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 December 31, 2005
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 |
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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)
610 Palomar Avenue, Sunnyvale, CA 94085
(Former name, former address and former fiscal year, if changed since last report)
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. þYes 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 o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). o Yes No þ
Shares of the Registrants Common Stock, par value $0.01 per share, outstanding as of
February 1, 2006: 14,116,695
MICRUS ENDOVASCULAR CORPORATION
INDEX TO FORM 10-Q
2
Table
of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
MICRUS ENDOVASCULAR CORPORATION
Consolidated Balance Sheets
(unaudited)
(in thousands, except share and per share amounts)
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December 31, |
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March 31, |
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2005 |
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2005 |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
38,874 |
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$ |
15,017 |
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Short-term investments |
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2,981 |
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1,977 |
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Accounts receivable, net of allowance for doubtful accounts
of $216 at December 31, 2005 and $230 at March 31, 2005 |
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4,996 |
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4,486 |
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Inventories, net |
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4,484 |
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3,930 |
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Prepaid expenses and other current assets |
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1,194 |
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524 |
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Total current assets |
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52,529 |
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25,934 |
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Long term investments |
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977 |
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Property and equipment, net |
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2,000 |
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922 |
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Intangible assets, net |
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5,359 |
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550 |
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Other assets |
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208 |
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96 |
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Deferred initial public offering costs |
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1,295 |
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Total assets |
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$ |
60,096 |
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$ |
29,774 |
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LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS EQUITY (DEFICIT) |
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Current Liabilities: |
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Accounts payable |
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$ |
1,451 |
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$ |
2,641 |
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Accrued payroll and other related expenses |
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2,446 |
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1,663 |
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Accrued liabilities |
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2,190 |
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1,337 |
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Total current liabilities |
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6,087 |
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5,641 |
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Warrant liability |
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3,201 |
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Other non-current liabilities |
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563 |
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51 |
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Total liabilities |
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6,650 |
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8,893 |
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Commitments and contingencies (Note 5) |
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Redeemable convertible preferred stock, $0.01 par value; |
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Authorized: 1,000,000 shares |
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Issued and outstanding: none at December 31, 2005 and
7,680,943 shares at March 31, 2005 |
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58,442 |
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Stockholders equity (deficit): |
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Common stock, $0.01 par value; |
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Authorized: 50,000,000 shares |
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Issued and outstanding:14,105,584 shares at December 31, 2005 and
1,468,235 shares at March 31, 2005 |
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141 |
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15 |
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Additional paid-in capital |
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101,041 |
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4,397 |
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Deferred stock-based compensation |
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(454 |
) |
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(630 |
) |
Accumulated other comprehensive loss |
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(203 |
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(368 |
) |
Accumulated deficit |
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(47,079 |
) |
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(40,975 |
) |
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Total stockholders equity (deficit) |
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53,446 |
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(37,561 |
) |
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Total liabilities, redeemable convertible preferred stock
and stockholders equity (deficit) |
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$ |
60,096 |
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$ |
29,774 |
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The accompanying notes are an integral part of these consolidated financial statements.
3
MICRUS ENDOVASCULAR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
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Three months ended |
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Nine months ended |
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December 31, |
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December 31, |
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2005 |
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2004 |
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2005 |
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2004 |
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Revenues |
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$ |
8,092 |
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$ |
5,659 |
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$ |
21,334 |
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$ |
16,623 |
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Cost of goods sold |
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2,416 |
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1,948 |
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6,264 |
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5,622 |
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Gross profit |
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5,676 |
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3,711 |
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15,070 |
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11,001 |
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Operating expenses: |
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Research and development |
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834 |
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741 |
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4,072 |
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1,811 |
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Sales and marketing |
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4,049 |
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2,047 |
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9,767 |
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6,010 |
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General and administrative |
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2,638 |
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3,175 |
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7,098 |
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6,724 |
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Total operating expenses |
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7,521 |
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5,963 |
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20,937 |
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14,545 |
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Loss from operations |
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(1,845 |
) |
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(2,252 |
) |
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(5,867 |
) |
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(3,544 |
) |
Interest and investment income |
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389 |
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29 |
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900 |
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137 |
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Interest expense |
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(2 |
) |
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(14 |
) |
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(11 |
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(27 |
) |
Other income (expense), net |
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(132 |
) |
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460 |
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(681 |
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435 |
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Net loss before provision for income taxes |
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(1,590 |
) |
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(1,777 |
) |
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(5,659 |
) |
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(2,999 |
) |
Provision for income taxes |
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62 |
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62 |
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Net loss |
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(1,652 |
) |
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(1,777 |
) |
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(5,721 |
) |
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(2,999 |
) |
Accretion of redeemable convertible preferred
stock to
redemption value including
beneficial conversion feature |
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(138 |
) |
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(659 |
) |
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(412 |
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Net loss attributable to common stockholders |
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$ |
(1,652 |
) |
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$ |
(1,915 |
) |
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$ |
(6,380 |
) |
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$ |
(3,411 |
) |
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Net loss per share attributable to common
stockholders: |
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|
|
|
|
|
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Basic and diluted |
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$ |
(0.12 |
) |
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$ |
(1.35 |
) |
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$ |
(0.62 |
) |
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$ |
(2.49 |
) |
Weighted-average number of shares used in per
share calculations: |
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Basic and diluted |
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14,139 |
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1,415 |
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10,282 |
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1,371 |
|
The accompanying notes are an integral part of these consolidated financial statements.
4
MICRUS ENDOVASCULAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
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Nine months ended |
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December 31, |
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2005 |
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2004 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(5,721 |
) |
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$ |
(2,999 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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657 |
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|
372 |
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Provision for doubtful accounts |
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|
1 |
|
|
|
39 |
|
Loss on disposal of equipment |
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1 |
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Provision for impairment of inventory |
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164 |
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|
320 |
|
Increase in fair value of 2005 common stock warrants |
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158 |
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Realized loss on investments |
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5 |
|
|
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16 |
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Stock-based compensation expense |
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|
180 |
|
|
|
261 |
|
Changes in operating assets and liabilities: |
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Accounts receivable |
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(605 |
) |
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|
(369 |
) |
Inventories |
|
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(149 |
) |
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(1,827 |
) |
Prepaid expenses and other current assets |
|
|
(564 |
) |
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|
(218 |
) |
Other assets |
|
|
(114 |
) |
|
|
(51 |
) |
Accounts payable |
|
|
(1,378 |
) |
|
|
648 |
|
Accrued payroll and other related expenses |
|
|
808 |
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|
|
262 |
|
Accrued liabilities |
|
|
873 |
|
|
|
714 |
|
Other non-current liabilties |
|
|
512 |
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|
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Net cash used in operating activities |
|
|
(5,172 |
) |
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|
(2,832 |
) |
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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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(5,139 |
) |
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Acquisition of property and equipment |
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(1,458 |
) |
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|
(530 |
) |
Proceeds from sales of available-for-sale securities |
|
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|
3,074 |
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Net cash (used in) provided by investing activities |
|
|
(6,597 |
) |
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|
2,544 |
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Cash flows from financing activities: |
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Proceeds from issuance of common stock, net of issuance costs |
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33,871 |
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(688 |
) |
Proceeds from exercise of preferred and common stock warrants |
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|
1,007 |
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21 |
|
Proceeds from exercise of stock options |
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434 |
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|
156 |
|
Proceeds from employee stock purchase plan |
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126 |
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Payments of issuance costs for issuance of convertible preferred stock and warrants |
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(238 |
) |
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Net cash provided by (used in) financing activities |
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35,200 |
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(511 |
) |
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Effect of exchange rate changes on cash |
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426 |
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(416 |
) |
Net increase (decrease) in cash and cash equivalents |
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23,431 |
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(799 |
) |
Cash and cash equivalents at beginning of period |
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15,017 |
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|
4,927 |
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Cash and cash equivalents at end of period |
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$ |
38,874 |
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$ |
3,712 |
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Supplemental disclosure of cash flow information: |
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Interest paid |
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$ |
11 |
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$ |
28 |
|
Supplemental schedule of noncash investing and financing activities: |
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Conversion of preferred stock to common stock |
|
$ |
59,227 |
|
|
$ |
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|
Accretion to redemption value of redeemable convertible preferred stock |
|
$ |
659 |
|
|
$ |
412 |
|
including beneficial conversion feature |
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Reclassification of 2005 common stock warrants to equity |
|
$ |
3,358 |
|
|
$ |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
5
MICRUS ENDOVASCULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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.
Stock split
On June 10, 2005, the Company effected a one-for-2.25 reverse stock split of its preferred and
common shares. All preferred and common share data presented herein have been restated to
retroactively reflect the reverse stock split.
Initial public offering
On June 21, 2005, the Company completed an initial public offering (IPO) in which it sold
3,250,000 shares of common stock at $11.00 per share providing net cash proceeds to the Company of
approximately $33,248,000, net of underwriting discounts and commissions. Upon the closing of the
IPO, all of the Companys outstanding shares of redeemable convertible preferred stock
automatically converted into 7,919,626 shares of common stock. On July 6, 2005, the underwriters
purchased an additional 250,000 shares of common stock at $11.00 per share pursuant to their
over-allotment option. Together with the over-allotment shares sold by the Company, the total cash
proceeds to the Company in the offering were approximately $35,805,000, net of underwriting
discounts and commissions.
Interim unaudited financial information
The accompanying interim unaudited 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 Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally accepted accounting principles
for complete financial statements. The interim unaudited consolidated financial statements have
been prepared on the same basis as the annual financial statements. In the opinion of management,
the accompanying interim unaudited 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 contained in the Companys Amendment No. 6 of the
Registration Statement on Form S-1, declared effective by the Securities and Exchange Commission on
June 16, 2005.
The results of operations for the interim periods ended December 31, 2005 may not necessarily
be indicative of the results that may be expected for the fiscal year ended March 31, 2006 or any
future period.
Note 2 Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries, Micrus Endovascular SA and Micrus Endovascular UK Limited. All significant
intercompany balances and transactions have been eliminated in consolidation.
The Companys international subsidiaries use the local currency as their functional currency.
Assets and liabilities are translated at exchange rates in effect at the balance sheet date and
revenue and expense accounts are translated at average exchange rates during the period. Resulting
translation adjustments are recorded directly to accumulated other comprehensive income (loss).
6
Use of estimates
The preparation of consolidated financial statements in conformity with generally accepted
accounting principles 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.
Net loss per common share
Basic net loss per share is computed by dividing net loss attributable to common stockholders
by the weighted average number of common shares outstanding during the period. Diluted net loss per
share is computed by giving effect to all potential dilutive common shares, including options,
warrants and redeemable convertible preferred shares. There is no difference between basic and
diluted net loss per share for all periods presented. A reconciliation of the numerator and
denominator used in the calculation of basic and diluted net loss per share follows (in thousands):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,652 |
) |
|
$ |
(1,777 |
) |
|
$ |
(5,721 |
) |
|
$ |
(2,999 |
) |
Beneficial conversion feature of preferred stock |
|
|
|
|
|
|
|
|
|
|
(383 |
) |
|
|
|
|
Accretion of redemable convertible preferred stock
to redemption value |
|
|
|
|
|
|
(138 |
) |
|
|
(276 |
) |
|
|
(412 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders |
|
$ |
(1,652 |
) |
|
$ |
(1,915 |
) |
|
$ |
(6,380 |
) |
|
$ |
(3,411 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common stocks outstanding
used in computing basic and diluted net loss per share |
|
|
14,139 |
|
|
|
1,415 |
|
|
|
10,282 |
|
|
|
1,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive securities
The following outstanding options, redeemable convertible preferred shares and warrants were
excluded from the computation of diluted net loss per common share for the periods presented
because their impact would have been anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Redeemable convertible preferred stock (as if converted) |
|
|
|
|
|
|
6,328 |
|
|
|
|
|
|
|
6,328 |
|
Options to purchase common stock |
|
|
2,559 |
|
|
|
2,403 |
|
|
|
2,559 |
|
|
|
2,403 |
|
Warrants to purchase common stock |
|
|
|
|
|
|
834 |
|
|
|
|
|
|
|
834 |
|
Warrants to purchase redeemable convertible
preferred stock (as if converted) |
|
|
|
|
|
|
421 |
|
|
|
|
|
|
|
421 |
|
|
|
|
2,559 |
|
|
|
9,986 |
|
|
|
2,559 |
|
|
|
9,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and complies with the disclosure requirements of SFAS No. 148, Accounting for
Stock-Based Compensation and Disclosure, an amendment of the Financial Accounting Standards Board
(FASB) Statement No. 123. Under APB No. 25, compensation expense is based upon the excess of the
estimated fair value of the Companys stock over the exercise price, if any, on the grant date.
Employee stock-based compensation is amortized on a straight-line basis over the vesting period of
the underlying options. SFAS No. 123 defines a fair value based method of accounting for an
employee stock option or similar equity investment.
7
The Company accounts for equity instruments issued to non-employees in accordance with the
provisions of SFAS No. 123 and Emerging Issues Task Force (EITF) Issue No. 96-18, Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services, which requires that the fair value of such instruments be recognized
as an expense over the period in which the related services are received based on the fair value of
the instruments as they vest. Stock compensation expense for non-employee equity instruments is
recognized using the multiple option method as prescribed by Financial Accounting Standards Board
Interpretation (FIN) No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock
Option or Award Plans, as they vest.
The following table illustrates the effect on net loss if the Company had applied the fair
value recognition provisions of SFAS No. 123 to stock-based employee compensation arrangements (in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net loss attributable to common stockholders |
|
$ |
(1,652 |
) |
|
$ |
(1,915 |
) |
|
$ |
(6,380 |
) |
|
$ |
(3,411 |
) |
Add: Stock-based employee compensation
expenses included in reported net loss |
|
|
57 |
|
|
|
70 |
|
|
|
172 |
|
|
|
210 |
|
Deduct: Total stock-based employee
compensation expenses determined under
fair value based method for all awards |
|
|
(100 |
) |
|
|
(153 |
) |
|
|
(389 |
) |
|
|
(331 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net loss |
|
$ |
(1,695 |
) |
|
$ |
(1,998 |
) |
|
$ |
(6,597 |
) |
|
$ |
(3,532 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common stock, basic and diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
(0.12 |
) |
|
$ |
(1.35 |
) |
|
$ |
(0.62 |
) |
|
$ |
(2.49 |
) |
Adjusted |
|
$ |
(0.12 |
) |
|
$ |
(1.41 |
) |
|
$ |
(0.64 |
) |
|
$ |
(2.58 |
) |
The fair value of options was estimated as of the date of grant using the Black-Scholes
option-pricing method with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Risk-free interest rates |
|
|
4.36 |
% |
|
|
3.11 |
% |
|
|
4.32 |
% |
|
|
3.08 |
% |
Expected lives |
|
4 years |
|
3 years |
|
4 years |
|
3 years |
Dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Volatility factor |
|
|
43.5 |
% |
|
|
0 |
% |
|
|
43.5 |
% |
|
|
0 |
% |
Prior to the Companys initial filing on Form S-1 with the Securities and Exchange Commission
in March 2005, the fair value of option grants to employees was computed using the minimum value
method. Following the IPO, the value of each option has been estimated using the Black-Scholes
Model with a volatility rate which is based upon the expected volatility of the Companys stock
price over the life of the option. Future option grants to employees will continue to be valued
using an expected volatility factor and accordingly, the above results are not representative of
future results.
