e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2007
Or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-51323
Micrus Endovascular Corporation
(Exact name of registrant as specified in its charter)
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Delaware
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23-2853441 |
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(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
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95131 |
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(Address of principal executive offices)
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(Zip Code) |
(408) 433-1400
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ No
o
Indicate by check mark whether the registrant 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 (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
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 August 1, 2007, there were 15,347,214 shares of common stock, par value $0.01, of the
registrant outstanding.
MICRUS ENDOVASCULAR CORPORATION
INDEX TO FORM 10-Q
2
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
MICRUS ENDOVASCULAR CORPORATION
Condensed Consolidated Balance Sheets
(unaudited)
(in thousands, except share and per share amounts)
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June 30, |
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March 31, |
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2007 |
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2007 |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
28,558 |
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$ |
34,536 |
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Accounts receivable, net of allowance for doubtful accounts
of $257 at June 30, 2007 and $234 at March 31, 2007 |
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9,014 |
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8,168 |
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Inventories |
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10,378 |
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9,049 |
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Prepaid expenses and other current assets |
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1,809 |
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1,442 |
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Total current assets |
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49,759 |
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53,195 |
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Property and equipment, net |
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4,814 |
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4,648 |
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Goodwill |
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5,552 |
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5,552 |
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Intangible assets, net |
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8,928 |
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9,405 |
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Other assets |
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285 |
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297 |
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Total assets |
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$ |
69,338 |
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$ |
73,097 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current Liabilities: |
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Accounts payable |
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$ |
1,845 |
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$ |
1,660 |
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Accrued payroll and other related expenses |
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4,076 |
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6,145 |
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Accrued liabilities |
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4,337 |
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6,288 |
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Total current liabilities |
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10,258 |
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14,093 |
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Other non-current liabilities |
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2,646 |
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2,710 |
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Total liabilities |
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12,904 |
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16,803 |
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Commitments and contingencies (Note 5) |
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Stockholders Equity: |
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Common stock, $0.01 par value; |
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Authorized: 50,000,000 shares |
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Issued and outstanding: 15,344,506 shares at June 30, 2007 and
15,249,057 shares at March 31, 2007 |
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153 |
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152 |
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Additional paid-in capital |
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113,441 |
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111,920 |
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Deferred stock-based compensation |
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(111 |
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(164 |
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Accumulated other comprehensive loss |
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(554 |
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(512 |
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Accumulated deficit |
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(56,495 |
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(55,102 |
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Total stockholders equity |
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56,434 |
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56,294 |
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Total liabilities and stockholders equity |
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$ |
69,338 |
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$ |
73,097 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
MICRUS ENDOVASCULAR CORPORATION
Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except per share amounts)
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Three months ended |
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June 30, |
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2007 |
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2006 |
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Revenues |
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$ |
16,790 |
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$ |
12,683 |
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Cost of goods sold |
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3,735 |
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3,262 |
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Gross profit |
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13,055 |
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9,421 |
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Operating expenses: |
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Research and development |
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1,965 |
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2,754 |
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Sales and marketing |
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6,685 |
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5,797 |
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General and administrative |
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6,101 |
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4,449 |
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Total operating expenses |
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14,751 |
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13,000 |
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Loss from operations |
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(1,696 |
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(3,579 |
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Interest and investment income |
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360 |
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379 |
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Other income, net |
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78 |
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204 |
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Loss before income taxes |
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(1,258 |
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(2,996 |
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Provision (benefit) for income taxes |
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135 |
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(37 |
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Net loss |
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$ |
(1,393 |
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$ |
(2,959 |
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Net loss per share: |
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Basic and diluted |
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$ |
(0.09 |
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$ |
(0.21 |
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Weighted-average number of shares used in per share calculations: |
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Basic and diluted |
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15,291 |
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14,226 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
MICRUS ENDOVASCULAR CORPORATION
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
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Three months ended |
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June 30, |
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2007 |
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2006 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(1,393 |
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$ |
(2,959 |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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791 |
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364 |
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Provision for doubtful accounts |
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23 |
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63 |
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Loss on disposal of property and equipment |
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27 |
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Provision for excess and obsolete inventories |
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153 |
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123 |
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Stock-based compensation |
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1,056 |
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440 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(873 |
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(173 |
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Inventories |
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(1,466 |
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(574 |
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Prepaid expenses and other current assets |
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(363 |
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(597 |
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Other assets |
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6 |
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(5 |
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Accounts payable |
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186 |
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(947 |
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Accrued payroll and other related expenses |
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(2,101 |
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(330 |
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Accrued liabilities |
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277 |
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1,644 |
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Other non-current liabilities |
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(76 |
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(10 |
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Net cash used in operating activities |
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(3,753 |
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(2,961 |
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Cash flows from investing activities: |
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Acquisition of property and equipment |
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(487 |
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(201 |
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Earn-out
payment in
connection with acquisition of Neurologic UK Ltd. |
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(2,232 |
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(1,403 |
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Payment to Biotronik AG for developed technology |
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(732 |
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Net cash used in investing activities |
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(2,719 |
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(2,336 |
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Cash flows from financing activities: |
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Proceeds from exercise of stock options |
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522 |
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97 |
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Net cash provided by financing activities |
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522 |
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97 |
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Effect of foreign exchange rate changes on cash and cash equivalents |
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(28 |
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(398 |
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Net decrease in cash and cash equivalents |
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(5,978 |
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(5,598 |
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Cash and cash equivalents at beginning of period |
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34,536 |
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36,104 |
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Cash and cash equivalents at end of period |
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$ |
28,558 |
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$ |
30,506 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
MICRUS ENDOVASCULAR CORPORATION
NOTES TO CONDENSED 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. The Company is also developing products for the treatment of ischemic disease and
recently launched its first product in this market.
Interim unaudited financial information
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America
(generally accepted accounting principles) for interim financial information and in accordance
with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange
Commission (SEC). Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements. The unaudited
interim condensed consolidated financial statements have been prepared on the same basis as the
annual financial statements. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation. These financial statements should be
read in conjunction with the audited financial statements and notes thereto for the preceding
fiscal year included in the Companys Annual Report on Form 10-K filed with the SEC on June 7,
2007.
The results of operations for the interim period ended June 30, 2007 may not necessarily be
indicative of the results that may be expected for the fiscal year ended March 31, 2008, or any
future period.
Revisions to fiscal year 2007 quarterly cash flows presentations
The consolidated cash flow statement for the three months ended June 30, 2006 has been revised
from that previously reported in the Companys Form 10-Q for the period ended June 30, 2006 to
correct the classification of the payment of an earn-out amount of approximately $1.4 million made
in April 2006 in connection with the acquisition of Neurologic UK Ltd. (Neurologic) that had been
accrued as of March 31, 2006, and correctly excluded, as it was a non-cash item, from the fiscal
2006 full year statement of cash flows included in the fiscal 2006 and 2007 annual reports on Form
10-K. The Company had previously incorrectly presented in its quarterly reports on Form 10-Q for
the first, second and third quarters of fiscal 2007, the payment as an operating cash outflow
(decrease in accrued liabilities) which resulted in an overstatement of the reported amount of cash
used in operating activities with a corresponding understatement of the cash used in investing
activities. This item has been adjusted in this Form 10-Q and will also be adjusted in the
consolidated cash flow statements for the six and nine months ended September 30, 2006 and December
31, 2006, respectively, when included in the Companys Form 10-Qs for the six and nine months
ended September 30, 2007 and December 31, 2007. The impact on the Companys cash flow data is as
follows:
6
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As previously |
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reported |
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As revised |
Three
months ended June 30, 2006 |
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Cash flows from operating activities: |
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Accrued liabilities |
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$ |
241 |
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$ |
1,644 |
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Net cash used in operating activities |
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$ |
(4,364 |
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$ |
(2,961 |
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Cash flows from investing activities: |
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Purchase of Neurologic UK Ltd., net of cash acquired |
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$ |
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$ |
(1,403 |
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Net cash used in investing activities |
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$ |
(933 |
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$ |
(2,336 |
) |
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Six months ended September 30, 2006 |
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Cash flows from operating activities: |
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Accrued liabilities |
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$ |
38 |
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$ |
1,441 |
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Net cash used in operating activities |
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$ |
(3,123 |
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$ |
(1,720 |
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Cash flows from investing activities: |
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Purchase of Neurologic UK Ltd., net of cash acquired |
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$ |
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$ |
1,403 |
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Net cash used in investing activities |
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$ |
(1,243 |
) |
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$ |
(2,646 |
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Nine months ended December 31, 2006 |
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Cash flows from operating activities: |
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Accrued liabilities |
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$ |
1,127 |
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$ |
2,530 |
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Net cash used in operating activities |
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$ |
(2,070 |
) |
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$ |
(667 |
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Cash flows from investing activities: |
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Purchase of Neurologic UK Ltd., net of cash acquired |
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$ |
(11 |
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$ |
(1,414 |
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Net cash used in investing activities |
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$ |
(3,549 |
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$ |
(4,952 |
) |
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. All significant intercompany balances and transactions have been eliminated in
consolidation.
