance, labeling, packaging, storage and shipping of
our products. The FDA enforces these quality system regulations
through unannounced inspections. If we or one of our suppliers
fail a quality system regulations inspection or if any
corrective action plan is not sufficient, or is very expensive
or time consuming to implement, the manufacture of our products
could be delayed until satisfactory corrections are made, or in
the event we are unable to correct the problems we may not be
able to continue manufacturing and distributing the particular
device or devices. Such a delay potentially could disrupt our
business, harm our reputation and adversely affect our sales and
revenues.
If interventionalists are unable to obtain sufficient
reimbursement for procedures performed with our products, it is
unlikely that our products will be widely used.
Successful sales of our products will depend on the availability
of adequate reimbursement from third-party payors. Healthcare
providers that purchase medical devices for treatment of their
patients, generally rely on third-party payors to cover the use
of the product for the particular procedure and reimburse all or
part of the costs and fees associated with the procedures
performed with these devices. Currently, the costs of our
products distributed domestically are being reimbursed by third
party payors. There is no guarantee that coverage and adequate
reimbursement will be available in the future for our existing
and/or new products. Both public and private insurance
reimbursement plans are central to new product acceptance.
Neurointerventionalists are unlikely to use our products if they
do not receive reimbursement adequate to cover the cost of our
products and related procedures.
In international markets, market acceptance may depend, in part,
upon the availability of reimbursement within prevailing
healthcare payment systems. Reimbursement and healthcare payment
systems in international markets vary significantly by country,
and include both government sponsored healthcare and private
insurance. Currently, the costs of our products distributed
internationally, other than in some Latin American countries,
are being reimbursed by public and private healthcare insurers.
We may not obtain international reimbursement approvals in a
timely manner, if at all, our failure to receive
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international reimbursement approvals would negatively impact
market acceptance of our products in the international markets
in which those approvals are sought.
In addition, in certain countries, such as France, Germany and
Japan, we are required to obtain regulatory clearance for our
products to be eligible for reimbursements by third party
payors, even though reimbursement for embolic coiling procedures
is already in place.
Future reimbursement may be subject to increased restrictions
both in the United States and in international markets.
Third-party reimbursement and coverage may not be available or
adequate in either the United States or international markets.
Future legislation, regulation or reimbursement policies of
third-party payors may adversely affect the demand for our
existing products or our products currently under development
and limit our ability to sell our products on a profitable basis.
Recent changes in accounting rules and regulations, such as
expensing of stock options, will result in unfavorable
accounting charges and could require us to change our
compensation policies.
In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123R, Share-Based
Payment, which replaced SFAS No. 123 and
superseded APB 25. Under SFAS No. 123R, companies
will no longer be able to account for share-based compensation
transactions using the intrinsic method in accordance with
APB 25 but will be required to account for such
transactions using a fair-value method and recognize the expense
in the consolidated statement of earnings. We will need to
comply with SFAS No. 123R as of the first quarter of
fiscal 2007.
As permitted by SFAS No. 123, we currently account for
share-based payments to employees using the intrinsic value
method of APB No. 25 and, as such, generally recognize no
compensation cost for employee stock options. Accordingly, the
adoption of the fair value method of SFAS No. 123R
will have a significant impact on our results of operations,
although it will have no impact on our overall financial
position. The impact of adoption of SFAS No. 123R
cannot be predicted at this time because it will depend on
levels of share-based payments granted in the future. While
SFAS No. 123R permits entities to continue the use of
the Black-Scholes option-pricing model, SFAS No. 123R
also permits the use of a binomial model. Based on
our research on the alternative models available to value option
grants, and in conjunction with the type and number of stock
options we expect to issue in the future, we have determined
that we will continue to use the Black-Scholes option pricing
model for stock option valuation upon the adoption of
SFAS No. 123R. Accordingly, our adoption of
SFAS No. 123R will have a significant impact on the
results of operations, although it will have no impact on our
overall financial position.
We may become subject to product liability claims which could
require us to pay damages that exceed our insurance coverage.
Our business exposes us to potential product liability claims
that are inherent in the testing, manufacture and sale of
medical devices for neurointerventional procedures. These
procedures involve significant risk of serious complications,
including intracranial bleeding, brain injury, paralysis and
even death. Any product liability claim brought against us, with
or without merit, could result in the increase of our product
liability insurance rates or the inability to secure coverage in
the future. In addition, we could have to pay an amount in
excess of policy limits, which would have to be paid out of cash
reserves. If longer-term patient results and experience indicate
that our products or any component cause tissue damage, motor
impairment or other adverse effects, we could be subject to
significant liability. Finally, even a meritless or unsuccessful
product liability claim could harm our reputation in the
industry, lead to significant legal fees and could result in the
diversion of managements attention from managing our
business.
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We may be subject to damages resulting from claims that we or
our employees have wrongfully used or disclosed alleged trade
secrets of their former employers.
Many of our employees were previously employed at other medical
device companies, including our competitors or potential
competitors. Although no claims against us are currently
pending, we may be subject to claims that these employees or we
have inadvertently or otherwise used or disclosed trade secrets
or other proprietary information of their former employers.
Litigation may be necessary to defend against these claims. Even
if we are successful in defending against these claims,
litigation could result in substantial costs and be a
distraction to management. If we fail in defending such claims,
in addition to paying monetary damages, we may lose valuable
intellectual property rights or personnel. A loss of key
research personnel or their work product could hamper or prevent
our ability to commercialize product candidates, which could
severely harm our business.
The price of our common stock has fluctuated and we expect
will continue to fluctuate substantially and you may not be able
to sell your shares at or above your purchase price.
The market price of our common stock has been and we expect will
continue to be highly volatile and may fluctuate substantially
due to many factors, including:
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volume and timing of orders for our products; |
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the introduction of new products or product enhancements by us
or our competitors; |
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disputes or other developments with respect to intellectual
property rights; |
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our ability to develop, obtain regulatory clearance for, and
market, new and enhanced products on a timely basis; |
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product liability claims or other litigation; |
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quarterly variations in our or our competitors results of
operations; |
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sales of large blocks of our common stock, including sales by
our executive officers and directors; |
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changes in governmental regulations or in the status of our
regulatory approvals or applications; |
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changes in the availability of third-party reimbursement in the
United States or other countries; |
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changes in earnings estimates or recommendations by securities
analysts; and |
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general market conditions and other factors, including factors
unrelated to our operating performance or the operating
performance of our competitors. |
Furthermore, to the extent there is an inactive market for our
common stock, the value of your shares and your ability to sell
your shares at the time you wish to sell them may be impaired.
An inactive market may also impair our ability to raise capital
by selling shares and may impair our ability to acquire other
companies, products or technologies by using our shares as
consideration.
Because of their significant stock ownership, our executive
officers, directors and principal stockholders will be able to
exert control over us and our significant corporate
decisions.
Based on shares outstanding at March 31, 2006, our
executive officers, directors, and stockholders holding more
than 5% of our outstanding common stock and their affiliates
will, in the aggregate, beneficially own approximately 46.8% of
our outstanding common stock. As a result, these persons, acting
together, may have the ability to determine the outcome of all
matters submitted to our stockholders for approval, including
the election and removal of directors and any merger,
consolidation, or sale of all or
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substantially all of our assets. This concentration of ownership
may harm the market price of our common stock by, among other
things:
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delaying, deferring or preventing a change in control of our
company; |
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impeding a merger, consolidation, takeover or other business
combination involving our company; or |
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causing us to enter into transactions or agreements that are not
in the best interests of all stockholders. |
Further, three of our eight current directors were designated by
our principal stockholders which may increase such
stockholders influence relating to matters submitted to
the Board of Directors.
Future sales of our common stock may depress our stock
price.
Our current stockholders hold a substantial number of shares of
our common stock that they are able to sell in the public market
A significant portion of these shares are held by a small number
of stockholders. Sales by our current stockholders of a
substantial number of shares could significantly reduce the
market price of our common stock. Moreover certain holders of
our common stock have the right to require us to file
registration statements covering their shares or to include
their shares in registration statements that we may file for
ourselves or other stockholders.
We have registered 4,972,187 shares of common stock that we
may issue under our 1998 Stock Plan, 2005 Equity Incentive Plan
and 2005 Employee Stock Purchase Plan. These shares can be
freely sold in the public market upon issuance. The sale by any
of these holders of a large number of securities in the public
market could reduce the trading price of our common stock and
impede our ability to raise future capital.
We may incur increased costs as a result of recently enacted
and proposed changes in laws and regulations.
Recently enacted and proposed changes in the laws and
regulations affecting public companies, including the provisions
of the Sarbanes-Oxley Act of 2002 and rules proposed by the
Securities and Exchange Commission (SEC) and by the Nasdaq
National Market, could result in increased costs to us. The new
rules could make it more difficult or more costly for us to
obtain certain types of insurance, including directors and
officers liability insurance, and we may be forced to
accept reduced policy limits and coverage or incur substantially
higher costs to obtain the same or similar coverage. The impact
of these events could also make it more difficult for us to
attract and retain qualified persons to serve on our board of
directors, our board committees or as executive officers. We are
presently evaluating and monitoring developments with respect to
new and proposed rules and cannot predict or estimate the amount
of the additional costs we may incur or the timing of such costs.
We may become involved in securities class action litigation
that could divert managements attention and harm our
business.
The stock market in general, the Nasdaq National Market and the
market for medical device companies in particular, has
experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating
performance of those companies. Further, the market prices of
securities of medical device companies have been particularly
volatile. These broad market and industry factors may materially
harm the market price of our common stock, regardless of our
operating performance. In the past, following periods of
volatility in the market price of a particular companys
securities, securities class action litigation has often been
brought against that company. We may become involved in this
type of litigation in the future. Litigation often is expensive
and diverts managements attention and resources, which
could materially harm our financial condition and results of
operations.
36
We do not intend to pay cash dividends.
We have never declared or paid cash dividends on our capital
stock. We currently intend to retain all available funds and any
future earnings for use in the operation and expansion of our
business and do not anticipate paying any cash dividends in the
foreseeable future. In addition, the terms of any future debt or
credit facility may preclude us from paying any dividends. As a
result, capital appreciation, if any, of our common stock will
be your sole source of potential gain for the foreseeable future.
Anti-takeover provisions in our organizational documents and
Delaware law may discourage or prevent a change of control, even
an acquisition which would be beneficial to our stockholders,
and thereby affect our stock price adversely and prevent
attempts by our stockholders to replace or remove our current
management.
Our amended and restated certificate of incorporation and
amended bylaws contain provisions that could delay or prevent a
change of control of our company or changes in our board of
directors that our stockholders might consider favorable. Some
of these provisions:
|
|
|
|
|
authorize the issuance of preferred stock which can be created
and issued by the board of directors without prior stockholder
approval, with rights senior to those of the common stock; |
|
|
|
provide for a classified board of directors, with each director
serving a staggered three-year term; |
|
|
|
prohibit our stockholders from filling board vacancies, calling
special stockholder meetings, or taking action by written
consent; |
|
|
|
prohibit our stockholders from making certain changes to our
amended and restated certificate of incorporation or bylaws
except with
662/3
% stockholder approval; and |
|
|
|
require advance written notice of stockholder proposals and
director nominations. |
In addition, we are subject to the provisions of
Section 203 of the Delaware General Corporation Law, which
may prohibit certain business combinations with stockholders
owning 15% or more of our outstanding voting stock. These and
other provisions in our amended and restated certificate of
incorporation, restated bylaws and Delaware law could make it
more difficult for stockholders or potential acquirers to obtain
control of our board of directors or initiate actions that are
opposed by our then-current board of directors, including
delaying or impeding a merger, tender offer, or proxy contest
involving our company. Any delay or prevention of a change of
control transaction or changes in our board of directors could
cause the market price of our common stock to decline.
In addition, we are subject to the provisions of
Section 203 of the Delaware General Corporation Law, which
may prohibit certain business combinations with stockholders
owning 15% or more of our outstanding voting stock. These and
other provisions in our amended and restated certificate of
incorporation, restated bylaws and Delaware law could make it
more difficult for stockholders or potential acquirors to obtain
control of our board of directors or initiate actions that are
opposed by our then-current board of directors, including
delaying or impeding a merger, tender offer, or proxy contest
involving our company. Any delay or prevention of a change of
control transaction or changes in our board of directors could
cause the market price of our common stock to decline.
|
|
Item 1B. |
Unresolved Staff Comments. |
None
Our worldwide headquarters are located in San Jose,
California. On June 6, 2005, we entered into a
non-cancelable
seven-year lease with
our current landlord pursuant to which we lease approximately
42,000 square feet of building space with both
administrative and manufacturing facilities. Additionally, we
lease office space for our two wholly-owned subsidiaries, Micrus
SA and Micrus UK, under non-
37
cancelable lease agreements with terms through November 2011 and
December 2010, respectively. We believe that our existing
facilities are adequate to meet our current and near term future
needs.
|
|
Item 3. |
Legal Proceedings. |
FCPA Investigation
In August 2004, while reviewing our sales and payment
procedures, we identified certain payments we made to physicians
located in France, Germany, Spain and Turkey that may have
likely violated the FCPA and the laws of such countries as well
as possibly the laws of Switzerland, where our Swiss subsidiary
is located. Our audit committee immediately directed our legal
counsel to conduct an internal investigation into these
payments. In September 2004, we voluntarily disclosed to the
United States Department of Justice (DOJ) the factual
information obtained in our internal investigation of potential
violations of the FCPA.
Soon after reaching the preliminary conclusions of the
investigation, our Board of Directors adopted a Foreign Corrupt
Practices Act Policy and appointed Tom Holdych, a Senior Vice
President of the Company, as Compliance Officer. The Compliance
Officer has with the assistance of our general counsel and
outside legal counsel developed a number of other corporate
policies that will govern payments to and contractual agreements
with physicians and other consultants. In addition, the
employment of our then Chief Executive Officer and our then Vice
President of Sales and Marketing was terminated in November 2004.
After reviewing the results of the internal investigation and
the compliance procedures implemented by us, the DOJ entered
into an agreement (the DOJ Agreement) with us in
February 2005 pursuant to which it will not prosecute us for the
conduct disclosed to the DOJ, and we agreed to: (i) accept
responsibility for the actions of our employees and officers,
(ii) pay a monetary penalty of $450,000,
(iii) continue to cooperate with the DOJ in its
investigation, including the waiver of legal privileges,
(iv) establish policies and procedures to assure compliance
with the FCPA and other relevant bribery laws, (v) retain
and pay for an independent law firm to act as a monitor, for
purposes of reporting to the DOJ for a period of three years as
to our compliance with the DOJ Agreement and monitoring our
implementation and adherence to FCPA compliance policies and
procedures, and (vi) cooperate fully with the DOJ, the
independent monitor and the SEC. We must remain in complete
compliance with these conditions for a period of two years, or
face the filing of a criminal complaint against us. Moreover,
the terms of the DOJ Agreement will bind our successors, or
merger partners, as long as the agreement is in effect.
The payments we made to physicians located in France, Germany,
Spain and Turkey also may have likely violated the applicable
laws in those foreign jurisdictions and may possibly have
violated laws in Switzerland. We are not able to determine at
this time what penalties or other actions, if any, authorities
in France, Germany, Spain, Turkey or Switzerland may impose on
us, or our Swiss subsidiary, as a result of such violations.
Such amounts could be material to the financial position,
results of operations or cash flows of the Company.
Patent Litigation
In September 2004, Boston Scientific Corporation and Target
Therapeutics, Inc., a subsidiary of Boston Scientific
Corporation (collectively Boston Scientific), filed
a patent infringement suit in the United States District Court
for the Northern District of California, alleging that our coil
devices infringe two patents held by Boston Scientific and that
this infringement is willful. Sales of our microcoil devices
currently represent virtually all of our revenues. Boston
Scientific is a large, publicly-traded corporation with
significantly greater financial resources than us. In November
2004, we answered Boston Scientifics complaint and
counterclaimed, alleging that Boston Scientifics occlusive
products, and their use, infringe three of our patents. Each
party seeks an injunction preventing manufacture, offer for
sale, use and importation of the others detachable coil
devices in the United States, damages for past infringement,
which may be trebled, and payment of its legal fees and costs.
In addition, each party seeks a declaration
38
that the patents of the other are invalid and not infringed and
has alleged that certain of the asserted patents of the other
are unenforceable due to inequitable conduct.
Boston Scientific is also a party in two other lawsuits against
Cordis Corporation and ev3/ Micro Therapeutics, Inc. in which
the Boston Scientific patents which are the basis of Boston
Scientifics suit against us are also at issue. An outcome
of either of these lawsuits adverse to Cordis Corporation or
ev3/ Micro Therapeutics, and related to the same patents Boston
Scientific asserts against us, could have an adverse impact on
certain of our defenses in our litigation with Boston Scientific.
In October 2004, Cordis requested ex parte reexamination
of certain claims in those patents. In February 2005, the court
granted a stay of the Boston Scientific lawsuit against Micrus
until the earlier of twelve 12 months or the outcome of the
reexamination by the U.S. Patent and Trademark Office
(USPTO) in the Cordis case. In February 2006, the
USPTO issued a Notice of Intent to Issue Ex Parte Reexamination
Certificate for one of the two patents, apparently confirming
all of the claims of that patent. In February 2006, the USPTO
also issued an Office Action in which it apparently confirmed
the patentability of certain of the claims in the second patent,
but rejected the remainder. Boston Scientific has stated to the
USPTO and to the court that the rejected claims from the second
patent can be reissued and certified as patentable upon
reexamination if a correction is made to the priority chain for
the second patent. In March 2006, the court lifted the stay with
respect to any claims that were confirmed as patentable in the
reexamination proceedings and has permitted discovery in the
case to commence with respect to those claims. The parties have
since exchanged preliminary infringement contentions in which
Boston Scientific asserted only claims from the first patent.
Boston Scientific has stated that it would supplement its
preliminary infringement contentions to include claims from the
second Boston Scientific patent still under reexamination upon
completion of the reexamination, and that these asserted claims
would be from the set of claims which has not yet been deemed in
condition to be confirmed by the USPTO. Based on our current
understanding of the reexamination, we believe that the claims
of the second Boston Scientific patent also will be confirmed.
The confirmation of asserted claims in one, and potentially
both, of Boston Scientifics asserted patents may
negatively impact our chances of mounting a successful
invalidity defense against this patent.
We are unable at this time to determine the likely outcome of
the patent litigation. Patent lawsuits involve complex legal and
factual issues which can take a number of years and a great deal
of expense and management attention to resolve. We may also be
subject to potentially negative publicity due to the litigation.
In the because of an event it is determined that we infringe
patent claims asserted by Boston Scientific and that those
claims are not invalid and not unenforceable we may, among other
things, be required to do one or more of the following:
|
|
|
|
|
pay damages, including up to treble damages and Boston
Scientifics attorneys fees and costs, which may be
substantial; |
|
|
|
cease, because of an injunction, the making, using, selling,
offering to sell, importing into the U.S. or exporting from
the U.S. of our microcoil devices, which currently
represent virtually all of our revenues, found to infringe the
patent claims asserted by Boston Scientific; |
|
|
|
expend significant resources to redesign our technology so that
it does not infringe the patent claims asserted by Boston
Scientific, which may not be possible; |
|
|
|
discontinue manufacturing or other processes that incorporate
technology that infringes the patent claims asserted by Boston
Scientific; |
|
|
|
become subject to a compulsory license order under which we
would be required to pay Boston Scientific a royalty on future
sales of our products; and/or |
|
|
|
obtain a license from Boston Scientific to use the relevant
patents, which may not be available to us on acceptable terms,
or at all. |
If our microcoil devices were found to infringe, any development
or acquisition of products or technologies that do not infringe
the patent claims asserted by Boston Scientific could require
the expenditure of substantial time and other resources and
could have a material adverse effect on our
39
business and financial results. If we were to be required to,
but could not obtain, a license under the patent claims asserted
by Boston Scientific, we would likely be prevented from
commercializing or further commercializing the relevant
products. We believe that it is unlikely that we would be able
to obtain a license under the patent claims being asserted by
Boston Scientific. If we need to redesign our products to avoid
the patent claims being asserted by Boston Scientific, we may
suffer significant regulatory delays associated with conducting
additional studies or submitting technical, manufacturing or
other information related to the redesigned products and,
ultimately, in obtaining approval.
As a result of Boston Scientifics answer to our
counterclaim that Boston Scientific infringes three of our
patents, the validity of those patents is now at issue in the
lawsuit. The court could find that those patents are invalid,
which would prevent us from asserting those patents against
third parties.
An unfavorable outcome for us in this patent litigation would
significantly harm our business and may cause us to materially
change our business model.
From time to time, we may be involved in other litigation
relating to claims arising out of our ordinary course of
business. We are not currently a party to any other material
legal proceedings.
|
|
Item 4. |
Submission of Matters to a Vote of Security
Holders. |
None
PART II
|
|
Item 5. |
Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities. |
Our common stock is traded on the Nasdaq National Market under
the symbol MEND. The following table sets forth the
high and low daily bid prices per share of our common stock, as
reported by the Nasdaq National Market.
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31, 2006 |
|
High | |
|
Low | |
|
|
| |
|
| |
First Quarter (from June 16, 2005)
|
|
$ |
11.40 |
|
|
$ |
10.75 |
|
Second Quarter
|
|
$ |
12.80 |
|
|
$ |
9.65 |
|
Third Quarter
|
|
$ |
10.25 |
|
|
$ |
6.34 |
|
Fourth Quarter
|
|
$ |
14.40 |
|
|
$ |
8.40 |
|
The last reported sale price of our common stock on the Nasdaq
National Market on June 1, 2006 was $14.40 share. As
of June 1, 2006, there were approximately 446 holders of
record of our common stock.
We have never declared a divided or paid any cash dividends on
our common stock. Because we currently intend to retain any
future earnings to fund the development and growth of our
business, we do not anticipate paying any cash dividends in the
near future.
|
|
|
Unregistered Securities Sold in Fiscal 2006 |
We did not sell any unregistered shares of our common stock
during fiscal 2006.
Our Registration Statement on Form S-1 (File
No. 333-123154) related to our IPO was declared effective
by the SEC on June 16, 2005. The public offering commenced
on June 17, 2005. All 3,250,000 shares of common stock
offered in the final prospectus were sold at the initial closing
on June 21, 2005, and an additional 250,000 shares of
common stock subject to the underwriters over-allotment
option, were sold at a third closing on July 6, 2005, in
each case at a price to public of $11.00 per share (before
deducting underwriting discounts and commissions) through a
syndicate of underwriters managed by A.G. Edwards and Needham
& Company, LLC. The aggregate gross proceeds of the shares
offered and sold was $38.5 million, out of which we paid an
aggregate of $2.7 million in underwriting discounts and
40
commissions to the underwriters. In addition, as of
March 31, 2006, we incurred additional expenses of
approximately $2.8 million in connection with the offering,
which when added to the underwriting discounts and commissions
paid by us, amounts to total expenses of approximately
$5.5 million.
We have used and intend to continue to use the net proceeds of
the public offering primarily for general corporate purposes,
including costs associated with our entry into the Japanese
market, expansion of our sales force, research and development
activities, facilities expansion and other working capital and
capital expenditures. The amounts and timing of our actual
expenditures will depend upon numerous factors, including the
growth of our sales and marketing activities, status of our
research and development efforts and the amount of cash
generated by our operations, if any. We have used and may in the
future also use a portion of the proceeds for the acquisition
of, or investment in, companies, technologies, products or
assets that complement our business.
We have not determined the amount of net proceeds to be used
specifically for the foregoing purposes. As a result, management
will have broad discretion over the proceeds from the IPO.
Pending these uses, we intend to invest the net proceeds of the
IPO in United States government and short-term investment grade
securities.
|
|
|
Issuer Purchases of Equity Securities |
We do not have a stock repurchase program and did not repurchase
any of our equity securities during the quarter ended
March 31, 2006.
41
|
|
Item 6. |
Selected Financial Data. |
The following selected consolidated financial data should be
read in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and the consolidated financial statements and the notes thereto
included in this report. The selected consolidated statements of
operations data for the fiscal years ended March 31, 2006,
2005 and 2004 and the selected consolidated balance sheet data
as of March 31, 2006 and 2005 are derived from the audited
consolidated financial statements that are included elsewhere in
this report. The selected consolidated statements of operations
data for the fiscal years ended March 31, 2003 and 2002 and
the selected consolidated balance sheet data as of
March 31, 2004, 2003 and 2002 are derived from our audited
consolidated financial statements not included in this report.
The historical results are not necessarily indicative of the
results of operations to be expected in any future periods. All
per share amounts for all periods presented have been restated
to reflect the 1-for-2.25 reverse stock split that became
effective on June 10, 2005.
