sv1za
As filed with the Securities and Exchange Commission on
May 9, 2008
Registration
No. 333-148798
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
AMENDMENT NO. 3
TO
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
CARDIOVASCULAR SYSTEMS,
INC.
(Exact name of registrant as
specified in its charter)
|
|
|
|
|
Minnesota
(State or other jurisdiction
of
incorporation or organization)
|
|
3841
(Primary Standard Industrial
Classification Code Number)
|
|
41-1698056
(I.R.S. Employer
Identification No.)
|
651 Campus Drive
St. Paul, Minnesota 55112-3495
(651) 259-1600
(Address, including zip code,
and telephone number,
including area code, of
registrants principal executive offices)
David L. Martin
President and Chief Executive Officer
Cardiovascular Systems, Inc.
651 Campus Drive
St. Paul, Minnesota 55112-3495
(651) 259-1600
(Name, address, including zip
code, and telephone number,
including area code, of agent
for service)
Copies to:
|
|
|
Robert K. Ranum, Esq.
Alexander Rosenstein, Esq.
Fredrikson & Byron, P.A.
200 South Sixth Street, Suite 4000
Minneapolis, Minnesota 55402
(612) 492-7000
|
|
Alan F. Denenberg, Esq.
Davis Polk & Wardwell
1600 El Camino Real
Menlo Park, California 94025
(650) 752-2000
|
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this registration statement.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, as amended,
check the following
box. o
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
number of the earlier effective registration statement for the
same
offering. o
If this form is a post effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this form is a post effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer, and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
|
|
|
|
|
|
|
Large accelerated
filer o
|
|
Accelerated
filer o
|
|
Non-accelerated
filer þ
(Do not check if a smaller
reporting company)
|
|
Smaller reporting
company o
|
CALCULATION
OF REGISTRATION FEE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proposed Maximum
|
|
|
Amount of
|
Title of Each Class of
|
|
|
Aggregate
|
|
|
Registration
|
Securities to be Registered
|
|
|
Offering
Price(1)(2)
|
|
|
Fee(3)
|
Common stock, no par value per share
|
|
|
$
|
86,250,000
|
|
|
|
$
|
3,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Estimated solely for the purpose of
computing the registration fee pursuant to Rule 457(o)
under the Securities Act.
|
(2)
|
|
Includes shares of common stock
that the underwriters have an option to purchase to cover
over-allotments, if any.
|
(3)
|
|
Previously paid.
|
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as
the Commission, acting pursuant to said Section 8(a), may
determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. The prospectus is not an offer to sell securities and
it is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
|
PROSPECTUS (Subject to
Completion)
Issued May 9, 2008
Shares
Cardiovascular Systems,
Inc.
Common Stock
Cardiovascular Systems, Inc. is
offering shares
of its common stock. This is our initial public offering and no
public market currently exists for our shares. We anticipate
that the initial public offering price will be between
$ and
$ per share.
We have applied to have our common stock approved for quotation
on the Nasdaq Global Market under the symbol CSII.
Investing in our common stock involves risks. See Risk
Factors beginning on page 9.
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
Total
|
|
|
Initial public offering price
|
|
$
|
|
|
|
$
|
|
|
Underwriting discounts
|
|
$
|
|
|
|
$
|
|
|
Proceeds, before expenses, to Cardiovascular Systems, Inc.
|
|
$
|
|
|
|
$
|
|
|
We have granted the underwriters the right to purchase up to an
additional shares
of common stock to cover over-allotments.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities, or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The underwriters expect to deliver the shares to purchasers
on ,
2008.
William Blair &
Company
,
2008
Conquer plaque in the peripherals and move mountains in the treatment of pad. their toughest
Challenge is our biggest opportunity. The ability to safely treat plaque including calcified
plaque is the new frontier in treatment options for 8 to 12 million Peripheral Arterial Disease
(PAD) patients in the U.S. The Diamondback 360°() Orbital Atherectomy System provides new options
to surgery or amputation. |
new heights in Conquering CalCium ~ new options for saving limbs the market the technology The
Diamondback 360° Orbital Atherectomy System treats complex diffuse disease including calcified
plaque with a proprietary mechanism of action and features designed to optimize safety and
efficiency. Prevalence of PAD Estimated Disease prevalence Differential sanding Restore flow
with a large 2008 PAD comparison in the U.S. designed for safety luminal gain and a smooth,
breakdown concentric lumen Allows for minimized incidence 20.8 M 2.5 M of arterial wall
perforations and Pre-Treatment Above the dissections. The orbital mechanism Diagnosed knee: 78.4%
Sub-total Occlusion of action lets the media flex away Peroneal 2.1mm* 12 M* from the crown.
Below 5.5 9.5 M the knee: Diseased tissue provides Undiagnosed 21.6% resistance and allows grit
to 5.8 M sand the plaque. Elastic healthy tissue gives Post-Treatment Stroke PAD Diabetes and
may not be affected by Peroneal diamond grit. 4.0mm* The population is aging, increasing the
incidence of PAD and diabetes. *average per company data Calcific disease is often associated
with the diabetic patient. There are significant drawbacks with existing alternatives for
interventional calcified plaque removal. Although awareness of the disease is growing, it still
remains largely under-diagnosed. This represents a large untapped market and a significant
opportunity to restore quality clinical confidence of life and save limbs. Proven performance
backed by clinical trial data. Over 1,500 * Reflects upper bound of 8-12 million range patients
treated since FDA clearance. A prospective, multi-center, FDA, IDE clinical study, OASIS, was
conducted to evaluate the efficacy and safety of the Diamondback 360º System. In 124 patients with
201 lesions treated, the results met or outperformed the Objective Performance Criteria targets.
More than 160,000 PAD related amputations are performed annually OASIS clinical study fda target
oasis trial results Primary efficacy endpoint 55% reduction 59.4% reduction Acute debulking
measured angiographically Primary safety endpoint 4.8% device related SAEs Cumulative number of
patients with serious 8-16% SAEs 9.7% overall SAEs adverse events (SAEs) through 30 days Secondary
efficacy/safety endpoint Target lesion revascularization (TLR) rate 20% TLR 2.4% TLR through 6
months The science of the smooth lumen 360° |
TABLE OF
CONTENTS
You should rely only on the information contained in this
prospectus and any free-writing prospectus that we authorize to
be distributed to you. We have not, and the underwriters have
not, authorized any other person to provide you information
different from or in addition to that contained in this
prospectus or any related free-writing prospectus. If anyone
provides you with different or inconsistent information, you
should not rely on it. This prospectus is not an offer to sell,
nor is it seeking an offer to buy, these securities in any state
where the offer or sale is not permitted. The information in
this prospectus is complete and accurate only as of the date on
the cover page of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of the common stock.
Our business, financial condition, results of operations and
prospects may have changed since that date.
Until ,
2008 (25 days after the date of this prospectus), all
dealers that buy, sell or trade shares of our common stock,
whether or not participating in this offering, may be required
to deliver a prospectus. This is in addition to the
dealers obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
For investors outside the United States: Neither we nor any of
the underwriters have done anything that would permit this
offering or possession or distribution of this prospectus in any
jurisdiction where action for that purpose is required, other
than in the United States. You are required to inform yourselves
about and to observe any restrictions relating to this offering
and the distribution of this prospectus.
Market
and Industry Data
Information and management estimates contained in this
prospectus concerning the medical device industry, including our
general expectations and market position, market opportunity and
market share, are based on publicly available information, such
as clinical studies, academic research reports and other
research reports, as well as information from industry reports
provided by third-party sources, such as Millennium Research
Group. The management estimates are also derived from our
internal research, using assumptions made by us that we believe
to be reasonable and our knowledge of the industry and markets
in which we operate and expect to compete. Other than Millennium
Research Group, none of the sources cited in this prospectus has
consented to the inclusion of any data from its reports, nor
have we sought their consent. Our internal research has not been
verified by any independent source, and we have not
independently verified any third-party information. In addition,
while we believe the market position, market opportunity and
market share information included in this prospectus is
generally reliable, such information is inherently imprecise.
Such data involves risks and uncertainties and are subject to
change based on various factors, including those discussed under
the heading Risk Factors.
ii
PROSPECTUS
SUMMARY
This summary highlights selected information contained in
more detail later in this prospectus. This summary provides an
overview of selected information and does not contain all the
information you should consider. You should carefully read the
entire prospectus including Risk Factors beginning
on page 9 and the financial statements and related notes
before making an investment decision. References in this
prospectus to CSI, our company,
we, us or our refer to
Cardiovascular Systems, Inc. and its subsidiaries, except where
the context makes clear that the reference is only to
Cardiovascular Systems, Inc. itself and not its subsidiaries.
Our
Business
We are a medical device company focused on developing and
commercializing interventional treatment systems for vascular
disease. Our initial product, the Diamondback 360° Orbital
Atherectomy System, is a minimally invasive catheter system for
the treatment of peripheral arterial disease, or PAD. PAD is a
common circulatory problem in which plaque deposits build up on
the walls of vessels, reducing blood flow. The plaque deposits
range from soft to calcified, with calcified plaque being
difficult to treat with traditional interventional procedures.
The Diamondback 360° is capable of treating a broad range
of plaque types, including calcified vessel lesions, and
addresses many of the limitations associated with existing
treatment alternatives.
The Diamondback 360° removes both soft and calcified plaque
in plaque-lined vessels through the orbital rotation of a
diamond grit coated offset crown that is attached to a flexible
drive shaft. Physicians position the crown at the site of an
arterial plaque lesion and remove the plaque by causing the
crown to orbit against it, creating a smooth lumen, or channel,
in the vessel. The Diamondback 360° is designed to
differentiate between plaque and compliant arterial tissue, a
concept that we refer to as differential sanding.
The particles of plaque resulting from differential sanding are
generally smaller than red blood cells and are carried away by
the blood stream. As the physician increases the rotational
speed of the drive shaft, the crown rotates faster and
centrifugal force causes the crown to orbit, creating a lumen
with a diameter that is approximately twice the diameter of the
device. By giving physicians the ability to create different
lumen diameters by changing rotational speed, the Diamondback
360° can reduce the need to use multiple catheters of
different sizes to treat a single lesion.
We have conducted three clinical trials involving
207 patients to demonstrate the safety and efficacy of the
Diamondback 360° in treating PAD. In particular, our
pivotal OASIS clinical trial was a prospective 20-center study
that involved 124 patients with 201 lesions. In August
2007, the U.S. Food and Drug Administration, or FDA,
granted us 510(k) clearance for use of the Diamondback 360°
as a therapy in patients with PAD. We were the first, and so far
the only, company to conduct a prospective multi-center clinical
trial with a prior investigational device exemption in support
of a 510(k) clearance for an atherectomy device. We commenced a
limited commercial introduction of the Diamondback 360° in
the United States in September 2007. This limited commercial
introduction intentionally limited the size of our sales force
and the number of customers each member of the sales force
served in order to focus on obtaining quality and timely product
feedback on initial product usages. During the quarter ended
March 31, 2008, we began our full commercial launch. We
believe that the Diamondback 360° provides a platform that
can be leveraged across multiple market segments. In the future,
we expect to launch additional products to treat lesions in
larger vessels, provided that we obtain appropriate 510(k)
clearance from the FDA. We also plan to seek premarket approval
from the FDA to use the Diamondback 360° to treat patients
with coronary artery disease.
Our
Market
PAD affects approximately eight to 12 million people in the
United States, as cited by the authors of the PARTNERS study
published in the Journal of the American Medical Association
in 2001. According to 2007 statistics from the American
Heart Association, PAD becomes more common with age and affects
approximately 12% to 20% of the U.S. population over
65 years old. An aging population, coupled with an
increasing incidence of PAD risk factors, such as diabetes and
obesity, is likely to increase the prevalence of PAD. In many
older PAD patients, particularly those with diabetes, PAD is
characterized by hard, calcified plaque deposits that have not
been successfully treated with existing non-invasive treatment
techniques. PAD may involve arteries either above or below the
knee. Arteries above the
1
knee are generally long, straight and relatively wide, while
arteries below the knee are shorter and branch into arteries
that are progressively smaller in diameter.
Despite the severity of PAD, it remains relatively
underdiagnosed. According to an article published in Podiatry
Today in 2006, only approximately 2.5 million of the eight
to 12 million people in the United States with PAD are
diagnosed. Although we believe the rate of diagnosis of PAD is
increasing, underdiagnosis continues due to patients failing to
display symptoms or physicians misinterpreting symptoms as
normal aging. Recent emphasis on PAD education from medical
associations, insurance companies and other groups, coupled with
publications in medical journals, is increasing physician and
patient awareness of PAD risk factors, symptoms and treatment
options. The PARTNERS study advocated increased PAD screening by
primary care physicians.
Physicians treat a significant portion of the 2.5 million
people in the United States who are diagnosed with PAD using
medical management, which includes lifestyle changes, such as
diet and exercise, and drug treatment. For instance, within a
reference group of over 1,000 patients from the PARTNERS
study, 54% of the patients with a prior diagnosis of PAD were
receiving antiplatelet medication treatment. While medications,
diet and exercise may improve blood flow, they do not treat the
underlying obstruction in the artery and many patients have
difficulty maintaining lifestyle changes. Additionally, many
prescribed medications are contraindicated, or inadvisable, for
patients with heart disease, which often exists in PAD patients.
As a result of these challenges, many medically managed patients
develop more severe symptoms that require procedural
intervention.
Traditional procedural intervention treatments for PAD include
surgical procedures, angioplasty, stenting and atherectomy.
Surgical procedures, such as bypass or amputation, are widely
utilized, but may have procedure-related complications that
range in severity and include mortality risk. Angioplasty and
stenting procedures may result in complications such as damage
to a vessel when a balloon is expanded or potential for stent
fracture. Current atherectomy procedures also have significant
drawbacks, including:
|
|
|
|
|
difficulty treating calcified lesions, diffuse disease and
lesions below the knee;
|
|
|
|
potential safety concerns relating to damage of the arterial
wall;
|
|
|
|
the inability to create lumens larger than the catheter itself
in a single insertion;
|
|
|
|
the creation of rough, uneven lumens with deep grooves;
|
|
|
|
the potential requirement for greater physician skill,
specialized technique or multiple operators to deliver the
catheter and remove plaque;
|
|
|
|
the potential requirement for reservoirs or aspiration to
capture and remove plaque;
|
|
|
|
the potential need for ancillary distal embolization protection
devices to prevent large particles of dislodged plaque from
causing distal embolisms or blockages downstream;
|
|
|
|
the potential requirement for large, expensive capital equipment
used in conjunction with the procedure; and
|
|
|
|
the potential requirement for extensive use of fluoroscopy and
increased emitted radiation exposure for physicians and patients
during the procedure.
|
Our
Solution
The Diamondback 360° represents a new approach to the
treatment of PAD that provides physicians and patients with a
procedure that addresses many of the limitations of traditional
treatment alternatives. We believe that the Diamondback
360° offers substantial benefits to patients, physicians,
hospitals and third-party payors, including:
|
|
|
|
|
Strong Safety Profile. The differential
sanding of the device reduces the risk of arterial perforation
and damage to the arterial wall. Moreover, the plaque particles
sanded away by the device are so small that they reduce the risk
of distal embolization and allow continuous blood flow during
the entire procedure, which reduces the risk of complications
such as excessive heat and tissue damage.
|
2
|
|
|
|
|
Proven Efficacy. The orbital motion of the
device enables the continuous removal of plaque in both soft and
calcified lesions, increasing blood flow through the resulting
smooth lumen. The efficacy of the device was demonstrated in our
pivotal OASIS trial.
|
|
|
|
Ease of Use. Utilizing familiar techniques, a
physician trained in endovascular surgery can complete the
treatment with a single insertion while utilizing limited
amounts of fluoroscopy during plaque removal.
|
|
|
|
Cost and Time Efficient Procedure. The
Diamondback 360° can create various lumen sizes using a
single sized crown, which limits hospital inventory costs and
allows a physician to complete a procedure with a single
insertion, potentially reducing procedural time. Use of the
Diamondback 360° may also require less expensive capital
equipment than other atherectomy procedures.
|
Our
Strategy
Our goal is to be the leading provider of minimally invasive
solutions for the treatment of vascular disease. The key
elements of our strategy include:
|
|
|
|
|
driving device adoption with key opinion leaders through our
direct sales organization;
|
|
|
|
collecting additional clinical evidence of the benefits of the
Diamondback 360°;
|
|
|
|
expanding our product portfolio within the market for the
treatment of peripheral arteries;
|
|
|
|
increasing referrals to interventional cardiologists and
radiologists through practice development programs or referral
physician education;
|
|
|
|
leveraging core technology into the coronary market; and
|
|
|
|
pursuing strategic acquisitions and partnerships.
|
Patents
and Intellectual Property
Since our inception, we have filed patent applications to
protect what we believe to be the most important intellectual
property that we have developed. We rely on a combination of
patent, copyright and other intellectual property laws, trade
secrets, nondisclosure agreements and other measures to protect
our proprietary rights. As of April 30, 2008, we held 16
issued U.S. patents and 27 issued
non-U.S. patents
covering aspects of our core technology.
Risks
Associated with Our Business
Our business is subject to a number of risks discussed under the
heading Risk Factors and elsewhere in this
prospectus, including the following:
|
|
|
|
|
Negative conditions in the global credit markets have impaired
the liquidity of our auction rate securities, and these
securities have experienced an other-than-temporary decline in
value, which has adversely affected our results of operations.
These circumstances, along with our history of incurring
substantial operating losses and negative cash flows from
operations, raise substantial doubt about our ability to
continue as a going concern.
|
|
|
|
|
|
Financing our operations for the next 12 months will require us
to raise equity or debt capital prior to September 30, 2008.
|
|
|
|
|
|
We have a history of net losses and anticipate that we will
continue to incur losses for the foreseeable future, and we may
require additional financing.
|
|
|
|
We have a limited history selling and manufacturing the
Diamondback 360°, which is currently our only product.
|
|
|
|
The Diamondback 360° may never achieve market acceptance.
|
|
|
|
Our customers may not be able to achieve adequate reimbursement
for using the Diamondback 360°.
|
3
|
|
|
|
|
We have limited data and experience regarding the safety and
efficacy of the Diamondback 360°.
|
|
|
|
We will face significant competition.
|
|
|
|
We depend on third-party suppliers, including single source
suppliers, making us vulnerable to supply problems and price
fluctuations.
|
|
|
|
We may experience difficulties managing growth.
|
|
|
|
We may not obtain necessary FDA clearances or approvals to
market our future products.
|
|
|
|
We may become subject to regulatory actions or our products
could be subject to restrictions or withdrawal from the market
in the event we are found to promote them for unapproved uses or
if we or our suppliers fail to comply with ongoing regulatory
requirements.
|
|
|
|
Our inability to adequately protect our intellectual property
could allow our competitors and others to produce products based
on our technology, which could substantially impair our ability
to compete.
|
|
|
|
We may incur liabilities and costs and be forced to redesign or
discontinue selling certain products if third parties claim that
we are infringing their intellectual property rights.
|
You should carefully consider these factors, as well as all of
the other information set forth in this prospectus, before
making an investment decision.