The Companys international subsidiaries use their local currency as the functional currency.
Assets and liabilities are translated at exchange rates in effect at the balance sheet date.
Revenue, expense, gain and loss accounts are translated at average exchange rates during the
period. Resulting translation adjustments are recorded directly to accumulated other comprehensive
income (loss).
Use of estimates
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.
Cost
of goods sold
The Companys cost of goods sold includes the cost of products sold to customers including
materials, direct labor, depreciation, overhead costs associated with manufacturing, impairments of
inventory and warranty expenses. Additionally, beginning with the quarter ended December 31, 2006,
cost of goods sold includes amortization of capitalized license technology in connection with the
Biotronik AG (Biotronik) agreement and acquired intangible assets in connection with the acquisition of VasCon,
LLC (VasCon).
7
Comprehensive loss
Comprehensive loss generally represents all changes in stockholders equity except those
resulting from investments or contributions by stockholders. As of June 30, 2007 and March 31,
2007, the Companys foreign currency translation represents the only component of accumulated other
comprehensive loss. Total comprehensive loss for the three months ended June 30, 2007 and 2006 was
$1.4 million and $3.1 million, respectively. This included other comprehensive loss of ($42,000)
and ($160,000), respectively, related to the Companys unrealized gains and losses on its
available-for-sale securities and foreign currency translation.
Net loss per share
Basic net loss per share is computed by dividing net loss 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 stock options and restricted stock units.
There is no difference between basic and diluted net loss per share for all periods presented due
to the Companys net losses.
The following outstanding stock options and restricted stock units 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):
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Three months ended |
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June 30, |
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2007 |
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2006 |
Shares issuable upon exercise of common stock options |
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3,239 |
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3,058 |
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Shares issuable upon settlement of restricted stock units |
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7 |
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10 |
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Shares issuable under employee stock purchase plan |
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16 |
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25 |
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3,262 |
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3,093 |
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Stock-based compensation
The Company has adopted various stock plans that provide for the grant of stock awards to
employees, non-employee directors and consultants. The Company also has an employee stock purchase
plan which enables employees to purchase the Companys common stock.
On April 1, 2006, the Company adopted the provisions of, and accounts for stock-based
compensation in accordance with, the Financial Accounting Standards Boards (FASB) Statement of
Financial Accounting Standards No. 123 revised 2004 (SFAS 123R), Share-Based Payment which
replaced Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for
Stock-Based Compensation and supersedes APB Opinion No. 25 (APB 25), Accounting for Stock
Issued to Employees. Under the fair value recognition provisions of SFAS 123R, stock-based
compensation cost is measured at the grant date based on the fair value of the award and is
recognized as expense on a straight-line basis over the requisite service period, which is
generally the vesting period. The Company elected the modified-prospective method, under which
prior periods are not revised for comparative purposes. The valuation provisions of SFAS 123R apply
to new grants and to grants that were outstanding prior to the effective date and are subsequently
modified. Estimated compensation for grants that were outstanding as of the effective date will be
recognized over the remaining service period using the compensation cost estimated for the SFAS 123
pro forma disclosures, excluding pre-IPO options for which the fair value was determined using the
minimum value method. For these grants, any remaining unamortized deferred compensation expenses
will continue to be accounted for under the intrinsic value method of APB 25.
Due to the adoption of SFAS 123R, some exercises result in tax deductions in excess of
previously recorded benefits based on the option value at the time of grant, or windfalls. The
Company recognizes windfall tax benefits associated with the exercise of stock options directly to
stockholders equity only when realized. Accordingly, deferred tax assets are not recognized for
net operating loss carryforwards resulting from windfall tax benefits occurring from April 1, 2006
onward. A windfall tax benefit occurs when the actual tax benefit realized by a company upon an
employees disposition of a share-based award exceeds the deferred tax asset, if any, associated
with the award that a company had recorded. When assessing whether a tax benefit relating to
share-based compensation has been realized, the Company has elected to follow the tax law ordering
method, under which current year share-based compensation deductions are assumed to be utilized
before net operating loss carryforwards and other tax attributes. Also, the Company has elected to
ignore the indirect tax effects of share-based compensation deductions in computing its research
and development tax credit. The Company will recognize the full effect of these deductions in the
statements of operations when the valuation allowance is released.
8
Income Taxes
Effective April 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for
Uncertainties in Income Taxes An Interpretation of FASB Statement No. 109 (FIN 48). FIN 48
prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN
48 also provides guidance on derecognition of tax benefits, classification on the balance sheet,
interest and penalties, accounting in interim periods, disclosure, and transition. See Note 4 for
further information regarding the adoption of FIN 48.
Recent accounting pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) 157,
Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures about fair value
measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair value
measurements, the FASB having previously concluded in those accounting pronouncements that fair
value is the relevant measurement attribute. Accordingly, this Statement does not require any new
fair value measurements. However, for some entities, the application of SFAS 157 will change
current practice. The provisions of SFAS 157 are effective as of the beginning of the Companys
2009 fiscal year. The Company is currently evaluating the impact of SFAS 157, but does not expect
the adoption of SFAS 157 to have a material impact on its consolidated financial position, results
of operations or cash flows.
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities, which expands opportunities to use fair value measurements in financial
reporting and permits entities to choose to measure many financial instruments and certain other
items at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The
Company is currently evaluating SFAS 159 to determine its impact on its consolidated financial
position, results of operations or cash flows.
Note 3 Balance Sheet Components
Inventories
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
March 31, |
|
|
|
2007 |
|
|
2007 |
|
Raw materials |
|
$ |
1,896 |
|
|
$ |
1,862 |
|
Work-in-progress |
|
|
1,448 |
|
|
|
1,413 |
|
Finished goods |
|
|
3,947 |
|
|
|
3,005 |
|
Consigned inventory |
|
|
2,929 |
|
|
|
2,622 |
|
Inventory held by Latin American distributors |
|
|
158 |
|
|
|
147 |
|
|
|
|
|
|
|
|
|
|
$ |
10,378 |
|
|
$ |
9,049 |
|
|
|
|
|
|
|
|
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.
9
Property and equipment, net
Property
and equipment, net, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
March 31, |
|
|
|
2007 |
|
|
2007 |
|
Computer equipment and software |
|
$ |
1,360 |
|
|
$ |
1,210 |
|
Furniture, fixtures and equipment |
|
|
4,781 |
|
|
|
4,701 |
|
Leasehold improvements |
|
|
948 |
|
|
|
936 |
|
Construction in progress |
|
|
126 |
|
|
|
148 |
|
|
|
|
|
|
|
|
Total cost |
|
|
7,215 |
|
|
|
6,995 |
|
Less accumulated depreciation and amortization |
|
|
(2,401 |
) |
|
|
(2,347 |
) |
|
|
|
|
|
|
|
|
|
$ |
4,814 |
|
|
$ |
4,648 |
|
|
|
|
|
|
|
|
Goodwill
On September 20, 2005, the Company entered into a Share Purchase Agreement acquiring all of
the outstanding capital stock of Neurologic, a privately held distributor of the Companys products
in the United Kingdom. The transaction included an initial cash payment in addition to future
multi-year revenue based earn-out payments. At March 31, 2007, the Company accrued for additional
consideration of approximately $2,232,000 for the second year earn-out payment, which was added to
goodwill. The Company paid the second year earn-out in April 2007.
