e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2007
Or
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-51323
Micrus Endovascular Corporation
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
|
|
23-2853441 |
|
(State or other jurisdiction of
|
|
(I.R.S. Employer Identification No.) |
incorporation or organization) |
|
|
|
|
|
821 Fox Lane |
|
|
San Jose, California
|
|
95131 |
|
(Address of principal executive offices)
|
|
(Zip Code) |
(408) 433-1400
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of November 1, 2007, there were 15,500,718 shares of common stock, par value $0.01, of the
registrant outstanding.
MICRUS ENDOVASCULAR CORPORATION
INDEX TO FORM 10-Q
2
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
MICRUS ENDOVASCULAR CORPORATION
Condensed Consolidated Balance Sheets
(unaudited)
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
March 31, |
|
|
|
2007 |
|
|
2007 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
28,748 |
|
|
$ |
34,536 |
|
Accounts receivable, net of allowance for doubtful accounts
of $233 at September 30, 2007 and $234 at March 31, 2007 |
|
|
7,368 |
|
|
|
8,168 |
|
Inventories |
|
|
12,179 |
|
|
|
9,049 |
|
Prepaid expenses and other current assets |
|
|
1,488 |
|
|
|
1,340 |
|
Deferred tax assets |
|
|
311 |
|
|
|
102 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
50,094 |
|
|
|
53,195 |
|
Property and equipment, net |
|
|
4,962 |
|
|
|
4,648 |
|
Goodwill |
|
|
5,552 |
|
|
|
5,552 |
|
Intangible assets, net |
|
|
8,451 |
|
|
|
9,405 |
|
Other assets |
|
|
302 |
|
|
|
297 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
69,361 |
|
|
$ |
73,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
1,513 |
|
|
$ |
1,660 |
|
Accrued payroll and other related expenses |
|
|
5,132 |
|
|
|
6,145 |
|
Accrued liabilities |
|
|
4,377 |
|
|
|
6,288 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
11,022 |
|
|
|
14,093 |
|
Deferred tax liabilities |
|
|
475 |
|
|
|
570 |
|
Other non-current liabilities |
|
|
2,068 |
|
|
|
2,140 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
13,565 |
|
|
|
16,803 |
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 5) |
|
|
|
|
|
|
|
|
Stockholders Equity: |
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; |
|
|
|
|
|
|
|
|
Authorized: 50,000,000 shares
|
|
|
|
|
|
|
|
|
Issued and outstanding: 15,479,758 shares at September 30, 2007 and
15,249,057 shares at March 31, 2007 |
|
|
155 |
|
|
|
152 |
|
Additional paid-in capital |
|
|
115,838 |
|
|
|
111,920 |
|
Deferred stock-based compensation |
|
|
(65 |
) |
|
|
(164 |
) |
Accumulated other comprehensive loss |
|
|
(625 |
) |
|
|
(512 |
) |
Accumulated deficit |
|
|
(59,507 |
) |
|
|
(55,102 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
55,796 |
|
|
|
56,294 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
69,361 |
|
|
$ |
73,097 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
MICRUS ENDOVASCULAR CORPORATION
Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Revenues |
|
$ |
14,362 |
|
|
$ |
14,527 |
|
|
$ |
31,152 |
|
|
$ |
27,210 |
|
Cost of goods sold |
|
|
3,151 |
|
|
|
3,894 |
|
|
|
6,886 |
|
|
|
7,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
11,211 |
|
|
|
10,633 |
|
|
|
24,266 |
|
|
|
20,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
2,617 |
|
|
|
1,502 |
|
|
|
4,582 |
|
|
|
4,256 |
|
Sales and marketing |
|
|
7,226 |
|
|
|
5,410 |
|
|
|
13,911 |
|
|
|
11,207 |
|
General and administrative |
|
|
5,545 |
|
|
|
4,444 |
|
|
|
11,646 |
|
|
|
8,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
15,388 |
|
|
|
11,356 |
|
|
|
30,139 |
|
|
|
24,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(4,177 |
) |
|
|
(723 |
) |
|
|
(5,873 |
) |
|
|
(4,302 |
) |
Interest and investment income |
|
|
351 |
|
|
|
406 |
|
|
|
711 |
|
|
|
785 |
|
Interest expense |
|
|
(2 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
Other income, net |
|
|
282 |
|
|
|
129 |
|
|
|
360 |
|
|
|
333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(3,546 |
) |
|
|
(188 |
) |
|
|
(4,804 |
) |
|
|
(3,184 |
) |
Income tax benefit |
|
|
(534 |
) |
|
|
(37 |
) |
|
|
(399 |
) |
|
|
(74 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(3,012 |
) |
|
$ |
(151 |
) |
|
$ |
(4,405 |
) |
|
$ |
(3,110 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(0.20 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.29 |
) |
|
$ |
(0.22 |
) |
Weighted-average number of shares used in per share
calculations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
15,388 |
|
|
|
14,404 |
|
|
|
15,339 |
|
|
|
14,315 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
MICRUS ENDOVASCULAR CORPORATION
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(4,405 |
) |
|
$ |
(3,110 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,595 |
|
|
|
794 |
|
Provision for doubtful accounts |
|
|
(6 |
) |
|
|
(35 |
) |
Loss on disposal of property and equipment |
|
|
22 |
|
|
|
|
|
Provision for excess and obsolete inventories |
|
|
418 |
|
|
|
136 |
|
Stock-based compensation |
|
|
2,179 |
|
|
|
902 |
|
Deferred tax benefit |
|
|
(389 |
) |
|
|
(74 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
954 |
|
|
|
259 |
|
Inventories |
|
|
(3,312 |
) |
|
|
(1,433 |
) |
Prepaid expenses and other current assets |
|
|
(132 |
) |
|
|
(427 |
) |
Other assets |
|
|
1 |
|
|
|
28 |
|
Accounts payable |
|
|
(166 |
) |
|
|
(826 |
) |
Accrued payroll and other related expenses |
|
|
(1,093 |
) |
|
|
630 |
|
Accrued liabilities |
|
|
342 |
|
|
|
1,441 |
|
Other non-current liabilities |
|
|
(73 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(4,065 |
) |
|
|
(1,720 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Acquisition of property and equipment |
|
|
(987 |
) |
|
|
(511 |
) |
Proceeds from sale of property and equipment |
|
|
65 |
|
|
|
|
|
Earn-out payment in connection with acquisition of Neurologic UK Ltd. |
|
|
(2,232 |
) |
|
|
(1,403 |
) |
Payment to Biotronik AG for developed technology |
|
|
|
|
|
|
(732 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(3,154 |
) |
|
|
(2,646 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net of issuance costs |
|
|
|
|
|
|
2,070 |
|
Proceeds from exercise of stock options |
|
|
1,303 |
|
|
|
292 |
|
Proceeds from employee stock purchase plan |
|
|
513 |
|
|
|
379 |
|
|
|
|
|
|
|
|
Net cash provided by financing
activities |
|
|
1,816 |
|
|
|
2,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rate changes on cash and cash equivalents |
|
|
(385 |
) |
|
|
(458 |
) |
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(5,788 |
) |
|
|
(2,083 |
) |
Cash and cash equivalents at beginning of period |
|
|
34,536 |
|
|
|
36,104 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
28,748 |
|
|
$ |
34,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Accrued offering costs for issuance of common stock |
|
$ |
|
|
|
$ |
30 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
MICRUS ENDOVASCULAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Formation and Business of the Company
Micrus Endovascular Corporation (the Company) was incorporated under the laws of the state
of Delaware in June 1996. The Company develops, manufactures and markets both implantable and
disposable medical devices used in the treatment of cerebral vascular
diseases. The Company develops products for the treatment of hemorrhagic and ischemic stroke.
Interim unaudited financial information
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America
(generally accepted accounting principles) for interim financial information and in accordance
with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange
Commission (SEC). Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements. The unaudited
interim condensed consolidated financial statements have been prepared on the same basis as the
annual financial statements. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation. These financial statements should be
read in conjunction with the audited financial statements and notes thereto for the preceding
fiscal year included in the Companys Annual Report on Form 10-K for the fiscal year ended March
31, 2007 which was filed with the SEC on June 7, 2007.
The results of operations for the interim periods ended September 30, 2007 may not necessarily
be indicative of the results that may be expected for the fiscal year ended March 31, 2008, or any
future period.
Revisions to fiscal year 2007 quarterly cash flows presentations
The consolidated cash flow statement for the six months ended September 30, 2006 has been
revised from that previously reported in the Companys Form 10-Q for the period ended September 30,
2006 to correct the classification of the payment of an earn-out amount of approximately $1.4
million made in April 2006 in connection with the acquisition of Neurologic UK Ltd. (Neurologic)
that had been accrued as of March 31, 2006, and correctly excluded, as it was a non-cash item, from
the fiscal 2006 full year statement of cash flows included in the fiscal 2006 and 2007 annual
reports on Form 10-K. The Company had previously incorrectly presented in its quarterly reports on
Form 10-Q for the first, second and third quarters of fiscal 2007, the payment as an operating cash
outflow (decrease in accrued liabilities) which resulted in an overstatement of the reported amount
of cash used in operating activities with a corresponding understatement of the cash used in
investing activities. This item has been adjusted in this Form 10-Q and will also be adjusted in
the consolidated cash flow statement for the nine months ended December 31, 2006, when included in
the Companys Form 10-Q for the nine months ended December 31, 2007. The impact on the Companys
cash flow data is as follows:
|
|
|
|
|
|
|
|
|
|
|
As Previously |
|
|
|
|
Reported |
|
As Revised |
|
|
|
|
|
|
|
|
|
Six months ended September 30, 2006 |
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Accrued liabilities |
|
$ |
38 |
|
|
$ |
1,441 |
|
Net cash used in operating activities |
|
$ |
(3,123 |
) |
|
$ |
(1,720 |
) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase of Neurologic UK, Ltd., net of cash acquired |
|
$ |
|
|
|
$ |
(1,403 |
) |
Net cash used in investing activities |
|
$ |
(1,243 |
) |
|
$ |
(2,646 |
) |
|
|
|
|
|
|
|
|
|
Nine months ended December 31, 2006 |
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Accrued liabilities |
|
$ |
1,127 |
|
|
$ |
2,530 |
|
Net cash used in operating activities |
|
$ |
(2,070 |
) |
|
$ |
(667 |
) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase of Neurologic UK, Ltd., net of cash acquired |
|
$ |
(11 |
) |
|
$ |
(1,414 |
) |
Net cash used in investing activities |
|
$ |
(3,549 |
) |
|
$ |
(4,952 |
) |
6
Note 2 Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany balances and transactions have been eliminated in
consolidation.
The Companys international subsidiaries use their local currency as the functional currency.
Assets and liabilities are translated at exchange rates in effect at the balance sheet date.
Revenue, expense, gain and loss accounts are translated at average exchange rates during the
period. Resulting translation adjustments are recorded directly to accumulated other comprehensive
income (loss).
Use of estimates
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the dates of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual results could differ from
these estimates. These estimates and assumptions include reserves and write-downs related to
accounts receivable and inventories, the recoverability of long-term assets, deferred tax assets
and liabilities and related valuation allowances and valuation of equity instruments.
Cost of goods sold
The Companys cost of goods sold includes the cost of products sold to customers including
materials, direct labor, depreciation, overhead costs associated with manufacturing, impairments of
inventory and warranty expenses. Additionally, beginning with the quarter ended December 31, 2006, cost of goods sold includes amortization of capitalized
license technology in connection with the Biotronik AG (Biotronik) agreement and acquired
intangible assets in connection with the acquisition of VasCon, LLC (VasCon).
Comprehensive loss
Comprehensive loss generally represents all changes in stockholders equity except those
resulting from investments or contributions by stockholders. Accumulated other comprehensive loss
as of September 30, 2007 and March 31, 2007 was comprised entirely of foreign currency translation
adjustments. Total comprehensive loss for the three and six months ended September 30, 2007 was
$3.1 million and $4.5 million, respectively. This included other comprehensive loss of $71,000 and
$113,000, respectively, related to foreign currency translation adjustments. Total comprehensive
loss for the three and six months ended September 30, 2006 was $206,000 and $3.3 million,
respectively. This included other comprehensive loss of $55,000 and $215,000, respectively, related
to the Companys unrealized gains and losses on its available-for-sale securities and foreign
currency translation adjustments.
Net loss per share
Basic net loss per share is computed by dividing net loss by the weighted average number of
common shares outstanding during the period. Diluted net loss per share is computed by giving
effect to all potential dilutive common shares, including stock options and restricted stock units.
There is no difference between basic and diluted net loss per share for all periods presented due
to the Companys net losses.
The following outstanding stock options and restricted stock units were excluded from the
computation of diluted net loss per common share for the periods presented because their impact
would have been anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Shares issuable upon exercise of common stock options |
|
|
3,242 |
|
|
|
3,036 |
|
|
|
3,242 |
|
|
|
3,036 |
|
Shares issuable upon settlement of restricted stock units |
|
|
7 |
|
|
|
10 |
|
|
|
7 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,249 |
|
|
|
3,046 |
|
|
|
3,249 |
|
|
|
3,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
Stock-based compensation
The Company has adopted various stock plans that provide for the grant of stock awards to
employees, non-employee directors and consultants. The Company also has an employee stock purchase
plan which enables employees to purchase the Companys common stock.
On April 1, 2006, the Company adopted the provisions of, and accounts for stock-based
compensation in accordance with, the Financial Accounting Standards Boards (FASB) Statement of
Financial Accounting Standards No. 123 revised 2004 (SFAS 123R), Share-Based Payment which
replaced Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for
Stock-Based Compensation and supersedes APB Opinion No. 25 (APB 25), Accounting for Stock
Issued to Employees. Under the fair value recognition provisions of SFAS 123R, stock-based
compensation cost is measured at the grant date based on the fair value of the award and is
recognized as expense on a straight-line basis over the requisite service period, which is
generally the vesting period. The Company elected the modified-prospective method for its
transition to SFAS 123R, under which prior periods are not revised for comparative purposes. The valuation provisions of SFAS 123R apply to new
grants and to grants that were outstanding prior to the effective date and are subsequently
modified. Estimated compensation for grants that were outstanding as of the effective date will be
recognized over the remaining service period using the compensation cost estimated for the SFAS 123
pro forma disclosures, excluding pre-IPO options for which the fair value was determined using the
minimum value method. For these grants, any remaining unamortized deferred stock-based compensation
expenses will continue to be accounted for under the intrinsic value method of APB 25.
Due to the adoption of SFAS 123R, some exercises result in tax deductions in excess of
previously recorded benefits based on the option value at the time of grant, or windfalls. The
Company recognizes windfall tax benefits associated with the exercise of stock options directly to
stockholders equity only when realized. Accordingly, deferred tax assets are not recognized for
net operating loss carryforwards resulting from windfall tax benefits occurring from April 1, 2006
onward. A windfall tax benefit occurs when the actual tax benefit realized by a company upon an
employees disposition of a share-based award exceeds the deferred tax asset, if any, associated
with the award that a company had recorded. When assessing whether a tax benefit relating to
share-based compensation has been realized, the Company has elected to follow the tax law ordering
method, under which current year share-based compensation deductions are assumed to be utilized
before net operating loss carryforwards and other tax attributes. Also, the Company has elected to
ignore the indirect tax effects of share-based compensation deductions in computing its research
and development tax credit. The Company will recognize the full effect of these deductions in the
statements of operations when the valuation allowance is released.
Income taxes
Effective April 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for
Uncertainties in Income Taxes An Interpretation of FASB Statement No. 109 (FIN 48). FIN 48
prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48
also provides guidance on derecognition of tax benefits, classification on the balance sheet,
interest and penalties, accounting in interim periods, disclosure, and transition. See Note 4 for
further information regarding the adoption of FIN 48.
Recent accounting pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) 157,
Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures about fair value
measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair value
measurements, the FASB having previously concluded in those accounting pronouncements that fair
value is the relevant measurement attribute. Accordingly, this Statement does not require any new
fair value measurements. However, for some entities, the application of SFAS 157 will change
current practice. The provisions of SFAS 157 are effective as of the beginning of the Companys
2009 fiscal year. The Company is currently evaluating the impact of SFAS 157 but does not expect
the adoption of SFAS 157 to have a material impact on its consolidated financial position, results
of operations or cash flows.
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities, which expands opportunities to use fair value measurements in financial
reporting and permits entities to choose to measure many financial instruments and certain other
items at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The
Company is currently evaluating the impact of SFAS 159 but does not expect the adoption of SFAS 159
to have a material impact on its consolidated financial position, results of operations or cash
flows.
8
Note 3 Balance Sheet Components
Inventories
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
March 31, |
|
|
|
2007 |
|
|
2007 |
|
Raw materials |
|
$ |
1,792 |
|
|
$ |
1,862 |
|
Work-in-progress |
|
|
2,013 |
|
|
|
1,413 |
|
Finished goods |
|
|
4,808 |
|
|
|
3,005 |
|
Consigned inventory |
|
|
3,253 |
|
|
|
2,622 |
|
Inventory held by distributors |
|
|
313 |
|
|
|
147 |
|
|
|
|
|
|
|
|
|
|
$ |
12,179 |
|
|
$ |
9,049 |
|
|
|
|
|
|
|
|
Consigned inventory is held at customer locations, primarily hospitals, and is under the
physical control of the customer. The Company retains title to the inventory until used and
purchased by the customer, generally when used in a medical procedure.