Consolidated Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
Revenues
|
|
$ |
32,781 |
|
|
$ |
24,012 |
|
|
$ |
15,700 |
|
|
$ |
8,287 |
|
|
$ |
3,770 |
|
Cost of goods sold(1)
|
|
|
9,710 |
|
|
|
8,003 |
|
|
|
5,725 |
|
|
|
3,629 |
|
|
|
2,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
23,071 |
|
|
|
16,009 |
|
|
|
9,975 |
|
|
|
4,658 |
|
|
|
1,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development(1)
|
|
|
6,589 |
|
|
|
2,360 |
|
|
|
2,927 |
|
|
|
1,763 |
|
|
|
1,364 |
|
|
Sales and marketing(1)
|
|
|
15,171 |
|
|
|
8,781 |
|
|
|
6,012 |
|
|
|
4,367 |
|
|
|
3,451 |
|
|
General and administrative(1)
|
|
|
10,307 |
|
|
|
11,884 |
|
|
|
3,511 |
|
|
|
3,080 |
|
|
|
3,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
32,067 |
|
|
|
23,025 |
|
|
|
12,450 |
|
|
|
9,210 |
|
|
|
8,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(8,996 |
) |
|
|
(7,016 |
) |
|
|
(2,475 |
) |
|
|
(4,552 |
) |
|
|
(7,134 |
) |
Interest income
|
|
|
1,295 |
|
|
|
177 |
|
|
|
153 |
|
|
|
95 |
|
|
|
254 |
|
Interest expense
|
|
|
(12 |
) |
|
|
(29 |
) |
|
|
(20 |
) |
|
|
(11 |
) |
|
|
(11 |
) |
Other income, net
|
|
|
(632 |
) |
|
|
164 |
|
|
|
328 |
|
|
|
287 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before income taxes
|
|
$ |
(8,345 |
) |
|
$ |
(6,704 |
) |
|
$ |
(2,014 |
) |
|
$ |
(4,181 |
) |
|
$ |
(6,861 |
) |
Benefit from income taxes
|
|
|
(84 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(8,261 |
) |
|
|
(6,704 |
) |
|
|
(2,014 |
) |
|
|
(4,181 |
) |
|
|
(6,861 |
) |
Accretion to redemption value of redeemable convertible
preferred stock
|
|
|
(659 |
) |
|
|
(588 |
) |
|
|
(530 |
) |
|
|
(476 |
) |
|
|
(458 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$ |
(8,920 |
) |
|
$ |
(7,292 |
) |
|
$ |
(2,544 |
) |
|
$ |
(4,657 |
) |
|
$ |
(7,319 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to stockholders, basic and
diluted
|
|
$ |
(0.79 |
) |
|
$ |
(5.22 |
) |
|
$ |
(2.02 |
) |
|
$ |
(3.82 |
) |
|
$ |
(6.17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing net loss per attributable to common
stockholders, basic and diluted
|
|
|
11,240 |
|
|
|
1,397 |
|
|
|
1,257 |
|
|
|
1,220 |
|
|
|
1,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes non-cash stock-based compensation of the following: |
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Cost of goods sold
|
|
$ |
26 |
|
|
$ |
26 |
|
|
$ |
11 |
|
|
$ |
|
|
|
$ |
|
|
Research and development
|
|
|
22 |
|
|
|
69 |
|
|
|
207 |
|
|
|
19 |
|
|
|
12 |
|
Sales and marketing
|
|
|
169 |
|
|
|
134 |
|
|
|
162 |
|
|
|
13 |
|
|
|
7 |
|
General and administrative
|
|
|
172 |
|
|
|
3,210 |
|
|
|
174 |
|
|
|
16 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
389 |
|
|
$ |
3,439 |
|
|
$ |
554 |
|
|
$ |
48 |
|
|
$ |
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
62,114 |
|
|
$ |
29,774 |
|
|
$ |
17,878 |
|
|
$ |
8,864 |
|
|
$ |
9,331 |
|
|
Mandatorily redeemable convertible preferred stock
|
|
|
|
|
|
|
58,442 |
|
|
|
49,479 |
|
|
|
39,305 |
|
|
|
35,395 |
|
|
Total stockholders equity (deficit)
|
|
|
51,316 |
|
|
|
(37,561 |
) |
|
|
(34,193 |
) |
|
|
(32,475 |
) |
|
|
(27,686 |
) |
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Conditions and Results of Operations. |
The following discussion and analysis of the financial
condition and results of operations of the Company should be
read in conjunction with the consolidated financial statements
and the related notes included elsewhere in this report, and
with other factors described from time to time in our other
filings with the Securities and Exchange Commission. This Annual
Report on
Form 10-K contains
forward-looking statements that involve risks and uncertainties.
Actual results and the timing of events may differ materially
from those contained in the forward-looking statements due to a
number of factors, including those discussed in Part I,
Item 1A Risk Factors above and elsewhere in
this Annual Report on
Form 10-K.
Overview
We develop, manufacture and market both implantable and
disposable medical devices used in the treatment of cerebral
vascular diseases. We also are developing products for the
treatment of ischemic disease and have recently launched our
first product in this market. Our products are used by
interventional neuroradiologists and neurosurgeons to treat
cerebral aneurysms responsible for hemorrhagic stroke. Both
hemorrhagic and ischemic stroke are significant causes of death
worldwide. Our product lines consist of endovascular systems
that enable a physician to gain access to the brain in a
minimally invasive manner through the vessels of the arterial
system. We believe our products provide a safe and reliable
alternative to more invasive neurosurgical procedures for
treating aneurysms. Our proprietary three-dimensional, embolic
coils are unique in that they automatically and rapidly deploy
within an aneurysm, forming a scaffold that conforms to a wide
diversity of aneurysm shapes and sizes. We also supply accessory
devices and products including microcatheters and guidewires
used to deliver microcoils and stents for the treatment of
cerebral vascular disease. We plan on growing our business by
continuing to penetrate our existing markets, bringing new
products and technologies to interventional neuroradiologists
and neurosurgeons, and by entering new markets such as Asia
where we introduced our products in Japan through a distributor.
Our products commenced selling in Japan in March 2006.
Our revenues are derived primarily from sales of our microcoils.
We also sell access devices, which currently do not account for
a significant portion of our revenues. Geographically, our
revenues are generally from sales to customers in the Americas,
Europe and Asia. Our products are shipped from our facilities in
the United States, Switzerland, United Kingdom, and a logistics
facility in the Netherlands, to either hospitals or
distributors. We invoice our customers upon shipment. In select
hospitals, our products are held on consignment, free of charge
and remain on site.
43
We anticipate that our cost of goods sold will generally
increase in absolute dollars during those quarters in which our
sales increase or we incur additional manufacturing costs in
anticipation of the commercial introduction of new products.
Furthermore, our gross margin percentage may decrease in those
quarters in which we initiate sales of new products or product
lines, or enter new geographic territories.
Our product development efforts are primarily focused on
expanding our current line of microcoils and broadening our
product offerings. In August 2004, we introduced our Cerecyte
microcoil product line and since June 2005 we have launched
seven new products, including microcoils, stents, microcatheters
and guidewires. We intend to continue this product line
expansion with the goal of continuing to increase our
per-procedure revenue.
We also intend to continue to expand our direct sales force in
Europe and the United States and enter the Asian markets through
distributors. In March 2006, we launched our sales and marketing
efforts in Japan through our distribution partner Goodman. We
recorded product sales of $2.2 million to Goodman in March
2006.
As we expect to continue to incur net losses for the foreseeable
future as described below, we currently anticipate that the
broadening of our product line, the worldwide expansion of our
direct sales force and our entry into the Asian market will be
primarily funded with our currently available cash.
We introduced our first proprietary, three-dimensional microcoil
in May 2000. Our revenues have grown from $1.8 million in
fiscal 2001 to $32.8 million in fiscal 2006.
Since inception, we have been unprofitable. We have incurred net
losses of $2.0 million in fiscal 2004, $6.7 million in
fiscal 2005 and $8.3 million in fiscal 2006. We believe
that our current cash position and the cash expected to be
generated from product sales will be sufficient to meet our
working capital and capital expenditure requirements for at
least the next twelve months. We expect to continue to incur net
losses for the foreseeable future as we expand our manufacturing
and sales activities and expand geographically. As of
March 31, 2006, we had an accumulated deficit of
$49.6 million.
Recent Developments
Expanded Manufacturing Facility. On June 6, 2005, we
signed a new lease for expanded facilities which will allow us
to further increase our manufacturing capacity. We believe this
additional capacity will allow us to meet the anticipated demand
for our products and improve manufacturing efficiencies.
Initial Public Offering. On June 21, 2005, we
completed an initial public offering (IPO) in which
we sold 3,250,000 shares of common stock at $11.00 per
share for net cash proceeds of approximately $33.2 million.
On July 6, 2005, we sold an additional 250,000 shares
of our common stock at $11.00 per share pursuant to the
over-allotment option granted. The net proceeds to us from the
exercise of the over-allotment option were approximately
$2.6 million. We received an aggregate of approximately
$33.0 million in cash proceeds from the offering, including
the proceeds we received from selling shares pursuant to the
over-allotment option, net of underwriting discounts and
offering expenses.
Vascular FX Intellectual Property Purchase. On
July 28, 2005, we entered into a technology transfer
agreement with Vascular FX, pursuant to which we purchased
certain intellectual property from Vascular FX. Pursuant to the
terms of the agreement, we are obligated to pay up to
$4.0 million in cash to Vascular FX, which included a
$1.5 million payment at closing followed by milestone
payments to be made over time, in addition to royalty payments
on potential future product sales. In January and May 2006, we
made milestone payments of $1.0 million and
$1.5 million, respectively. There are no future milestone
payments to Vascular FX under the terms of the agreement.
Neurologic Acquisition. On September 20, 2005, we
purchased all of the outstanding capital stock of Neurologic UK
Limited (Neurologic), a privately held distributor
of our products in the United Kingdom. Neurologic accounted for
approximately 14% of our revenues during the fiscal year ended
March 31, 2005. The results of operations for the partial
period subsequent to the acquisition date are included in the
accompanying consolidated statements of operations.
44
The transaction included an initial cash consideration of
approximately $4.7 million and future multi-year revenue
based earn-out payments. All three earn-out payments will be
one-third of Neurologics product sales during specified
periods. In November 2005, we paid an additional $120,000 as a
purchase price adjustment pursuant to the provisions of the
purchase agreement. In April 2006, we paid an additional
$1.4 million for the first year earn-out payment.
After the purchase of Neurologic, we formed a new wholly-owned
subsidiary in the UK and changed the name from Neurologic to
Micrus Endovascular UK Ltd (Micrus Endovascular UK).
We concurrently entered into long term services agreements with
each of the two founders of Neurologic to provide for their
employment by Micrus Endovascular UK.
In addition, the two founders of Neurologic agreed to a
non-competition provision to last for a period of six years,
under which they may not actively carry on any business that
would compete with Neurologics business within the UK or
Ireland. Similarly, they have agreed not to solicit former
clients, customers or suppliers of Neurologic for a period of
three years.
The total consideration paid of approximately $7.2 million
consisted of the cash payments and accrued first year earn-out
payment totaling $6.2 million, assumed forgiveness of
receivables from Neurologic to Micrus Endovascular SA at the
acquisition date of $0.6 million, and direct acquisition
related costs of $316,000. The net tangible assets acquired and
liabilities assumed in the acquisition were recorded at fair
value. We determined the valuation of the identifiable
intangible assets acquired in the transaction to be
$3.9 million. We recorded goodwill of $3.3 million
associated with the purchase of Neurologic. A deferred tax
liability of $0.7 million was recorded for the tax effect
of the amortizable intangible assets which are not deductible
for tax purposes.
Goodman Distribution Agreement. On September 30,
2005, we entered into a five-year, exclusive distribution
agreement with Goodman, CO., LTD (Goodman). Under
the terms of the agreement, Goodman will promote and market our
full line of products, as such products are approved, in Japan
and will purchase a minimum of $27.25 million of such
products over the five year term of the agreement, ranging from
$2.0 million during fiscal year 2006 to $9.0 million
during fiscal year 2010. The initial term of the agreement is
five years, subject to the right of the parties to terminate
earlier based upon the occurrence of certain events, and
automatically renews for successive one-year periods unless
otherwise determined by either party. In connection with the
agreement, Goodman paid us an up-front cash payment of
$0.8 million which has been recorded as deferred revenue.
We are recognizing the deferred revenue on a straight-line basis
over the five-year term of the agreement. In February 2006, we
received regulatory clearance to sell our products in Japan
through Goodman. We recorded product sales of $2.2 million
to Goodman in March 2006.
Biotronik Agreement. On January 6, 2006, we entered
into a license, development and distribution agreement (the
Biotronik Agreement) with Biotronik AG, a Swiss
corporation (Biotronik), pursuant to which we will
collaborate with Biotronik to develop certain neurovascular
products and we will be the exclusive worldwide distributor for
jointly developed neurovascular products. Biotronik granted us
an exclusive license to certain patents, know-how and other
proprietary technology in the neurovascular field.
Under the terms of our agreement, we paid an upfront licensing
fee of approximately $0.6 million to Biotronik and were
required to make milestone payments to Biotronik upon receipt of
approvals to market stent products we jointly developed for the
treatment of neurovascular disease and royalty payments on the
products sold. In February 2006, Biotronik received CE Mark
clearance for the Pharos stent intended for both the treatment
of aneurysms and the treatment of ischemic diseases. As a
consequence we paid milestone payments to Biotronik of
approximately $0.7 million in both March and April 2006. We
will make royalty payments to Biotronik when we start selling
the Pharos stent in the first quarter of fiscal 2007. Under the
terms of this agreement, there are no future milestone payments
to Biotronik related to the Pharos stent. Additionally, we will
continue to fund ongoing project development based on the terms
of this agreement.
45
Results of Operations
The following table sets forth the results of our operations,
expressed as percentages of revenues, for the years ended
March 31, 2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
% | |
|
% | |
|
% | |
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Cost of goods sold
|
|
|
30 |
% |
|
|
33 |
% |
|
|
36 |
% |
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
70 |
% |
|
|
67 |
% |
|
|
64 |
% |
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
20 |
% |
|
|
10 |
% |
|
|
19 |
% |
|
Sales and marketing
|
|
|
46 |
% |
|
|
36 |
% |
|
|
38 |
% |
|
General and administrative
|
|
|
31 |
% |
|
|
50 |
% |
|
|
22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
97 |
% |
|
|
96 |
% |
|
|
79 |
% |
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(27 |
)% |
|
|
(29 |
)% |
|
|
(15 |
)% |
Interest and investment income
|
|
|
4 |
% |
|
|
1 |
% |
|
|
1 |
% |
Interest expense
|
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Other income, net
|
|
|
(2 |
)% |
|
|
0 |
% |
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
Net loss before provision for income taxes
|
|
|
(25 |
)% |
|
|
(28 |
)% |
|
|
(13 |
)% |
Benefit from income taxes
|
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(25 |
)% |
|
|
(28 |
)% |
|
|
(13 |
)% |
Accretion of redeemable convertible preferred stock to
redemption value including beneficial conversion feature
|
|
|
(2 |
)% |
|
|
(2 |
)% |
|
|
(3 |
)% |
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
|
(27 |
)% |
|
|
(30 |
)% |
|
|
(16 |
)% |
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended March 31, 2006 and 2005
Our revenues are derived primarily from sales of our microcoils
and to a lesser extent sales of accessory devices used in the
treatment of cerebral vascular diseases. Our revenues were
$32.8 million in fiscal 2006, an increase of
$8.8 million or 37% from $24.0 million in fiscal 2005.
Revenues from the Americas were $18.0 in fiscal 2006, an
increase of $4.2 million or 31% from $13.8 million in
fiscal 2005. Revenues from Europe were $14.8 million in
fiscal 2006, an increase of $4.6 million or 44% from
$10.2 million in fiscal 2005. The increase was primarily
due to an increase in the number of microcoil products sold
during this period. Factors driving the increase included growth
in the overall market for embolic coils, an increase in our
share of both the domestic and foreign markets in which we
participate and the introduction of new products. Additionally,
the increase in revenues was partially due to higher average
selling prices as a result of increased Cerecyte product sales
in fiscal 2006. Our revenues in fiscal 2006 also included
initial sales to our distributor in Japan of $2.2 million
which has been included in the Companys European
geographic segment.
Cost of goods sold consists of materials, direct labor, overhead
costs associated with manufacturing, impairments of inventory
and warranty expenses. Cost of goods sold were $9.7 million
in fiscal 2006, an increase of $1.7 million or 21% from
$8.0 million in fiscal 2005. The increase in cost of goods
sold during
46
fiscal 2006 as compared to fiscal year 2005 was primarily due to
an increase in personnel and manufacturing costs associated with
increased sales of our products as well as increased costs
attributable to a general increase in salaries, benefits and
overhead costs resulting from increased production, partially
offset by increased manufacturing efficiencies. Cost of goods
sold in fiscal 2005 included a $279,000 impairment of inventory
related to design changes to further enhance the handling and
performance of the product and a $298,000 impairment of
inventory related to products determined to be excess
inventories.
Gross profit was $23.1 million in fiscal 2006, an increase
of $7.1 million or 44% from $16.0 million in fiscal
2005. Gross margin was 70% in fiscal 2006 and 67% in fiscal
2005. The increase was primarily due to an increase in revenue
from sales of higher margin products and manufacturing
efficiencies, partially offset by the increase in cost of goods
sold of $426,000 due to higher per unit cost of inventory
acquired in connection with the purchase of Neurologic that was
sold from the acquisition date through the end of fiscal 2006
and import handling fees of $282,000 associated with product
shipments through our prior distributor in Japan. We expect our
gross margin to fluctuate in future periods based on the mix of
our product sales.
Research and Development. Research and development
expenses consist primarily of costs associated with the design,
development, and testing of new and existing products. Such
costs are expensed as they are incurred and include salaries and
related personnel costs, fees paid to outside consultants, and
other direct and indirect costs related to research and product
development. Research and development expenses were
$6.6 million in fiscal 2006, an increase of
$4.2 million or 179% from $2.4 million in fiscal 2005.
The increase was primarily due to expenses in connection with
the purchase of intellectual property (IP) from
Vascular FX amounting to $2.5 million, an increase of
$277,000 related to evaluating in-process technology, an
increase of $0.6 million, in the form of an upfront
licensing fee in connection with the Biotronik Agreement, an
increase of $0.6 million related to increased headcount, as
well as an increase of $192,000 in supplies expense and $143,000
in consulting expense associated with the developing and testing
of new products. As a percentage of revenues, research and
development expenses were 20% in fiscal 2006 and 10% in fiscal
2005. Excluding the non-routine charges related primarily to the
acquisition of IP from Vascular FX, we expect our research and
development expenses to increase in absolute dollars in future
periods as we hire additional development personnel, continue
work on product improvements, and expand our existing product
line.
Sales and Marketing. Sales and marketing expenses consist
primarily of compensation costs of our direct sales force and
marketing personnel, as well as overhead costs related to these
activities. Also included are costs associated with promotional
literature and videos, trade show participation, and education
and training of physicians. Sales and marketing expenses were
$15.2 million in fiscal 2006, an increase of
$6.4 million or 73% from $8.8 million in fiscal 2005.
This increase was primarily due to an increase of
$2.6 million associated with additional sales and marketing
personnel in the United States and Europe, higher sales
incentive and commission costs of $1.1 million on increased
sales in the United States and Europe, higher travel expenses of
$1.1 million, an increase of $0.6 million related to
graphic design, promotional and printing costs in connection
with new product releases and the relocation of our offices in
the United States, Switzerland, and the United Kingdom, an
increase of $277,000 related to consulting expenses incurred
primarily due to outsourced product marketing functions, as well
as an increase of $98,000 due to a randomized post product
release trial with our Cerecyte product. As a percentage of
revenues, sales and marketing expenses increased to 46% in
fiscal 2006 from 36% in fiscal 2005 due to an increase in
headcount both in the United States and Europe in the sales
force and clinical support group. We anticipate that sales and
marketing expenses will increase in absolute dollars in future
periods as we continue to increase the size of our direct sales
force and clinical support group, increase spending on
additional sales and marketing programs and expand into
additional geographic territories.
General and Administrative. General and administrative
expenses consist primarily of compensation and related costs for
finance, human resources, facilities, information technology,
insurance, and professional services. Professional services are
principally comprised of outside legal, audit and information
technology consulting. General and administrative expenses were
$10.3 million in fiscal 2006, a decrease of
47
$1.6 million or 13% from $11.9 million in fiscal 2005.
The decrease was primarily due to a stock-based compensation
charge in fiscal 2005 relating to our former CEO of
$3.0 million, a decrease in audit and tax fees of
$1.0 million as our general and administrative expenses in
fiscal year 2005 included audit and other fees related to the
preparation for our IPO and for international tax restructuring
and planning, and the monetary penalty of $450,000 pursuant to
the agreement we entered into with the DOJ in February 2005,
partially offset by increases of $0.7 million related to
higher finance and administrative personnel costs, $388,000
related to the amortization of identifiable intangible assets in
connection with the purchase of Neurologic, $358,000 due to
higher insurance premiums for our directors and officers
insurance policy associated with being a public company,
$195,000 related to management bonuses in connection with our
IPO, $299,000 associated with investor relations costs and board
of directors fees, and $292,000 for regulatory costs associated
with entering the Japanese market. As a percentage of revenues,
general and administrative expenses were 31% in fiscal 2006 and
50% in fiscal 2005. As we incur additional expenses associated
with being a public company and to the extent our business
expands, we expect that general and administrative expenses will
increase in absolute dollars in future periods.
|
|
|
Stock-based Compensation Charges |
Deferred compensation for stock options granted to employees has
been calculated as the difference between the exercise price and
the fair value of our common stock on the date of grant. In
connection with the grant of stock options to employees during
fiscal 2004, we recorded deferred stock-based compensation of
$1.1 million. We recorded these amounts as a component of
stockholders equity and are amortizing the amount, on a
straight-line basis, as a non-cash charge to cost of goods sold
and operating expenses over the vesting period of the options.
Exercise prices of options granted subsequent to March 31,
2004 were determined to be equal to the fair market value of our
common stock on the date of grant.
The resulting amortization expense of the deferred stock-based
compensation for the grant of stock options to employees was
$229,000 and $265,000 in fiscal 2006 and 2005, respectively. We
anticipate we will record amortization of deferred compensation
related to these employee stock option grants as follows:
|
|
|
|
|
Fiscal Year 2007
|
|
$ |
229,000 |
|
Fiscal Year 2008
|
|
$ |
168,000 |
|
The compensation expense will be reduced in the period of
forfeiture for any accrued but unvested compensation arising
from early termination of an option holders services. In
addition to the amounts outlined above, beginning in the first
quarter of fiscal 2007, we will record compensation expense for
the value of stock options vesting from that date forward in
accordance with the provisions of Statement of Financial
Accounting Standards (SFAS) No. 123R.
In addition, stock options issued to non-employees, generally
for consulting services related to patient studies or marketing
analysis, are recorded at their fair value on the date of
vesting in accordance with SFAS No. 123 and EITF
No. 96-18 and recognized over the respective service or
vesting period. In connection with stock options issued to
non-employees, we recorded $160,000 and $189,000 of stock-based
compensation expense in fiscal 2006 and 2005, respectively.
Other income, net consists primarily of investment income,
interest expense, and foreign currency gains and losses. Total
other income, net was $0.7 million in fiscal 2006, an
increase of $339,000 from $312,000 in fiscal 2005. This increase
was primarily due to an increase in interest income of
$1.1 million primarily as a result of higher interest rates
and higher average cash and investment balances. This was
partially offset by higher foreign exchange losses of
$0.7 million resulting from differences in exchange rates
between the time of the recording of the transaction and
settlement of foreign currency denominated receivables and
payables, and a non-operating charge of $158,000 recorded upon
the completion of our IPO for the change in fair value of the
2005 common stock warrants.
48
We have incurred net operating losses for both federal and state
purposes since inception and, as a result, we have paid no
federal or state income taxes. In fiscal 2006, we accrued a
current tax benefit of approximately $11,000 arising from a net
operating loss attributed to Neurologic for the period after the
acquisition date and a noncurrent tax benefit of approximately
$73,000 for the tax effect of the current year amortization
related to the intangible assets acquired in the Neurologic
transaction which are not deductible. As of March 31, 2006,
we had federal, state and foreign net operating loss
carryforwards (NOLs) that are available to reduce
future taxable income of approximately $30.8 million,
$16.5 million and $2.1 million, respectively. The
federal NOLs will expire at various dates beginning in 2012,
state NOLs will expire beginning in 2007 and the foreign NOLs
will expire beginning in 2009. We also have federal and state
tax research and development credit carryforwards of
approximately $0.9 million and $0.8 million,
respectively. The federal tax credit carryforwards will expire
beginning in 2012. The state tax credit carryforwards do not
expire. Due to the uncertainty of our ability to generate
sufficient taxable income to realize the carryforwards prior to
their expiration, we have established a valuation allowance at
March 31, 2006 and 2005 to fully offset the deferred tax
assets.
|
|
|
Accretion of Redeemable Convertible Preferred Stock to
Redemption Value |
Our convertible preferred stock that was outstanding prior to
the closing of our initial public offering in June 2005 was
redeemable at the request of the holder on or after the sixth
anniversary of the original issuance date based upon certain
circumstances. This right expired upon the automatic conversion
of all of our preferred stock into common stock upon the closing
of the IPO. Prior to the closing of the IPO, we were accreting
the carrying value of the preferred stock to the mandatory
redemption amount on the sixth anniversary using the effective
interest method through periodic charges to additional paid-in
capital. We recorded a non-cash charge of $276,000 and
$0.6 million for the accretion on our redeemable
convertible preferred stock in fiscal 2006 and 2005,
respectively.
|
|
|
Beneficial Conversion Feature |
The difference between the proceeds allocated to the
Series E preferred stock and the estimated fair value of
the common stock issuable upon conversion resulted in a
beneficial conversion feature on the Series E preferred
stock which was recorded as a reduction to the Series E
preferred stock and an increase to additional
paid-in-capital. The
total beneficial conversion feature was $383,000 which, prior to
the completion of the IPO, was being amortized as a reduction of
net income available to common stockholders over the period of
redemption of the Series E preferred stock. Upon completion
of the IPO, we recorded a non-cash charge of $383,000 for the
beneficial conversion feature on our Series E preferred
stock in the first quarter of fiscal 2006.
Fiscal Years Ended March 31, 2005 and 2004
Our revenues were $24.0 million in fiscal 2005, an increase
of $8.3 million or 53% from $15.7 million in fiscal
2004. This increase was primarily due to an increase in the
number of microcoils shipped by us during this period. Factors
driving this increase included growth in the overall market for
embolic coils, an increase in our share of both the domestic and
foreign markets in which we participate and the launch of our
Cerecyte microcoil product line in August 2004. In addition,
$0.7 million of our increase in revenues resulted from the
decline in the U.S. dollar against the foreign currencies
in which our international revenues are denominated.
Cost of goods sold were $8.0 million in fiscal 2005, an
increase of $2.3 million or 40% from $5.7 million in
fiscal 2004. The increase in cost of goods sold during fiscal
2005 as compared to the prior year was primarily from increased
personnel and manufacturing costs associated with increased
sales of our
49
products as well as increased costs attributable to a general
increase in salaries, benefits and overhead costs resulting from
capacity expansion, and higher costs associated with the
ramp-up of
manufacturing of our new Cerecyte microcoil product line. Cost
of goods sold in fiscal 2005 included a $279,000 impairment of
inventory in the third quarter of fiscal 2005 for the cost of
certain first generation Cerecyte microcoils replaced with a
coil that has been designed to further enhance the handling and
performance of the product and a $298,000 impairment of
inventory in the fourth quarter of fiscal 2005 for microcoils in
our consignment accounts and finished goods inventory which
after review of historical turnover, future demand and market
conditions for our product were determined to be excess
inventories. Cost of goods sold in fiscal 2004 included a
$387,000 impairment of inventory in the first quarter of fiscal
2004 for anticipated obsolescence of platinum product due to a
design optimization intended to improve deployment performance
and a $255,000 impairment of excess inventory in the fourth
quarter of fiscal 2004 reflecting an anticipated decrease in
demand for our platinum product line in response to the
introduction of our Cerecyte microcoil product line in the
second quarter of fiscal 2005.
Gross profit was $16.0 million in fiscal 2005, an increase
of $6.0 million from $10.0 million in fiscal 2004,
primarily as a result of an increase in revenue and lower per
unit production costs. Gross margin was 67% in fiscal 2005 and
64% in fiscal 2004. This increase was primarily due to higher
gross margins we derived from sales of our Cerecyte microcoils,
which commenced commercial sales in August 2004.
Research and Development. Research and development
expenses were $2.4 million in fiscal 2005, a decrease of
$0.6 million or 19% from $2.9 million in fiscal 2004.