Intangible assets, net
Intangible
assets, net, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful |
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net |
|
|
|
Life |
|
|
March 31, |
|
|
|
|
|
|
June 30, |
|
|
March 31, |
|
|
|
|
|
|
June 30, |
|
|
June 30, |
|
|
March 31, |
|
|
|
(years) |
|
|
2007 |
|
|
Additions |
|
|
2007 |
|
|
2007 |
|
|
Additions |
|
|
2007 |
|
|
2007 |
|
|
2007 |
|
Existing process technology |
|
|
7 |
|
|
$ |
4,590 |
|
|
$ |
|
|
|
$ |
4,590 |
|
|
$ |
(219 |
) |
|
$ |
(164 |
) |
|
$ |
(383 |
) |
|
$ |
4,207 |
|
|
$ |
4,371 |
|
Distribution agreements |
|
|
5 |
|
|
|
2,300 |
|
|
|
|
|
|
|
2,300 |
|
|
|
(704 |
) |
|
|
(115 |
) |
|
|
(819 |
) |
|
|
1,481 |
|
|
|
1,596 |
|
Capitalized license fee |
|
|
7 |
|
|
|
1,565 |
|
|
|
|
|
|
|
1,565 |
|
|
|
(112 |
) |
|
|
(56 |
) |
|
|
(168 |
) |
|
|
1,397 |
|
|
|
1,453 |
|
Patents microcoil |
|
|
10 |
|
|
|
1,100 |
|
|
|
|
|
|
|
1,100 |
|
|
|
(770 |
) |
|
|
(27 |
) |
|
|
(797 |
) |
|
|
303 |
|
|
|
330 |
|
Non-compete agreements |
|
|
6 |
|
|
|
700 |
|
|
|
|
|
|
|
700 |
|
|
|
(177 |
) |
|
|
(29 |
) |
|
|
(206 |
) |
|
|
494 |
|
|
|
523 |
|
Customer relationships |
|
|
5 |
|
|
|
900 |
|
|
|
|
|
|
|
900 |
|
|
|
(274 |
) |
|
|
(45 |
) |
|
|
(319 |
) |
|
|
581 |
|
|
|
626 |
|
Patents catheter |
|
|
7 |
|
|
|
300 |
|
|
|
|
|
|
|
300 |
|
|
|
(14 |
) |
|
|
(11 |
) |
|
|
(25 |
) |
|
|
275 |
|
|
|
286 |
|
Existing product technology |
|
|
2 |
|
|
|
260 |
|
|
|
|
|
|
|
260 |
|
|
|
(40 |
) |
|
|
(30 |
) |
|
|
(70 |
) |
|
|
190 |
|
|
|
220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,715 |
|
|
$ |
|
|
|
$ |
11,715 |
|
|
$ |
(2,310 |
) |
|
$ |
(477 |
) |
|
$ |
(2,787 |
) |
|
$ |
8,928 |
|
|
$ |
9,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets included in the results of operations is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
Cost of goods sold |
|
$ |
260 |
|
|
$ |
|
|
Operating expenses |
|
|
217 |
|
|
|
231 |
|
|
|
|
|
|
|
|
|
|
$ |
477 |
|
|
$ |
231 |
|
|
|
|
|
|
|
|
The amortization expense of the acquired intangible assets related to existing technology in
the manufacturing process and design of products resulting from the acquisition of VasCon in the
amount of $204,000 is included in cost of goods sold for the three
months ended June 30, 2007.
10
The Company started generating revenue from the stent product associated with the capitalized
license technology in the third quarter of fiscal 2007. The amortization expense related to the
capitalized license technology in the amount of $56,000 is included in cost of goods sold for the
three months ended June 30, 2007.
The expected future amortization of intangible assets is as follows (in thousands):
|
|
|
|
|
For Years Ended March 31, |
|
Amortization |
|
2008 (remaining 9 months) |
|
$ |
1,431 |
|
2009 |
|
|
1,870 |
|
2010 |
|
|
1,793 |
|
2011 |
|
|
1,345 |
|
2012 |
|
|
982 |
|
Thereafter |
|
|
1,507 |
|
|
|
|
|
|
|
$ |
8,928 |
|
|
|
|
|
Accruals
Accrued payroll and other related expenses consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
March 31, |
|
|
|
2007 |
|
|
2007 |
|
Accrued bonuses |
|
$ |
1,253 |
|
|
$ |
2,646 |
|
Accrued salaries |
|
|
404 |
|
|
|
702 |
|
Accrued vacation |
|
|
1,485 |
|
|
|
1,333 |
|
Accrued commissions |
|
|
498 |
|
|
|
725 |
|
Accrued payroll taxes |
|
|
401 |
|
|
|
739 |
|
Accrued 401(k) |
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,076 |
|
|
$ |
6,145 |
|
|
|
|
|
|
|
|
Accrued liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
March 31, |
|
|
|
2007 |
|
|
2007 |
|
Professional fees |
|
$ |
1,298 |
|
|
$ |
1,069 |
|
VAT payable |
|
|
580 |
|
|
|
438 |
|
Development costs |
|
|
542 |
|
|
|
559 |
|
Earn-out payment in connection with Neurologic acquisition |
|
|
|
|
|
|
2,232 |
|
Other |
|
|
1,917 |
|
|
|
1,990 |
|
|
|
|
|
|
|
|
|
|
$ |
4,337 |
|
|
$ |
6,288 |
|
|
|
|
|
|
|
|
Other non-current liabilities
Other non-current liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
March 31, |
|
|
|
2007 |
|
|
2007 |
|
Contingent purchase price |
|
$ |
1,596 |
|
|
$ |
1,596 |
|
Deferred tax liability |
|
|
542 |
|
|
|
570 |
|
Deferred revenue from Japan distribution agreement |
|
|
338 |
|
|
|
375 |
|
Other non-current liabilities |
|
|
170 |
|
|
|
169 |
|
|
|
|
|
|
|
|
|
|
$ |
2,646 |
|
|
$ |
2,710 |
|
|
|
|
|
|
|
|
11
Note 4 Income Taxes
Effective April 1, 2007, the Company adopted FIN 48, which requires that the Company recognize
the financial statement effects of a tax position when it becomes more likely than not, based on
the technical merits, that the position will be sustained upon examination. As a result of the
implementation of FIN 48, the Company recognized a $192,000 increase in its unrecognized tax
benefits. None was accounted for as an increase in the April 1, 2007 balance of accumulated
deficit since the benefit relates to attribute carryovers for which the related deferred tax asset
was subject to a full valuation allowance. At the adoption date of April 1, 2007 and at June 30,
2007, the Company had zero accrued interest and penalties related to tax contingencies.
As of April 1, 2007, the Company had approximately $192,000 of unrecognized tax benefits.
Since the benefit relates to attribute carryover for which the related deferred tax asset was
subject to a full valuation allowance, the recognition of the unrecognized tax benefits will not
affect the Companys effective tax rate. The Company has elected to include interest and penalties
as a component of tax expense. The Company does not anticipate that the amount of unrecognized tax
benefits relating to tax positions existing at March 31, 2007 will significantly increase or
decrease within the next 12 months. Because of net operating loss and credit carryforwards,
substantially all of the Companys tax years, dating to inception in 1996, remain open to federal
tax examination. Most state and foreign jurisdictions have 3 to 10 open tax years at any point in
time.
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 tax. For the three months ended June 30, 2007, the Company recorded an income tax expense of approximately $135,000. The
expense includes an income tax expense of $173,000 for its Swiss subsidiary and a noncurrent tax
benefit of approximately $38,000 for the tax effect of the current quarter amortization related to
the intangible assets acquired in the Neurologic transaction which is not deductible.
As of March 31, 2007, the Company had federal, state and foreign net operating loss
carryforwards (NOLs) that are available to reduce future taxable income of approximately $36.0
million, $21.5 million and $0.9 million, respectively. The federal NOLs will expire at various
dates beginning in 2012, state NOLs will expire beginning in 2008 and the foreign NOLs will expire
beginning in 2013. The Company also has federal and state tax research and development credit
carryforwards of approximately $1.0 million and $0.9 million, respectively. The federal tax credit
carryforwards will expire beginning in 2012. The state tax credit carryforwards can be carried
forward indefinitely. Due to the uncertainty of its ability to generate sufficient taxable income
to realize the carryforwards prior to their expiration, the Company has recorded a valuation
allowance at June 30, 2007 to offset its federal and state deferred tax assets.
Note 5 Commitments and Contingencies
Indemnification
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.
Litigation
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.
FCPA investigation
In August 2004, the Company identified certain payments made to physicians located in France,
Germany, Spain and Turkey that are also likely to have violated the Foreign Corrupt Practices Act
(FCPA) and the laws of such countries as well as possibly the laws of Switzerland, where the
Companys Swiss subsidiary is located. The Companys audit committee immediately directed internal
legal counsel to conduct an internal investigation into these payments. In September 2004, the
Company voluntarily disclosed to the United States Department of Justice (DOJ) the factual
information obtained in the Companys internal investigation of potential violations
12
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, 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 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, where the Companys Swiss subsidiary is located. The Company is not able to determine
at this time what penalties or other sanctions, if any, authorities in France, Germany, Spain, or
Turkey 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. The Company has been notified by the
Swiss Federal Prosecutor that it does not intend to bring any action or impose any penalties on the
Company relating to its activities in Switzerland.
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 the
Companys embolic coil products infringe two patents held by Boston Scientific and that this
infringement is willful. Sales of the Companys embolic coil products currently represent virtually
all of the Companys revenues. Boston Scientific is a large, publicly-traded corporation with
significantly greater financial resources than the Company. In November 2004, the Company answered
Boston Scientifics complaint and counterclaimed, alleging that Boston Scientifics embolic coil
products, and their use, infringe three of the Companys patents. In November 2006, the Company
withdrew one of its three asserted patents from the litigation to pursue a reissue application
filed with the United States Trademark and Patent Office (USPTO). 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 embolic coil products 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 and ev3/Micro
Therapeutics, Inc. in which the Boston Scientific patents, which are the basis of Boston
Scientifics suit against the Company, 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 the Company, could have an adverse impact on certain of the Company
defenses in its 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 the Company
until the earlier of 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 Company subsequently negotiated with Boston Scientific, and the
Court confirmed, a schedule that would permit discovery and claim construction proceedings to
proceed for the second patent while it is still undergoing reexamination and reissue proceedings.