Inventory held by distributors at September 30, 2007 consists of inventory of $248,000 held by
the Companys Latin American distributors and inventory of $65,000 held by the Companys Chinese
distributor. Inventory held by distributors at March 31, 2007
was all held by the Companys Latin American distributors.
Property and equipment, net
Property and equipment, net, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
March 31, |
|
|
|
2007 |
|
|
2007 |
|
Computer equipment and software |
|
$ |
1,496 |
|
|
$ |
1,210 |
|
Furniture, fixtures and equipment |
|
|
5,054 |
|
|
|
4,701 |
|
Leasehold improvements |
|
|
955 |
|
|
|
936 |
|
Construction in progress |
|
|
172 |
|
|
|
148 |
|
|
|
|
|
|
|
|
Total cost |
|
|
7,677 |
|
|
|
6,995 |
|
Less accumulated depreciation and amortization |
|
|
(2,715 |
) |
|
|
(2,347 |
) |
|
|
|
|
|
|
|
|
|
$ |
4,962 |
|
|
$ |
4,648 |
|
|
|
|
|
|
|
|
Goodwill
On September 20, 2005, the Company entered into a Share Purchase Agreement acquiring all of
the outstanding capital stock of Neurologic, a privately held distributor of the Companys products
in the United Kingdom. The transaction included an initial cash payment in addition to future
multi-year revenue based earn-out payments. At March 31, 2007, the Company accrued for additional
consideration of approximately $2,232,000 for the second year earn-out payment, which was added to
goodwill. The Company paid the second year earn-out in April 2007.
9
Intangible assets, net
Intangible assets, net, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful |
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net |
|
|
|
Life |
|
|
March 31, |
|
|
|
|
|
|
September 30, |
|
|
March 31, |
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
March 31, |
|
|
|
(Years) |
|
|
2007 |
|
|
Additions |
|
|
2007 |
|
|
2007 |
|
|
Additions |
|
|
2007 |
|
|
2007 |
|
|
2007 |
|
Existing process technology |
|
|
7 |
|
|
$ |
4,590 |
|
|
$ |
|
|
|
$ |
4,590 |
|
|
$ |
(219 |
) |
|
$ |
(328 |
) |
|
$ |
(547 |
) |
|
$ |
4,043 |
|
|
$ |
4,371 |
|
Distribution agreements |
|
|
5 |
|
|
|
2,300 |
|
|
|
|
|
|
|
2,300 |
|
|
|
(704 |
) |
|
|
(230 |
) |
|
|
(934 |
) |
|
|
1,366 |
|
|
|
1,596 |
|
Capitalized license fee |
|
|
7 |
|
|
|
1,565 |
|
|
|
|
|
|
|
1,565 |
|
|
|
(112 |
) |
|
|
(112 |
) |
|
|
(224 |
) |
|
|
1,341 |
|
|
|
1,453 |
|
Patents microcoil |
|
|
10 |
|
|
|
1,100 |
|
|
|
|
|
|
|
1,100 |
|
|
|
(770 |
) |
|
|
(55 |
) |
|
|
(825 |
) |
|
|
275 |
|
|
|
330 |
|
Non-compete agreements |
|
|
6 |
|
|
|
700 |
|
|
|
|
|
|
|
700 |
|
|
|
(177 |
) |
|
|
(58 |
) |
|
|
(235 |
) |
|
|
465 |
|
|
|
523 |
|
Customer relationships |
|
|
5 |
|
|
|
900 |
|
|
|
|
|
|
|
900 |
|
|
|
(274 |
) |
|
|
(90 |
) |
|
|
(364 |
) |
|
|
536 |
|
|
|
626 |
|
Patents catheter |
|
|
7 |
|
|
|
300 |
|
|
|
|
|
|
|
300 |
|
|
|
(14 |
) |
|
|
(21 |
) |
|
|
(35 |
) |
|
|
265 |
|
|
|
286 |
|
Existing product technology |
|
|
2 |
|
|
|
260 |
|
|
|
|
|
|
|
260 |
|
|
|
(40 |
) |
|
|
(60 |
) |
|
|
(100 |
) |
|
|
160 |
|
|
|
220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,715 |
|
|
$ |
|
|
|
$ |
11,715 |
|
|
$ |
(2,310 |
) |
|
$ |
(954 |
) |
|
$ |
(3,264 |
) |
|
$ |
8,451 |
|
|
$ |
9,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets included in the results of operations is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Cost of goods sold |
|
$ |
261 |
|
|
$ |
|
|
|
$ |
521 |
|
|
$ |
|
|
Operating expenses |
|
|
216 |
|
|
|
217 |
|
|
|
433 |
|
|
|
448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
477 |
|
|
$ |
217 |
|
|
$ |
954 |
|
|
$ |
448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortization expense of the acquired intangible assets related to existing technology in
the manufacturing process and design of products resulting from the acquisition of VasCon in the
amount of $205,000 and $409,000 is included in cost of goods sold for the three and six months
ended September 30, 2007.
The Company started generating revenue from the stent product associated with the capitalized
license technology in the third quarter of fiscal 2007. The amortization expense related to the
capitalized license technology in the amount of $56,000 and $112,000 is included in cost of goods
sold for the three and six months ended September 30, 2007.
The expected future amortization of intangible assets is as follows (in thousands):
|
|
|
|
|
For Years Ended March 31, |
|
Amortization |
|
2008 (remaining 6 months) |
|
$ |
954 |
|
2009 |
|
|
1,870 |
|
2010 |
|
|
1,793 |
|
2011 |
|
|
1,345 |
|
2012 |
|
|
982 |
|
Thereafter |
|
|
1,507 |
|
|
|
|
|
|
|
$ |
8,451 |
|
|
|
|
|
10
Accruals
Accrued payroll and other related expenses consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
March 31, |
|
|
|
2007 |
|
|
2007 |
|
Accrued bonuses |
|
$ |
1,577 |
|
|
$ |
2,646 |
|
Accrued salaries |
|
|
775 |
|
|
|
702 |
|
Accrued vacation |
|
|
1,462 |
|
|
|
1,333 |
|
Accrued commissions |
|
|
848 |
|
|
|
725 |
|
Accrued payroll taxes |
|
|
470 |
|
|
|
739 |
|
|
|
|
|
|
|
|
|
|
$ |
5,132 |
|
|
$ |
6,145 |
|
|
|
|
|
|
|
|
Accrued liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
March 31, |
|
|
|
2007 |
|
|
2007 |
|
Professional fees |
|
$ |
1,470 |
|
|
$ |
1,069 |
|
Development costs |
|
|
678 |
|
|
|
559 |
|
VAT payable |
|
|
565 |
|
|
|
438 |
|
Earn-out payment in connection with Neurologic acquisition |
|
|
|
|
|
|
2,232 |
|
Other |
|
|
1,664 |
|
|
|
1,990 |
|
|
|
|
|
|
|
|
|
|
$ |
4,377 |
|
|
$ |
6,288 |
|
|
|
|
|
|
|
|
Other non-current liabilities
Other non-current liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
March 31, |
|
|
|
2007 |
|
|
2007 |
|
Contingent purchase price |
|
$ |
1,596 |
|
|
$ |
1,596 |
|
Deferred revenue from Japan distribution agreement |
|
|
300 |
|
|
|
375 |
|
Other non-current liabilities |
|
|
172 |
|
|
|
169 |
|
|
|
|
|
|
|
|
|
|
$ |
2,068 |
|
|
$ |
2,140 |
|
|
|
|
|
|
|
|
Note 4 Income Taxes
Effective April 1, 2007, the Company adopted FIN 48, which requires that the Company recognize
the financial statement effects of a tax position when it becomes more likely than not, based on
the technical merits, that the position will be sustained upon examination. As a result of the
implementation of FIN 48, the Company recognized a $192,000 increase in its unrecognized tax
benefits. None was accounted for as an increase in the April 1, 2007 balance of accumulated deficit
since the benefit relates to attribute carryovers for which the related deferred tax asset was
subject to a full valuation allowance. At the adoption date of April 1, 2007 and at September 30,
2007, the Company had no accrued interest or penalties related to tax contingencies. Since the
unrecognized tax benefit relates to attribute carryover for which the related deferred tax asset
was subject to a full valuation allowance, the recognition of the unrecognized tax benefits will
not affect the Companys effective tax rate. The Company has elected to include interest and
penalties as a component of tax expense. The Company does not anticipate that the amount of
unrecognized tax benefits relating to tax positions existing at March 31, 2007 will significantly
increase or decrease within the next 12 months. Because of net operating loss and credit
carryforwards, substantially all of the Companys tax years, dating to inception in 1996, remain
open to federal tax examination. Most state and foreign jurisdictions have 3 to 10 open tax years
at any point in time.
The Company has incurred net operating losses for both federal and state purposes since
inception and, as a result, the Company has paid no federal or state income tax. For the three and
six months ended September 30, 2007, the Company recorded an income tax benefit of approximately
$534,000 and $399,000, respectively. The income tax benefit for the three and six months ended
September 30, 2007 includes an income tax benefit of $456,000 and $283,000, respectively, related
to net operating losses for its Swiss subsidiary and a non-current tax benefit of approximately
$78,000 and $116,000, respectively, for the tax effect of the amortization related to the
intangible assets acquired in the Neurologic transaction which is not deductible and the tax effect
of operating losses for its United Kingdom subsidiary.
11
As of March 31, 2007, the Company had federal, state and foreign net operating loss
carryforwards (NOLs) that are available to reduce future taxable income of approximately $36.0
million, $21.5 million and $0.9 million, respectively. The federal NOLs will expire at various
dates beginning in 2012, state NOLs will expire beginning in 2008 and the foreign NOLs will expire
beginning in 2013. The Company also has federal and state tax research and development credit
carryforwards of approximately $1.0 million and $0.9 million, respectively. The federal tax credit
carryforwards will expire beginning in 2012. The state tax credit carryforwards can be carried
forward indefinitely. Due to the uncertainty of its ability to generate sufficient taxable income
to realize the carryforwards prior to their expiration, the Company has recorded a valuation
allowance at September 30, 2007 to offset its federal and state deferred tax assets.
Note 5 Commitments and Contingencies
Indemnification
In the normal course of business, the Company enters into contracts and agreements that
contain a variety of representations and warranties and provide for general indemnification. The
Companys exposure under these agreements is unknown because it involves claims that may be made
against the Company in the future, but have not yet been made. To date, the Company has not paid
any claims or been required to defend any action related to its indemnification obligations, and
accordingly, the Company has not accrued any amounts for such indemnification obligations. However,
the Company may record charges in the future as a result of these indemnification obligations.
Litigation
The Company is from time to time subject to various lawsuits. The Company does not believe
that it is probable that resolution of pending litigation will have a material adverse effect on
the Companys consolidated financial statements; however the outcome of litigation is inherently
uncertain.
FCPA investigation
In August 2004, the Company identified certain payments made to physicians located in France,
Germany, Spain and Turkey that are also likely to have violated the Foreign Corrupt Practices Act
(FCPA) and the laws of such countries as well as possibly the laws of Switzerland, where the
Companys Swiss subsidiary is located. The Companys audit committee immediately directed internal
legal counsel to conduct an internal investigation into these payments. In September 2004, the
Company voluntarily disclosed to the United States Department of Justice (DOJ) the factual
information obtained in the Companys internal investigation of potential violations of the FCPA.
In February 2005, the DOJ and the Company entered into an agreement pursuant to which the DOJ
agreed not to prosecute the Company for conduct disclosed to the DOJ, provided that the Company
accepted responsibility for the actions of its employees and officers, paid a monetary penalty of
$450,000, continues to cooperate with the DOJ in its investigation, including the waiver of legal
privileges, establishes policies and procedures to assure compliance with the FCPA and other
relevant bribery laws, retains and pays for an independent monitor, which shall report to the DOJ
for a period of three years to assure compliance with the agreement with the DOJ and the Companys
implementation and adherence to FCPA compliance policies and procedures, and cooperates fully with
the DOJ, the independent monitor and the SEC. The Company must remain in compliance with these
conditions for a period of two years following February 28, 2005 or face the filing of a criminal
complaint by the DOJ. The independent monitor is currently assessing
the Companys compliance with the terms of the agreement. The monetary penalty was accrued in fiscal 2005 and was paid in April 2005.
The ongoing cost of compliance with the DOJ agreement will be recorded as an expense as incurred.
The payments made to physicians in France, Germany, Spain and Turkey also may likely have
violated the applicable laws in those foreign jurisdictions and may possibly have violated laws in
Switzerland, where the Companys Swiss subsidiary is located. The Company is not able to determine
at this time what penalties or other sanctions, if any, authorities in France, Germany, Spain, or
Turkey may impose as a result of such violations. Such amounts could be material to the financial
position, results of operations or cash flows of the Company. The Company has been notified by the
Swiss Federal Prosecutor that it does not intend to bring any action or impose any penalties on the
Company relating to its activities in Switzerland.
Patent litigation
In September 2004, Boston Scientific Corporation and Target Therapeutics, Inc., a subsidiary
of Boston Scientific Corporation, (collectively Boston Scientific), filed a patent infringement
suit in the United States District Court for the Northern District of
12
California, alleging that the Companys embolic coil products infringe two patents held by
Boston Scientific and that this infringement is willful. Sales of the Companys embolic coil
products currently represent virtually all of the Companys revenues. Boston Scientific is a large,
publicly-traded corporation with significantly greater financial resources than the Company.
In November 2004, the Company answered Boston Scientifics complaint and counterclaimed,
alleging that Boston Scientifics embolic coil products, and their use, infringe three of the
Companys patents. In addition, the Company alleged that Boston Scientific has violated United
States antitrust laws, and has violated certain California state laws by committing unfair business
practices, disparaging its products, and interfering with the its prospective economic advantage.
In November 2006, the Company withdrew one of its three asserted patents from the litigation to
pursue a reissue application filed with the United States Trademark and Patent Office (USPTO).
Each party seeks an injunction preventing the making, using, selling, offering to sell, importing
into the U.S. or exporting from the U.S., of the others embolic coil products in the United
States, damages for past infringement, which may be trebled, and payment of its legal fees and
costs. In addition, each party seeks a declaration that the patents of the other are invalid and
not infringed and has alleged that certain of the asserted patents of the other are unenforceable
due to inequitable conduct.
In January 2005, Boston Scientific filed a motion to dismiss the Company claims for
disparagement, interference with prospective economic advantage and unfair business practices. That
motion has been fully briefed but no oral argument has been heard or scheduled and the Court has
not ruled on the motion.
Boston Scientific is also a party in two other lawsuits against Cordis and ev3/Micro
Therapeutics, Inc. in which the Boston Scientific patents, which are the basis of Boston
Scientifics suit against the Company, are also at issue. An outcome of either of these lawsuits
adverse to Cordis or ev3/Micro Therapeutics, Inc., and related to the same patent claims Boston
Scientific asserts against the Company, could have an adverse impact on certain of the Company
defenses in its litigation with Boston Scientific.
In October 2004, Cordis requested ex parte reexamination of certain claims in those patents.
In February 2005, the court granted a stay of the Boston Scientific lawsuit against the Company
until the earlier of 12 months or the outcome of the reexamination by the U.S. Patent and Trademark
Office (USPTO) in the Cordis case. In February 2006, the USPTO issued a Notice of Intent to Issue
Ex Parte Reexamination Certificate for one of the two patents, apparently confirming all of the
claims of that patent. In February 2006, the USPTO also issued an Office Action in which it
apparently confirmed the patentability of certain of the claims in the second patent, but rejected
the remainder. Boston Scientific has stated to the USPTO and to the court that the rejected claims
from the second patent can be reissued and certified as patentable upon reexamination if a
correction is made to the priority chain for the second patent.
In March 2006, the court lifted the stay with respect to any claims that were confirmed as
patentable in the reexamination proceedings and has permitted discovery in the case to commence
with respect to those claims. The Company subsequently negotiated with Boston Scientific, and the
Court confirmed, a schedule that would permit discovery and claim construction proceedings to
proceed for the second patent while it is still undergoing reexamination and reissue proceedings.
Since the stay was lifted, the Company and Boston Scientific have exchanged preliminary
infringement and invalidity contentions, expert reports, claim construction briefs, and have
deposed each others expert witnesses concerning each of the four patents-in-suit. Discovery is
ongoing in the case. A hearing on claim construction was held on June 1, 2007. The Court has not
calendared any other dates.
Securities litigation
On October 3, 2007, a purported securities class action complaint (the Complaint) was filed
in the United States District Court for the Southern District of Florida against the Company and
certain of its directors and officers (the Defendants). The Complaint alleges that the Company
and the individual defendants made materially false and/or misleading statements or omissions in
violation of the federal securities laws during the period of February 12, 2007 through September
16, 2007 (the Class Period). The Complaint seeks to recover damages on behalf of anyone who
purchased or otherwise acquired the Companys stock during the Class Period. The Company intends to
take all appropriate action in response to this lawsuit.
The Company is unable at this time to determine the outcome of any such litigation. As such,
no provision for any liability that may result upon resolution of these matters has been made in
the accompanying financial statements. If the litigation is protracted or 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.