Recent accounting pronouncements
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, which replaced SFAS
No. 123 and superseded APB No. 25. SFAS No. 123R addresses the accounting for share-based payment
transactions in which a company receives employee services in exchange for either equity
instruments of the company or liabilities that are based on the fair value of the companys equity
instruments or that may be settled by the issuance of such equity instruments. Under SFAS No. 123R,
companies will no longer be able to account for share-based compensation transactions using the
intrinsic method in accordance with APB No. 25 but will be required to account for such
transactions using a fair-value method and recognize the expense in the consolidated statement of
earnings. SFAS No. 123R is effective beginning in the Companys first quarter of fiscal year 2007.
The Company has not yet determined which fair-value method and transitional provision it will
follow.
8
In June 2005, the FASB issued Staff Position (FSP) No. FAS 150-5 Issuers Accounting under
FASB Statement No.150 for Freestanding Warrants and Other Similar Instruments on Shares that are
Redeemable. The FSP requires that freestanding warrants and similar instruments on shares that are
redeemable should be accounted for as liabilities under FASB Statement No. 150 Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity regardless of the timing of the redemption feature
or price, even though the underlying shares may be classified as equity. The FSP is effective for
the first reporting period beginning after June 30, 2005. Although the Company does have
outstanding warrants, the common stock issuable upon exercise of the warrants are not redeemable;
consequently, FSP No. FAS 150-5 did not have a material impact on the Companys results of
operations or financial condition.
Note 3 Business Combination
On September 20, 2005, the Company entered into a Share Purchase Agreement (Purchase
Agreement) acquiring all of the outstanding capital stock of Neurologic UK Limited (Neurologic),
a privately held distributor of Micrus Endovascular products in the United Kingdom (UK).
Neurologic accounted for approximately 14% of the Companys revenues during the fiscal year ended
March 31, 2005. The acquisition of Neurologic, which was the Companys largest distributor, is
intended to provide the Company with additional leverage and a strengthened presence in the UK
market and the Company intends to use this acquisition as a platform to expand sales to existing
accounts and support sales to customers using alternative procedures and competing products.
The transaction included an initial cash payment of approximately $4,709,000 in addition to
future multi-year revenue based earn-out payments. All three earn-out payments shall be one-third
of Neurologics product sales during specified periods. In November 2005, the Company paid
additional consideration of approximately $120,000 as a purchase price adjustment pursuant to the
provisions of the Purchase Agreement.
As a result of the purchase of Neurologic, the Company has a new wholly owned subsidiary in
the UK and has changed the name from Neurologic to Micrus Endovascular UK Limited (Micrus
Endovascular UK). The Company concurrently entered into long term Services Agreements with each of
the two founders of Neurologic to provide for their employment by Micrus Endovascular UK.
In addition, pursuant to the Purchase Agreement, the two founders of Neurologic agreed to a
non-competition provision to last for a period of six years, under which they may not actively
carry on any business that would compete with Neurologics business within the UK or Ireland.
Similarly, they agreed not to solicit former clients, customers or suppliers of Neurologic for a
period of three years.
The transaction has been accounted for under the purchase method of accounting and,
accordingly, the results of operations are included in the accompanying unaudited consolidated
statements of operations for all periods or partial periods subsequent to the acquisition date.
The total purchase price of approximately $5,756,000 consisted of the cash payments of
$4,829,000, the assumed forgiveness of receivables from Neurologic to Micrus Endovascular SA at the
acquisition date of $611,000, and direct acquisition related costs of $316,000.
The net tangible assets acquired and liabilities assumed in the acquisition were recorded at
fair value. The Company determined the valuation of the identifiable intangible assets acquired in
the transaction to be $3,900,000 using future revenue assumptions and a valuation analysis from an
independent appraiser. The amounts allocated to the identifiable intangible assets were determined
through established valuation techniques accepted in the technology industry. Additionally, the
Company recorded goodwill of $993,000 associated with the purchase of Neurologic. During the
quarter ended December 31, 2005, the Company increased the goodwill balance by approximately
$199,000 due to the purchase price adjustment of $120,000, additional direct acquisition related
costs of $49,000, and an adjustment related to an assumed tax liability of $30,000.
The consideration paid for Neurologic was comprised of (in thousands):
|
|
|
|
|
Total cash payment |
|
$ |
4,829 |
|
Forgiven intercompany payables |
|
|
611 |
|
Direct acquisition related costs |
|
|
316 |
|
|
|
|
|
Total consideration |
|
$ |
5,756 |
|
|
|
|
|
9
The purchase price of Neurologic was allocated as follows (in thousands):
|
|
|
|
|
Acquired net assets |
|
$ |
664 |
|
Goodwill |
|
|
1,192 |
|
Other intangible assets consisting of: |
|
|
|
|
Customer relationships |
|
|
900 |
|
Distribution agreements |
|
|
2,300 |
|
Non-compete agreements |
|
|
700 |
|
|
|
|
|
Total purchase price |
|
$ |
5,756 |
|
|
|
|
|
The following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition (in thousands):
|
|
|
|
|
Cash |
|
$ |
6 |
|
Accounts receivable |
|
|
760 |
|
Inventories |
|
|
690 |
|
Prepaid expenses and other current assets |
|
|
143 |
|
|
|
|
|
Total current assets acquired |
|
|
1,599 |
|
Accounts payable |
|
|
(612 |
) |
Accrued and other liabilities |
|
|
(323 |
) |
|
|
|
|
Total current liabilities
assumed |
|
|
(935 |
) |
|
|
|
|
Net assets acquired |
|
$ |
664 |
|
|
|
|
|
Intangible assets
The components of intangible assets resulting from the Neurologic acquisition as of December
31, 2005 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying |
|
|
Accumulated |
|
|
Net carrying |
|
|
|
amount |
|
|
amortization |
|
|
amount |
|
Customer relationships |
|
$ |
900 |
|
|
$ |
49 |
|
|
$ |
851 |
|
Distribution agreements |
|
|
2,300 |
|
|
|
124 |
|
|
|
2,176 |
|
Non-compete agreements |
|
|
700 |
|
|
|
32 |
|
|
|
668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,900 |
|
|
$ |
205 |
|
|
$ |
3,695 |
|
|
|
|
|
|
|
|
|
|
|
The identifiable intangible assets are subject to amortization and have original estimated
useful lives as follows: customer relationships- five years, distribution agreements- five years,
non compete agreements- six years.
The future amortization of the identifiable assets is as follows (in thousands):
|
|
|
|
|
For Years Ended March 31, |
|
Amortization |
|
2006 (remaining 3 months) |
|
$ |
189 |
|
2007 |
|
|
757 |
|
2008 |
|
|
757 |
|
2009 |
|
|
757 |
|
2010 |
|
|
757 |
|
2011 |
|
|
424 |
|
2012 |
|
|
54 |
|
|
|
|
|
Total |
|
$ |
3,695 |
|
|
|
|
|
On July 28, 2005, the Company entered into a Technology Transfer Agreement with Vascular FX, a
Delaware limited liability company, pursuant to which the Company purchased the intellectual
property (IP) of Vascular FX. The $4.0 million cash purchase
10
price includes a $1.5 million payment at closing followed by milestone payments to be
made over time, in addition to royalty payments on potential future product sales. On January
31, 200 6, the Company made the first milestone payment of $1. 0 million. The Company has
recorded the initial and milestone payments as research and development expense since there are
currently no FDA approved products being sold and the intellectual property has no alternative
use.
Note 4 Balance Sheet Components
Inventories
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
March 31, |
|
|
|
2005 |
|
|
2005 |
|
Raw materials |
|
$ |
448 |
|
|
$ |
664 |
|
Work-in-progress |
|
|
432 |
|
|
|
722 |
|
Finished goods |
|
|
1,554 |
|
|
|
1,340 |
|
Consigned inventory |
|
|
2,760 |
|
|
|
1,794 |
|
Inventory held by Latin American distributors |
|
|
223 |
|
|
|
361 |
|
|
|
|
|
|
|
|
Total inventory |
|
|
5,417 |
|
|
|
4,881 |
|
Less inventory allowances |
|
|
(933 |
) |
|
|
(951 |
) |
|
|
|
|
|
|
|
Net inventory |
|
$ |
4,484 |
|
|
$ |
3,930 |
|
|
|
|
|
|
|
|
Consigned inventory is held at customer locations, primarily hospitals, and is under the
physical control of the customer. The Company retains title to the inventory until used and
purchased by the customer, generally when used in a medical procedure.
Accruals
Accrued payroll and other related expenses consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
March 31, |
|
|
|
2005 |
|
|
2005 |
|
Accrued bonuses |
|
$ |
1,091 |
|
|
$ |
579 |
|
Accrued salaries |
|
|
209 |
|
|
|
304 |
|
Accrued vacation |
|
|
665 |
|
|
|
504 |
|
Accrued 401(k) payable |
|
|
|
|
|
|
|
|
Accrued commissions |
|
|
217 |
|
|
|
113 |
|
Accrued payroll taxes |
|
|
264 |
|
|
|
163 |
|
|
|
|
|
|
|
|
Total |
|
$ |
2,446 |
|
|
$ |
1,663 |
|
|
|
|
|
|
|
|
Accrued liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
March 31, |
|
|
|
2005 |
|
|
2005 |
|
Accrued professional fees |
|
$ |
563 |
|
|
$ |
825 |
|
Accrued warranty |
|
|
75 |
|
|
|
77 |
|
Deferred revenue from Japan distribution agreement |
|
|
150 |
|
|
|
|
|
Accrued income tax payable United Kingdom |
|
|
172 |
|
|
|
|
|
VAT payable |
|
|
260 |
|
|
|
24 |
|
Accrued other |
|
|
970 |
|
|
|
411 |
|
|
|
|
|
|
|
|
Total |
|
$ |
2,190 |
|
|
$ |
1,337 |
|
|
|
|
|
|
|
|
11
Other non- current liabilities
Other non- current liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
March 31, |
|
|
|
2005 |
|
|
2005 |
|
Deferred revenue from Japan distribution agreement |
|
$ |
563 |
|
|
$ |
|
|
Other non-current liabilities |
|
|
|
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
$ |
563 |
|
|
$ |
51 |
|
|
|
|
|
|
|
|
On September 30, 2005, the Company entered into a five-year, exclusive Distribution Agreement
with Goodman, CO., LTD (Goodman). Under the terms of the Distribution Agreement, Goodman will
promote and market Micrus Endovasculars full line of products in Japan and will purchase a
minimum of $27.25 million of such products over the five year term of the agreement, ranging
from $2.0 million during the fiscal year ending March 31, 2006 to $9.0 million during the
fiscal year ending March 31, 2010. In connection with the Distribution Agreement, Goodman paid
the Company an up-front cash payment of $750,000 which has been recorded as deferred revenue.
The Company is recognizing the deferred revenue on a straight -line basis over the five year
term of the agreement.
Note 5 Commitments and Contingencies
Lease commitments
On June 6, 2005, the Company and its current landlord entered into a non-cancelable 7-year
lease agreement (the Lease). Pursuant to the Lease, the Company will lease approximately 42,
000 square feet of building space to be used as the Companys headquarters in the United States
with both administrative and manufacturing facilities. The Lease commenced in January 2006,
with an option for one 5 year extension that may be exercised by the Company.
The Lease provides for a base rent that increases periodically and averages approximately
$41,445 monthly over the lease period and is accounted for on a straight-line basis. The Lease
also provides for certain additional payments including the Companys share of landlords
operating expenses, including project costs, property taxes and overhead management fees.
The Companys old lease of approximately 20,000 square feet of building space with its
landlord terminated upon the commencement of the new lease.
Additionally, the Company leases office space for its two wholly -owned subsidiaries,
Micrus SA and Micrus UK, under non-cancelable lease agreements with terms through November 2011
and December 2010, respectively. The combined rent expense for the two operating leases is
approximately $90,000 annually. The leases also provide for certain additional payments
including the Companys share of the landlords operating expenses.
Future minimum lease payments are as follows (in thousands):
|
|
|
|
|
|
|
Minimum lease |
|
For Years Ended March 31, |
|
payments |
|
2006 (remaining 3 months) |
|
$ |
190 |
|
2007 |
|
|
649 |
|
2008 |
|
|
642 |
|
2009 |
|
|
629 |
|
2010 |
|
|
600 |
|
2011 and beyond |
|
|
1,360 |
|
|
|
|
|
Total minimum lease payments |
|
$ |
4,070 |
|
|
|
|
|
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
12
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 may likely have violated the Foreign Corrupt Practices
Act (FCPA) and the laws of certain foreign countries. In September 2004, the Company
voluntarily disclosed to the United States Department of Justice (DOJ) factual information
obtained in the Companys internal investigation of potential violations of the FCPA. In
February, 2005, the DOJ and the Company entered into an agreement pursuant to which the DOJ
agreed not to prosecute the Company for conduct disclosed to the DOJ, provided that the Company
accepted responsibility for the actions of its employees and officers, paid a monetary penalty
of $450,000, continues to cooperate with the DOJ in its investigation, 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 Company s implementation and adherence to FCPA compliance policies and procedures, and
cooperates fully with the DOJ, the independent monitor and the Securities and Exchange
Commission (SEC). The Company must remain in compliance with these conditions for a period of
two years following February 28, 2005 or face the filing of a criminal complaint by the DOJ.
The monetary penalty was accrued in fiscal 2005 and was paid in April 2005. The ongoing cost of
compliance with the DOJ agreement will be recorded as an expense as incurred.
The payments made to physicians in France, Germany, Spain and Turkey also may likely have
violated the applicable laws in those foreign jurisdictions and may possibly have violated laws
in Switzerland. The Company is not able to determine at this time what penalties or other
actions, if any, authorities in France, Germany, Spain, Turkey or Switzerland may impose as a
result of such violations. Such amounts could be material to the financial position, results of
operations or cash flows of the Company.