Since the stay was lifted, the Company and Boston Scientific have exchanged preliminary
infringement and invalidity contentions, expert reports, claim construction briefs, and have
deposed each others expert witnesses concerning each of the four patents-in-suit. Discovery is
ongoing in the case. A hearing on claim construction was held on June 1, 2007. The Court has not
calendared any other dates.
The Company is unable at this time to determine the outcome of any such litigation. As such,
no provision for any liability that may result upon resolution of these matters has been made in
the accompanying financial statements. If the litigation is protracted or
13
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 6 Stock-based Compensation
Stock options
The Companys stock option program is a long-term retention program that is intended to
attract, retain and provide incentives for talented employees, officers and directors, and to align
stockholder and employee interests. The Company considers the stock option program critical to its
operations and productivity. As of June 30, 2007, the Company has three stock option plans: the
1996 Stock Option Plan (the 1996 Plan), the 1998 Stock Plan (the 1998 Plan), and the 2005
Equity Incentive Plan (the 2005 Plan). Currently, the Company grants options from the 2005 Plan,
which permits the Company to grant options to all employees, including executive officers, and
outside consultants, and directors. Effective June 16, 2005, no new options may be granted under
the 1996 Plan or the 1998 Plan. As of June 30, 2007, there were no outstanding options under the
1996 Plan and 1,173,979 outstanding options under the 1998 Plan. As of June 30, 2007, there were
3,732,212 remaining shares reserved for issuance under the 2005 Plan, of which 1,660,429 were
available for grant, 2,065,117 shares were subject to outstanding options and 6,666 shares were
subject to outstanding restricted stock units. Stock options issued under the Companys stock
option plans generally vest based on 4 years of continuous service and have 10-year contractual
terms.
2005 Employee stock purchase plan
The 2005 Employee Stock Purchase Plan (the Purchase Plan) became effective upon the
Companys IPO. The Purchase Plan provides employees with an opportunity to purchase the Companys
common stock through accumulated payroll deductions. As of June 30, 2007, there were 548,188 shares
reserved for issuance under the Purchase Plan.
Stock-based compensation
On April 1, 2006, the Company adopted the provisions of SFAS 123R. The Companys financial
statements for the three months ended June 30, 2007 and 2006 reflect the impact of SFAS 123R. The
Company currently uses the Black-Scholes option pricing model to determine the fair value of
employee stock options and employee stock purchase plan shares. The determination of the fair value
of employee stock options and employee stock purchase plan shares has been estimated using the
following weighted-average valuation assumptions:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
June 30, |
|
|
2007 |
|
2006 |
Employee Stock Option Plans |
|
|
|
|
|
|
|
|
Expected term (in years) |
|
|
6 |
|
|
|
6 |
|
Volatility |
|
|
42 |
% |
|
|
46 |
% |
Risk-free interest rate |
|
|
4.8 |
% |
|
|
5.0 |
% |
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
Weighted average fair value at date of grant |
|
$ |
10.96 |
|
|
$ |
5.87 |
|
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan |
|
|
|
|
|
|
|
|
Expected term (in years) |
|
|
0.5 |
|
|
|
0.5 |
|
Volatility |
|
|
41 |
% |
|
|
39 |
% |
Risk-free interest rate |
|
|
5.1 |
% |
|
|
5.0 |
% |
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
The fair value of each purchase right granted under the Companys Purchase Plan
during the three months ended June 30, 2007 and 2006 was estimated at the date of grant using the
Black-Scholes option pricing model, and is not subject to revaluation as a result of subsequent
stock price fluctuations.
14
The stock-based compensation expense related to SFAS 123R is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
Cost of goods sold |
|
$ |
110 |
|
|
$ |
20 |
|
Research and development |
|
|
112 |
|
|
|
26 |
|
Sales and marketing |
|
|
240 |
|
|
|
126 |
|
General and administrative |
|
|
535 |
|
|
|
109 |
|
|
|
|
|
|
|
|
Total |
|
$ |
997 |
|
|
$ |
281 |
|
|
|
|
|
|
|
|
Additionally,
approximately $115,000 and $28,000 in stock-based compensation expense related to SFAS 123R
has been capitalized in inventory as of June 30, 2007 and 2006,
respectively.
As of June 30, 2007, there was approximately $11.3 million of total stock-based compensation
expense, after estimated forfeitures, related to unvested employee stock options and restricted
stock units, which is expected to be recognized over an estimated weighted average amortization
period 2.8 years.
Stock-based compensation expense recognized for the three months ended June 30, 2007 and 2006
related to the amortization of deferred stock-based compensation was $53,000 and $57,000,
respectively. The Company anticipates recording the remaining amortization of deferred compensation
of $111,000 in fiscal 2008. This deferred stock-based 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 previous years, certain stock options were issued to non-employees, generally in exchange
for consulting services related to patient studies or marketing analysis. The stock options are
recorded at their fair value on the date of vesting and recognized over the respective service or
vesting period. The fair value of the stock options granted was calculated at each reporting date
using the Black-Scholes option pricing model using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
June 30, |
|
|
2007 |
|
2006 |
Expected term (in years) |
|
|
5 |
|
|
|
5 |
|
Volatility |
|
|
41 |
% |
|
|
42 |
% |
Risk-free interest rate |
|
|
5.0 |
% |
|
|
5.2 |
% |
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
Stock-based compensation expense recognized for the three months ended June 30, 2007 and 2006
related to non-employee options was $6,000 and $102,000, respectively. The non-employee stock-based
compensation expense will fluctuate as the fair market value of the common stock fluctuates.
Total stock-based compensation expense included in the results of operations is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
Cost of goods sold |
|
$ |
116 |
|
|
$ |
27 |
|
Research and development |
|
|
112 |
|
|
|
43 |
|
Sales and marketing |
|
|
245 |
|
|
|
216 |
|
General and administrative |
|
|
583 |
|
|
|
154 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,056 |
|
|
$ |
440 |
|
|
|
|
|
|
|
|
15
General stock option information
The following table sets forth the summary of stock options activity for the three months
ended June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Aggregate |
|
|
|
Shares |
|
|
Exercise |
|
|
Term |
|
|
Intrinsic Value |
|
|
|
(in thousands) |
|
|
Price |
|
|
(in years) |
|
|
(in thousands) |
|
Beginning outstanding at March 31, 2007 |
|
|
3,182 |
|
|
$ |
10.71 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
213 |
|
|
$ |
22.65 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(92 |
) |
|
$ |
5.69 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(63 |
) |
|
$ |
13.28 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
(1 |
) |
|
$ |
13.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending outstanding at June 30, 2007 |
|
|
3,239 |
|
|
$ |
11.59 |
|
|
|
8.3 |
|
|
$ |
42,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at June 30, 2007 |
|
|
1,246 |
|
|
$ |
7.43 |
|
|
|
7.4 |
|
|
$ |
21,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total aggregate intrinsic value of options exercised during the three months ended June
30, 2007 and 2006 was $1.4 million and $340,000, respectively. The market value of a share of the
Companys common stock as of June 30, 2007 was $24.60 per share as reported by The NASDAQ Stock
Market.