The reduction was primarily due to higher spending of $322,000
in fiscal 2004 for animal studies and testing related to the
development of our stent and microcatheter products, and an
increase of $198,000 in supplies and raw materials costs related
to the stent and microcatheter projects, and savings of $145,000
from reduced headcount in fiscal 2005. The decrease was
partially offset by $104,000 of recruiting and relocation costs
for our research and development staff and partially offset by a
$190,000 increase in fees and related costs in connection with
evaluating in-process technology. As a percentage of revenues,
research and development expenses were 10% in fiscal 2005 and
19% in fiscal 2004.
Sales and Marketing. Sales and marketing expenses were
$8.8 million in fiscal 2005, an increase of
$2.8 million or 46% from $6.0 million in fiscal 2004.
This increase was primarily attributable to higher sales
commissions of $377,000 on increased sales in the United States
and an increase of $0.9 million associated with additional
sales and marketing personnel in the United States and Europe
and related higher travel costs of $446,000, as well as
increased participation and sponsorship of domestic and
international meetings to promote awareness of our product line.
As a percentage of revenues, sales and marketing expenses were
36% in fiscal 2005 and 38% in fiscal 2004, the decrease was
primarily due to the $8.3 million increase in product sales
during fiscal 2005, partially offset by the increased expenses
described above.
General and Administrative. General and administrative
expenses were $11.9 million in fiscal 2005, an increase of
$8.4 million or 238% from $3.5 million in fiscal 2004.
The increase was primarily attributable to (i) an increase
of $1.6 million in legal fees related to an internal
investigation of potential violations of the FCPA and
intellectual property litigation in connection with the patent
infringement suit filed by Boston Scientific; (ii) a
monetary penalty of $450,000 to the DOJ pursuant to the
agreement we entered into with the DOJ in February 2005;
(iii) an increase of $1.1 million in audit fees
related to the preparation for our initial public offering and
for international tax restructuring and planning; (iv) a
stock-based compensation charge relating to the former CEO of
$3.0 million; (v) an increase of $1.2 million
related to an increase in finance and administrative personnel
costs, including $220,000 for our European operations;
(vi) an increase of $110,000 in costs related to supporting
our information technology infrastructure; and
(vii) termination costs of $100,000 related to our former
CEO. As a percentage of revenues, general and administrative
expenses were 50% in fiscal 2005 and 22% in fiscal 2004.
50
|
|
|
Stock-based Compensation Charges |
The amortization expense of the deferred stock-based
compensation for the grant of stock options to employees was
$265,000 and $87,000 in fiscal 2005 and 2004, respectively.
In March 2005, we entered into a settlement agreement with our
former CEO relating to the termination of his employment in
November 2004. The settlement agreement provides that in
consideration for executing a release of all claims against us,
he will be paid $100,000 in equal installments of $20,000 over a
period of five fiscal quarters. In addition, all options held by
our former CEO continued to vest through February 28, 2005
and all vested options at that date shall be exercisable through
August 31, 2005. As a result of the continued vesting and
the change in the exercise date of the options, in the quarter
ended March 31, 2005 the Company recorded an expense of
$3.0 million related to the intrinsic value of the
approximately 325,322 affected options held by our former CEO.
The amortization expense of the deferred stock-based
compensation for the grant of stock options to non-employees was
$189,000 and $467,000 in fiscal 2005 and 2004, respectively.
Total other income, net was $312,000 in fiscal 2005, a decrease
of $149,000 from $461,000 in fiscal 2004. This decrease was
primarily due to lower foreign exchange gains of $164,000
resulting from differences in exchange rates between the time of
the recording of the transaction and settlement of foreign
currency denominated receivables and payables, partially offset
by $24,000 of interest income as a result of higher average cash
and investment balances in fiscal 2005 as compared to the prior
year.
|
|
|
Accretion of Redeemable Convertible Preferred Stock to
Redemption Value |
We recorded a non-cash charge of $0.6 million and
$0.5 million for the accretion on our redeemable
convertible preferred stock in fiscal 2005 and 2004,
respectively.
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Cash flow activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
$ |
(9,055 |
) |
|
$ |
(3,402 |
) |
|
$ |
(716 |
) |
Net cash (used in) provided by investing activities
|
|
$ |
(5,940 |
) |
|
$ |
2,462 |
|
|
$ |
(4,965 |
) |
Net cash provided by financing activities
|
|
$ |
35,665 |
|
|
$ |
11,255 |
|
|
$ |
9,953 |
|
Since our inception, we have funded our operations primarily
through issuances of convertible preferred stock and related
warrants, which provided us with aggregate gross proceeds of
$61.7 million. On June 21, 2005, we completed an IPO
in which we sold 3,250,000 shares of our common stock at
$11.00 per share for net cash proceeds to us of
approximately $33.2 million, net of underwriting discounts
and commissions. On July 6, 2005, we sold an additional
250,000 shares of common stock at $11.00 per share
pursuant to the over-allotment option granted to the
underwriters. Together with the over-allotment shares sold by
us, cash proceeds to us in the offering were approximately
$33.0 million, net of underwriting discounts and offering
expenses.
As of March 31, 2006, we had cash and marketable securities
of $37.1 million, compared to $18.0 million at
March 31, 2005. We believe that our current cash position
and the cash expected to be generated from product sales will be
sufficient to meet our working capital and capital expenditure
requirements for at least the next twelve months.
Net cash used in operating activities was $9.1 million
during fiscal 2006 as compared to $3.4 million during
fiscal 2005 and $0.7 million during fiscal 2004. Net cash
used in operating activities during fiscal 2006 resulted
primarily from operating losses, an increase in accounts
receivable due to an increase in the number of microcoil
products sold, including the initial sales to our distributor in
Japan in March 2006,
51
and a decrease in accounts payable primarily attributable to
payments of audit fees related to our IPO and payments to the
DOJ and payment of other legal costs related to FCPA matters.
These factors were partially offset by an increase in accrued
payroll and related expenses due to increased headcount, an
increase in accrued liabilities primarily arising from import
handling fees associated with shipments to Japan and the
short-term portions of deferred revenue recorded for the upfront
payment under our distribution agreement with Goodman and an
increase in non-current liabilities primarily consisting of a
deferred tax liability recorded in connection with the
Neurologic acquisition and the long-term portion of deferred
revenue recorded for the upfront payment pursuant to our
distribution agreement with Goodman.
Net cash used in operating activities during fiscal 2005
resulted primarily from operating losses, an increase in
accounts receivable due to an increase in the number of
microcoils sold and an increase in inventory primarily due to an
increase in the number of consignment locations. These factors
were partially offset by an increase in stock-based compensation
expense primarily resulting from a change for stock options in
connection with our settlement agreement with our former chief
executive officer, an increase in accrued payroll and related
expenses attributable primarily to increased headcount and an
increase in accounts payable attributable to audit fees related
to our IPO and monetary penalties assessed by the DOJ and legal
costs incurred relating to FCPA issues. During fiscal 2004, net
cash used in operating activities resulted primarily from
operating losses and net increases in accounts receivable and
inventories, partially offset by increases in accrued payroll,
accrued liabilities and non-cash items such as depreciation and
amortization, provision for doubtful accounts, provision for
impairment of inventory, and stock-based compensation.
Net cash used in investing activities was $5.9 million
during fiscal 2006, as compared to net cash provided by
investing activities of $2.5 million during fiscal 2005 and
net cash used in investing activities of $5.0 million
during fiscal 2004. Net cash used in investing activities during
fiscal 2006 was primarily related to the purchase of Neurologic,
the purchase of capital equipment primarily related to the
relocation of our corporate headquarters and manufacturing
facilities, and the milestone payment to Biotronik which has
been capitalized as capitalized license technology. Net cash
provided by investing activities during fiscal 2005 was
primarily related to the proceeds from sales of marketable
securities, partially offset by the purchase of capital
equipment. During fiscal 2004, cash used in investing activities
was primarily related to the purchase of marketable securities
with a portion of the proceeds from the sale of preferred stock,
partially offset by the proceeds from the sales of marketable
securities.
Net cash provided by financing activities was $35.7 million
during fiscal 2006, as compared to $11.3 million during
fiscal 2005 and $10.0 million during fiscal 2004. Net cash
provided by financing activities during fiscal 2006 primarily
consisted of net proceeds from the sale of common stock in our
IPO, net proceeds from the over-allotment option exercise by the
underwriters, proceeds from the exercise of preferred and common
stock warrants, and proceeds from the exercise of stock options
and employee stock purchase plan, partially offset by payments
related to issuance costs for preferred stock. Net cash used by
financing activities during fiscal 2005 primarily consisted of
net proceeds from the issuance of Series E preferred stock
and warrants and proceeds from the exercise of stock options and
preferred stock warrants, partially offset by the expenditures
incurred in preparation for the IPO. During fiscal 2004, net
cash provided by financing activities primarily consisted of net
proceeds from the sale of preferred stock.
To the extent that existing cash and marketable securities and
cash from operations are insufficient to fund our future
activities, we may need to raise additional funds through public
or private equity or debt financing. Although we are currently
not a party to any definitive agreement with respect to
potential investments in, or acquisitions of, complementary
businesses, services or technologies, we may enter into such
agreements in the future, which could require us to seek
additional funds through public or private equity or debt
financing. Additional funds may not be available on terms
favorable to us or at all.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance
with accounting principles generally accepted in the United
States (GAAP). In doing so, we have to make estimates and
assumptions that
52
affect our reported amounts of assets, liabilities, revenues and
expenses, as well as related disclosure of contingent assets and
liabilities. In many cases, we could reasonably have used
different accounting policies and estimates. In some cases,
changes in the accounting estimates are reasonably likely to
occur from period to period. Accordingly, actual results could
differ materially from our estimates. To the extent that there
are material differences between these estimates and actual
results, our financial condition or results of operations will
be affected. We base our estimates on past experience and other
assumptions that we believe are reasonable under the
circumstances, and we evaluate these estimates on an ongoing
basis. We refer to accounting estimates of this type as critical
accounting policies and estimates, which we discuss below. Our
management has reviewed our critical accounting policies and
estimates with our accounting advisors, audit committee and
board of directors.
Although our significant policies are more fully described in
Note 1 to our Consolidated Financial Statements appearing
at the end of this report, we believe the following accounting
policies to be critical to the judgment and estimates used in
the preparation of our consolidated financial statements.
Revenue Recognition and Product Warranty. We generate
revenues from the sale of our microcoil product line and related
equipment and accessories. Revenues are generated from sales to
hospitals and third-party distributors.
Revenues are recognized when evidence of an arrangement exists,
delivery to the customer has occurred, the selling price is
fixed or determinable and collectibility is reasonably assured.
Revenues are recognized generally upon shipment, after the
receipt of a replenishment or purchase order.
The evidence of an arrangement generally consists of a contract
or a purchase order approved by the customer.
Delivery to the customer occurs when the customer takes title to
the product. Generally title passes upon shipment, but may occur
when the product is received by the customer based on the terms
of the agreement with the customer.
The selling price for all sales are fixed and agreed with the
customer prior to shipment and are generally based on
established list prices or contractual agreements.
We perform a credit check on new customers and periodic credit
checks on existing customers. Accordingly, collectibility is
generally assured prior to shipment. In the event a sale is made
to a customer for which collectibility is not reasonably
assured, we either require prepayment of the order or revenue is
deferred and recognized upon collection. We maintain a reserve
for amounts which may not be collectible. As of March 31,
2006 our accounts receivable reserve was $317,000.
Sales made to our South American distributors are made according
to the same contractual terms as sales made to other customers.
However, we have historically experienced longer delays in
receiving payments and a higher level of write-offs relating to
our South American distributors and have been unable to conclude
that collectibility is reasonably assured at the time that the
customer takes title to the inventory on sales to this class of
customers. Accordingly, for this class of customers, we
recognize revenues when cash is collected. Revenues recognized
from these customers was $0.8 million, $0.8 million,
and $0.9 million for the years ended March 31, 2006,
2005, and 2004, respectively. The cost of goods sold is deferred
as a component of finished goods inventory and recognized at the
time the related sale is recognized.
We maintain inventory at various hospital locations under the
custody of hospital personnel for use in procedures. We
recognize revenues on sales to these customers when the revenue
criteria have been met, which occurs when the hospital customer
informs us that product has been removed from inventory and used
in a procedure.
Once a sale has occurred, we provide our customers with limited
warranty privileges. To date, product returns under warranty
have not been significant.
53
Sales to distributors are recognized at the time of shipment,
provided the price is fixed or determinable, and collectibility
is reasonably assured. Non-refundable fees received from
distributors upon entering into multi-year distribution
agreements, where there is no culmination of a separate earnings
process, are deferred and amortized over the term of the
distribution agreement or the expected period of performance,
whichever is longer.
Allowance for Doubtful Accounts. In estimating the
collectibility of our accounts receivable, we analyze historical
bad debts, customer concentrations, customer credit-worthiness,
current economic trends, and changes in customer payment terms.
We record allowances in the period when the revenues are
recognized based on anticipated future events. If there are
unanticipated future events, this allowance may need to be
adjusted.
Excess and Obsolete Inventory. We calculate an inventory
reserve for estimated obsolescence or excess inventory based
upon historical turnover and assumptions about future demand for
our products and market conditions. Our products have a
three-year shelf life, with the exception of our Cerecyte
microcoils, which have a two-year shelf life. Our products are
subject to demand fluctuations based on the availability and
demand for alternative products. Our inventory, which consists
primarily of microcoils, is at risk of obsolescence following
the introduction and development of new or enhanced products.
The inventory reserve at March 31, 2006 was
$0.9 million, which included a $0.7 million impairment
of inventory for our microcoils in our consignment accounts and
finished goods inventory which after review of historical
turnover, future demand and market conditions for our product
were determined to be excess inventories, and a $57,000
impairment of inventory for obsolescence of product due to
expiration or anticipated expiration of shelf life. Our
estimates and assumptions for excess and obsolete inventory are
reviewed and updated on a quarterly basis. The estimates we use
for demand are also used for near-term capacity planning and
inventory purchasing and are consistent with our revenue
forecasts. Future product introductions and related inventories
may require additional reserves based upon changes in market
demand or introduction of competing technologies. Increases in
the reserve for excess and obsolete inventory result in a
corresponding expense to cost of goods sold.
Accounting for Income Taxes. Significant management
judgment is required in determining our provision for income
taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. We have
recorded a full valuation allowance on our net deferred tax
assets as of March 31, 2006 and 2005, respectively, due to
uncertainties related to our ability to utilize our deferred tax
assets in the foreseeable future. These deferred tax assets
primarily consist of certain net operating loss carry forwards
and research and development tax credits.
Stock-based Compensation. We have granted to our
employees options to purchase our common stock at exercise
prices equal to the fair value of the underlying common stock,
as determined by our board of directors on the date of grant. In
anticipation of our IPO, we determined that for financial
reporting purposes the estimated value of our common stock was
in excess of the exercise price for certain option grants
occurring in the fiscal year ended March 31, 2004. We
record the deferred compensation expense on a straight-line
basis over the vesting period, reduced for any cancellation of
unvested options. For the years ended March 31, 2006, 2005
and 2004, we recorded employee stock-based compensation expense
of $229,000, $265,000 and $87,000, respectively. No deferred
compensation has been recognized on grants occurring prior to
June 23, 2003 and subsequent to March 31, 2004 as we
determined that the exercise price for these grants was equal to
or greater than the fair value of the common stock on the date
of grant. We anticipate that nearly all stock options granted in
the future will have no difference between the exercise price
and the deemed value of the underlying shares because the vast
majority of stock options will have an exercise price determined
by the trading price in the market on the date of grant.
Deferred compensation, net of forfeitures recorded from stock
option grants through March 31, 2006 totaled approximately
$1.0 million.
These valuations are inherently highly uncertain and subjective.
If we had made different assumptions, our deferred stock-based
compensation amount, our stock-based compensation expense, our
net loss and net loss per share could have been significantly
different.
54
Under generally accepted accounting principles, companies are
permitted to use an alternative method of valuing stock options
which is based on the fair value of the stock option on the date
of grant. This method generally results in the recording of a
greater expense related to stock options. Recent changes to the
accounting rules require all companies to use a fair value
method to record compensation expense related to stock options.
We are required to adopt this change in the first quarter of
fiscal 2007.
As of March 31, 2006, the intrinsic value of outstanding
employee stock options, based on the closing price of
$14.00 per share, was as follows:
|
|
|
|
|
Vested
|
|
$ |
1.3 million |
|
|
|
|
|
Unvested
|
|
$ |
1.6 million |
|
|
|
|
|
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R,
Share-Based Payment, which replaced
SFAS No. 123 and superseded APB No. 25.
SFAS No. 123R addresses the accounting for share-based
payment transactions in which a company receives employee
services in exchange for either equity instruments of the
company or liabilities that are based on the fair value of the
companys equity instruments or that may be settled by the
issuance of such equity instruments. Under
SFAS No. 123R, companies will no longer be able to
account for share-based compensation transactions using the
intrinsic method in accordance with APB No. 25 but will be
required to account for such transactions using a fair-value
method and recognize the expense in the consolidated statements
of operations. SFAS No. 123R is effective beginning in
the Companys first quarter of fiscal 2007.
As permitted by SFAS No. 123, we currently account for
share-based payments to employees using the intrinsic value
method of APB No. 25 and, as such, generally recognize no
compensation cost for employee stock options. Accordingly, the
adoption of the fair value method of SFAS No. 123R
will have a significant impact on the results of operations,
although it will have no impact on our overall financial
position. The impact of adoption of SFAS No. 123R
cannot be predicted at this time because it will depend on
levels of share-based payments granted in the future. While
SFAS No. 123R permits entities to continue the use of
the Black-Scholes option pricing model, SFAS No. 123R
also permits the use of a binomial model. Based on
the research done by the Company on the alternative models
available to value option grants, and in conjunction with the
type and number of stock options the Company expects to issue in
the future, the Company has determined that it will continue to
use the Black-Scholes option pricing model for stock option
valuation upon the adoption of SFAS No. 123R.
Contractual Obligations
We have obligations under non-cancelable operating leases with
various expiration dates through 2012 and purchase commitments
for inventory, capital equipment and operating expenses, such as
materials for research and development and consulting.
As of March 31, 2006, our contractual commitments were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period | |
|
|
| |
|
|
|
|
Less Than | |
|
1-3 | |
|
3-5 | |
|
Beyond | |
|
|
Total | |
|
1 Year | |
|
Years | |
|
Years | |
|
5 Years | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Contractual obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cancelable operating lease obligations
|
|
$ |
3,982 |
|
|
$ |
625 |
|
|
$ |
1,830 |
|
|
$ |
1,113 |
|
|
$ |
414 |
|
Purchase commitments
|
|
|
2,658 |
|
|
|
2,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
6,640 |
|
|
$ |
3,283 |
|
|
$ |
1,830 |
|
|
$ |
1,113 |
|
|
$ |
414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We made a milestone payment of $0.7 million associated with
the Biotronik Agreement in April 2006. Under the terms of this
agreement, there are no future milestone payments to Biotronik.
55
We paid the first year earn-out amount associated with the
purchase of Neurologic in April 2006. The future earn-out
payments will be one-third of Neurologics product sales
during specified periods.
|
|
Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk. |
Foreign Currency Market Risks. Historically, we have been
exposed to risks from fluctuations in currency exchange rates
due to intercompany loans made to Micrus SA, our Swiss
subsidiary, in 2001 in connection with its incorporation. These
loans are denominated in Swiss francs and will fluctuate in
value against the U.S. dollar, causing us to recognize
foreign exchange gains and losses. The functional currency of
our Swiss subsidiary is the Swiss franc. The functional currency
of our UK subsidiary is the pound sterling. In Europe, our
revenues are denominated in Swiss francs, euros, pounds sterling
and other currencies. Accordingly, we are exposed to market risk
related to changes between the Swiss franc and these other
currencies. If the Swiss franc appreciates against the
currencies in which our receivables are denominated, we will
recognize foreign currency losses. For the preparation of our
consolidated financial statements, the financial results of our
Swiss subsidiary are translated into U.S. dollars based on
average exchange rates during the applicable period. A
hypothetical 10% decline in the value of the Swiss franc versus
the U.S. dollar would cause us to recognize a loss of
$156,000 related to our loan with Micrus SA and a $260,000
decrease in our comprehensive loss from our investment in Micrus
SA. A hypothetical 10% decline in the value of the pound
sterling versus the U.S. dollar would cause us to recognize
a $185,000 increase in our comprehensive loss from our
investment in Micrus UK. A hypothetical 10% decline in the value
of the euro versus the Swiss franc would cause us to recognize a
loss of $433,000 based on our foreign denominated receivables as
of March 31, 2006.
In fiscal 2006, approximately 42% of our revenues was
denominated in currencies other than the U.S. dollar. In
future periods, we believe a greater portion of our revenues
could be denominated in currencies other than the
U.S. dollar, thereby increasing our exposure to exchange
rate gains and losses on non-U.S. currency transactions. We do
not currently enter into forward exchange contracts to hedge
exposure denominated in foreign currencies or any other
derivative financial instruments for trading or speculative
purposes. In the future, if we believe our currency exposure
merits, we may consider entering into transactions to help
mitigate that risk.
Interest Rate Market Risk. Our cash is invested in bank
deposits and money market funds denominated in
U.S. dollars. The carrying value of these cash equivalents
approximates fair market value. Our investments in marketable
securities are subject to interest rate risk, which is the risk
that our financial condition and results of operations could be
adversely affected due to movements in interest rates.