Our
Corporate Information
We were incorporated in Minnesota in 1989. Our principal
executive office is located at 651 Campus Drive, Saint Paul,
Minnesota 55112. Our telephone number is
(651) 259-1600,
and our website is www.csi360.com. The information contained in
or connected to our website is not incorporated by reference
into, and should not be considered part of, this prospectus.
We have applied for federal registration of certain marks,
including Diamondback 360° and
ViperWire. All other trademarks, trade names and
service marks appearing in this prospectus are the property of
their respective owners.
4
SUMMARY
OF THE OFFERING
|
|
|
Common stock offered by us |
|
Shares |
|
Common stock to be outstanding after this offering |
|
Shares |
|
|
|
Use of proceeds |
|
We intend to use the net proceeds from this offering to repay
outstanding debt with a principal balance of $10.9 million
at March 31, 2008, plus accrued interest, and for working
capital and general corporate purposes. See Use of
Proceeds. |
|
|
|
Risk Factors |
|
You should read the Risk Factors section of this
prospectus for a discussion of factors to consider carefully
before deciding to invest in shares of our common stock. |
|
Proposed Nasdaq Global Market symbol |
|
CSII |
The number of shares of our common stock that will be
outstanding immediately after this offering is based on
16,663,459 shares outstanding as of April 30, 2008,
and excludes:
|
|
|
|
|
6,013,974 shares of common stock issuable upon the exercise
of outstanding stock options at a weighted average exercise
price of $6.56 per share;
|
|
|
|
|
|
929,175 shares of common stock issuable upon the exercise
of outstanding warrants at a weighted average exercise price of
$5.55 per share; and
|
|
|
|
|
|
8,582 additional shares of common stock reserved and available
for future issuances under our 2007 Equity Incentive Plan.
|
Except as otherwise noted, all information in this prospectus
assumes:
|
|
|
|
|
the conversion of all our outstanding shares of preferred stock
upon the closing of this offering into 9,088,136 shares of
common stock and the conversion of all of our outstanding
warrants to purchase preferred stock upon the closing of this
offering into warrants to purchase 662,439 shares of common
stock and no exercise of such warrants; and
|
|
|
|
no exercise of the underwriters over-allotment option.
|
5
SUMMARY
CONSOLIDATED FINANCIAL DATA
The following table summarizes our consolidated financial data.
We have derived the following summary of our consolidated
statements of operations data for the years ended June 30,
2005, 2006 and 2007 from our audited consolidated financial
statements and related notes included elsewhere in this
prospectus. The consolidated statement of operations data for
the nine months ended March 31, 2007 and 2008 and
consolidated balance sheet data as of March 31, 2008 have
been derived from our unaudited financial statements and related
notes included elsewhere in this prospectus. We have prepared
the unaudited interim consolidated financial statements in
accordance with accounting principles generally accepted in the
United States of America, or GAAP, and the rules and regulations
of the Securities and Exchange Commission, or SEC, for interim
financial statements. These interim financial statements reflect
all adjustments consisting of normal recurring accruals, which,
in the opinion of management, are necessary to present fairly
our consolidated financial position and results of operations
for the interim periods. Our historical results are not
necessarily indicative of the results that may be experienced in
the future and the results for the nine months ended
March 31, 2008 are not necessarily indicative of results to
be expected for the full year. You should read the summary
financial data set forth below in conjunction with
Selected Consolidated Financial Data,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated
financial statements and related notes, all included elsewhere
in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Years Ended June 30,
|
|
|
March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007(1)
|
|
|
2007(1)
|
|
|
2008(1)
|
|
|
|
(in thousands, except share and per share amounts)
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
12,285
|
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
1,177
|
|
|
|
1,735
|
|
|
|
6,691
|
|
|
|
4,077
|
|
|
|
23,276
|
|
Research and development
|
|
|
2,371
|
|
|
|
3,168
|
|
|
|
8,446
|
|
|
|
4,442
|
|
|
|
10,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
3,548
|
|
|
|
4,903
|
|
|
|
15,137
|
|
|
|
8,519
|
|
|
|
33,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,548
|
)
|
|
|
(4,903
|
)
|
|
|
(15,137
|
)
|
|
|
(8,519
|
)
|
|
|
(26,897
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
(48
|
)
|
|
|
(1,340
|
)
|
|
|
(881
|
)
|
|
|
(912
|
)
|
Interest income
|
|
|
37
|
|
|
|
56
|
|
|
|
881
|
|
|
|
746
|
|
|
|
1,012
|
|
Impairment on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,023
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
37
|
|
|
|
8
|
|
|
|
(459
|
)
|
|
|
(135
|
)
|
|
|
(923
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(3,511
|
)
|
|
|
(4,895
|
)
|
|
|
(15,596
|
)
|
|
|
(8,654
|
)
|
|
|
(27,820
|
)
|
Accretion of redeemable convertible preferred
stock(2)
|
|
|
|
|
|
|
|
|
|
|
(16,835
|
)
|
|
|
(12,403
|
)
|
|
|
(19,422
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common shareholders
|
|
$
|
(3,511
|
)
|
|
$
|
(4,895
|
)
|
|
$
|
(32,431
|
)
|
|
$
|
(21,057
|
)
|
|
$
|
(47,242
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted(3)
|
|
$
|
(0.61
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
(5.22
|
)
|
|
$
|
(3.39
|
)
|
|
$
|
(7.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares used in computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted(3)
|
|
|
5,779,942
|
|
|
|
6,183,715
|
|
|
|
6,214,820
|
|
|
|
6,205,810
|
|
|
|
6,612,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
|
|
|
|
|
|
|
$
|
(1.47
|
)
|
|
|
|
|
|
$
|
(2.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted average common shares used in computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
|
|
|
|
|
|
|
|
10,605,726
|
|
|
|
|
|
|
|
13,344,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(footnotes appear on following page)
6
|
|
|
(1)
|
|
Operating expenses in the year
ended June 30, 2007 and the nine months ended
March 31, 2007 and 2008 include stock-based compensation
expense as a result of the adoption of Financial Accounting
Standards Board (FASB) Statement of Accounting Standards (SFAS)
No. 123(R), Share-Based Payment on July 1,
2006, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Nine Months Ended
|
|
|
June 30,
|
|
March 31,
|
|
|
2007
|
|
2007
|
|
2008
|
|
|
(in thousands)
|
|
Cost of goods sold
|
|
$
|
|
|
|
$
|
1
|
|
|
$
|
141
|
|
Selling, general and administrative
|
|
|
327
|
|
|
|
202
|
|
|
|
5,893
|
|
Research and development
|
|
|
63
|
|
|
|
20
|
|
|
|
188
|
|
|
|
|
(2)
|
|
See Notes 1 and 10 of the
notes to our consolidated financial statements for discussion of
the accretion of redeemable convertible preferred stock.
|
(3)
|
|
See Note 12 of the notes to
our consolidated financial statements for a description of the
method used to compute basic and diluted net loss per common
share and basic and diluted weighted-average number of shares
used in per common share calculations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2008
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Actual
|
|
|
Pro
Forma(1)
|
|
|
as
Adjusted(2)
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,087
|
|
|
$
|
16,087
|
|
|
$
|
|
|
Working
capital(3)
|
|
|
6,724
|
|
|
|
6,724
|
|
|
|
|
|
Total current assets
|
|
|
24,930
|
|
|
|
24,930
|
|
|
|
|
|
Total assets
|
|
|
48,817
|
|
|
|
48,817
|
|
|
|
|
|
Redeemable convertible preferred stock warrants
|
|
|
3,982
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
22,290
|
|
|
|
18,308
|
|
|
|
|
|
Redeemable convertible preferred stock
|
|
|
98,242
|
|
|
|
|
|
|
|
|
|
Total shareholders (deficiency) equity
|
|
|
(71,715
|
)
|
|
|
30,509
|
|
|
|
|
|
|
|
|
(1)
|
|
On a pro forma basis to reflect the
conversion of all our outstanding shares of preferred stock into
shares of common stock upon the closing of this offering and the
conversion of Series A convertible preferred stock warrants
into common stock warrants upon the closing of this offering.
|
(2)
|
|
On a pro forma as adjusted basis to
further reflect the receipt of the estimated net proceeds from
the sale
of shares
of common stock in this offering at an assumed initial public
offering price of $ per share, the
midpoint of the range on the cover page of this prospectus,
after deducting underwriting discounts and commissions and
estimated offering expenses payable by us. A $1.00 increase
(decrease) in the assumed initial public offering price of
$ per share would increase
(decrease) cash, cash equivalents and short-term investments,
working capital, total assets and total shareholders
(deficiency) equity by
$ million, assuming that the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same and after deducting
underwriting discounts and commissions.
|
(3)
|
|
Working capital is calculated as
total current assets less total current liabilities as of the
balance sheet indicated.
|
7
Quarterly
Results of Operations
The following table presents our unaudited quarterly results of
operations for each of our last eight quarters ended
March 31, 2008. You should read the following table in
conjunction with the consolidated financial statements and
related notes contained elsewhere in this prospectus. We have
prepared the unaudited information on the same basis as our
audited consolidated financial statements. These interim
financial statements reflect all adjustments consisting of
normal recurring accruals, which, in the opinion of management,
are necessary to present fairly the results of our operations
for the interim periods. Results of operations for any quarter
are not necessarily indicative of results for any future
quarters or for a full year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,631
|
|
|
$
|
7,654
|
|
Gross profit (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(539
|
)
|
|
|
2,438
|
|
|
|
5,142
|
|
Loss from operations
|
|
|
(1,510
|
)
|
|
|
(1,572
|
)
|
|
|
(2,964
|
)
|
|
|
(3,984
|
)
|
|
|
(6,618
|
)
|
|
|
(7,419
|
)
|
|
|
(10,187
|
)
|
|
|
(9,291
|
)
|
Net loss
|
|
|
(1,542
|
)
|
|
|
(1,329
|
)
|
|
|
(3,139
|
)
|
|
|
(4,187
|
)
|
|
|
(6,942
|
)
|
|
|
(7,441
|
)
|
|
|
(9,768
|
)
|
|
|
(10,611
|
)
|
Net loss available to common
shareholders(1)
|
|
|
(1,542
|
)
|
|
|
(5,207
|
)
|
|
|
(7,266
|
)
|
|
|
(8,584
|
)
|
|
|
(11,374
|
)
|
|
|
(12,294
|
)
|
|
|
(10,121
|
)
|
|
|
(24,827
|
)
|
|
|
|
(1)
|
|
Net loss available to common
shareholders includes accretion of redeemable convertible
preferred stock.
|
8
RISK
FACTORS
Investing in our common stock involves a high degree of risk.
You should carefully consider the risks described below and all
other information in this prospectus before making an investment
decision. The risks described below are not the only ones facing
our company.
Our business, financial condition and results of operations
could be materially adversely affected by any of these risks.
The trading price of our common stock could decline due to any
of these risks, and you may lose all or part of your investment.
Additional risks not presently known to us or that we currently
deem immaterial may also impair our business operations.
Risks
Relating to Our Business and Operations
Negative conditions in the global credit markets have
impaired the liquidity of our auction rate securities, and these
securities have experienced an other-than-temporary decline in
value, which has adversely affected our income. These
circumstances, along with our history of incurring substantial
operating losses and negative cash flows from operations, raise
substantial doubt about our ability to continue as a going
concern.
As of March 31, 2008, our investments included
$23.0 million of AAA rated auction rate securities issued
primarily by state agencies and backed by student loans
substantially guaranteed by the Federal Family Education Loan
Program. These auction rate securities are debt instruments with
a long-term maturity and with an interest rate that is reset in
short intervals, primarily every 28 days, through auctions. The
recent conditions in the global credit markets have prevented us
from liquidating our holdings of auction rate securities because
the amount of securities submitted for sale has exceeded the
amount of purchase orders for such securities. In February 2008,
we were informed that there was insufficient demand for auction
rate securities, resulting in failed auctions for
$23.0 million in auction rate securities held at
March 31, 2008. Currently, these affected securities are
not liquid and will not become liquid until a future auction for
these investments is successful or they are redeemed by the
issuer or they mature. In the event that we need to access the
funds of our auction rate securities that have experienced
insufficient demand at auctions, we will not be able to do so
without the possible loss of principal, until a future auction
for these investments is successful or they are redeemed by the
issuer or they mature. If we are unable to sell these securities
in the market or they are not redeemed, then we may be required
to hold them to maturity and we may have insufficient funds to
operate our business. At March 31, 2008, we recorded an
other-than-temporary impairment loss of $1.0 million
relating to these securities in our statement of operations. We
will continue to monitor and evaluate the value of our
investments each reporting period for a possible impairment if a
decline in fair value occurs.
In addition, we have incurred substantial operating losses and
negative cash flows from operations, all of which will require
us to obtain additional funding to continue our operations,
management has concluded that there is substantial doubt about
our ability to continue as a going concern. Based on the
factors described above, our independent registered public
accountants have included an explanatory paragraph in their
report for our fiscal year ended June 30, 2007 with respect
to our ability to continue as a going concern. Based on current
operating levels combined with limited liquid capital resources,
financing our operations for the next 12 months will require us
to raise equity or debt capital prior to September 30,
2008. If we fail to raise sufficient equity or debt capital,
management would implement cost reduction measures, including
workforce reductions, as well as reductions in overhead costs
and capital expenditures. There can be no assurance that these
sources will provide sufficient cash to enable us to continue as
a going concern. Although we obtained an $11.5 million
margin loan from a financial institution secured by the auction
rate securities on March 28, 2008, we currently have no
commitments for additional debt or equity financing and may
experience difficulty in obtaining additional financing on
favorable terms, if at all.
The existence of the explanatory paragraph may adversely affect
our relationships with current and prospective customers,
suppliers and investors, and therefore could have a material
adverse effect on our business, financial condition, results of
operations and cash flows. Furthermore, if we are not able to
continue as a going concern, you could lose your investment in
our common stock.
9
We
have a history of net losses and anticipate that we will
continue to incur losses for the foreseeable
future.
We are not profitable and have incurred net losses in each
fiscal year since our formation in 1989. In particular, we had
net losses of $3.5 million in fiscal 2005,
$4.9 million in fiscal 2006 and $15.6 million in
fiscal 2007, and $27.8 million in the nine months ended
March 31, 2008. As of March 31, 2008, we had an
accumulated deficit of approximately $107.0 million. We
only commenced limited commercial sales of the Diamondback
360° Orbital Atherectomy System in September 2007, and our
short commercialization experience makes it difficult for us to
predict future performance. We also expect to incur significant
additional expenses for sales and marketing and manufacturing as
we continue to commercialize the Diamondback 360° and
additional expenses as we seek to develop and commercialize
future versions of the Diamondback 360° and other products.
Additionally, we expect that our general and administrative
expenses will increase as our business grows and we incur the
legal and regulatory costs associated with being a public
company. As a result, we expect to continue to incur significant
operating losses for the foreseeable future.
We
have a very limited history selling the Diamondback 360°,
which is currently our only product, and our inability to market
this product successfully would have a material adverse effect
on our business and
financial
condition.
The Diamondback 360° is our only product, and we are wholly
dependent on it. The Diamondback 360° received 510(k)
clearance from the FDA in the United States for use as a therapy
in patients with PAD in August 2007, and we initiated a limited
commercial introduction of the Diamondback 360° in the
United States in September 2007, and we therefore have very
limited experience in the commercial manufacture and marketing
of this product. Our ability to generate revenue will depend
upon our ability to successfully commercialize the Diamondback
360° and to develop, manufacture and receive required
regulatory clearances and approvals and patient reimbursement
for treatment with future versions of the Diamondback 360°.
As we seek to commercialize the Diamondback 360°, we will
need to expand our sales force significantly to reach our target
market. Developing a sales force is expensive and time consuming
and could delay or limit the success of any product launch.
Thus, we may not be able to expand our sales and marketing
capabilities on a timely basis or at all. If we are unable to
adequately increase these capabilities, we will need to contract
with third parties to market and sell the Diamondback 360°
and any other products that we may develop. To the extent that
we enter into arrangements with third parties to perform sales,
marketing and distribution services on our behalf, our product
revenues could be lower than if we marketed and sold our
products on a direct basis. Furthermore, any revenues resulting
from co-promotion or other marketing and sales arrangements with
other companies will depend on the skills and efforts of others,
and we do not know whether these efforts will be successful.
Some of these companies may have current products or products
under development that compete with ours, and they may have an
incentive not to devote sufficient efforts to marketing our
products. If we fail to successfully develop, commercialize and
market the Diamondback 360° or any future versions of this
product that we develop, our business will be materially
adversely affected.
The
Diamondback 360° and future products may never achieve
market acceptance.
The Diamondback 360° and future products we may develop may
never gain market acceptance among physicians, patients and the
medical community. The degree of market acceptance of any of our
products will depend on a number of factors, including:
|
|
|
|
|
the actual and perceived effectiveness and reliability of our
products;
|
|
|
|
the prevalence and severity of any adverse patient events
involving our products, including infection, perforation or
dissection of the artery wall, internal bleeding, limb loss and
death;
|
|
|
|
the results of any long-term clinical trials relating to use of
our products;
|
|
|
|
the availability, relative cost and perceived advantages and
disadvantages of alternative technologies or treatment methods
for conditions treated by our systems;
|
10
|
|
|
|
|
the degree to which treatments using our products are approved
for reimbursement by public and private insurers;
|
|
|
|
the strength of our marketing and distribution
infrastructure; and
|
|
|
|
the level of education and awareness among physicians and
hospitals concerning our products.
|
Failure of the Diamondback 360° to significantly penetrate
current or new markets would negatively impact our business,
financial condition and results of operations.
If longer-term or more extensive clinical trials performed by us
or others indicate that procedures using the Diamondback
360° or any future products are not safe, effective and
long lasting, physicians may choose not to use our products.
Furthermore, unsatisfactory patient outcomes or injuries could
cause negative publicity for our products. Physicians may be
slow to adopt our products if they perceive liability risks
arising from the use of these products. It is also possible that
as our products become more widely used, latent defects could be
identified, creating negative publicity and liability problems
for us, thereby adversely affecting demand for our products. If
the Diamondback 360° and our future products do not achieve
an adequate level of acceptance by physicians, patients and the
medical community, our overall business and profitability would
be harmed.
Our
future growth depends on physician adoption of the Diamondback
360°, which requires physicians to change their screening
and referral practices.