The options outstanding and currently exercisable by exercise price at June 30, 2007 are as
follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Options Exercisable |
|
|
|
|
|
|
|
|
|
|
Average |
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Remaining |
|
Average |
|
|
|
|
|
Average |
Range of |
|
Number |
|
Contractual Life |
|
Exercise |
|
Number |
|
Exercise |
Exercise Prices |
|
Outstanding |
|
(years) |
|
Price |
|
Exercisable |
|
Price |
|
|
$ |
0.68 - $1.01 |
|
|
|
124 |
|
|
|
4.7 |
|
|
$ |
0.82 |
|
|
|
124 |
|
|
$ |
0.82 |
|
|
|
$ |
1.01 - $1.15 |
|
|
|
106 |
|
|
|
6.6 |
|
|
$ |
1.15 |
|
|
|
91 |
|
|
$ |
1.15 |
|
|
|
$ |
5.63 - $5.63 |
|
|
|
729 |
|
|
|
7.5 |
|
|
$ |
5.63 |
|
|
|
486 |
|
|
$ |
5.63 |
|
|
|
$ |
6.51 - $9.44 |
|
|
|
412 |
|
|
|
8.5 |
|
|
$ |
8.68 |
|
|
|
141 |
|
|
$ |
8.69 |
|
|
|
$ |
9.50 - $12.22 |
|
|
|
413 |
|
|
|
8.6 |
|
|
$ |
10.58 |
|
|
|
163 |
|
|
$ |
10.47 |
|
|
|
$ |
12.34 - $13.39 |
|
|
|
417 |
|
|
|
8.2 |
|
|
$ |
12.94 |
|
|
|
168 |
|
|
$ |
13.03 |
|
|
|
$ |
13.58 - $18.44 |
|
|
|
429 |
|
|
|
8.9 |
|
|
$ |
16.00 |
|
|
|
70 |
|
|
$ |
16.15 |
|
|
|
$ |
18.45 - $22.04 |
|
|
|
433 |
|
|
|
9.3 |
|
|
$ |
20.37 |
|
|
|
|
|
|
$ |
|
|
|
|
$ |
22.05 - $24.75 |
|
|
|
176 |
|
|
|
9.7 |
|
|
$ |
23.80 |
|
|
|
3 |
|
|
$ |
22.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.68 - $24.75 |
|
|
|
3,239 |
|
|
|
8.3 |
|
|
$ |
11.59 |
|
|
|
1,246 |
|
|
$ |
7.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
The following table sets forth the summary of restricted stock units activity for the three
months ended June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Aggregate |
|
|
|
|
|
|
|
Purchase |
|
|
Term |
|
|
Intrinsic Value |
|
|
|
Shares |
|
|
Price |
|
|
(in years) |
|
|
(in thousands) |
|
Non-vested restricted stock units at March 31, 2007 |
|
|
10 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Awarded |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Released |
|
|
(3 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock units at June 30, 2007 |
|
|
7 |
|
|
$ |
|
|
|
|
1.5 |
|
|
$ |
164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7 Segment and Geographic Information
Revenues from unaffiliated customers by geographic area, based on the customers shipment
locations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
United States |
|
$ |
8,666 |
|
|
$ |
5,943 |
|
Japan |
|
|
1,139 |
|
|
|
2,219 |
|
United Kingdom |
|
|
2,255 |
|
|
|
1,545 |
|
Rest of the world |
|
|
4,730 |
|
|
|
2,976 |
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
16,790 |
|
|
$ |
12,683 |
|
|
|
|
|
|
|
|
The
Companys long lived assets by geographic area were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
March 31, |
|
|
|
2007 |
|
|
2007 |
|
United States |
|
$ |
4,515 |
|
|
$ |
4,342 |
|
United Kingdom |
|
|
115 |
|
|
|
120 |
|
Rest of the world |
|
|
184 |
|
|
|
186 |
|
|
|
|
|
|
|
|
|
|
$ |
4,814 |
|
|
$ |
4,648 |
|
|
|
|
|
|
|
|
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 the following three business segments: the Americas, Europe and Asia
Pacific. The products sold by each segment are 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):
17
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
Revenues: |
|
|
|
|
|
|
|
|
Americas |
|
$ |
9,474 |
|
|
$ |
6,585 |
|
Europe |
|
|
5,868 |
|
|
|
3,728 |
|
Asia Pacific |
|
|
1,448 |
|
|
|
2,370 |
|
|
|
|
|
|
|
|
Total |
|
$ |
16,790 |
|
|
$ |
12,683 |
|
|
|
|
|
|
|
|
Gross Profit: |
|
|
|
|
|
|
|
|
Americas |
|
$ |
7,950 |
|
|
$ |
5,486 |
|
Europe |
|
|
4,192 |
|
|
|
2,477 |
|
Asia Pacific |
|
|
913 |
|
|
|
1,458 |
|
|
|
|
|
|
|
|
Total |
|
$ |
13,055 |
|
|
$ |
9,421 |
|
|
|
|
|
|
|
|
The Companys total assets by operating segment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
March 31, |
|
|
|
2007 |
|
|
2007 |
|
Americas |
|
$ |
51,774 |
|
|
$ |
56,507 |
|
Europe |
|
|
17,564 |
|
|
|
16,590 |
|
|
|
|
|
|
|
|
|
|
$ |
69,338 |
|
|
$ |
73,097 |
|
|
|
|
|
|
|
|
Note 8 Subsequent Event
On July 31, 2007, the Company entered into a five-year, exclusive distribution agreement with
Beijing Tian Xin Fu Medical Appliances Co., LTD (TXF Medical). Under the terms of the
distribution agreement, TXF Medical will promote and market the Companys full line of products, as
such products are approved, in China and is required to purchase a minimum of $53.5 million of such
products over the five year term of the agreement in order to maintain its exclusive distributor
status in China, ranging from $2.5 million during the fiscal
year ending March 31, 2008 to $16.5 million during the fiscal year ending March 31, 2012. The Company will begin distributing its
products through TXF Medical in the Chinese market upon receiving regulatory approval.
18
Item 2. 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 condensed 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 Quarterly Report on
Form 10-Q 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 II, Item 1A Risk Factors
in this Quarterly Report on Form 10-Q.
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 accessories for use with our microcoils and
other products for the treatment of neurovascular disease including microcatheters, guidewires and
stents. 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 geographic territories such as Asia where we introduced our products in Japan through
a distributor. We commenced selling our products in Japan in March 2006. On July 31, 2007, we
entered into an exclusive distribution agreement with TXF Medical to market our products in the
Chinese market. We will begin distributing our products through TXF Medical in the Chinese market
upon receiving regulatory approval.
Our revenues are derived primarily from sales of our microcoils. We also sell stents and
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, and
remain on site, free of charge until used.
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 we have launched seven new products in the
last 24 months, including
microcoils, stents, microcatheters and guidewires. During the first quarter of fiscal 2008, we
introduced two new products the Cashmere microcoil system and the ENZO steerable microcatheter.
The Cashmere is a platinum, stretch-resistant microcoil designed to provide stable framing or
filling of aneurysms that may require a softer microcoil, such as those with irregular shapes or
ruptured aneurysms. The ENZO steerable catheter is designed to offer improved maneuverability
through the brains tortuous vasculature and to enable in vivo repositioning of the microcatheter
in the aneurysm, allowing physicians to more efficiently fill aneurysms, which may lead to improved
outcomes. 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 the United States and Europe as
necessary and enter the Asian markets through distributors. In March 2006, we launched our sales
and marketing efforts in Japan through our distribution partner, Goodman, CO., LTD (Goodman). We
recorded product sales to Goodman of $2.2 million and $8.7 million in fiscal 2006 and 2007,
respectively, and $1.1 million in the first quarter of fiscal 2008. We are also
preparing to enter the Chinese market. We have selected TXF Medical to be our distributor in China.
We will begin selling our products in China upon receiving regulatory approval.
19
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 $58.8 million in fiscal 2007. Our revenues were
$16.8 million in the first quarter of fiscal 2008.
Since inception, we have been unprofitable. We incurred net losses of $6.7 million in fiscal
2005, $8.3 million in fiscal 2006, $5.5 million in fiscal 2007 and $1.4 million in the first
quarter of fiscal 2008. As of June 30, 2007, we had cash and cash equivalents of $28.6 million. 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. There is no assurance that we will be profitable in the foreseeable future
as we expand our manufacturing and sales activities and expand geographically. As of June 30, 2007,
we had an accumulated deficit of $56.5 million.
Recent Development
On July 31, 2007, we entered into a five-year, exclusive distribution agreement with TXF
Medical. Under the terms of the distribution agreement, TXF Medical will promote and market our
full line of products, as such products are approved, in China and is required to purchase a
minimum of $53.5 million of such products over the five year term of the agreement in order to
maintain its exclusive distributor status in China, ranging from $2.5 million during the fiscal
year ending March 31, 2008 to $16.5 million during the fiscal year ending March 31, 2012. We will
begin distributing its products through TXF Medical in the Chinese market upon receiving regulatory
approval.