Patent Litigation
In September 2004, Boston Scientific Corporation (Boston Scientific), filed a patent
infringement suit in the United States District Court for the Northern District of California,
alleging that the Companys detachable coil devices infringed two patents held by Boston
Scientific. In November 2004, the Company answered Boston Scientifics complaint and
counterclaimed, alleging that Boston Scientifics occlusive products, and their use, infringed
three of the Companys patents. Each party is seeking an injunction preventing manufacture,
offer for sale, use and importation of the others detachable coil devices in the United
States, damages for past infringement, which may be trebled, and its legal fees and costs. In
addition, each party seeks a declaration that the patents of the other are invalid and not
infringed and has alleged that certain patents of the other are unenforceable due to
inequitable conduct.
Boston Scientific
is also a party in two other lawsuits against Cordis Corporation and
Micro Therapeutics, Inc. in which the Boston Scientific patents which are the basis of Boston
Scientifics suit against Micrus are also at issue. Those patents are currently being
reexamined by the United States Patent and Trademark Office (USPTO). In February 2005, the
court granted a stay of the Boston Scientific lawsuit against Micrus until the earlier of
twelve months or the outcome of the reexamination by the USPTO in the Cordis case. Micrus has
filed a motion to extend the stay pen ding reexamination of the patents. Unless this motion is
granted, discovery will commence following expiration of the stay on February 23, 2006.
The Company is unable at this time to determine the outcome of any such litigation. If the
litigation is protracted or results in an unfavorable outcome to the Company, the impact to the
financial position, results of operations or cash flows of the Company could be material.
Note 6 Redeemable Convertible Preferred Stock
The Companys Certificate of Incorporation, as amended, authorizes the Company to issue
1,000,000 shares of $0.01 par value preferred stock. As of December 31, 2005, there are no
shares of preferred stock issued or outstanding.
13
Conversion
Upon closing of the Companys IPO, all outstanding s hares of redeemable convertible
preferred stock automatically converted into 7,919,626 shares of common stock.
Redemption
The Companys preferred stock that was outstanding prior to the IPO was redeemable at the
request of the holder on or after the sixth anniversary of the original issuance dates based
upon certain circumstances. Prior to the closing of the IPO, the Company was accreting the
carrying value of the preferred stock from the issuance date to the mandatory redemption amount
on the sixth anniversary using the effective interest method through periodic charges to
additional paid-in capital and accumulated deficit.
Preferred Stock Warrants
In conjunction with its Series D and D-1 preferred stock financing in August 2000, the
Company issued warrants to Series D and Series D-1 stockholders to purchase shares of Series D
redeemable convertible preferred stock (the Series D preferred stock warrants). The total
proceeds of the issuance of the preferred stock in the financing was allocated between the
relative fair value of the preferred stock and the warrants, resulting in a discount to the
preferred stock which, prior to the closing of the IPO, was being accreted to its face amount
through periodic charges against additional paid-in capital and accumulated deficit through the
redemption date.
Between April 1, 2005 and the closing of the Companys IPO, the holders of warrants to
purchase 397,068 shares of Series D preferred stock exercised their warrants. Of these
warrants, the holders of warrants to purchase 365,196 shares elected to net exercise their
warrants which resulted in the issuance of 115,700 shares and no proceeds to the Company from
the exercise of these warrants. Holders of warrants to purchase 31,872 shares of Series D
preferred stock exercised their warrants providing proceeds to the Company of approximately
$240,000.
The warrants to purchase 7,753 shares of Series D preferred stock that were not exercised
prior to the closing of the IPO expired. None of these warrants remain outstanding at December
31, 2005.
Note 7 Common Stock
The Companys Certificate of Incorporation, as amended, authorizes the Company to issue
50,000,000 shares of $0.01 par value common stock. Each holder of common stock has the right to
one vote and is also entitled to receive dividends whenever funds are legally available and
when declared by the Board of Directors, subject to the prior rights of holders of all classes
of stock outstanding having priority rights as to dividends. No dividends have been declared or
paid as of December 31, 2005.
2000 Common Warrants
In December 2000, the Company entered into a warrant agreement with the Series D
redeemable convertible preferred stock financing placement agent. The Company issued warrants
to purchase 167,618 shares of common stock at an exercise price of $8.64 per share. These
warrants expired in December 2005.
2003 Common Warrants
In conjunction with the Series D-3 preferred stock financing in June 2003, the Company
issued warrants to the Series D-3 stockholders to purchase 666,644 shares of common stock at an
exercise price of $7.52 per share (the 2003 common stock warrants). The 2003 common stock
warrants were to expire upon the earlier of June 2008 or the closing of an IPO.
Between April 1, 2005 and the closing of the Companys IPO, the holders of warrants to
purchase 664,648 shares of the Companys common stock exercised their warrants. Of these
warrants, the holders of warrants to purchase 562,520 shares elected to net exercise their
warrants which resulted in the issuance of 178,216 shares of common stock and no proceeds to
the Company from the exercise of these warrants. Holders of warrants to purchase 102,128 shares
of common stock exercised their 2003 common stock warrants for cash providing proceeds to the
Company of approximately $768,000.
14
Of the 2003 common stock warrants, there were warrants to purchase 1,996 shares of common
stock that were not exercised prior to closing of the IPO and expired. None of these warrants
remain outstanding at December 31, 2005.
2005 Common Warrants
In conjunction with the Series E preferred stock financing in February and March of 2005,
the Company issued warrants to purchase common stock of the Company (the 2005 common stock
warrants). The 2005 common stock warrants were not initially exercisable, but were to become
exercisable for an aggregate of 671,614 shares of common stock at $9.00 per share if the
Company had not closed the IPO prior to December 31, 2005, or for an adjusted number of shares
(calculated based on the IPO price) with an exercise price of $0.000225 if the IPO closed prior
to December 31, 2005 at a price less than $13.50 per share. Based on the IPO price of $11.00
per share, the 2005 common stock warrants became exercisable for an aggregate of 305,272 shares
of common stock at an exercise price of $0.000225 per share.
Between April 1, 2005 and December 31, 2005, warrants to purchase 263,018 shares of common
stock were issued upon the exercise of warrants. All of these warrants were exercised at an
aggregate exercise price of $0.000225 per share. Warrants covering an aggregate of 238,761
shares of common stock were exercised without cash. In most cases the aggregate purchase price
was offset by the value of fractional shares payable upon exercise of such warrants; however an
aggregate of 2 shares were withheld in payment of the aggregate exercise price of one warrant
resulting in a net issue of 238,759. Warrants covering additional 24,259 shares of common stock
were exercised for cash. There were warrants to purchase 42,252 shares of common stock at an
exercise price of $0.000225 per share outstanding at December 31, 2005, which will expire on
January 1, 2011.
Prior
to the completion of the IPO, the 2005 common stock warrants were
accounted for as a liability and marked to market at each period-end date. The original aggregate fair value of
these warrants of $3,201,000 was recorded as a liability. Upon completion of the IPO, the fair
value of these warrants was approximately $3,359,000 and the Company recognized a
non-operating charge of $158,000 in the quarter ended June 30, 2005. Following the completion
of the IPO, these warrants are accounted for as a component of stockholders equity. Subsequent
changes in the fair value of these warrants will not be reflected in income.
The difference between the proceeds allocated to the Series E preferred stock and the
estimated fair value of the common stock issuable upon conversion resulted in a beneficial
conversion feature on the Series E preferred stock which was recorded as a reduction to the
Series E preferred stock and an increase to additional paid-in-capital. The total beneficial
conversion feature was $383,000 which, prior to the IPO, was being amortized as a reduction of
net income available to common stockholders over the period of redemption of the Series E
preferred stock. Upon completion of the IPO, the Company recorded a charge of $383,000 for the
beneficial conversion feature in the quarter ended June 30, 2005.
Note 8 Employee Benefit Plans
1996 Stock Option Plan
As of June 16, 2005 (the effective date of the IPO), 14,633 shares were available for
grant under the 1996 Plan. Upon the effectiveness of the Companys IPO, all shares available
for grant under the 1996 Plan became available for grant under the 2005 Plan. All options
previously granted under the 1996 Plan will continue to be administered under the 1996 Plan.
1998 Stock Plan
As of June 16, 2005 (the effective date of the IPO), 158,167 shares were available for
grant under the 1998 Plan. Upon the effectiveness of the Companys IPO, all shares available
for grant under the 1998 Plan became available for grant under the 2005 Plan. All options
previously granted under the 1998 Plan will continue to be administered under the 1998 Plan.
2005 Equity Incentive Plan
In March 2005, the Companys board of directors approved the 2005 Equity Incentive Plan
(the 2005 Plan) contingent upon stockholder approval of the 2005 Plan and the effectiveness
of the Companys IPO. Since the effectiveness of the IPO, the Company will no longer issue any
options under the 1996 Plan and the 1998 Plan and the issuance of options will be made solely
under the 2005 Plan.
15
The 2005 Plan provides for the issuance of both incentive stock options and nonqualified
stock options. The Company has reserved a total of 2,222,220 shares of its common stock for
issuance under the 2005 Plan. In addition, any authorized shares not issued under the 1998
Plan, on the effective date of the Companys IPO, as well as any shares that are (1) issuable
upon exercise of options granted pursuant to the 1998 Plan and the 1996 Plan that expire or
become unexercisable for any reason without having been exercised in full, and (2) are
forfeited or repurchased under the 1998 Plan and the 1996 Plan, will be available for grant
under the 2005 Plan.
Option activity under the 2005 Plan is as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options |
|
|
Options outstanding |
|
|
|
available |
|
|
Number |
|
|
Weighted average |
|
|
|
for grant |
|
|
of options |
|
|
exercise price |
|
Balance at March 31, 2004 |
|
|
235 |
|
|
|
1,620 |
|
|
$ |
0.83 |
|
Options authorized |
|
|
978 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
(1,265 |
) |
|
|
1,265 |
|
|
$ |
7.58 |
|
Options exercised |
|
|
|
|
|
|
(203 |
) |
|
$ |
0.88 |
|
Options forfeited |
|
|
186 |
|
|
|
(186 |
) |
|
$ |
1.97 |
|
Options canceled |
|
|
49 |
|
|
|
(49 |
) |
|
$ |
1.52 |
|
Common stock issued under the plan |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2005 |
|
|
179 |
|
|
|
2,447 |
|
|
$ |
4.06 |
|
Options authorized |
|
|
2,222 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
(721 |
) |
|
|
721 |
|
|
$ |
9.34 |
|
Options exercised |
|
|
|
|
|
|
(530 |
) |
|
$ |
0.82 |
|
Options forfeited |
|
|
79 |
|
|
|
(79 |
) |
|
$ |
7.80 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
1,759 |
|
|
|
2,559 |
|
|
$ |
6.10 |
|
|
|
|
|
|
|
|
|
|
|
|
The options outstanding and currently exercisable by exercise price at December 31, 2005
are as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options exercisable |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
average |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
remaining |
|
|
average |
|
|
|
|
|
|
average |
|
|
|
Number |
|
|
contractual life |
|
|
exercise |
|
|
Number |
|
|
exercise |
|
Exercise
Price |
|
Outstanding |
|
|
(years) |
|
|
price |
|
|
exercisable |
|
|
price |
|
$ 0.68 - $ 1.01 |
|
|
541 |
|
|
|
5.5 |
|
|
$ |
0.78 |
|
|
|
498 |
|
|
$ |
0.77 |
|
$ 1.13 - $ 1.15 |
|
|
156 |
|
|
|
7.0 |
|
|
$ |
1.14 |
|
|
|
100 |
|
|
$ |
1.14 |
|
$ 5.63 |
|
|
894 |
|
|
|
9.0 |
|
|
$ |
5.63 |
|
|
|
305 |
|
|
$ |
5.63 |
|
$ 6.51 - $ 9.89 |
|
|
463 |
|
|
|
10.0 |
|
|
$ |
8.55 |
|
|
|
64 |
|
|
$ |
7.54 |
|
$10.00 - $13.39 |
|
|
505 |
|
|
|
9.0 |
|
|
$ |
11.93 |
|
|
|
169 |
|
|
$ |
13.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 0.68 - $13.39 |
|
|
2,559 |
|
|
|
8.3 |
|
|
$ |
6.10 |
|
|
|
1,136 |
|
|
$ |
4.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
Stock-Based Compensation
In anticipation of the Companys IPO, the Company determined that for financial reporting
purposes the estimated value of its common stock was in excess of the exercise price for
certain option grants occurring in the fiscal year ended March 31, 2004. The Company records
the deferred compensation expense on a straight-line basis over the vesting period , reduced
for any cancellation of unvested options. For the three and nine months ended December 31, 2005
and 2004, the Company recorded employee stock-based compensation expense of $57,000, $70,000,
$172,000 and $210,000, respectively.
Non-Employee Options
The Company believes that the fair value of the stock options issued to non-employees is
more reliably measurable than the fair value of the services received. The fair value of the
stock options granted is calculated at each reporting date using the Black-Scholes
option-pricing model as prescribed by SFAS No. 123 using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Risk-free interest rate |
|
|
4.39 |
% |
|
|
4.62 |
% |
Expected life (in years) |
|
6 years |
|
7 years |
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
Volatility |
|
|
48 |
% |
|
|
51 |
% |
The stock -based compensation expense will fluctuate as the fair market value of the common stock fluctuates. For the three and
nine months ended December 31, 2005 and 2004, the Company recorded non-employee stock based compensation expense (income)
of $(1,000), $38,000, $8,000 and $51,000, respectively.
The non-cash employee and non -employee stock-based compensation has been recorded as follows:
Formatted: Font: 8 pt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Cost of goods sold |
|
$ |
6 |
|
|
$ |
7 |
|
|
$ |
19 |
|
|
$ |
20 |
|
Research and development |
|
|
(2 |
) |
|
|
10 |
|
|
|
7 |
|
|
|
20 |
|
Sales and marketing |
|
|
2 |
|
|
|
36 |
|
|
|
22 |
|
|
|
60 |
|
General and administrative |
|
|
50 |
|
|
|
55 |
|
|
|
132 |
|
|
|
161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
56 |
|
|
$ |
108 |
|
|
$ |
180 |
|
|
$ |
261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Employee Stock Purchase Plan
In March 2005, the Companys board of directors approved the 2005 Employee Stock Purchase
Plan (the Purchase Plan), contingent on stockholder approval and the effectiveness of the
IPO. The stockholders approved the Purchase Plan in May 2005 and the board of directors amended
the plan in June 2005. The Purchase Plan became effective when the public offering for the
Companys common stock commenced on June 17, 2005. The Purchase Plan provides employees with an
opportunity to purchase the Companys common stock through accumulated payroll deductions.