We believe that we must educate physicians to change their
screening and referral practices. For example, although there is
a significant correlation between PAD and coronary artery
disease, many physicians do not routinely screen for PAD while
screening for coronary artery disease. We target our sales
efforts to interventional cardiologists, vascular surgeons and
interventional radiologists because they are often the primary
care physicians diagnosing and treating both coronary artery
disease and PAD. However, the initial point of contact for many
patients may be general practitioners, podiatrists,
nephrologists and endocrinologists, each of whom commonly treats
patients experiencing complications resulting from PAD. If we do
not educate referring physicians about PAD in general and the
existence of the Diamondback 360° in particular, they may
not refer patients to interventional cardiologists, vascular
surgeons or interventional radiologists for the procedure using
the Diamondback 360°, and those patients may instead be
surgically treated or treated with an alternative interventional
procedure. If we are not successful in educating physicians
about screening for PAD or referral opportunities, our ability
to increase our revenue may be impaired.
Our
customers may not be able to achieve adequate reimbursement for
using the Diamondback 360°, which could affect the
acceptance of our product and cause our business to
suffer.
The availability of insurance coverage and reimbursement for
newly approved medical devices and procedures is uncertain. The
commercial success of our products is substantially dependent on
whether third-party insurance coverage and reimbursement for the
use of such products and related services are available. We
expect the Diamondback 360° to generally be purchased by
hospitals and other providers who will then seek reimbursement
from various public and private third-party payors, such as
Medicare, Medicaid and private insurers, for the services
provided to patients. We can give no assurance that these
third-party payors will provide adequate reimbursement for use
of the Diamondback 360° to permit hospitals and doctors to
consider the product cost-effective for patients requiring PAD
treatment. In addition, the overall amount of reimbursement
available for PAD treatment could decrease in the future.
Failure by hospitals and other users of our product to obtain
sufficient reimbursement could cause our business to suffer.
Medicare, Medicaid, health maintenance organizations and other
third-party payors are increasingly attempting to contain
healthcare costs by limiting both coverage and the level of
reimbursement, and, as a result, they may not cover or provide
adequate payment for use of the Diamondback 360°. In order
to position the Diamondback 360° for acceptance by
third-party payors, we may have to agree to lower prices than we
might otherwise charge. The continuing efforts of governmental
and commercial third-party payors to contain or reduce the costs
of healthcare may limit our revenue.
11
We expect that there will continue to be federal and state
proposals for governmental controls over healthcare in the
United States. Governmental and private sector payors have
instituted initiatives to limit the growth of healthcare costs
using, for example, price regulation or controls and competitive
pricing programs. Some
third-party
payors also require demonstrated superiority, on the basis of
randomized clinical trials, or pre-approval of coverage, for new
or innovative devices or procedures before they will reimburse
healthcare providers who use such devices or procedures. Also,
the trend toward managed healthcare in the United States and
proposed legislation intended to reduce the cost of government
insurance programs could significantly influence the purchase of
healthcare services and products and may result in necessary
price reductions for our products or the exclusion of our
products from reimbursement programs. It is uncertain whether
the Diamondback 360° or any future products we may develop
will be viewed as sufficiently cost-effective to warrant
adequate coverage and reimbursement levels.
If third-party coverage and reimbursement for the Diamondback
360° is limited or not available, the acceptance of the
Diamondback 360° and, consequently, our business will be
substantially harmed.
We
have limited data and experience regarding the safety and
efficacy of the Diamondback 360°. Any
long-term
data that is generated may not be positive or consistent with
our limited short-term data, which would affect the rate at
which this product is adopted.
Our success depends on the acceptance of the Diamondback
360° by the medical community as safe and effective.
Because our technology is relatively new in the treatment of
PAD, we have performed clinical trials only with limited patient
populations. The long-term effects of using the Diamondback
360° in a large number of patients are not known and the
results of short-term clinical use of the Diamondback 360°
do not necessarily predict long-term clinical benefit or reveal
long-term adverse effects. For example, we do not have
sufficient experience with the Diamondback 360° to evaluate
its relative effectiveness in different plaque morphologies,
including hard, calcified lesions and soft, non-calcified
lesions. If the results obtained from any future clinical trials
or clinical or commercial experience indicate that the
Diamondback 360° is not as safe or effective as other
treatment options or as current short-term data would suggest,
adoption of this product may suffer and our business would be
harmed. Even if we believe that the data collected from clinical
trials or clinical experience indicate positive results, each
physicians actual experience with our device will vary.
Clinical trials conducted with the Diamondback 360° have
involved procedures performed by physicians who are very
technically proficient. Consequently, both short and long-term
results reported in these studies may be significantly more
favorable than typical results achieved by physicians, which
could negatively impact rates of adoption of the Diamondback
360°.
We
will face significant competition and may be unable to sell the
Diamondback 360° at profitable levels.
We compete against very large and well-known stent and balloon
angioplasty device manufacturers, including Abbott Laboratories,
Boston Scientific, Cook, Johnson & Johnson and
Medtronic. We may have difficulty competing effectively with
these competitors because of their well-established positions in
the marketplace, significant financial and human capital
resources, established reputations and worldwide distribution
channels. We also compete against manufacturers of atherectomy
catheters including, among others, ev3, Spectranetics and Boston
Scientific, as well as other manufacturers that may enter the
market due to the increasing demand for treatment of vascular
disease. Several other companies provide products used by
surgeons in peripheral bypass procedures. Other competitors
include pharmaceutical companies that manufacture drugs for the
treatment of mild to moderate PAD and companies that provide
products used by surgeons in peripheral bypass procedures.
Our competitors may:
|
|
|
|
|
develop and patent processes or products earlier than us;
|
|
|
|
obtain regulatory clearances or approvals for competing medical
device products more rapidly than us;
|
|
|
|
market their products more effectively than us; or
|
|
|
|
develop more effective or less expensive products or
technologies that render our technology or products obsolete or
non-competitive.
|
We have encountered and expect to continue to encounter
potential customers who, due to existing relationships with our
competitors, are committed to or prefer the products offered by
these competitors. If we
12
are unable to compete successfully, our revenue will suffer.
Increased competition might lead to price reductions and other
concessions that might adversely affect our operating results.
Competitive pressures may decrease the demand for our products
and could adversely affect our financial results.
Our
ability to compete depends on our ability to innovate
successfully. If our competitors demonstrate the increased
safety or efficacy of their products as compared to ours, our
revenue may decline.
The market for medical devices is highly competitive, dynamic
and marked by rapid and substantial technological development
and product innovations. Our ability to compete depends on our
ability to innovate successfully, and there are few barriers
that would prevent new entrants or existing competitors from
developing products that compete directly with ours. Demand for
the Diamondback 360° could be diminished by equivalent or
superior products and technologies offered by competitors. Our
competitors may produce more advanced products than ours or
demonstrate superior safety and efficacy of their products. If
we are unable to innovate successfully, the Diamondback
360° could become obsolete and our revenue would decline as
our customers purchase our competitors products.
We
have limited commercial manufacturing experience and could
experience difficulty in producing the Diamondback 360° or
will need to depend on third parties to manufacture the
product.
We have limited experience in commercially manufacturing the
Diamondback 360° and have no experience manufacturing this
product in the volume that we anticipate will be required if we
achieve planned levels of commercial sales. As a result, we may
not be able to develop and implement efficient, low-cost
manufacturing capabilities and processes that will enable us to
manufacture the Diamondback 360° or future products in
significant volumes, while meeting the legal, regulatory,
quality, price, durability, engineering, design and production
standards required to market our products successfully. If we
fail to develop and implement these manufacturing capabilities
and processes, we may be unable to profitably commercialize the
Diamondback 360° and any future products we may develop
because the per unit cost of our products is highly dependent
upon production volumes and the level of automation in our
manufacturing processes. There are technical challenges to
increasing manufacturing capacity, including equipment design
and automation capabilities, material procurement, problems with
production yields and quality control and assurance. Increasing
our manufacturing capacity will require us to invest substantial
additional funds and to hire and retain additional management
and technical personnel who have the necessary manufacturing
experience. We may not successfully complete any required
increase in manufacturing capacity in a timely manner or at all.
If we are unable to manufacture a sufficient supply of our
products, maintain control over expenses or otherwise adapt to
anticipated growth, or if we underestimate growth, we may not
have the capability to satisfy market demand and our business
will suffer.
Since we have little actual commercial experience with the
Diamondback 360°, the forecasts of demand we use to
determine order quantities and lead times for components
purchased from outside suppliers may be incorrect. Lead times
for components may vary significantly depending on the type of
component, the size of the order, time required to fabricate and
test the components, specific supplier requirements and current
market demand for the components and subassemblies. Failure to
obtain required components or subassemblies when needed and at a
reasonable cost would adversely affect our business.
In addition, we may in the future need to depend upon third
parties to manufacture the Diamondback 360° and future
products. We also cannot assure you that any third-party
contract manufacturers will have the ability to produce the
quantities of our products needed for development or commercial
sales or will be willing to do so at prices that allow the
products to compete successfully in the market. In addition, we
can give no assurance that even if we do contract with
third-party manufacturers for production that these
manufacturers will not experience manufacturing difficulties or
experience quality or regulatory issues. Any difficulties in
locating and hiring third-party manufacturers, or in the ability
of third-party manufacturers to supply quantities of our
products at the times and in the quantities we need, could have
a material adverse effect on our business.
13
We
depend upon third-party suppliers, including single source
suppliers to us and our customers, making us vulnerable to
supply problems and price fluctuations.
We rely on third-party suppliers to provide us certain
components of our products and to provide key components or
supplies to our customers for use with our products. We rely on
single source suppliers for the following components of the
Diamondback 360°: diamond grit coated crowns, ABS molded
products, components within the brake assembly and the turbine
assembly, and the
air-and-saline
cable assembly. We purchase components from these suppliers on a
purchase order basis and carry only very limited levels of
inventory for these components. If we underestimate our
requirements, we may not have an adequate supply, which could
interrupt manufacturing of our products and result in delays in
shipments and loss of revenue. Our customers depend on a single
source supplier for the catheter lubricant used with our
Diamondback 360° system. If our customers are unable to
obtain adequate supplies of this lubricant, our customers may
reduce or cease purchases of our product. We depend on these
suppliers to provide us and our customers with materials in a
timely manner that meet our and their quality, quantity and cost
requirements. These suppliers may encounter problems during
manufacturing for a variety of reasons, including unanticipated
demand from larger customers, failure to follow specific
protocols and procedures, failure to comply with applicable
regulations, equipment malfunction, quality or yield problems,
and environmental factors, any of which could delay or impede
their ability to meet our demand and our customers demand.
Our reliance on these outside suppliers also subjects us to
other risks that could harm our business, including:
|
|
|
|
|
interruption of supply resulting from modifications to, or
discontinuation of, a suppliers operations;
|
|
|
|
delays in product shipments resulting from defects, reliability
issues or changes in components from suppliers;
|
|
|
|
price fluctuations due to a lack of long-term supply
arrangements for key components with our suppliers;
|
|
|
|
our suppliers may make errors in manufacturing components, which
could negatively affect the efficacy or safety of our products
or cause delays in shipment of our products;
|
|
|
|
our suppliers may discontinue production of components, which
could significantly delay our production and sales and impair
operating margins;
|
|
|
|
we and our customers may not be able to obtain adequate supplies
in a timely manner or on commercially acceptable terms;
|
|
|
|
we and our customers may have difficulty locating and qualifying
alternative suppliers for our and their sole-source supplies;
|
|
|
|
switching components may require product redesign and new
regulatory submissions, either of which could significantly
delay production and sales;
|
|
|
|
we may experience production delays related to the evaluation
and testing of products from alternative suppliers and
corresponding regulatory qualifications;
|
|
|
|
our suppliers manufacture products for a range of customers, and
fluctuations in demand for the products these suppliers
manufacture for others may affect their ability to deliver
components to us or our customers in a timely manner; and
|
|
|
|
our suppliers may encounter financial hardships unrelated to our
or our customers demand for components or other products,
which could inhibit their ability to fulfill orders and meet
requirements.
|
Other than existing, unfulfilled purchase orders, our suppliers
have no contractual obligations to supply us with, and we are
not contractually obligated to purchase from them, any of our
supplies. Any supply interruption from our suppliers or failure
to obtain additional suppliers for any of the components used in
our products would limit our ability to manufacture our products
and could have a material adverse effect on our business,
financial condition and results of operations. We have no reason
to believe that any of our current suppliers could not be
replaced if they were unable to deliver components to us in a
timely manner or at an acceptable price and level of quality.
However, if we lost one of these suppliers and were unable to
obtain an alternate source on a timely basis or
14
on terms acceptable to us, our production schedules could be
delayed, our margins could be negatively impacted, and we could
fail to meet our customers demand. Our customers rely upon
our ability to meet committed delivery dates and any disruption
in the supply of key components would adversely affect our
ability to meet these dates and could result in legal action by
our customers, cause us to lose customers or harm our ability to
attract new customers, any of which could decrease our revenue
and negatively impact our growth. In addition, to the extent
that our suppliers use technology or manufacturing processes
that are proprietary, we may be unable to obtain comparable
materials or components from alternative sources.
Manufacturing operations are often faced with a suppliers
decision to discontinue manufacturing a component, which may
force us or our customers to make last time purchases, qualify a
substitute part, or make a design change which may divert
engineering time away from the development of new products.
We
will need to increase the size of our organization and we may
experience difficulties managing growth. If we are unable to
manage the anticipated growth of our business, our future
revenue and operating results may be adversely
affected.
The growth we may experience in the future will provide
challenges to our organization, requiring us to rapidly expand
our sales and marketing personnel and manufacturing operations.
Our sales and marketing force has increased from
six employees on January 1, 2007 to 73 employees
on April 30, 2008, and we expect to continue to grow our
sales and marketing force. We also expect to significantly
expand our manufacturing operations to meet anticipated growth
in demand for our products. Rapid expansion in personnel means
that less experienced people may be producing and selling our
product, which could result in unanticipated costs and
disruptions to our operations. If we cannot scale and manage our
business appropriately, our anticipated growth may be impaired
and our financial results will suffer.
We
anticipate future losses and may require additional financing,
and our failure to obtain additional financing when needed could
force us to delay, reduce or eliminate our product development
programs or commercialization efforts.
We expect to incur losses for the foreseeable future, and we may
require financing in addition to the proceeds of this offering
in order to satisfy our capital requirements. In particular, we
may require additional capital in order to continue to conduct
the research and development and obtain regulatory clearances
and approvals necessary to bring any future products to market
and to establish effective marketing and sales capabilities for
existing and future products. We believe that the net proceeds
of this offering will be sufficient to satisfy our cash
requirements for at least the next 12 months. However, our
operating plan may change, and we may need additional funds
sooner than anticipated to meet our operational needs and
capital requirements for product development, clinical trials
and commercialization. Additional funds may not be available
when we need them on terms that are acceptable to us, or at all.
If adequate funds are not available on a timely basis, we may
terminate or delay the development of one or more of our
products, or delay establishment of sales and marketing
capabilities or other activities necessary to commercialize our
products.
Our future capital requirements will depend on many factors,
including:
|
|
|
|
|
the costs of expanding our sales and marketing infrastructure
and our manufacturing operations;
|
|
|
|
the degree of success we experience in commercializing the
Diamondback 360°;
|
|
|
|
the number and types of future products we develop and
commercialize;
|
|
|
|
the costs, timing and outcomes of regulatory reviews associated
with our future product candidates;
|
|
|
|
the costs of preparing, filing and prosecuting patent
applications and maintaining, enforcing and defending
intellectual property-related claims; and
|
|
|
|
the extent and scope of our general and administrative expenses.
|
15
Raising
additional capital may cause dilution to our shareholders or
restrict our operations.
To the extent that we raise additional capital through the sale
of equity or convertible debt securities, your ownership
interest will be diluted, and the terms may include liquidation
or other preferences that adversely affect your rights as a
shareholder. Debt financing, if available, may involve
agreements that include covenants limiting or restricting our
ability to take specific actions such as incurring additional
debt, making capital expenditures or declaring dividends. Any of
these events could adversely affect our ability to achieve our
product development and commercialization goals and have a
material adverse effect on our business, financial condition and
results of operations.
We do
not currently intend to market the Diamondback 360°
internationally, which will limit our potential revenue from
this product.
As a part of our product development and regulatory strategy, we
do not currently intend to market the Diamondback 360°
internationally in order to focus our resources and efforts on
the U.S. market, as international efforts would require
substantial additional sales and marketing, regulatory and
personnel expenses. Our decision to market this product only in
the United States will limit our ability to reach all of our
potential markets and will limit our potential sources of
revenue. In addition, our competitors will have an opportunity
to further penetrate and achieve market share abroad until such
time, if ever, that we market the Diamondback 360° or other
products internationally.
We are
dependent on our senior management team and scientific
personnel, and our business could be harmed if we are unable to
attract and retain personnel necessary for our
success.
We are highly dependent on our senior management, especially
David L. Martin, our President and Chief Executive Officer. Our
success will depend on our ability to retain our senior
management and to attract and retain qualified personnel in the
future, including scientists, clinicians, engineers and other
highly skilled personnel and to integrate current and additional
personnel in all departments. Competition for senior management
personnel, as well as scientists, clinical and regulatory
specialists, engineers and sales personnel, is intense and we
may not be able to retain our personnel. The loss of members of
our senior management, scientists, clinical and regulatory
specialists, engineers and sales personnel could prevent us from
achieving our objectives of continuing to grow our company. The
loss of a member of our senior management or our professional
staff would require the remaining senior executive officers to
divert immediate and substantial attention to seeking a
replacement. In particular, we expect to substantially increase
the size of our sales force, which will require
managements attention. In that regard, ev3 Inc., ev3
Endovascular, Inc., and FoxHollow Technologies, Inc. have
brought an action against us that, if successful, could limit
our ability to retain the services of certain sales personnel
that were formerly employed by those companies and make it more
difficult to recruit and hire such sales and other personnel in
the future. We do not carry key person life insurance on any of
our employees, other than Michael J. Kallok, our Chief
Scientific Officer and former Chief Executive Officer.
We
have a new management team and may experience instability in the
short term as a result.
Since July 2006, we have added six new executives to our
management team, including our Chief Executive Officer, who
joined us in February 2007, and our Chief Financial Officer, who
joined us in April 2008. During the preparation for this
offering, our board of directors determined that it would be in
our best interests to replace James Flaherty in his role as
Chief Financial Officer due to his consent to a court order
enjoining him from any violation of certain provisions of
federal securities law in connection with events that occurred
while he was the Chief Financial Officer of Zomax Incorporated.
The board of directors desired to retain Mr. Flaherty as a
member of our executive team, and, accordingly, Mr. Flaherty
became our Chief Administrative Officer, giving him
responsibility over non-financial operations matters, and
Mr. Martin became Interim Chief Financial Officer until the
hiring of Laurence L. Betterley as our Chief Financial Officer.