13
Note 6 Stock-based Compensation
Stock options
The Companys stock option program is a long-term retention program that is intended to
attract, retain and provide incentives for talented employees, officers and directors, and to align
stockholder and employee interests. The Company considers the stock option program critical to its
operations and productivity. As of September 30, 2007, the Company has three stock option plans:
the 1996 Stock Option Plan (the 1996 Plan), the 1998 Stock Plan (the 1998 Plan), and the 2005
Equity Incentive Plan (the 2005 Plan). Currently, the Company grants options from the 2005 Plan,
which permits the Company to grant options to all employees, including executive officers, and
outside consultants, and directors. Effective June 16, 2005, no new options may be granted under
the 1996 Plan or the 1998 Plan. As of September 30, 2007, there were no outstanding options under
the 1996 Plan and 1,115,698 outstanding options under the 1998 Plan. As of September 30, 2007,
there were 3,699,750 remaining shares reserved for issuance under the 2005 Plan, of which 1,566,464
were available for grant, 2,126,620 shares were subject to outstanding options and 6,666 shares
were subject to outstanding restricted stock units. Stock options issued under the Companys stock
option plans generally vest based on 4 years of continuous service and have 10-year contractual
terms.
2005 Employee stock purchase plan
The 2005 Employee Stock Purchase Plan (the Purchase Plan) became effective upon the
Companys IPO. The Purchase Plan provides employees with an opportunity to purchase the Companys
common stock through accumulated payroll deductions. As of September 30, 2007, there were 503,679
shares reserved for issuance under the Purchase Plan.
Stock-based compensation
On April 1, 2006, the Company adopted the provisions of SFAS 123R. The Companys financial
statements for the three and six months ended September 30, 2007 and 2006 reflect the impact of
SFAS 123R. The Company currently uses the Black-Scholes option pricing model to determine the fair
value of employee stock options and employee stock purchase plan shares. The determination of the
fair value of employee stock options and employee stock purchase plan shares has been estimated
using the following weighted-average valuation assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Employee Stock Option Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term (in years) |
|
|
6 |
|
|
|
6 |
|
|
|
6 |
|
|
|
6 |
|
Volatility |
|
|
41 |
% |
|
|
46 |
% |
|
|
41 |
% |
|
|
46 |
% |
Risk-free interest rate |
|
|
4.7 |
% |
|
|
4.8 |
% |
|
|
4.7 |
% |
|
|
4.9 |
% |
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Weighted average fair value at date of grant |
|
$ |
10.90 |
|
|
$ |
6.88 |
|
|
$ |
10.93 |
|
|
$ |
6.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term (in years) |
|
|
0.5 |
|
|
|
0.5 |
|
|
|
0.5 |
|
|
|
0.5 |
|
Volatility |
|
|
40 |
% |
|
|
39 |
% |
|
|
41 |
% |
|
|
39 |
% |
Risk-free interest rate |
|
|
5.2 |
% |
|
|
5.0 |
% |
|
|
5.1 |
% |
|
|
5.0 |
% |
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
The fair value of each purchase right granted under the Companys Purchase Plan during the
three and six months ended September 30, 2007 and 2006 was estimated at the date of grant using the
Black-Scholes option pricing model, and is not subject to revaluation as a result of subsequent
stock price fluctuations.
14
The stock-based compensation expense related to SFAS 123R is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Cost of goods sold |
|
$ |
97 |
|
|
$ |
48 |
|
|
$ |
207 |
|
|
$ |
68 |
|
Research and development |
|
|
116 |
|
|
|
36 |
|
|
|
228 |
|
|
|
62 |
|
Sales and marketing |
|
|
313 |
|
|
|
137 |
|
|
|
553 |
|
|
|
263 |
|
General and administrative |
|
|
551 |
|
|
|
153 |
|
|
|
1,086 |
|
|
|
262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,077 |
|
|
$ |
374 |
|
|
$ |
2,074 |
|
|
$ |
655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additionally, approximately $143,000 and $47,000 in stock-based compensation expense related
to SFAS 123R has been capitalized in inventory as of September 30, 2007 and 2006, respectively.
As of September 30, 2007, there was approximately $11.9 million of total stock-based
compensation expense, after estimated forfeitures, related to unvested employee stock options and
restricted stock units, which is expected to be recognized over an estimated weighted average
amortization period of 2.7 years.
Stock-based compensation expense recognized for the three months ended September 30, 2007 and
2006 related to the amortization of deferred stock-based compensation was $46,000 and $82,000,
respectively. For the six months ended September 30, 2007 and 2006, the amortization of deferred
stock-based compensation expense was $99,000 and $139,000, respectively. The Company anticipates
recording the remaining amortization of deferred stock-based compensation of $65,000 in the
remaining six months of fiscal 2008. This deferred stock-based compensation expense will be reduced
in the period of forfeiture for any accrued but unvested compensation arising from early
termination of an option holders services.
In previous years, certain stock options were issued to non-employees, generally in exchange
for consulting services related to patient studies or marketing analysis. The stock options are
recorded at their fair value on the date of vesting and recognized over the respective service or
vesting period. The fair value of the stock options granted was calculated at each reporting date
using the Black-Scholes option pricing model using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term (in years) |
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
Volatility |
|
|
40 |
% |
|
|
43 |
% |
|
|
40 |
% |
|
|
43 |
% |
Risk-free interest rate |
|
|
4.6 |
% |
|
|
4.6 |
% |
|
|
4.6 |
% |
|
|
4.9 |
% |
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Stock-based compensation expense recognized for the three months ended September 30, 2007 and
2006 related to non-employee options was zero and $6,000, respectively. For the six months ended
September 30, 2007 and 2006, the stock-based compensation expense recognized related to
non-employee options was $6,000 and $108,000, respectively. The non-employee stock-based
compensation expense will fluctuate as the fair market value of the common stock fluctuates.
15
Total stock-based compensation expense included in the results of operations is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Cost of goods sold |
|
$ |
103 |
|
|
$ |
54 |
|
|
$ |
219 |
|
|
$ |
81 |
|
Research and development |
|
|
116 |
|
|
|
37 |
|
|
|
228 |
|
|
|
80 |
|
Sales and marketing |
|
|
316 |
|
|
|
172 |
|
|
|
561 |
|
|
|
388 |
|
General and administrative |
|
|
588 |
|
|
|
199 |
|
|
|
1,171 |
|
|
|
353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,123 |
|
|
$ |
462 |
|
|
$ |
2,179 |
|
|
$ |
902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General stock option information
The following table sets forth the summary of stock options activity for the six months ended
September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Aggregate |
|
|
|
Shares |
|
|
Exercise |
|
|
Term |
|
|
Intrinsic Value |
|
|
|
(in thousands) |
|
|
Price |
|
|
(in years) |
|
|
(in thousands) |
|
Beginning outstanding at March 31, 2007 |
|
|
3,182 |
|
|
$ |
10.71 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
375 |
|
|
$ |
22.81 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(183 |
) |
|
$ |
7.14 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(131 |
) |
|
$ |
14.00 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
(1 |
) |
|
$ |
13.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending outstanding at September 30, 2007 |
|
|
3,242 |
|
|
$ |
12.18 |
|
|
|
8.1 |
|
|
$ |
22,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at September 30, 2007 |
|
|
1,331 |
|
|
$ |
7.78 |
|
|
|
7.1 |
|
|
$ |
13,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total aggregate intrinsic value of options exercised during the three months ended
September 30, 2007 and 2006 was $1.3 million and $389,000, respectively. For the six months ended
September 30, 2007 and 2006, the total aggregate intrinsic value
of options exercised was $2.7 million and
$0.7 million, respectively. The market value of a share of the Companys common stock as of
September 28, 2007 was $18.27 per share as reported by The NASDAQ Stock Market.
The options outstanding and currently exercisable by exercise price at September 30, 2007 are
as follows (in thousands, except per share data):
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
Average |
|
|
|
|
|
Average |
Range of |
|
Number |
|
Contractual Life |
|
Exercise |
|
Number |
|
Exercise |
Exercise Prices |
|
Outstanding |
|
(years) |
|
Price |
|
Exercisable |
|
Price |
$ |
0.68 |
|
|
|
$ |
1.01 |
|
|
109 |
|
|
|
4.2 |
|
|
$ |
0.81 |
|
|
|
109 |
|
|
$ |
0.81 |
|
$ |
1.15 |
|
|
|
$ |
1.15 |
|
|
99 |
|
|
|
6.3 |
|
|
$ |
1.15 |
|
|
|
91 |
|
|
$ |
1.15 |
|
$ |
5.63 |
|
|
|
$ |
8.44 |
|
|
751 |
|
|
|
7.2 |
|
|
$ |
5.67 |
|
|
|
529 |
|
|
$ |
5.65 |
|
$ |
8.62 |
|
|
|
$ |
12.66 |
|
|
857 |
|
|
|
8.2 |
|
|
$ |
10.10 |
|
|
|
333 |
|
|
$ |
9.83 |
|
$ |
12.72 |
|
|
|
$ |
18.37 |
|
|
658 |
|
|
|
8.4 |
|
|
$ |
14.75 |
|
|
|
263 |
|
|
$ |
14.34 |
|
$ |
18.40 |
|
|
|
$ |
22.23 |
|
|
470 |
|
|
|
9.4 |
|
|
$ |
20.30 |
|
|
|
3 |
|
|
$ |
19.94 |
|
$ |
22.35 |
|
|
|
$ |
24.75 |
|
|
298 |
|
|
|
9.4 |
|
|
$ |
23.85 |
|
|
|
3 |
|
|
$ |
22.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.68 |
|
|
|
$ |
24.75 |
|
|
3,242 |
|
|
|
8.1 |
|
|
$ |
12.18 |
|
|
|
1,331 |
|
|
$ |
7.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the summary of restricted stock units activity for the six
months ended September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Aggregate |
|
|
|
|
|
|
|
Purchase |
|
|
Term |
|
|
Intrinsic Value |
|
|
|
Shares |
|
|
Price |
|
|
(in years) |
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock units at March 31, 2007 |
|
|
10 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Awarded |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Released |
|
|
(3 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock units at September 30,
2007 |
|
|
7 |
|
|
$ |
|
|
|
|
1.3 |
|
|
$ |
122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7 Segment and Geographic Information
Revenues from unaffiliated customers by geographic area, based on the customers shipment
locations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
United States |
|
$ |
7,781 |
|
|
$ |
6,976 |
|
|
$ |
16,447 |
|
|
$ |
12,919 |
|
Japan |
|
|
|
|
|
|
2,840 |
|
|
|
1,139 |
|
|
|
5,059 |
|
United Kingdom |
|
|
2,265 |
|
|
|
1,411 |
|
|
|
4,520 |
|
|
|
2,956 |
|
Rest of the world |
|
|
4,316 |
|
|
|
3,300 |
|
|
|
9,046 |
|
|
|
6,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
14,362 |
|
|
$ |
14,527 |
|
|
$ |
31,152 |
|
|
$ |
27,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
The Companys long lived assets by geographic area were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
March 31, |
|
|
|
2007 |
|
|
2007 |
|
United States |
|
$ |
4,686 |
|
|
$ |
4,342 |
|
United Kingdom |
|
|
89 |
|
|
|
120 |
|
Rest of the world |
|
|
187 |
|
|
|
186 |
|
|
|
|
|
|
|
|
|
|
$ |
4,962 |
|
|
$ |
4,648 |
|
|
|
|
|
|
|
|
The Company identifies its operating segments based on how management views and evaluates the
Companys operations, which is primarily based on geographic location. For all periods presented,
the Company operated in the following three business segments: the Americas, Europe and Asia
Pacific. The products sold by each segment are substantially the same and the Company evaluates
performance and allocates resources primarily based on revenues and gross profit. Revenues and
gross profit for these segments were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
8,464 |
|
|
$ |
7,513 |
|
|
$ |
17,938 |
|
|
$ |
14,098 |
|
Europe |
|
|
5,522 |
|
|
|
3,963 |
|
|
|
11,390 |
|
|
|
7,691 |
|
Asia Pacific |
|
|
376 |
|
|
|
3,051 |
|
|
|
1,824 |
|
|
|
5,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
14,362 |
|
|
$ |
14,527 |
|
|
$ |
31,152 |
|
|
$ |
27,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
7,114 |
|
|
$ |
6,129 |
|
|
$ |
15,064 |
|
|
$ |
11,615 |
|
Europe |
|
|
3,923 |
|
|
|
2,519 |
|
|
|
8,115 |
|
|
|
4,996 |
|
Asia Pacific |
|
|
174 |
|
|
|
1,985 |
|
|
|
1,087 |
|
|
|
3,443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
11,211 |
|
|
$ |
10,633 |
|
|
$ |
24,266 |
|
|
$ |
20,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys total assets by operating segment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
March 31, |
|
|
|
2007 |
|
|
2007 |
|
Americas |
|
$ |
52,840 |
|
|
$ |
56,507 |
|
Europe |
|
|
16,521 |
|
|
|
16,590 |
|
|
|
|
|
|
|
|
|
|
$ |
69,361 |
|
|
$ |
73,097 |
|
|
|
|
|
|
|
|
Note 8 Subsequent Events
On October 26, 2007, the Company entered into a Stock Purchase Agreement (the Agreement)
with The Cleveland Clinic Foundation (The Cleveland Clinic) and ReVasc Technologies, Inc.
(ReVasc), a wholly-owned subsidiary of The Cleveland Clinic, pursuant to which it acquired all of
the outstanding stock of ReVasc from The Cleveland Clinic for an aggregate up-front purchase price
of $1 million. Pursuant to the Agreement, the Company also agreed to pay The Cleveland Clinic up to
an additional $5 million in payments upon the achievement of certain milestones set forth in the
Agreement, with minimum milestone payments of at
least $2 million to The Cleveland Clinic upon the third anniversary of the closing of the
acquisition. The Company acquired only pre-regulatory approved technology and did not assume any
liabilities in connection with the acquisition of ReVasc.
ReVasc is party to a license agreement with The Cleveland Clinic (the License Agreement)
pursuant to which The Cleveland Clinic granted ReVasc an exclusive license to its revascularization
technology for the treatment of ischemic stroke. In connection with the acquisition, the parties
amended the License Agreement to provide, among other matters, for the payment to The Cleveland
Clinic of certain royalties for sales of products based on the technology subject to the License
Agreement. As soon as practicable following the acquisition, the Company intends to merge ReVasc
into Micrus. Following such merger, Micrus will become the direct recipient of the license of the
revascularization technology from The Cleveland Clinic under the License Agreement.
18
On November 2, 2007, the Company entered into a non-binding term sheet to sell certain cardiac
and peripheral catheter platform assets and technology for $3 million to Merit Medical Systems,
Inc. (Merit). The purchase will include transfer from the Company to Merit of manufacturing
know-how, intellectual property, inventory and technology.
Under the terms of the term sheet, the Company will receive an up-front payment of $1.5
million and an additional $1.5 million upon the transfer of the assets and technology to Merit,
provided that the transfer occurs no later than the one year anniversary of the closing. The
definitive agreement will be subject to customary closing conditions and is expected to close prior
to the end of calendar year 2007. The assets for sale were originally acquired by the Company in
November 2006 with the completion of its purchase of VasCon.
Item 2. Managements Discussion and Analysis of Financial Conditions and Results of Operations.
The following discussion and analysis of the financial condition and results of operations of
the Company should be read in conjunction with the condensed consolidated financial statements and
the related notes included elsewhere in this report, and with other factors described from time to
time in our other filings with the Securities and Exchange Commission. This Quarterly Report on
Form 10-Q contains forward-looking statements that involve risks and uncertainties. Actual results
and the timing of events may differ materially from those contained in the forward-looking
statements due to a number of factors, including those discussed in Part II, Item 1A Risk Factors
in this Quarterly Report on Form 10-Q.
Overview
We develop, manufacture and market both implantable and disposable medical devices used in the
treatment of cerebral vascular diseases. We develop products for the treatment of hemorrhagic and
ischemic stroke. Our products are used by interventional neuroradiologists and neurosurgeons. Both
hemorrhagic and ischemic stroke are significant causes of death worldwide. Our product lines
consist of endovascular systems that enable a physician to gain access to the brain in a minimally
invasive manner through the vessels of the arterial system. We believe our products provide a safe
and reliable alternative to more invasive neurosurgical procedures for treating aneurysms. Our
proprietary three-dimensional, embolic coils are unique in that they automatically and rapidly
deploy within an aneurysm, forming a scaffold that conforms to a wide diversity of aneurysm shapes
and sizes. We also supply accessories for use with our microcoils and other products for the
treatment of neurovascular disease including microcatheters, guidewires and stents. We plan on
growing our business by continuing to penetrate our existing hemorrhagic and ischemic stroke
markets, bringing new products and technologies to interventional neuroradiologists and
neurosurgeons, and by entering new geographic territories such as
Asia where we commenced selling our
products in Japan through a distributor in March 2006.
Additionally, on July 31, 2007, we entered into an exclusive distribution agreement with Beijing Tianxinfu
Medical appliances Co., LTD (TXF Medical) to market our products in the Chinese market. We will
begin distributing our products through TXF Medical in the Chinese market upon receiving regulatory
approval.
Our revenues are derived primarily from sales of our microcoils. We also sell stents, access
products and accessories for use with our microcoils, which accounted for approximately 5% of our
revenues for both the second quarter and the first six months of fiscal 2008. Geographically, our
revenues are generally from sales to customers in the Americas, Europe and Asia. Our products are
shipped from our facilities in the United States, Switzerland, United Kingdom, and a logistics
facility in the Netherlands, to either hospitals or distributors. We invoice our customers upon
shipment. In select hospitals, our products are held on consignment, and remain on site, free of
charge until used.
We anticipate that our cost of goods sold will generally increase in absolute dollars during
those quarters in which our sales increase or we incur additional manufacturing costs in
anticipation of the commercial introduction of new products. Furthermore, our gross margin
percentage may decrease in those quarters in which we initiate sales of new products or product
lines, or enter new geographic territories.