56
|
|
Item 8. |
Financial Statements and Supplementary Data. |
Index to Consolidated Financial Statements
|
|
|
|
|
|
|
Page | |
|
|
| |
|
|
|
58 |
|
|
|
|
59 |
|
|
|
|
60 |
|
|
|
|
61 |
|
|
|
|
63 |
|
|
|
|
64 |
|
|
Supplementary Data
|
|
|
|
|
|
|
|
|
106 |
|
57
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of Micrus Endovascular Corporation
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of Micrus Endovascular Corporation and
its subsidiaries at March 31, 2005 and 2006, and the
results of their operations and their cash flows for each of the
three years in the period ended March 31, 2006 in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the
financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related
consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
/s/ PricewaterhouseCoopers LLP
San Jose, California
June 15, 2006
58
MICRUS ENDOVASCULAR CORPORATION
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In thousands, except | |
|
|
share and per share amounts) | |
ASSETS |
Current Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
36,104 |
|
|
$ |
15,017 |
|
|
Short-term investments
|
|
|
984 |
|
|
|
1,977 |
|
|
Accounts receivable, net of allowance for doubtful accounts of
$317 at March 31, 2006 and $230 at March 31, 2005
|
|
|
8,267 |
|
|
|
4,486 |
|
|
Inventories, net
|
|
|
4,479 |
|
|
|
3,930 |
|
|
Prepaid expenses and other current assets
|
|
|
766 |
|
|
|
524 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
50,600 |
|
|
|
25,934 |
|
Long term investments
|
|
|
|
|
|
|
977 |
|
Property and equipment, net
|
|
|
2,488 |
|
|
|
922 |
|
Goodwill
|
|
|
3,309 |
|
|
|
|
|
Intangible assets, net
|
|
|
5,417 |
|
|
|
550 |
|
Other assets
|
|
|
300 |
|
|
|
96 |
|
Deferred initial public offering costs
|
|
|
|
|
|
|
1,295 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
62,114 |
|
|
$ |
29,774 |
|
|
|
|
|
|
|
|
|
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS EQUITY (DEFICIT) |
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
2,088 |
|
|
$ |
2,641 |
|
|
Accrued payroll and other related expenses
|
|
|
3,147 |
|
|
|
1,663 |
|
|
Accrued liabilities
|
|
|
4,308 |
|
|
|
1,337 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
9,543 |
|
|
|
5,641 |
|
|
Warrant liability
|
|
|
|
|
|
|
3,201 |
|
|
Other non-current liabilities
|
|
|
1,255 |
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
10,798 |
|
|
|
8,893 |
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 6)
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred stock, $0.01 par value;
|
|
|
|
|
|
|
|
|
|
Authorized: 1,000,000 shares
|
|
|
|
|
|
|
|
|
|
Issued and outstanding: none at March 31, 2006 and
7,680,943 shares at March 31, 2005
|
|
|
|
|
|
|
58,442 |
|
|
|
|
|
|
|
|
Stockholders equity (deficit):
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value;
|
|
|
|
|
|
|
|
|
|
|
Authorized: 50,000,000 shares
|
|
|
|
|
|
|
|
|
|
|
Issued and outstanding: 14,190,287 shares at March 31,
2006 and 1,468,235 shares at March 31, 2005
|
|
|
142 |
|
|
|
15 |
|
|
Additional paid-in capital
|
|
|
101,430 |
|
|
|
4,397 |
|
|
Deferred stock-based compensation
|
|
|
(397 |
) |
|
|
(630 |
) |
|
Accumulated other comprehensive loss
|
|
|
(240 |
) |
|
|
(368 |
) |
|
Accumulated deficit
|
|
|
(49,619 |
) |
|
|
(40,975 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
51,316 |
|
|
|
(37,561 |
) |
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable convertible preferred stock and
stockholders equity (deficit)
|
|
$ |
62,114 |
|
|
$ |
29,774 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
59
MICRUS ENDOVASCULAR CORPORATION
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except | |
|
|
per share amounts) | |
Revenues
|
|
$ |
32,781 |
|
|
$ |
24,012 |
|
|
$ |
15,700 |
|
Cost of goods sold
|
|
|
9,710 |
|
|
|
8,003 |
|
|
|
5,725 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
23,071 |
|
|
|
16,009 |
|
|
|
9,975 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
6,589 |
|
|
|
2,360 |
|
|
|
2,927 |
|
|
Sales and marketing
|
|
|
15,171 |
|
|
|
8,781 |
|
|
|
6,012 |
|
|
General and administrative
|
|
|
10,307 |
|
|
|
11,884 |
|
|
|
3,511 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
32,067 |
|
|
|
23,025 |
|
|
|
12,450 |
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(8,996 |
) |
|
|
(7,016 |
) |
|
|
(2,475 |
) |
Interest and investment income
|
|
|
1,295 |
|
|
|
177 |
|
|
|
153 |
|
Interest expense
|
|
|
(12 |
) |
|
|
(29 |
) |
|
|
(20 |
) |
Other income (expense), net
|
|
|
(632 |
) |
|
|
164 |
|
|
|
328 |
|
|
|
|
|
|
|
|
|
|
|
Loss before benefit from income taxes
|
|
|
(8,345 |
) |
|
|
(6,704 |
) |
|
|
(2,014 |
) |
Benefit from income taxes
|
|
|
(84 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(8,261 |
) |
|
|
(6,704 |
) |
|
|
(2,014 |
) |
Accretion of redeemable convertible preferred stock to
redemption value including beneficial conversion feature
|
|
|
(659 |
) |
|
|
(588 |
) |
|
|
(530 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$ |
(8,920 |
) |
|
$ |
(7,292 |
) |
|
$ |
(2,544 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$ |
(0.79 |
) |
|
$ |
(5.22 |
) |
|
$ |
(2.02 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares used in per share calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
11,240 |
|
|
|
1,397 |
|
|
|
1,257 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
60
MICRUS ENDOVASCULAR CORPORATION
Consolidated Statements of Stockholders Equity
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
Total | |
|
|
Common Stock | |
|
Additional | |
|
Deferred | |
|
Other | |
|
|
|
Stockholders | |
|
|
| |
|
Paid-in | |
|
Stock-Based | |
|
Comprehensive | |
|
Accumulated | |
|
Equity | |
|
|
Shares | |
|
Amount | |
|
Capital | |
|
Compensation | |
|
Loss | |
|
Deficit | |
|
(Deficit) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Balance at March 31, 2003
|
|
|
1,247 |
|
|
$ |
13 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(231 |
) |
|
$ |
(32,257 |
) |
|
$ |
(32,475 |
) |
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,014 |
) |
|
|
(2,014 |
) |
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(58 |
) |
|
|
|
|
|
|
(58 |
) |
|
Change in unrealized gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,051 |
) |
Exercise of stock options
|
|
|
14 |
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
Deferred stock based compensation
|
|
|
|
|
|
|
|
|
|
|
1,119 |
|
|
|
(1,119 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87 |
|
|
|
|
|
|
|
|
|
|
|
87 |
|
Fair value of warrants
|
|
|
|
|
|
|
|
|
|
|
298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
298 |
|
Non-employee stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
467 |
|
Accretion of redemable convertible preferred stock to redemption
value
|
|
|
|
|
|
|
|
|
|
|
(530 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(530 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2004
|
|
|
1,261 |
|
|
|
13 |
|
|
|
1,365 |
|
|
|
(1,032 |
) |
|
|
(268 |
) |
|
|
(34,271 |
) |
|
|
(34,193 |
) |
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,704 |
) |
|
|
(6,704 |
) |
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56 |
) |
|
|
|
|
|
|
(56 |
) |
|
Change in unrealized loss on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44 |
) |
|
|
|
|
|
|
(44 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,804 |
) |
Issuance of common stock in exchange for in-process technology
|
|
|
4 |
|
|
|
|
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25 |
|
Exercise of stock options
|
|
|
203 |
|
|
|
2 |
|
|
|
175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
177 |
|
Deferred stock-based compensation associated with stock options
forfeited
|
|
|
|
|
|
|
|
|
|
|
(137 |
) |
|
|
137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial conversion feature related to issuance of
Series E preferred stock
|
|
|
|
|
|
|
|
|
|
|
383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
383 |
|
Amortization of deferred stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
265 |
|
|
|
|
|
|
|
|
|
|
|
265 |
|
Stock-based compensation related to option modification
|
|
|
|
|
|
|
|
|
|
|
2,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,985 |
|
Non-employee stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
189 |
|
Accretion of redeemable convertible preferred stock to
redemption value
|
|
|
|
|
|
|
|
|
|
|
(588 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(588 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2005
|
|
|
1,468 |
|
|
|
15 |
|
|
|
4,397 |
|
|
|
(630 |
) |
|
|
(368 |
) |
|
|
(40,975 |
) |
|
|
(37,561 |
) |
61
MICRUS ENDOVASCULAR CORPORATION
Consolidated Statements of Stockholders Equity
(Deficit) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
Total | |
|
|
Common Stock | |
|
Additional | |
|
Deferred | |
|
Other | |
|
|
|
Stockholders | |
|
|
| |
|
Paid-in | |
|
Stock-Based | |
|
Comprehensive | |
|
Accumulated | |
|
Equity | |
|
|
Shares | |
|
Amount | |
|
Capital | |
|
Compensation | |
|
Loss | |
|
Deficit | |
|
(Deficit) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,261 |
) |
|
|
(8,261 |
) |
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92 |
|
|
|
|
|
|
|
92 |
|
|
Change in unrealized loss on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,133 |
) |
Issuance of common stock in connection with the initial public
offering (IPO), net of issuance costs
|
|
|
3,250 |
|
|
|
33 |
|
|
|
30,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,472 |
|
Conversion of preferred stock to common stock in connection with
the IPO
|
|
|
7,920 |
|
|
|
79 |
|
|
|
59,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,227 |
|
Exercise of over-allotment by underwriters
|
|
|
250 |
|
|
|
3 |
|
|
|
2,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,558 |
|
Reclassification of liability for Series E preferred stock
warrants upon IPO
|
|
|
|
|
|
|
|
|
|
|
3,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,358 |
|
Beneficial conversion feature related to issuance of
Series E prefereed stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(383 |
) |
|
|
(383 |
) |
Accretion of preferred stock
|
|
|
|
|
|
|
|
|
|
|
(276 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(276 |
) |
Exercise of common stock warrants
|
|
|
699 |
|
|
|
6 |
|
|
|
863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
869 |
|
Exercise of stock options
|
|
|
563 |
|
|
|
6 |
|
|
|
459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
465 |
|
Issuance of shares under employee stock purchase plan
|
|
|
40 |
|
|
|
|
|
|
|
333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
333 |
|
Amortization of deferred stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
229 |
|
|
|
|
|
|
|
|
|
|
|
229 |
|
Deferred stock-based compensation associated with stock options
forfeited
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-employee stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160 |
|
Payment for fractional shares on stock split
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2006
|
|
|
14,190 |
|
|
$ |
142 |
|
|
$ |
101,430 |
|
|
$ |
(397 |
) |
|
$ |
(240 |
) |
|
$ |
(49,619 |
) |
|
$ |
51,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
62
MICRUS ENDOVASCULAR CORPORATION
Consolidated Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(8,261 |
) |
|
$ |
(6,704 |
) |
|
$ |
(2,014 |
) |
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
989 |
|
|
|
505 |
|
|
|
424 |
|
|
|
Provision for doubtful accounts
|
|
|
102 |
|
|
|
11 |
|
|
|
176 |
|
|
|
Loss on disposal of equipment
|
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
|
Provision for impairment of inventory
|
|
|
264 |
|
|
|
734 |
|
|
|
739 |
|
|
|
Increase in fair value of 2005 common stock warrants
|
|
|
158 |
|
|
|
|
|
|
|
|
|
|
|
Realized loss on investments
|
|
|
5 |
|
|
|
16 |
|
|
|
20 |
|
|
|
Stock-based compensation expense
|
|
|
389 |
|
|
|
3,439 |
|
|
|
554 |
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(4,005 |
) |
|
|
(1,385 |
) |
|
|
(621 |
) |
|
|
|
Inventories
|
|
|
(239 |
) |
|
|
(2,470 |
) |
|
|
(540 |
) |
|
|
|
Prepaid expenses and other current assets
|
|
|
(134 |
) |
|
|
(159 |
) |
|
|
12 |
|
|
|
|
Other assets
|
|
|
(208 |
) |
|
|
(28 |
) |
|
|
(1 |
) |
|
|
|
Accounts payable
|
|
|
(938 |
) |
|
|
1,522 |
|
|
|
(116 |
) |
|
|
|
Accrued payroll and other related expenses
|
|
|
1,507 |
|
|
|
583 |
|
|
|
306 |
|
|
|
|
Accrued liabilities
|
|
|
826 |
|
|
|
549 |
|
|
|
335 |
|
|
|
|
Other non-current liabilities
|
|
|
489 |
|
|
|
(17 |
) |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(9,055 |
) |
|
|
(3,402 |
) |
|
|
(716 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of Neurologic UK Ltd., net of cash acquired
|
|
|
(5,139 |
) |
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(2,070 |
) |
|
|
(612 |
) |
|
|
(330 |
) |
|
Payment to Biotronik AG for developed technology
|
|
|
(731 |
) |
|
|
|
|
|
|
|
|
|
Purchases of available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
(7,156 |
) |
|
Proceeds from sales of available-for-sale securities
|
|
|
2,000 |
|
|
|
3,074 |
|
|
|
2,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(5,940 |
) |
|
|
2,462 |
|
|
|
(4,965 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net of issuance costs
|
|
|
33,872 |
|
|
|
(844 |
) |
|
|
|
|
|
Proceeds from exercise of preferred and common stock warrants
|
|
|
1,007 |
|
|
|
61 |
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
465 |
|
|
|
177 |
|
|
|
11 |
|
|
Proceeds from employee stock purchase plan
|
|
|
333 |
|
|
|
|
|
|
|
|
|
|
Proceeds from (costs of) issuance of convertible preferred stock
and warrants
|
|
|
(11 |
) |
|
|
11,861 |
|
|
|
9,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
35,665 |
|
|
|
11,255 |
|
|
|
9,953 |
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
416 |
|
|
|
(225 |
) |
|
|
(192 |
) |
Net increase in cash and cash equivalents
|
|
|
20,670 |
|
|
|
10,315 |
|
|
|
4,272 |
|
Cash and cash equivalents at beginning of period
|
|
|
15,017 |
|
|
|
4,927 |
|
|
|
847 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
36,104 |
|
|
$ |
15,017 |
|
|
$ |
4,927 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$ |
12 |
|
|
$ |
29 |
|
|
$ |
20 |
|
Income taxes paid liability assumed in Neurologic UK
Ltd. acquisition
|
|
$ |
192 |
|
|
$ |
|
|
|
$ |
|
|
Supplemental schedule of noncash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of preferred stock to common stock
|
|
$ |
59,227 |
|
|
$ |
|
|
|
$ |
|
|
|
Accretion to redemption value of redeemable convertible
preferred stock including beneficial conversion feature
|
|
$ |
659 |
|
|
$ |
588 |
|
|
$ |
530 |
|
|
Reclassification of 2005 common stock warrants to equity
|
|
$ |
3,358 |
|
|
$ |
|
|
|
$ |
|
|
|
Accrued first year earn-out payment associated with the purchase
of Neurologic UK Ltd.
|
|
$ |
1,403 |
|
|
$ |
|
|
|
$ |
|
|
|
Accrued milestone payment associated with the Biotronik AG
transaction
|
|
$ |
732 |
|
|
$ |
|
|
|
$ |
|
|
|
Accrued offering cost for issuance of common stock
|
|
$ |
|
|
|
$ |
450 |
|
|
$ |
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
63
MICRUS ENDOVASCULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Formation and Business of the
Company
Micrus Endovascular Corporation (the Company),
formerly Micrus Corporation, was incorporated under the laws of
the state of Delaware in June 1996. The Company develops,
manufactures and markets both implantable and disposable medical
devices used in the treatment of cerebral vascular diseases.
On June 10, 2005, the Company effected a one-for-2.25
reverse stock split of its preferred and common shares. All
preferred and common share data presented herein have been
restated to retroactively reflect the reverse stock split.
On June 21, 2005, the Company completed an initial public
offering (IPO) in which it sold
3,250,000 shares of common stock at $11.00 per share
providing net cash proceeds to the Company of approximately
$33,248,000, net of underwriting discounts and commissions. Upon
the closing of the IPO, all of the Companys outstanding
shares of redeemable convertible preferred stock automatically
converted into 7,919,626 shares of common stock. On
July 6, 2005, the underwriters purchased an additional
250,000 shares of common stock at $11.00 per share
pursuant to their over-allotment option. Together with the
over-allotment shares sold by the Company, cash proceeds to the
Company in the offering were approximately $33,030,000, net of
underwriting discounts and offering expenses.
Note 2 Summary of Significant Accounting
Policies
|
|
|
Principles of consolidation |
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, Micrus
Endovascular SA and Micrus Endovascular UK Limited. All
significant intercompany balances and transactions have been
eliminated in consolidation.
The Companys international subsidiaries use the local
currency as their functional currency. Assets and liabilities
are translated at exchange rates in effect at the balance sheet
date. Revenue, expense, gains and losses accounts are translated
at average exchange rates during the period. Resulting
translation adjustments are recorded directly to accumulated
other comprehensive income (loss).
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the dates of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from these estimates. These
estimates and assumptions include reserves and write-downs
related to accounts receivable and inventories, the
recoverability of long-term assets, deferred tax assets and
related valuation allowances and valuation of equity instruments.
|
|
|
Revenue recognition and product warranty |
The Company generates revenues from the sale of its microcoil
product line and related equipment and accessories. Revenue is
generated from sales to hospitals and third-party distributors.
64
MICRUS ENDOVASCULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenue is recognized when evidence of an arrangement exists,
delivery to the customer has occurred, the selling price is
fixed or determinable and collectibility is reasonably assured.
Revenue is recognized generally upon shipment after the receipt
of a replenishment or purchase order.
The evidence of an arrangement generally consists of a contract
or a purchase order approved by the customer.
Delivery to the customer occurs when the customer takes title to
the product. Generally title passes upon shipment, but may occur
when the product is received by the customer based on the terms
of the agreement with the customer.
The selling price for all sales are fixed and agreed with the
customer prior to shipment and are generally based on
established list prices.
The Company performs credit checks on new customers and periodic
credit checks on existing customers. Accordingly, collectibility
is generally assured prior to shipment. In the event a sale is
made to a customer for which collectibility is not reasonably
assured, the Company either requires prepayment of the order or
revenue is deferred and recognized upon collection. The Company
maintains a reserve for amounts which may not be collectible.
Sales made to the Companys South American distributors are
made according to the same contractual terms as sales made to
other customers. However, the Company has historically
experienced longer delays in receiving payments and a higher
level of write-offs relating to its South American distributors
and has been unable to conclude that collectibility is
reasonably assured at the time that the customer takes title to
the inventory on sales to this class of customers. Accordingly,
for this class of customers, the Company recognizes revenue when
cash is collected. Revenues recognized from these customers were
$839,000, $757,000, and $854,000 for the years ended
March 31, 2006, 2005, and 2004, respectively. The related
cost of goods sold is deferred and recognized at the time the
related sale is recognized.
The Company maintains inventory at various hospital locations
under the custody of hospital personnel for use in procedures.
The Company recognizes revenue on sales to these customers when
the revenue criteria have been met, which occurs when the
hospital informs the Company that product has been removed from
inventory and used in a procedure.
Once a sale has occurred, the customer has no right of return
and the Company provides its customers with limited warranty
privileges. To date, product returns under warranty have not
been significant.
Sales to distributors are recognized at the time of shipment,
provided that the Company has received an order, the price is
fixed or determinable and collectibility is reasonably assured.
Non-refundable fees received from distributors upon entering
into multi-year distribution agreements, where there is no
culmination of a separate earnings process, are deferred and
amortized over the term of the distribution agreement or the
expected period of performance, whichever is longer.
|
|
|
Allowance for doubtful accounts |
The Company maintains an allowance for doubtful accounts for
estimated losses resulting from the inability of its customers
to make required payments. The Company provides an allowance for
specific customer accounts where collection is doubtful and also
provides an allowance for other accounts based on historical
collection and write-off experience. If the financial condition
of customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be
required.
65
MICRUS ENDOVASCULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Certain significant risks and uncertainties |
Certain of the Companys products require approval from the
Food and Drug Administration and foreign regulatory agencies
prior to commercialized sale and are subject to continued
regulations once approved. There can be no assurance that the
Companys new products or new versions of previous products
will receive these required approvals. If the Company was denied
such approvals or such approvals were delayed, it could have a
materially adverse impact on the Company.
A portion of the Companys sales operations are based
outside of the United States, principally in Europe and South
America. As a result, the Company must comply with a wide
variety of foreign laws and regulations. In particular, the
Company may be materially adversely affected by changes in the
political, social and economic conditions in these countries,
and by changes in government policies with respect to such
matters as laws and regulations, methods to address inflation,
currency conversion and restrictions and rates and methods of
taxation.
Certain of the components and materials used in the
Companys devices are provided by single source suppliers.
The loss of any of these suppliers, or their inability to supply
the Company with an adequate supply of materials could have a
materially adverse impact on the Company.
|
|
|
Cash and cash equivalents and short-term
investments |
The Company considers all highly liquid investments purchased
with original maturities of three months or less to be cash
equivalents. Cash equivalents may be invested in money market
funds. Cash equivalents are carried at cost, which approximates
fair value.
|
|
|
Available-for-sale securities |
The Company has classified its investments as
available-for-sale. Such investments are recorded at
fair market value with unrealized gains and losses on such
securities reported as a separate component of
stockholders equity (deficit). Realized gains and losses
on sales of all such securities are reported in earnings and
computed using the specific identification cost method. Realized
gains or losses and charges for other-than-temporary declines in
value, if any, on available-for-sale securities are reported in
other income or expense as incurred. The Company periodically
evaluates these investments for other-than-temporary impairment.
|
|
|
Fair value of financial instruments |
Carrying amounts of certain of the Companys financial
instruments, including cash and cash equivalents, investments,
accounts receivable, accounts payable, accrued expenses and
other liabilities, approximate fair value due to their short
maturities. Estimated fair value for marketable securities,
which are separately disclosed elsewhere, are based on quoted
market prices for the same or similar instruments.
|
|
|
Concentration of credit risk |
Financial instruments, which potentially subject the Company to
concentrations of credit risk, are cash and cash equivalents and
accounts receivable. The Company maintains cash and cash
equivalents with various major financial institutions. Deposits
in these banks may exceed the amount of insurance provided on
such deposits. The Company has not experienced any losses on its
deposits of cash and cash equivalents.
The Company grants credit to its business customers, which are
primarily located in the United States, Europe, and South
America, and performs ongoing credit evaluations on its
customers and
66
MICRUS ENDOVASCULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
collateral is generally not required for trade receivables. The
Company maintains allowance for potential credit losses and such
losses have been within the Companys expectations.
The Company had no customer which accounted for 10% of revenues
for the year ended March 31, 2006. The Company had one
customer which accounted for 26% of accounts receivable at
March 31, 2006. The Company had one customer who accounted
for 14% of revenues for the year ended March 31, 2005. The
Company had one customer which accounted for 13% of accounts
receivable at March 31, 2005. The Company had one customer
who accounted for 15% of revenues for the year ended
March 31, 2004.
Inventories of raw materials,
work-in-progress and
finished goods are stated at the lower of cost or market, cost
being determined under a standard cost method, which
approximates first-in,
first-out.
The Company makes inventory provisions for estimated excess and
obsolete inventory based on managements assessment of
future demand and market conditions. If actual future demand or
market conditions are less favorable than those projected by
management, additional inventory write-downs may be required.
Property and equipment are stated at cost and depreciated on a
straight-line basis over the estimated useful lives of the
related assets, which is generally three to seven years.
Amortization of leasehold improvements is computed using the
straight-line method over the shorter of the remaining lease
term or the estimated useful life of the related assets. Upon
sale or retirement of assets, the costs and related accumulated
depreciation and amortization are removed from the consolidated
balance sheets and the resulting gain or loss is reflected in
operations. Maintenance and repairs are charged to operations as
incurred.
|
|
|
Impairment of long-lived assets |
The Company reviews long-lived assets, including property and
equipment and intangibles, for impairment whenever events or
changes in business circumstances indicate that the carrying
amount of the assets may not be fully recoverable. An impairment
loss is recognized when estimated undiscounted future cash flows
expected to result from the use of the asset and its eventual
disposition is less than its carrying amount. Impairment, if
any, is measured as the amount by which the carrying amount of a
long-lived asset exceeds its fair value. Through March 31,
2006, there have been no such impairments.
|
|
|
Goodwill and Intangible assets |
Goodwill represents the excess of the purchase price over the
fair value of the net tangible and identifiable intangible
assets acquired in a business combination. Intangible assets
resulting from acquisitions accounted for using the purchase
method of accounting are estimated by management based on the
fair market value of assets received. Identifiable intangible
assets are comprised of customer relationships, distribution
agreements and non compete agreements, and are carried at cost
less accumulated amortization. Amortization is computed using
the straight-line method over their estimated useful lives
ranging from five to six years. In accordance with Statement of
Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets, goodwill is not subject to
amortization. The Company evaluates goodwill for impairment
annually in the fourth quarter, or more frequently if events or
changes in circumstances suggest that the carrying amounts may
not be recoverable.
67
MICRUS ENDOVASCULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Intangible assets not resulting from acquisitions are comprised
of patents and licensed technology, and are carried at cost less
accumulated amortization. Amortization of patents is computed
using the straight-line method over their estimated useful lives
of ten years. Patent application, maintenance costs and costs
incurred in obtaining the license rights to technology in the
research phase are expensed as incurred. Amortization of
licensed technology is computed using the straight-line method
over its estimated useful life of seven years when the Company
starts selling the product and generating revenue.
|
|
|
Redeemable convertible preferred stock |
The carrying value of redeemable convertible preferred stock is
increased by periodic accretion, using the effective interest
method, so that the carrying amount will equal the redemption
value at the redemption date. These increases are affected
through charges against additional paid in capital and
accumulated deficit.
Comprehensive loss generally represents all changes in
stockholders equity (deficit) except those resulting
from investments or contributions by stockholders. The
Companys unrealized gains and losses on its
available-for-sale securities and the foreign currency
translation represent the only components of comprehensive loss
excluded from reported net loss. These components of
comprehensive loss are presented in the statement of
stockholders equity (deficit).
The Company accounts for income taxes under the liability
method. Under this method, deferred tax assets and liabilities
are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted
tax rates in effect for the year in which the differences are
expected to effect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
Research and development costs are charged to operations as
incurred and consist primarily of costs associated with
evaluating in-process technology, purchases of intellectual
property, personnel costs and supplies.
Advertising costs are expensed as incurred and included in sales
and marketing expenses.
|
|
|
Foreign currency transactions |
Other income includes foreign currency gains or losses related
to a loan with the Companys Swiss subsidiary, and currency
gains or losses resulting from differences in exchange rates
between the time of recording of the transaction and the cash
settlement of foreign currency denominated receivables and
payables. The Company recorded currency gains/(losses) for the
years ended March 31, 2006, 2005, and 2004 of ($444,000),
$223,000, and $286,000, respectively.
Certain prior year amounts have been reclassified to conform to
current year presentation. These reclassifications had no impact
on previously reported total assets, stockholders equity
(deficit) or net loss.
68
MICRUS ENDOVASCULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Net loss per common share |
Basic net loss per share is computed by dividing net loss
attributable to common stockholders by the weighted average
number of common shares outstanding during the period. Diluted
net loss per share is computed by giving effect to all potential
dilutive common shares, including options, warrants and
redeemable convertible preferred shares. There is no difference
between basic and diluted net loss per share for all periods
presented due to the Companys net losses. A reconciliation
of the numerator and denominator used in the calculation of
basic and diluted net loss per share follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(8,261 |
) |
|
$ |
(6,704 |
) |
|
$ |
(2,014 |
) |
|
Beneficial conversion feature of preferred stock
|
|
|
(383 |
) |
|
|
|
|
|
|
|
|
|
Accretion of redeemable convertible preferred stock to
redemption value
|
|
|
(276 |
) |
|
|
(588 |
) |
|
|
(530 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$ |
(8,920 |
) |
|
$ |
(7,292 |
) |
|
$ |
(2,544 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding used in
computing basic and diluted net loss per share
|
|
|
11,240 |
|
|
|
1,397 |
|
|
|
1,257 |
|
|
|
|
|
|
|
|
|
|
|
The following outstanding options, redeemable convertible
preferred shares and warrants were excluded from the computation
of diluted net loss per common share for the periods presented
because their impact would have been anti-dilutive (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Redeemable convertible preferred stock (as if converted)
|
|
|
|
|
|
|
7,901 |
|
|
|
6,545 |
|
Options to purchase common stock
|
|
|
2,804 |
|
|
|
2,447 |
|
|
|
1,620 |
|
Warrants to purchase common stock
|
|
|
|
|
|
|
834 |
|
|
|
834 |
|
Warrants to purchase redeemable convertible preferred stock (as
if converted)
|
|
|
|
|
|
|
405 |
|
|
|
424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,804 |
|
|
|
11,587 |
|
|
|
9,423 |
|
|
|
|
|
|
|
|
|
|
|
The Company accounts for stock-based employee compensation
arrangements in accordance with the provisions of Accounting
Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and
complies with the disclosure requirements of
SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure, an amendment
of the Financial Accounting Standards Board (FASB)
Statement No. 123. Under APB No. 25,
compensation expense is based upon the excess of the estimated
fair value of the Companys stock over the exercise price,
if any, on the grant date. Employee stock-based compensation is
amortized on a straight-line basis over the vesting period of
the underlying options. SFAS No. 123 defines a
fair value based method of accounting for an
employee stock option or similar equity investment.
The Company accounts for equity instruments issued to
non-employees in accordance with the provisions of
SFAS No. 123 and Emerging Issues Task Force
(EITF) Issue No. 96-18, Accounting for
69
MICRUS ENDOVASCULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or
Services, which requires that the fair value of such
instruments be recognized as an expense over the period in which
the related services are received based on the fair value of the
instruments as they vest. Stock-based compensation expense for
non-employee equity instruments is recognized using the multiple
option method as prescribed by Financial Accounting Standards
Board Interpretation (FIN) No. 28,
Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans, as they vest.
The following table illustrates the effect on net loss if the
Company had applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee compensation
arrangements (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Net loss attributable to common stockholders
|
|
$ |
(8,920 |
) |
|
$ |
(7,292 |
) |
|
$ |
(2,544 |
) |
|
Add: Stock-based employee compensation expenses included in
reported net loss
|
|
|
229 |
|
|
|
3,250 |
|
|
|
87 |
|
|
Deduct: Total stock-based employee compensation expenses
determined under fair value based method for all awards
|
|
|
(829 |
) |
|
|
(4,300 |
) |
|
|
(164 |
) |
|
|
|
|
|
|
|
|
|
|
Adjusted net loss
|
|
$ |
(9,520 |
) |
|
$ |
(8,342 |
) |
|
$ |
(2,621 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
(0.79 |
) |
|
$ |
(5.22 |
) |
|
$ |
(2.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
Adjusted
|
|
$ |
(0.85 |
) |
|
$ |
(5.97 |
) |
|
$ |
(2.09 |
) |
|
|
|
|
|
|
|
|
|
|
The fair value of options was estimated as of the date of grant
using the Black-Scholes option-pricing model with the following
assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Risk-free interest rates
|
|
|
4.3% |
|
|
|
3.5% |
|
|
|
2.1% |
|
Expected lives
|
|
|
4 years |
|
|
|
4 years |
|
|
|
4 years |
|
Dividend yield
|
|
|
0.0% |
|
|
|
0.0% |
|
|
|
0.0% |
|
Volatility factor
|
|
|
44.0% |
|
|
|
0.0% |
|
|
|
0.0% |
|
Based on the above assumptions, the weighted-average estimated
fair value per share of options granted was $3.69, $0.74 and
$3.15 per share for the years ended March 31, 2006, 2005,
and 2004, respectively.