Our new executives lack long-term experience with us. We may
experience instability in the short term as our new executives
become integrated into our company. Competition for qualified
employees is intense and the loss of service of any of our
executive officers or certain key employees could delay or
curtail our research, development, commercialization and
financial objectives.
16
Becoming
a public company will cause us to incur increased costs and
demands on our management.
As a public reporting company, we will need to comply with the
Sarbanes-Oxley Act of 2002 and the related rules and regulations
adopted by the SEC and by the Nasdaq Global Market, including
expanded disclosures, accelerated reporting requirements, more
complex accounting rules and internal control requirements.
These obligations will require significant additional
expenditures, place additional demands on our management and
divert managements time and attention away from our core
business. These additional obligations will also require us to
hire additional personnel. For example, we are evaluating our
internal controls systems in order to allow us to report on, and
our independent registered public accounting firm to attest to,
our internal controls, as required by Section 404 of the
Sarbanes-Oxley Act. We cannot be certain as to the timing of
completion of our evaluation, testing and remediation actions or
the impact of the same on our operations. Our management may not
be able to effectively and timely implement controls and
procedures that adequately respond to the increased regulatory
compliance and reporting requirements that will be applicable to
us as a public company. If we fail to staff our accounting and
finance function adequately or maintain internal controls
adequate to meet the demands that will be placed upon us as a
public company, including the requirements of the Sarbanes-Oxley
Act, we may be unable to report our financial results accurately
or in a timely manner and our business and stock price may
suffer. The costs of being a public company, as well as
diversion of managements time and attention, may have a
material adverse effect on our business, financial condition and
results of operations.
Additionally, these laws and regulations could make it more
difficult or more costly for us to obtain certain types of
insurance, including director and officer 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 may
be subject to damages or other remedies as a result of the ev3
litigation.
On December 28, 2007, ev3 Inc., ev3 Endovascular, Inc., and
FoxHollow Technologies, Inc. filed a complaint against us and
certain of our employees alleging, among other things,
misappropriation and use of their confidential information by us
and certain of our employees who were formerly employees of
FoxHollow. The complaint also alleges that these employees
violated their employment agreements with FoxHollow requiring
them to refrain from soliciting FoxHollow employees. This
litigation is in an early stage and there can be no assurance as
to its outcome. If we are not successful in defending it, we
could be required to pay substantial damages and be subject to
equitable relief that could include a requirement that we
terminate the employment of certain employees, including certain
key sales personnel who were formerly employed by FoxHollow. In
any event, the defense of this litigation, regardless of the
outcome, could result in substantial legal costs and diversion
of our managements time and efforts from the operation of
our business. If the plaintiffs in this litigation are
successful, it could have a material adverse effect on our
business, operations and financial condition.
Risks
Related to Government Regulation
Our
ability to market the Diamondback 360° in the United States
is limited to use as a therapy in patients with PAD, and if we
want to expand our marketing claims, we will need to file for
additional FDA clearances or approvals and conduct further
clinical trials, which would be expensive and time-consuming and
may not be successful.
The Diamondback 360° received FDA 510(k) clearance in the
United States for use as a therapy in patients with PAD. This
general clearance restricts our ability to market or advertise
the Diamondback 360° beyond this use and could affect our
growth. While off-label uses of medical devices are common and
the FDA does not regulate physicians choice of treatments,
the FDA does restrict a manufacturers communications
regarding such off-label use. We will not actively promote or
advertise the Diamondback 360° for off-label uses. In
addition, we cannot make comparative claims regarding the use of
the Diamondback 360° against any alternative treatments
without conducting head-to-head comparative clinical trials,
which would be expensive and time consuming. We do not have any
current plans to conduct clinical trials in the near future to
evaluate the Diamondback 360° against any
17
alternative method of treatment. If our promotional activities
fail to comply with the FDAs regulations or guidelines, we
may be subject to FDA warnings or enforcement action.
If we determine to market the Diamondback 360° in the
United States for other uses, for instance, use in the coronary
arteries, we will need to conduct further clinical trials and
obtain premarket approval from the FDA. Clinical trials are
complex, expensive, time consuming, uncertain and subject to
substantial and unanticipated delays. Before we may begin
clinical trials, we must submit and obtain approval for an
investigational device exemption, or IDE, that describes, among
other things, the manufacture of, and controls for, the device
and a complete investigational plan. Clinical trials generally
involve a substantial number of patients in a multi-year study.
We may encounter problems with our clinical trials, and any of
those problems could cause us or the FDA to suspend those
trials, or delay the analysis of the data derived from them.
A number of events or factors, including any of the following,
could delay the completion of our clinical trials in the future
and negatively impact our ability to obtain FDA clearance or
approval for, and to introduce, a particular future product:
|
|
|
|
|
failure to obtain approval from the FDA or any foreign
regulatory authority to commence an investigational study;
|
|
|
|
conditions imposed on us by the FDA or any foreign regulatory
authority regarding the scope or design of our clinical trials;
|
|
|
|
delays in obtaining or maintaining required approvals from
institutional review boards or other reviewing entities at
clinical sites selected for participation in our clinical trials;
|
|
|
|
insufficient supply of our future product candidates or other
materials necessary to conduct our clinical trials;
|
|
|
|
difficulties in enrolling patients in our clinical trials;
|
|
|
|
negative or inconclusive results from clinical trials, results
that are inconsistent with earlier results, or the likelihood
that the part of the human anatomy involved is more prone to
serious adverse events, necessitating additional clinical trials;
|
|
|
|
serious or unexpected side effects experienced by patients who
use our future product candidates; or
|
|
|
|
failure by any of our third-party contractors or investigators
to comply with regulatory requirements or meet other contractual
obligations in a timely manner.
|
Our clinical trials may not begin as planned, may need to be
redesigned, and may not be completed on schedule, if at all.
Delays in our clinical trials may result in increased
development costs for our future product candidates, which could
cause our stock price to decline and limit our ability to obtain
additional financing. In addition, if one or more of our
clinical trials are delayed, competitors may be able to bring
products to market before we do, and the commercial viability of
our future product candidates could be significantly reduced.
Even if we believe that a clinical trial demonstrates promising
safety and efficacy data, such results may not be sufficient to
obtain FDA clearance or approval. Without conducting and
successfully completing further clinical trials, our ability to
market the Diamondback 360° will be limited and our revenue
expectations may not be realized.
We may
become subject to regulatory actions in the event we are found
to promote the Diamondback 360° for unapproved
uses.
If the FDA determines that our promotional materials, training
or other activities constitute promotion of our product for an
unapproved use, it could request that we cease use of or modify
our training or promotional materials or subject us to
regulatory enforcement actions, including the issuance of an
untitled or warning letter, injunction, seizure, civil fine and
criminal penalties. It is also possible that other federal,
state or foreign enforcement authorities might take action if
they consider promotional, training or other materials to
constitute promotion of our product for an unapproved or
uncleared use, which could result in significant fines or
penalties under other statutory authorities, such as laws
prohibiting false claims for reimbursement.
18
The
Diamondback 360° may in the future be subject to product
recalls that could harm our reputation.
The FDA and similar governmental authorities in other countries
have the authority to require the recall of commercialized
products in the event of material regulatory deficiencies or
defects in design or manufacture. A government mandated or
voluntary recall by us could occur as a result of component
failures, manufacturing errors or design or labeling defects. We
have not had any instances requiring consideration of a recall,
although as we continue to grow and develop our products,
including the Diamondback 360°, we may see instances of
field performance requiring a recall. Any recalls of our product
would divert managerial and financial resources, harm our
reputation with customers and have an adverse effect on our
financial condition and results of operations.
If we
or our suppliers fail to comply with ongoing regulatory
requirements, or if we experience unanticipated problems, our
products could be subject to restrictions or withdrawal from the
market.
The Diamondback 360° and related manufacturing processes,
clinical data, adverse events, recalls or corrections and
promotional activities, are subject to extensive regulation by
the FDA and other regulatory bodies. In particular, we and our
component suppliers are required to comply with the FDAs
Quality System Regulation, or QSR, and other regulations, which
cover the methods and documentation of the design, testing,
production, control, quality assurance, labeling, packaging,
storage and shipping of any product for which we obtain
marketing clearance or approval. The FDA enforces the QSR
through announced and unannounced inspections. We and certain of
our third-party manufacturers have not yet been inspected by the
FDA. Failure by us or one of our component suppliers to comply
with the QSR requirements or other statutes and regulations
administered by the FDA and other regulatory bodies, or failure
to adequately respond to any observations, could result in,
among other things:
|
|
|
|
|
warning letters or untitled letters from the FDA;
|
|
|
|
fines, injunctions and civil penalties;
|
|
|
|
product recall or seizure;
|
|
|
|
unanticipated expenditures;
|
|
|
|
delays in clearing or approving or refusal to clear or approve
products;
|
|
|
|
withdrawal or suspension of approval or clearance by the FDA or
other regulatory bodies;
|
|
|
|
orders for physician notification or device repair, replacement
or refund;
|
|
|
|
operating restrictions, partial suspension or total shutdown of
production or clinical trials; and
|
|
|
|
criminal prosecution.
|
If any of these actions were to occur, it would harm our
reputation and cause our product sales to suffer.
Furthermore, any modification to a device that has received FDA
clearance or approval that could significantly affect its safety
or efficacy, or that would constitute a major change in its
intended use, design or manufacture, requires a new clearance or
approval from the FDA. If the FDA disagrees with any
determination by us that new clearance or approval is not
required, we may be required to cease marketing or to recall the
modified product until we obtain clearance or approval. In
addition, we could be subject to significant regulatory fines or
penalties.
Regulatory clearance or approval of a product may also require
costly post-marketing testing or surveillance to monitor the
safety or efficacy of the product. Later discovery of previously
unknown problems with our products, including unanticipated
adverse events or adverse events of unanticipated severity or
frequency, manufacturing problems, or failure to comply with
regulatory requirements such as the QSR, may result in
restrictions on such products or manufacturing processes,
withdrawal of the products from the market, voluntary or
mandatory recalls, fines, suspension of regulatory approvals,
product seizures, injunctions or the imposition of civil or
criminal penalties.
19
The
use, misuse or off-label use of the Diamondback 360° may
increase the risk of injury, which could result in product
liability claims and damage to our business.
The use, misuse or off-label use of the Diamondback 360°
may result in injuries that lead to product liability suits,
which could be costly to our business. The Diamondback 360°
is not FDA-cleared or approved for treatment of the carotid
arteries, the coronary arteries, within bypass grafts or stents,
of thrombus or where the lesion cannot be crossed with a
guidewire or a significant dissection is present at the lesion
site. We cannot prevent a physician from using the Diamondback
360° for off-label applications. The application of the
Diamondback 360° to coronary or carotid arteries, as
opposed to peripheral arteries, is more likely to result in
complications that have serious consequences, including heart
attacks or strokes which could result, in certain circumstances,
in death.
We
will face risks related to product liability claims, which could
exceed the limits of available insurance coverage.
If the Diamondback 360° is defectively designed,
manufactured or labeled, contains defective components or is
misused, we may become subject to costly litigation by our
customers or their patients. The medical device industry is
subject to substantial litigation, and we face an inherent risk
of exposure to product liability claims in the event that the
use of our product results or is alleged to have resulted in
adverse effects to a patient. In most jurisdictions, producers
of medical products are strictly liable for personal injuries
caused by medical devices. We may be subject in the future to
claims for personal injuries arising out of the use of our
products. Product liability claims could divert
managements attention from our core business, be expensive
to defend and result in sizable damage awards against us. A
product liability claim against us, even if ultimately
unsuccessful, could have a material adverse effect on our
financial condition, results of operations and reputation. While
we have product liability insurance coverage for our products
and intend to maintain such insurance coverage in the future,
there can be no assurance that we will be adequately protected
from the claims that will be brought against us.
Compliance
with environmental laws and regulations could be expensive.
Failure to comply with environmental laws and regulations could
subject us to significant liability.
Our operations are subject to regulatory requirements relating
to the environment, waste management and health and safety
matters, including measures relating to the release, use,
storage, treatment, transportation, discharge, disposal and
remediation of hazardous substances. Although we are currently
classified as a Very Small Quantity Hazardous Waste Generator
within Ramsey County, Minnesota, we cannot ensure that we will
maintain our licensed status as such, nor can we ensure that we
will not incur material costs or liability in connection with
our operations, or that our past or future operations will not
result in claims or injury by employees or the public.
Environmental laws and regulations could also become more
stringent over time, imposing greater compliance costs and
increasing risks and penalties associated with violations.
We and
our distributors must comply with various federal and state
anti-kickback, self-referral, false claims and similar laws, any
breach of which could cause a material adverse effect on our
business, financial condition and results of
operations.
Our relationships with physicians, hospitals and the marketers
of our products are subject to scrutiny under various federal
anti-kickback, self-referral, false claims and similar laws,
often referred to collectively as healthcare fraud and abuse
laws. Healthcare fraud and abuse laws are complex, and even
minor, inadvertent violations can give rise to claims that the
relevant law has been violated. If our operations are found to
be in violation of these laws, we, as well as our employees, may
be subject to penalties, including monetary fines, civil and
criminal penalties, exclusion from federal and state healthcare
programs, including Medicare, Medicaid, Veterans Administration
health programs, workers compensation programs and TRICARE
(the healthcare system administered by or on behalf of the
U.S. Department of Defense for uniformed services
beneficiaries, including active duty and their dependents,
retirees and their dependents), and forfeiture of amounts
collected in violation of such prohibitions. Individual
employees may need to defend such suits on behalf of us or
themselves, which could lead to significant disruption in our
present and future operations. Certain states in which we intend
to market our products have similar fraud and abuse laws,
imposing substantial penalties for violations. Any government
investigation or a
20
finding of a violation of these laws would likely have a
material adverse effect on our business, financial condition and
results of operations.
Anti-kickback laws and regulations prohibit any knowing and
willful offer, payment, solicitation or receipt of any form of
remuneration in return for the referral of an individual or the
ordering or recommending of the use of a product or service for
which payment may be made by Medicare, Medicaid or other
government-sponsored healthcare programs. In addition, the cost
of non-compliance with these laws could be substantial, since we
could be subject to monetary fines and civil or criminal
penalties, and we could also be excluded from federally funded
healthcare programs, including Medicare and Medicaid, for
non-compliance.
We have entered into consulting agreements with physicians,
including some who may make referrals to us or order our
product. One of these physicians was one of 20 principal
investigators in our OASIS clinical trial at the same time he
was acting as a paid consultant for us. In addition, some of
these physicians own our stock, which they purchased in
arms-length
transactions on terms identical to those offered to
non-physicians, or received stock options from us as
consideration for consulting services performed by them. We
believe that these consulting agreements and equity investments
by physicians are common practice in our industry, and while
these transactions were structured with the intention of
complying with all applicable laws, including the federal ban on
physician self-referrals, commonly known as the Stark
Law, state anti-referral laws and other applicable
anti-kickback laws, it is possible that regulatory or
enforcement agencies or courts may in the future view these
transactions as prohibited arrangements that must be
restructured or for which we would be subject to other
significant civil or criminal penalties, or prohibit us from
accepting referrals from these physicians. Because our strategy
relies on the involvement of physicians who consult with us on
the design of our product, we could be materially impacted if
regulatory or enforcement agencies or courts interpret our
financial relationships with our physician advisors who refer or
order our product to be in violation of applicable laws and
determine that we would be unable to achieve compliance with
such applicable laws. This could harm our reputation and the
reputations of our clinical advisors.
The scope and enforcement of all of these laws is uncertain and
subject to rapid change, especially in light of the lack of
applicable precedent and regulations. There can be no assurance
that federal or state regulatory or enforcement authorities will
not investigate or challenge our current or future activities
under these laws. Any investigation or challenge could have a
material adverse effect on our business, financial condition and
results of operations. Any state or federal regulatory or
enforcement review of us, regardless of the outcome, would be
costly and time consuming. Additionally, we cannot predict the
impact of any changes in these laws, whether these changes are
retroactive or will have effect on a going-forward basis only.
Risks
Relating to Intellectual Property
Our
inability to adequately protect our intellectual property could
allow our competitors and others to produce products based on
our technology, which could substantially impair our ability to
compete.
Our success and ability to compete depends, in part, upon our
ability to maintain the proprietary nature of our technologies.
We rely on a combination of patents, copyrights and trademarks,
as well as trade secrets and nondisclosure agreements, to
protect our intellectual property. As of April 30, 2008,
we had a portfolio of 16 issued U.S. patents and 27 issued
non-U.S. patents
covering aspects of our core technology, which expire between
2017 and 2021. However, our issued patents and related
intellectual property may not be adequate to protect us or
permit us to gain or maintain a competitive advantage. The
issuance of a patent is not conclusive as to its scope, validity
or enforceability. The scope, validity or enforceability of our
issued patents can be challenged in litigation or proceedings
before the U.S. Patent and Trademark Office, or the USPTO.
In addition, our pending patent applications include claims to
numerous important aspects of our products under development
that are not currently protected by any of our issued patents.
We cannot assure you that any of our pending patent applications
will result in the issuance of patents to us. The USPTO may deny
or require significant narrowing of claims in our pending patent
applications. Even if any patents are issued as a result of
pending patent applications, they may not provide us with
significant commercial protection or be issued in a form that is
advantageous to us. Proceedings before the USPTO could result in
adverse decisions as to the priority of our inventions and the
narrowing or invalidation of claims in issued patents. Further,
if any patents we obtain or license are deemed invalid and
unenforceable, or have their scope narrowed, it could impact our
ability to commercialize or license our technology.
21
Changes in either the patent laws or in interpretations of
patent laws in the United States and other countries may
diminish the value of our intellectual property. For instance,
the U.S. Supreme Court has recently modified some tests
used by the USPTO in granting patents during the past
20 years, which may decrease the likelihood that we will be
able to obtain patents and increase the likelihood of challenge
of any patents we obtain or license. In addition, the USPTO has
adopted new rules of practice (the application of which has been
enjoined as a result of litigation) that limit the number of
claims that may be filed in a patent application and the number
of continuation or
continuation-in-part
applications that can be filed may result in patent applicants
being unable to secure all of the rights that they would
otherwise have been entitled to in the absence of the new rules
and, therefore, may negatively effect our ability to obtain
comprehensive patent coverage. The laws of some foreign
countries may not protect our intellectual property rights to
the same extent as the laws of the United States, if at all.