Results of Operations
The following table sets forth the results of our operations, expressed as percentages of
revenues, for the three months ended June 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
June 30, |
|
|
2007 |
|
2006 |
Consolidated Statement of Operations Data: |
|
|
|
|
|
|
|
|
Revenues |
|
|
100 |
% |
|
|
100 |
% |
Cost of goods sold |
|
|
22 |
% |
|
|
26 |
% |
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
78 |
% |
|
|
74 |
% |
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Research and development |
|
|
12 |
% |
|
|
22 |
% |
Sales and marketing |
|
|
40 |
% |
|
|
45 |
% |
General and administrative |
|
|
36 |
% |
|
|
35 |
% |
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
88 |
% |
|
|
102 |
% |
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(10 |
)% |
|
|
(28 |
)% |
Interest and investment income |
|
|
2 |
% |
|
|
3 |
% |
Other income, net |
|
|
1 |
% |
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(7 |
)% |
|
|
(24 |
)% |
Provision (benefit) for income taxes |
|
|
1 |
% |
|
|
(1 |
)% |
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(8 |
)% |
|
|
(23 |
)% |
|
|
|
|
|
|
|
|
|
20
Three Months Ended June 30, 2007 and 2006
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
June 30, |
|
|
Change |
|
(Dollars in thousands) |
|
2007 |
|
|
2006 |
|
|
$ |
|
|
% |
|
Americas |
|
$ |
9,474 |
|
|
$ |
6,585 |
|
|
$ |
2,889 |
|
|
|
44 |
% |
Europe |
|
|
5,868 |
|
|
|
3,728 |
|
|
|
2,140 |
|
|
|
57 |
% |
Asia Pacific |
|
|
1,448 |
|
|
|
2,370 |
|
|
|
(922 |
) |
|
|
(39 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
16,790 |
|
|
$ |
12,683 |
|
|
$ |
4,107 |
|
|
|
32 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our revenues are derived primarily from sales of our microcoils used in the treatment of
cerebral vascular diseases. We also sell stents, access products and
accessories for use with our microcoils, which
currently do not account for a significant portion of our revenues. The increase in total revenues
in the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007 was primarily due
to an increase in the number of microcoil products, and to a lesser
extent the number of non-embolic 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,
expansion of our direct and distributor sales force and the introduction of new products including
stents and access products. Additionally, the increase in revenues was partially due to higher
average selling prices as a result of increased Cerecyte® and Presidio product sales in the first
quarter of fiscal 2008. Revenues from Asia Pacific were $1.4 million in the first quarter of
fiscal 2008, and included sales of $1.1 million to our distributor in Japan, compared with revenues
of $2.4 million in the first quarter of fiscal 2007, which included initial sales of $2.2 million
to our distributor in Japan. In February 2006, we received regulatory clearance to sell our
products in Japan through our distributor, and the sale of our products in Japan commenced in March
2006. Revenues from our non-embolic products were $0.6 million in the first quarter of fiscal 2008
compared with revenues of $19,000 in the first quarter of fiscal 2007.
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
June 30, |
|
Change |
(Dollars in thousands) |
|
2007 |
|
2006 |
|
$ |
|
% |
Cost of goods sold |
|
$ |
3,735 |
|
|
$ |
3,262 |
|
|
$ |
473 |
|
|
|
15 |
% |
Gross profit |
|
|
13,055 |
|
|
|
9,421 |
|
|
|
3,634 |
|
|
|
39 |
% |
Cost of goods sold consists primarily of materials, direct labor, depreciation, overhead costs
associated with manufacturing, impairments of inventory, warranty expenses, amortization of
intangible assets that were acquired by us as part of the acquisition of VasCon and amortization of
capitalized license technology. The increase in cost of goods sold during the first quarter of
fiscal 2008 as compared to the first quarter of fiscal 2007 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).
Additionally, cost of goods sold in the first quarter of fiscal 2008 includes the amortization of
intangibles acquired from the acquisition of VasCon on November 30, 2006 and the amortization of
capitalized license fees which we started to amortize in the third quarter of fiscal 2007 when we
began selling the Pharos stent product and generating revenue.
Gross margin was 78% in the first quarter of fiscal 2008 and 74% in the first quarter of
fiscal 2007. The increase was primarily due to an increase in revenue from sales of higher margin
products and manufacturing efficiencies, partially offset by distributor sales of lower
margin products primarily in Japan and certain European markets. We expect our gross margin to
fluctuate in future periods based on the mix of our product sales.
21
Operating Expenses
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
June 30, |
|
Change |
(Dollars in thousands) |
|
2007 |
|
2006 |
|
$ |
|
% |
Research and development |
|
$ |
1,965 |
|
|
$ |
2,754 |
|
|
$ |
(789 |
) |
|
|
(29 |
)% |
Research and development expenses consist primarily of costs associated with the design,
development, and testing of 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
decreased in the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007
primarily due to a milestone payment to Vascular FX in the first quarter of fiscal 2007 in
connection with the purchase of intellectual property in the amount of $1.5 million. We had
recorded the milestone payment to Vascular FX as research and development expense as there were no
regulatory clearances for a product at that time. This decrease was partially offset by an increase
of $537,000 related to increased headcount, an increase of $69,000 in stock-based compensation
expense and an increase of $59,000 in supplies expense. 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 developments, and expand our existing product line.
Sales and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
June 30, |
|
Change |
(Dollars in thousands) |
|
2007 |
|
2006 |
|
$ |
|
% |
Sales and marketing |
|
$ |
6,685 |
|
|
$ |
5,797 |
|
|
$ |
888 |
|
|
|
15 |
% |
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 increased in the first quarter of fiscal
2008 compared to the first quarter of fiscal 2007 primarily due to an increase of $379,000 in
travel and personnel costs due to an increase in sales and marketing personnel in the United States
and Europe, an increase of $256,000 in cost associated with meetings, training and conferences, an
increase of $189,000 primarily associated with the randomized post-marketing study of our Cerecyte®
product, as well as an increase of $95,000 in sales incentives on higher levels of sales. 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
June 30, |
|
Change |
(Dollars in thousands) |
|
2007 |
|
2006 |
|
$ |
|
% |
General and administrative |
|
$ |
6,101 |
|
|
$ |
4,449 |
|
|
$ |
1,652 |
|
|
|
37 |
% |
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, Sarbanes Oxley compliance
and information technology consulting. General and administrative expenses increased in the first
quarter of fiscal 2008 compared to the first quarter of fiscal 2007 primarily due to an increase of
$0.9 million related to higher finance and administrative personnel costs due to increased
headcount, an increase of $433,000 in stock-based compensation expense, as well as an increase of
$116,000 in legal fees associated with our FCPA compliance. 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.
22
Other Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
June 30, |
|
|
Change |
|
(Dollars in thousands) |
|
2007 |
|
|
2006 |
|
|
$ |
|
|
% |
|
Interest and investment income |
|
$ |
360 |
|
|
$ |
379 |
|
|
$ |
(19 |
) |
|
|
(5 |
)% |
Other income (expense), net |
|
|
78 |
|
|
|
204 |
|
|
|
(126 |
) |
|
|
(62 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net |
|
$ |
438 |
|
|
$ |
583 |
|
|
$ |
(145 |
) |
|
|
(25 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net consists primarily of investment income and foreign currency gains and
losses. Total other income, net decreased in the first quarter of fiscal 2008 compared to the first
quarter of fiscal 2007 primarily due to a decrease in foreign exchange gains resulting from
differences in exchange rates between the time of the recording of the transaction and settlement
of foreign currency denominated receivables and payables.
Income Taxes
Effective April 1, 2007, we adopted FIN 48, which requires that we recognize the financial
statement effects of a tax position when it becomes more likely than not, based on the technical
merits, that the position will be sustained upon examination. As a result of the implementation of
FIN 48, we recognized a $192,000 increase in our unrecognized tax benefits. None was accounted for
as an increase in the April 1, 2007 balance of accumulated deficit since the benefit relates to
attribute carryovers for which the related deferred tax asset was subject to a full valuation
allowance. At the adoption date of April 1, 2007 and at June 30, 2007, we had zero accrued
interest and penalties related to tax contingencies.
As of April 1, 2007, we had approximately $192,000 of unrecognized tax benefits. Since the
benefit relates to attribute carryover for which the related deferred tax asset was subject to a
full valuation allowance, the recognition of the unrecognized tax benefits will not affect our
effective tax rate. We have elected to include interest and penalties as a component of tax
expense. We do not anticipate that the amount of unrecognized tax benefits relating to tax
positions existing at March 31, 2007 will significantly increase or decrease within the next 12
months. Because of net operating loss and credit carryforwards, substantially all of our tax
years, dating to inception in 1996, remain open to federal tax examination. Most state and foreign
jurisdictions have 3 to 10 open tax years at any point in time.
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 tax. In the first quarter of fiscal 2008, we
recorded an income tax expense of approximately $135,000. The expense includes an income tax
expense of $173,000 for our Swiss subsidiary and a noncurrent tax benefit of approximately $38,000
for the tax effect of the current quarter amortization related to the intangible assets acquired in
the Neurologic transaction which is not deductible.
As of March 31, 2007, we had federal, state and foreign NOLs that are available to reduce
future taxable income of approximately $36.0 million, $21.5 million and $0.9 million, respectively.
The federal NOLs will expire at various dates beginning in 2012, state NOLs will expire beginning
in 2008 and the foreign NOLs will expire beginning in 2013. We also have federal and state tax
research and development credit carryforwards of approximately $1.0 million and $0.9 million,
respectively. The federal tax credit carryforwards will expire beginning in 2012. The state tax
credit carryforwards can be carried forward indefinitely. Due to the uncertainty of our ability to
generate sufficient taxable income to realize the carryforwards prior to their expiration, we have
recorded a valuation allowance at June 30, 2007 to offset our federal and state deferred tax
assets.