The Company has reserved total of 222,222 shares of common stock for issuance under the
Purchase Plan. In addition, the Purchase Plan provides for annual increases in the total number
of shares available for issuance under this plan on April 1 of each year during the term of the
Purchase Plan beginning on April 1, 2006, by a number of shares that is equal to the least of:
(1) 2% of the outstanding shares of the Companys common stock on the immediately preceding
March 31; (2) 222,222 shares; or (3) a lesser number determined by the Companys board of
directors.
The Purchase Plan permits participants to purchase the Companys common stock through
payroll deductions of up to 15% of the participants compensation, up to a maximum of $25,000
per year, and up to a maximum of 1,111 shares per purchase period. Amounts deducted and
accumulated for the participants account are used to purchase shares of the Companys common
stock on the last trading day of each purchase period at a price of at least 85% of the lesser
of the fair market values of the common stock at the beginning of the offering period or at the
end of the purchase period.
17
The Purchase Plan provides for offering periods of 12 months and purchase periods of 6
months or such shorter period as may be established by the Companys board of directors. The
offering periods start on April 1 and October 1 of each year; provided, however, that the
initial offering period shall commence on the effective date of the IPO and end on September
30, 2005. During the quarter ended September 30, 2005, there were 15,016 shares issued under
the Purchase Plan at a purchase price of $8.41 per share.
Note 9 Segments
The Company identifies its operating segments based on how management views and evaluates
the Companys operations, which is primarily based on geographic location. For all periods
presented, the Company operated in two business segments, the Americas and Europe. The products
and services sold by each segment is substantially the same and the Company evaluates
performance and allocates resources primarily based on revenue and gross profit. Revenue and
gross profit for these segments were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
4,796 |
|
|
$ |
3,399 |
|
|
$ |
12,490 |
|
|
$ |
9,590 |
|
Europe |
|
|
3,296 |
|
|
|
2,260 |
|
|
|
8,844 |
|
|
|
7,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,092 |
|
|
$ |
5,659 |
|
|
$ |
21,334 |
|
|
$ |
16,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
3,826 |
|
|
$ |
2,349 |
|
|
$ |
10,739 |
|
|
$ |
7,774 |
|
Europe |
|
|
1,850 |
|
|
|
1,362 |
|
|
|
4,331 |
|
|
|
3,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,676 |
|
|
$ |
3,711 |
|
|
$ |
15,070 |
|
|
$ |
11,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 10 Subsequent Event
On January 6, 2006, the Company entered into a License, Development and Distribution
Agreement (the Biotronik Agreement) with Biotronik AG, a Swiss corporation ( Biotronik),
pursuant to which the Company will be the exclusive worldwide distributor for neurovascular
products developed based the Biotronik Agreement. Pursuant to the Biotronik Agreement,
Biotronik and the Company will collaborate to develop certain neurovascular products. In
addition, pursuant to the Biotronik Agreement, Biotronik granted to the Company an exclusive
license to certain patents, know-how and other proprietary technology in the neurovascular
field. The Biotronik Agreement has a term that is perpetual unless earlier terminated by the
parties or by operation of law.
Under the terms of the Biotronik Agreement, the Company has paid an upfront licensing fee
of 500,000 Euros, or approximately $610,000, and will make milestone payments to Biotronik upon
receipt of approvals to market products jointly developed through the Biotronik Agreement.
Additionally, the Company will fund ongoing project development, make payments based on the
achievement of certain predetermined milestones and pay royalties on products sold based on
this agreement.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the financial condition and results of operations
of the Company should be read in conjunction with the consolidated financial statements with
the Risk Factors listed under Part II, Item 1A of this Quarterly Report on Form 10-Q, with the
related notes included elsewhere in this Quarterly Report on Form 10-Q and with other factors
described from time to time in our other filings with the Securities and Exchange Commission,
or SEC. 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 below and elsewhere 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. Our products are used by interventional
neuroradiologists and neurosurgeons primarily to treat cerebral aneurysms responsible for
hemorrhagic stroke, a significant cause of death in the United States. Our product line is an
endovascular system that
18
enables a physician to gain access to the brain in a minimally invasive manner through
the vessels of the circulatory system. We believe our products provide a safe and reliable
alternative to neurosurgical procedures for treating aneurysms. Our proprietary,
three-dimensional, embolic coils are unique in that they automatically deploy within an
aneurysm, forming a scaffold that conforms to a wide diversity of aneurysm shapes and sizes. We
also sell accessory devices and products used in conjunction with our microcoils to treat
cerebral aneurysms. We plan on growing our business by continuing to penetrate our existing
markets, bringing new products and technologies to interventional neuroradiologists and
neurosurgeons, and by entering new markets such as Asia where we currently do not sell our
products.
Our revenues are derived primarily from sales of our microcoils. We also sell accessory
devices, which currently do not account for a significant portion of our revenues. Geo
graphically, our revenues are generally split between customers in the Americas and Europe. Our
products are shipped from our facilities in the United States, Switzerland, United Kingdom, and
a logistics facility in the Netherlands, to either hospitals or distributors. We invoice our
customers upon shipment. In select hospitals, our products are held on consignment, free of
charge and remain on site, provided the hospital orders minimum monthly quantities of our
products. In those cases, hospitals are invoiced upon receipt of notice of product use.
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, we expect our gross
margin percentage may decrease in those quarters in which we initiate sales of a new product or
product line, or enter new geographic territories. In August 2004, we introduced our Cerecyte®
microcoil product line incorporating a bioactive filament in our MicruSphere ®, HeliPaq® and
UltiPaq® microcoils. In November 2005, we introduced our PresidioTM microcoil
product line for the treatment of large, irregular cerebral aneurysms. In December 2005 , we
introduced our Cerecyte 18 microcoil, which expands our Cerecyte product line to include
additional microcoils that enable the treatment of large cerebral aneurysms. Our product
development efforts are primarily focused on expanding our current line of microcoils and
broadening our accessory product offerings. We also intend to expand our direct sales force
worldwide and enter the Asian market. On September 30, 2005, the Company entered into a
five-year, exclusive distribution agreement with Goodman, CO., LTD (Goodman). Under the terms
of the distribution agreement, Goodman will promote and market Micrus Endovasculars full line
of products in Japan once we receive the requisite local regulatory approvals.
As we expect to continue to incur net losses for the foreseeable future as described
below, we currently anticipate that the broadening of our product line, the worldwide expansion
of our direct sales force and our entry into the Asian market will be primarily funded with our
currently available cash which includes the net proceeds from our recent initial public
offering.
We introduced our first proprietary, three-dimensional microcoil in May 2000. Our revenues
have grown from $1.8 million in fiscal 200 1, to $24.0 million in fiscal 2005 and to $21.3
million in the first nine months of fiscal 2006.
Since inception, we have been unprofitable. We have incurred net losses of $4.2 million in
fiscal 2003, $2.0 million in fiscal 2004, $6.7 million in fiscal 2005 and $5.7 million in the
first nine months of fiscal 2006. We expect to continue to incur net losses for the foreseeable
future as we expand our manufacturing and sales activities and expand geographically. As of
December 31, 2005, we had an accumulated deficit of $47.1 million.
Recent Developments
On June 6, 2005, we signed a new lease agreement for expanded facilities which will allow
us to increase our manufacturing capacity. We believe this additional capacity will allow us to
meet the anticipated demand for our products and improve manufacturing efficiencies.
On June 21, 2005, we completed an initial public offering (IPO) in which we sold
3,250,000 shares of common stock at $11.00 per share for net cash proceeds of approximately
$33.2 million, net of underwriting discounts and commissions.
On July 6, 2005, we sold an additional 250,000 shares of our common stock at $11.00 per
share pursuant to the over-allotment option granted by us to the underwriters of our IPO. The
net proceeds to us from the exercise of the over-allotment option was approximately $2.6
million. Together with the over -allotment shares sold by the Company, the total cash proceeds
in the offering to the Company were approximately $35.8 million, net of underwriting discounts
and commissions.
On July 28, 2005, the Company entered into a Technology Transfer Agreement with Vascular
FX, a Delaware limited liability company, pursuant to which the Company purchased the
intellectual property of Vascular FX. The $4.0 million cash purchase price
19
includes a $1.5 million payment at closing followed by milestone payments to be made over time,
in addition to royalty payments on potential future product sales. On January 31, 200 6, we
made the first milestone payment of $1.0 million.
On September 20, 2005, we entered into a Share Purchase Agreement (Purchase Agreement)
with Mark Ellis and James MacKenzie for the entire issued share capital of Neurologic UK
Limited (Neurologic), a privately held distributor of Micrus Endovascular products in the
United Kingdom. Neurologic accounted for approximately 14% of our revenues during the fiscal
year ended March 31, 2005.
Pursuant to the Purchase Agreement, Mark Ellis sold 50 Ordinary Shares, and James
MacKenzie sold 50 Ordinary Shares to the Company for an initial cash consideration of
approximately $4,709,000 in addition to future multi-year revenue based earn-out payments. All
three earn -out payments will be one-third of Neurologics product sales during specified
periods. In November 2005, we paid additional consideration of approximately $120,000 as a
purchase price adjustment pursuant to the provisions of the Purchase Agreement.
After the purchase of Neurologic, the Company has a new wholly owned subsidiary in the UK
and has changed the name from Neurologic to Micrus Endovascular UK Limited (Micrus
Endovascular UK). The Company concurrently entered into long term Services Agreements with
each of the two founders of Neurologic to provide for their employment by Micrus Endovascular
UK.
In addition, pursuant to the Purchase Agreement, Mark Ellis and James MacKenzie agreed to
a non-competition provision to last for a period of six years, under which they may not
actively carry on any business that would compete with Neurologics business within the UK or
Ireland. Similarly, they have agreed not to solicit former clients, customers or suppliers of
Neurologic for a period of three years from September 20, 2005.
The transaction has been accounted for under the purchase method of accounting and,
accordingly, the results of operations for the partial period subsequent to the acquisition
date are included in the accompanying unaudited consolidated statements of operations.
The total purchase price of approximately $5,756,000 consisted of th e initial cash
payment of $4, 709,000, the additional payment for the purchase price adjustment of $120,000,
the assumed forgiveness of receivables from Neurologic to Micrus Endovascular SA at the
acquisition date of $611,000, and direct acquisition related costs of $316,000. The net
tangible assets acquired and liabilities assumed in the acquisition were recorded at fair
value. The Company determined the valuation of the identifiable intangible assets acquired in
the transaction to be $3,900,000. Additionally, the Company recorded goodwill of $1,192,000
associated with the purchase of Neurologic.
On September 30, 2005 , we entered into a five-year, exclusive Distribution Agreement with
Goodman, CO., LTD (Goodman). Under the terms of the Distribution Agreement, Goodman will
promote and market Micrus Endovasculars full line of products in Japan and will purchase a
minimum of $27.25 million of such products over the five year term of the agreement, ranging
from $2.0 million during fiscal year 2006 to $9.0 million during fiscal year 2010. The initial
term of the Distribution Agreement is five years, subject to the right of the parties to
terminate earlier based upon the occurrence of certain events, and automatically renews for
successive one year periods unless otherwise determined by either party. In connection with the
Distribution Agreement, Goodman paid us an up-front cash payment of $750,000 which has been
recorded as deferred revenue. We are recognizing the deferred revenue on a straight-line basis
over the five year term of the agreement.
On January 6, 2006, the Company entered into a License, Development and Distribution
Agreement (the Biotronik Agreement) with Biotronik AG, a Swiss corporation ( Biotronik),
pursuant to which the Company will be the exclusive worldwide distributor for neurovascular
products developed based on the Biotronik Agreement. Pursuant to the Biotronik Agreement,
Biotronik and the Company will collaborate to develop certain neurovascular products. In
addition, pursuant to the Biotronik Agreement, Biotronik granted to the Company an exclusive
license to certain patents, know-how and other proprietary technology in the neurovascular
field. The Biotronik Agreement has a term that is perpetual unless earlier terminated by the
parties or by operation of law.
Under the terms of the Biotronik Agreement, the Company has paid an upfront licensing fee
of 500,000 Euros, or approximately $610,000, and will make milestone payments to Biotronik upon
receipt of approvals to market products jointly developed through the Biotronik Agreement.
Additional ly, the Company will fund ongoing project development, make payments based on the
achievement of certain predetermined milestones and pay royalties on products sold based on
this agreement.
20
Results of Operations
The following table sets forth the results of our operations, expressed as percentages of
revenues, for the three and nine months ended December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
% |
|
|
% |
|
|
% |
|
|
% |
|
Consolidated Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Cost of goods sold |
|
|
30 |
% |
|
|
34 |
% |
|
|
29 |
% |
|
|
34 |
% |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
70 |
% |
|
|
66 |
% |
|
|
71 |
% |
|
|
66 |
% |
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
10 |
% |
|
|
13 |
% |
|
|
19 |
% |
|
|
11 |
% |
Sales and marketing |
|
|
50 |
% |
|
|
36 |
% |
|
|
46 |
% |
|
|
36 |
% |
General and administrative |
|
|
33 |
% |
|
|
56 |
% |
|
|
33 |
% |
|
|
40 |
% |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
93 |
% |
|
|
105 |
% |
|
|
98 |
% |
|
|
87 |
% |
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(23 |
%) |
|
|
(39 |
%) |
|
|
(27 |
%) |
|
|
(21 |
%) |
Interest and investment income |
|
|
5 |
% |
|
|
1 |
% |
|
|
4 |
% |
|
|
1 |
% |
Interest expense |
|
|
0 |
% |
|
|
(0 |
%) |
|
|
0 |
% |
|
|
0 |
% |
Other income, net |
|
|
(2 |
%) |
|
|
8 |
% |
|
|
(3 |
%) |
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
Net loss before provision for income taxes |
|
|
(20 |
%) |
|
|
(30 |
%) |
|
|
(26 |
%) |
|
|
(17 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
1 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(21 |
%) |
|
|
(30 |
%) |
|
|
(26 |
%) |
|
|
(17 |
%) |
Accretion of redeemable convertible preferred stock to
redemption value including beneficial conversion feature |
|
|
0 |
% |
|
|
(2 |
%) |
|
|
(3 |
%) |
|
|
(3 |
%) |
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders |
|
|
(21 |
%) |
|
|
(32 |
%) |
|
|
(29 |
%) |
|
|
(20 |
%) |
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2005 and 2004
Revenues
Our revenues are derived primarily from sales of our microcoils and to a lesser extent
sales of accessory devices used in the treatment of cerebral vascular diseases. Our revenues
were $8.1 million in the third quarter of fiscal 2006, an increase of $2.4 million or 43% from
$5.7 million in the third quarter of fiscal 2005. This increase was primarily due to an
increase in the number of microcoils shipped during this period. Factors driving this increase
included growth in the overall market for embolic coils, an increase in our share of both the
domestic and foreign markets in which we participate and the launch of our Cerecyte microcoil
product line in August 2004.