To protect our proprietary rights, we may, in the future, need
to assert claims of infringement against third parties to
protect our intellectual property. The outcome of litigation to
enforce our intellectual property rights in patents, copyrights,
trade secrets or trademarks is highly unpredictable, could
result in substantial costs and diversion of resources, and
could have a material adverse effect on our financial condition,
reputation and results of operations regardless of the final
outcome of such litigation. In the event of an adverse judgment,
a court could hold that some or all of our asserted intellectual
property rights are not infringed, invalid or unenforceable, and
could order us to pay third-party attorney fees. Despite our
efforts to safeguard our unpatented and unregistered
intellectual property rights, we may not be successful in doing
so or the steps taken by us in this regard may not be adequate
to detect or deter misappropriation of our technology or to
prevent an unauthorized third party from copying or otherwise
obtaining and using our products, technology or other
information that we regard as proprietary. In addition, we may
not have sufficient resources to litigate, enforce or defend our
intellectual property rights. Additionally, third parties may be
able to design around our patents.
We also rely on trade secrets, technical know-how and continuing
innovation to develop and maintain our competitive position. In
this regard, we seek to protect our proprietary information and
other intellectual property by requiring our employees,
consultants, contractors, outside scientific collaborators and
other advisors to execute non-disclosure and assignment of
invention agreements on commencement of their employment or
engagement. Agreements with our employees also forbid them from
bringing the proprietary rights of third parties to us. We also
require confidentiality or material transfer agreements from
third parties that receive our confidential data or materials.
However, trade secrets are difficult to protect. We cannot
provide any assurance that employees and third parties will
abide by the confidentiality or assignment terms of these
agreements, or that we will be effective securing necessary
assignments from these third parties. Despite measures taken to
protect our intellectual property, unauthorized parties might
copy aspects of our products or obtain and use information that
we regard as proprietary. Enforcing a claim that a third party
illegally obtained and is using any of our trade secrets is
expensive and time consuming, and the outcome is unpredictable.
In addition, courts outside the United States are sometimes less
willing to protect trade secrets. Finally, others may
independently discover trade secrets and proprietary
information, and this would prevent us from asserting any such
trade secret rights against these parties.
We are currently involved in disputes with our founder,
Dr. Leonid Shturman, and a company owned by
Dr. Shturman regarding the ownership of certain
counterbalance technology not used in the Diamondback 360°,
for which Dr. Shturman and his company have attempted to
seek patent protection in the United Kingdom and from the World
Intellectual Property Organization. The forums for the disputes
are an AAA arbitration proceeding and a Federal District Court
case, both in Minneapolis, Minnesota. By order dated May 5,
2008, the panel in the AAA arbitration proceeding ruled that
Dr. Shturmans company breached its agreements with us
by failing to transfer the counterbalance technology to us, and
ordered Dr. Shturmans company to assign to us its
interest in the technology. Dr. Shturmans company may
attempt to appeal the decision. The Federal District Court case
is still pending. Our disputes with Dr. Shturman may result
in a finding that we do not own the counterbalance technology
that is the subject of these disputes, and we may be unable to
use this technology in future products without incurring
obligations to pay royalties, or at all. Moreover, the Shturman
patent applications could prevent us from obtaining our own
patents on similar technology. Additionally, Dr. Shturman
has raised counterclaims in the Federal District Court case with
regard to two shaft winding machines that we imported from
Russia. Dr. Shturman is seeking monetary damages, which he
believes to be in excess of $1.0 million, for our use of the
machines and the intellectual property they embody. It is
possible that we may incur substantial costs as a result of this
litigation. The technology
22
that is the subject of these disputes is not used in the
Diamondback 360° and the shaft winding machines represent
obsolete technology that we will likely never use.
Our inability to adequately protect our intellectual property
could allow our competitors and others to produce products based
on our technology, which could substantially impair our ability
to compete.
Claims
of infringement or misappropriation of the intellectual property
rights of others could prohibit us from commercializing
products, require us to obtain licenses from third parties or
require us to develop non-infringing alternatives, and subject
us to substantial monetary damages and injunctive
relief.
The medical technology industry is characterized by extensive
litigation and administrative proceedings over patent and other
intellectual property rights. The likelihood that patent
infringement or misappropriation claims may be brought against
us increases as we achieve more visibility in the marketplace
and introduce products to market. All issued patents are
entitled to a presumption of validity under the laws of the
United States. Whether a product infringes a patent involves
complex legal and factual issues, the determination of which is
often uncertain. Therefore, we cannot be certain that we have
not infringed the intellectual property rights of such third
parties or others. Our competitors may assert that our products
are covered by U.S. or foreign patents held by them. We are
aware of numerous patents issued to third parties that relate to
the manufacture and use of medical devices for interventional
cardiology. The owners of each of these patents could assert
that the manufacture, use or sale of our products infringes one
or more claims of their patents. Because patent applications may
take years to issue, there may be applications now pending of
which we are unaware that may later result in issued patents
that we infringe. If another party has filed a U.S. patent
application on inventions similar to ours, we may have to
participate in an interference proceeding declared by the USPTO
to determine priority of invention in the United States. The
costs of these proceedings can be substantial, and it is
possible that such efforts would be unsuccessful if unbeknownst
to us, the other party had independently arrived at the same or
similar invention prior to our own invention, resulting in a
loss of our U.S. patent position with respect to such
inventions. There could also be existing patents of which we are
unaware that one or more aspects of our technology may
inadvertently infringe. In some cases, litigation may be
threatened or brought by a patent-holding company or other
adverse patent owner who has no relevant product revenues and
against whom our patents may provide little or no deterrence.
Any infringement or misappropriation claim could cause us to
incur significant costs, place significant strain on our
financial resources, divert managements attention from our
business and harm our reputation. Some of our competitors may be
able to sustain the costs of complex patent litigation more
effectively than we can because they have substantially greater
resources. In addition, any uncertainties resulting from the
initiation and continuation of any litigation could have a
material adverse effect on our ability to raise the funds
necessary to continue our operations. Although patent and
intellectual property disputes in the medical device area have
often been settled through licensing or similar arrangements,
costs associated with such arrangements may be substantial and
could include ongoing royalties. If the relevant patents were
upheld in litigation as valid and enforceable and we were found
to infringe, we could be prohibited from commercializing any
infringing products unless we could obtain licenses to use the
technology covered by the patent or are able to design around
the patent. We may be unable to obtain a license on terms
acceptable to us, if at all, and we may not be able to redesign
any infringing products to avoid infringement. Further, any
redesign may not receive FDA clearance or approval or may not
receive such clearance or approval in a timely manner. Any such
license could impair operating margins on future product
revenue. A court could also order us to pay compensatory damages
for such infringement, and potentially treble damages, plus
prejudgment interest and third-party attorney fees. These
damages could be substantial and could harm our reputation,
business, financial condition and operating results. A court
also could enter orders that temporarily, preliminarily or
permanently enjoin us and our customers from making, using,
selling, offering to sell or importing infringing products, or
could enter an order mandating that we undertake certain
remedial activities. Depending on the nature of the relief
ordered by the court, we could become liable for additional
damages to third parties. Adverse determinations in a judicial
or administrative proceeding or failure to obtain necessary
licenses could prevent us from manufacturing and selling our
products, which would have a significant adverse impact on our
business.
23
Risks
Relating to this Offering and Ownership of Our Common
Stock
Because
there has not been a public market for our common stock and our
stock price may be volatile, you may not be able to resell your
shares at or above the initial public offering
price.
Prior to this offering, you could not buy or sell our common
stock publicly. We cannot predict the extent to which an active
trading market for our common stock will develop or whether the
market price of our common stock will be volatile following this
offering. If an active trading market does not develop, you may
have difficulty selling any of our common stock that you buy.
The initial public offering price for our common stock was
determined by negotiations between representatives of the
underwriters and us and may not be indicative of prices that
will prevail in the open market following this offering.
Consequently, you may not be able to sell our common stock at
prices equal to or greater than the price you paid in this
offering. In addition, the stock markets have been extremely
volatile. The risks related to our company discussed above, as
well as decreases in market valuations of similar companies,
could cause the market price of our common stock to decrease
significantly from the price you pay in this offering.
In addition, the volatility of medical technology company stocks
often does not correlate to the operating performance of the
companies represented by such stocks. Some of the factors that
may cause the market price of our common stock to fluctuate
include:
|
|
|
|
|
our ability to develop, obtain regulatory clearances or
approvals for and market new and enhanced products on a timely
basis;
|
|
|
|
changes in governmental regulations or in the status of our
regulatory approvals, clearances or future applications;
|
|
|
|
our announcements or our competitors announcements
regarding new products, product enhancements, significant
contracts, number of hospitals and physicians using our
products, acquisitions or strategic investments;
|
|
|
|
announcements of technological or medical innovations for the
treatment of vascular disease;
|
|
|
|
delays or other problems with the manufacturing of the
Diamondback 360°;
|
|
|
|
volume and timing of orders for the Diamondback 360° and
any future products, if and when commercialized;
|
|
|
|
changes in the availability of third-party reimbursement in the
United States and other countries;
|
|
|
|
quarterly variations in our or our competitors results of
operations;
|
|
|
|
changes in earnings estimates or recommendations by securities
analysts, if any, who cover our common stock;
|
|
|
|
failure to meet estimates or recommendations by securities
analysts, if any, who cover our stock;
|
|
|
|
changes in healthcare policy;
|
|
|
|
product liability claims or other litigation involving us;
|
|
|
|
product recalls;
|
|
|
|
accusations that we have violated a law or regulation;
|
|
|
|
sales of large blocks of our common stock, including sales by
our executive officers, directors and significant shareholders;
|
|
|
|
disputes or other developments with respect to intellectual
property rights;
|
|
|
|
changes in accounting principles; and
|
|
|
|
general market conditions and other factors, including factors
unrelated to our operating performance or the operating
performance of our competitors.
|
24
In addition, securities class action litigation often has been
initiated when a companys stock price has fallen below the
companys initial public offering price soon after the
offering closes or following a period of volatility in the
market price of the companys securities. If class action
litigation is initiated against us, we would incur substantial
costs and our managements attention would be diverted from
our operations. All of these factors could cause the market
price of our stock to decline, and you may lose some or all of
your investment.
If
equity research analysts do not publish research or reports
about our business or if they issue unfavorable research or
downgrade our common stock, the price of our common stock could
decline.
As a public company, investors may look to reports of equity
research analysts for additional information regarding our
industry and operations. Therefore, the trading market for our
common stock will rely in part on the research and reports that
equity research analysts publish about us and our business. We
do not control these analysts. Equity research analysts may
elect not to provide research coverage of our common stock,
which may adversely affect the market price of our common stock.
If equity research analysts do provide research coverage of our
common stock, the price of our common stock could decline if one
or more of these analysts downgrade our common stock or if they
issue other unfavorable commentary about us or our business. If
one or more of these analysts ceases coverage of our company, we
could lose visibility in the market, which in turn could cause
our stock price to decline.
Future
sales of our common stock by our existing shareholders could
cause our stock price to decline.
If our shareholders sell substantial amounts of our common stock
in the public market, the market price of our common stock could
decrease significantly. The perception in the public market that
our shareholders might sell shares of our common stock could
also depress the market price of our common stock. Substantially
all of our shareholders prior to this offering are subject to
lock-up
agreements that restrict their ability to transfer their shares
of our common stock. In addition, upon the closing of this
offering we intend to file registration statements with the SEC
covering any shares of our common stock acquired upon option
exercises prior to the closing of this offering and all of the
shares subject to options outstanding, but not exercised, as of
the closing of this offering. The market price of shares of our
common stock may decrease significantly when the restrictions on
resale by our existing shareholders lapse and our shareholders,
warrant holders and option holders are able to sell shares of
our common stock into the market. A decline in the price of our
common stock might impede our ability to raise capital through
the issuance of additional shares of our common stock or other
equity securities, and may cause you to lose part or all of your
investment in our common stock.
We
have broad discretion in the use of the proceeds of this
offering and may apply the proceeds in ways with which you do
not agree.
Our net proceeds from this offering will be used, as determined
by management in its sole discretion, for working capital and
general corporate purposes. We may also use a portion of the
proceeds for the potential acquisition of businesses,
technologies and products, although we have no current
understandings, commitments or agreements to do so. Our
management will have broad discretion over the use and
investment of these net proceeds, and, accordingly, you will
have to rely upon the judgment of our management with respect to
our use of these net proceeds, with only limited information
concerning managements specific intentions. You will not
have the opportunity, as part of your investment decision, to
assess whether we used the net proceeds from this offering
appropriately. We may place the net proceeds in investments that
do not produce income or that lose value, which may cause our
stock price to decline.
Our
directors and executive officers will continue to have
substantial control over us after this offering and could limit
your ability to influence the outcome of key transactions,
including changes of control.
We anticipate that our executive officers and directors and
entities affiliated with them will, in the aggregate,
beneficially own % of our
outstanding common stock following the completion of this
offering, assuming the underwriters do not exercise their
over-allotment option. Our executive officers, directors and
affiliated entities, if acting together, would be able to
control or influence significantly all matters requiring
approval by our shareholders, including the election of
directors and the approval of mergers or other significant
corporate transactions.
25
These shareholders may have interests that differ from yours,
and they may vote in a way with which you disagree and that may
be adverse to your interests. The concentration of ownership of
our common stock may have the effect of delaying, preventing or
deterring a change of control of our company, could deprive our
shareholders of an opportunity to receive a premium for their
common stock as part of a sale of our company, and may affect
the market price of our common stock. This concentration of
ownership of our common stock may also have the effect of
influencing the completion of a change in control that may not
necessarily be in the best interests of all of our shareholders.
Certain
provisions of Minnesota law and our articles of incorporation
and bylaws may make a takeover of our company more difficult,
depriving shareholders of opportunities to sell shares at
above-market prices.
Certain provisions of Minnesota law and our bylaws may have the
effect of discouraging attempts to acquire us without the
approval of our board of directors. Section 302A.671 of the
Minnesota Statutes, with certain exceptions, requires approval
of any acquisition of the beneficial ownership of 20% or more of
our voting stock then outstanding by a majority vote of our
shareholders prior to its consummation. In general, shares
acquired in the absence of such approval are denied voting
rights and are redeemable by us at their then fair market value
within 30 days after the acquiring person failed to give a
timely information statement to us or the date our shareholders
voted not to grant voting rights to the acquiring persons
shares. Section 302A.673 of the Minnesota Statutes
generally prohibits any business combination by us with an
interested shareholder, which includes any shareholder that
purchases 10% or more of our voting shares, within four years
following such interested shareholders share acquisition
date, unless the business combination or share acquisition is
approved by a committee of one or more disinterested members of
our board of directors before the interested shareholders
share acquisition date. In addition, our bylaws provide for an
advance notice procedure for nomination of candidates to our
board of directors that could have the effect of delaying,
deterring or preventing a change in control. Consequently,
holders of our common stock may lose opportunities to sell their
stock for a price in excess of the prevailing market price due
to these statutory protective measures. Please see
Description of Capital Stock Anti-Takeover
Provisions for a more detailed description of these
provisions.
You
will experience immediate and substantial dilution in the net
tangible book value of the common stock you purchase in this
offering.
If you purchase common stock in this offering, you will incur
immediate dilution of $ in pro
forma as adjusted net tangible book value per share of common
stock, based on an assumed initial public offering price of
$ per share, the midpoint of the
range on the cover page of this prospectus, because the price
that you pay will be substantially greater than the adjusted net
tangible book value per share of common stock that you acquire.
This dilution is due in large part to the fact that our earlier
investors paid substantially less than the price of the shares
being sold in this offering when they purchased their shares of
our capital stock. In addition, if outstanding options to
purchase our common stock are exercised, you will experience
additional dilution. Please see Dilution for a more
detailed description of how dilution will affect you.
We do
not intend to declare dividends on our stock after this
offering.
We currently intend to retain all future earnings for the
operation and expansion of our business and, therefore, do not
anticipate declaring or paying cash dividends on our common
stock in the foreseeable future. Any payment of cash dividends
on our common stock will be at the discretion of our board of
directors and will depend upon our results of operations,
earnings, capital requirements, financial condition, future
prospects, contractual restrictions and other factors deemed
relevant by our board of directors. Therefore, you should not
expect to receive dividends from shares of our common stock.
26
INFORMATION
REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve
risks and uncertainties. In some cases, you can identify
forward-looking statements by the following words:
anticipate, believe,
continue, could, estimate,
expect, intend, may,
ongoing, plan, potential,
predict, project, should,
will, would, or the negative of these
terms or other comparable terminology, although not all
forward-looking statements contain these words. These statements
involve known and unknown risks, uncertainties and other factors
that may cause our results or our industrys actual
results, levels of activity, performance or achievements to be
materially different from the information expressed or implied
by these forward-looking statements. Forward-looking statements
are only predictions and are not guarantees of performance.
These statements are based on our managements beliefs and
assumptions, which in turn are based on their interpretation of
currently available information.
These important factors that may cause actual results to differ
from our forward-looking statements include those that we
discuss under the heading Risk Factors. You should
read these risk factors and the other cautionary statements made
in this prospectus as being applicable to all related
forward-looking statements wherever they appear in this
prospectus. We cannot assure you that the forward-looking
statements in this prospectus will prove to be accurate.
Furthermore, if our forward-looking statements prove to be
inaccurate, the inaccuracy may be material. You should read this
prospectus completely. Other than as required by law, we
undertake no obligation to update these forward-looking
statements, even though our situation may change in the future.
This prospectus also contains industry and market data obtained
through surveys and studies conducted by third parties and
industry publications. Industry publications and reports cited
in this prospectus generally indicate that the information
contained therein was obtained from sources believed to be
reliable, but do not guarantee the accuracy and completeness of
such information. Although we believe that the publications and
reports are reliable, we have not independently verified the
data.
27
USE OF
PROCEEDS
Based on an assumed initial public offering price of
$ per share, the midpoint of the
range on the cover page of this prospectus, we estimate our net
proceeds from the sale of shares of our common stock in this
offering will be approximately
$ million after deducting the
underwriting discounts and commissions and estimated offering
expenses payable by us. If the underwriters exercise their
over-allotment option in full, we estimate that our net proceeds
from this offering will be approximately
$ million, after deducting
the underwriting discounts and commissions, and estimated
offering expenses payable by us.
A $1.00 increase or decrease in the assumed initial public
offering price of $ per share
would increase or decrease the net proceeds to us from this
offering by $ million,
assuming the number of shares offered by us, as set forth on the
cover page of this prospectus remains the same and after
deducting underwriting discounts and commissions and estimated
offering expenses payable by us.
We currently intend to use the net proceeds from this offering
to repay a margin loan we obtained from a financial institution
on March 28, 2008 in the principal amount of
$11.5 million, plus accrued interest, and for working
capital and general corporate purposes. The margin loan has a
floating interest rate equal to
30-day
LIBOR, plus 0.25%, and has no maturity date. The principal
outstanding balance of this debt at March 31, 2008 was
$10.9 million. We may also use a portion of the proceeds
for the potential acquisition of businesses, technologies and
products complementary to our existing operations, although we
have no current understandings, commitments or agreements to do
so.