Our product development efforts are primarily focused on expanding our current line of
microcoils and broadening our product offerings in the hemorrhagic and ischemic stroke markets. In
August 2004, we introduced our Cerecyte® microcoil product line and we have launched eight new
products in the last 24 months, including microcoils, stents, microcatheters and guidewires. During
the first quarter of fiscal 2008, we introduced two new products the Cashmere microcoil system
and the ENZO steerable microcatheter. The Cashmere is a stretch-resistant microcoil designed to
provide stable framing or filling of aneurysms that may require a softer microcoil, such as those
with irregular shapes or ruptured aneurysms. The ENZO steerable microcatheter is
designed to offer improved maneuverability through the brains tortuous vasculature and to
enable in vivo repositioning of the microcatheter in the aneurysm, allowing physicians to more
efficiently fill aneurysms, which may lead to improved outcomes. We intend to continue this product
line expansion with the goal of continuing to increase our per-procedure revenue.
19
We also intend to continue to expand our direct sales force in the United States and Europe as
necessary and enter the Asian markets through distributors. In March 2006, we launched our sales
and marketing efforts in Japan through our distribution partner, Goodman, CO., LTD (Goodman). We
recorded product sales to Goodman of $2.2 million and $8.7 million in fiscal 2006 and 2007,
respectively, and $1.1 million in the first six months of fiscal 2008. Sales to Goodman have been
lower than anticipated in the first half of fiscal 2008 due to regulatory approval delays in Japan.
We currently believe that we will gain the additional regulatory approvals necessary to sell our
stretch-resistant and Cerecyte microcoils in Japan within the next 12 months. The timing of these
approvals will be later than we had initially anticipated. The delay in these product approvals
could have an adverse impact on the revenues previously anticipated from sales in Japan for fiscal
2008. Goodman is required to purchase a minimum of $5.5 million of Micrus products during fiscal
2008, and they have purchased regulatory approved products in the amount of $1.1 million which we
have recognized as revenue during the first six months of fiscal 2008. We have received additional
orders from Goodman for our stretch-resistant products in the amount of $1.6 million which will be
shipped and recorded as revenue following regulatory approvals. We are also preparing to enter the Chinese market. We have
selected TXF Medical to be our distributor in China. We will begin selling our products in China
upon receiving regulatory approval. We currently believe that we will gain regulatory approvals to
market the full Micrus product line in China. However, we have recently learned that the timing of
product approvals in China will be delayed due to a pending review by the Chinese State Food and
Drug Administration (SFDA) of drug and medical device approvals granted during the term of the
former SFDA minister. We believe this review process along with more stringent approval procedures
will significantly delay review and approval of applications for new products. Therefore, we do not
expect to recognize revenues from sales in China this fiscal year.
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 and cash expected to be generated from product sales.
We introduced our first proprietary, three-dimensional microcoil in May 2000. Our revenues
have grown from $1.8 million in fiscal 2001 to $58.8 million in fiscal 2007. Our revenues were
$31.2 million in the first six months of fiscal 2008.
Since inception, we have been unprofitable. We incurred net losses of $6.7 million in fiscal
2005, $8.3 million in fiscal 2006, $5.5 million in fiscal 2007 and $4.4 million in the first six
months of fiscal 2008. As of September 30, 2007, we had cash and cash equivalents of $28.7 million.
We believe that our current cash position and the cash expected to be generated from product sales
will be sufficient to meet our working capital and capital expenditure requirements for at least
the next twelve months. There is no assurance that we will be profitable in the foreseeable future
as we expand our manufacturing and sales activities and expand geographically. As of September 30,
2007, we had an accumulated deficit of $59.5 million.
Recent Developments
On July 31, 2007, we entered into a five-year, exclusive distribution agreement with TXF
Medical. Under the terms of the distribution agreement, TXF Medical will promote and market our
full line of products, as such products are approved, in China and is required to purchase a
minimum of $53.5 million of such products over the five year term of the agreement commencing upon
regulatory approvals in order to maintain its exclusive distributor status in China, ranging from
$2.5 million during the fiscal year ending March 31, 2008 to $16.5 million during the fiscal year
ending March 31, 2012. We will begin distributing our products through TXF Medical in the Chinese
market upon receiving regulatory approval. The timing of product approvals in China is currently
delayed due to a pending review by the Chinese State Food and Drug Administration (SFDA) of drug
and medical device approvals granted during the term of the former SFDA minister. We believe this
review process along with more stringent approval procedures will significantly delay review and
approval of applications for new products. Therefore, we do not expect to recognize revenues from
sales in China this fiscal year.
On October 26, 2007, we entered into a Stock Purchase Agreement (the Agreement) with The
Cleveland Clinic Foundation (The Cleveland Clinic) and ReVasc Technologies Inc. (ReVasc), a
wholly-owned subsidiary of The Cleveland Clinic, pursuant to which we acquired all of the
outstanding stock of ReVasc from The Cleveland Clinic for an aggregate up-front purchase price of
$1 million. Pursuant to the Agreement, we also agreed to pay The Cleveland Clinic up to an
additional $5 million in payments upon the achievement of certain milestones set forth in the
Agreement, with minimum milestone payments of at least $2 million to The Cleveland Clinic upon the
third anniversary of the closing of the acquisition. We acquired only pre-regulatory approved
technology and did not assume any liabilities in connection with the acquisition of ReVasc.
20
ReVasc is party to a license agreement with The Cleveland Clinic (the License Agreement)
pursuant to which The Cleveland Clinic granted ReVasc an exclusive license to its revascularization
technology for the treatment of ischemic stroke. In connection with the acquisition, the parties
amended the License Agreement to provide, among other matters, for the payment to The Cleveland
Clinic of certain royalties for sales of products based on the technology subject to the License
Agreement. As soon as practicable following the acquisition, we intend to merge ReVasc into
Micrus. Following such merger, Micrus will become the direct recipient of the license of the
revascularization technology from The Cleveland Clinic under the License Agreement.
On November 2, 2007, we entered into a non-binding term sheet to sell certain cardiac and
peripheral catheter platform assets and technology for $3 million to Merit Medical Systems, Inc.
(Merit). The purchase will include transfer from us to Merit of manufacturing know-how,
intellectual property, inventory and technology.
Under terms of the term sheet, we will receive an up-front payment of $1.5 million and an
additional $1.5 million upon the transfer of the assets and technology to Merit, provided that the
transfer occurs no later than the one year anniversary of the closing. The definitive agreement
will be subject to customary closing conditions and is expected to close prior to the end of
calendar year 2007. The assets for sale were originally acquired by us in November 2006 with the
completion of our purchase of VasCon, LLC (VasCon).
Results of Operations
The following table sets forth the results of our operations, expressed as percentages of
revenues, for the three and six months ended September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Cost of goods sold |
|
|
22 |
% |
|
|
27 |
% |
|
|
22 |
% |
|
|
26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
78 |
% |
|
|
73 |
% |
|
|
78 |
% |
|
|
74 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
18 |
% |
|
|
10 |
% |
|
|
15 |
% |
|
|
16 |
% |
Sales and marketing |
|
|
50 |
% |
|
|
37 |
% |
|
|
45 |
% |
|
|
41 |
% |
General and administrative |
|
|
39 |
% |
|
|
31 |
% |
|
|
37 |
% |
|
|
33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
107 |
% |
|
|
78 |
% |
|
|
97 |
% |
|
|
90 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(29 |
%) |
|
|
(5 |
%) |
|
|
(19 |
%) |
|
|
(16 |
%) |
Interest and investment income |
|
|
2 |
% |
|
|
3 |
% |
|
|
2 |
% |
|
|
3 |
% |
Interest
expense |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Other income, net |
|
|
2 |
% |
|
|
1 |
% |
|
|
2 |
% |
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(25 |
%) |
|
|
(1 |
%) |
|
|
(15 |
%) |
|
|
(12 |
%) |
Income tax
benefit |
|
|
(4 |
%) |
|
|
0 |
% |
|
|
(1 |
%) |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(21 |
%) |
|
|
(1 |
%) |
|
|
(14 |
%) |
|
|
(12 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2007 and 2006
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
September 30, |
|
|
Change |
|
(Dollars in thousands) |
|
2007 |
|
|
2006 |
|
|
$ |
|
|
% |
|
Americas |
|
$ |
8,464 |
|
|
$ |
7,513 |
|
|
$ |
951 |
|
|
|
13 |
% |
Europe |
|
|
5,522 |
|
|
|
3,963 |
|
|
|
1,559 |
|
|
|
39 |
% |
Asia Pacific |
|
|
376 |
|
|
|
3,051 |
|
|
|
(2,675 |
) |
|
|
(88 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
14,362 |
|
|
$ |
14,527 |
|
|
$ |
(165 |
) |
|
|
(1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Our revenues are derived primarily from sales of our microcoils used in the treatment of
cerebral vascular diseases. We also sell stents, access products and accessories for use with our
microcoils, which accounted for 5% of our revenues for the second quarter of fiscal 2008. The
revenue decline was a result of no product sales to Japan in the second quarter of fiscal 2008
due to product approval delays for our stretch-resistant product lines. We currently believe that
we will gain the additional regulatory approvals necessary to sell our stretch-resistant and
Cerecyte microcoils in Japan within the next 12 months. The timing of these approvals will be later
than we had initially anticipated. The delay in these product approvals could have an adverse
impact on the revenues previously anticipated from sales in Japan for fiscal 2008. Goodman is
required to purchase a minimum of $5.5 million of Micrus products during fiscal 2008, and they have
purchased regulatory approved products in the amount of $1.1 million which we have recognized as
revenue during the first six months of fiscal 2008. While there were
no product sales to Japan in the second quarter of fiscal 2008, we received additional orders during the quarter from Goodman
for our stretch-resistant products in the amount of $1.6 million
which will be shipped and recorded as revenue following
regulatory approval. Revenues from our non-embolic products were $0.7 million in the second quarter
of fiscal 2008 compared with revenues of $192,000 in the second quarter of fiscal 2007.
We
are also preparing to enter the Chinese market through our
distribution partner, TXF
Medical. We will begin selling our products in China upon receiving regulatory approval. We believe
that we will gain regulatory approvals to market the full Micrus product line in China. However, we
have recently learned that the timing of product approvals in China will be delayed due to a
pending review by the SFDA of drug and medical device approvals granted during the term of the
former SFDA minister. We currently believe this review process along with more stringent approval
procedures will significantly delay review and approval of applications for new products.
Therefore, we do not expect to recognize revenues from sales in China this fiscal year.
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
September 30, |
|
Change |
(Dollars in thousands) |
|
2007 |
|
2006 |
|
$ |
|
% |
Cost of goods sold |
|
$ |
3,151 |
|
|
$ |
3,894 |
|
|
$ |
(743 |
) |
|
|
(19 |
%) |
Gross profit |
|
|
11,211 |
|
|
|
10,633 |
|
|
|
578 |
|
|
|
5 |
% |
Cost of goods sold consists primarily of materials, direct labor, depreciation, overhead costs
associated with manufacturing, impairments of inventory, warranty expenses, amortization of
intangible assets that were acquired by us as part of the acquisition of VasCon and amortization of
capitalized license technology. The decrease in cost of goods sold during the second quarter of
fiscal 2008 as compared to the second quarter of fiscal 2007 was primarily due to a decrease in
sales of our products as well as increased manufacturing efficiencies
that have lowered per unit
costs, partially offset by additional provisions for excess and expired inventories
resulting from slower inventory turns. Cost of goods sold in the second quarter of fiscal 2008
includes $205,000 related to the amortization of intangibles acquired from the acquisition of
VasCon on November 30, 2006 and $56,000 related to the amortization of capitalized license fees
which we started to amortize in the third quarter of fiscal 2007 when we began selling the Pharos
stent product and generating revenue.
Gross margin was 78% in the second quarter of fiscal 2008 and 73% in the second quarter of
fiscal 2007. The increase was primarily due to an increase in revenue from sales of higher margin
products, increased manufacturing efficiencies that have lowered per unit costs, and fewer
distributor sales of lower margin products primarily as a result of
no product sales to Japan
during the second quarter of fiscal 2008. We expect our gross margin to fluctuate in future periods
based on the mix of our product sales.
Operating Expenses
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
September 30, |
|
Change |
(Dollars in thousands) |
|
2007 |
|
2006 |
|
$ |
|
% |
Research and development |
|
$ |
2,617 |
|
|
$ |
1,502 |
|
|
$ |
1,115 |
|
|
|
74 |
% |
22
Research and development expenses consist primarily of costs associated with the design,
development, and testing of products. Such costs are expensed as they are incurred and include
salaries and related personnel costs, fees paid to outside consultants, and other direct and
indirect costs related to research and product development. Research and development expenses
increased in the second quarter of fiscal 2008 compared to the second quarter of fiscal 2007
primarily due to an increase of $430,000 related to increased headcount, an increase of $236,000 in
supplies expense, an increase of $149,000 in animal and product testing and consulting expense, as
well as an increase of $120,000 in technology acquisition expense primarily related to a
non-refundable acquisition fee in connection with the letter of intent signed with ReVasc to
acquire the rights to a revascularization technology. In the second quarter of fiscal 2008,
approximately 24% of our research and development costs are attributable to our subsidiary, Micrus
Design Technology Inc. (MDT), formed on November 30, 2006 in connection with the acquisition of
VasCon. We expect our research and development expenses to increase in absolute dollars in future
periods as we hire additional development personnel, continue work on product developments, and
expand our existing product line.
Sales and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
September 30, |
|
Change |
(Dollars in thousands) |
|
2007 |
|
2006 |
|
$ |
|
% |
Sales and marketing |
|
$ |
7,226 |
|
|
$ |
5,410 |
|
|
$ |
1,816 |
|
|
|
34 |
% |
Sales and marketing expenses consist primarily of compensation costs of our direct sales force
and marketing personnel, as well as overhead costs related to these activities. Also included are
costs associated with promotional literature and videos, trade show participation, and education
and training of physicians. Sales and marketing expenses increased in the second quarter of fiscal
2008 compared to the second quarter of fiscal 2007 primarily due to an increase of $0.8 million in
travel and personnel costs due to an increase in sales and marketing personnel in the United States
and Europe, an increase of $313,000 in costs associated with meetings, conferences and trade shows,
an increase of $231,000 primarily associated with the randomized post-marketing study of our
Cerecyte® product, an increase of $188,000 in sales incentives resulting from changes in the sales
compensation structure, as well as an increase of $144,000 in stock-based compensation expense
primarily due to SFAS 123R. We anticipate that sales and marketing expenses will increase in
absolute dollars in future periods as we continue to increase the size of our direct sales force
and clinical support group, increase spending on additional sales and marketing programs and expand
into additional geographic territories.
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
September 30, |
|
Change |
(Dollars in thousands) |
|
2007 |
|
2006 |
|
$ |
|
% |
General and administrative |
|
$ |
5,545 |
|
|
$ |
4,444 |
|
|
$ |
1,101 |
|
|
|
25 |
% |
General and administrative expenses consist primarily of compensation and related costs for
finance, human resources, facilities, information technology, insurance, and professional services.
Professional services are principally comprised of outside legal, audit, Sarbanes Oxley compliance
and information technology consulting. General and administrative expenses increased in the second
quarter of fiscal 2008 compared to the second quarter of fiscal 2007 primarily due to an increase
of $0.6 million related to higher finance and administrative personnel costs due to increased
headcount, as well as an increase of $389,000 in stock-based compensation expense primarily due to
SFAS 123R. In the second quarter of fiscal 2008, approximately 8% of our general and administrative
costs are attributable to our subsidiary, MDT, formed on November 30, 2006 in connection with the
acquisition of VasCon. 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.
23
Other Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
September 30, |
|
|
Change |
|
(Dollars in thousands) |
|
2007 |
|
|
2006 |
|
|
$ |
|
|
% |
|
Interest and investment income |
|
$ |
351 |
|
|
$ |
406 |
|
|
$ |
(55 |
) |
|
|
(14 |
%) |
Interest expense |
|
|
(2 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
Other income, net |
|
|
282 |
|
|
|
129 |
|
|
|
153 |
|
|
|
119 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net |
|
$ |
631 |
|
|
$ |
535 |
|
|
$ |
96 |
|
|
|
18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net consists primarily of investment income and foreign currency gains and
losses. Total other income, net increased in the second quarter of fiscal 2008 compared to the
second quarter of fiscal 2007 primarily due to an increase in foreign exchange gains resulting from
differences in exchange rates between the time of the recording of the transaction and settlement
of foreign currency denominated receivables and payables partially offset by lower interest and
investment income resulting from lower average cash and investment balances earning interest.
Income Taxes
Effective April 1, 2007, we adopted FIN 48, which requires that we recognize the financial
statement effects of a tax position when it becomes more likely than not, based on the technical
merits, that the position will be sustained upon examination. As a result of the implementation of
FIN 48, we recognized a $192,000 increase in our unrecognized tax benefits. None was accounted for
as an increase in the April 1, 2007 balance of accumulated deficit since the benefit relates to
attribute carryovers for which the related deferred tax asset was subject to a full valuation
allowance. At the adoption date of April 1, 2007 and at September 30, 2007, we had no accrued
interest or penalties related to tax contingencies. Since the unrecognized tax benefit relates to
attribute carryover for which the related deferred tax asset was subject to a full valuation
allowance, the recognition of the unrecognized tax benefits will not affect our effective tax rate.