Gross Profit
Cost of goods sold consists of materials, direct labor, overhead costs associated with
manufacturing, impairments of inventory and warranty expenses. Cost of goods sold were $2.4
million in the third quarter of fiscal 2006, an increase of $0.5 million or 24% from $1.9
million in the third quarter of fiscal 2005. The in crease in cost of goods sold during the
third quarter of fiscal 2006 as compared to the corresponding quarter in the prior year was
primarily from increased 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.
Gross profit was $5.7 million in the third quarter of fiscal 2006, an increase of $2.0
million or 53% from $3.7 million in the third quarter of fiscal 2005. Gross margin was 70% in
the third quarter of iscalf 2006 and 66% in the third quarter of fiscal 2005. The increase was
primarily due to an increase in revenue from sales of higher margin products and manufacturing
efficiencies , partially offset by the increase in cost of goods sold of $267,000 primarily due
to higher per unit cost of inventory acquired in connection with the purchase of Neurologic
that was sold in the third quarter of fiscal 2006. We expect our gross margins to fluctuate in
future periods based on the mix of our product sales.
Operating Expenses
Research and Development. Research and development expenses consist primarily of costs
associated with the design, development, and testing of new and existing products. Such costs
are expensed as they are incurred and include salaries and related
21
personnel costs, fees paid to outside consultants, and other direct and indirect costs related
to research and product development. Research and development expenses were $0.8 million in the
third quarter of fiscal 2006, an increase of $0.1 million or 13% from $0.7 million in the third
quarter of fiscal 2005. The increase was primarily due to an increase of $157,000 related to
increased headcount, an increase of $98,000 in supplies expense associated with developing and
testing of new products, an increase of $ 76,000 in expenses related to animal studies and
consulting expenses related to the development of our stent, microcatheter and microcoil
products, as well as an increase of $32,000 travel related expenses. These increases were
partially offset by a decrease of $0. 3 million in expenses in connection with evaluating
in-process technology. As a percentage of revenues, research and development expenses were 10%
in the third quarter of fiscal 2006 and 13% in the third quarter of fiscal 2005. We expect our
research and development expenses to increase in absolute dollars in future periods as we as
hire additional development personnel, continue work on product improvements, expand our
existing product line and explore new product opportunities.
Sales and Marketing. Sales and marketing expenses consist primarily of compensation costs
of our direct sales force and marketing personnel, as well as overhead costs related to these
activities. Also included are costs associated with promotional literature and videos, trade
show participation, and education and training of physicians. Sales and marketing expenses
were $4.0 million in the third quarter of fiscal 2006, an increase of $2.0 million or 98 % from
$2.0 million in the third quarter of fiscal 2005. This increase was primarily due to an
increase of $0.7 million associated with additional sales and marketing personnel in the United
States and Europe, higher sales incentive and commission costs of $379,000 on increased sales
in the United States and Europe, higher travel expenses of $303,000 as a res ult of increased
headcount, as well as an increase of $266,000 in graphic design, promotional and printing costs
in connection with new product releases and the relocation of our offices in the United States,
Switzerland, and the United Kingdom. As a percentage of revenues, sales and marketing expenses
increased to 50% in the third quarter of fiscal 2006 from 36% in the third quarter of fiscal
2005 primarily due to an increase in headcount both in the United States and Europe in the
direct sales force and clinical support group. We anticipate that sales and marketing expenses
will increase in absolute dollars in future periods as we continue to increase the size of our
direct sales force and clinical support group, increase spending on additional sales and
marketing programs and expand into additional geographic territories.
General and Administrative. General and administrative expenses consist primarily of
compensation and related costs for finance, human resources, facilities, information
technology, insurance, and professional services. Professional services are principally
comprised of outside legal, audit and information technology consulting. General and
administrative expenses were $2.6 million in the third quarter of fiscal 2006, a decrease of
$0.5 million or 17% from $3.2 million in the third quarter of fiscal 2005. The decrease was
primarily due to lower legal costs of $0.7 million related to FCPA compliance, patent
litigation and general matters and lower audit costs of $192,000 in connection with the
Companys preparation for an IPO. These decreases were partially offset by an increase of
$183,000 related to the amortization of identifiable intangible assets in connection with the
purchase of Neurologic, an increase of $160,000 related to higher finance and administrative
personnel costs, an increase of $120,000 due to higher directors and officers insurance
premiums, an increase of $112,000 related to audit costs in connection with the Companys
filing of a Current Report on Form 8-K in connection with Neurologic and an increase of $89,000
related to investor relations costs and board of directors fees. As a percentage of revenues,
general and administrative expenses were 33% in the third quarter of fiscal 2006 and 56% in the
third quarter of fiscal 2005. As we incur additional expenses associated with being a public
company and to the extent our business expands, we expect that general and administrative
expenses will increase in absolute dollars in future periods.
Stock-based Compensation Charges
Deferred compensation for stock options granted to employees has been determined as the
difference between the exercise price and the fair value of our common stock on the date of
grant. In connection with the grant of stock options to employees during the fiscal year ended
March 31, 2004, we recorded deferred stock-based compensation of $1.1 million. We recorded
these amounts as a component of stockholders equity and are amortizing the amount, on a
straight-line basis, as a non-cash charge to cost of goods sold and operating expenses over the
vesting period of the options.
Exercise prices of options granted subsequent to March 31, 2004 were determined to be
equal to the fair market value of our common stock on the date of grant.
The resulting amortization expense of the deferred stock-based compensation for the grant
of stock options to employees was $57,000 and $70,000 in the third quarters of fiscal years
2006 and 2005, respectively. We anticipate we will record amortization of deferred compensation
related to these employee stock option grants as follows:
22
|
|
|
|
|
Fiscal Year 2006 (remaining 3 months) |
|
$ |
57,000 |
|
Fiscal Year 2007 |
|
$ |
229,000 |
|
Fiscal Year 2008 |
|
$ |
168,000 |
|
The compensation expense will be reduced in the period of forfeiture for any accrued but
unvested compensation arising from early termination of an option holders services. In
addition to the amounts outlined above, beginning in the first quarter of our fiscal year 2007,
we will record compensation expense for the value of stock options vesting from that date
forward in accordance with the provisions of SFAS No. 123R.
In addition, stock options issued to non-employees, generally for consulting services
related to patient studies or marketing analysis, are recorded at their fair value on the date
of vesting in accordance with SFAS No. 123 and EITF No. 96-18 and recognized over the
respective service or vesting period. In connection with stock options issued to non-employees,
we recorded $(1,000) and $38,000 of stock-based compensation expense (income) in the third
quarters of fiscal years 2006 and 2005, respectively.
Other Income, net
Other income, net consists primarily of investment income, interest expense, and foreign
currency gains and losses. Total other income, net was $255,000 in the third quarter of fiscal
2006, a decrease of $220,000 from $475,000 in the third quarter of fiscal 2005. This decrease
was primarily due to higher foreign exchange losses of $0.6 million resulting from differences
in exchange rates between the time of the recording of the transaction and settlement of
foreign currency denominated receivables and payables , offset by an increase to interest
income of $360,000 as a result of higher average cash and investment balances , which includes
the net proceeds from our IP O.
Accretion of Redeemable Convertible Preferred Stock to Redemption Value
Our convertible preferred stock that was outstanding prior to the closing of the IPO was
redeemable at the request of the holder on or after the sixth anniversary of the original
issuance date based upon certain circumstances. This right expired upon the automatic
conversion of all of our preferred stock into common stock upon the closing of the IPO. Prior
to the closing of the IPO, we were accreting the carrying value of the preferred stock to the
mandatory redemption amount on the sixth anniversary using the effective interest method
through periodic charges to additional paid-in capital. We recorded a non-cash charge of
$138,000 for the accretion on our redeemable convertible preferred stock in the third quarter
of fiscal year 2005. No charge was recorded in the third quarter of fiscal 2006 as the IPO was
completed in June 2005.
Beneficial Conversion Feature
The difference between the proceeds allocated to the Series E preferred stock and the
estimated fair value of the common stock issuable upon conversion resulted in a beneficial
conversion feature on the Series E preferred stock which was recorded as a reduction to the
Series E preferred stock and an increase to additional paid-in-capital. The total beneficial
conversion feature was $383,000 which, prior to the completion of the IPO, was being amortized
as a reduction of net income available to common stockholders over the period of redemption of
the Series E preferred stock. Upon completion of the IPO, we recorded a non-cash charge of
$383,000 for the beneficial conversion feature on our Series E preferred stock in the first
quarter of fiscal year 2006.
Nine Months Ended December 31, 2005 and 2004
Revenues
Our revenues were $21.3 million in the first nine months of fiscal 2006, an increase of
$4.7 million or 28% from $16.6 million in the first nine months of fiscal 2005. This increase
was primarily due to an increase in the number of microcoil products shipped during this
period. Factors driving this increase included growth in the overall market for embolic coils,
an increase in our share of both the domestic and foreign markets in which we participate and
the launch of our Cerecyte microcoil product line in August 2004.
Gross Profit
Cost of goods sold were $6.3 million in the first nine months of fiscal 2006, an increase
of $0.6 million or 11% from $5.6 million in the first nine months of fiscal 2005. The increase
in cost of goods sold during the first nine months of fiscal 2006 as compared to the
corresponding period in the prior year was primarily from increased 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.
23
Gross profit was $15.1 million in the first nine months of fiscal 2006, an increase of
$4.1 million or 37% from $11.0 million in the first nine months of fiscal 2005. Gross margin
was 71% in the first nine months of fiscal 2006 and 66% in the first nine months of fiscal
2005. The increase was primarily due to an increase in revenue from sales of higher margin
products and manufacturing efficiencies, partially offset by the increase in cost of goods sold
of $331,000 primarily due to higher per unit cost of inventory acquired in connection with the
purchase of Neurologic that was sold from the acquisition date thru the third quarter of fiscal
2006..
Operating Expenses
Research and Development. Research and development expenses were $4.1 million in the first
nine months of fiscal 2006, an increase of $2.3 million or 125% from $1.8 million in the first
nine months of fiscal 2005. The increase was primarily due to expenses in connection with
evaluating in-process technology and the purchase of intellectual property (IP) from Vascular
FX amounting to $1.6 million, an increase of $ 337,000 related to increased headcount, as well
as an increase of $178,000 in supplies expense associated with developing and testing of new
products. As a percentage of revenues, research and development expenses were 19 % in the first
nine months of fiscal 2006 and 11% in the first nine months of fiscal 2005.
Sales and Marketing. Sales and marketing expenses were $9.8 million in the first nine
months of fiscal 2006, an increase of $3.8 million or 63% from $6.0 million in the first nine
months of fiscal 2005. This increase was primarily due to an increase of $1.5 million
associated with additional sales and marketing personnel in the United States and Europe,higher
sales incentive and commission costs of $0.7 million on increased sales in the United States
and Europe, higher travel expenses of $0.6 million, an increase of $323,000 related to graphic
design, promotional and printing costs in connection with new product releases and the
relocation of our offices in the United States, Switzerland, and the United Kingdom, as well as
an increase of $13 0,000 primarily due to a randomized post product release trial with our
Cerecyte product. As a percentage of revenues, sales and marketing expenses increased to 46% in
the first nine months of fiscal 2006 from 36% in the first nine months of fiscal 2005 due to an
increase in headcount both in the United States and Europe in the direct sales force and
clinical support group.
General and Administrative. General and administrative expenses were $7.1 million in the
first nine months of fiscal 2006, an increase of $0.4 million or 6% from $6.7 million in the
first nine months of fiscal 2005. The increase was primarily due to an increase of $469,000
related to higher finance and administrative personnel costs, an increase of $321,000 primarily
related to management bonuses in connection with our IPO, an increase of $247,000 due to higher
insurance premiums for our directors and officers insurance policy, an increase of $210,000
associated with investor relations costs and board of directors fees , as well as an increase
of $204,000 related to the amortization of identifiable intangible assets in connection with
the purchase of Neurologic and an increase of $159,000 primarily related to audit costs in
connection with the 8K filing for the acquisition of Neurologic. These increases were offset by
a decrease in legal costs of $434,000 related to FCPA compliance, patent litigation and general
matters, a decrease in audit costs of $415,000 in connection with the Companys preparation for
the IPO and a decrease in outside services costs of $135,000 primarily due to lower costs
supporting our information technology infrastructure. As a percentage of revenues, general and
administrative expenses were 33% in the first nine months of fiscal 2006 and 40% in the first
nine months of fiscal 2005.
Stock-based Compensation Charges
The amortization expense of the deferred stock-based compensation for the grant of stock
options to employees was $172,000 and $210,000 in the first nine months of fiscal years 2006
and 2005, respectively.
The amortization expense of the deferred stock-based compensation for the grant of stock
options to non-employees was $8,000 and $51,000 in the first nine months of fiscal years 2006
and 2005, respectively.
Other Income, net
Total other income, net was $208,000 in the first nine months of fiscal 2006, a decrease
of $337,000 from total other income, net of $545,000 in the first nine months of fiscal 2005.
This decrease was primarily due to higher foreign exchange losses of $1.0 million resulting
from differences in exchange rates between the time of the recording of the transaction and
settlement of foreign currency denominated receivables and payables , a non-operating charge of
$158,000 recorded upon the completion of the IPO for the change in fair value of the 2005
common stock warrants, offset by in increase in interest income of $0.8 million as a result of
higher average cash and investment balances.
24
Accretion of Redeemable Convertible Preferred Stock to Redemption Value
We recorded a non-cash charge of $276,000 and $412,000 for the accretion on our redeemable
convertible preferred stock in the first nine months of fiscal years 2006 and 2005,
respectively.
Beneficial Conversion Feature
Upon completion of the IPO, we recorded a non-cash charge of $383,000 for the beneficial
conversion feature on our Series E preferred stock in the first quarter of fiscal year 2006.
Liquidity and Capital Resources
Since our inception, we have funded our operations primarily through issuances of
convertible preferred stock and related warrants, which provided us with aggregate gross
proceeds of $61.7 million. On June 21, 2005, we completed an IPO in which we sold 3,250,000
shares of our common stock at $11.00 per share for net cash proceeds to the Company 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, the total cash proceeds to the Company in the offering were approximately $35.8 million,
net of underwriting discounts and commissions.