As of the date of this prospectus, we cannot specify with
certainty all of the particular uses for the net proceeds to be
received upon the completion of this offering. Accordingly, our
management will have broad discretion in the application of the
net proceeds, and investors will be relying on the judgment of
our management regarding the application of the net proceeds of
this offering.
Pending the uses described above, we intend to invest the net
proceeds in U.S. government securities and other short- and
intermediate-term, investment-grade, interest-bearing
instruments.
DIVIDEND
POLICY
We have never declared or paid cash dividends on our common
stock. Following the completion of this offering, we intend to
retain our future earnings, if any, to finance the further
development and expansion of our business and do not expect to
pay cash dividends on our common stock in the foreseeable
future. Payment of future cash dividends, if any, will be at the
discretion of our board of directors after taking into account
various factors, including our financial condition, operating
results, current and anticipated cash needs, outstanding
indebtedness and plans for expansion and restrictions imposed by
lenders, if any.
28
CAPITALIZATION
The following table sets forth our capitalization as of
March 31, 2008 on:
|
|
|
|
|
an actual basis;
|
|
|
|
a pro forma basis to reflect the conversion of all our
outstanding shares of preferred stock into shares of common
stock upon the closing of this offering and the conversion of
all Series A warrants into common stock warrants upon the
closing of this offering; and
|
|
|
|
a pro forma as adjusted basis to further reflect the receipt of
the estimated net proceeds from the sale
of shares
of common stock in this offering at an assumed initial public
offering price of $ per share, the
midpoint of the range on the cover page of this prospectus,
after deducting underwriting discounts and commissions and
estimated offering expenses payable by us and the application of
a portion of the proceeds therefrom as set forth under Use
of Proceeds.
|
You should read this capitalization table together with our
consolidated financial statements and the related notes included
elsewhere in this prospectus, as well as Managements
Discussion and Analysis of Financial Condition and Results of
Operations and other financial information included in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2008
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
as
Adjusted(1)
|
|
|
|
(in thousands, except
|
|
|
|
share and per share data)
|
|
|
Redeemable convertible preferred stock warrants
|
|
$
|
3,982
|
|
|
$
|
|
|
|
$
|
|
|
Series A redeemable convertible preferred stock, no par
value; 5,400,000 shares authorized, 4,737,561 issued and
outstanding, actual; no shares issued and outstanding, pro
forma; no shares issued and outstanding, pro forma as adjusted
|
|
|
51,213
|
|
|
|
|
|
|
|
|
|
Series A-1
redeemable convertible preferred stock, no par value;
2,188,425 shares authorized, 2,188,425 issued and
outstanding, actual; no shares issued and outstanding, pro
forma; no shares issued and outstanding, pro forma as adjusted
|
|
|
23,657
|
|
|
|
|
|
|
|
|
|
Series B redeemable convertible preferred stock, no par
value; 2,162,162 shares authorized, 2,162,150 issued and
outstanding, actual; no shares issued and outstanding, pro
forma; no shares issued and outstanding, pro forma as adjusted
|
|
|
23,372
|
|
|
|
|
|
|
|
|
|
Shareholders (deficiency) equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, no par value per share, 70,000,000 common shares
and 5,000,000 undesignated shares authorized,
7,227,099 shares issued and outstanding, actual; 70,000,000
common shares and 5,000,000 undesignated shares authorized,
16,315,235 shares issued and outstanding, pro forma;
70,000,000 common shares and 5,000,000 undesignated shares
authorized, shares
issued and outstanding, pro forma as adjusted;
|
|
|
34,336
|
|
|
|
132,578
|
|
|
|
|
|
Common stock warrants
|
|
|
907
|
|
|
|
4,889
|
|
|
|
|
|
Accumulated deficit
|
|
|
(106,958
|
)
|
|
|
(106,958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders (deficiency) equity
|
|
|
(71,715
|
)
|
|
$
|
30,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
30,509
|
|
|
$
|
30,509
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
A $1.00 increase or decrease in the
assumed initial public offering price would result in an
approximately $ million
increase or decrease in each of pro forma as adjusted additional
paid-in capital, pro forma as adjusted total shareholders
equity and pro forma as adjusted total capitalization, assuming
the number of shares offered by us, as set forth on the cover
page of this prospectus, remains the same and after deducting
underwriting discounts and commission and estimated offering
expenses payable by us.
|
29
The outstanding shares set forth in the table above excludes, as
of March 31, 2008:
|
|
|
|
|
6,013,974 shares of common stock issuable upon the exercise
of outstanding stock options at a weighted average exercise
price of $6.56 per share;
|
|
|
|
|
|
954,599 shares of common stock issuable upon the exercise
of outstanding warrants at a weighted average exercise price of
$5.54 per share; and
|
|
|
|
|
|
337,182 additional shares of common stock reserved and available
for future issuances under our 2007 Equity Incentive Plan.
|
Shares available for future issuance under our 2007 Equity
Incentive Plan do not include shares that may become available
for issuance pursuant to provisions in this plan that provide
for the automatic annual increase in the number of shares
reserved thereunder and the re-issuance of shares that are
cancelled or forfeited in accordance with such plans. See
Compensation Employee Benefit
Plans 2007 Equity Incentive Plan.
30
DILUTION
If you invest in our common stock, your ownership interest will
be diluted to the extent of the difference between the initial
public offering price per share of our common stock and the pro
forma as adjusted net tangible book value per share of our
common stock immediately after completion of this offering.
Our net tangible book value as of March 31, 2008 was
$(72.5) million, or $(10.03) per share of common stock, not
taking into account the conversion of our outstanding preferred
stock. Net tangible book value per share is equal to our total
tangible assets (total assets less intangible assets) less our
total liabilities (including our preferred stock) divided by the
number of shares of common stock outstanding. Prior to this
offering, the pro forma net tangible book value of our common
stock as of March 31, 2008 was approximately
$29.7 million, or approximately $1.82 per share, based on
the number of shares outstanding as of March 31, 2008,
after giving effect to the conversion of all outstanding
preferred stock into shares of common stock upon the closing of
this offering.
After giving effect to our sale of shares of common stock at an
assumed initial public offering price of
$ per share, the midpoint of the
range on the cover page of this prospectus, after deducting
underwriting discounts and commissions and estimated offering
expenses, and applying the net proceeds from such sale, the pro
forma as adjusted net tangible book value of our common stock,
as of March 31, 2008, would have been approximately
$ million, or
$ per share. This amount
represents an immediate increase in net tangible book value to
our existing shareholders of $ per
share and an immediate dilution to new investors of
$ per share. The following table
illustrates this per share dilution:
|
|
|
|
|
|
|
|
|
Assumed initial public offering price per share
|
|
|
|
|
|
$
|
|
|
Net tangible book value (deficit) per share as of March 31,
2008
|
|
$
|
(10.03
|
)
|
|
|
|
|
Increase per share attributable to conversion of preferred stock
|
|
|
11.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net tangible book value per share as of March 31,
2008
|
|
|
1.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase per share attributable to new investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma as adjusted net tangible book value per share as of
March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilution per share to new investors in this offering
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
A $1.00 increase or decrease in the assumed initial public
offering price of $ per share
would increase or decrease, respectively, our pro forma as
adjusted net tangible book value by
$ million, the pro forma as
adjusted net tangible book value per share by
$ per share and the dilution in
the net tangible book value to investors in this offering by
$ per share, assuming the number
of shares offered by us, as set forth on the cover page of this
prospectus, remains the same and after deducting the
underwriting discount and estimated offering expenses payable by
us.
The following table summarizes, as of March 31, 2008, on a
pro forma as adjusted basis, the number of shares of common
stock purchased from us, the total consideration paid to us and
the average price per share paid by our existing shareholders
and by new investors, based upon an assumed initial public
offering price of $ per share, and
before deducting estimated underwriting discounts and
commissions and offering expenses payable by us.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Average Price
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
per Share
|
|
|
Existing shareholders
|
|
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
New investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Total
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
A $1.00 increase or decrease in the assumed initial public
offering price of $ per share
would increase or decrease, respectively, total consideration
paid by new investors and total consideration paid by all
shareholders by approximately
$ million, assuming that the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same.
31
Sales of common stock in the offering will reduce the number of
shares of common stock held by existing shareholders
to ,
or approximately % of the total
shares of common stock outstanding, and will increase the number
of shares held by new investors
to ,
or approximately % of the total
shares of common stock outstanding after the offering.
In the preceding tables, the shares of common stock outstanding
as of March 31, 2008 exclude:
|
|
|
|
|
6,013,974 shares of common stock issuable upon the exercise
of outstanding stock options at a weighted average exercise
price of $6.56 per share;
|
|
|
|
|
|
954,599 shares of common stock issuable upon the exercise
of outstanding warrants at a weighted average exercise price of
$5.54 per share; and
|
|
|
|
|
|
337,182 additional shares of common stock reserved and available
for future issuances under our 2007 Equity Incentive Plan.
|
Shares available for future issuance under our 2007 Equity
Incentive Plan do not include shares that may become available
for issuance pursuant to provisions in this plan that provide
for the automatic annual increase in the number of shares
reserved thereunder and the re-issuance of shares that are
cancelled or forfeited in accordance with such plan.
If the underwriters exercise their over-allotment option in full:
|
|
|
|
|
the number of shares of our common stock held by existing
shareholders would decrease to
approximately % of the total number
of shares of our common stock outstanding after this offering;
|
|
|
|
the number of shares of our common stock held by new investors
would increase to approximately %
of the total number of shares of our common stock outstanding
after this offering; and
|
|
|
|
|
|
our pro forma as adjusted net tangible book value at
March 31, 2008 would have been
$ million, or
$ per share of common stock,
representing an immediate increase in pro forma net tangible
book value of $ per share of
common stock to our existing shareholders and an immediate
dilution of $ per share to
investors purchasing shares in this offering.
|
Because we expect the exercise prices of the outstanding options
and warrants to be below the assumed initial public offering
price of $ per share, investors
purchasing common stock in this offering will suffer additional
dilution when and if these options and warrants are exercised.
If the options exercisable for 6,013,974 shares and
warrants exercisable for 954,599 shares of common stock
were exercised prior to this offering, but assuming no exercise
of the underwriters over-allotment option, our existing
shareholders would, after this offering, own
approximately % of the total number
of outstanding shares of our common stock while
contributing % of the total
consideration for all shares, and our new investors would own
approximately % of the total number
of outstanding shares of our common stock while
contributing % of the total
consideration for all shares.
32
SELECTED
CONSOLIDATED FINANCIAL DATA
The following table presents our selected historical
consolidated financial data. We derived the selected statements
of operations data for the years ended June 30, 2005, 2006
and 2007 and balance sheet data as of June 30, 2006 and
2007 from our audited consolidated financial statements and
related notes that are included elsewhere in this prospectus. We
derived the selected consolidated statements of operations data
for the years ended June 30, 2003 and 2004 and the balance
sheet data as of June 30, 2003, 2004, and 2005 from our
audited consolidated financial statements that do not appear in
this prospectus. We derived the consolidated statements of
operations data for the nine months ended March 31, 2007
and 2008 and the balance sheet data as of March 31, 2008
from our unaudited consolidated financial statements and related
notes that are included elsewhere in this prospectus. We have
prepared this unaudited information on the same basis as the
audited consolidated financial statements and have included all
adjustments, consisting only of normal recurring adjustments,
that we consider necessary for a fair presentation of our
financial position and operating results for such period. We
have prepared the unaudited interim consolidated financial
statements in accordance with accounting principles generally
accepted in the United States of America, or GAAP, and the rules
and regulations of the SEC for interim financial statements.
These interim financial statements reflect all adjustments
consisting of normal recurring accruals, which, in the opinion
of management, are necessary to present fairly our consolidated
financial position and results of operations for the interim
periods. Our historical results are not necessarily indicative
of the results that may be expected in the future and the
results for the nine months ended March 31, 2008 are not
necessarily indicative of the results for the full year. You
should read this data together with our consolidated financial
statements and related notes included elsewhere in this
prospectus and the information under Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
Nine Months Ended March 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007(1)
|
|
|
2007(1)
|
|
|
2008(1)
|
|
|
|
(in thousands, except share and per share amounts)
|
|
|
Consolidated Statements of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
12,285
|
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
829
|
|
|
|
984
|
|
|
|
1,177
|
|
|
|
1,735
|
|
|
|
6,691
|
|
|
|
4,077
|
|
|
|
23,276
|
|
Research and development
|
|
|
681
|
|
|
|
3,246
|
|
|
|
2,371
|
|
|
|
3,168
|
|
|
|
8,446
|
|
|
|
4,442
|
|
|
|
10,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,510
|
|
|
|
4,230
|
|
|
|
3,548
|
|
|
|
4,903
|
|
|
|
15,137
|
|
|
|
8,519
|
|
|
|
33,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,510
|
)
|
|
|
(4,230
|
)
|
|
|
(3,548
|
)
|
|
|
(4,903
|
)
|
|
|
(15,137
|
)
|
|
|
(8,519
|
)
|
|
|
(26,897
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(275
|
)
|
|
|
|
|
|
|
|
|
|
|
(48
|
)
|
|
|
(1,340
|
)
|
|
|
(881
|
)
|
|
|
(912
|
)
|
Interest income
|
|
|
10
|
|
|
|
18
|
|
|
|
37
|
|
|
|
56
|
|
|
|
881
|
|
|
|
746
|
|
|
|
1,012
|
|
Impairment on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,023
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(265
|
)
|
|
|
18
|
|
|
|
37
|
|
|
|
8
|
|
|
|
(459
|
)
|
|
|
(135
|
)
|
|
|
(923
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,775
|
)
|
|
|
(4,212
|
)
|
|
|
(3,511
|
)
|
|
|
(4,895
|
)
|
|
|
(15,596
|
)
|
|
|
(8,654
|
)
|
|
|
(27,820
|
)
|
Accretion of redeemable convertible preferred
stock(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,835
|
)
|
|
|
(12,403
|
)
|
|
|
(19,422
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common shareholders
|
|
$
|
(1,775
|
)
|
|
$
|
(4,212
|
)
|
|
$
|
(3,511
|
)
|
|
$
|
(4,895
|
)
|
|
$
|
(32,431
|
)
|
|
$
|
(21,057
|
)
|
|
$
|
(47,242
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted(3)
|
|
$
|
(0.44
|
)
|
|
$
|
(0.78
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
(5.22
|
)
|
|
$
|
(3.39
|
)
|
|
$
|
(7.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares used in computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted(3)
|
|
|
4,001,111
|
|
|
|
5,375,795
|
|
|
|
5,779,942
|
|
|
|
6,183,715
|
|
|
|
6,214,820
|
|
|
|
6,205,810
|
|
|
|
6,612,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1.47
|
)
|
|
|
|
|
|
$
|
(2.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted average common shares used in computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,605,726
|
|
|
|
|
|
|
|
13,344,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
(1)
|
|
Operating expenses in the year
ended June 30, 2007 and nine months ended March 31,
2007 and 2008 include stock-based compensation expense as a
result of the adoption of SFAS No. 123(R),
Share-Based Payment on July 1, 2006, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
Cost of goods sold
|
|
$
|
|
|
|
$
|
1
|
|
|
$
|
141
|
|
Selling, general and administrative
|
|
|
327
|
|
|
|
202
|
|
|
|
5,893
|
|
Research and development
|
|
|
63
|
|
|
|
20
|
|
|
|
188
|
|
|
|
|
(2)
|
|
See Notes 1 and 10 of the
notes to our consolidated financial statements for a discussion
of the accretion of redeemable convertible preferred stock.
|
(3)
|
|
See Note 12 of the notes to
our consolidated financial statements for a description of the
method used to compute basic and diluted net loss per common
share and basic and diluted weighted-average number of shares
used in pro forma per common share calculations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
As of June 30,
|
|
|
March 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,851
|
|
|
$
|
3,144
|
|
|
$
|
1,780
|
|
|
$
|
1,554
|
|
|
$
|
7,908
|
|
|
$
|
16,087
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,615
|
|
|
|
|
|
Working
capital(1)
|
|
|
3,415
|
|
|
|
2,868
|
|
|
|
1,349
|
|
|
|
(1,240
|
)
|
|
|
18,171
|
|
|
|
6,724
|
|
Total current assets
|
|
|
3,871
|
|
|
|
3,166
|
|
|
|
2,116
|
|
|
|
2,424
|
|
|
|
20,828
|
|
|
|
24,930
|
|
Total assets
|
|
|
4,550
|
|
|
|
4,031
|
|
|
|
2,874
|
|
|
|
3,296
|
|
|
|
22,025
|
|
|
|
48,817
|
|
Redeemable convertible preferred stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,094
|
|
|
|
3,982
|
|
Total liabilities
|
|
|
456
|
|
|
|
298
|
|
|
|
767
|
|
|
|
3,723
|
|
|
|
5,830
|
|
|
|
22,290
|
|
Redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,498
|
|
|
|
98,242
|
|
Total shareholders (deficiency) equity
|
|
|
4,094
|
|
|
|
3,733
|
|
|
|
2,107
|
|
|
|
(427
|
)
|
|
|
(32,303
|
)
|
|
|
(71,715
|
)
|
|
|
|
(1)
|
|
Working capital is calculated as
total current assets less total current liabilities as of the
balance sheet date indicated.
|
34
Quarterly
Results of Operations
The following table presents our unaudited quarterly results of
operations for each of our last eight quarters ended
March 31, 2008. You should read the following table in
conjunction with the consolidated financial statements and
related notes contained elsewhere in this prospectus. We have
prepared the unaudited information on the same basis as our
audited consolidated financial statements. These interim
financial statements reflect all adjustments consisting of
normal recurring accruals, which, in the opinion of management,
are necessary to present fairly the results of our operations
for the interim periods. Results of operations for any quarter
are not necessarily indicative of results for any future
quarters or for a full year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,631
|
|
|
$
|
7,654
|
|
Gross profit (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(539
|
)
|
|
|
2,438
|
|
|
|
5,142
|
|
Loss from operations
|
|
|
(1,510
|
)
|
|
|
(1,572
|
)
|
|
|
(2,964
|
)
|
|
|
(3,984
|
)
|
|
|
(6,618
|
)
|
|
|
(7,419
|
)
|
|
|
(10,187
|
)
|
|
|
(9,291
|
)
|
Net loss
|
|
|
(1,542
|
)
|
|
|
(1,329
|
)
|
|
|
(3,139
|
)
|
|
|
(4,187
|
)
|
|
|
(6,942
|
)
|
|
|
(7,441
|
)
|
|
|
(9,768
|
)
|
|
|
(10,611
|
)
|
Net loss available to common
shareholders(1)
|
|
|
(1,542
|
)
|
|
|
(5,207
|
)
|
|
|
(7,266
|
)
|
|
|
(8,584
|
)
|
|
|
(11,374
|
)
|
|
|
(12,294
|
)
|
|
|
(10,121
|
)
|
|
|
(24,827
|
)
|
|
|
|
(1)
|
|
Net loss available to common
shareholders includes accretion of redeemable convertible
preferred stock.
|
35
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of
financial condition and results of operations together with our
consolidated financial statements and the related notes included
elsewhere in this prospectus. This discussion and analysis
contains forward-looking statements about our business and
operations, based on current expectations and related to future
events and our future financial performance, that involve risks
and uncertainties. Our actual results may differ materially from
those we currently anticipate as a result of many important
factors, including the factors we describe under Risk
Factors and elsewhere in this prospectus.