We have elected to include interest and penalties as a component of tax expense. We do not
anticipate that the amount of unrecognized tax benefits relating to tax positions existing at March
31, 2007 will significantly increase or decrease within the next 12 months. Because of net
operating loss and credit carryforwards, substantially all of our tax years, dating to inception in
1996, remain open to federal tax examination. Most state and foreign jurisdictions have 3 to 10
open tax years at any point in time.
We have incurred net operating losses for both federal and state purposes since inception and,
as a result, we have paid no federal or state income tax. In the second quarter of fiscal 2008, we
recorded an income tax benefit of approximately $534,000. The income tax benefit includes an income
tax benefit of $456,000 for our Swiss subsidiary and a non-current tax benefit of approximately
$78,000 for the tax effect of the current quarter amortization related to the intangible assets
acquired in the Neurologic transaction which is not deductible.
As of March 31, 2007, we had federal, state and foreign NOLs that are available to reduce
future taxable income of approximately $36.0 million, $21.5 million and $0.9 million,
respectively. The federal NOLs will expire at various dates beginning in 2012, state NOLs will
expire beginning in 2008 and the foreign NOLs will expire beginning in 2013. We also have federal
and state tax research and development credit carryforwards of approximately $1.0 million and $0.9
million, respectively. The federal tax credit carryforwards will expire beginning in 2012. The
state tax credit carryforwards can be carried forward indefinitely. Due to the uncertainty of our
ability to generate sufficient taxable income to realize the carryforwards prior to their
expiration, we have recorded a valuation allowance at September 30, 2007 to offset our federal and
state deferred tax assets.
24
Six Months Ended September 30, 2007 and 2006
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
September 30, |
|
|
Change |
|
(Dollars in thousands) |
|
2007 |
|
|
2006 |
|
|
$ |
|
|
% |
|
Americas |
|
$ |
17,938 |
|
|
$ |
14,097 |
|
|
$ |
3,841 |
|
|
|
27 |
% |
Europe |
|
|
11,390 |
|
|
|
7,692 |
|
|
|
3,698 |
|
|
|
48 |
% |
Asia Pacific |
|
|
1,824 |
|
|
|
5,421 |
|
|
|
(3,597 |
) |
|
|
(66 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
31,152 |
|
|
$ |
27,210 |
|
|
$ |
3,942 |
|
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in total revenues in the first six months of fiscal 2008 compared to the first
six months of fiscal 2007 was primarily due to an increase in the number of microcoil products sold
in the first six months of fiscal 2008, and to a lesser extent the number of
non-embolic products sold as compared to the same period in fiscal 2007. Total revenues in the
first six months of fiscal 2008 increased primarily due to the introduction of new products
including stents and access products. This increase was partially offset by a decrease in revenues
from Asia Pacific. Revenues from Asia Pacific were $1.8 million in the first six months of fiscal
2008, and included sales of $1.1 million to our distributor in Japan, compared with revenues of
$5.4 million for the same period, which included sales of $5.1 million to Japan. The decline in
revenues from Japan was primarily a result of no sales in the second
quarter of fiscal 2008 due to product approval delays for our stretch-resistant product lines in
Japan. We currently believe that we will gain the additional regulatory approvals necessary to sell
our stretch-resistant and Cerecyte microcoils in Japan within the next 12 months. The timing of
these approvals will be later than we had initially anticipated. The delay in these product
approvals could have an adverse impact on the revenues previously anticipated from sales in Japan
for fiscal 2008. Goodman is required to purchase a minimum of $5.5 million of Micrus products
during fiscal 2008, and they have purchased regulatory approved products in the amount of $1.1
million which we have recognized as revenue during the first six
months of fiscal 2008. While there were no product sales to Japan in
the second quarter of fiscal 2008, we received additional orders
during the second quarter from Goodman for our stretch-resistant products in the amount of
$1.6 million which will be shipped and recorded as revenue following regulatory approval. Revenues from our non-embolic
products were $1.6 million in the first six months of fiscal 2008 compared with revenues of
$394,000 in the first six months of fiscal 2007.
We
are also preparing to enter the Chinese market through our
distribution partner, TXF
Medical. We will begin selling our products in China upon receiving regulatory approval. We
currently believe that we will gain regulatory approvals to market the full Micrus product line in
China. However, we have recently learned that the timing of product approvals in China will be
delayed due to a pending review by the SFDA of drug and medical device approvals granted during the
term of the former SFDA minister. We believe this review process along with more stringent
approval procedures will significantly delay review and approval of applications for new products.
Therefore, we do not expect to recognize revenues from sales in China this fiscal year.
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
September 30, |
|
Change |
(Dollars in thousands) |
|
2007 |
|
2006 |
|
$ |
|
% |
Cost of goods sold |
|
$ |
6,886 |
|
|
$ |
7,156 |
|
|
$ |
(270 |
) |
|
|
(4 |
%) |
Gross profit |
|
|
24,266 |
|
|
|
20,054 |
|
|
|
4,212 |
|
|
|
21 |
% |
The decrease in cost of goods sold during the first six months of fiscal 2008
as compared to
the first six months of fiscal 2007 was primarily due to an increase in manufacturing efficiencies
that have lowered per unit costs, partially offset by additional
provisions for excess
and expired inventories resulting from slower inventory turns and increased costs attributable to a
general increase in salaries and benefits. The cost of goods sold in the first six months of fiscal
2008 includes $409,000 related to the amortization of intangibles acquired from the acquisition of
VasCon on November 30, 2006 and $112,000 related to the amortization
of capitalized license fees which we started to amortize in the third quarter of fiscal 2007
when we began selling the Pharos stent product and generating revenue.
Gross margin was 78% in the first six months of fiscal 2008 and 74% in the first six months of
fiscal 2007. The increase was primarily due to an increase in revenue from sales of higher margin
products as well as increased manufacturing efficiencies that have lowered per unit costs, and
fewer distributor sales of lower margin products primarily as a
result of lower product sales to Japan in the first six months of fiscal 2008.
25
Operating Expenses
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
September 30, |
|
Change |
(Dollars in thousands) |
|
2007 |
|
2006 |
|
$ |
|
% |
Research and development |
|
$ |
4,582 |
|
|
$ |
4,256 |
|
|
$ |
326 |
|
|
|
8 |
% |
Research and development expenses increased in the first six months of fiscal 2008 compared to
the first six months of fiscal 2007 primarily due to an increase of $0.9 million related to
increased headcount, an increase of $294,000 in supplies expense, an increase of $205,000 in animal
and product testing and consulting expense, as well as an increase of $148,000 in stock-based
compensation expense primarily due to SFAS 123R. This increase was partially offset by a decrease
of $1.4 million in technology acquisition costs primarily related to a milestone payment to
Vascular FX in the first quarter of fiscal 2007 in connection with the purchase of intellectual
property. We had recorded the milestone payment to Vascular FX as research and development expense
as there were no regulatory clearances for a product at that time. In the first six months of
fiscal 2008, approximately 22% of our research and development costs are attributable to our
subsidiary, MDT, formed on November 30, 2006 in connection with the acquisition of VasCon.
Sales and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
September 30, |
|
Change |
(Dollars in thousands) |
|
2007 |
|
2006 |
|
$ |
|
% |
Sales and marketing |
|
$ |
13,911 |
|
|
$ |
11,207 |
|
|
$ |
2,704 |
|
|
|
24 |
% |
Sales and marketing expenses increased in the first six months of fiscal 2008 compared to the
first six months of fiscal 2007 primarily due to an increase of $1.1 million in travel and
personnel costs due to an increase in sales and marketing personnel in the United States and
Europe, an increase of $0.6 million in costs associated with meetings, conferences and trade shows,
an increase of $421,000 primarily associated with the randomized post-marketing study of our
Cerecyte® product, an increase of $283,000 in sales incentives on higher levels of sales, as well
as an increase of $174,000 in stock-based compensation expense primarily due to SFAS 123R.
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
September 30, |
|
Change |
(Dollars in thousands) |
|
2007 |
|
2006 |
|
$ |
|
% |
General and administrative |
|
$ |
11,646 |
|
|
$ |
8,893 |
|
|
$ |
2,753 |
|
|
|
31 |
% |
General and administrative expenses increased in the first six months of fiscal 2008 compared
to the first six months of fiscal 2007 primarily due to an increase of $1.5 million related to
higher finance and administrative personnel costs due to increased headcount, an increase of $0.8
million in stock-based compensation expense primarily due to SFAS 123R, an increase of $160,000 in
legal fees associated with our FCPA compliance, as well as an increase in audit fees of $140,000
related primarily to the year end audit. These increases were offset by a decrease in common stock
offering costs of $0.6 million incurred on behalf of the selling stockholders in
connection with our secondary offering completed during the second quarter of fiscal 2007. In
the first six months of fiscal 2008, approximately 7% of our general and administrative costs are
attributable to our subsidiary, MDT, formed on November 30, 2006 in connection with the acquisition
of VasCon.
26
Other Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
September 30, |
|
|
Change |
|
(Dollars in thousands) |
|
2007 |
|
|
2006 |
|
|
$ |
|
|
% |
|
Interest and investment income |
|
$ |
711 |
|
|
$ |
785 |
|
|
$ |
(74 |
) |
|
|
(9 |
%) |
Interest expense |
|
|
(2 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
Other income, net |
|
|
360 |
|
|
|
333 |
|
|
|
27 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net |
|
$ |
1,069 |
|
|
$ |
1,118 |
|
|
$ |
(49 |
) |
|
|
(4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net decreased in the first six months of fiscal 2008 compared to the first
six months in fiscal 2007 primarily due to lower interest and investment income resulting from
lower average cash and investment balances earning interest partially offset by foreign exchange
gains resulting from differences in exchange rates between the time of the recording of the
transaction and settlement of foreign currency denominated receivables and payables.
Income Taxes
In the first six months of fiscal 2008, we recorded an income tax benefit of approximately
$399,000. The income tax benefit includes an income tax benefit of $283,000 for our Swiss
subsidiary and a non-current tax benefit of approximately $116,000 for the tax effect of the two
quarters amortization related to the intangible assets acquired in the Neurologic transaction which
is not deductible.
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
September 30, |
|
|
2007 |
|
2006 |
|
|
(Dollars in thousands) |
Cash flow activities: |
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
$ |
(4,065 |
) |
|
$ |
(1,720 |
) |
Net cash used in investing activities |
|
$ |
(3,154 |
) |
|
$ |
(2,646 |
) |
Net cash provided by financing activities |
|
$ |
1,816 |
|
|
$ |
2,741 |
|
Since our inception, we have funded our operations primarily through issuances of stock and
related warrants.
As of September 30, 2007, we had cash and cash equivalents of $28.7 million, compared to $34.5
million at March 31, 2007. We believe that our current cash position and the cash expected to be
generated from product sales will be sufficient to meet our working capital and capital expenditure
requirements for at least the next twelve months.
Net cash used in operating activities was $4.1 million during the first six months of fiscal
2008 compared to $1.7 million during the first six months of fiscal 2007. Net cash used in
operating activities during the first six months of fiscal 2008 resulted primarily from operating
losses, an increase in inventory due to the buildup of finished goods inventory in anticipation of
future sales upon regulatory approvals in Japan and China and an increase in the number of
consignment locations, an increase in prepaid expenses and other current assets, a decrease in
accounts payable due to timing of payments made to our vendors, a decrease in accrued payroll and
related expenses attributable to the payment of fiscal 2007 employee cash bonuses and a decrease in
other non-current liabilities.
These factors were partially offset by a decrease in accounts receivable resulting from lower
revenues in the quarter, an increase in accrued liabilities due to accrued professional fees
associated with legal fees and Sarbanes Oxley compliance and higher VAT payables, and non-cash
items such as stock-based compensation expense primarily due to SFAS 123R, depreciation and
amortization, deferred tax benefit and provision for excess and obsolete inventories.
Net cash used in operating activities during the first six months of fiscal 2007 resulted
primarily from operating losses, an increase in inventory primarily due to an increase in the
number of consignment locations, an increase in prepaid expenses and other current assets primarily
related to the payment of directors and officers insurance premiums, and a decrease in accounts
payable due to timing of payments made to our vendors. These factors
were partially offset by an increase in accrued liabilities primarily
due to accrued professional fees associated with legal fees and higher VAT payables, an
increase in accrued payroll and related expenses attributable to increased headcount and the timing
of payroll payments, a decrease in accounts receivable due to
collection efforts which resulted in
lower days sales outstanding, and noncash items such as stock-based compensation expense primarily
due to the adoption of SFAS 123R, depreciation and amortization, and provision for excess and
obsolete inventories.
27
Net cash used in investing activities was $3.2 million during the first six months of fiscal
2008 compared to $2.6 million during the first six months of fiscal 2007. Net cash used in
investing activities during the first six months of fiscal 2008 was primarily related to the
earn-out payment associated with the purchase of Neurologic and the purchase of capital equipment.
Net cash used in investing activities during the first six months of fiscal 2007 was primarily
related to the earn-out payment associated with the purchase of Neurologic, a milestone payment to
Biotronik which has been capitalized as licensed technology and the purchase of capital equipment.
Net cash provided by financing activities was $1.8 million during the first six months of
fiscal 2008 compared to $2.7 million during the first six months of fiscal 2007. Net cash provided
by financing activities during the first six months of fiscal 2008 consisted of proceeds from the
exercise of stock options and employee stock purchase plan.
Net cash provided by financing activities during the first six months of fiscal 2007 consisted
of net proceeds from the exercise of the over-allotment option by the underwriters in connection
with our secondary offering, and proceeds from the exercise of stock options and employee stock
purchase plan.
To the extent that existing cash and cash generated from operations are insufficient to fund
our future activities, we may need to raise additional funds through public or private equity or
debt financing. On October 26, 2007, we entered into a definitive agreement with respect to the
acquisition of ReVasc providing us access to revascularization technology for the treatment of
ischemic stroke. We may enter into additional agreements with respect to potential investments in,
or acquisitions of, complementary businesses, services or technologies in the future, which could
require us to seek additional funds through public or private equity or debt financing. Additional
funds may not be available on terms favorable to us or at all.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with accounting principles
generally accepted in the United States (GAAP). In doing so, we have to make estimates and
assumptions that affect our reported amounts of assets, liabilities, revenues and expenses, as well
as related disclosure of contingent assets and liabilities. In many cases, we could reasonably have
used different accounting policies and estimates. In some cases, changes in the accounting
estimates are reasonably likely to occur from period to period. Accordingly, actual results could
differ materially from our estimates. To the extent that there are material differences between
these estimates and actual results, our financial condition or results of operations will be
affected. We base our estimates on past experience and other assumptions that we believe are
reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer
to accounting estimates of this type as critical accounting policies and estimates, which we
discuss below. Our management has reviewed our critical accounting policies and estimates with our
accounting advisors, audit committee and board of directors.
Our significant accounting policies are fully described in Note 2 to our Consolidated
Financial Statements included in our annual report filed on Form 10-K for the fiscal year ended
March 31, 2007, that was filed with the SEC on June 7, 2007 except for a description of our income
taxes critical accounting policy and our adoption of FIN 48 on April 1, 2007, the beginning of our
2008 fiscal year. See Notes 2 and 4 in this Quarterly Report for further information regarding the
adoption of FIN 48.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 defines fair
value, establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. SFAS 157 applies to other
accounting pronouncements that require or permit fair value measurements, the FASB having
previously concluded in those accounting pronouncements that fair value is the relevant measurement
attribute. Accordingly, this Statement does not require any new fair value measurements. However,
for some entities, the application of SFAS 157 will change current practice. The provisions of SFAS
157 are effective as of the beginning of our 2009 fiscal year. We are currently evaluating the
impact of SFAS 157, but do not expect the adoption of SFAS 157 to have a material impact on our
consolidated financial position, results of operations or cash flows.
28
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities, which expands opportunities to use fair value measurements in financial
reporting and permits entities to choose to measure many financial instruments and certain other
items at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We
are currently evaluating the impact of SFAS 159, but do not expect the adoption of SFAS 159 to have
a material impact on our consolidated financial position, results of operations or cash flows.
Contractual Obligations
We have obligations under non-cancelable operating leases with various expiration dates
through 2013 and purchase commitments for inventory, capital equipment and operating expenses, such
as materials for research and development and consulting.
As of September 30, 2007, our contractual commitments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less than |
|
|
1-3 |
|
|
3-5 |
|
|
Beyond |
|
Contractual obligations: |
|
Total |
|
|
1 year |
|
|
years |
|
|
years |
|
|
5 years |
|
Non-cancelable operating lease obligations |
|
$ |
3,144 |
|
|
$ |
681 |
|
|
$ |
1,800 |
|
|
$ |
663 |
|
|
$ |
|
|
Purchase commitments |
|
|
2,314 |
|
|
|
2,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,458 |
|
|
$ |
2,995 |
|
|
$ |
1,800 |
|
|
$ |
663 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We are required to pay future earn-out amounts associated with the purchase of Neurologic. The
future earn-out payments will be one-third of Neurologics product sales during specified periods.
We paid the first and second year earn-out payments in April 2006 and April 2007.
We are required to pay future earn-out amounts associated with the purchase of VasCon. The
future earn-out payments will be an amount not to exceed $10 million based on the sales and
manufacturing performance of Micrus Design Technology, Inc. as set forth in the asset purchase
agreement. No earn-out payment has been accrued or paid to date.