As
of December 31, 2005, we had cash and marketable securities of
$41.9 million, compared
to $18.0 million at March 31, 2005. We believe that existing cash and marketable securities, and
funds expected to be generated from operations 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 $5. 2 million during the first nine months of
fiscal 2006 as compared to $2.8 million during the first nine months of fiscal 2005. Net cash
used in operating activities during the first nine months of fiscal 2006 resulted primarily
from operating losses, and increases in prepaid expenses and other assets primarily related to
the payment of directors and officers insurance premiums of $4 29,000, and prepayments of
services related to the Companys new headquarters and manufacturing facility of $204,000, a
decrease in accounts payable primarily related to (i) payments of audit fees in connection with
the Companys preparation for the IPO of $659,000; (ii) payment of the monetary penalty of
$450,000 to the Department of Justice; (iii) payments of legal costs related to FCPA
compliance, patent litigation and general matters of $415,000, partially offset by an increase
in other accrued liabilities primarily related to the upfront payment of $750,000 in connection
with the Japan distribution agreement, an increase in accrued payroll and related expenses
primarily related to higher accrued bonuses and commissions and non -cash items such as
depreciation and amortization, charges related to certain stock warrants and stock-based
compensation. Net cash used in operating activities during the first nine months of fiscal 2005
resulted from operating losses and net increases in accounts receivable, inventories, and
accounts payable resulting from the growth of our business, partially offset by and non-cash
items such as depreciation and amortization, and stock-based compensation.
Net cash used in investing activities was $6.6 million during the first nine months of
fiscal 2006, as compared to net cash provided by investing activities of $2.5 million during
the first nine months of fiscal 2005. Cash used in investing activities during the first nine
months of fiscal 2006 was primarily related to the purchase of Neurologic and, the purchase of
capital equipment primarily related to the relocation of our corporate headquarters. Net cash
provided by investing activities during the first nine months of fiscal 2005 was primarily
related to the proceeds from sales of marketable securities of $3.1 million, partially offset
by the purchase of capital equipment.
Net cash provided by financing activities was $35. 2 million during the first nine months
of fiscal 2006, primarily consisting of net proceeds of $33.2 million from the sale of common
stock in our IPO, partially offset by the expenditure of $1.9 million incurred in preparation
for the IPO, net proceeds of $2.6 million from the over-allotment option exercise by the
underwriters, proceeds of $1.0 million from the exercise of preferred and common stock
warrants, and proceeds of $0.6 million from the exercise of stock options and employee stock
purchase plan, partially offset by payments related to issuance costs for preferred stock of
$238,000. During the first nine months of fiscal 2005, net cash used by financing activities
was $0.5 million primarily consisting of common stock issuance costs of $688,000 partially
offset by proceeds of $177,000 from the exercise of stock options and warrants.
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.
25
Contractual Obligations
We have obligations under non-cancelable operating leases with various expiration dates
through 2012 and purchase commitments for inventory, capital equipment and operating expenses, such
as materials for research and development and consulting. As of December 31, 2005, the future
minimum lease payments under these leases and purchases commitments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
Less than |
|
1-3 |
|
4 |
|
Beyond |
|
|
Total |
|
1 year |
|
years |
|
years |
|
4 years |
Contractual obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cancelable operating lease obligations |
|
$ |
4,070 |
|
|
$ |
676 |
|
|
$ |
1,886 |
|
|
$ |
592 |
|
|
$ |
916 |
|
Purchase commitments |
|
$ |
1,232 |
|
|
$ |
1,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,303 |
|
|
$ |
1,909 |
|
|
$ |
1,886 |
|
|
$ |
592 |
|
|
$ |
916 |
|
|
|
|
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. In the first nine months ended December 31, 2005, approximately 47%
of our revenue was denominated in currencies other than the U.S. dollar. The functional
currency of our Swiss subsidiary is the Swiss franc. In Europe, our revenue is 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 $154,000
related to our loan with Micrus SA and a $291,000 decrease in our comprehensive loss from our
investment in Micrus SA. A hypothetical 10% decline in the value of the euro and pound sterling
versus the Swiss franc would cause us to recognize a loss of $138,000 and $119,000,
respectively, based on our foreign denominated receivables as of December 31, 2005.
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 operation could be adversely affected
due to movements in interest rates.
Item 4. Controls and Procedures.
The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15(d) -15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act))
that are designed to ensure that information required to be disclosed in the Companys reports
under the Exchange Act, is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms, and that such information is accumulated and
communicated to the Companys management, including the Companys Chief Executive Officer and
Chief Financial Officer. Based on that evaluation, our President and Chief Executive Officer
and our Executive Vice President, Chief Financial Officer and Secretary have concluded that our
disclosure controls and procedures are effective as of the end of the period covered by this
report.
There has been no change in the Companys internal control over financial reporting (as
defined in Rules 13(a)-15(f) and 15(d)-15(f) under the Exchange Act) during the period covered
by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.
26
PART IIOTHER INFORMATION
Item 1. Legal Proceedings.
FCPA Investigation
In August 2004, while reviewing our sales and payment procedures, we identified certain
payments we made to physicians located in France, Germany, Spain and Turkey that may have likely
violated the Foreign Corrupt Practices Act (FCPA) and the laws of such countries as well as
possibly the laws of Switzerland, where our Swiss subsidiary is located. Our audit committee
immediately directed our legal counsel to conduct an internal investigation into these payments. In
September 2004, we voluntarily disclosed to the United States Department of Justice (DOJ) the
factual information obtained in our internal investigation of potential violations of the FCPA.
Soon after reaching the preliminary conclusions of the investigation, our Board of Directors
adopted a Foreign Corrupt Practices Act Policy and appointed Tom Holdych, a Senior Vice President
of the Company, as Compliance Officer. The Compliance Officer has with the assistance of legal
counsel been developing a number of other corporate policies that will govern payments to and
contractual agreements with physicians and other consultants. In addition, the employment of our
then Chief Executive Officer and our then Vice President of Sales and Marketing was terminated in
November 2004.
After reviewing the results of the internal investigation and the compliance procedures implemented
by us, the DOJ entered into an agreement (the DOJ Agreement) with us in February 2005 pursuant to
which it will not prosecute us for the conduct disclosed to the DOJ, and we agreed to: (i) accept
responsibility for the actions of our employees and officers, (ii) pay a monetary penalty of
$450,000, (iii) continue to cooperate with the DOJ in its investigation, including the waiver of
legal privileges, (iv) establish policies and procedures to assure compliance with the FCPA and
other relevant bribery laws, (v) retain and pay for an independent law firm to act as a monitor,
for purposes of reporting to the DOJ for a period of three years as to our compliance with the DOJ
Agreement and monitoring our implementation and adherence to FCPA compliance policies and
procedures, and (vi) cooperate fully with the DOJ, the independent monitor and the SEC. We must
remain in complete compliance with these conditions for a period of two years, or face the filing
of a criminal complaint against us. Moreover, the terms of the DOJ Agreement will bind our
successors, or merger partners, as long as the agreement is in effect.
The payments we made to physicians located in France, Germany, Spain and Turkey also may have
likely violated the applicable laws in those foreign jurisdictions and may possibly have violated
laws in Switzerland. We are not able to determine at this time what penalties or other actions, if
any, authorities in France, Germany, Spain, Turkey or Switzerland may impose on us, or our Swiss
subsidiary, as a result of such violations. Such amounts could be material to the financial
position, results of operations or cash flows of the Company.
Patent Litigation
In September 2004, Boston Scientific Corporation and Target Therapeutics, Inc., a subsidiary
of Boston Scientific Corporation, (collectively Boston Scientific), filed a patent infringement
suit in the United States District Court for the Northern District of California, alleging that our
coil devices infringe two patents held by Boston Scientific and that this infringement is willful.
Sales of our microcoil devices currently represent approximately 94% of our revenues. Boston
Scientific is a large, publicly-traded corporation with significantly greater financial resources
than us. In November 2004, we answered Boston Scientifics complaint and counterclaimed, alleging
that Boston Scientifics occlusive products, and their use, infringe three of our patents. Each
party seeks an injunction preventing manufacture, offer for sale, use and importation of the
others detachable coil devices in the United States, damages for past infringement, which may be
trebled, and payment of its legal fees and costs. In addition, each party seeks a declaration that
the patents of the other are invalid and not infringed and has alleged that certain of the asserted
patents of the other are unenforceable due to inequitable conduct.
Boston Scientific is also a party in two other lawsuits against Cordis Corporation and Micro
Therapeutics, Inc. in which the Boston Scientific patents which are the basis of Boston
Scientifics suit against us are also at issue. An outcome of either of these lawsuits adverse to
Cordis Corporation or Micro Therapeutics, and related to the same patents Boston Scientific assets
against Micrus, could have an adverse impact on certain of our defenses in our litigation with
Boston Scientific. Those patents are currently being re-examined by the United States Patent and
Trademark Office (USPTO). Under the federal patent statutes and regulations, a wide spectrum of
outcomes is possible as a result of reexamination proceedings, including cancellation of any claim
of the patents finally
27
determined to be un-patentable, confirmation of any claim of the patents finally determined to
be patentable, or incorporation into the patents of any proposed amendment or new claim determined
to be patentable that does not enlarge the scope of the patents.
In February 2005,
the court granted a stay of the Boston Scientific lawsuit against us until
the earlier of twelve months or the outcome of the reexamination discussed above. We have filed a
motion to extend the stay beyond the twelve-month period pending the reexamination. The stay will
expire February 23, 2006, unless the court grants our motion. If the Boston Scientific lawsuit
against us resumes after the stay and if claims of the Boston Scientific patents that are in
reexamination are determined to be patentable, including any added, amended or modified claims, we
would have to litigate or attempt to settle the patent infringement claims asserted by Boston
Scientific. No discovery has been conducted in the litigation and none will be conducted during the
stay. Boston Scientific has not yet identified the asserted claims in its patents at issue or the
accused products. We are unable at this time to determine the likely outcome of any such
litigation. Patent lawsuits involve complex legal and factual issues which can take a number of
years and a great deal of expense and management attention to resolve. We may also be subject to
potentially negative publicity due to the litigation. In the event it is determined that we
infringe patent claims asserted by Boston Scientific and that those claims are not invalid and not
unenforceable we may, among other things, be required to do one or more of the following:
|
|
|
pay damages, including up to treble damages and Boston Scientifics attorneys fees and
costs, which may be substantial; |
|
|
|
|
cease, by injunction, the making, using, selling, offering to sell, importing into the
U.S. or exporting from the U.S. of our microcoil devices found to infringe the patent claims
asserted by Boston Scientific, which microcoil devices currently represent approximately 94%
of our revenues; |
|
|
|
|
expend significant resources to redesign our technology so that it does not infringe the
patent claims asserted by Boston Scientific, which may not be possible; |
|
|
|
|
discontinue manufacturing or other processes that incorporate technology that infringes
the patent claims asserted by Boston Scientific; |
|
|
|
|
become subject to a compulsory license order under which we would be required to pay
Boston Scientific a royalty on future sales of our products; and/or |
|
|
|
|
obtain a license from Boston Scientific to use the relevant patents, which may not be
available to us on acceptable terms, or at all. |
If our microcoil devices were found to infringe, any development or acquisition of products or
technologies that do not infringe the patent claims asserted by Boston Scientific could require the
expenditure of substantial time and other resources and could have a material adverse effect on our
business and financial results. If we were to be required to, but could not obtain, a license under
the patent claims asserted by Boston Scientific, we would likely be prevented from commercializing
or further commercializing the relevant products. We believe that it is unlikely that we would be
able to obtain a license under the patent claims being asserted by Boston Scientific. If we need to
redesign our products to avoid the patent claims being asserted by Boston Scientific, we may suffer
significant regulatory delays associated with conducting additional studies or submitting
technical, manufacturing or other information related to the redesigned product and, ultimately, in
obtaining approval.
As a result of Boston Scientifics answer to our counterclaim that Boston Scientific infringes
three of our patents, the validity of those patents is now at issue in the lawsuit. The court could
find that those patents are invalid, which would prevent us from asserting those patents against
third parties.
An unfavorable outcome for us in this patent litigation would significantly harm our business
and may cause us to materially change our business model.
From time to time, we may be involved in other litigation relating to claims arising out of
our ordinary course of business. We are not currently a party to any other material legal
proceedings.
28
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 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 interventionalists 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. Industry sources estimate that
approximately 30% of patients diagnosed with cerebral aneurysms are currently being treated through
embolic coiling procedures in the United States. 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 interventionalists, 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 interventionalists in the United States who perform embolic coiling procedures.
We believe less than one-third of these physicians perform a preponderance of the total number of
embolic coiling procedures per year. In the three months ended December 31, 2005, a substantial
portion of our product sales were to approximately 54 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 interventionalists that currently
use products offered by our competitors. We believe that interventionalists who do not currently
use our products will not widely adopt our products unless they determine, based on experience,
clinical data and published peer reviewed journal articles, that our products provide benefits or
an attractive alternative to the clipping of aneurysms or the use of competitors products. We
believe interventionalists base their decision to use an alternative procedure or product on the
following criteria, among others:
|
|
|
extent of clinical evidence supporting patient benefits; |
|
|
|
|
their level of experience with the alternative product; |
|
|
|
|
perceived liability risks generally associated with the use of new products and procedures; |
|
|
|
|
availability of reimbursement within healthcare payment systems; and |
|
|
|
|
costs associated with the purchase of new products and equipment. |
In addition, we believe that recommendations and support of our products by influential
interventionalists are essential for market acceptance and adoption. If we do not receive continued
support from such interventionalists, interventionalists and hospitals may not use our products. In
such circumstances, we may not achieve expected revenue levels and our business will suffer.
We have a limited operating history, have incurred significant operating losses since inception and
expect to continue to incur losses, and we cannot assure you that we will achieve profitability.
We were incorporated in the state of Delaware in 1996, and began commercial sales of our
microcoil products in 2000. We have yet to demonstrate that we can generate sufficient sales of our
products to become profitable. The extent of our future operating losses and the timing of
profitability are highly uncertain, and we may never achieve profitability. We have incurred
significant net losses since our inception, including losses of approximately $4.2 million in
fiscal 2003, $2.0 million in fiscal 2004, $6.7 million in fiscal 2005 and $5.7 million for the
first nine months of fiscal 2006. At December 31, 2005, we had an accumulated deficit of $47.1
million. It is possible that we will never generate sufficient revenues from product sales to
achieve profitability. Even if we do achieve
29
significant revenues from our product sales, we expect that increased operating expenses will
result in significant operating losses in the near term as we, among other things:
|
|
|
grow our internal and third-party sales and marketing forces to expand the sales of our
products in the United States and internationally; |
|
|
|
|
increase our research and development efforts to improve upon our existing products and
develop new product candidates; |
|
|
|
|
perform clinical research and trials on our existing products and product candidates; |
|
|
|
|
expand our regulatory resources in order to obtain governmental approvals for our
existing product enhancements and new products; and |
|
|
|
|
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.