Prior to the Companys initial filing on
Form S-1 with the
Securities and Exchange Commission in March 2005, the fair value
of option grants to employees was computed using the minimum
value method. Following the IPO, the value of each option has
been estimated using the Black-Scholes option-pricing model with
a volatility rate which is based upon the expected volatility of
the Companys stock price over the life of the option.
Future option grants to employees will continue to be valued
using an expected volatility factor and, accordingly, the above
results are not representative of future results.
The pro forma net loss and net loss per share listed above
include expense related to the Companys employee stock
purchase plan. The fair value of issuances under the employee
stock purchase plan is
70
MICRUS ENDOVASCULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
estimated on the date of issuance using the Black-Scholes
option-pricing model, with the following assumptions for
issuances made in 2006:
|
|
|
|
|
|
|
Year | |
|
|
Ended | |
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
|
| |
Risk-free interest rate
|
|
|
4.19% |
|
Expected lives
|
|
|
0.4 years |
|
Expected dividend yield
|
|
|
0.0% |
|
Volatility factor
|
|
|
44.0% |
|
Based on the above assumptions, the weighted-average estimated
grant date fair value of purchase rights granted was
$2.69 per share for the year ended March 31, 2006.
|
|
|
Recent accounting pronouncements |
In December 2004, the FASB issued SFAS No. 123R,
Share-Based Payment, which replaced
SFAS No. 123 and superseded APB No. 25.
SFAS No. 123R addresses the accounting for share-based
payment transactions in which a company receives employee
services in exchange for either equity instruments of the
company or liabilities that are based on the fair value of the
companys equity instruments or that may be settled by the
issuance of such equity instruments. Under
SFAS No. 123R, companies will no longer be able to
account for share-based compensation transactions using the
intrinsic method in accordance with APB No. 25 but will be
required to account for such transactions using a fair-value
method and recognize the expense in the consolidated statements
of operations. SFAS No. 123R is effective beginning in
the Companys first quarter of fiscal year 2007.
As permitted by SFAS No. 123, we currently account for
share-based payments to employees using the intrinsic value
method of APB No. 25 and, as such, generally recognize no
compensation cost for employee stock options. Accordingly, the
adoption of the fair value method of SFAS No. 123R
will have a significant impact on the results of operations,
although it will have no impact on our overall financial
position. The impact of adoption of SFAS No. 123R
cannot be predicted at this time because it will depend on
levels of share-based payments granted in the future. While
SFAS No. 123R permits entities to continue the use of
the Black-Scholes option-pricing model, SFAS No. 123R
also permits the use of a binomial model. Based on
the research done by the Company on the alternative models
available to value option grants, and in conjunction with the
type and number of stock options the Company expects to issue in
the future, the Company has determined that it will continue to
use the Black-Scholes option-pricing model for stock option
valuation upon the adoption of SFAS No. 123R.
Note 3 Business Combination
On September 20, 2005, the Company entered into a Share
Purchase Agreement (Purchase Agreement) acquiring
all of the outstanding capital stock of Neurologic UK Limited
(Neurologic), a privately held distributor of the
Companys products in the United Kingdom (UK).
Neurologic accounted for approximately 14% of the Companys
revenues during the fiscal year ended March 31, 2005. The
acquisition of Neurologic, which was the Companys largest
distributor, is intended to provide the Company with additional
leverage and a strengthened presence in the UK market and the
Company intends to use this acquisition as a platform to expand
sales to existing accounts and support sales to customers using
alternative procedures and competing products.
The transaction included an initial cash payment of
approximately $4,709,000 in addition to future multi-year
revenue based earn-out payments. All three earn-out payments
shall be one-third of
71
MICRUS ENDOVASCULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Neurologics product sales during specified periods. At
March 31, 2006, the Company has accrued for the additional
consideration of approximately $1,403,000 for the first year
earn-out payment which has been added to goodwill. The Company
paid the first year earn-out in April 2006. In November 2005,
the Company paid additional consideration of approximately
$120,000 as a purchase price adjustment pursuant to the
provisions of the Purchase Agreement.
As a result of the purchase of Neurologic, the Company has a new
wholly owned subsidiary in the UK and has changed the name from
Neurologic to Micrus Endovascular UK Limited (Micrus
Endovascular UK). The Company concurrently entered
into long term Services Agreements with each of the two founders
of Neurologic to provide for their employment by Micrus
Endovascular UK.
In addition, pursuant to the Purchase Agreement, the two
founders of Neurologic agreed to a non-competition provision to
last for a period of six years, under which they may not
actively carry on any business that would compete with
Neurologics business within the UK or Ireland. Similarly,
they agreed not to solicit former clients, customers or
suppliers of Neurologic for a period of three years.
The transaction has been accounted for under the purchase method
of accounting and, accordingly, the results of operations are
included in the accompanying consolidated statements of
operations for all periods or partial periods subsequent to the
acquisition date.
The total consideration paid of approximately $7,159,000
consisted of the cash payments and accrued first year earn-out
payment totaling $6,232,000, the assumed forgiveness of
receivables from Neurologic to Micrus Endovascular SA at the
acquisition date of $611,000, and direct acquisition related
costs of $316,000.
The net tangible assets acquired and liabilities assumed in the
acquisition were recorded at fair value. The Company determined
the valuation of the identifiable intangible assets acquired in
the transaction to be $3,900,000 using future revenue
assumptions and a valuation analysis. The amounts allocated to
the identifiable intangible assets were determined through
established valuation techniques accepted in the technology
industry. Additionally, the Company recorded goodwill of
$3,309,000 associated with the purchase of Neurologic.
The Company performed its annual test for impairment of goodwill
in the fourth quarter of fiscal year 2006 and management
determined that there was no impairment of goodwill. However the
Company could be required to record impairment charges in future
periods if indicators of potential impairment exist.
The goodwill has been allocated to the Companys Europe
business segment.
The consideration paid for Neurologic was comprised of (in
thousands):
|
|
|
|
|
Total cash payments and accrued first year earn-out payment
|
|
$ |
6,232 |
|
Forgiven intercompany payables
|
|
|
611 |
|
Direct acquisition related costs
|
|
|
316 |
|
|
|
|
|
Total consideration
|
|
$ |
7,159 |
|
|
|
|
|
72
MICRUS ENDOVASCULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The purchase price of Neurologic was allocated as follows (in
thousands):
|
|
|
|
|
|
Acquired net assets
|
|
$ |
664 |
|
Deferred tax liability
|
|
|
(714 |
) |
Goodwill
|
|
|
3,309 |
|
Other intangible assets consisting of:
|
|
|
|
|
|
Customer relationships
|
|
|
900 |
|
|
Distribution agreements
|
|
|
2,300 |
|
|
Non-compete agreements
|
|
|
700 |
|
|
|
|
|
|
Total purchase price
|
|
$ |
7,159 |
|
|
|
|
|
Any future earn-out payments will be added to goodwill.
The Company has recorded a deferred tax liability for the tax
effect of the amortizable intangible assets which are not
deductible for tax purposes.
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of
acquisition (in thousands):
|
|
|
|
|
|
Cash
|
|
$ |
6 |
|
Accounts receivable
|
|
|
760 |
|
Inventories
|
|
|
690 |
|
Prepaid expenses and other current assets
|
|
|
143 |
|
|
|
|
|
|
Total current assets acquired
|
|
|
1,599 |
|
Accounts payable
|
|
|
(612 |
) |
Accrued and other liabilities
|
|
|
(323 |
) |
|
|
|
|
|
Total current liabilities assumed
|
|
|
(935 |
) |
|
|
|
|
|
Net assets acquired
|
|
$ |
664 |
|
|
|
|
|
The following table presents pro forma financial information for
the combined entity of Micrus Endovascular and Neurologic for
the years ended March 31, 2006 and 2005, as if the
acquisition had occurred at the beginning of each of the periods
presented after giving effect to certain purchase accounting
adjustments (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Total revenues
|
|
$ |
33,560 |
|
|
$ |
25,356 |
|
Net loss
|
|
$ |
(9,220 |
) |
|
$ |
(7,706 |
) |
Net loss per share basic and diluted
|
|
$ |
(0.82 |
) |
|
$ |
(5.52 |
) |
73
MICRUS ENDOVASCULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of intangible assets resulting from the
Neurologic acquisition as of March 31, 2006 are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying | |
|
Accumulated | |
|
Net Carrying | |
|
|
Amount | |
|
Amortization | |
|
Amount | |
|
|
| |
|
| |
|
| |
Customer relationships
|
|
$ |
900 |
|
|
$ |
92 |
|
|
$ |
808 |
|
Distribution agreements
|
|
|
2,300 |
|
|
|
234 |
|
|
|
2,066 |
|
Non-compete agreements
|
|
|
700 |
|
|
|
59 |
|
|
|
641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,900 |
|
|
$ |
385 |
|
|
$ |
3,515 |
|
|
|
|
|
|
|
|
|
|
|
The identifiable intangible assets are subject to amortization
and have original estimated useful lives as follows: customer
relationships five years, distribution
agreements five years, non compete
agreements six years.
The future amortization of the identifiable intangible assets is
as follows (in thousands):
|
|
|
|
|
|
|
Amortization | |
|
|
| |
For Years Ended March 31,
|
|
|
|
|
2007
|
|
$ |
757 |
|
2008
|
|
|
757 |
|
2009
|
|
|
757 |
|
2010
|
|
|
757 |
|
2011
|
|
|
431 |
|
2012
|
|
|
56 |
|
|
|
|
|
Total
|
|
$ |
3,515 |
|
|
|
|
|
On July 28, 2005, the Company entered into a Technology
Transfer Agreement with Vascular FX, a Delaware limited
liability company, pursuant to which the Company purchased the
intellectual property (IP) of Vascular FX. The
$4.0 million cash purchase price includes a
$1.5 million payment at closing followed by milestone
payments to be made over time, in addition to royalty payments
on potential future product sales. On January 31 and
May 31, 2006, the Company made milestone payments of
$1.0 million and $1.5 million, respectively. The
Company has recorded the initial and milestone payments in the
corresponding accounting periods as research and development
expense since there are currently no FDA approved products being
sold and the intellectual property has no alternative future
use. There are no future milestone payments to Vascular FX under
the terms of the agreement.
On January 6, 2006, the Company entered into a License,
Development and Distribution Agreement (the Biotronik
Agreement) with Biotronik AG, a Swiss corporation
(Biotronik), pursuant to which the Company will
collaborate with Biotronik to develop certain neurovascular
products and the Company will be the exclusive worldwide
distributor for neurovascular products. Pursuant to the terms of
the agreement, Biotronik granted to the Company an exclusive
license to certain patents, know-how and other proprietary
technology in the neurovascular field. The Biotronik Agreement
has a term that is perpetual unless earlier terminated by the
parties or by operation of law.
Under the terms of the Biotronik Agreement, the Company paid an
upfront licensing fee of
500,000, or
approximately $610,000, and was required to make milestone
payments to Biotronik upon receipt of approvals to market stent
products we jointly developed for the treatment of neurovascular
disease and royalty payments on the products sold. The Company
has recorded the upfront licensing fee as research and
development expense in the fiscal year ended March 31, 2006
as there were no regulatory clearances for a product at that
time. In February 2006, Biotronik met the established milestones
of the agreement
74
MICRUS ENDOVASCULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
when it received CE Mark clearance for the Pharos product
intended for both the treatment of aneurysms and the treatment
of ischemic diseases. As a consequence the Company paid
milestone payments to Biotronik of $731,000 and $732,000 in
March and April 2006, respectively. The Company has recorded the
milestone payments of $1,462,000 as capitalized licensed
technology at March 31, 2006 since there was a CE Mark
approved product available for sale. The Company will amortize
the capitalized licensed technology over the estimated useful
life of seven years once the Company starts selling the product
and generating revenue. The Company will also make royalty
payments to Biotronik when it starts selling the Pharos product.
Under the terms of this agreement, there are no future milestone
payments to Biotronik related to the Pharos stent.
Note 4 Balance Sheet Components
|
|
|
Available-for-sale securities |
Available-for-sale securities are summarized as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Government Securities:
|
|
|
|
|
|
|
|
|
Fair market value
|
|
$ |
984 |
|
|
$ |
2,954 |
|
Amortized cost basis
|
|
|
995 |
|
|
|
3,001 |
|
|
|
|
|
|
|
|
Unrealized gain (loss)
|
|
$ |
(11 |
) |
|
$ |
(47 |
) |
|
|
|
|
|
|
|
Maturities of securities at March 31, 2006 are within one
year. Realized losses have not been significant.
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Raw materials
|
|
$ |
507 |
|
|
$ |
664 |
|
Work-in-progress
|
|
|
504 |
|
|
|
722 |
|
Finished goods
|
|
|
1,294 |
|
|
|
1,340 |
|
Consigned inventory
|
|
|
2,874 |
|
|
|
1,794 |
|
Inventory held by Latin American distributors
|
|
|
230 |
|
|
|
361 |
|
|
|
|
|
|
|
|
Gross inventory
|
|
|
5,409 |
|
|
|
4,881 |
|
Less inventory allowances
|
|
|
(930 |
) |
|
|
(951 |
) |
|
|
|
|
|
|
|
|
|
$ |
4,479 |
|
|
$ |
3,930 |
|
|
|
|
|
|
|
|
Consigned inventory is held at customer locations, primarily
hospitals, and is under the physical control of the customer.
The Company retains title to the inventory until used and
purchased by the customer, generally when used in a medical
procedure.
75
MICRUS ENDOVASCULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Computer equipment and software
|
|
$ |
1,093 |
|
|
$ |
925 |
|
Furniture, fixtures and equipment
|
|
|
2,419 |
|
|
|
1,438 |
|
Leasehold improvements
|
|
|
1,040 |
|
|
|
192 |
|
|
|
|
|
|
|
|
Total cost
|
|
|
4,552 |
|
|
|
2,555 |
|
Less accumulated depreciation and amortization
|
|
|
(2,064 |
) |
|
|
(1,633 |
) |
|
|
|
|
|
|
|
|
|
$ |
2,488 |
|
|
$ |
922 |
|
|
|
|
|
|
|
|
Depreciation and amortization expense was $491,000, $395,000 and
$314,000 for the years ended March 31, 2006, 2005 and 2004,
respectively.
Intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31 | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Identifiable intangible assets-Neurologic acquisition
|
|
$ |
3,900 |
|
|
$ |
|
|
Licensed technology-Biotronik
|
|
|
1,462 |
|
|
|
|
|
Patents
|
|
|
1,100 |
|
|
|
1,100 |
|
|
|
|
|
|
|
|
|
|
|
6,462 |
|
|
|
1,100 |
|
Less accumulated amortization
|
|
|
(1,045 |
) |
|
|
(550 |
) |
|
|
|
|
|
|
|
|
|
$ |
5,417 |
|
|
$ |
550 |
|
|
|
|
|
|
|
|
The identifiable intangible assets are being amortized using the
straight-line method over the useful lives ranging from five to
six years as follows: customer relationships five
years, distribution agreements five years, non
compete agreements six years. Amortization expense
was $388,000 for the year ended March 31, 2006.
The licensed technology will be amortized using the
straight-line method over seven years. The amortization
period will begin once the Company starts selling the stent
product associated with this licensed technology and generating
revenue.
The patents are being amortized using the straight-line method
over seven years. Amortization expense was $110,000 for
each of the years ended March 31, 2006, 2005 and 2004.
Amortization for each of the next four years is expected to
be $110,000 per year.
76
MICRUS ENDOVASCULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accrued payroll and other related expenses consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Accrued bonuses
|
|
$ |
1,157 |
|
|
$ |
579 |
|
Accrued salaries
|
|
|
478 |
|
|
|
304 |
|
Accrued vacation
|
|
|
804 |
|
|
|
504 |
|
Accrued commissions
|
|
|
392 |
|
|
|
113 |
|
Accrued payroll taxes
|
|
|
316 |
|
|
|
163 |
|
|
|
|
|
|
|
|
|
|
$ |
3,147 |
|
|
$ |
1,663 |
|
|
|
|
|
|
|
|
Accrued liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Earn-out payment in connection with Neurologic acquisition
|
|
$ |
1,403 |
|
|
$ |
|
|
Biotronik milestone payment
|
|
|
732 |
|
|
|
|
|
Accrued professional fees
|
|
|
709 |
|
|
|
825 |
|
Import handling fee Japan product shipments
|
|
|
282 |
|
|
|
|
|
Deferred revenue from Japan distribution agreement
|
|
|
150 |
|
|
|
|
|
Marketing related programs
|
|
|
144 |
|
|
|
|
|
Other
|
|
|
888 |
|
|
|
512 |
|
|
|
|
|
|
|
|
|
|
$ |
4,308 |
|
|
$ |
1,337 |
|
|
|
|
|
|
|
|
|
|
|
Other non-current liabilities |
Other non-current liabilities consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Deferred tax liability
|
|
$ |
641 |
|
|
$ |
|
|
Deferred revenue from Japan distribution agreement
|
|
|
525 |
|
|
|
|
|
Other non-current liabilities
|
|
|
89 |
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
$ |
1,255 |
|
|
$ |
51 |
|
|
|
|
|
|
|
|
On September 30, 2005, the Company entered into a
five-year, exclusive Distribution Agreement with Goodman, CO.,
LTD (Goodman). Under the terms of the Distribution
Agreement, Goodman will promote and market the Companys
full line of products, as such products are approved, in Japan
and will purchase a minimum of $27.25 million of such
products over the five year term of the agreement, ranging from
$2.0 million during the fiscal year ended March 31,
2006 to $9.0 million during the fiscal year ending
March 31, 2010. In connection with the Distribution
Agreement, Goodman paid the Company an up-front cash payment of
$750,000 which has been recorded as deferred revenue. The
Company is recognizing the deferred revenue on a straight-line
basis over the five year term of the agreement.
77
MICRUS ENDOVASCULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 5 Income Taxes
As of March 31, 2006, the Company had federal, state and
foreign net operating loss carryforwards (NOLs) of
approximately $30,800,000, $16,500,000 and $2,100,000,
respectively. The federal NOLs will expire at various dates
beginning in 2012 and the state NOLs expire beginning in 2007,
and the foreign NOLs will expire beginning in 2009.
The Company also had federal and state research and development
tax credit carryforwards of approximately $930,000 and $780,000
as of March 31, 2006. The federal credits will expire
beginning in 2012 and the state credits can be carried forward
indefinitely.
The Tax Reform Act of 1986 limits the use of net operating loss
and tax credit carryforwards in the case of an ownership
change of a corporation. An ownership change, as defined,
may restrict utilization of tax attribute carryforwards. The
Company experienced an ownership change, as defined in
Section 382 of the Internal Revenue Code, in May 2002, but
the previously limited net operating loss and tax credit
carryovers have now become available to offset taxable income in
future periods. The Company has not determined if an ownership
change has occurred in the period subsequent to the May 2002
ownership change. If a second ownership change has occurred, all
net operating loss carryovers and all tax credit carryovers
arising prior to the ownership change would be subject to
limitation in the post change period for US tax purposes.
Tax filings are based on tax laws which are subject to
significant and varied interpretation. It is often unclear
whether a particular position taken in a tax return will
ultimately be sustained. The Company has reviewed its filing
positions and believes it has adequately accrued for such
uncertainties.
The related benefit from income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
|
|
|
2006 | |
|
2005 |
|
2004 |
|
|
| |
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current income tax benefit
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
(73 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax benefit
|
|
|
(73 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit
|
|
$ |
(84 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
The Company has incurred net operating losses for both federal
and state purposes since inception and, as a result, the Company
has paid no federal or state income taxes. In fiscal 2006, the
Company has a current tax benefit of approximately $11,000
arising from a net operating loss attributed to Neurologic for
the period after the acquisition date and a noncurrent tax
benefit of approximately $73,000 for the tax effect of the
current year amortization related to the intangible assets
acquired in the Neurologic transaction which are not deductible
for tax purposes.
78
MICRUS ENDOVASCULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net deferred tax assets (liabilities) consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$ |
11,992 |
|
|
$ |
11,198 |
|
|
Basis difference in fixed assets
|
|
|
326 |
|
|
|
2,266 |
|
|
Accruals deductible in different periods
|
|
|
2,324 |
|
|
|
1,828 |
|
|
Credit carryforwards
|
|
|
1,436 |
|
|
|
1,439 |
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
16,078 |
|
|
|
16,731 |
|
|
Less valuation allowance
|
|
|
(16,078 |
) |
|
|
(16,731 |
) |
|
|
|
|
|
|
|
Net deferred tax asset
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Basis difference in intangible assets
|
|
|
641 |
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(641 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$ |
(641 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
The Company has established a valuation allowance against its
deferred tax assets due to the uncertainty surrounding the
realization of such assets. Management evaluates on a periodic
basis the recoverability of deferred tax assets. At such time as
it is determined that it is more likely than not that deferred
tax assets are realizable, the valuation allowance will be
reduced.
The effective tax rate differs from the U.S. federal
statutory rate as a result of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Income tax benefit at statutory rate
|
|
|
(35 |
)% |
|
|
(35 |
)% |
|
|
(35 |
)% |
State taxes, net of federal benefit
|
|
|
(3 |
)% |
|
|
(6 |
)% |
|
|
(6 |
)% |
Non-US income taxed at different rates
|
|
|
11 |
% |
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
23 |
% |
|
|
26 |
% |
|
|
28 |
% |
Nondeductible deferred compensation
|
|
|
1 |
% |
|
|
15 |
% |
|
|
13 |
% |
Other
|
|
|
2 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
(1 |
)% |
|
|
0 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
Note 6 Commitments and Contingencies
On June 6, 2005, the Company and its current landlord
entered into a non-cancelable
7-year lease agreement
(the Lease). Pursuant to the Lease, the Company has
leased approximately 42,000 square feet of building space
which is being used as the Companys headquarters in the
United States with both administrative and manufacturing
facilities. The Lease commenced in January 2006, with an option
for one 5 year extension that may be exercised by the
Company.
The Lease provides for a base rent that increases periodically
and averages approximately $41,445 monthly over the lease
period and is accounted for on a straight-line basis. The Lease
also provides for certain additional payments including the
Companys share of landlords operating expenses,
including project costs, property taxes and overhead management
fees.
79
MICRUS ENDOVASCULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys old lease of approximately 20,000 square
feet of building space with its landlord terminated upon the
commencement of the new lease.
Additionally, the Company leases office space for its two
wholly-owned subsidiaries, Micrus SA and Micrus UK, under
non-cancelable lease agreements with terms through November 2011
and December 2010, respectively. The combined rent expense for
the two operating leases is approximately $90,000 annually. The
leases also provide for certain additional payments including
the Companys share of the landlords operating
expenses.
Future minimum lease payments are as follows (in thousands):
|
|
|
|
|
|
|
Minimum | |
|
|
Lease | |
|
|
Payments | |
|
|
| |
For Years Ended March 31,
|
|
|
|
|
2007
|
|
$ |
625 |
|
2008
|
|
|
623 |
|
2009
|
|
|
615 |
|
2010
|
|
|
592 |
|
2011 and beyond
|
|
|
1,527 |
|
|
|
|
|
Total minimum lease payments
|
|
$ |
3,982 |
|
|
|
|
|
Rent expense for the years ended March 31, 2006, 2005 and
2004 was $519,000, $536,000 and $511,000, respectively.
In the normal course of business, the Company enters into
contracts and agreements that contain a variety of
representations and warranties and provide for general
indemnification. The Companys exposure under these
agreements is unknown because it involves claims that may be
made against the Company in the future, but have not yet been
made. To date, the Company has not paid any claims or been
required to defend any action related to its indemnification
obligations, and accordingly, the Company has not accrued any
amounts for such indemnification obligations. However, the
Company may record charges in the future as a result of these
indemnification obligations.
The Company is from time to time subject to various lawsuits.
The Company does not believe that it is probable that resolution
of pending litigation will have a material adverse effect on the
Companys consolidated financial statements, however the
outcome of litigation is inherently uncertain.
In August 2004, the Company identified certain payments made to
physicians located in France, Germany, Spain and Turkey that may
likely have violated the Foreign Corrupt Practices Act
(FCPA) and the laws of certain foreign countries. In
September 2004, the Company voluntarily disclosed to the
United States Department of Justice (DOJ)
factual information obtained in the Companys internal
investigation of potential violations of the FCPA. In February,
2005, the DOJ and the Company entered into an agreement pursuant
to which the DOJ agreed not to prosecute the Company for conduct
disclosed to the DOJ, provided that the Company accepted
responsibility for the actions of its employees and officers,
paid a monetary penalty of $450,000, continues to cooperate with
the DOJ in its investigation,
80
MICRUS ENDOVASCULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
including the waiver of legal privileges, establishes policies
and procedures to assure compliance with the FCPA and other
relevant bribery laws, retains and pays for an independent
monitor, which shall report to the DOJ for a period of three
years to assure compliance with the agreement with the DOJ and
the Companys implementation and adherence to FCPA
compliance policies and procedures, and cooperates fully with
the DOJ, the independent monitor and the Securities and Exchange
Commission (SEC). The Company must remain in
compliance with these conditions for a period of two years
following February 28, 2005 or face the filing of a
criminal complaint by the DOJ. The monetary penalty was accrued
in fiscal 2005 and was paid in April 2005. The ongoing cost of
compliance with the DOJ agreement will be recorded as an expense
as incurred.
The payments made to physicians in France, Germany, Spain and
Turkey also may likely have violated the applicable laws in
those foreign jurisdictions and may possibly have violated laws
in Switzerland. The Company is not able to determine at this
time what penalties or other actions, if any, authorities in
France, Germany, Spain, Turkey or Switzerland may impose as a
result of such violations. Such amounts could be material to the
financial position, results of operations or cash flows of the
Company.
In September 2004, Boston Scientific Corporation (Boston
Scientific), filed a patent infringement suit in the
United States District Court for the Northern District of
California, alleging that the Companys detachable coil
devices infringed two patents held by Boston Scientific. In
November 2004, the Company answered Boston Scientifics
complaint and counterclaimed, alleging that Boston
Scientifics occlusive products, and their use, infringed
three of the Companys patents. Each party is seeking an
injunction preventing manufacture, offer for sale, use and
importation of the others detachable coil devices in the
United States, damages for past infringement, which may be
trebled, and its legal fees and costs. In addition, each party
seeks a declaration that the patents of the other are invalid
and not infringed and has alleged that certain patents of the
other are unenforceable due to inequitable conduct.