We are required to pay The Cleveland Clinic up to $5 million in payments upon the achievement
of certain milestones set forth in the stock purchase agreement, with minimum milestone payments of
at least $2 million to The Cleveland Clinic upon the third anniversary of the closing of the
acquisition of ReVasc stock.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Foreign Currency Market Risks. Historically, we have been exposed to risks from fluctuations
in currency exchange rates due to intercompany loans made to Micrus SA, our Swiss subsidiary, in
2001 in connection with its incorporation. These loans are denominated in Swiss francs and will
fluctuate in value against the U.S. dollar, causing us to recognize foreign exchange gains and
losses. The functional currency of our Swiss subsidiary is the Swiss franc. The functional currency
of our UK subsidiary is the pound sterling. In Europe, our revenues are denominated in Swiss
francs, euros, pounds sterling and other currencies. Accordingly, we are exposed to market risk
related to changes between the Swiss franc and these other currencies. If the Swiss franc
appreciates against the currencies in which our receivables are denominated, we will recognize
foreign currency losses. For the preparation of our
consolidated financial statements, the financial results of our Swiss subsidiary are
translated into U.S. dollars based on average exchange rates during the applicable period. A
hypothetical 10% decline in the value of the Swiss franc versus the U.S. dollar would cause us to
recognize a loss of $175,000 related to our loan with Micrus SA and a $211,000 decrease in our
comprehensive loss from our investment in Micrus SA as of September 30, 2007. A hypothetical 10%
decline in the value of the pound sterling versus the U.S. dollar would cause us to recognize a
$221,000 decrease in our comprehensive loss from our investment in Micrus UK as of September 30,
2007. A hypothetical 10% decline in the value of the Euro versus the Swiss franc would cause us to
recognize a loss of $216,000 based on our foreign denominated receivables as of September 30, 2007.
In the first six months of fiscal 2008, approximately 37% of our revenues were denominated in
currencies other than the U.S. dollar. In future periods, we believe a greater portion of our
revenues could be denominated in currencies other than the U.S. dollar, thereby increasing our
exposure to exchange rate gains and losses on non-U.S. currency transactions. We do not currently
enter into forward exchange contracts to hedge exposure denominated in foreign currencies or any
other derivative financial instruments for trading or speculative purposes. In the future, if we
believe our currency exposure merits, we may consider entering into transactions to help mitigate
that risk.
29
Interest Rate Market Risk. Our cash is invested in bank deposits and money market funds
denominated in U.S. dollars. The carrying value of these cash equivalents approximates fair market
value. Our investments in marketable securities are subject to interest rate risk, which is the
risk that our financial condition and results of operations could be adversely affected due to
movements in interest rates.
Item 4. Controls and Procedures
(1) Disclosure controls and procedures
Our management, with the participation of our Chairman of the Board of Directors and Chief
Executive Officer, John T. Kilcoyne, and our President, Chief Operating Officer, Chief Financial
Officer and Secretary, Robert A. Stern, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on their
evaluation, they concluded that our disclosure controls and procedures as of September 30, 2007
were effective in providing reasonable assurance that material information relating to our company
is made known to management on a timely basis during the period when our periodic reports are being
prepared.
(2) Changes in internal controls
There were no changes in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2007 that
have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
Part II OTHER INFORMATION
Item 1. Legal Proceedings.
FCPA Investigation
See the risk factor regarding international operations on page 35 below for a discussion of
the FCPA investigation we carried out in 2004 and our resulting agreement with the Department of
Justice.
Patent Litigation
See
the risk factor regarding patent litigation below on page 32 for a detailed discussion of
our patent litigation with Boston Scientific Corporation.
Discovery is ongoing in the patent litigation with Boston Scientific Corporation. A hearing on
claim construction was held on June 1, 2007. The Court has not calendared any other dates.
Securities Litigation
See the risk factor regarding securities litigation below on page 31 for a detailed discussion
of this litigation.
Item 1A. Risk Factors.
Certain Factors that May Affect Our Business and Future Results
Some of the information included herein contains forward-looking statements as defined in
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Such forward-looking statements are based on the beliefs of, estimates
made by and information currently available to our management and are subject to certain risks,
uncertainties and assumptions. Any statements contained herein (including, without limitation,
statements to the effect that the Company, we, or management may, will, expects,
anticipates, estimates, continues, plans, believes, or projects, or statements
concerning potential or opportunity, and any variations thereof, comparable terminology or the
negative thereof) that are not statements of historical fact should be construed as forward-looking
statements. Our actual results may vary materially from those expected in these forward-looking
statements. The realization of such forward-looking statements may be impaired by risks including,
but not limited to the following:
30
Our future success is dependent on the continued growth in embolic coiling procedures and our
ability to convince a concentrated customer base of neurointerventionalists to use our products as
an alternative to other available products.
Our future success and revenue growth are significantly dependent upon an increase in the use
of embolic coiling as a procedure to treat cerebral aneurysms. If the number of embolic coiling
procedures does not increase or if a new procedure that does not employ our products becomes a more
acceptable alternative among neurointerventionalists, our business would be seriously harmed.
The number of interventional neuroradiologists and neurosurgeons trained to conduct embolic
coiling procedures is relatively small, both in the United States and abroad. There are currently
approximately 300 neurointerventionalists in the United States who perform embolic coiling
procedures. We believe less than one-third of these physicians perform a substantial majority of
the total number of embolic coiling procedures per year. For the first six months of fiscal 2008, a
substantial portion of our product sales were to approximately 93 hospitals in the United States.
The growth in the number of interventional neuroradiologists and neurosurgeons in the United States
is constrained by the lengthy training programs required to educate these physicians. Accordingly,
our revenue growth will be primarily dependent on our ability to increase sales of our products to
our existing customers and to increase sales of products to trained neurointerventionalists that
currently use products offered by our competitors. We believe that neurointerventionalists who do
not currently use our products will not widely adopt our products unless they determine, based on
experience, clinical data and published peer reviewed journal articles, that our products provide
benefits or an attractive alternative to the clipping of aneurysms or the use of competitors
products. We believe neurointerventionalists base their decision to use an alternative procedure or
product on the following criteria, among others:
|
|
|
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
physicians are essential for market acceptance and adoption. If we do not receive continued support
from such influential physicians, neurointerventionalists and hospitals may not use our products.
In such circumstances, we may not achieve expected revenue levels and our business will suffer.
We are party to securities litigation, which, if determined adversely to us, could materially harm
our business and financial results.
On October 3, 2007, a purported securities class action complaint (the Complaint) was filed
in the United States District Court for the Southern District of Florida against Micrus and certain
of our directors and officers (the Defendants). The Complaint alleges that Micrus and the
individual defendants made materially false and/or misleading statements or omissions in violation
of the federal
securities laws during the period of February 12, 2007 through September 16, 2007 (the Class
Period). The Complaint seeks to recover damages on behalf of anyone who purchased or otherwise
acquired our stock during the Class Period. We intend to take all appropriate action in response to
this lawsuit. We are unable to estimate any possible loss at this time, and there can be no
assurance that this action will be resolved in our favor. Claims successfully asserted against us
may cause us to pay substantial damages or result in other injunctive relief. Further, defending
the action will likely be time-consuming and may result in the diversion of managements time and
attention away from business operations, which could harm our business and financial results. In
addition, costs of defense and any damages resulting from the litigation may materially adversely
affect our business and financial results. The litigation may also harm our relationships with
existing customers and subject us to negative publicity, each of which could harm our business and
financial results.
31
We are currently involved in a patent litigation action involving Boston Scientific Corporation
and, if we do not prevail in this action, we could be liable for past damages and be prevented
from making, using, selling, offering to sell, importing into the U.S. or exporting from the U.S.,
our microcoils, our primary product line.
In September 2004, Boston Scientific Corporation and Target Therapeutics, Inc., a subsidiary
of Boston Scientific Corporation, (collectively Boston Scientific), filed a patent infringement
suit in the United States District Court for the Northern District of California, alleging that our
embolic coil products infringe two patents held by Boston Scientific and that this infringement is
willful. Sales of our embolic coil products currently represent virtually all of our revenues.
Boston Scientific is a large, publicly-traded corporation with significantly greater financial
resources than us.
In November 2004, we answered Boston Scientifics complaint and counterclaimed, alleging that
Boston Scientifics embolic coil products, and their use, infringe three of our patents. In
addition, we alleged that Boston Scientific has violated United States antitrust laws, and has
violated certain California state laws by committing unfair business practices, disparaging our
products, and interfering with the our prospective economic advantage. In November 2006, we
withdrew one of our three asserted patents from the litigation to pursue a reissue application
filed with the United States Patent and Trademark Office (USPTO). Each party seeks an injunction
preventing the making, using, selling, offering to sell, importing into the U.S. or exporting from
the U.S., of the others embolic coil products in the United States, damages for past infringement,
which may be trebled, and payment of its legal fees and costs. In addition, each party seeks a
declaration that the patents of the other are invalid and not infringed and has alleged that
certain of the asserted patents of the other are unenforceable due to inequitable conduct.
In January 2005, Boston Scientific filed a motion to dismiss our claims for disparagement,
interference with prospective economic advantage and unfair business practices. That motion has
been fully briefed but no oral argument has been heard or scheduled and the Court has not ruled on
the motion.
Boston Scientific is also a party in two other lawsuits against Cordis and ev3/Micro
Therapeutics, Inc. in which the Boston Scientific patents, which are the basis of Boston
Scientifics suit against us, are also at issue. An outcome of either of these lawsuits adverse to
Cordis or ev3/Micro Therapeutics, Inc., and related to the same patent claims Boston Scientific
asserts against us, could have an adverse impact on certain of our defenses in our litigation with
Boston Scientific.
In October 2004, Cordis requested ex parte reexamination of certain claims in those patents.
In February 2005, the court granted a stay of the Boston Scientific lawsuit against Micrus until
the earlier of 12 months or the outcome of the reexamination by the USPTO in the Cordis case. In
February 2006, the USPTO issued a Notice of Intent to Issue Ex Parte Reexamination Certificate for
one of the two patents, apparently confirming all of the claims of that patent. In February 2006,
the USPTO also issued an Office Action in which it apparently confirmed the patentability of
certain of the claims in the second patent, but rejected the remainder. Boston Scientific has
stated to the USPTO and to the court that the rejected claims from the second patent can be
reissued and certified as patentable upon reexamination if a correction is made to the priority
chain for the second patent.
In March 2006, the court lifted the stay with respect to any claims that were confirmed as
patentable in the reexamination proceedings and has permitted discovery in the case to commence
with respect to those claims. Micrus subsequently negotiated with Boston Scientific, and the Court
confirmed, a schedule that would permit discovery and claim construction proceedings to proceed for
the second patent while it is still undergoing reexamination and reissue proceedings. Since the
stay was lifted, Micrus and Boston Scientific have exchanged preliminary infringement and
invalidity contentions, expert reports, claim construction briefs, and have deposed each others
expert witnesses concerning each of the four patents-in-suit. Discovery is ongoing in the case. A
hearing on claim construction was held on June 1, 2007. The Court has not calendared any other
dates.
We are unable at this time to determine the likely outcome of the patent litigation. Patent
lawsuits involve complex legal and factual issues which can take a number of years and a great deal
of expense and management attention to resolve. We may also be subject to negative publicity due to
the litigation. In the event it is determined that we infringe patent claims asserted by Boston
Scientific and that those claims are not invalid and not unenforceable we may, among other things,
be required to do one or more of the following:
|
|
|
pay damages, including up to treble damages and Boston Scientifics attorneys fees
and costs, which may be substantial; |
|
|
|
|
cease, because of an injunction, the making, using, selling, offering to sell,
importing into the U.S. or exporting from the U.S. of our embolic coil products, which
currently represent virtually all of our revenues, found to infringe the patent claims
asserted by Boston Scientific; |
|
|
|
|
expend significant resources to redesign our technology so that it does not
infringe the patent claims asserted by Boston Scientific, which may not be possible; |
32
|
|
|
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 embolic coil products were found to infringe, any development or acquisition of
products or technologies that do not infringe the patent claims asserted by Boston Scientific could
require the expenditure of substantial time and other resources and could have a material adverse
effect on our business and financial results. If we were required to but could not obtain a license
under the patent claims asserted by Boston Scientific, we would likely be prevented from
commercializing or further commercializing the relevant products. We believe that it is unlikely
that we would be able to obtain a license under the patent claims being asserted by Boston
Scientific. If we need to redesign our products to avoid the patent claims being asserted by Boston
Scientific, we may suffer significant regulatory delays associated with conducting additional
studies or submitting technical, manufacturing or other information related to the redesigned
product and, ultimately, in obtaining approval.
As a result of Boston Scientifics answer to our counterclaim that Boston Scientific infringes
our two remaining patents-in-suit, the validity of those patents is now at issue in the lawsuit.
The court could find that those patents are invalid, which would prevent us from asserting those
patents against third parties.
An unfavorable outcome for us in this patent litigation would significantly harm our business
and may cause us to materially change our business model.
We have a limited operating history, have incurred significant operating losses since inception,
and expect to continue to incur losses, and we cannot assure you that we will achieve
profitability.
We were incorporated in the State of Delaware in 1996, and began commercial sales of our
microcoil products in 2000. We have yet to demonstrate that we can generate sufficient sales of our
products to become profitable. The extent of our future operating losses and the timing of
profitability are uncertain, and we may never achieve profitability. We have incurred significant
net losses since our inception, including losses of approximately $5.5 million, $8.3 million and
$6.7 million for the fiscal year ended March 31, 2007, 2006 and 2005, respectively. We incurred a
net loss of $4.4 million and $3.1 million in the first six months of fiscal 2008 and 2007,
respectively. At September 30, 2007, we had an accumulated deficit of $59.5 million. It is possible
that we will never generate sufficient revenues from product sales to achieve profitability. Even
if we do achieve significant revenues from our product sales, we expect our operating expenses to
increase as we, among other things:
|
|
|
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 products; |
|
|
|
|
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; |
|
|
|
|
acquire and/or license new technologies; 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.
33
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:
|
|
|
neurointerventionalist and patient acceptance of our products; |
|
|
|
|
changes in the number of embolic coiling procedures performed to treat cerebral
aneurysms; |
|
|
|
|
the seasonality of our product sales; |
|
|
|
|
the mix of our products sold; |
|
|
|
|
stocking patterns for distributors; |
|
|
|
|
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; |
|
|
|
|
levels of third-party reimbursement for our products; |
|
|
|
|
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; |
|
|
|
|
the amount and timing of our operating expenses; |
|
|
|
|
litigation expenses; |
|
|
|
|
fluctuations in foreign currency exchange rates; |
|
|
|
|
regulatory approvals and legislative changes affecting the products we may offer or
those of our competitors; |
|
|
|
|
the effect of competing technological and market developments; |
|
|
|
|
changes in our ability to obtain and maintain FDA approval or clearance for our
products; |
|
|
|
|
inventory adjustments we may have to make in any quarter; |
|
|
|
|
interruption in the manufacturing or distribution of 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; and |
|
|
|
|
amount and timing of capital expenditures and other costs relating to any potential
expansion of our operations. |
Many of the products we may seek to develop and introduce in the future will require FDA
approval or clearance and will be required to meet similar regulatory requirements in other
countries where we seek to market our products, without which we cannot begin to commercialize
them. Forecasting the timing of sales of our products is difficult due to the delay inherent in
seeking FDA and other clearance or approval, or the failure to obtain such clearance or approval.
In addition, we will be increasing our operating expenses as we build our commercial capabilities.
Accordingly, we may experience significant, unanticipated quarterly losses. Because of these
factors, our operating results in one or more future quarters may fail to meet the expectations of
securities analysts or investors, which could cause our stock price to decline significantly.
34
We may not be able to develop new products or product enhancements that will be accepted by the
market.
Our success will depend in part on our ability to develop and introduce new products and
enhancements to our existing products. We cannot assure you that we will be able to successfully
develop or market new products or that any of our future products will be accepted by the
neurointerventionalists who use our products or the payors who reimburse for many of the procedures
performed with our products. The success of any new product offering or enhancement to an existing
product will depend on several factors, including our ability to:
|
|
|
properly identify and anticipate interventionalist and patient needs; |
|
|
|
|
develop new products or enhancements in a timely manner; |
|
|
|
|
obtain the necessary regulatory approvals for new products or product enhancements; |
|
|
|
|
provide adequate training to potential users of our products; |
|
|
|
|
receive adequate reimbursement for our procedures; and |
|
|
|
|
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 Securities and Exchange Commission (SEC). We must remain in complete compliance with
these conditions for a period of two years, or face the filing of a criminal complaint against us.
The independent monitor is currently assessing our compliance with
the terms of the agreement. The terms of the DOJ Agreement will bind our successors, or any merger partners, as long as the DOJ
Agreement is in effect.
The payments we made to physicians in France, Germany, Spain and Turkey are also likely to
have violated the applicable laws in those foreign jurisdictions and may possibly have violated
laws in Switzerland, where our Swiss subsidiary is located. We are not able to determine at this
time what penalties or other sanctions, if any, authorities in France, Germany, Spain or Turkey may
impose on us as a result of such violations. Such amounts could be material to our financial
position, results of operations or cash flows. We have been notified by the Swiss Federal
Prosecutor that it does not intend to bring any action or impose any penalties on us relating to
our activities in Switzerland.