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
coil devices infringe two patents held by Boston Scientific and that this infringement is willful.
Sales of our microcoil devices currently represent approximately 94% of our revenues. Boston
Scientific is a large, publicly-traded corporation with significantly greater financial resources
than us. In November 2004, we answered Boston Scientifics complaint and counterclaimed, alleging
that Boston Scientifics occlusive products, and their use, infringe three of our patents. Each
party seeks an injunction preventing the making, using, selling, offering to sell, importing into
the U.S. or exporting from the U.S. of the others detachable coil devices in the United States,
damages for past infringement, which may be trebled, and payment of its legal fees and costs. In
addition, each party seeks a declaration that the patents of the other are invalid and not
infringed and has alleged that certain of the asserted patents of the other are unenforceable due
to inequitable conduct.
Boston Scientific
is also a party in two other lawsuits against Cordis Corporation and Micro
Therapeutics, Inc. in which the Boston Scientific patents which are the basis of Boston
Scientifics suit against us are also at issue. An outcome of either of these lawsuits adverse to
Cordis Corporation or Micro Therapeutics, Inc., and related to the same patents Boston Scientific
assets against Micrus, could have an adverse impact on certain of our defenses in our litigation
with Boston Scientific. Those patents are currently being re-examined by the United States Patent
and Trademark Office (USPTO). Under the federal patent statutes and regulations, a wide spectrum of
outcomes is possible as a result of reexamination proceedings, including cancellation of any claim
of the patents finally determined to be un-patentable, confirmation of any claim of the patents
finally determined to be patentable, or incorporation into the patents of any proposed amendment or
new claim determined to be patentable that does not enlarge the scope of the patents.
In February 2005,
the court granted a stay of the Boston Scientific lawsuit against us until
the earlier of twelve months or the outcome of the reexamination discussed above. We have filed a
motion to extend the stay beyond the twelve-month period pending the reexamination. The stay will
expire February 23, 2006, unless the court grants our motion. If the Boston Scientific lawsuit
against us resumes after the stay and if claims of the Boston Scientific patents that are in
reexamination are determined to be patentable, including any added, amended or modified claims, we
would have to litigate or attempt to settle the patent infringement claims asserted by Boston
Scientific. No discovery has been conducted in the litigation and none will be conducted during the
stay. Boston Scientific has not yet identified the asserted claims in its patents at issue or the
accused products. We are unable at this time to determine the likely outcome of any such
litigation. Patent lawsuits involve complex legal and factual issues which can take a number of
years and a great deal of expense and management attention to resolve. We may also be subject to
potentially negative publicity due to the litigation. In the event it is determined that we
infringe patent claims asserted by Boston Scientific and that those claims are not invalid and not
unenforceable we may, among other things, be required to do one or more of the following:
|
|
|
pay damages, including up to treble damages and Boston Scientifics attorneys fees and
costs, which may be substantial; |
30
|
|
|
cease, by an injunction, the making, using, selling, offering to sell, importing into the
U.S. or exporting from the U.S. of our microcoil devices found to infringe the patent claims
asserted by Boston Scientific, which microcoil devices currently represent approximately 94%
of our revenues; |
|
|
|
|
expend significant resources to redesign our technology so that it does not infringe the
patent claims asserted by Boston Scientific, which may not be possible; |
|
|
|
|
discontinue manufacturing or other processes that incorporate technology that infringes
the patent claims asserted by Boston Scientific; |
|
|
|
|
become subject to a compulsory license order under which we would be required to pay
Boston Scientific a royalty on future sales of our products; and/or |
|
|
|
|
obtain a license from Boston Scientific to use the relevant patents, which may not be
available to us on acceptable terms, or at all. |
If our microcoil devices were found to infringe, any development or acquisition of products or
technologies that do not infringe the patent claims asserted by Boston Scientific could require the
expenditure of substantial time and other resources and could have a material adverse effect on our
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
three of our patents, the validity of those patents is now at issue in the lawsuit. The court could
find that those patents are invalid, which would prevent us from asserting those patents against
third parties.
An unfavorable outcome for us in this patent litigation would significantly harm our business
and may cause us to materially change our business model.
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, which includes the net proceeds from our recent
IPO, and 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:
|
|
|
the revenues generated by sales of our products; |
|
|
|
|
the costs associated with expanding our sales and marketing efforts; |
|
|
|
|
the expenses we incur in manufacturing and selling our products; |
|
|
|
|
the costs of developing new products or technologies; |
|
|
|
|
the cost of obtaining and maintaining FDA approval or clearance of our products and products in development; |
|
|
|
|
costs associated with our litigation with Boston Scientific; |
|
|
|
|
the number and timing of acquisitions and other strategic transactions; |
|
|
|
|
the expenses we incur related to compliance with the FCPA and laws and regulations in non-U.S. jurisdictions; |
31
|
|
|
costs associated with compliance with the Sarbanes-Oxley Act of 2002 and rules and
regulations affecting public companies recently promulgated by the Securities and Exchange
Commission and the Nasdaq National Market; |
|
|
|
|
the costs associated with our facilities expansion, if any; and |
|
|
|
|
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.
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:
|
|
|
interventionalist and patient acceptance of our products; |
|
|
|
|
changes in the number of embolic coiling procedures performed to treat cerebral aneurysms; |
|
|
|
|
the development of new procedures to treat cerebral aneurysms; |
|
|
|
|
results of clinical research and trials on our existing products and products in development; |
|
|
|
|
demand for, and pricing of, our products; |
|
|
|
|
the mix of our products sold; |
|
|
|
|
timing of new product offerings, acquisitions, licenses or other significant events involving us or our competitors; |
|
|
|
|
increases in the costs of manufacturing and selling our products; |
|
|
|
|
our ability to maintain and expand our sales force and operational personnel; |
|
|
|
|
the ability of our suppliers to timely provide us with an adequate supply of materials and components; |
|
|
|
|
amount and timing of capital expenditures and other costs relating to any potential expansion of our operations; |
|
|
|
|
the amount and timing of our operating expenses; |
|
|
|
|
fluctuations in foreign currency exchange rates; |
|
|
|
|
inventory adjustments we may have to make in any quarter; |
|
|
|
|
regulatory approvals and legislative changes affecting the products we may offer or those of our competitors; |
|
|
|
|
the effect of competing technological and market developments; |
|
|
|
|
levels of third-party reimbursement for our products; |
|
|
|
|
interruption in the manufacturing or distribution of our products; and |
32
|
|
|
changes in our ability to obtain and maintain FDA approval or clearance for our products. |
Many of the products we may seek to develop and introduce in the future will require FDA
approval or clearance, 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 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
interventionalists 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 reporting to the DOJ for a period of three years as to our
compliance with the DOJ Agreement and to monitor our implementation of and adherence to FCPA
compliance policies and procedures, and fully cooperating with the DOJ, the independent monitor,
and the SEC. We must remain in complete compliance with these conditions for a period of two years,
or face the filing of a criminal complaint against us. The terms of the DOJ Agreement will bind our
successors, or any merger partners, as long as the DOJ Agreement is in effect
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The payments we made to physicians in France, Germany, Spain and Turkey also may have likely
violated the applicable laws in those foreign jurisdictions and may possibly have violated laws in
Switzerland, where our Swiss subsidiary is located. We are not able to determine at this time what
penalties or other sanctions, if any, authorities in France, Germany, Spain, Turkey or Switzerland
may impose on us as a result of such violations.
Though we have adopted a number of compliance procedures, including adoption of a Foreign Corrupt
Practices Act Policy and related procedures, and appointed a Compliance Officer, we cannot assure
you that we will be able to comply with the various regulations in foreign jurisdictions, which
vary from country to country. Implementing and monitoring such compliance procedures in a number of
foreign jurisdictions can be very expensive and time-consuming. Any failure by us to adopt
appropriate compliance procedures and ensure that our employees and agents comply with applicable
laws and regulations in foreign jurisdictions could result in substantial penalties and/or
restrictions in our ability to sell products in certain foreign jurisdictions.
We are in a highly competitive market segment, face competition from large, well-established
medical device manufacturers with significant resources, and may not be able to increase
penetration in our markets or otherwise compete effectively.
The market for medical devices for treatment of cerebral vascular diseases is intensely
competitive, subject to rapid change and significantly affected by new product introductions and
other market activities of industry participants. We compete primarily with the Target Therapeutics
division of Boston Scientific Corporation, the market leader, as well as the Cordis division of
Johnson & Johnson, ev3, Micro Therapeutics and 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 publicly traded or
divisions or subsidiaries of 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 interventionalists; |
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established distribution networks; |
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greater experience in obtaining and maintaining United States Food and Drug
Administration, or 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. |
None of our customers has long-term purchase agreements with us and may at any time switch to
the use of our competitors products.
For these reasons, we may not be able to compete successfully against our current or potential
future competitors and sales of our products and our revenues may decline.
Our sales in international markets subject us to foreign currency exchange and other risks and
costs that could harm our business.
A substantial portion of our revenues are derived from outside the United States. For the
fiscal years ended March 31, 2003, 2004 and 2005, revenues from customers outside the United States
represented approximately 53%, 50% and 48%, respectively, of our revenues. For the first nine
months ended December 31, 2005, revenues from customers outside the United States represented
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approximately 51% of our revenues. We anticipate that revenues from international customers
will continue to represent a substantial portion of our revenues. Because we generate revenues in
foreign currencies, we are subject to the effects of exchange rate fluctuations. In the first nine
months ended December 31, 2005, approximately 47% of our revenues were denominated in currencies
other than the U.S. dollar. The functional currency of our Swiss subsidiary is the Swiss franc. In
Europe, our revenues are denominated in Swiss francs, euros, pounds sterling and U.S. dollars.
Accordingly, we are exposed to market risk related to changes between the Swiss franc and these
other currencies in which we conduct business. If the Swiss franc appreciates against the
currencies in which our receivables are denominated, we will recognize foreign currency losses. For
the preparation of our consolidated financial statements, the financial results of our Swiss and UK
subsidiaries are translated into U.S. dollars based on average exchange rates during the applicable
period. If the U.S. dollar appreciates against the Swiss franc and pounds sterling, the revenues we
recognize from sales by our European subsidiaries will be adversely impacted. Historically, we have
also been exposed to risks from fluctuations in currency exchange rates due to intercompany loans
made to Micrus SA, our Swiss subsidiary, in 2001 in connection with its incorporation. These loans
are denominated in Swiss francs and will fluctuate in value against the U.S. dollar, causing us to
recognize foreign exchange gains and losses. Foreign exchange gains or losses as a result of
exchange rate fluctuations in any given period could harm our operating results and negatively
impact our revenues. Additionally, if the effective price of our products were to increase as a
result of fluctuations in foreign currency exchange rates, demand for our products could decline
and adversely affect our results of operations and financial condition.
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. We
expect to utilize a distribution network in connection with our intended launch of sales in Japan.
As we launch new products and increase our marketing efforts with respect to existing products, we
will need to significantly expand the number of our direct sales personnel on a worldwide basis.
The establishment and development of a more extensive sales force will be expensive and time
consuming. There is significant competition for sales personnel experienced in interventional
medical device sales. If we are unable to attract, motivate and retain qualified sales personnel
and thereby increase our sales force, we may not be able to increase our revenues.
If we fail to properly manage our anticipated growth, our business could suffer.
We have experienced, and may continue to experience, periods of rapid growth and expansion,
which have placed, and will likely continue to place, a significant strain on our limited personnel
and other resources. In particular, the expansion of our fabrication facility and the planned
increase in our direct sales force will require significant management, technical and
administrative resources. Certain members of our senior management team have been with the Company
for less than, or a little over, one year. Any failure by us to manage our growth effectively, or
our senior management to work together effectively, could have an adverse effect on our ability to
achieve our development and commercialization goals.
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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. 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 can provide no assurance regarding our, or our independent registered public accounting firms,
conclusions at March 31, 2007 with respect to the effectiveness of our internal controls over
financial reporting.
Section 404 of the Sarbanes-Oxley Act of 2002 (the Act) will require us to include an
internal controls report from management in our Annual Report on Form 10-K for the fiscal year
ended March 31, 2007 and in subsequent Annual Reports. The internal control report must include a
statement
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About managements responsibility for establishing and maintaining adequate internal
controls over financial reporting; |
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Identifying the framework used by management to conduct the required evaluation of the
effectiveness of our internal control over financial reporting; |
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Concerning managements assessment of the effectiveness of our internal control over
financial reporting as of March 31, 2007, including a statement as to whether or not
internal control over financial reporting is effective; and |
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That our independent registered public accounting firm has issued an attestation report
on managements assessment of internal control over financial reporting. |
We will be required to expend significant resources in developing the necessary documentation
and testing procedures required by Section 404. We have not completed our assessment as required by
Section 404. In addition, through 2007 we anticipate significant growth in our business, including
international expansion. As a result, given the risks inherent in the design and operation of
internal controls over financial reporting, we can provide no assurance as to our, or our
independent registered public accounting firms, conclusions at March 31, 2007 with respect to the
effectiveness of our internal controls over financial reporting. If our internal controls are not
designed or operating effectively, we would be required to disclose that our internal control over
financial reporting was not effective. In addition, our registered public accounting firm may
either disclaim an opinion as it relates to managements assessment of the effectiveness of our
internal controls or may issue an adverse opinion on the effectiveness of our internal controls
over financial reporting. Investors may lose confidence in the reliability of our financial
statements, which could cause the market price of our common stock to decline and which could
affect our ability to run our business as we otherwise would like to.
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. Accordingly, we may
in the future pursue the acquisition of complementary businesses, products or technologies instead
of developing them ourselves. We do not know if we will be able to successfully complete any
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.
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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, and delivery schedules. 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 regulatory
requirements, delivery schedules, manufacturing yields and costs. Such manufacturers have
possession of and at times title to molds for certain manufactured components of our products.