Boston Scientific is also a party in two other lawsuits against
Cordis Corporation and Micro Therapeutics, Inc. in which the
Boston Scientific patents which are the basis of Boston
Scientifics suit against Micrus are also at issue. In
October 2004, Cordis requested ex parte reexamination of certain
claims in those patents. In February 2005, the court granted a
stay of the Boston Scientific lawsuit against Micrus until the
earlier of twelve months or the outcome of the reexamination by
the USPTO in the Cordis case. In March 2006 the Court lifted the
stay with respect to any claims that were confirmed in the
reexamination proceedings and has permitted discovery in the
case to commence with respect to those confirmed claims. The
parties have exchanged preliminary infringement contentions, and
Boston Scientific has stated that it would supplement its
preliminary infringement contentions to include claims with
respect to the Boston Scientific patent still under
reexamination upon completion the reexamination.
The Company is unable at this time to determine the outcome of
any such litigation. If the litigation is protracted or results
in an unfavorable outcome to the Company, the impact to the
financial position, results of operations or cash flows of the
Company could be material.
Note 7 Redeemable Convertible Preferred
Stock
The Companys Certificate of Incorporation, as amended,
authorizes the Company to issue 1,000,000 shares of
$0.01 par value preferred stock. As of March 31, 2006,
there are no shares of preferred stock issued or outstanding.
81
MICRUS ENDOVASCULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of March 31, 2005, the redeemable convertible preferred
stock consists of the following (in thousands, except per share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares | |
|
Accounting | |
|
Common Stock | |
|
Per Share | |
|
|
|
|
|
|
|
|
Shares | |
|
Issued and | |
|
Proceeds, | |
|
Reserved for | |
|
Redemption | |
|
Liquidation | |
|
Redemption |
|
|
Issuance Date |
|
Authorized | |
|
Outstanding | |
|
Net | |
|
Conversion | |
|
Value | |
|
Value | |
|
Date |
|
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Series A
|
|
November-96 |
|
|
223 |
|
|
|
223 |
|
|
$ |
1,101 |
|
|
|
223 |
|
|
$ |
5.06 |
|
|
$ |
1,127 |
|
|
November-02 |
Series B
|
|
December-97 |
|
|
642 |
|
|
|
642 |
|
|
|
7,182 |
|
|
|
845 |
|
|
$ |
11.25 |
|
|
$ |
7,225 |
|
|
December-03 |
Series C
|
|
June-99 |
|
|
958 |
|
|
|
958 |
|
|
|
6,405 |
|
|
|
958 |
|
|
$ |
6.75 |
|
|
$ |
6,471 |
|
|
June 05 |
Series D
|
|
August-00 |
|
|
2,914 |
|
|
|
2,504 |
|
|
|
16,310 |
|
|
|
2,504 |
|
|
$ |
7.52 |
|
|
$ |
18,818 |
|
|
August-06 |
Series D-1
|
|
August-00 |
|
|
334 |
|
|
|
334 |
|
|
|
2,184 |
|
|
|
334 |
|
|
$ |
7.52 |
|
|
$ |
2,505 |
|
|
August-06 |
Series D-2
|
|
May-02 |
|
|
344 |
|
|
|
344 |
|
|
|
3,434 |
|
|
|
361 |
|
|
$ |
10.19 |
|
|
$ |
3,502 |
|
|
May-08 |
Series D-3
|
|
June-03 |
|
|
1,333 |
|
|
|
1,333 |
|
|
|
9,644 |
|
|
|
1,333 |
|
|
$ |
7.52 |
|
|
$ |
15,030 |
|
|
June-09 |
Series E
|
|
February-05 |
|
|
1,667 |
|
|
|
1,343 |
|
|
|
8,661 |
|
|
|
1,343 |
|
|
$ |
9.00 |
|
|
$ |
18,134 |
|
|
June-09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
8,415 |
|
|
|
7,681 |
|
|
$ |
54,921 |
|
|
$ |
7,901 |
|
|
|
|
|
|
$ |
72,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upon closing of the Companys IPO, all outstanding shares
of redeemable convertible preferred stock automatically
converted into 7,919,626 shares of common stock.
The Companys preferred stock that was outstanding prior to
the IPO was redeemable at the request of the holder on or after
the sixth anniversary of the original issuance dates based upon
certain circumstances. Prior to the closing of the IPO, the
Company was accreting the carrying value of the preferred stock
from the issuance date to the mandatory redemption amount on the
sixth anniversary using the effective interest method through
periodic charges to additional paid-in capital and accumulated
deficit.
In conjunction with its Series D and D-1 preferred stock
financing in August 2000, the Company issued warrants to
Series D and Series D-1 stockholders to purchase
shares of Series D redeemable convertible preferred stock
(the Series D preferred stock warrants). The
total proceeds of the issuance of the preferred stock in the
financing was allocated between the relative fair value of the
preferred stock and the warrants, resulting in a discount to the
preferred stock which, prior to the closing of the IPO, was
being accreted to its face amount through periodic charges
against additional paid-in capital and accumulated deficit
through the redemption date.
Between April 1, 2005 and the closing of the Companys
IPO, the holders of warrants to
purchase 397,068 shares of Series D preferred
stock exercised their warrants. Of these warrants, the holders
of warrants to purchase 365,196 shares elected to net
exercise their warrants which resulted in the issuance of
115,700 shares and no proceeds to the Company from the
exercise of these warrants. Holders of warrants to
purchase 31,872 shares of Series D preferred
stock exercised their warrants providing proceeds to the Company
of approximately $240,000.
The warrants to purchase 7,753 shares of Series D
preferred stock that were not exercised prior to the closing of
the IPO expired.
82
MICRUS ENDOVASCULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys Certificate of Incorporation, as amended,
authorizes the Company to issue 50,000,000 shares of
$0.01 par value common stock. Each holder of common stock
has the right to one vote and is also entitled to receive
dividends whenever funds are legally available and when declared
by the Board of Directors, subject to the prior rights of
holders of all classes of stock outstanding having priority
rights as to dividends. No dividends have been declared or paid
as of March 31, 2006.
In December 2000, the Company entered into a warrant agreement
with the Series D redeemable convertible preferred stock
financing placement agent. The Company issued warrants to
purchase 167,618 shares of common stock at an exercise
price of $8.64 per share. These warrants expired in
December 2005.
In conjunction with the Series D-3 preferred stock
financing in June 2003, the Company issued warrants to the
Series D-3 stockholders to purchase 666,644 shares of
common stock at an exercise price of $7.52 per share (the
2003 common stock warrants). The 2003 common stock
warrants were to expire upon the earlier of June 2008 or the
closing of an IPO.
Between April 1, 2005 and the closing of the Companys
IPO, the holders of warrants to
purchase 664,648 shares of the Companys common
stock exercised their warrants. Of these warrants, the holders
of warrants to purchase 562,520 shares elected to net
exercise their warrants which resulted in the issuance of
178,216 shares of common stock and no proceeds to the
Company from the exercise of these warrants. Holders of warrants
to purchase 102,128 shares of common stock exercised
their 2003 common stock warrants for cash providing proceeds to
the Company of approximately $768,000.
Of the 2003 common stock warrants, there were warrants to
purchase 1,996 shares of common stock that were not
exercised prior to closing of the IPO and expired.
In conjunction with the Series E preferred stock financing
in February and March of 2005, the Company issued warrants to
purchase common stock of the Company (the 2005 common
stock warrants). The 2005 common stock warrants were not
initially exercisable, but were to become exercisable for an
aggregate of 671,614 shares of common stock at
$9.00 per share if the Company had not closed the IPO prior
to December 31, 2005, or for an adjusted number of shares
(calculated based on the IPO price) with an exercise price of
$0.000225 if the IPO closed prior to December 31, 2005 at a
price less than $13.50 per share. Based on the IPO price of
$11.00 per share, the 2005 common stock warrants became
exercisable for an aggregate of 305,272 shares of common
stock at an exercise price of $0.000225 per share.
Between April 1, 2005 and March 31, 2006, warrants to
purchase 289,794 of common stock were exercised. All of
these warrants were exercised at an aggregate exercise price of
$0.000225 per share. Warrants covering an aggregate of
265,537 shares of common stock were exercised without cash.
In most cases the aggregate purchase price was offset by the
value of fractional shares payable upon exercise of such
warrants; however an aggregate of 2 shares were withheld in
payment of the aggregate exercise price of one warrant resulting
in a net issue of 265,535 warrants covering additional
24,259 shares of common stock were exercised for cash.
There were warrants to purchase 15,476 shares of
common stock at an exercise price of $0.000225 per share
outstanding at March 31, 2006, which will expire on
January 1, 2011.
83
MICRUS ENDOVASCULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Prior to the completion of the IPO, the 2005 common stock
warrants were accounted for as a liability and marked to market
at each period-end date. The original aggregate fair value of
these warrants of $3,201,000 was recorded as a liability. Upon
completion of the IPO, the fair value of these warrants was
approximately $3,359,000 and the Company recognized a
non-operating charge of $158,000 in the quarter ended
June 30, 2005. Following the completion of the IPO, these
warrants are accounted for as a component of stockholders
equity. Subsequent changes in the fair value of these warrants
will not be reflected in income.
The difference between the proceeds allocated to the
Series E preferred stock and the estimated fair value of
the common stock issuable upon conversion resulted in a
beneficial conversion feature on the Series E preferred
stock which was recorded as a reduction to the Series E
preferred stock and an increase to additional
paid-in-capital. The
total beneficial conversion feature was $383,000 which, prior to
the IPO, was being amortized as a reduction of net loss
available to common stockholders over the period of redemption
of the Series E preferred stock. Upon completion of the
IPO, the Company recorded a charge of $383,000 for the
beneficial conversion feature in the quarter ended June 30,
2005.
|
|
|
Note 9 Stock Option Plans and Other Employee
Benefits |
As of June 16, 2005 (the effective date of the IPO),
14,633 shares were available for grant under the 1996 Stock
Option Plan (the 1996 Plan). Upon the effectiveness
of the Companys IPO, all shares available for grant under
the 1996 Plan became available for grant under the 2005 Plan.
There were no options outstanding under the 1996 Plan as of
the Companys IPO.
As of June 16, 2005 (the effective date of the IPO),
158,167 shares were available for grant under the 1998
Stock Option Plan (the 1998 Plan). Upon the
effectiveness of the Companys IPO, all shares available
for grant under the 1998 Plan became available for grant under
the 2005 Plan. All options previously granted under the 1998
Plan will continue to be administered under the 1998 Plan.
|
|
|
2005 Equity Incentive Plan |
In March 2005, the Companys board of directors approved
the 2005 Equity Incentive Plan (the 2005 Plan)
contingent upon stockholder approval of the 2005 Plan and the
effectiveness of the Companys IPO. Since the effectiveness
of the IPO, the Company will no longer issue any options under
the 1996 Plan and the 1998 Plan and the issuance of options will
be made solely under the 2005 Plan.
The 2005 Plan provides for the issuance of both incentive stock
options and nonqualified stock options. The Company initially
reserved a total of 2,222,220 shares of its common stock
for issuance under the 2005 Plan. Thereafter, on the
effectiveness of the IPO, all of the shares available for grant
under the 1996 Plan and the 1998 Plan became available
for grant under the 2005 Plan. Effective upon the IPO, all
share that are issuable upon exercise of options granted under
the 1998 Plan that expire or become unexercisable for any
reason become available for issuance under the 2005 Plan.
In addition, the 2005 Plan provides for an automatic annual
increase of the number of shares reserved for issuance
thereunder by amount equal to the lesser of (i) 5% of our
total number of outstanding shares;
(ii) 666,666 shares, or (iii) a number of shares
determined by our board of directors.
84
MICRUS ENDOVASCULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Option activity under all Plans is as follows (in thousands,
except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
|
|
|
| |
|
|
|
|
|
|
Weighted | |
|
|
Options | |
|
|
|
Average | |
|
|
Available | |
|
Number of | |
|
Exercise | |
|
|
for Grant | |
|
Options | |
|
Price | |
|
|
| |
|
| |
|
| |
Balance at March 31, 2003
|
|
|
86 |
|
|
|
1,340 |
|
|
$ |
0.81 |
|
|
Options authorized
|
|
|
444 |
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(393 |
) |
|
|
393 |
|
|
$ |
0.90 |
|
|
Options exercised
|
|
|
|
|
|
|
(14 |
) |
|
$ |
0.81 |
|
|
Options forfeited
|
|
|
99 |
|
|
|
(99 |
) |
|
$ |
0.86 |
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2004
|
|
|
236 |
|
|
|
1,620 |
|
|
$ |
0.83 |
|
|
Options authorized
|
|
|
978 |
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(1,265 |
) |
|
|
1,265 |
|
|
$ |
7.58 |
|
|
Options exercised
|
|
|
|
|
|
|
(203 |
) |
|
$ |
0.88 |
|
|
Options forfeited
|
|
|
186 |
|
|
|
(186 |
) |
|
$ |
1.97 |
|
|
Options canceled
|
|
|
49 |
|
|
|
(49 |
) |
|
$ |
1.52 |
|
|
Common stock issued under the plan
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2005
|
|
|
180 |
|
|
|
2,447 |
|
|
$ |
4.06 |
|
|
Options authorized
|
|
|
2,222 |
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(1,040 |
) |
|
|
1,040 |
|
|
$ |
9.51 |
|
|
Options exercised
|
|
|
|
|
|
|
(563 |
) |
|
$ |
0.82 |
|
|
Options forfeited
|
|
|
98 |
|
|
|
(98 |
) |
|
$ |
9.35 |
|
|
Options canceled
|
|
|
22 |
|
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2006
|
|
|
1,482 |
|
|
|
2,804 |
|
|
$ |
6.54 |
|
|
|
|
|
|
|
|
|
|
|
The options outstanding and currently exercisable by exercise
price at March 31, 2006 are as follows (in thousands,
except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
Options Exercisable | |
|
|
| |
|
| |
|
|
|
|
Weighted | |
|
|
|
|
|
|
|
|
Average | |
|
Weighted | |
|
|
|
Weighted | |
|
|
|
|
Remaining | |
|
Average | |
|
|
|
Average | |
|
|
Number | |
|
Contractual Life | |
|
Exercise | |
|
Number | |
|
Exercise | |
Exercise Price |
|
Outstanding | |
|
(Years) | |
|
Price | |
|
Exercisable | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$ 0.68 - $ 1.01
|
|
|
510 |
|
|
|
5.3 |
|
|
$ |
0.78 |
|
|
|
478 |
|
|
$ |
0.77 |
|
$ 1.13 - $ 1.15
|
|
|
156 |
|
|
|
6.7 |
|
|
$ |
1.14 |
|
|
|
106 |
|
|
$ |
1.14 |
|
$ 5.63 - $ 7.26
|
|
|
938 |
|
|
|
8.8 |
|
|
$ |
5.69 |
|
|
|
399 |
|
|
$ |
5.63 |
|
$ 8.56 - $12.48
|
|
|
942 |
|
|
|
9.7 |
|
|
$ |
9.59 |
|
|
|
3 |
|
|
$ |
10.13 |
|
$13.05 - $13.39
|
|
|
258 |
|
|
|
8.3 |
|
|
$ |
13.11 |
|
|
|
173 |
|
|
$ |
13.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 0.68 - $13.39
|
|
|
2,804 |
|
|
|
8.3 |
|
|
$ |
6.54 |
|
|
|
1,159 |
|
|
$ |
4.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The number of options outstanding and exercisable at
March 31, 2005 was 1,250 shares with a weighted
average exercise price of $2.10 per share. The number of
options outstanding and exercisable at March 31, 2004 was
974 shares with a weighted average exercise price of
$0.79 per share.
85
MICRUS ENDOVASCULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In anticipation of the Companys IPO, the Company
determined that for financial reporting purposes the estimated
value of its common stock was in excess of the exercise price
for certain option grants occurring in the fiscal year ended
March 31, 2004. The Company records the deferred
compensation expense on a straight-line basis over the vesting
period, reduced for any cancellation of unvested options. For
the years ended March 31, 2006, 2005 and 2004, the Company
recorded employee stock-based compensation expense of $229,000,
$265,000 and $87,000, respectively.
In March 2005, the Company entered into a settlement agreement
with its former CEO relating to his termination in November
2004. The settlement agreement provided that in consideration
for executing a release of all claims against the Company, the
former CEO would be paid $100,000, payable in equal installments
of $20,000 over a period of five fiscal quarters. In addition,
all options held by the former CEO continued to vest through
February 28, 2005 and all vested options at that date were
exercisable through August 31, 2005. As a result of the
continued vesting and the change in the exercise date of the
options, in the quarter ended March 31, 2005 the Company
recorded a general and administrative expense of $2,985,000
related to the intrinsic value of the approximately 325,322
affected options held by the former CEO.
The Company believes that the fair value of the stock options
issued to non-employees is more reliably measurable than the
fair value of the services received. The fair value of the stock
options granted is calculated at each reporting date using the
Black-Scholes option-pricing model as prescribed by
SFAS No. 123 using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Risk-free interest rate
|
|
|
4.4% |
|
|
|
4.6% |
|
|
|
3.5% |
|
Expected life (in years)
|
|
|
6 years |
|
|
|
7 years |
|
|
|
8 years |
|
Dividend yield
|
|
|
0.0% |
|
|
|
0.0% |
|
|
|
0.0% |
|
Volatility
|
|
|
45% |
|
|
|
51% |
|
|
|
56% |
|
The stock-based compensation expense will fluctuate as the fair
market value of the common stock fluctuates. For the years ended
March 31, 2006, 2005 and 2004, the Company recorded
non-employee stock-based compensation expense of $160,000,
$189,000 and $467,000 respectively.
The non-cash employee and non -employee stock-based compensation
has been recorded as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Cost of goods sold
|
|
$ |
26 |
|
|
$ |
26 |
|
|
$ |
11 |
|
Research and development
|
|
|
22 |
|
|
|
69 |
|
|
|
207 |
|
Sales and marketing
|
|
|
169 |
|
|
|
134 |
|
|
|
162 |
|
General and administrative
|
|
|
172 |
|
|
|
3,210 |
|
|
|
174 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
389 |
|
|
$ |
3,439 |
|
|
$ |
554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Employee Stock Purchase Plan |
In March 2005, the Companys board of directors approved
the 2005 Employee Stock Purchase Plan (the Purchase
Plan), contingent on stockholder approval and the
effectiveness of the IPO. The
86
MICRUS ENDOVASCULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
stockholders approved the Purchase Plan in May 2005 and the
board of directors amended the plan in June 2005. The Purchase
Plan became effective when the public offering for the
Companys common stock commenced on June 17, 2005. The
Purchase Plan provides employees with an opportunity to purchase
the Companys common stock through accumulated payroll
deductions.
The Company has reserved total of 222,222 shares of common
stock for issuance under the Purchase Plan. In addition, the
Purchase Plan provides for annual increases in the total number
of shares available for issuance under this plan on April 1
of each year during the term of the Purchase Plan beginning on
April 1, 2006, by a number of shares that is equal to the
least of: (1) 2% of the outstanding shares of the
Companys common stock on the immediately preceding
March 31; (2) 222,222 shares; or (3) a
lesser number determined by the Companys board of
directors.
The Purchase Plan permits participants to purchase the
Companys common stock through payroll deductions of up to
15% of the participants compensation, up to a maximum of
$25,000 per year, and up to a maximum of 1,111 shares
per purchase period. Amounts deducted and accumulated for the
participants account are used to purchase shares of the
Companys common stock on the last trading day of each
purchase period at a price of at least 85% of the lesser of the
fair market values of the common stock at the beginning of the
offering period or at the end of the purchase period.
The Purchase Plan provides for offering periods of
12 months and purchase periods of 6 months or such
shorter period as may be established by the Companys board
of directors. The offering periods start on April 1 and
October 1 of each year; provided, however, that the initial
offering period shall commence on the effective date of the IPO
and end on September 30, 2005. During the quarter ended
September 30, 2005, there were 15,016 shares issued at
a purchase price of $8.41 per share and during the quarter
ended March 31, 2006 there were 25,138 shares issued
at a purchase price of $8.245 per share under the Purchase
Plan.
The Company has a 401(K) income deferral plan (the
Plan) for employees who have completed one hour of
service and are 18 years and older. According to the terms
of the Plan, the Company may make discretionary matching
contributions to the Plan each year, allocable to all plan
participants. The Company made no discretionary contributions
during the years ended March 31, 2006, 2005 and 2004.
The Companys significant operations outside the United
States include two sales subsidiaries in Europe (located in
Switzerland and the United Kingdom). Revenues from unaffiliated
customers by geographic area, based on the customers
shipment locations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
United States
|
|
$ |
16,541 |
|
|
$ |
12,517 |
|
|
$ |
7,908 |
|
Europe
|
|
|
12,537 |
|
|
|
10,225 |
|
|
|
6,820 |
|
Asia Pacific
|
|
|
2,868 |
|
|
|
520 |
|
|
|
119 |
|
Other
|
|
|
835 |
|
|
|
750 |
|
|
|
853 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
32,781 |
|
|
$ |
24,012 |
|
|
$ |
15,700 |
|
|
|
|
|
|
|
|
|
|
|
Revenues generated from our distributor in the United Kingdom
represented 14% and 15% of total revenues for the years ended
March 31, 2005 and 2004, respectively.
87
MICRUS ENDOVASCULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys long lived assets consist primarily of
property and equipment which are summarized below by geographic
area (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
United States
|
|
$ |
2,246 |
|
|
$ |
802 |
|
Europe
|
|
|
242 |
|
|
|
120 |
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$ |
2,488 |
|
|
$ |
922 |
|
|
|
|
|
|
|
|
The Company identifies its operating segments based on how
management views and evaluates the Companys operations,
which is primarily based on geographic location. For all periods
presented, the Company operated in two business segments, the
Americas and Europe. The products and services sold by each
segment is substantially the same and the Company evaluates
performance and allocates resources primarily based on revenues
and gross profit. Revenues and gross profit for these segments
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$ |
18,021 |
|
|
$ |
13,787 |
|
|
$ |
8,880 |
|
|
Europe
|
|
|
14,760 |
|
|
|
10,225 |
|
|
|
6,820 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
32,781 |
|
|
$ |
24,012 |
|
|
$ |
15,700 |
|
|
|
|
|
|
|
|
|
|
|
Gross Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$ |
14,213 |
|
|
$ |
9,414 |
|
|
$ |
5,353 |
|
|
Europe
|
|
|
8,858 |
|
|
|
6,595 |
|
|
|
4,622 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
23,071 |
|
|
$ |
16,009 |
|
|
$ |
9,975 |
|
|
|
|
|
|
|
|
|
|
|
The gross profit amounts by geographic segments for the years
ended March 31, 2005 and 2004 have been revised to correct
a misallocation between the Americas and Europe as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As revised | |
|
As previously reported | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Gross Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$ |
9,414 |
|
|
$ |
5,353 |
|
|
$ |
11,461 |
|
|
$ |
6,707 |
|
|
Europe
|
|
|
6,595 |
|
|
|
4,622 |
|
|
|
4,548 |
|
|
|
3,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
16,009 |
|
|
$ |
9,975 |
|
|
$ |
16,009 |
|
|
$ |
9,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above revisions had no impact on the consolidated results of
operations, cash flows, or the financial position of the Company
88
MICRUS ENDOVASCULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Total assets by geographic segments at March 31, 2006, 2005
and 2004 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Americas
|
|
$ |
46,243 |
|
|
$ |
25,331 |
|
|
$ |
14,226 |
|
Europe
|
|
|
15,871 |
|
|
|
4,443 |
|
|
|
3,652 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
62,114 |
|
|
$ |
29,774 |
|
|
$ |
17,878 |
|
|
|
|
|
|
|
|
|
|
|
Note 11 Line of Credit
In October 2004, the Company entered into a revolving line of
credit agreement with maximum principal draw-downs of
$1.5 million. The credit agreement matured on
September 30, 2005. There are no amounts outstanding as of
March 31, 2006.
Note 12 Quarterly Financial Information
(unaudited)
The following table represents certain unaudited quarterly
information for the eight quarters ended March 31, 2006. In
managements opinion, this information has been prepared on
the same basis as the audited financial statements and includes
all the adjustments necessary to fairly state the unaudited
quarterly results of operations set forth herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
|
| |
|
| |
|
| |
|
| |
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
7,112 |
|
|
$ |
6,130 |
|
|
$ |
8,092 |
|
|
$ |
11,447 |
|
|
Gross profit
|
|
|
4,993 |
|
|
|
4,401 |
|
|
|
5,676 |
|
|
|
8,001 |
|
|
Net loss attributable to common stockholders
|
|
|
(1,897 |
) |
|
|
(2,831 |
) |
|
|
(1,652 |
) |
|
|
(2,540 |
) |
|
Net loss attributable to common stockholders basic and diluted
|
|
$ |
(0.70 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.18 |
) |
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
5,131 |
|
|
$ |
5,833 |
|
|
$ |
5,659 |
|
|
$ |
7,389 |
|
|
Gross profit
|
|
|
3,455 |
|
|
|
3,835 |
|
|
|
3,711 |
|
|
|
5,008 |
|
|
Net loss attributable to common stockholders
|
|
|
(593 |
) |
|
|
(903 |
) |
|
|
(1,915 |
) |
|
|
(3,881 |
) |
|
Net loss attributable to common stockholders basic and diluted
|
|
$ |
(0.45 |
) |
|
$ |
(0.65 |
) |
|
$ |
(1.35 |
) |
|
$ |
(2.66 |
) |
89
|
|
Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. |
None
|
|
Item 9A. |
Controls and Procedures. |
Our President and Chief Executive Officer, John T.
Kilcoyne, and our Executive Vice President, Chief Financial
Officer and Secretary, Robert A. Stern, evaluated the
effectiveness of our disclosure controls and procedures as of
the end of fiscal 2006. Based on their evaluation, they
concluded that our disclosure controls are effective in
providing reasonable assurance that material information
relating to our company is made known to management on a timely
basis during the period when our periodic reports are being
prepared.