23
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
June 30, |
|
|
2007 |
|
2006 |
|
|
(Dollars in thousands) |
Cash flow activities: |
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
$ |
(3,753 |
) |
|
$ |
(2,961 |
) |
Net cash used in investing activities |
|
$ |
(2,719 |
) |
|
$ |
(2,336 |
) |
Net cash provided by financing activities |
|
$ |
522 |
|
|
$ |
97 |
|
Since our inception, we have funded our operations primarily through issuances of stock and
related warrants. From November 1996 to March 2005, issuances of convertible preferred stock and
related warrants provided us with aggregate proceeds of
$59.9 million, net of issuance costs. 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. On
July 19, 2006, we completed a
secondary public offering in which certain stockholders sold 1,270,211 shares of common stock at
the public offering price of $11.89 per share. On July 19, 2006, the underwriters purchased 190,531
shares of common stock from us pursuant to their over-allotment option. We did not receive any
proceeds from the sale of common stock by the selling stockholders. The total cash proceeds from
the over-allotment were approximately $2.0 million, net of underwriting discount and offering
expenses. Common stock offering expenses of $0.6 million were incurred by us on behalf of the
selling stockholders and were expensed to general and administrative expense in the second quarter
of fiscal 2007.
As of June 30, 2007, we had cash and cash equivalents of $28.6 million, compared to $34.5
million at March 31, 2007. 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 $3.8 million during the first quarter of fiscal 2008
compared to $3.0 million during the first quarter of fiscal 2007. Net cash used in operating
activities during the first quarter of fiscal 2008 resulted primarily from operating losses, an
increase in accounts receivable primarily due to an increase in the number of microcoil products
sold, an increase in inventory due to the buildup of finished goods inventory in anticipation of
future sales and an increase in the number of consignment locations, an increase in prepaid
expenses and other current assets primarily related to the payment of directors and officers
insurance premiums, a decrease in accrued payroll and related expenses attributable to the payment
of fiscal 2007 employee cash bonuses. These factors were partially offset by an increase in
accounts payable due to timing of payments made to our vendors, an increase in accrued liabilities
due to accrued professional fees associated with legal fees and Sarbanes Oxley compliance and
higher VAT payables, and non-cash items such as stock-based compensation expense primarily due to
SFAS 123R, depreciation and amortization, and provision for excess and obsolete inventories.
Net cash used in operating activities during the first quarter of fiscal 2007 resulted
primarily from operating losses, an increase in accounts receivable due to an increase in the
number of microcoil products sold, an increase in inventory primarily due to an increase in the
number of consignment locations, an increase in prepaid expenses and other current assets primarily
related to the payment of directors and officers insurance premiums, a decrease in accounts payable
due to timing of payments made to our vendors. These factors were partially offset by an increase
in accrued liabilities primarily due to accrued professional fees associated with legal fees and
Sarbanes Oxley compliance and higher VAT payables, an increase in stock-based compensation expense
primarily due to the adoption of SFAS No. 123R, an increase in depreciation and amortization, and
an increase in the provision for excess and obsolete inventories.
Net cash used in investing activities was $2.7 million during the first quarter of fiscal 2008
compared to $2.3 million during the first quarter of fiscal 2007. Net cash used in investing
activities during the first quarter of fiscal 2008 was primarily related to the earn-out payment
associated with the purchase of Neurologic and the purchase of capital equipment.
Net cash used in investing activities during the first quarter of fiscal 2007 was primarily
related to the earn-out payment
associated with the purchase of Neurologic, the milestone payment to Biotronik which has
been capitalized as licensed technology and the purchase of capital equipment.
24
Net cash provided by financing activities was $522,000 during the first quarter of fiscal 2008
compared to $97,000 during the first quarter of fiscal 2007. Net cash provided by financing
activities during the first quarter of fiscal 2008 and 2007 consisted of proceeds from the exercise
of stock options.
To the extent that existing cash and cash generated 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 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.
Our significant accounting policies are fully described in Note 2 to our Consolidated
Financial Statements included in our annual report filed on Form 10-K for the fiscal year ended
March 31, 2007, that was filed with the SEC on June 7, 2007
except for a description of our income
taxes critical accounting policy and our adoption of FIN 48
on April 1, 2007, the beginning of our 2008 fiscal year. See
Notes 2 and 4 for further information
regarding the adoption of FIN 48.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 defines fair
value, establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. SFAS 157 applies to other
accounting pronouncements that require or permit fair value measurements, the FASB having
previously concluded in those accounting pronouncements that fair value is the relevant measurement
attribute. Accordingly, this Statement does not require any new fair value measurements. However,
for some entities, the application of SFAS 157 will change current practice. The provisions of SFAS
157 are effective as of the beginning of our 2009 fiscal year. We are currently evaluating the
impact of SFAS 157, but do not expect the adoption of SFAS 157 to have a material impact on our
consolidated financial position, results of operations or cash flows.
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities, which expands opportunities to use fair value measurements in financial
reporting and permits entities to choose to measure many financial instruments and certain other
items at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We
are currently evaluating SFAS 159 to determine its impact on our consolidated financial position,
results of operations or cash flows.
Contractual Obligations
We have obligations under non-cancelable operating leases with various expiration dates
through 2013 and purchase commitments for inventory, capital equipment and operating expenses, such
as materials for research and development and consulting.
25
As of June 30, 2007, our contractual commitments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
Less than |
|
1-3 |
|
3-5 |
|
Beyond |
Contractual obligations: |
|
Total |
|
1 year |
|
years |
|
years |
|
5 years |
Non-cancelable operating lease obligations |
|
$ |
3,320 |
|
|
$ |
708 |
|
|
$ |
1,825 |
|
|
$ |
787 |
|
|
$ |
|
|
Purchase commitments |
|
|
2,016 |
|
|
|
2,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,336 |
|
|
$ |
2,724 |
|
|
$ |
1,825 |
|
|
$ |
787 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We are required to pay future earn-out amounts associated with the purchase of Neurologic. The
future earn-out payments will be one-third of Neurologics product sales during specified periods.
We are required to pay future earn-out amounts associated with the purchase of VasCon. The
future earn-out payments will be an amount not to exceed $10 million based on the sales and
manufacturing performance of Micrus Design Technology, Inc. as set forth in the asset purchase
agreement.
Item 3. 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 $165,000 related to our loan
with Micrus SA and a $110,000 increase in our comprehensive loss from our investment in Micrus SA
as of June 30, 2007. A hypothetical 10% decline in the value of the pound sterling versus the U.S.
dollar would cause us to recognize a $240,000 decrease in our comprehensive loss from our
investment in Micrus UK as of June 30, 2007. A hypothetical 10% decline in the value of the Euro
versus the Swiss franc would cause us to recognize a loss of $229,000 based on our foreign
denominated receivables as of June 30, 2007.
In the first quarter of fiscal 2008, approximately 35% of our revenues were 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.
Item 4. Controls and Procedures
(1) Disclosure controls and procedures
Our management, with the participation of 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 defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act). Based on their evaluation, they concluded that our
disclosure controls and procedures as of June 30, 2007 were 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.
26
(2) Changes in internal controls
There were no changes in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2007 that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
Part II OTHER INFORMATION
Item 1. Legal Proceedings.
FCPA Investigation
See
the risk factor regarding international operations on page 31 below for a discussion of
the FCPA investigation we carried out in 2004 and our resulting agreement with the Department of
Justice.
Patent Litigation
See
the risk factor regarding patent litigation below on page 28 for a detailed discussion of
our patent litigation with Boston Scientific Corporation.
Discovery is ongoing in the patent litigation with Boston Scientific Corporation. A hearing on
claim construction was held on June 1, 2007. The Court has not calendared any other dates.
Item 1A. Risk Factors.
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 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. For the first quarter of fiscal 2008, a
substantial portion of our product sales were to approximately 78 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
27
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
embolic coil products infringe two patents held by Boston Scientific and that this infringement is
willful. Sales of our embolic coil products 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 embolic coil products, and their use, infringe three of our
patents. In November 2006, we withdrew one of our three asserted patents from the litigation to
pursue a reissue application filed with the United States Trademark and Patent Office (USPTO).
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 embolic coil products 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 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 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. Micrus subsequently negotiated with Boston Scientific, and the Court
confirmed, a schedule that would permit discovery and claim construction proceedings to proceed for
the second patent while it is still undergoing reexamination and reissue proceedings. Since the
stay was lifted, Micrus and Boston Scientific have exchanged preliminary infringement and
invalidity contentions, expert reports, claim construction briefs, and have deposed each others
expert witnesses concerning each of the four patents-in-suit. Discovery is ongoing in the case. A
hearing on claim construction was held on June 1, 2007. The Court has not calendared any other
dates.