35
Though we have adopted a number of compliance procedures, including a Foreign Corrupt
Practices Act Policy and related procedures, and appointed a Compliance Officer, we cannot assure
you that we will be able to comply with the various regulations in foreign jurisdictions, which
vary from country to country. Implementing and monitoring such compliance procedures in a number of
foreign jurisdictions can be very expensive and time-consuming. Any failure by us to adopt
appropriate compliance procedures and ensure that our employees and agents comply with applicable
laws and regulations in foreign jurisdictions could result in substantial penalties and/or
restrictions in our ability to sell products in certain foreign jurisdictions.
We are in a highly competitive market segment, face competition from large, well-established
medical device manufacturers with significant resources, and may not be able to increase
penetration in our markets or otherwise compete effectively.
The market for medical devices for treatment of cerebral vascular diseases is intensely
competitive, subject to rapid change and significantly affected by new product introductions and
other market activities of industry participants. We compete primarily with the Target Therapeutics
division of Boston Scientific Corporation, the market leader, as well as Cordis, ev3/Micro
Therapeutics and Terumo/MicroVention. At any time, other companies may develop alternative
treatments, products or procedures for the treatment of cerebral aneurysms that compete directly or
indirectly with our products. If alternative treatments prove to be superior to our microcoil or
other products, continued use or adoption of our products could be negatively affected and our
future revenues could suffer.
In addition, most of our current and potential competitors are either large publicly traded or
divisions or subsidiaries of large publicly traded companies, and enjoy several competitive
advantages over us, including:
|
|
|
greater financial and personnel resources; |
|
|
|
|
significantly greater name recognition; |
|
|
|
|
established relationships with neurointerventionalists; |
|
|
|
|
established distribution networks; |
|
|
|
|
greater experience in obtaining and maintaining FDA, and other regulatory approvals
for products and product enhancements, and greater experience in developing compliance
programs for compliance with numerous federal, state, local and similar laws in non-U.S.
jurisdictions; |
|
|
|
|
greater resources for product research and development; |
|
|
|
|
greater experience in, and resources for, launching, marketing, distributing and
selling products; and |
|
|
|
|
broader product lines. |
Except for our agreements with our distributors, we have no material long-term purchase
agreements with our customers, who may at any time switch to the use of our competitors products.
For these reasons, we may not be able to compete successfully against our current or potential
future competitors and sales of our products and our revenues may decline.
Our sales in international markets subject us to foreign currency exchange and other risks and
costs that could harm our business.
A substantial portion of our revenues are derived from outside the U.S. For the fiscal years
ended March 31, 2007, 2006 and 2005, revenues from customers outside the U.S. represented
approximately 51%, 53% and 48%, respectively, of our revenues. For the first six months of fiscal
2008, revenues from customers outside the U.S. represented 47% of our revenues. We anticipate that
revenues from international customers will continue to represent a substantial portion of our
revenues as we continue to expand in new international markets including China and Japan. Because
we generate revenues in foreign currencies, we are subject to the effects of exchange rate
fluctuations. For the first six months of fiscal 2008, approximately 37% of our revenues were
denominated in currencies other than the U.S. dollar.
36
The functional currency of our Swiss
subsidiary is the Swiss franc. In Europe, our revenues are denominated in Swiss francs, euros,
pounds sterling and U.S. dollars. Accordingly, we are exposed to market risk related to changes
between the Swiss franc and these other currencies in which we conduct business. If the Swiss franc
appreciates against the currencies in which our receivables are denominated, we will recognize foreign currency losses. For the
preparation of our consolidated financial statements, the financial results of our Swiss and UK
subsidiaries are translated into U.S. dollars based on average exchange rates during the applicable
period. If the U.S. dollar appreciates against the Swiss franc and pound sterling, the revenues we
recognize from sales by our European subsidiaries will be adversely impacted. Historically, we have
also been exposed to risks from fluctuations in currency exchange rates due to intercompany loans
made to Micrus SA, our Swiss subsidiary, in 2001 in connection with its incorporation. These loans
are denominated in Swiss francs and will fluctuate in value against the U.S. dollar, causing us to
recognize foreign exchange gains and losses. Foreign exchange gains or losses as a result of
exchange rate fluctuations in any given period could harm our operating results and negatively
impact our revenues. Additionally, if the effective price of our products were to increase as a
result of fluctuations in foreign currency exchange rates, demand for our products could decline
and adversely affect our results of operations and financial condition. We currently do not enter
into foreign currency forward contracts and other arrangements intended to hedge our exposure to
adverse fluctuations in exchange rates.
We are subject to various additional risks as a consequence of doing business internationally,
and, in particular in Argentina, Brazil, Chile, Columbia, Costa Rica, Mexico, Peru, Venezuela,
Greece and Turkey, each of which could harm our business, including the following:
|
|
|
unexpected delays or changes in regulatory requirements; |
|
|
|
|
local economic and political instability or other potentially adverse conditions; |
|
|
|
|
lack of experience in certain geographical markets; |
|
|
|
|
increased difficulty in collecting accounts receivables in certain foreign
countries; |
|
|
|
|
delays and expenses associated with tariffs and other trade barriers; |
|
|
|
|
difficulties and costs associated with attracting and maintaining third party
distributors; |
|
|
|
|
compliance with foreign laws and regulations; and |
|
|
|
|
adverse tax consequences or overlapping tax structures. |
If we fail to increase our direct sales force in a timely manner, our business could suffer.
We have a limited domestic and international direct sales force. We also have a distribution
network for sales in the major markets in Europe, Latin America, Asia and the Middle East. As we
launch new products and increase our marketing efforts with respect to existing products, we will
need to expand the number of our direct sales personnel on a worldwide basis. The establishment and
development of a more extensive sales force will be expensive and time consuming. There is
significant competition for sales personnel experienced in interventional medical device sales. If
we are unable to attract, motivate and retain qualified sales personnel and thereby increase our
sales force, we may not be able to increase our revenues.
If we fail to properly manage our anticipated growth, our business could suffer.
We have experienced, and may continue to experience, periods of rapid growth and expansion,
which have placed, and will likely continue to place, a significant strain on our limited personnel
and other resources. In particular, the expansion of our fabrication facility and the continuing
expansion of our direct sales force will require significant management, technical and
administrative resources. Any failure by us to manage our growth effectively, could have an adverse
effect on our ability to achieve our development and commercialization goals.
To achieve our revenue goals, we must successfully increase production in our fabrication
facility as required by customer demand. We may in the future experience difficulties in increasing
production, including problems with production yields and quality control and assurance and in
satisfying and maintaining compliance with regulatory requirements. These problems could result in
delays in product availability and increases in expenses. Any such delay or increased expense could
adversely affect our ability to generate revenues.
Future growth will also impose significant added responsibilities on management, including the
need to identify, recruit, train and integrate additional employees. In addition, rapid and
significant growth will place a strain on our administrative and operational infrastructure. In
order to manage our operations and growth we will need to continue to improve our operational,
financial and
37
management controls, reporting systems and procedures. If we are unable to manage our growth
effectively, it may be difficult for us to execute our business strategy and our operating results
and business could suffer.
We are required to evaluate our internal control over financial reporting under Section 404 of the
Sarbanes-Oxley Act of 2002 and are exposed to future risks of non compliance.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404), we are required to
furnish a report by our management on our internal control over financial reporting. The report
contains, among other matters, an assessment of the effectiveness of our internal control over
financial reporting as of the end of our fiscal year, including a statement as to whether or not
our internal control over financial reporting is effective. This assessment must include disclosure
of any material weaknesses in our internal control over financial reporting identified by
management. The report must also contain a statement that our independent registered public
accounting firm has issued an attestation report on the effectiveness of internal control over
financial reporting.
We completed our assessment of our internal control over financial reporting as required by
Section 404 for the fiscal year ended March 31, 2007. Our assessment, testing and evaluation
resulted in our conclusion that as of March 31, 2007, our internal control over financial reporting
was effective. Our independent registered accounting firm has also expressed the opinion that our
internal controls over financial reporting were effective during that period. However, our
controls, may not prove to be adequate for the future periods and we cannot predict the outcome of
our testing in future periods. If our internal controls are deemed to be ineffective in future
periods, our financial results or the market price of our stock could be adversely affected. In any
event, we will incur additional expenses and commitment of managements time in connection with
further evaluations, which may adversely affect our future operating results and financial
condition.
Our future capital needs are uncertain and we may need to raise additional funds in the future,
and such funds may not be available on acceptable terms or at all.
We believe that our current cash position, together with the cash to be generated from
expected product sales will be sufficient to meet our projected operating requirements for at least
the next 12 months. However, after such period we may be required to seek additional funds from
public and private stock or debt 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 and or acquiring new products or technologies; |
|
|
|
|
the cost of obtaining and maintaining FDA and other domestic and foreign approval
or clearance of our products and products in development; |
|
|
|
|
costs associated with our litigation with Boston Scientific and our securities
litigation; |
|
|
|
|
the expenses we incur related to compliance with the U.S. FCPA and laws and
regulations in non-U.S. jurisdictions; |
|
|
|
|
costs associated with compliance with the Sarbanes-Oxley Act of 2002 and rules and
regulations affecting public companies recently promulgated by the SEC and The NASDAQ
Stock Market; |
|
|
|
|
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
38
rights to our potential products or proprietary technologies, or grant licenses on terms that
are not favorable to us. If we cannot raise funds on acceptable terms, we may not be able to
develop or enhance our products, execute our business plan, take advantage of future opportunities,
or respond to competitive pressures or unanticipated customer requirements. In these events, our
ability to achieve our development and commercialization goals would be adversely affected.
If we choose to acquire new and complementary businesses, products or technologies instead of
developing them ourselves, we may be unable to complete these acquisitions or to successfully
integrate them in a cost effective and non-disruptive manner.
Our success depends on our ability to continually enhance and broaden our product offerings in
response to changing customer demands, competitive pressures and technologies. We may in the future
pursue the acquisition of additional complementary businesses, products or technologies instead of
developing them ourselves. We do not know if we will be able to successfully complete any such
acquisitions, or whether we will be able to successfully integrate any acquired business, product
or technology or retain any key employees. Integrating any business, product or technology we
acquire could be expensive and time consuming, disrupt our ongoing business and distract our
management. If we are unable to integrate any acquired businesses, products or technologies
effectively, our business will suffer. In addition, any amortization or charges resulting from the
costs of acquisitions could harm our business and operating results.
We are dependent on single source suppliers for components and materials used in our devices, and
the loss of any of these suppliers, or their inability to supply us with an adequate supply of
materials, could harm our business.
We rely on third-party suppliers for components and materials used in our products and rely on
single sources for many of the microcoil and delivery system components, including tubing,
connectors and sterilization services. Our dependence on third-party suppliers involves several
risks, including limited control over pricing, availability, quality, delivery schedules and
supplier compliance with regulatory requirements. Any delays in delivery of such components or
provision of such services or shortages of such components could cause delays in the shipment of
our products, which could significantly harm our business. We generally acquire our single source
components pursuant to purchase orders placed in the ordinary course of business, and we have no
guaranteed supply arrangements with any of our single source suppliers. Because of our reliance on
these vendors, we may also be subject to increases in component costs. These increases could
significantly harm our business. For us to be successful, our third-party suppliers must also be
able to provide us with the materials and components of our products in substantial quantities, in
compliance with regulatory requirements, in accordance with agreed upon specifications, at
acceptable cost and on a timely basis. Our anticipated growth may strain the ability of suppliers
to deliver an increasingly large supply of materials and components. If we are unable to obtain
sufficient quantities of high quality components and materials to meet customer demand on a timely
basis, we could lose customers, our reputation may be harmed and our business could suffer. If any
one or more of our third-party suppliers cease to provide us with sufficient quantities of our
materials or components in a timely manner or on terms acceptable to us, we would have to seek
alternative sources of supply. We could incur delays while we locate and engage alternative
qualified suppliers and we might be unable to engage alternative suppliers on favorable terms. Any
such disruption or increased expenses could harm our commercialization efforts and adversely affect
our ability to generate revenues.
We rely on independent contract manufacturers for the manufacture and assembly of certain of
our products and components. Reliance on independent contract manufacturers involves several risks,
including the potential inadequacy of capacity, the unavailability of or interruptions in access to
certain process technologies and reduced control over product quality, compliance with regulatory
requirements, delivery schedules, manufacturing yields and costs. Such manufacturers have
possession of and at times title to molds for certain manufactured components of our products.
Shortages of raw materials, production capacity constraints or delays by our contract manufacturers
could negatively affect our ability to meet our production obligations and result in increased
prices for affected parts. Any such reduction, constraint or delay may result in delays in
shipments of our products or increases in the prices of components, either of which could have a
material adverse effect on our business, operating results and financial condition. We have no
supply agreements with our current contract manufacturers and utilize purchase orders which are
subject to supplier acceptance. The unanticipated loss of any of our contract manufacturers could
cause delays in our ability to deliver product while we identify and qualify a replacement
manufacturer. If our current or future independent contract manufacturers are unable to meet our
requirements for manufactured components, our business could suffer.
Our operations are currently conducted at several locations that may be at risk from earthquakes
or other natural disasters.
We currently conduct our manufacturing, development and management activities at two locations
in Silicon Valley, California, near known earthquake fault zones and in Doral, Florida, where there
is a risk of hurricanes. We have taken precautions to safeguard our facilities, including
insurance, health and safety protocols, and off-site storage of computer data. However, any future
natural
39
disaster, such as an earthquake or hurricane, could cause substantial delays in our
operations, damage or destroy our equipment or inventory, and cause us to incur additional
expenses. A disaster could seriously harm our business and results of operations.
If we are unable to effectively manage our inventory held on consignment by our intended
customers, we will not achieve our expected results.
A significant portion of our inventory is held on consignment by hospitals that purchase the
inventory as they use it. In these consignment locations, we do not have physical possession of the
consigned inventory. We therefore have to rely on information from our customers as well as
periodic inspections by our sales personnel to determine when our products have been used. We have
in the past experienced problems managing appropriate consigned inventory levels and as a result we
recorded an impairment of inventory for anticipated obsolescence in fiscal 2004 and an impairment
of excess inventory in both fiscal 2004 and 2005. If we are not able to effectively manage
appropriate consigned inventory levels, we may suffer inventory losses that will reduce our gross
profit levels. There can be no assurance that any efforts to strengthen our monitoring and
management of consigned inventory will be adequate to meaningfully reduce the risk of inventory
loss.
We are dependent on our senior management team, key clinical advisors and scientific personnel,
and the loss of any of them could harm our business.
Our continued success depends in part upon the continued availability and contributions of our
senior management team and the continued participation of our key clinical advisors. We have
entered into agreements with certain members of our senior management team, but none of these
agreements guarantee the services of the individual for a specified period of time. We also rely on
the skills and talents of our scientific personnel because of the complexity of our products. The
loss of members of our senior management, key clinical advisors or scientific personnel, or our
inability to attract or retain other qualified personnel or advisors could have a material adverse
effect on our results of operations and financial condition.
The medical device industry is characterized by patent litigation, which could be costly, result
in the diversion of managements time and efforts and require us to pay damages.
The medical device industry is characterized by extensive litigation and administrative
proceedings over patent and other intellectual property rights. Accordingly, we may in the future
be subject to further litigation and administrative proceedings over such rights with other
companies in our industry. As we have discussed above with respect to our current litigation with
Boston Scientific, whether a product or method infringes a patent involves complex legal and
factual issues rendering the outcome of any patent dispute largely unpredictable. In the future,
other competitors may assert that at least one of our products, its components, or the methods we
employ in the use or manufacture of our products are covered by and infringe the competitors U.S.
or foreign patents held by them. In addition, should our patents or applications have claims that
encompass the same scope as claims pending or issued to a third party competitor, that third party
may claim that its claims have priority over ours because they invented the claimed subject matter
first. Because patent applications generally take many years to issue, there may be third party
applications presently pending of which we are unaware, that may in the future result in issued
patents that at least one of our products, its components, or the methods we employ in the use or
manufacture of our product(s) may infringe. There could also be issued patents that one or more
components of our products may inadvertently be infringing, of which we are unaware. As the number
of participants in the market for cerebral vascular treatments and the number of issued patents in
this technology area grows, the possibility of being charged with patent infringement increases.
As we have discussed above with respect to our litigation with Boston Scientific, any
infringement claims against us may cause us to incur substantial costs, could place a significant
strain on our financial resources, divert the attention of management from our core business and
harm our reputation. If the relevant patent claims are upheld as valid and enforceable and we are
found to infringe, we could be required to pay substantial damages and/or royalties and could be
prevented from selling our products unless we could obtain a license or were able to redesign our
products to avoid infringement. Any such license may not be available on reasonable terms, if at
all. If we fail to obtain any required licenses or make any necessary changes to our products or
technologies, we may be unable to commercialize one or more of our products or practice the methods
we employ in the use or manufacture of our products.
Our ability to protect our intellectual property and proprietary technology through patents and
other means is uncertain.
Our success depends significantly on our ability to procure proprietary rights to the
technologies used in our products. We rely on patent protection, as well as a combination of
copyright, trade secret and trademark laws, and nondisclosure, confidentiality and other
contractual restrictions to protect our proprietary technology. However, these legal means afford
only limited protection and may not
40
be sufficient to adequately protect our intellectual property or permit us to gain or keep any
competitive advantage. For example, any of our pending U.S. or foreign patent applications may
ultimately not issue as a patent or, alternatively, may issue with claims that are of little or no
value to us. In addition, once issued, a valuable patent may be challenged successfully by third
parties and invalidated, such as is being attempted by Boston Scientific in our presently ongoing
litigation. In addition, our patent protection for material aspects of our products and methods is
presently being pursued with applications that have been filed but not issued, such that these
material aspects are not presently protected by patents. Competitors may further be able to get
around having to license our technology in order to avoid infringement by designing around our
issued and published patent claims, thereby staying clear of our proprietary rights. Similarly,
competitors may develop products and methods that are equivalent or superior to ours. Our
confidentiality agreements and intellectual property assignment agreements with our employees,
consultants and advisors may not be enforceable or may not provide meaningful protection for our
trade secrets or other proprietary information in the event of unauthorized use or disclosure or
other breaches of the agreements. Furthermore, the laws of some foreign countries may not protect
our intellectual property rights to the same extent as do the laws of the United States. Both the
process of procuring patent rights and the process of managing patent disputes can be time
consuming and expensive.