There were no changes in our internal control over financial
reporting during the quarter ended March 31, 2006 that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
90
|
|
Item 9B. |
Other Information. |
None
PART III
|
|
Item 10. |
Directors and Executive Officers of the Registrant. |
|
|
|
Our executive officers and directors and their ages and
positions, as of March 31, 2006, are set forth below. The
Board is divided into three classes, with each director serving
a three-year term and one class being elected at each
years Annual Meeting of stockholders: |
|
|
|
|
|
|
|
Name |
|
Age | |
|
Position |
|
|
| |
|
|
John T. Kilcoyne
|
|
|
46 |
|
|
President, Chief Executive Officer and Director (Director term
expires at annual meeting of stockholders to be held in 2007) |
Robert A. Stern
|
|
|
49 |
|
|
Executive Vice President, Chief Financial Officer and Secretary |
Robert C. Colloton
|
|
|
48 |
|
|
Vice President, Global Sales and Marketing |
Tom M. Holdych
|
|
|
46 |
|
|
Senior Vice President |
Edward F. Ruppel, Jr.
|
|
|
39 |
|
|
Vice President, Technical Operations |
William G. Rigas
|
|
|
63 |
|
|
Vice President of Sales, Asia and Latin America |
Carolyn M. Bruguera
|
|
|
40 |
|
|
Vice President and General Counsel |
David A. Watson
|
|
|
47 |
|
|
Vice President of Research and Development |
Michael R. Henson(2)(3)
|
|
|
60 |
|
|
Chairman of the Board of Directors (Term expires at annual
meeting of stockholders to be held in 2007) |
L. Nelson Hopkins, M.D.
|
|
|
62 |
|
|
Director (Term expires at annual meeting of stockholders to be
held in 2008) |
Fred Holubow(1)(3)
|
|
|
66 |
|
|
Director (Term expires at annual meeting of stockholders to be
held in 2006) |
Beat R. Merz, Dr. sc. Techn.
|
|
|
45 |
|
|
Director(Term expires at annual meeting of stockholders to be
held in 2006) |
Francis J. Shammo(1)(3)
|
|
|
45 |
|
|
Director(Term expires at annual meeting of stockholders to be
held in 2008) |
Jeffrey H. Thiel(1)(3)
|
|
|
50 |
|
|
Director(Term expires at annual meeting of stockholders to be
held in 2007) |
Simon Waddington, Ph.D.(2)(3)
|
|
|
41 |
|
|
Director(Term expires at annual meeting of stockholders to be
held in 2006) |
|
|
(1) |
Member of the Audit Committee |
|
(2) |
Member of the Compensation Committee |
|
(3) |
Member of the Nominating and Corporate Governance Committee |
Mr. Kilcoyne has served as our President and Chief
Executive Officer since December 2004. From April 2002 to April
2004, Mr. Kilcoyne served as the President and Chief
Executive Officer of Solace Therapeutics, Inc., a medical device
company. From November 1997 to January 2002, he served as the
President and Chief Executive Officer of Endonetics, Inc., a
medical device company. From February 1997 to November 1997, he
served as the Vice President, Sales and Marketing and New
Business Development at Medical Scientific, Inc., a medical
device company. From July 1993 to February 1997, he served as
the Director of Marketing at Microsurge, Inc., a medical device
company. Mr. Kilcoyne served in various sales and marketing
positions with Guidant Corporation and Boston Scientific
Corporation.
91
Mr. Kilcoyne received his B.S. from Cornell University.
Mr. Kilcoyne serves as a member of the board of directors
of Onset Medical Corp., a private company.
Mr. Stern has served as our Executive Vice President
and Chief Financial Officer since November 2004 and was Vice
President, Finance and Administration and Chief Financial
Officer from January-November 2004. Mr. Stern was appointed
our Secretary in March 2005. From September 2000 to January
2004, Mr. Stern served as the President and Chief Executive
Officer of Context Connect, Inc., a telecommunications company.
From March 2000 to September 2000, he served as the Executive
Vice President of Quixel Capital Group, an investment holding
company. From January 1996 to March 2000, he served as the Vice
President and Chief Financial Officer of InnerDyne, Inc., a
medical device company. From October 1991 to January 1996, he
served as Vice President, Corporate Finance and Chief Financial
Officer of RhoMed Incorporated, a pharmaceutical company.
Mr. Stern received his B.S. in Business Administration from
the University of New Hampshire, Whittemore School of Business
and Economics, and his M.B.A. from the University of New Mexico,
Anderson School of Management. Mr. Stern serves as a member
of the board of directors of Context Connect, Inc., AorTx Inc.,
and UltraTouch Corporation, all private companies.
Mr. Colloton joined us in March 2005 and is our Vice
President, Global Sales and Marketing. From February 2003 to
March 2005, Mr. Colloton served as the Vice President,
Account and Market Development of VNUS Medical Technologies,
Inc., a medical device company. Prior to this position, he also
held the positions of Vice President, Worldwide Marketing and
International Sales from April 2001 to February 2003 and Vice
President, Worldwide Sales and Marketing from June 1999 to April
2001, at VNUS Medical Technologies, Inc. From June 1997 to June
1999, Mr. Colloton served as Vice President, Sales and
Marketing of TransVascular, Inc., a medical device company. From
January 1993 to June 1997, he served in various sales and
marketing executive positions at Cardiometrics, Inc.
Mr. Colloton received his B.S. in Business Administration
at Miami University in Oxford, Ohio.
Mr. Holdych joined us in June 1998 and is our Senior
Vice President. From June 1997 to June 1998, Mr. Holdych
served as the Vice President of Regulatory and Clinical Affairs
at VNUS Medical Technologies, Inc., a medical device
company. From June 1986 to June 1997, Mr. Holdych served as
the Director of Regulatory Affairs and Quality Assurance, among
other positions, with Medtronic PS Medical, a medical device
company. Mr. Holdych received his B.A. from the University
of California at Santa Barbara.
Mr. Ruppel joined us in June 2003 and is our Vice
President, Technical Operations. From March 2001 to March 2003,
Mr. Ruppel served as the Vice President of Operations of
CBYON, Inc., a surgical navigation software and equipment
company. From June 1994 to December 2000, he served as Director
of Operations, among other management positions, for Biometric
Imaging Inc., a subsidiary of Becton, Dickinson &
Company, a medical technology company. Mr. Ruppel received
his B.S. in Mechanical Engineering at the University of
Rochester.
Mr. Rigas joined us in November 2004 and is our Vice
President of Sales, Asia and Latin America. From October 2003 to
November 2004, Mr. Rigas served as Vice President of Sales
and Marketing of Bioplate Inc., a manufacturer of neurosurgical
and cranial facial products. From March 2002 to November 2003,
he served as Managing Partner of Neurox Inc., a medical device
company. Mr. Rigas also served as the Director
International Sales and Marketing of Micro Therapeutics, Inc.,
from March 2001 to March 2002. From November 1998 to January
2001, Mr. Rigas served as Vice President Worldwide
Sales & Marketing of Radiance Medical
Systems Inc., a medical device company. Mr. Rigas also
served as Vice President Worldwide Sales from June 1993 to
December 1997 and as Vice President Sales and Marketing from
June 1991 to July 1993 of Neuro Navigational Corporation, a
manufacturer of neurosurgery products. Mr. Rigas received
his B.S. from California State University, Long Beach.
Ms. Bruguera joined us in November 2005 and is our
Vice President and General Counsel. From March 2004 to November
2005, she was a partner with Montgomery Law Group in Menlo Park,
specializing in corporate and securities law, and from 2000 to
2004 she was a partner with Thoits, Love,
Hershberger & McLean in Palo Alto, which she
joined as an associate in 1998. She was an associate with
92
Venture Law Group from 1995-1998 and with Heller, Ehrman,
White & McAuliffe from
1993-1995.
Ms. Bruguera received her J.D. from the University of
California, Berkeleys Boalt Hall School of Law, and her
A.B. from Harvard University.
Mr. Watson has served as our Vice President of
Research and Development since October 2004. From July 1999 to
September 2004, Mr. Watson acted as an engineering and
program management consultant to companies in the medical device
industry from August 1999 to September 2004. From June 2001 to
December 2002, he served as the Director of Engineering and
Product Development for Control Delivery Systems, Inc., a
medical device company. From September 1995 to July 1999, he
served as Director of Engineering and Program Management,
Director of Engineering and Associate Director, Engineering
Development at Cythotherapeutics, Inc. Mr. Watson received
his B.S. in Mechanical Engineering from California Polytechnic
State University.
Mr. Henson has served as our director since 1996 and
is the Chairman of our Board. Since 2000, Mr. Henson has
served as a principal manager of the MedFocus Family of Funds, a
group of venture capital funds focused on emerging medical
technology. In addition, since 2003 Mr. Henson has served
as a general manager of the Biostar Private Equity Investment
Fund, LLC, a venture capital firm. Mr. Henson joined
Endologix, Inc. formerly known as Radiance Medical Systems,
Inc., a medical device company, in March 1997 as President,
Chief Executive Officer and Chairman of the Board of Directors,
and served as a director until November 2003. In June 1997,
Mr. Henson served as Chairman of the Board, Chief Executive
Officer and President of Radiance Medical Systems, Inc., and
served as a director until May 2002. Prior to that,
Mr. Henson served as the Chief Executive Officer of
Endosonics Corporation from 1988 to 1995, and as Chairman of the
Board from 1993 to 1996. Mr. Henson also serves on the
board of directors of several private medical companies and a
charitable organization. He received his B.S. in Business
Administration from Ball State University and his M.B.A. from
Ohio State University.
Dr. Hopkins has served as our director since
September 1998. Dr. Hopkins has served as a Professor and
Chairman of Neurosurgery at the State University of New York at
Buffalo since January 1989 and as a Professor of Radiology at
the State University of New York at Buffalo since July 1989. He
received his B.A. from Rutgers University and his M.D. from
Albany Medical College.
Mr. Holubow has served as our director since July
1999. Since January 2001, Mr. Holubow has been a Managing
Director of William Harris Investors Inc., a registered
investment advisory firm. From August 1982 to January 2001,
Mr. Holubow served as Vice President of Pegasus Associates,
a registered investment advisory firm he co-founded. He is a
director of BioSante Pharmaceuticals, Inc, a pharmaceuticals
company. He received his B.S. from the Massachusetts Institute
of Technology and his M.B.A. from the University of Chicago.
Dr. Merz has served as our director since June 2003.
Since March 2003, Dr. Merz has served as an Investment
Advisor with HBM Partners AG in Switzerland. Dr. Merz was
Managing Director with NMT Management AG, a venture capital firm
in Switzerland, from September 1999 until February 2003, and a
Group Manager and Senior Engineer with Institute Straumann AG, a
producer of dental implants in Switzerland, from January 1994
until September 1999. He received a degree in Mechanical
Engineering from the Swiss Federal Institute of Technology, or
ETH, in Zurich, Switzerland, a Dr. sc. Techn. from ETH, and
an M.B.A. from the University of Strathclyde, Scotland.
Dr. Merz serves as a member of the board of directors of
several private medical device companies.
Mr. Shammo has served as our director since July
2004. Since September 2005, Mr. Shammo has served as Senior
Vice President and Chief Financial Officer of Verizon Business.
From 2003 to September 2005, Mr. Shammo served as President
of the West Area for Verizon Wireless, a telecommunications
company. From 1995 to 2003, Mr. Shammo served as Vice
President and Controller of Verizon Wireless. Mr. Shammo is
a Certified Public Accountant. He received his B.S. in
accounting from the Philadelphia College of Textiles and Science
and his M.B.A. from LaSalle University.
Mr. Thiel has served as our director since 1999.
Since 2003, Mr. Thiel has served as President, Chief
Executive Officer and Director of Devax, Inc., a medical device
company. From January 2001 until
93
June 2002, Mr. Thiel served as President and Chief
Executive Officer of Radiance Medical Systems, Inc., a medical
device company. Prior to that, Mr. Thiel served as
President and Chief Operating Officer of Radiance Medical
Systems, Inc. from February 1999 until January 2001, and as Vice
President of Operations from October 1996 until February 1999.
Mr. Thiel received his B.S. in Economics from the
University of Wisconsin-River Falls, and his M.B.A. from the
College of St. Thomas.
Dr. Waddington has served as our director since May
2001. Dr. Waddington has served as Managing Partner of
PolyTechnos Venture-Partners GmbH since January 2003 and joined
the firm in May 1998. From July 1996 to April 1998, he served as
Business Development Manager for Monsanto Companys Growth
Enterprises Division. From July 1991 to August 1994, he served
as Product Development Manager for Zeneca Group plc, a
pharmaceutical company, in its biodegradable polymer business
unit. From October 1988 to June 1991, he served as Senior
Research Scientist for Imperial Chemical Industries plc. He
received both his B.S. and Ph.D. in Physics from the University
of Liverpool and his M.B.A. from Harvard Business School.
Our executive officers are appointed by, and serve at the
discretion of, our board of directors. There are no family
relationships among our directors and executive officers.
Our audit committee is composed of Messrs. Shammo
(chairperson), Holubow and Thiel. Mr. Shammo is our audit
committee financial expert as currently defined under applicable
Securities and Exchange Commission rules. We believe that the
composition of our audit committee meets the criteria for
independence under, and the functioning of our audit committee
complies with the applicable requirements of, the Sarbanes-Oxley
Act of 2002 and the Nasdaq National Market rules. The primary
functions of our audit committee include:
|
|
|
|
|
reviewing and monitoring our accounting practices and financial
reporting procedures and audits of our financial statements; |
|
|
|
appointing, compensating and overseeing our independent
auditors; and |
|
|
|
reviewing and evaluating the effectiveness of our internal
controls over financial reporting. |
Both our independent auditors and internal financial personnel
will regularly meet privately with our audit committee and have
unrestricted access to this committee.
|
|
|
Section 16(a) Beneficial Ownership Reporting
Compliance |
Section 16 of the Securities Exchange Act of 1934 requires
the Companys directors and officers, and persons who own
more than 10% of the Companys common stock to file initial
reports of ownership and reports of changes in ownership with
the SEC and the Nasdaq National Market. Such persons are
required by SEC regulation to furnish the Company with copies of
all Section 16(a) forms that they file.
Based solely on its review of the copies of such forms furnished
to the Company and written representations from the executive
officers and directors, the Company believes that all
Section 16(a) filing requirements for the year ended
December 31, 2005 were satisfied on a timely basis except
as indicated herein.
One late Form 4 was filed by Edward Ruppel on July 13,
2005 to report the acquisition of 400 shares of common
stock on June 16, 2005.
One late Form 4 was filed by Simon Waddington to
report the exercise by PolyTechnos Venture
Fund II GmbH & Co. KG and PolyTechnos
Venture Fund II LP of warrants to purchase 6,042 and
24,259 shares, respectively, of our common stock.
94
One late Form 4 was filed by Robert A. Stern on
February 17, 2006 to report the grant to Mr. Stern on
February 14, 2006 of an option to
purchase 72,685 shares of common stock.
One late Form 4 was filed by Beat Merz on May 23, 2006
to report the exercise by Mr. Merz of an option to
purchase 2,778 shares on December 16, 2005.
The Company has adopted a Code of Ethics that applies to its
principal executive officer, principal financial and accounting
officer, controller and certain other senior financial
management. The Code of Ethics is posted on the Companys
website at
http://investor.micrusendovascular.com/governance/ethics.cfm.
If any substantive amendments are made to the Code of Ethics or
grant of any waiver, including any implicit waiver, from a
provision of the Code of Ethics to the Companys Chief
Executive Officer, Chief Financial Officer or Controller, the
Company will disclose the nature of such amendment or waiver on
its website or in a report on
Form 8-K.
|
|
Item 11. |
Executive Compensation. |
The following table summarizes the compensation earned during
the fiscal year ended March 31, 2006 by our chief executive
officer, our other four most highly compensated executive
officers who were serving as executive officers on
March 31, 2006 and an additional officer who would have
been included if he had been serving as an executive officer at
the end of the last completed fiscal year (each, a named
executive officer).
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Long-Term Compensation | |
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|
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| |
|
|
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|
|
Other | |
|
Restricted | |
|
Securities | |
|
|
|
|
Annual | |
|
Annual | |
|
Annual | |
|
Stock | |
|
Underlying | |
|
LTIP |
|
All Other | |
Name and Principal Position(s) |
|
Salary | |
|
Bonus | |
|
Compensation | |
|
Awards | |
|
Options | |
|
Payouts |
|
Compensation(1) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
| |
John T. Kilcoyne
|
|
$ |
265,385 |
|
|
$ |
62,569 |
|
|
$ |
|
|
|
|
|
|
|
|
346,220 |
|
|
$ |
|
|
|
$ |
194 |
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
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Robert A. Stern
|
|
$ |
239,769 |
|
|
$ |
154,219 |
|
|
$ |
|
|
|
|
|
|
|
|
217,125 |
|
|
$ |
|
|
|
$ |
194 |
|
|
Executive Vice President, Chief Financial Officer |
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
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Tom M. Holdych
|
|
$ |
194,400 |
|
|
$ |
36,360 |
|
|
$ |
|
|
|
|
|
|
|
|
117,863 |
|
|
$ |
|
|
|
$ |
194 |
|
|
Senior Vice President |
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Edward F. Ruppel, Jr
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|
$ |
183,480 |
|
|
$ |
34,320 |
|
|
$ |
|
|
|
|
|
|
|
|
73,330 |
|
|
$ |
|
|
|
$ |
186 |
|
|
Vice President of Technical Operations |
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|
|
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|
|
|
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|
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|
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Robert Colloton
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|
$ |
211,154 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
161,110 |
|
|
$ |
|
|
|
$ |
194 |
|
|
Vice President of Global Sales and Marketing |
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|
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Eckhard H. Reitz(2)(3)
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|
$ |
215,768 |
|
|
$ |
26,971 |
|
|
$ |
41,266 |
|
|
|
|
|
|
|
55,555 |
|
|
$ |
|
|
|
$ |
|
|
|
Executive Vice President Micrus Endovascular
SA |
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|
(1) |
Represents the payment of life insurance premiums. |
|
(2) |
Mr. Reitz ceased to serve as an executive officer of the
Company in January, 2006. |
|
(3) |
Mr. Reitzs other annual compensation includes a
representation allowance of $11,769, a relocation allowance of
$13,271 and car expenses of $16,226. |
95
Option Grants In Year Ended March 31, 2006
The following table sets forth each grant of stock options
during the fiscal year ended March 31, 2006 to each of the
named executive officers. No stock appreciation rights were
granted to the named executive officers during the fiscal year.
All options were granted under our 2005 Plan at an exercise
price equal to the closing price of our common stock on the date
of grant or, if no sales were reported on such date, the
immediately preceding trading day. The potential realizable
value set forth in the last column of the table is based on
assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date of grant until the end of the
stock options maximum contractual term of ten years, minus
the applicable exercise price. These numbers are calculated
based on the requirements of the SEC and do not reflect our
estimate of future stock price growth. Actual gains, if any, on
stock option exercises will depend on the future performance of
the common stock and overall market conditions on the date on
which the options are exercised.
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|
Potential Realizable Value | |
|
|
Number of | |
|
Percentage of | |
|
|
|
|
|
at Assumed Annual Rates | |
|
|
Shares | |
|
Total Options | |
|
|
|
|
|
of Stock Price Appreciation | |
|
|
Underlying | |
|
Granted to | |
|
Exercise | |
|
|
|
for Option Term | |
|
|
Options | |
|
Employees in the | |
|
Price per | |
|
Expiration | |
|
| |
Named Executive Officers |
|
Granted | |
|
Fiscal Year | |
|
Share | |
|
Date | |
|
5% | |
|
10% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Robert A. Stern
|
|
|
72,685 |
|
|
|
7.2 |
% |
|
$ |
10.05 |
|
|
|
2/14/2016 |
|
|
$ |
459,398 |
|
|
$ |
1,164,204 |
|
Robert Colloton
|
|
|
50,000 |
|
|
|
5.0 |
% |
|
$ |
9.25 |
|
|
|
1/6/2016 |
|
|
$ |
290,864 |
|
|
$ |
737,106 |
|
Aggregated Option Exercises During Year Ended March 31,
2006 and Year-End Option Values
The following table sets forth information for each of the named
executive officers regarding the exercise of options during the
2006 fiscal year and the unexercised options held by them as of
March 31, 2006. The value of the unexercised
in-the-money options at
fiscal year-end has been calculated based on our closing price
on March 31, 2006 of $14.00 per share, less the
applicable exercise price per share, multiplied by the number of
shares issued or issuable, as the case may be, on the
exercise of the option. The values have not been and may never
be realized. No options or stock appreciation rights were
exercised during the fiscal year and no stock appreciation
rights were outstanding at the end of the fiscal year.
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|
|
|
|
|
|
|
|
Number of Securities | |
|
Value of Unexercised | |
|
|
Shares | |
|
|
|
Underlying Unexercised | |
|
In-The-Money Options | |
|
|
Acquired | |
|
|
|
Options at March 31, 2006 | |
|
at March 31, 2006 | |
|
|
Upon | |
|
Value | |
|
| |
|
| |
Named Executive Officers |
|
Exercise | |
|
Realized | |
|
Exercisable | |
|
Unexercisable | |
|
Exercisable | |
|
Unexercisable | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
John T. Kilcoyne
|
|
|
|
|
|
|
|
|
|
|
125,443 |
|
|
|
220,777 |
|
|
$ |
1,050,585 |
|
|
$ |
1,849,007 |
|
Robert A. Stern
|
|
|
|
|
|
|
|
|
|
|
83,560 |
|
|
|
133,565 |
|
|
$ |
877,146 |
|
|
$ |
911,847 |
|
Tom M. Holdych
|
|
|
|
|
|
|
|
|
|
|
108,382 |
|
|
|
9,481 |
|
|
$ |
1,399,224 |
|
|
$ |
89,302 |
|
Edward F. Ruppel, Jr.
|
|
|
|
|
|
|
|
|
|
|
42,034 |
|
|
|
31,296 |
|
|
$ |
339,906 |
|
|
$ |
210,088 |
|
Robert Colloton
|
|
|
|
|
|
|
|
|
|
|
34,721 |
|
|
|
126,389 |
|
|
$ |
290,788 |
|
|
$ |
877,258 |
|
Eckhard H. Reitz
|
|
|
|
|
|
|
|
|
|
|
21,990 |
|
|
|
33,565 |
|
|
$ |
281,107 |
|
|
$ |
184,166 |
|
Director Compensation
We pay each non-employee director an annual cash retainer of
$8,000 for attending up to four board meetings per year, plus
$1,000 for each additional meeting attended. In addition, each
member of our audit committee and compensation committee
receives $1,000 per meeting attended for up to four
meetings of those committees and an additional $500 for each
additional committee meeting attended. We pay the chairman of
the board of directors an additional annual cash retainer of
$72,000, and we pay the chairman of our audit committee an
additional annual cash retainer of $2,000. In addition, we will
reimburse our directors for all reasonable expenses incurred in
attending meetings of the board of directors and its committees.
96
No options were granted to our non-employee directors during the
2006 fiscal year. Our 2005 Plan provides for the automatic grant
of options to purchase shares of common stock to our
non-employee directors on the date of each annual meeting of
stockholders, beginning with the annual meeting to be held in
2006, equal in amount to 17,778 shares of common stock for
each non-employee director who first becomes a Micrus director
after the date the 2005 Plan became effective (an initial
grant), and 8,889 shares of common stock for each
non-employee director (including current non-employee directors)
if he or she has served as a director for at least the previous
six months (an annual grant). The initial grants
will vest as to
1/48
of the shares on each monthly anniversary of the date of grant,
subject to the directors continued service on each
relevant vesting date. The annual grants will vest as to
1/12
of the shares on each monthly anniversary of the date of
grant, subject to the directors continued service on each
relevant vesting date. Generally, upon a change in our ownership
or control or a merger or sale of all or substantially all of
our assets, the vesting of options granted to non-employee
directors, who are then serving on our board of directors, will
accelerate, and become immediately exercisable. Each option
granted to a non-employee director will have an exercise price
equal to the fair market value of our common stock on the date
of grant and will have a ten year term.
Compensation Committee Interlocks and Insider
Participation
Michael Henson and Simon Waddington served as members of the
compensation committee for all of fiscal 2006. None of the
members of the compensation committee is an officer or employee
of the Company or any of its subsidiaries. None of our current
executive officers serves as a director of another entity that
has an executive officer which serves on our board of directors.
Each member of our compensation committee is an
outside director as that term is defined in
Section 162(m) of the Internal Revenue Code of 1986, as
amended, and a non-employee director within the
meaning of Rule 16b-3 of the rules promulgated under the
Securities Exchange Act of 1934, as amended.
Employment and Severance Agreements
In November 2004, we entered into an employment letter with
Mr. Kilcoyne, our President and Chief Executive Officer.
The employment letter provides that he will receive an initial
annual base salary of $250,000 and an initial annual bonus in an
amount up to 30% of his base salary subject to the achievement
of goals mutually agreed upon by Mr. Kilcoyne and our board
of directors. In addition, the agreement provides that
Mr. Kilcoynes initial option grant of 311,110 shares
will fully vest immediately upon a change of control. In the
event Mr. Kilcoynes employment is terminated without
cause, he will be entitled to severance payments equal to six
months of his then current base salary.
In November 2003, we entered into an employment letter with
Mr. Stern, our Executive Vice President, Chief Financial
Officer and Secretary. The employment letter provides that he
will receive an initial annual base salary of $200,000 and an
initial annual bonus in an amount up to 20% of his base salary
subject to the achievement of goals mutually agreed upon by
Mr. Stern, our Chief Executive Officer and our board of
directors. In the event of a change of control, Mr. Stern
shall be entitled to receive severance payments equal to twelve
months of his then current base salary and his initial option to
purchase 79,999 shares of our common stock shall fully vest if,
within the twelve month period following the change of control,
Mr. Sterns employment is terminated other than for
cause or if Mr. Stern resigns for good reason. Furthermore,
absent a change of control, if we terminate
Mr. Sterns employment other than for cause,
Mr. Stern shall be entitled to receive severance payments
equal to twelve months of his then current base salary, subject
to certain limitations.
In June 1998, we entered into an employment letter with
Mr. Holdych, our Senior Vice President. The employment
letter provides that Mr. Holdych will receive an initial
annual base salary of $95,000 and an initial annual bonus in an
amount up to 15% of his base salary subject to the achievement
of goals mutually agreed upon by Mr. Holdych and our board
of directors.
97
In May 2003, we entered into an employment letter with
Mr. Ruppel, our Vice President of Technical Operations. The
employment letter provides that Mr. Ruppel will receive an
initial annual base salary of $165,000.
In February of 2005, we entered into an employment letter with
Mr. Colloton, our Vice President of Global Sales and
Marketing. Under the terms of the employment letter,
Mr. Colloton will receive an initial annual base salary of
$205,000 and an initial annual bonus in an amount up to 20% of
his base salary subject to the achievement of goals mutually
agreed upon by Mr. Colloton, our Chief Executive Officer
and our board of directors. In addition, if we terminate
Mr. Collotons employment other than for cause,
Mr. Colloton shall be entitled to receive severance
payments equal to six months of his then current base salary.