Shortages of raw materials, production capacity constraints or delays by our contract manufacturers
could negatively affect our ability to meet our production obligations and result in increased
prices for affected parts. Any such reduction, constraint or delay may result in delays in
shipments of our products or increases in the prices of components, either of which could have a
material adverse effect on our business, operating results and financial condition. We have no
supply agreements with our current contract manufacturers and utilize purchase orders which are
subject to supplier acceptance. The unanticipated loss of any of our contract manufacturers could
cause delays in our ability to deliver product while we identify and qualify a replacement
manufacturer. If our current or future independent contract manufacturers are unable to meet our
requirements for manufactured components, our business could suffer.
Our operations are currently conducted at a single location that may be at risk from earthquakes or
other natural disasters.
We currently conduct all of our manufacturing, development and management activities at a
single location in Silicon Valley, California, near known earthquake fault zones. We have taken
precautions to safeguard our facilities, including insurance, health and safety protocols, and
off-site storage of computer data. However, any future natural disaster, such as an earthquake,
could cause substantial delays in our operations, damage or destroy our equipment or inventory, and
cause us to incur additional expenses. A disaster could seriously harm our business and results of
operations. The insurance we maintain against earthquakes and other natural disasters may not be
adequate to cover our losses in any particular case.
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 and third party inventory auditors 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 letter agreements with certain members of our senior
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management team, but none of these agreements guaranty the services of the individual for a
specified period of time. We also rely on the skills and talents of our scientific personnel
because of the complexity of our products. The loss of members of our senior management, key
clinical advisors or scientific personnel, or our inability to attract or retain other qualified
personnel or advisors could have a material adverse effect on our results of operations and
financial condition.
The medical device industry is characterized by patent litigation, which could be costly, result in
the diversion of managements time and efforts and require us to pay damages.
The medical device industry is characterized by extensive litigation and administrative
proceedings over patent and other intellectual property rights. Accordingly, we may in the future
be subject to further litigation and administrative proceedings over such rights with other
companies in our industry. As we have discussed above with respect to our current litigation with
Boston Scientific, whether a product infringes a patent involves complex legal and factual issues,
the determination of which is often uncertain. In the future, other competitors could assert that
our system, its components, or the methods we employ in the use or manufacture of our system are
covered by U.S. or foreign patents held by them. In addition, they may claim that their patents
have priority over ours because their patents were filed first. Because patent applications can
take many years to issue, there may be applications by others now pending of which we are unaware,
that may later result in issued patents that our system may infringe. There could also be existing
patents that one or more components of our system may inadvertently be infringing, of which we are
unaware. As the number of participants in the market for cerebral vascular treatments grows, the
possibility of patent infringement claims against us increases.
As we have discussed above with respect to our litigation with Boston Scientific, any 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 patents 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 system 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.
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 protect our 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 adequately protect our rights or permit us to gain or keep any
competitive advantage. For example, our pending U.S. and foreign patent applications may not issue
as patents in a form that will be advantageous to us or may issue and be subsequently successfully
challenged by others and invalidated, such as is being attempted by Boston Scientific. In addition,
our pending patent applications include claims to material aspects of our products and procedures
that are not currently protected by issued patents. Both the patent application process and the
process of managing patent disputes can be time consuming and expensive. Competitors may be able to
design around our patents or develop products that provide outcomes which are comparable to or may
exceed 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.
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, 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
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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. To date all of our products have been cleared by the FDA using the
510(k) process. Any products we develop that require regulatory clearance or approval may be
delayed, if approved at all. In addition, we believe that some of our new products will require an
approved PMA before we can commercially distribute the device and we cannot assure you that any new
products or any product enhancements we develop will be subject to the shorter 510(k) clearance
process instead of the more lengthy PMA requirements. Additionally, certain of our products under
development may involve both device and drug or biologic regulation and we will need to comply with
drug and biologic regulations in addition to medical device requirements. Accordingly, we
anticipate that the regulatory review and approval process for some of our future products or
product enhancements may take significantly longer than anticipated or that we have experienced in
the past. We will also be required to pay a medical device user fee and may also be required to pay
a drug or biologic user fee. There is no assurance that the FDA will not require that a certain new
product or product enhancement go through the lengthy and expensive PMA approval process. We have
no experience in obtaining PMA approval. We also have no experience in obtaining drug or 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.
Foreign governmental authorities that regulate the manufacture and sale of medical devices
have become increasingly stringent and, to the extent we market and sell our products in foreign
countries, we may be subject to more rigorous regulation in the future. In such circumstances, we
would rely significantly on our foreign independent sales distributors to comply with the varying
regulations, and any failures on their part could result in restrictions on the sale of our
products in foreign countries. For instance, manufacturers of medical devices outside of Japan must
utilize a contractually bound In-Country Caretaker (ICC) to submit an application for device
approval to the Japanese Ministry of Health, Labor and Welfare (MHLW). As part of its approval
process, the MHLW may require that the product be tested in Japanese laboratories and the approval
process can be quite lengthy. We have entered into a contractual arrangement with an ICC in Japan
which has submitted an application with the MHLW for approval of our microcoil delivery system but
do not currently have authorization to import and sell our products in Japan. We rely on our ICC to
file applications for approval of our products accurately and on a timely basis and to comply with
the regulatory requirements applicable to our products once they are approved. We have in the past
experienced problems with our former ICC not obtaining regulatory approvals in a timely and cost
effective manner and may encounter those types of issues in the future as well. In addition,
failure by our ICC to comply with applicable regulatory requirements can result in enforcement
action by the MHLW, which may include fines, injunctions, and civil penalties, recall or seizure of
our products, operating restrictions, partial suspension or total shutdown of sales in Japan, or
criminal prosecution. These actions could prevent or restrict us from selling our products in
Japan. We expect that there will be some significant changes in the regulation of medical devices
in Japan in 2005 but are unable at this time to determine the impact of such changes on our
approved products, products for which we have already applied for approval in Japan or future
products.
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.
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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, 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. Interventionalists 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.
In addition in certain countries, such as France, Germany and Japan, we are required to obtain
regulatory clearance for our products to be eligible for reimbursements by third party payors, even
though reimbursement for embolic coiling procedures is already in place.
Future reimbursement may be subject to increased restrictions both in the United States and in
international markets. Third-party reimbursement and coverage may not be available or adequate in
either the United States or international markets. Future legislation, regulation or reimbursement
policies of third-party payors may adversely affect the demand for our existing products or our
products currently under development and limit our ability to sell our products on a profitable
basis.
Recent changes in accounting rules and regulations, such as expensing of stock options, will result
in unfavorable accounting charges and could require us to change our compensation policies.
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R,
Share-Based Payment, which replaced SFAS No. 123 and superseded APB 25. Under SFAS No. 123R,
companies will no longer be able to account for share-based compensation transactions using the
intrinsic method in accordance with APB 25 but will be required to account for such transactions
using a fair-value method and recognize the expense in the consolidated statement of earnings. We
will need to comply with SFAS No. 123R as of the first quarter of fiscal 2007. We have not yet
determined which fair-value method and transitional provision we will follow. The impact on our
financial statements of applying Black-Scholes option valuation method of accounting for stock
options is disclosed in the accompanying financial statements and related notes. Our operating
expenses will increase as a result of expensing share-based payments.
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 interventional neurovascular 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,
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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 merit less 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 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.
We expect that the price of our common stock will 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 is likely 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 February 1, 2006, our executive officers, directors, and
stockholders holding more than 5% of our outstanding common stock and their affiliates will, in the
aggregate, beneficially own approximately 39.9% 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
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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. |
Further, three of our current directors were designated by our principal stockholders which
may increase such stockholders influence relating to matters submitted to the Board of Directors.
The right of our principal stockholders to nominate any directors terminated upon the consummation
of our recent IPO.
Our management team may invest or spend the proceeds from the recent IPO in ways with which you may
not agree or in ways that may not yield a return, and the use of the proceeds of the IPO will be
subject to covenants contained in our debt financing agreements.
Our management will have considerable discretion in the application of the net proceeds from
our recent IPO. We expect to use a majority of the net proceeds from the IPO to expand our sales
and marketing activities and to fund research and development relating to potential new products
and for general corporate purposes. We may also use a portion of the net proceeds of the IPO to
acquire or invest in complementary businesses, products, or technologies, or to obtain the right to
use such complementary technologies, although we are not currently involved in any negotiations and
have no commitments with respect to any such transactions. We cannot specify with certainty how we
will use the net proceeds of the IPO or our existing cash balance. The net proceeds may be used for
corporate purposes that do not increase our operating results or market value. Until the net
proceeds are used, they may be placed in investments that do not produce income or that lose value.
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
will be able to sell in the public market in December 2005 upon the expiration of lock-up
agreements between the representatives of the underwriters of our IPO and such stockholders. A
significant portion of these shares are held by a small number of stockholders. Sales by our
current stockholders of a substantial number of shares could significantly reduce the market price
of our common stock. Moreover certain holders of our common stock have the right to require us to
file registration statements covering their shares or to include their shares in registration
statements that we may file for ourselves or other stockholders.
We have registered all the common stock that we may issue under our 1998 Stock Plan, 2005
Equity Incentive Plan and 2005 Employee Stock Purchase Plan, totaling 4,972,187 shares. These
shares can be freely sold in the public market upon issuance, subject to customary lock-up
agreements. The sale by any of these holders of a large number of securities in the public market
could reduce the trading price of our common stock and impede our ability to raise future capital.
We may incur increased costs as a result of recently enacted and proposed changes in laws and
regulations.
Recently enacted and proposed changes in the laws and regulations affecting public companies,
including the provisions of the Sarbanes-Oxley Act of 2002 and rules proposed by the Securities and
Exchange Commission (SEC) and by the Nasdaq National Market, could result in increased costs to us.
The new rules could make it more difficult or more costly for us to obtain certain types of
insurance, including directors and officers liability insurance, and we may be forced to accept
reduced policy limits and coverage or incur substantially higher costs to obtain the same or
similar coverage. The impact of these events could also make it more difficult for us to attract
and retain qualified persons to serve on our board of directors, our board committees or as
executive officers. We are presently evaluating and monitoring developments with respect to new and
proposed rules and cannot predict or estimate the amount of the additional costs we may incur or
the timing of such costs.
We may become involved in securities class action litigation that could divert managements
attention and harm our business.
The stock market in general, the Nasdaq National Market and the market for medical device
companies in particular, has experienced extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of those companies. Further, the market
prices of securities of medical device companies have been particularly volatile. These broad
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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 amended and restated
certificate of incorporation, restated bylaws and Delaware law could make it more difficult for
stockholders or potential acquirors to obtain control of our board of directors or initiate actions
that are opposed by our then-current board of directors, including delaying or impeding a merger,
tender offer, or proxy contest involving our company. Any delay or prevention of a change of
control transaction or changes in our board of directors could cause the market price of our common
stock to decline.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following share numbers give effect to our 1 for 2.25 reverse split of our common and
preferred stock, which occurred on June 10, 2005, and the conversion of all outstanding preferred
stock to common stock, which occurred on the closing of the IPO.
During the first nine months ended December 31, 2005 we issued and sold the following
unregistered securities:
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98,948 shares of common stock to employees pursuant to the exercise of options under our
1996 Stock Option Plan and 1998 Stock Plan prior to the effectiveness, on June 30, 2005, of
the Companys registration statement on Form S-8 covering all options outstanding under the
Companys equity incentive plans. These options were exercised at a weighted average
exercise price of $0.81 per share for an aggregate cash consideration of $79,866. |
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427,917 shares of common stock upon the exercise of warrants that expired upon completion
of our IPO. All of these warrants were exercised at a weighted average exercise price of
$7.52 per share. 134,000 of such warrants were exercised for an aggregate cash consideration
of $1,007,680. Warrants to purchase an aggregate of 927,716 were cashless exercised at the
closing of the IPO, resulting in a net issuance of 293,917 shares in consideration of the
cancellation of an aggregate of 633,799 shares valued at $11.00 per share (the initial price
to the public in the IPO). |
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263,018 shares of common stock upon the exercise of warrants issued in connection with
the Companys Series E preferred stock financing that expire January 1, 2011. All of these
warrants were exercised at an aggregate exercise price of $0.000225 per share. Warrants
covering an aggregate of 238,761 shares of common stock were exercised without cash. In most
cases the aggregate purchase price was offset by the value of fractional shares payable upon
exercise of such warrants; however an aggregate of 2 shares were withheld in payment of the
aggregate exercise price of one warrant resulting in a net issue of 238,759 shares. An
additional 24,259 shares were exercised for cash. |
The issuances of the above securities were deemed to be exempt from registration under the
Securities Act of 1933, as amended, in reliance on Section 4(2), Regulation D, Rule 701, or other
applicable exemption of such Securities Act as transactions by an issuer not involving any public
offering. The recipients of securities in each such transaction represented their intentions to
acquire the securities for investment only and not with a view to or for sale in connection with
any distribution thereof and appropriate legends were affixed to the share certificates issued in
such transactions. All recipients had adequate access, through their relationships with us, to
information about us.
Use of Proceeds
Our Registration Statement on Form S-1 (File No. 333-123154) related to our IPO was declared
effective by the SEC on June 16, 2005. The public offering commenced on June 17, 2005. All
3,250,000 shares of common stock offered in the final prospectus were sold at the initial closing
on June 21, 2005, and an additional 250,000 shares of common stock subject to the underwriters
over-allotment option, were sold at a third closing on July 6, 2005, in each case at a price to
public of $11.00 per share (before deducting underwriting discounts and commissions) through a
syndicate of underwriters managed by A.G. Edwards and Needham & Company, LLC. The aggregate gross
proceeds of the shares offered and sold was $38,500,000, out of which we paid an aggregate of
$2,695,000 in underwriting discounts and commissions to the underwriters. In addition, as of
December 31, 2005, we incurred additional expenses of approximately $2,776,000 in connection with
the offering, which when added to the underwriting discounts and commissions paid by us, amounts to
total expenses of approximately $5,471,000.
We have used and intend to continue to use the net proceeds of the public offering primarily
for general corporate purposes, including costs associated with our entry into the Japanese market,
expansion of our sales force, research and development activities, facilities expansion and other
working capital and capital expenditures. The amounts and timing of our actual expenditures will
depend upon numerous factors, including the growth of our sales and marketing activities, status of
our research and development efforts and the amount of cash generated by our operations, if any. We
have used and may in the future also use a portion of the proceeds for the acquisition of, or
investment in, companies, technologies, products or assets that complement our business.
We have not determined the amount of net proceeds to be used specifically for the foregoing
purposes. As a result, management will have broad discretion over the proceeds from the IPO.
Pending these uses, we intend to invest the net proceeds of the IPO in United States government and
short-term investment grade securities.
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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 47 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.
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Date: February 14, 2006 |
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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Date: February 14, 2006 |
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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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. |
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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 |
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31.2
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Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
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