28
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 embolic coil products, 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 embolic coil products 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.
As a result of Boston Scientifics answer to our counterclaim that Boston Scientific infringes
our two remaining patents-in-suit, 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 uncertain, and we may never achieve profitability. We have incurred significant
net losses since our inception, including losses of approximately $5.5 million, $8.3 million and
$6.7 million for the fiscal year ended March 31, 2007, 2006 and 2005, respectively. We incurred a
net loss of $1.4 million and $3.0 million in the first quarter of fiscal 2008 and 2007,
respectively. At June 30, 2007, we had an accumulated deficit of $56.5 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 our operating expenses to
increase 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; |
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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. |
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
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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 Securities and Exchange Commission
(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 are also likely to
have 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 or Turkey may
impose on us as a result of such violations. Such amounts could be material to our financial
position, results of operations or cash flows. We have been notified by the Swiss Federal
Prosecutor that it does not intend to bring any action or impose any penalties on us relating to
our activities in Switzerland.
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 Cordis, ev3/Micro
Therapeutics and Terumo/MicroVention. 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 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
agreements with our distributors, we have no material long-term purchase agreements with our customers, who 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.
32
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, 2007, 2006 and 2005, revenues from customers outside the U.S. represented
approximately 51%, 53% and 48%, respectively, of our revenues. For the first quarter of fiscal
2008, revenues from customers outside the United States represented 48% of our revenues. We
anticipate that revenues from international customers will continue to represent a substantial
portion of our revenues as we continue to 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 first quarter of fiscal 2008, approximately 35% 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 pound 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. We currently do not enter into foreign currency forward
contracts and other arrangements intended to hedge our exposure to adverse fluctuations in exchange
rates.
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 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.
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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.
We are required to evaluate our internal control over financial reporting under Section 404 of
the Sarbanes-Oxley Act of 2002 and are exposed to future risks of non compliance.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404), we are required to
furnish a report by our management on our internal control over financial reporting. The report
contains, among other matters, an assessment of the effectiveness of our internal control over
financial reporting as of the end of our fiscal year, including a statement as to whether or not
our internal control over financial reporting is effective. This assessment must include disclosure
of any material weaknesses in our internal control over financial reporting identified by
management. The report must also contain a statement that our independent registered public
accounting firm has issued an attestation report on the effectiveness of internal control over
financial reporting.
We completed our assessment of our internal control over financial reporting as required by
Section 404 for the fiscal year ended March 31, 2007. Our assessment, testing and evaluation
resulted in our conclusion that as of March 31, 2007, our internal control over financial reporting
was effective. Our independent registered accounting firm has also expressed the opinion that our
internal controls over financial reporting were effective during that period. However, our
controls, may not prove to be adequate for the future periods and we cannot predict the outcome of
our testing in future periods. If our internal controls are deemed to be ineffective in future
periods, our financial results or the market price of our stock could be adversely affected. In any
event, we will incur additional expenses and commitment of managements time in connection with
further evaluations, which may adversely affect our future operating results and financial
condition.
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 revenues generated by sales of our products; |
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the costs associated with expanding our sales and marketing efforts; |
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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 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. 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 SEC and The
NASDAQ Stock Market; |
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the costs associated with our facilities expansion, if any; and |
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the costs associated with increased capital expenditures. |
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 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
35
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 several locations that may be at risk from
earthquakes or other natural disasters.
We currently conduct our manufacturing, development and management activities at two locations
in Silicon Valley, California, near known earthquake fault zones and in Doral, Florida, where there
is a risk of hurricanes. We have taken precautions to safeguard our facilities, including
insurance, health and safety protocols, and off-site storage of computer data. However, any future
natural disaster, such as an earthquake or hurricane, 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.
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 agreements with certain members of our senior management team, but none of these
agreements guarantee 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
36
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 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)
37
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 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 international reimbursement approvals would negatively
impact market acceptance of our products in the international markets in which those approvals are
sought.
38
In addition, in certain countries, such as France, Germany, China 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.
The adoption of Statement of Financial Accounting Standard No. 123R and changes to existing
accounting pronouncements or taxation rules or practices may affect how we conduct our business
and affect our reported results of operations.
On April 1, 2006, we adopted the provisions of, and account for stock-based compensation in
accordance with, the Financial Accounting Standards Boards (FASB) Statement of Financial
Accounting Standards No. 123-revised 2004 (SFAS 123R), Share-Based Payment, which replaced
Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based
Compensation and supersedes APB Opinion No. 25 (APB 25), Accounting for Stock Issued to
Employees. Under the fair value recognition provisions of this statement, stock-based compensation
cost is measured at the grant date based on the fair value of the award and is recognized as
expense on a straight-line basis over the requisite service period, which is generally the vesting
period. The effective date of this new standard under these new rules for our financial statements
was April 1, 2006. Adoption of this statement has had a significant impact on our consolidated
financial statements, as we are now required to expense the fair value of our stock option grants
and stock purchases under our employee stock purchase plan rather than disclose the impact on our
net loss within our footnotes. The impact of SFAS 123R on our consolidated financial statements and
related disclosures is, and is expected to continue to be, material to our results of operations.
Our future stock-based compensation expense will be dependent on a number of factors, including the
amount of awards granted and the fair value of those awards at the time of grant, as well as any
changes in variables or underlying assumptions used to determine fair value under our pricing
model. In addition, a change in accounting pronouncements or taxation rules or practices can have a
significant effect on our reported results and may even affect our reporting of transactions
completed before the change is effective. Other new accounting pronouncements or taxation rules and
varying interpretations of accounting pronouncements or taxation practice have occurred and may
occur in the future. Changes to existing rules, future changes, if any, or the questioning of
current practices may adversely affect our reported financial results or the way we conduct our
business.
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.
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 have wrongfully used or disclosed alleged trade
secrets of their former employers 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.
39
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 June 30, 2007, our executive officers, directors, and
stockholders holding more than 5% of our outstanding common stock and their affiliates, in the
aggregate, beneficially owned approximately 24% 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 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. |
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.
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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 SEC and by The
NASDAQ Stock 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 Stock Market and the market for medical device
companies in particular, has experienced extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of those companies. Further, the market
prices of securities of medical device companies have been particularly volatile. These broad
market and industry factors may materially harm the market price of our common stock, regardless of
our operating performance. In the past, following periods of volatility in the market price of a
particular companys securities, securities class action litigation has often been brought against
that company. We may become involved in this type of litigation in the future. Litigation often is
expensive and diverts managements attention and resources, which could materially harm our
financial condition and results of operations.
We 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:
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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; |
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provide for a classified board of directors, with each director serving a
staggered three-year term; |
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prohibit our stockholders from filling board vacancies, calling special
stockholder meetings, or taking action by written consent; |
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prohibit our stockholders from making certain changes to our amended and
restated certificate of incorporation or bylaws except with 66 2/3% stockholder
approval; and |
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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
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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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits.
See
the Index to Exhibits on Page 44 of this report
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 8, 2007
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By: |
/s/ John T. Kilcoyne
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John T. Kilcoyne |
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President and Chief Executive Officer |
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By: |
/s/ Robert A. Stern
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Robert A. Stern |
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Executive Vice President, Chief Financial Officer and Secretary |
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43
INDEX TO EXHIBITS
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Exhibit |
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Number |
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Description |
3.1
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Certificate of Incorporation (incorporated by reference to Exhibit 3.2 of Amendment No. 3 to the
Registrants Registration Statement on Form S-1 filed on May 17, 2005 Registration No.
333-123154) (Amendment No. 3) |
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3.2
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Bylaws (incorporated by reference to Exhibit 3.4 of Amendment No. 3) |
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4.1
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Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 of the Registrants
Registration Statement on Form S-1 filed on March 4, 2005 (Registration No. 333-123154) (Form
S-1) |
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4.2
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Warrant dated as of December 11, 2000 among the Registrant and Roberts Mitani Capital, LLC
(incorporated by reference to Exhibit 4.2 of Form S-1) |
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4.3
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Amended and Restated Stockholders Rights Agreement dated as of February 21, 2005 among the
Registrant and the parties listed therein (incorporated by reference to Exhibit 4.3 of Form S-1) |
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4.4
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Form of Common Stock Warrant issued in connection with the Series E Preferred Stock and Warrant
Purchase Agreement dated February 21, 2005, among the Registrant and the purchasers of the
Registrants Series E Preferred Stock (incorporated by reference to Exhibit 4.4 of Form 10-Q
filed on February 14, 2006) |
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10.26# |
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Amended and Restated Employee Cash
Bonus Plan with respect to Executive Officers |
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31.1#
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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 |
44