Mr. Reitz ceased to provide services to Micrus Endovascular
SA in January 2006. Under the provisions of his employment
contract and applicable Swiss law, he will remain an employee of
Micrus Endovascular SA for a period ending not later than
October 31, 2006, unless an earlier termination date is
agreed upon. As long as he remains an employee, he will continue
to receive his base salary of 275,000 Swiss francs, or
approximately $210,000, and use of a leased company car, as well
as vesting of his stock options at a rate of 1,157 shares per
month.
|
|
Item 12. |
Security Ownership of Certain Beneficial Owners and
Management. |
The following table sets forth information regarding beneficial
ownership of our common stock as of June 1, 2006 (except as
noted) by:
|
|
|
|
|
each of our directors and named executive officers; |
|
|
|
all of our directors and executive officers as a group; and |
|
|
|
each person or group of affiliated persons known by us to be the
beneficial owner of more than 5% of our common stock. |
Beneficial ownership and percentage ownership are determined in
accordance with the rules of the SEC and includes voting or
investment power with respect to shares of stock. This
information does not necessarily indicate beneficial ownership
for any other purpose. Under these rules, shares of common stock
issuable under stock options that are exercisable within
60 days of June 1, 2006 are deemed outstanding for the
purpose of computing the percentage ownership of the person
holding the options but are not deemed outstanding for the
purpose of computing the percentage ownership of any other
person.
Unless otherwise indicated and subject to applicable community
property laws, to our knowledge, each stockholder named in the
following table possesses sole voting and investment power over
their shares of common stock, except for those jointly owned
with that persons spouse. Percentage of beneficial
98
ownership before the offering is based on 14,220,891 shares
of common stock outstanding as of June 1, 2006.
Unless otherwise noted below, the address of each person listed
on the table is c/o Micrus Endovascular Corporation, Attn:
CFO, 821 Fox Lane, San Jose, California 95131.
|
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|
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|
|
|
|
Number of Shares | |
Name and Address |
|
|
|
Beneficially Owned | |
|
|
|
|
| |
John T. Kilcoyne(1)
|
|
|
139,258 |
|
|
|
* |
|
Robert A. Stern(2)
|
|
|
90,875 |
|
|
|
* |
|
Robert C. Colloton(3)
|
|
|
39,351 |
|
|
|
* |
|
Eckhard H. Reitz(4)
|
|
|
23,148 |
|
|
|
* |
|
Tom M. Holdych(5)
|
|
|
109,426 |
|
|
|
* |
|
Edward F. Ruppel, Jr(6)
|
|
|
45,290 |
|
|
|
* |
|
Michael R. Henson(7)
|
|
|
481,404 |
|
|
|
3.43 |
% |
Leo Nelson Hopkins(8)
|
|
|
108,836 |
|
|
|
* |
|
Fred Holubow(9)
|
|
|
60,805 |
|
|
|
* |
|
Beat R. Merz(10)
|
|
|
35,229 |
|
|
|
* |
|
Francis J. Shammo(11)
|
|
|
19,999 |
|
|
|
* |
|
Jeffrey H. Thiel(12)
|
|
|
61,364 |
|
|
|
* |
|
Simon Waddington(13)
|
|
|
42,744 |
|
|
|
* |
|
All directors and executive officers as a group(14)
|
|
|
1,298,691 |
|
|
|
9.13 |
% |
Holders of more than 5% of our voting securities
|
|
|
|
|
|
|
|
|
|
|
HBM Bioventures (Cayman) Ltd |
|
|
|
|
|
|
|
|
|
Unit 10 Eucalyptus Building |
|
|
|
|
|
|
|
|
|
Grand Cayman A1 00000(15) |
|
|
1,927,561 |
|
|
|
13.55 |
% |
|
PolyTechnos Medical Devices Ltd. |
|
|
|
|
|
|
|
|
|
13-15 Victoria Road |
|
|
|
|
|
|
|
|
|
St Peter Port |
|
|
|
|
|
|
|
|
|
Guernsey, GY5 70A(16) |
|
|
965,936 |
|
|
|
6.79 |
% |
|
William Harris Investors |
|
|
|
|
|
|
|
|
|
191 North Wacker Drive, Suite 1500 |
|
|
|
|
|
|
|
|
|
Chicago, IL 60606(17) |
|
|
908,068 |
|
|
|
6.39 |
% |
|
Delaware Management Holdings |
|
|
|
|
|
|
|
|
|
One Commerce Square |
|
|
|
|
|
|
|
|
|
2005 Market Street |
|
|
|
|
|
|
|
|
|
Philadelphia, PA 19103(18) |
|
|
826,500 |
|
|
|
5.81 |
% |
|
Aureus Capital Partners, Ltd |
|
|
|
|
|
|
|
|
|
P.O. Box 641, No. 1 Seaton Place |
|
|
|
|
|
|
|
|
|
St Helier, Jersey |
|
|
|
|
|
|
|
|
|
Channel Islands XO JE4 8YJ(19) |
|
|
732,351 |
|
|
|
5.15 |
% |
|
|
|
|
* |
Indicates beneficial ownership of less than one percent. |
|
|
|
|
(1) |
Includes 138,406 shares of common stock issuable upon
exercise of stock options. |
|
|
(2) |
Includes 88,653 shares of common stock issuable upon
exercise of stock options. |
|
|
(3) |
Includes 39,351 shares of common stock issuable upon
exercise of stock options. |
|
|
(4) |
Represents 109,426 shares of common stock issuable upon
exercise of stock options. Mr. Reitz ceased to serve as an
executive officer of the Company in January, 2006. |
|
|
(5) |
Includes 44,552 shares of common stock issuable upon
exercise of stock options. |
|
|
(6) |
Represents 23,148 shares of common stock issuable upon
exercise of stock options. |
99
|
|
|
|
(7) |
Includes 140,895 shares of common stock issuable upon
exercise of stock options. Includes shares of record held by the
Henson Family Trust, 1/8/87 Michael Henson Annuity
Trust No. 1, and Linda Henson Annuity
Trust No. 1, of which Mr. Henson is the trustee,
the Michael R. Henson UTA Charles Schwab & Co. Inc. IRA
Rollover, the Linda A. Henson Charles Schwab & Co. Inc.
IRA Rollover and shares of record and warrants held by
JAIC-Henson MedFocus, LLC of which Mr. Henson is a partner.
Mr. Henson holds voting and investment power over the
foregoing shares. |
|
|
(8) |
Represents 108,836 shares of common stock issuable upon
exercise of stock options. |
|
|
(9) |
Includes 30,861 shares of common stock issuable upon
exercise of stock options Mr. Holubow, our director, is an
employee of William Harris Investors, Inc. William Harris
Investors, Inc. is affiliated with or provides investment advice
to the following individuals and entities that hold shares of
our common stock: Adjuvant Foundation, Courderay Partners,
Harris Venture Partners LLC, Irving B. Harris Revocable Trust,
Irving Harris Foundation, Jack Polsky Investment Trust, Jerome
Kahn, Jr. Revocable Trust, Margot Kahn, Peter Martin, James
J. Pelts, Michael S. Resnick, Rotonda Foundation, Roxanne H.
Frank Trust and Virginia H. Polsky Trust. Mr. Holubow does
not have voting or dispositive power over any of our shares held
by affiliates or clients of William Harris Investors, Inc. |
|
|
(10) |
Includes 26,804 shares of common stock issuable upon
exercise of stock options. Dr. Merz, our director, is an
employee of HBM Partners AG. HBM Partners AG acts as an
investment advisor to HBM Partners (Cayman) Ltd. HBM Partners
(Cayman) Ltd. provides investment management services to HBM
BioVentures (Cayman) Ltd. In addition, HBM Partners (Cayman)
Ltd. is the sole shareholder of HBM BioPartners Limited. HBM
BioPartners Limited is the general partner of International Life
Science Managers LP, and International Life Science Managers LP
is the general partner of International Life Science Partners
LP. Dr. Merz does not have voting or dispositive power over
any of our shares held by HBM BioVentures (Cayman) Ltd. or
International Life Science Partners LP. |
|
(11) |
Represents 19,999 shares of common stock issuable upon
exercise of stock options. |
|
(12) |
Includes 52,162 shares of common stock issuable upon
exercise of stock options. Also includes 9,202 shares held
by the Thiel Family Trust dated 5/10/00, of which Mr. Thiel
is the trustee. Mr. Thiel exercises voting and investment
power over the foregoing shares. |
|
(13) |
Includes 41,972 shares of common stock issuable upon
exercise of stock options. Also includes 772 shares of
record held by Global Venture Advisors GmbH, of which
Dr. Waddington is a Managing Director. Dr. Waddington,
our director, is a Managing Director and Managing Partner of
PolyTechnos Venture-Partners GmbH, or PTVP. PTVP acts as an
investment advisor to PolyTechnos (GP) Ltd., the General
Partner of the Enabling Technology Limited Partnership, which
has invested in Micrus through PolyTechnos Medical Devices Ltd.
PTVP acts as an investment advisor to PolyTechnos (GP) II Ltd.,
the General Partner of the PolyTechnos Venture Fund II Limited
Partnership. PTVP acts as an investment advisor to PolyTechnos
Management GmbH, the General Partner of PolyTechnos Venture
Fund II GmbH & Co. KG. PolyTechnos
Partners & Team GmbH is a trustee vehicle for
co-investments made into various companies. Dr. Waddington
has a carried interest in the various general
partnerships described above and has participated in
co-investments made by PolyTechnos Partners & Team
GmbH. Dr. Waddington does not have voting or dispositive
power over any shares held by the various PolyTechnos funds and
entities with the exception of those shares held by Global
Venture Advisors GmbH. Dr. Waddington disclaims beneficial
ownership of the shares held by the various PolyTechnos funds
and entities except to the extent of his proportional interest
in those entities. |
|
(14) |
See footnotes (1) through (13). Includes an aggregate of
865,065 shares of common stock issuable upon the exercise
of stock options. |
|
(15) |
See footnote 10 for a description of the relationship of
Dr. Merz, our director, with HBM BioVentures (Cayman) Ltd.
The board of directors of HBM BioVentures (Cayman) Ltd.
exercises voting and investment power over any of our shares
held by such entity and acts by majority vote. The board of
directors of HBM BioVentures (Cayman) Ltd. is comprised of John
Arnold, Colin |
100
|
|
|
Shaw, Richard Coles, Dr. Andreas Wicki and John Urquhart,
none of whom has individual voting or investment power with
respect to these shares. |
|
|
(16) |
See footnote 13 for a description of the relationship of
Dr. Waddington, our director, with PolyTechnos Medical
Devices Ltd. This information is based on Schedule 13G/A
filed with the SEC by Simon Waddington on April 12, 2006.
Includes 327,083 shares held by PolyTechnos Venture Fund
II, LP, 81,472 shares held by PolyTechnos Venture Fund II
GmbH & Co., 2,472 shares held by PolyTechnos
Partners and Team GmbH and 554,909 shares held by
PolyTechnos Medical Devices Ltd. The board of directors of
PolyTechnos Medical Devices Ltd. exercises voting and investment
power over the shares of our capital stock held by such entity.
The board of directors of PolyTechnos Medical Devices Ltd. is
comprised of Andrew Gill and Peter Touzeau. |
|
(17) |
This information is based on Schedule 13G filed with the
SEC on February 14, 2006. According to the
Schedule 13G Harris William Investors (William Harris
Investors, Inc.) hold sole voting power over 172,627 shares
and shared voting power over 675,603 shares and sole
dispositive power over 848,230 shares and shared
dispositive power over 59,838 shares. |
|
(18) |
This information is based on Schedule 13G filed with the
SEC on February 9, 2006 by Delaware Management Holdings.
According to the Schedule 13G, such entity has voting and
dispositive power with respect to all such shares. |
|
(19) |
Includes 508,494 shares of record held by Mach II L.P. and
223,857 shares of record held by Mach Capital L.P. The board of
directors of Aureus Capital Partners Ltd. exercises voting and
investment power over the shares of our capital stock held by
Mach II L.P., as general partner of Mach Capital L.P., which is
in turn the general partner of Mach II L.P. The board of
directors of Aureus Capital Partners Ltd. is comprised of Frank
Becker, Peter Donnelly, Keith Mackenzie and Andrew Wignall. |
The following table summarizes information with respect to the
shares of our common stock that may be issued pursuant to
options under our equity compensation plans at March 31,
2006:
Equity Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) | |
|
|
|
(c) | |
|
|
Number of | |
|
(b) | |
|
Number of Securities | |
|
|
Securities to be | |
|
Weighted- | |
|
Remaining Available | |
|
|
Issued Upon | |
|
Average Exercise | |
|
for Future Issuance | |
|
|
Exercise of | |
|
Price of | |
|
Under Equity | |
|
|
Outstanding | |
|
Outstanding | |
|
Compensation Plans | |
|
|
Options, | |
|
Options, | |
|
(Excluding Securities | |
|
|
Warrants and | |
|
Warrants and | |
|
Reflected in | |
Plan Category |
|
Rights | |
|
Rights | |
|
Column (a)) | |
|
|
| |
|
| |
|
| |
Equity compensation plans approved by security holders
|
|
|
2,804,093 |
(1) |
|
$ |
6.54 |
|
|
|
1,481,988 |
(2) |
Equity compensation plans not approved by security holders
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,804,093 |
(1) |
|
$ |
6.54 |
|
|
|
1,481,988 |
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes 1,874,930 shares subject to options outstanding
under our 1998 Plan and 929,163 shares subject to options
outstanding under our 2005 Plan. Excludes purchase rights
currently accruing under the Purchase Plan. |
|
(2) |
Includes 910,826 shares of common stock reserved for future
issuance under our 2005 Plan and 182,068 shares of common
stock reserved for future issuance under our Purchase Plan. As
of April 1, 2006, the number of shares available for
issuance under the foregoing plans automatically increased to
2,166,991 shares available for issuance under the 2005 Plan
and 404,290 shares available for issuance under the
Purchase Plan. |
101
For further details regarding our equity compensation plans, see
Note 9, Stock Option Plans and other Employee
Benefits, in the consolidated financial statements in
Item 8 of this Report.
|
|
Item 13. |
Certain Relationships and Related Transactions. |
You should review certain arrangements with our executive
officers that are described under Executive
Compensation.
Stockholders Agreement
In February 2005, we entered into an Amended and Restated
Stockholders Agreement with each director, executive
officer, entity affiliated with any director and other holder of
more than 5% of our securities who purchased shares of our
Series E preferred stock. The Stockholders Agreement
grants certain holders of our common stock the right to require
us to file registration statements covering their shares or to
include their shares in registration statements that we may file
for ourselves or other stockholders. Please see
Description of Capital Stock Registration
Rights for a description of these registration rights.
|
|
Item 14. |
Principal Accountant Fees and Services. |
The following table shows the fees relating to audit and other
services provided by our independent registered public
accounting firm PricewaterhouseCoopers LLP for fiscal 2006, 2005
and 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Audit Fees(1)
|
|
$ |
779 |
|
|
$ |
1,418 |
|
Audit-Related Fees(2)
|
|
|
168 |
|
|
|
|
|
Tax Fees(3)
|
|
|
54 |
|
|
|
214 |
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,001 |
|
|
$ |
1,632 |
|
|
|
|
|
|
|
|
|
|
(1) |
These fees consisted of the audit of our financial statements,
review of our financial statements included in our Quarterly
Reports on
Form 10-Q and the
review of our
Form S-1
Registration Statement in connection with our initial
public offering. |
|
(2) |
These fees consisted of services primarily related to our
Form 8-K filing in
connection with the acquisition of Neurologic. |
|
(3) |
These fees consisted of tax compliance, tax advice and tax
planning including preparation of tax forms and some consulting
for international tax matters. |
102
PART IV
|
|
Item 15. |
Exhibits and Financial Statement Schedules. |
(a) The following documents are filed as part of this
Annual Report on
Form 10-K:
|
|
|
(1) Financial Statements. The following statements
of Micrus Endovascular Corporation and the report of
PricewaterhouseCoopers LLP, Independent Registered Public
Accounting Firm, are included in Part II, Item 8: |
|
|
|
(2) Financial Statement Schedules. The following
schedule is required to be filed by Item 15(b). |
|
|
Schedule II Valuation and Qualifying Accounts
for each of the three years in the period ended March 31,
2006 |
|
|
All other schedules have been omitted because they are either
inapplicable or the required information has been provided in
the consolidated financial statements or the notes thereto. |
|
|
|
(b) Exhibits. The list of exhibits on the Index to
Exhibits on pages 107 through 108 of this report is
incorporated herein by reference. |
103
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, Micrus Endovascular
Corporation has duly caused this report to be signed on its
behalf by the undersigned, thereto duly authorized.
|
|
|
MICRUS ENDOVASCULAR CORPORATION |
|
|
|
|
|
John T. Kilcoyne |
|
President and Chief Executive Officer |
Date: June 16, 2006
POWERS OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints John T.
Kilcoyne and Robert A. Stern, and each of them, his true and
lawful
attorneys-in-fact and
agents with full power of substitution, for him and in his name,
place and stead, in any and all capacities, to sign any
amendments to this Report on
Form 10-K and to
file the same, with exhibits thereto and other documents in
connection therewith with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of
said attorneys-in-fact,
or his substitute or substitutes may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this
Form 10-K has been
signed by the following persons in the capacities and on the
dates indicated:
|
|
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
/s/ John T. Kilcoyne
John T. Kilcoyne |
|
President and Chief Executive Officer (Principal Executive
Officer) |
|
June 16, 2006 |
|
/s/ Robert A. Stern
Robert A. Stern |
|
Executive Vice President, Chief Financial Officer and Secretary
(Principal Financial and
Accounting Officer) |
|
June 16, 2006 |
|
/s/ Michael R. Henson
Michael R. Henson |
|
Chairman of the Board of
Directors and Director |
|
June 16, 2006 |
|
/s/ L. Nelson Hopkins
L. Nelson Hopkins, M.D. |
|
Director |
|
June 16, 2006 |
|
/s/ Fred Holubow
Fred Holubow |
|
Director |
|
June 16, 2006 |
|
/s/ Beat R. Merz
Beat R. Merz |
|
Director |
|
June 16, 2006 |
104
|
|
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
/s/ Francis J. Shammo
Francis J. Shammo |
|
Director |
|
June 16, 2006 |
|
/s/ Jeffrey H. Thiel
Jeffrey H. Thiel |
|
Director |
|
June 16, 2006 |
|
/s/ Simon Waddington
Simon Waddington |
|
Director |
|
June 16, 2006 |
105
Schedule II Valuation and Qualifying
Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged to | |
|
|
|
|
|
|
Balance at | |
|
Expenses/ | |
|
Write-Offs | |
|
|
|
|
Beginning | |
|
Against | |
|
Net of | |
|
Balance at | |
|
|
of Year | |
|
Revenue | |
|
Recoveries | |
|
End of Year | |
|
|
| |
|
| |
|
| |
|
| |
Allowance for Doubtful Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, 2006
|
|
$ |
230 |
|
|
$ |
102 |
|
|
$ |
(15 |
) |
|
$ |
317 |
|
|
Year Ended March 31, 2005
|
|
|
267 |
|
|
|
11 |
|
|
|
(48 |
) |
|
|
230 |
|
|
Year Ended March 31, 2004
|
|
|
136 |
|
|
|
176 |
|
|
|
(45 |
) |
|
|
267 |
|
Inventory Reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, 2006
|
|
|
951 |
|
|
|
264 |
|
|
|
(285 |
) |
|
|
930 |
|
|
Year Ended March 31, 2005
|
|
|
868 |
|
|
|
734 |
|
|
|
(651 |
) |
|
|
951 |
|
|
Year Ended March 31, 2004
|
|
|
119 |
|
|
|
739 |
|
|
|
10 |
|
|
|
868 |
|
106
INDEX TO EXHIBITS
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
3 |
.1 |
|
Certificate of Incorporation (Filed as Exhibit 3.2 of Amendment
No. 3 to the Companys Registration Statement on Form S-1
filed on May 17, 2005 (Registration No. 333-123154)
(Amendment No. 3), and incorporated herein by
reference) |
|
3 |
.2 |
|
Bylaws (Filed as Exhibit 3.4 of Amendment No. 3, and
incorporated herein by reference) |
|
4 |
.1 |
|
Specimen Stock Certificate (Filed as Exhibit 4.1 of the
Companys Registration Statement on Form S-1 filed on March
4, 2005 (Registration No. 333-123154) (Form S-1),
and incorporated herein by reference) |
|
4 |
.2 |
|
Warrant dated as of December 11, 2000 among the Registrant and
Roberts Mitani Capital, LLC (Filed as Exhibit 4.2 of Form S-1,
and incorporated herein by reference) |
|
4 |
.3 |
|
Amended and Restated Stockholders Rights Agreement dated
as of February 21, 2005 among the Registrant and the parties
listed therein (Filed as Exhibit 4.3 of Form S-1, and
incorporated herein by reference) |
|
4 |
.4 |
|
Form of Common Stock Warrant issued in connection with the
Series E Preferred Stock and Warrant Purchase Agreement dated
February 21, 2005, among the Company and the purchasers of the
Companys Series E Preferred Stock (Filed as Exhibit 4.4 to
the Companys Quarterly Report on Form 10-Q filed on
February 14, 2006, and incorporated herein by reference) |
|
10 |
.1* |
|
1996 Stock Option Plan (Filed as Exhibit 10.1 of Form S-1, and
incorporated herein by reference) |
|
10 |
.2* |
|
1998 Stock Plan (Filed as Exhibit 10.2 of Form S-1, and
incorporated herein by reference) |
|
10 |
.3* |
|
2005 Equity Incentive Plan (Filed as Exhibit 10.3 of Amendment
No. 4 to the Companys Registration Statement on Form S-1
filed on May 23, 2005 (Registration No. 333-123154)
(Amendment No. 4), and incorporated herein by
reference) |
|
10 |
.4* |
|
2005 Equity Incentive Plan Form of Incentive Stock
Option Agreement for Executive Officers and Directors (Filed as
Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q
filed on August 15, 2005, and incorporated herein by reference) |
|
10 |
.5* |
|
2005 Equity Incentive Plan Form of Nonstatutory
Stock Option Agreement for Executive Officers and Directors
(Filed as Exhibit 10.3 to the Companys Quarterly Report on
Form 10-Q filed on August 15, 2005, and incorporated herein by
reference) |
|
10 |
.6* |
|
Employee Cash Bonus Plan with respect to Executive Officers
(Filed as Exhibit 99.1 to the Companys Current Report on
Form 8-K filed on July 19, 2005, and incorporated herein by
reference) |
|
10 |
.7* |
|
2005 Employee Stock Purchase Plan, as amended (Filed as Exhibit
10.4 of Amendment No. 6 to the Companys Registration
Statement on Form S-1 filed on June 13, 2005 (Registration No.
333-123154) (Amendment No. 6), and incorporated
herein by reference) |
|
10 |
.8* |
|
Letter Agreement dated November 15, 2004 with John R. Kilcoyne
(Filed as Exhibit 10.7 of Form S-1, and incorporated herein by
reference) |
|
10 |
.9* |
|
Letter Agreement dated November 5, 2003 with Robert A. Stern
(Filed as Exhibit 10.8 of Form S-1, and incorporated herein by
reference) |
|
10 |
.10* |
|
Letter Agreement dated June 12, 1998 with Tom M. Holdych (Filed
as Exhibit 10.9 of Form S-1, and incorporated herein by
reference) |
|
10 |
.11* |
|
Letter Agreement dated May 23, 2003 with Edward F. Ruppel, Jr.
(Filed as Exhibit 10.10 of Form S-1, and incorporated herein by
reference) |
|
10 |
.12* |
|
Letter Agreement dated October 25, 2004 with Eckhard H. Reitz
(Filed as Exhibit 10.13 of Form S-1, and incorporated herein by
reference) |
|
10 |
.13* |
|
Letter Agreement dated February 16, 2005 with Robert
C. Colloton (Filed as Exhibit 10.23 of Amendment
No. 6, and incorporated herein by reference) |
|
10 |
.14 |
|
Form of Director and Executive Officer Indemnification Agreement
(Filed as Exhibit 10.14 of Form S-1, and incorporated herein by
reference) |
107
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
10 |
.15 |
|
Office Lease dated June 6, 2005 between the Registrant and WW/LJ
GATEWAYS LTD., a California limited partnership, for office
space located at 821 Fox Lane in San Jose, California (Filed as
Exhibit 99.1 to the Companys Current Report on Form 8-K
filed on July 5, 2005, and incorporated herein by reference) |
|
10 |
.16** |
|
Distribution Agreement, dated September 30, 2005, between Micrus
Endovascular Corporation and Goodman CO., Ltd. (Filed as Exhibit
10.3 to the Companys Quarterly Report on Form 10-Q filed
on November 14, 2005, and incorporated herein by reference) |
|
10 |
.17 |
|
Share Purchase Agreement, dated September 20, 2005, between Mark
Ellis and James Mackenzie and Micrus Endovascular Corporation
(Filed as Exhibit 2.1 to the Companys Current Report on
Form 8-K filed on September 26, 2005, and incorporated herein by
reference) |
|
10 |
.18** |
|
License Agreement, effective July 1, 2005, between Micrus
Endovascular Corporation and Micrus Endovascular SA (Filed as
Exhibit 10.5 to the Companys Quarterly Report on Form 10-Q
filed on November 14, 2005, and incorporated herein by reference) |
|
10 |
.19** |
|
Contract Manufacturing Agreement, effective July 1, 2005,
between Micrus Endovascular Corporation and Micrus Endovascular
SA (Filed as Exhibit 10.6 to the Companys Quarterly Report
on Form 10-Q filed on November 14, 2005, and incorporated herein
by reference) |
|
10 |
.20** |
|
Agreement for Sharing Development Costs, effective July 1, 2005,
between Micrus Endovascular Corporation and Micrus Endovascular
SA (Filed as Exhibit 10.7 to the Companys Quarterly Report
on Form 10-Q filed on November 14, 2005, and incorporated herein
by reference) |
|
10 |
.21** |
|
Support Services Agreement, effective July 1, 2005, between
Micrus Endovascular Corporation and Micrus Endovascular SA
(Filed as Exhibit 10.8 to the Companys Quarterly Report on
Form 10-Q filed on November 14, 2005, and incorporated herein by
reference) |
|
10 |
.22** |
|
Technology Transfer Agreement, effective July 28, 2005,
between Micrus Endovascular Corporation and VascularFX (Filed as
Exhibit 10.9 to the Companys Quarterly Report on
Form 10-Q filed on November 14, 2005, and incorporated
herein by reference) |
|
10 |
.23#** |
|
License, Development and Distribution Agreement, effective
January 6, 2006, between Micrus Endovascular Corporation and
Biotronik AG |
|
21 |
.1# |
|
List of Subsidiaries |
|
23 |
.1# |
|
Consent of PricewaterhouseCoopers LLP, Independent Registered
Public Accounting Firm |
|
24 |
.1# |
|
Powers of Attorney (appears on the signature page of this form) |
|
31 |
.1# |
|
Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 |
|
31 |
.2# |
|
Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 |
|
32# |
|
|
Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
# |
|
Filed herewith. |
|
* |
|
Indicates a management contract or compensatory plan or
arrangement, as required by Item 15(a)3. |
|
** |
|
Confidential treatment requested for certain portions of this
Exhibit pursuant to Rule 24b-2 promulgated under the
Securities Exchange Act, which portions are omitted and filed
separately with the Securities and Exchange Commission. |
108