Overview
We are a medical device company focused on developing and
commercializing interventional treatment systems for vascular
disease. Our initial product, the Diamondback 360° Orbital
Atherectomy System, is a minimally invasive catheter system for
the treatment of peripheral arterial disease, or PAD.
We were incorporated in Minnesota in 1989. From 1989 to 1997, we
engaged in research and development on several different product
concepts that were later abandoned. Since 1997, we have devoted
substantially all of our resources to the development of the
Diamondback 360°. In 2003, we changed our name to
Cardiovascular Systems, Inc.
From 2003 to 2005, we conducted numerous bench and animal tests
in preparation for application submissions to the FDA. We
initially focused our testing on providing a solution for
coronary in-stent restenosis but later changed the focus to PAD.
In 2006, we obtained an investigational device exemption from
the FDA to conduct our pivotal OASIS clinical trial, which was
completed in January 2007. The OASIS clinical trial was a
prospective
20-center
study that involved 124 patients with 201 lesions.
In August 2007, the FDA granted us 510(k) clearance for the use
of the Diamondback 360° as a therapy in patients with PAD.
We commenced a limited commercial introduction of the
Diamondback 360° in the United States in September
2007. This limited commercial introduction intentionally limited
the size of our sales force and the number of customers each
member of the sales force served in order to focus on obtaining
quality and timely product feedback on initial product usages.
We intend to market the Diamondback 360° in the United
States through a direct sales force and commenced a full
commercial launch in the quarter ended March 31, 2008. We
plan to expend significant capital to increase the size of our
sales and marketing efforts to expand our customer base as we
begin full commercialization of the Diamondback 360°. We
intend to manufacture the Diamondback 360° internally at
our facilities.
As of March 31, 2008, we had an accumulated deficit of
$107.0 million. We expect our losses to continue and to
increase as we continue our commercialization activities and
develop additional product enhancements and make further
regulatory submissions. To date, we have financed our operations
primarily through the private placement of equity securities.
Our consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course
of business. Since our inception, we have experienced
substantial operating losses and negative cash flows from
operations. We had cash and cash equivalents of
$16.1 million at March 31, 2008. During the nine
months ended March 31, 2008 and the year ended
June 30, 2007, net cash used in operations amounted to
$22.4 million and $12.3 million, respectively. In
February 2008, we were notified that recent conditions in the
global credit markets have caused insufficient demand for
auction rate securities, resulting in failed auctions for
$23.0 million of our auction rate securities held at
March 31, 2008. These securities are currently not liquid,
as we have an inability to sell the securities due to continued
failed auctions. As a result, we recorded an
other-than-temporary impairment loss of $1.0 million
relating to these securities in our statement of operations at
March 31, 2008. On March 28, 2008, we obtained a
margin loan from a financial institution in the principal amount
of $11.5 million, with a floating interest rate equal to
30-day
LIBOR, plus 0.25%. The loan is secured by the $23.0 million
par value of our auction rate securities. We intend to repay
this loan with a portion of the proceeds from this offering. We
will need to access the funds borrowed against our auction rate
securities during the quarter ending June 30, 2008 if other
funding is not obtained or the liquidity of
36
our auction rate securities does not improve. Our ability to
continue as a going concern ultimately depends on our ability to
raise additional debt or equity capital. If this offering is
not consummated or we are unable to raise additional debt or
equity financing on terms acceptable to us, there will continue
to be substantial doubt about our ability to continue as a going
concern.
During the remainder of fiscal year 2008, we will continue to
expand our sales and marketing efforts, conduct research and
development of product improvements and increase our
manufacturing capacity to support anticipated future growth. We
believe the net proceeds of this offering, together with
existing cash and cash equivalents will be sufficient to fund
our ongoing capital needs for at least the next 12 months.
Financial
Overview
Revenues. We expect to derive substantially
all of our revenues for the foreseeable future from the sale of
the Diamondback 360°. The system consists of a disposable,
single-use, low-profile catheter that travels over our
proprietary ViperWire guidewire and an external control unit
that powers the system. Initial hospital orders include ten
single-use catheters and guidewires, along with a control unit.
Reorders for single-use catheters and guidewires occur as
hospitals utilize the single-use catheters.
We have applied Emerging Issues Task Force Bulletin (EITF)
No. 00-21,
Revenue Arrangements with Multiple Deliverables, the
primary impact of which was to treat the Diamondback 360°
as a single unit of accounting for initial customer orders. As
such, revenues are deferred until the title and risk of loss of
all Diamondback 360° components passes to the
customer. Many initial shipments to customers included a loaner
control unit, which we provided, until the new control unit
received clearance from the FDA and was subsequently available
for sale. The loaner control units are company-owned property
and we maintain legal title to these units. The loaner control
units were held in inventory at the time they were loaned to the
various accounts under our limited commercial launch. The net
inventory value of the loaner control units was $20,246 at
June 30, 2007. At March 31, 2008, the loaner control
units were fully reserved, as we had received FDA clearance on
the new control unit and began shipping our new control unit
during the quarter ended December 31, 2007. However, we
could not meet the production demands of the new control units
and, as a result, we continued to ship loaner control units
during the quarter ended December 31, 2007. As of
March 31, 2008, we had deferred revenue of $517,000,
reflecting all disposable component shipments to customers
pending receipt of a customer purchase order and shipment of a
new control unit. We are currently meeting production demands
for the new control units and expect all deferred revenue to be
recognized by June 30, 2008.
Cost of Goods Sold. We assemble the single-use
catheter with components purchased from third-party suppliers,
as well as with components manufactured in-house. The control
unit and guidewires are purchased from third-party suppliers.
Our cost of goods sold consists primarily of direct labor,
manufacturing overhead, purchased raw materials and manufactured
components. With the anticipated benefits of future cost
reduction initiatives and increased volume and related economies
of scale, we anticipate that gross margin percentages on
single-use catheters that we assemble will be higher than those
achieved on the control unit and guidewires that we purchase
from third parties.
Selling, General and Administrative
Expenses. Selling, general and administrative
expenses include compensation for executive, sales, marketing,
finance, information technology, human resources and
administrative personnel, including stock-based compensation.
Other significant expenses include travel and marketing costs,
professional fees, and patent prosecution expenses.
Research and Development. Research and
development expenses include costs associated with the design,
development, testing, enhancement and regulatory approval of our
products. Research and development expenses include employee
compensation including stock-based compensation, supplies and
materials, consulting expenses, travel and facilities overhead.
We also incur significant expenses to operate our clinical
trials, including trial design, third-party fees, clinical site
reimbursement, data management and travel expenses. All research
and development expenses are expensed as incurred.
Interest Income. Interest income is attributed
to interest earned on deposits in investments that consist of
money market funds, U.S. government securities and
commercial paper.
37
Interest Expense. Interest expense resulted
from the change in value of convertible preferred stock warrants
and the issuance of convertible promissory notes in 2006.
Convertible preferred stock warrants are classified as a
liability under Financial Accounting Standards Board (FASB)
Statement of Accounting Standards (SFAS) No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity and are
subject to remeasurement at each balance sheet date with any
change in value recognized as a component of interest expense.
Upon completion of this offering the convertible preferred stock
warrants will convert into common stock warrants, thereby
eliminating the preferred stock warrant liability.
Accretion of Redeemable Convertible Preferred
Stock. Accretion of redeemable convertible
preferred stock reflects the change in the current estimated
fair market value of the preferred stock on a quarterly basis,
as determined by management and the board of directors.
Accretion is recorded as an increase to redeemable convertible
preferred stock in the consolidated balance sheet and an
increase to the loss attributable to common shareholders in the
consolidated statement of operations. The redeemable convertible
preferred stock will be converted into common stock
automatically upon the completion of this offering. As such, the
preferred shareholders will forfeit their liquidation
preferences and we will no longer record accretion.
Net Operating Loss Carryforwards. We have
established valuation allowances to fully offset our deferred
tax assets due to the uncertainty about our ability to generate
the future taxable income necessary to realize these deferred
assets, particularly in light of our historical losses. The
future use of net operating loss carryforwards is dependent on
our attaining profitable operations and will be limited in any
one year under Internal Revenue Code Section 382 due to
significant ownership changes (as defined in
Section 382) resulting from our equity financings. At
June 30, 2007, we had net operating loss carryforwards for
federal and state income tax reporting purposes of approximately
$40.8 million, which will expire at various dates through
fiscal 2027.
Critical
Accounting Policies and Significant Judgments and
Estimates
Our managements discussion and analysis of our financial
condition and results of operations are based on our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of our consolidated financial
statements requires us to make estimates, assumptions and
judgments that affect amounts reported in those statements. Our
estimates, assumptions and judgments, including those related to
revenue recognition, excess and obsolete inventory, stock-based
compensation, preferred stock and preferred stock warrants are
updated as appropriate, which, in most cases, is at least
quarterly. We use authoritative pronouncements, our technical
accounting knowledge, cumulative business experience, judgment
and other factors in the selection and application of our
accounting policies. While we believe that the estimates,
assumptions and judgments that we use in preparing our
consolidated financial statements are appropriate, these
estimates, assumptions and judgments are subject to factors and
uncertainties regarding their outcome. Therefore, actual results
may materially differ from these estimates.
Our significant accounting policies are described in Note 1
to our consolidated financial statements. Some of those
significant accounting policies require us to make subjective or
complex judgments or estimates. An accounting estimate is
considered to be critical if it meets both of the following
criteria: (1) the estimate requires assumptions about
matters that are highly uncertain at the time the accounting
estimate is made, and (2) different estimates that
reasonably could have been used, or changes in the estimate that
are reasonably likely to occur from period to period, would have
a material impact on the presentation of our financial
condition, results of operations, or cash flows. We believe that
the following are our critical accounting policies and estimates:
Revenue Recognition. We recognize revenue in
accordance with SEC Staff Accounting Bulletin (SAB)
No. 104, Revenue Recognition and EITF
No. 00-21,
Revenue Arrangements with Multiple Deliverables. Revenue
is recognized when all of the following criteria are met:
(1) persuasive evidence of an arrangement exists;
(2) shipment of all components has occurred or delivery of
all components has occurred if the terms specify that title and
risk of loss pass when products reach their destination;
(3) the sales price is fixed or determinable; and
(4) collectability is reasonably assured. We have no
additional post-shipment or other contractual obligations or
performance requirements and do not provide any credits or other
pricing adjustments affecting revenue recognition once these
criteria have been met. The customer has no right of return on
any component once the above criteria have been met. Payment
terms are generally set at 30 days.
38
We derive our revenue through the sale of the Diamondback
360°, which includes single-use catheters, guidewires and
control units used in the atherectomy procedure. Initial orders
from all new customers require the customer to purchase the
entire Diamondback 360° system, which includes multiple
single-use catheters and guidewires and one control unit. Due to
delays in the final FDA clearance of the new control unit and
early production constraints of the new control unit, we were
not able to deliver all components of the initial order. For
these initial orders, we shipped and billed only for the
single-use catheters and guidewires. In addition, we sent an
older version of our control unit as a loaner unit with the
customers expectation that we would deliver and bill for a
new control unit once it becomes available. As we have not
delivered each of the individual components to all customers, we
have deferred the revenue for the entire amount billed for
single-use catheters and guidewires shipped to the customers
that have not received the new control unit. Those billings
totaled $517,000 at March 31, 2008, which amount has been
deferred pending receipt of a customer purchase order and
shipment of a new control unit. After the initial order,
customers are not required to purchase any additional disposable
products from us. Once we have delivered the new control unit to
a customer, we recognize revenue that was previously deferred
and revenue for subsequent reorders of single-use catheters,
guidewires and additional new control units when the criteria of
SAB No. 104 are met.
Investments. We classify all investments as
available-for-sale.
Investments are recorded at fair value and unrealized gains and
losses are recorded as a separate component of
shareholders deficiency until realized. Realized gains and
losses are accounted for on the specific identification method.
We have historically placed our investments primarily in auction
rate securities, U.S. government securities, and commercial
paper. These investments, a portion of which had original
maturities beyond one year, were classified as
short-term
based on their liquid nature. The securities that had stated
maturities beyond one year had certain economic
characteristics of
short-term
investments due to a rate-setting mechanism and the ability to
sell them through a Dutch auction process that occurred at
pre-determined
intervals, primarily every 28 days. For the year ended
June 30, 2007 and nine months ended March 31, 2008,
the amount of gross realized gains and losses related to sales
of investments were insignificant.
In February 2008, we were informed that there was insufficient
demand for auction rate securities, resulting in failed auctions
for $23.0 million of our auction rate securities held at
March 31, 2008. Currently, these affected securities are
not liquid and will not become liquid until a future auction for
these investments is successful or they are redeemed by the
issuer or they mature. As a result, at March 31, 2008, we
have classified the fair value of the auction rate securities as
a long-term asset. Starting in February 2008, interest rates on
all auction rate securities were reset to temporary
predetermined penalty or maximum rates.
These maximum rates are limited to a maximum amount payable over
a 12 month period generally equal to a rate based on the
trailing
12-month
average of
90-day
treasury bills, plus 120 basis points. As of March 31,
2008, interest rates on our auction rate securities varied from
0% to 18%. This range resulted from adjustments in rates to
achieve maximum allowable amounts over specific periods of time.
We have collected all interest due on our auction rate
securities and have no reason to believe that we will not
collect all interest due in the future. We do not expect to
receive the principal associated with our auction rate
securities until the earlier of a successful auction, their
redemption by the issuer or their maturity. On March 28,
2008, we obtained a margin loan from a financial institution in
the principal amount of $11.5 million, with a floating
interest rate equal to
30-day
LIBOR, plus 0.25%. The loan is secured by the $23.0 million
par value of our auction rate securities. We will need to access
the funds borrowed against our auction rate securities during
the quarter ending June 30, 2008 if other funding is not
obtained or liquidity of our auction rate securities does not
improve.
In accordance with
EITF 03-01
and FSP
FAS 115-1
and 124-1,
The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments, we review several
factors to determine whether a loss is other-than-temporary.
These factors include but are not limited to: (1) the
length of time a security is in an unrealized loss position,
(2) the extent to which fair value is less than cost,
(3) the financial condition and near term prospects of the
issuer, and (4) our intent and ability to hold the security
for a period of time sufficient to allow for any unanticipated
recovery in fair value. As of June 30, 2007,
September 30, 2007 and December 31, 2007, we did not
believe there was any other-than-temporary impairment to any of
our investment holdings. At March 31, 2008, we recorded an
other-than-temporary impairment loss of $1.0 million
relating to our auction rate securities in our statement of
operations. We determined the fair value of our auction rate
securities and quantified the other-than-temporary impairment
loss
39
with the assistance of an independent third party valuation,
which utilized various valuation methods and considered, among
other factors, trades of similar securities in secondary markets
other than the primary auction rate market, estimates of present
value of the auction rate securities based upon expected cash
flows, the likelihood and potential timing of issuers of the
auction rate securities exercising their redemption rights at
par value, and the likelihood of a return of liquidity to the
market for these securities. To derive estimates of the present
value of the auction rate securities based upon expected cash
flows, we used the securities expected annual interest
payments, ranging from 2.6% to 4.2% of par value; the
securities annual market interest rates, ranging from 4.1%
to 5.0%, based on observed traded, state sponsored, taxable
certificates rated AAA or lower and issued between March 15 and
March 31, 2008; and a range of expected terms to liquidity, with
an implied term to liquidity of approximately 2.5 years implied
by the result. In addition, we considered (i) our
brokers estimation of the value of our auction rate
securities, (ii) our current inability to hold these
securities for a period of time sufficient to allow for an
unanticipated recovery in fair value, and (iii) failed
auctions and the anticipation of continued failed auctions for
all of our auction rate securities. We will continue to monitor
and evaluate the value of our investments each reporting period
for a possible impairment if a decline in fair value occurs.
Excess and Obsolete Inventory. We have
inventories that are principally comprised of capitalized direct
labor and manufacturing overhead, raw materials and components,
and finished goods. Due to the technological nature of our
products, there is a risk of obsolescence to changes in our
technology and the market, which is impacted by exogenous
technological developments and events. Accordingly, we write
down our inventories as we become aware of any situation where
the carrying amount exceeds the estimated realizable value based
on assumptions about future demands and market conditions. The
evaluation includes analyses of inventory levels, expected
product lives, product at risk of expiration, sales levels by
product and projections of future sales demand.
Stock-Based Compensation. Effective
July 1, 2006, we adopted SFAS No. 123(R),
Share-Based Payment, as interpreted by
SAB No. 107, using the prospective application method,
to account for stock-based compensation expense associated with
the issuance of stock options to employees and directors on or
after July 1, 2006. The unvested compensation costs at
July 1, 2006, which relate to grants of options that
occurred prior to the date of adoption of
SFAS No. 123(R), will continue to be accounted for
under Accounting Principles Board (APB) No. 25,
Accounting for Stock Issued to Employees.
SFAS No. 123(R) requires us to recognize stock-based
compensation expense in an amount equal to the fair value of
share-based payments computed at the date of grant. The fair
value of all employee and director stock options is expensed in
the consolidated statements of operations over the related
vesting period of the options. We calculated the fair value on
the date of grant using a Black-Scholes option pricing model.
To determine the inputs for the Black-Scholes option pricing
model, we are required to develop several assumptions, which are
highly subjective. These assumptions include:
|
|
|
|
|
our common stocks volatility;
|
|
|
|
the length of our options lives, which is based on future
exercises and cancellations;
|
|
|
|
the number of shares of common stock pursuant to which options
which will ultimately be forfeited;
|
|
|
|
the risk-free rate of return; and
|
|
|
|
future dividends.
|
We use comparable public company data to determine volatility,
as our common stock has not yet been publicly traded. We use a
weighted average calculation to estimate the time our options
will be outstanding as prescribed by Staff Accounting
Bulletin No. 107, Share-Based Payment. We
estimate the number of options that are expected to be forfeited
based on our historical experience. The risk-free rate is based
on the U.S. Treasury yield curve in effect at the time of
grant for the estimated life of the option. We use our judgment
and expectations in setting future dividend rates, which is
currently expected to be zero.