In the event a competitor infringes upon our patent or other intellectual property rights,
enforcing those rights may be difficult and time consuming. Even if successful, litigation to
enforce our intellectual property rights or to defend our patents against challenge could be
prolonged, costly and could divert our managements attention. We may not have sufficient resources
to enforce our intellectual property rights or to defend our patents against a challenge.
If we fail to obtain, or experience significant delays in obtaining, FDA clearances or approvals
for our future products or product enhancements, or to comply with similar regulatory requirements
in other countries where we market our products, our ability to commercially distribute and market
our products could suffer.
Our medical devices are subject to rigorous regulation by the FDA and numerous other federal,
state and foreign governmental authorities. Our failure to comply with such regulations could lead
to the imposition of injunctions, suspensions or loss of regulatory clearances or approvals,
product recalls, termination of distribution or product seizures or the need to invest substantial
resources to comply with various existing or new requirements. In the more egregious cases,
criminal sanctions, civil penalties, disgorgement of profits or closure of our manufacturing
facilities are possible. The process of obtaining regulatory clearances or approvals to market a
medical device, particularly from the FDA, can be costly and time consuming, and there can be no
assurance that such clearances or approvals will be granted on a timely basis, if at all. In
particular, the FDA permits commercial distribution of most new medical devices only after the
device has received 510(k) clearance or is the subject of an approved pre-market approval
application, or PMA. The FDA will clear marketing of a medical device through the 510(k) process if
it is demonstrated that the new product has the same intended use, is substantially equivalent to
another legally marketed device, including a 510(k)-cleared product, and otherwise meets the FDAs
requirements. The PMA approval process is more costly, lengthy and uncertain than the 510(k)
clearance process and requires the development and submission of clinical studies supporting the
safety and effectiveness of the device. Product modifications may also require the submission of a
new 510(k) clearance, or the approval of a PMA before the modified product can be marketed. Changes
in labeling and manufacturing site for a PMA approved device may require the submission and
approval of a PMA supplement. Any products we develop that require regulatory clearance or approval
may be delayed, if approved at all. In addition, we believe that some of our new products will
require an approved PMA before we can commercially distribute the device and we cannot assure you
that any new products or any product enhancements we develop will be subject to the shorter 510(k)
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.
41
Modifications to our marketed products may require new 510(k) clearances or pre-market approvals,
or may require us to cease marketing or recall the modified products until clearances are
obtained.
Any modification to a 510(k)-cleared device that could significantly affect its safety or
effectiveness, or that would constitute a change in its intended use, requires a new 510(k)
clearance or, possibly, PMA approval. The FDA requires every manufacturer to make this
determination in the first instance, but the FDA may review a manufacturers decision. The FDA may
not agree with any of our past or future decisions regarding whether new clearances or approvals
are necessary. If the FDA requires us to seek 510(k) clearance or PMA approval for any modification
to a previously cleared product, we may be required to cease marketing and/or to recall the
modified product until we obtain clearance or approval, and we may be subject to significant
regulatory fines or penalties. Further, our products could be subject to recall if the FDA
determines, for any reason, that our products are not safe, including but not limited to new safety
data from use of the product, or manufacturing defects. Any recall or FDA requirement that we seek
additional approvals or clearances could result in delays, fines, costs associated with
modification of a product, loss of revenue and potential operating restrictions imposed by the FDA.
If we or our suppliers fail to comply with the FDAs quality system regulations, the manufacture
of our products could be delayed.
We and our suppliers are required to comply with the FDAs quality system regulations, which
cover the methods and documentation of the design, testing, production, control, quality assurance,
labeling, packaging, storage and shipping of our products. The FDA enforces these quality system
regulations through unannounced inspections. If we or one of our suppliers fail a quality system
regulations inspection or if any corrective action plan is not sufficient, or is very expensive or
time consuming to implement, the manufacture of our products could be delayed until satisfactory
corrections are made, or in the event we are unable to correct the problems we may not be able to
continue manufacturing and distributing the particular device or devices. Such a delay potentially
could disrupt our business, harm our reputation and adversely affect our sales and revenues.
If interventionalists are unable to obtain sufficient reimbursement for procedures performed with
our products, it is unlikely that our products will be widely used.
Successful sales of our products will depend on the availability of adequate reimbursement
from third-party payors. Healthcare providers that purchase medical devices for treatment of their
patients, generally rely on third-party payors to cover the use of the product for the particular
procedure and reimburse all or part of the costs and fees associated with the procedures performed
with these devices. Currently, the costs of our products distributed domestically are being
reimbursed by third party payors. There is no guarantee that coverage and adequate reimbursement
will be available in the future for our existing and/or new products. Both public and private
insurance reimbursement plans are central to new product acceptance. Neurointerventionalists are
unlikely to use our products if they do not receive reimbursement adequate to cover the cost of our
products and related procedures.
In international markets, market acceptance may depend, in part, upon the availability of
reimbursement within prevailing healthcare payment systems. Reimbursement and healthcare payment
systems in international markets vary significantly by country, and include both government
sponsored healthcare and private insurance. Currently, the costs of our products distributed
internationally, other than in some Latin American countries, are being reimbursed by public and
private healthcare insurers. We may not obtain international reimbursement approvals in a timely
manner, if at all, our failure to receive international reimbursement approvals would negatively
impact market acceptance of our products in the international markets in which those approvals are
sought.
In addition, in certain countries, such as France, Germany, China and Japan, we are required
to obtain regulatory clearance for our products to be eligible for reimbursements by third party
payors, even though reimbursement for embolic coiling procedures is already in place.
Future reimbursement may be subject to increased restrictions both in the United States and in
international markets. Third-party reimbursement and coverage may not be available or adequate in
either the United States or international markets. Future legislation, regulation or reimbursement
policies of third-party payors may adversely affect the demand for our existing products or our
products currently under development and limit our ability to sell our products on a profitable
basis.
42
The adoption of Statement of Financial Accounting Standard No. 123R and changes to existing
accounting pronouncements or taxation rules or practices may affect how we conduct our business
and affect our reported results of operations.
On April 1, 2006, we adopted the provisions of, and account for stock-based compensation in
accordance with, the Financial Accounting Standards Boards (FASB) Statement of Financial
Accounting Standards No. 123-revised 2004 (SFAS 123R), Share-Based Payment, which replaced
Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based
Compensation and supersedes APB Opinion No. 25 (APB 25), Accounting for Stock Issued to
Employees. Under the fair value recognition provisions of this statement, stock-based compensation
cost is measured at the grant date based on the fair value of the award and is recognized as
expense on a straight-line basis over the requisite service period, which is generally the vesting
period. The effective date of this new standard under these new rules for our financial statements
was April 1, 2006. Adoption of this statement has had a significant impact on our consolidated
financial statements, as we are now required to expense the fair value of our stock option grants
and stock purchases under our employee stock purchase plan rather than disclose the impact on our
net loss within our footnotes. The impact of SFAS 123R on our consolidated financial statements and
related disclosures is, and is expected to continue to be, material to our results of operations.
Our future stock-based compensation expense will be dependent on a number of factors, including the
amount of awards granted and the fair value of those awards at the time of grant, as well as any
changes in variables or underlying assumptions used to determine fair value under our pricing
model. In addition, a change in accounting pronouncements or taxation rules or practices can have a
significant effect on our reported results and may even affect our reporting of transactions
completed before the change is effective. Other new accounting pronouncements or taxation rules and
varying interpretations of accounting pronouncements or taxation practice have occurred and may
occur in the future. Changes to existing rules, future changes, if any, or the questioning of
current practices may adversely affect our reported financial results or the way we conduct our
business.
We may become subject to product liability claims which could require us to pay damages that
exceed our insurance coverage.
Our business exposes us to potential product liability claims that are inherent in the
testing, manufacture and sale of medical devices for neurointerventional procedures. These
procedures involve significant risk of serious complications, including intracranial bleeding,
brain injury, paralysis and even death. Any product liability claim brought against us, with or
without merit, could result in the increase of our product liability insurance rates or the
inability to secure coverage in the future. In addition, we could have to pay an amount in excess
of policy limits, which would have to be paid out of cash reserves. If longer-term patient results
and experience indicate that our products or any component cause tissue damage, motor impairment or
other adverse effects, we could be subject to significant liability. Finally, even a meritless or
unsuccessful product liability claim could harm our reputation in the industry, lead to significant
legal fees and could result in the diversion of managements attention from managing our business.
We may be subject to damages resulting from claims that we or our employees have wrongfully used
or disclosed alleged trade secrets of their former employers.
Many of our employees were previously employed at other medical device companies, including
our competitors or potential competitors. Although no claims against us are currently pending, we
may be subject to claims that these employees have wrongfully used or disclosed alleged trade
secrets of their former employers or we have inadvertently or otherwise used or disclosed trade
secrets or other proprietary information of their former employers. Litigation may be necessary to
defend against these claims. Even if we are successful in defending against these claims,
litigation could result in substantial costs and be a distraction to management. If we fail in
defending such claims, in addition to paying monetary damages, we may lose valuable intellectual
property rights or personnel. A loss of key research personnel or their work product could hamper
or prevent our ability to commercialize product candidates, which could severely harm our business.
The price of our common stock has fluctuated and we expect will continue to fluctuate
substantially and you may not be able to sell your shares at or above your purchase price.
The market price of our common stock has been and we expect will continue to be highly
volatile and may fluctuate substantially due to many factors, including:
|
|
|
volume and timing of orders for our products; |
|
|
|
|
the introduction of new products or product enhancements by us or our competitors; |
43
|
|
|
disputes or other developments with respect to intellectual property rights; |
|
|
|
|
our ability to develop, obtain regulatory clearance for, and market, new and
enhanced products on a timely basis; |
|
|
|
|
product liability claims or other litigation; |
|
|
|
|
quarterly variations in our or our competitors results of operations; |
|
|
|
|
sales of large blocks of our common stock, including sales by our executive
officers and directors; |
|
|
|
|
changes in governmental regulations or in the status of our regulatory approvals or
applications; |
|
|
|
|
changes in the availability of third-party reimbursement in the United States or
other countries; |
|
|
|
|
changes in earnings estimates or recommendations by securities analysts; and |
|
|
|
|
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 September 30, 2007, our executive officers, directors, and
stockholders holding more than 5% of our outstanding common stock and their affiliates, in the
aggregate, beneficially owned approximately 43% of our outstanding common stock. As a result, these
persons, acting together, may have the ability to determine the outcome of all matters submitted to
our stockholders for approval, including the election and removal of directors and any merger,
consolidation, or sale of all or substantially all of our assets. This concentration of ownership
may harm the market price of our common stock by, among other things:
|
|
|
delaying, deferring or preventing a change in control of our company; |
|
|
|
|
impeding a merger, consolidation, takeover or other business combination involving
our company; or |
|
|
|
|
causing us to enter into transactions or agreements that are not in the best
interests of all stockholders. |
Future sales of our common stock may depress our stock price.
Our current stockholders hold a substantial number of shares of our common stock that they are
able to sell in the public market A significant portion of these shares are held by a small number
of stockholders. Sales by our current stockholders of a substantial number of shares could
significantly reduce the market price of our common stock. Moreover certain holders of our common
stock have the right to require us to file registration statements covering their shares or to
include their shares in registration statements that we may file for ourselves or other
stockholders.
We have registered 6,749,963 shares of common stock that we may issue under our 1998 Stock
Plan, 2005 Equity Incentive Plan and 2005 Employee Stock Purchase Plan. These shares can be freely
sold in the public market upon issuance. The sale by any of these holders of a large number of
securities in the public market could reduce the trading price of our common stock and impede our
ability to raise future capital.
We may incur increased costs as a result of recently enacted and proposed changes in laws and
regulations.
Recently enacted and proposed changes in the laws and regulations affecting public companies,
including the provisions of the Sarbanes-Oxley Act of 2002 and rules proposed by the SEC and by The
NASDAQ Stock Market, could result in increased costs to us.
44
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 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 us 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 debtor 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.
We may become involved in securities class action litigation that could divert managements
attention and harm our business.
The stock market in general, The NASDAQ Stock Market and the market for medical device
companies in particular, has experienced extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of those companies. Further, the market
prices of securities of medical device companies have been particularly volatile. These broad
market and industry factors may materially harm the market price of our common stock, regardless of
our operating performance. In the past, following periods of volatility in the market price of a
particular companys securities, securities class action litigation has often been brought against
that company. As noted above, we are currently involved in securities litigation as a defendant in
the United States District Court in the Southern District of Florida. We may become involved in
more of 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.
Anti-takeover provisions in our organizational documents and Delaware law may discourage or
prevent a change of control, even an acquisition which would be beneficial to our stockholders,
and thereby affect our stock price adversely and prevent attempts by our stockholders to replace
or remove our current management.
Our amended and restated certificate of incorporation and amended bylaws contain provisions
that could delay or prevent a change of control of our company or changes in our board of directors
that our stockholders might consider favorable. Some of these provisions:
|
|
|
authorize the issuance of preferred stock which can be created and issued by the
board of directors without prior stockholder approval, with rights senior to those of the
common stock; |
|
|
|
|
provide for a classified board of directors, with each director serving a staggered
three-year term; |
|
|
|
|
prohibit our stockholders from filling board vacancies, calling special stockholder
meetings, or taking action by written consent; |
|
|
|
|
prohibit our stockholders from making certain changes to our amended and restated
certificate of incorporation or bylaws except with 66 2/3% stockholder approval; and |
|
|
|
|
require advance written notice of stockholder proposals and director nominations. |
In addition, we are subject to the provisions of Section 203 of the Delaware General
Corporation Law, which may prohibit certain business combinations with stockholders owning 15% or
more of our outstanding voting stock. These and other provisions in our amended and restated
certificate of incorporation, restated bylaws and Delaware law could make it more difficult for
stockholders or potential acquirers to obtain control of our board of directors or initiate actions
that are opposed by our then-current board of directors, including delaying or impeding a merger,
tender offer, or proxy contest involving our company. Any delay or prevention of a change of
control transaction or changes in our board of directors could cause the market price of our common
stock to decline.
45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
The following is a tabulation of the votes on proposals considered at our annual meeting of
stockholders held on September 20, 2007:
1. To elect three directors to serve on our Board of Directors for three-years term.
|
|
|
|
|
|
|
|
|
|
|
For |
|
|
Withheld |
|
|
|
|
|
|
|
|
|
|
Michael R. Henson |
|
|
10,628,321 |
|
|
|
893,266 |
|
John T. Kilcoyne |
|
|
10,845,507 |
|
|
|
676,080 |
|
Jeffrey H. Thiel |
|
|
10,842,243 |
|
|
|
679,344 |
|
2. To ratify the appointment of PricewaterhouseCoopers LLP as our independent registered
public accounting firm for the fiscal year ending March 31, 2008.
|
|
|
|
|
For |
|
|
11,477,429 |
|
Against |
|
|
43,958 |
|
Abstain |
|
|
200 |
|
Item 5. Other Information.
None
Item 6. Exhibits.
See the Index to Exhibits on Page 48 of this report
46
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 9, 2007
|
|
|
|
|
|
|
|
|
By: |
/s/ John T. Kilcoyne
|
|
|
|
John T. Kilcoyne |
|
|
|
Chairman and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
By: |
/s/ Robert A. Stern
|
|
|
|
Robert A. Stern |
|
|
|
President, Chief Operating Officer, Chief
Financial Officer and Secretary |
|
47
INDEX TO EXHIBITS
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
3.1 |
|
|
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) |
|
|
|
|
|
3.2 |
|
|
Bylaws (incorporated by reference to Exhibit 3.4 of Amendment No. 3) |
|
|
|
|
|
4.1 |
|
|
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) |
|
|
|
|
|
4.2 |
|
|
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) |
|
|
|
|
|
4.3 |
|
|
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) |
|
|
|
|
|
4.4 |
|
|
Form of Common Stock Warrant issued in connection with the Series E Preferred Stock and Warrant
Purchase Agreement dated February 21, 2005, among the Registrant and the purchasers of the
Registrants Series E Preferred Stock (incorporated by reference to Exhibit 4.4 of Form 10-Q
filed on February 14, 2006) |
|
|
|
|
|
10.27#** |
|
|
Amendment No. 1 to Distribution Agreement, dated September 20, 2007, between Micrus Endovascular Corporation and Goodman CO., Ltd. |
|
|
|
|
|
10.28#** |
|
|
Distribution Agreement, dated July 31, 2007, between Micrus Endovascular Corporation and Beijing
Tianxinfu Medical Appliance Co. LTD. |
|
|
|
|
|
31.1# |
|
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
31.2# |
|
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
32# |
|
|
Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
# |
|
Filed herewith |
|
** |
|
Confidential treatment requested for certain portions of this Exhibit pursuant to Rule 24b-2
promulgated under the Securities Exchange Act, which portions are omitted and filed separately
with the Securities and Exchange Commission. |
48