The absence of an active market for our common stock also
requires our management and board of directors to estimate the
fair value of our common stock for purposes of granting options
and for determining stock-based compensation expense. In
response to these requirements, our management and board of
directors estimate the fair market value of common stock at each
date at which options are granted based upon stock valuations
and other
40
qualitative factors. We have conducted stock valuations using
two different valuation methods: the option pricing method and
the probability weighted expected return method, or PWERM. The
option pricing method assumes a liquidation of a company and
treats common and preferred stock as call options on the
enterprise value. The option pricing method is often used when
the possible outcomes for a liquidity event are deemed to have
equal likelihood and when valuing securities with a high degree
of uncertainty regarding potential future values. We used the
option pricing method for valuations of our common stock as of
July 19, 2006, December 31, 2006, June 29, 2007
and September 30, 2007, as we deemed all liquidity events
to have equal likelihood at those dates. All of these valuations
were conducted retrospectively. We began using the PWERM in
contemporaneous valuations of our common stock as of
December 31, 2007 and March 31, 2008, as of which time
we had commenced significant efforts in connection with our
initial public offering process and the probability of a public
offering had increased. Accordingly, management and the board of
directors determined that the PWERM would be more appropriate
than the option pricing method. For the PWERM, we estimated the
likely return to shareholders based upon our becoming a public
company, being acquired or remaining a private company, and
employed comparable public company, merger and acquisition
transaction, and discounted cash flow analysis. These values
were adjusted and weighted based on probability of occurrence.
As of March 31, 2008, we assumed an 80% probability of
completing an initial public offering, a 10% probability of
being acquired, and a 10% probability of remaining a private
company.
Both the option pricing method and the PWERM have taken into
consideration the following factors:
|
|
|
|
|
Financing Activity: Between July 19, 2006
and October 3, 2006, we sold $27.0 million in
Series A convertible preferred stock at $5.71 per share;
between May 16, 2007 and September 19, 2007, we sold
$18.6 million in
Series A-1
convertible preferred stock at $8.50 per share; and between
November 13, 2007 and December 17, 2007, we sold
$20.0 million in Series B convertible preferred stock
at $9.25 per share. New and existing investors participated in
the convertible preferred stock offerings, while certain
existing investors declined the opportunity to participate. As
of each valuation date, management and the board of directors
considered the differences between the valuation of the common
stock and the most recent price of our preferred stock and
determined that such differences were reasonable and accurately
reflected the anticipated time until a liquidity event,
including this offering.
|
|
|
|
Preferred Stock Rights and Preferences: The
holders of preferred stock are entitled to receive cash
dividends at the rate of 8% of the original purchase price,
which dividends accrue, whether or not earned or declared, and
whether or not we have legally available funds. Holders of
preferred stock have the right to require us to redeem in cash
30% of the original amount on the fifth year anniversary of the
purchase agreement for the applicable series of preferred stock,
30% after the sixth year and 40% after the seventh year. The
price we would pay for the redeemed shares would be the greater
of (i) the price per share paid for the preferred stock,
plus all accrued and unpaid dividends, or (ii) the fair
market value of the preferred stock at the time of redemption as
determined by a professional appraiser. The holders of the
preferred stock have the right to convert, at their option,
their shares into common stock on a share for share basis. The
holders of preferred stock also have the right to designate, and
have designated, two individuals to our board of directors.
Finally, in the event of our liquidation or winding up, the
holders of preferred stock are entitled to receive an amount
equal to (i) the price paid for the preferred shares, plus
(ii) all dividends accrued and unpaid before any payments
are made to holders of stock junior to the preferred stock. Our
remaining net assets, if any, would be distributed to the
holders of preferred and common stock based on their ownership
|
41
|
|
|
|
|
amounts assuming the conversion of the preferred stock. The
aggregate liquidation preferences of our preferred stock at the
dates listed below are as follows:
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
Liquidation
|
|
Date
|
|
Preference
|
|
|
September 30, 2006
|
|
$
|
25.4 million
|
|
December 31, 2006
|
|
$
|
27.9 million
|
|
March 31, 2007
|
|
$
|
28.4 million
|
|
June 30, 2007
|
|
$
|
37.3 million
|
|
September 30, 2007
|
|
$
|
48.3 million
|
|
December 31, 2007
|
|
$
|
69.3 million
|
|
March 31, 2008
|
|
$
|
70.6 million
|
|
|
|
|
|
|
Growth of Executive Management
Team: Management and the board of directors
considered the development and growth of our executive
management team, including the hiring of our Vice President of
Sales and Vice President of Business Development to begin the
process of building a sales organization, our Vice President of
Marketing to continue building the sales and marketing function,
and our Chief Executive Officer.
|
|
|
|
OASIS Clinical Trial: The progress of our
OASIS clinical trial, which began enrollment in January 2006 and
was completed in January 2007.
|
|
|
|
FDA Process: In May 2007, we applied for
510(k) clearance from the FDA for the Diamondback 360°
system. We received 510(k) clearance for use of the Diamondback
360° with a hollow crown as a therapy for patients with PAD
in August 2007, and we received 510(k) clearances in October
2007 for the updated control unit used with the Diamondback
360° and in November 2007 for the Diamondback 360°
with a solid crown.
|
|
|
|
Limited Commercial Launch: Upon receiving FDA
510(k) clearance, we began shipping product to customers under
our limited commercial launch plan.
|
|
|
|
Merger and Acquisition Process: During the
period from July 2007 through September 2007, we engaged
investment bankers to explore potential merger and acquisition
opportunities.
|
|
|
|
Offering Process: Beginning in the quarter
ended June 30, 2007, we began discussions with investment
bankers concerning our initial public offering process, and the
organizational meeting for this offering occurred in October
2007.
|
|
|
|
|
|
Revenues: We recognized $12.3 million in
revenues for the nine months ended March 31, 2008.
|
Our management and board of directors also considered the
valuations of comparable public companies, our cash and working
capital amounts, and additional objective and subjective factors
relating to our business. For each valuation, our management and
board of directors considered all of the factors that they
considered to be relevant at the time and did not rely
exclusively on any particular factors. Certain factors described
with respect to each valuation represented progress in the
development of our business, which reduced risk and improved the
probability that we would achieve our business plan. In
addition, the order in which we have described these factors in
this prospectus does not represent the relative importance or
weight given to any of the factors.
The following highlights key milestones that contributed to the
valuation of our common stock in each of our valuations:
Valuation
as of July 19, 2006
This valuation estimated that the fair market value of our
common stock as of July 19, 2006 was $2.43 per share,
taking into consideration the sale of Series A convertible
preferred stock at $5.71 per share and the hiring of our Vice
President of Sales and Vice President of Business Development to
begin the process of building a sales organization in the period
from July 2006 through September 2006.
42
Valuation
as of December 31, 2006
This valuation estimated that the fair market value of our
common stock as of December 31, 2006 was $2.79 per share,
taking into consideration the sale of Series A convertible
preferred stock at $5.71 per share, changes in the value of
comparable public companies, the substantial completion of
enrollment for the OASIS clinical trial, and the hiring of our
Vice President of Marketing to continue building our sales and
marketing function.
Valuation
as of June 29, 2007
This valuation estimated that the fair market value of our
common stock as of June 29, 2007 was $5.95 per share,
taking into consideration the sale of
Series A-1
convertible preferred stock at $8.50 per share, the completion
of the OASIS clinical trial, the hiring of our Chief Executive
Officer, our application for FDA 510(k) clearance for the
Diamondback 360°, and the commencement of discussions with
investment bankers regarding the initial public offering process.
Valuation
as of September 30, 2007
This valuation estimated that the fair market value of our
common stock as of September 30, 2007 was $7.36 per share,
taking into consideration the sale of
Series A-1
convertible preferred stock at $8.50 per share, expectation of
the sale of Series B convertible preferred stock at $9.25
per share, receipt of FDA 510(k) clearance for the Diamondback
360°, continued discussions with investment bankers
regarding the initial public offering process, the engagement of
investment bankers to explore potential merger and acquisition
opportunities, and the limited commercial launch of the
Diamondback 360°.
Valuation
as of December 31, 2007
This valuation estimated that the fair market value of our
common stock as of December 31, 2007 was $8.44 per share,
taking into consideration the sale of Series B convertible
preferred stock at $9.25 per share, receipt of FDA 510(k)
clearances for the updated control unit for the Diamondback
360° and for the Diamondback 360° with a solid crown,
revenues of $4.6 million in revenue for the quarter ended
December 31, 2007, and the holding of preparatory meetings
as part of the initial public offering process.
Valuation
as of March 31, 2008
This valuation estimated that the fair market value of our
common stock as of March 31, 2008 was $10.27 per share,
taking into consideration the sale of Series B convertible
preferred stock at $9.25 per share during the quarter ending
December 31, 2007, initiation of the full commercial launch
of the Diamondback 360°, revenues of $12.3 million for
the nine months ended March 31, 2008, and substantial
completion of some of the milestones in the initial public
offering process.
Our management and board of directors set the exercise prices
for option grants based upon their best estimate of the fair
market value of our common stock at the time they made such
grants, taking into account all information available at those
times. In some cases, management and the board of directors made
retrospective assessments of the valuation of our common stock
at later dates and determined that the fair market value of our
common stock at the times the grants were made was different
than the exercise prices established for those grants. In cases
in which the fair market value was higher than the exercise
price, we recognized stock-based compensation expense for the
excess of the fair market value of the common stock over the
exercise price.
43
The following table sets forth the exercise prices of options
granted during fiscal year 2007 and the nine months ended
March 31, 2008, and the fair market value of our common
stock, as determined by our management and board of directors,
on the dates of the option grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Market Value Per Share
|
|
|
|
|
|
|
|
|
|
Assigned by Management and
|
|
Date of Option Grant
|
|
Number of Shares
|
|
|
Exercise Price
|
|
|
Board of Directors
|
|
|
July 1, 2006
|
|
|
132,000
|
|
|
$
|
5.71
|
|
|
$
|
2.43
|
|
July 17, 2006
|
|
|
230,000
|
|
|
|
5.71
|
|
|
|
2.43
|
|
August 15, 2006
|
|
|
239,500
|
|
|
|
5.71
|
|
|
|
2.43
|
|
October 3, 2006
|
|
|
375,000
|
|
|
|
5.71
|
|
|
|
2.58
|
|
December 19, 2006
|
|
|
446,100
|
|
|
|
5.71
|
|
|
|
2.79
|
|
February 14, 2007
|
|
|
48,000
|
|
|
|
5.71
|
|
|
|
3.58
|
|
February 15, 2007
|
|
|
540,000
|
|
|
|
5.71
|
|
|
|
3.58
|
|
April 18, 2007
|
|
|
299,250
|
|
|
|
5.71
|
|
|
|
4.63
|
|
June 12, 2007
|
|
|
315,000
|
|
|
|
5.11
|
|
|
|
5.95
|
|
August 7, 2007
|
|
|
402,500
|
|
|
|
5.11
|
|
|
|
5.95
|
|
October 9, 2007
|
|
|
331,083
|
|
|
|
5.11
|
|
|
|
7.36
|
|
November 13, 2007
|
|
|
154,917
|
|
|
|
7.36
|
|
|
|
7.90
|
|
December 12, 2007
|
|
|
775,000
|
|
|
|
7.86
|
|
|
|
8.44
|
|
December 31, 2007
|
|
|
1,056,234
|
|
|
|
7.86
|
|
|
|
8.44
|
|
February 14, 2008
|
|
|
172,213
|
|
|
|
9.04
|
|
|
|
9.36
|
|
We also have granted restricted stock awards with vesting terms
ranging from 12 to 36 months. The following table sets
forth the number of shares of restricted stock awarded and the
fair market value of our common stock, as determined by our
management and board of directors, on the dates of the
restricted stock award grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Market Value per Share
|
|
|
|
|
Assigned by Management and
|
Date of Restricted Stock Award Grant
|
|
Number of Shares
|
|
Board of Directors
|
|
December 12, 2007
|
|
|
204,338
|
|
|
$
|
8.44
|
|
February 14, 2008
|
|
|
307,200
|
|
|
$
|
9.36
|
|
Preferred Stock. Effective in fiscal 2007,
with the sale of our Series A and
A-1
convertible preferred stock, we began recording the current
estimated fair value of our convertible preferred stock on a
quarterly basis based on the fair market value of that stock as
determined by our management and board of directors. In
accordance with Accounting Series Release No. 268,
Presentation in Financial Statements of Redeemable
Preferred Stocks and EITF Abstracts, Topic D-98,
Classification and Measurement of Redeemable Securities,
we record changes in the current fair value of our redeemable
convertible preferred stock in the consolidated statements of
changes in shareholders (deficiency) equity and
comprehensive (loss) income and consolidated statements of
operations as accretion of redeemable convertible preferred
stock.
44
In connection with the preparation of our financial statements,
our management and board of directors established what they
believe to be the fair value of our Series A convertible
preferred stock and
Series A-1
convertible preferred stock. This determination was based on
concurrent significant stock transactions with third parties and
a variety of factors, including our business milestones achieved
and future financial projections, our position in the industry
relative to our competitors, external factors impacting the
value of our stock in the marketplace, the stock volatility of
comparable companies in our industry, general economic trends
and the application of various valuation methodologies. The
following table shows the fair market value of one share of our
Series A convertible preferred stock,
Series A-1
convertible preferred stock and Series B convertible preferred
stock at the dates noted during the fiscal year ended
June 30, 2007 and the nine months ended March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
Series A-1
|
|
|
Series B
|
|
Date
|
|
Convertible Preferred Stock
|
|
|
Convertible Preferred Stock
|
|
|
Convertible Preferred Stock
|
|
|
September 30, 2006
|
|
$
|
5.71
|
|
|
$
|
|
|
|
$
|
|
|
December 31, 2006
|
|
|
6.64
|
|
|
|
|
|
|
|
|
|
March 31, 2007
|
|
|
7.57
|
|
|
|
|
|
|
|
|
|
June 30, 2007
|
|
|
8.50
|
|
|
|
8.50
|
|
|
|
|
|
September 30, 2007
|
|
|
9.20
|
|
|
|
9.20
|
|
|
|
|
|
December 31, 2007
|
|
|
9.25
|
|
|
|
9.25
|
|
|
|
9.25
|
|
March 31, 2008
|
|
|
10.81
|
|
|
|
10.81
|
|
|
|
10.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock Warrants. Freestanding
warrants and other similar instruments related to shares that
are redeemable are accounted for in accordance with
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity, and its related interpretations. Under
SFAS No. 150, the freestanding warrant that is related
to our redeemable convertible preferred stock is classified as a
liability on the balance sheet as of June 30, 2007 and
March 31, 2008. The warrant is subject to remeasurement at
each balance sheet date and any change in fair value is
recognized as a component of interest expense. Fair value is
measured using the Black-Scholes option pricing model. We will
continue to adjust the liability for changes in fair value until
the earlier of the exercise or expiration of the warrant or the
completion of a liquidation event, including the completion of
an initial public offering with gross cash proceeds to us of at
least $40.0 million, at which time all preferred stock
warrants will be converted into warrants to purchase common
stock and, accordingly, the liability will be reclassified to
equity.
45
Results
of Operations
The following table sets forth, for the periods indicated, our
results of operations expressed as dollar amounts (in
thousands), and, for certain line items, the changes between the
specified periods expressed as percent increases or decreases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
Years Ended June 30,
|
|
|
Nine Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
2005
|
|
|
2006
|
|
|
Change
|
|
|
2006
|
|
|
2007
|
|
|
Change
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
12,285
|
|
|
|
|
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
1,177
|
|
|
|
1,735
|
|
|
|
47.4
|
%
|
|
|
1,735
|
|
|
|
6,691
|
|
|
|
285.6
|
%
|
|
|
4,077
|
|
|
|
23,276
|
|
|
|
470.9
|
%
|
Research and development
|
|
|
2,371
|
|
|
|
3,168
|
|
|
|
33.6
|
|
|
|
3,168
|
|
|
|
8,446
|
|
|
|
166.6
|
|
|
|
4,442
|
|
|
|
10,662
|
|
|
|
140.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
3,548
|
|
|
|
4,903
|
|
|
|
38.2
|
|
|
|
4,903
|
|
|
|
15,137
|
|
|
|
208.7
|
|
|
|
8,519
|
|
|
|
33,938
|
|
|
|
298.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,548
|
)
|
|
|
(4,903
|
)
|
|
|
38.2
|
|
|
|
(4,903
|
)
|
|
|
(15,137
|
)
|
|
|
208.7
|
|
|
|
(8,519
|
)
|
|
|
(26,897
|
)
|
|
|
215.7
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
(48
|
)
|
|
|
|
|
|
|
(48
|
)
|
|
|
(1,340
|
)
|
|
|
2,691.7
|
|
|
|
(881
|
)
|
|
|
(912
|
)
|
|
|
3.5
|
|
Interest income
|
|
|
37
|
|
|
|
56
|
|
|
|
51.4
|
|
|
|
56
|
|
|
|
881
|
|
|
|
1,473.2
|
|
|
|
746
|
|
|
|
1,012
|
|
|
|
35.7
|
|
Impairment on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,023
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
37
|
|
|
|
8
|
|
|
|
78.3
|
|
|
|
8
|
|
|
|
(459
|
)
|
|
|
5,837.5
|
|
|
|
(135
|
)
|
|
|
(923
|
)
|
|
|
583.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(3,511
|
)
|
|
|
(4,895
|
)
|
|
|
39.4
|
|
|
|
(4,895
|
)
|
|
|
(15,596
|
)
|
|
|
218.6
|
|
|
|
(8,645
|
)
|
|
|
(27,820
|
)
|
|
|
221.8
|
|
Accretion of redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,835
|
)
|
|
|
|
|
|
|
(12,403
|
)
|
|
|
(19,422
|
)
|
|
|
43.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common shareholders
|
|
$
|
(3,511
|
)
|
|
$
|
(4,895
|
)
|
|
|
39.4
|
%
|
|
$
|
(4,895
|
)
|
|
$
|
(32,431
|
)
|
|
|
562.5
|
%
|
|
$
|
(21,057
|
)
|
|
$
|
(47,242
|
)
|
|
|
124.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of the Nine Months Ended March 31, 2007 and
2008
Revenues. We generated revenues of
$12.3 million during the nine months ended March 31,
2008 attributable to sales of the Diamondback 360° to
customers following FDA clearance in August 2007. We commenced a
limited commercial introduction of the Diamondback 360° in
the United States in September 2007, followed by a full
commercial launch in the quarter ended March 31, 2008.
Since September 2007, we have expanded our sales and marketing
efforts and have shipped more than 3,900 single-use catheters
through March 31, 2008. We expect our revenue to increase
as we continue to expand our sales and marketing teams to
increase penetration of the U.S. PAD market.
We have applied EITF
No. 00-21,
Revenue Arrangements with Multiple Deliverables, the
primary impact of which was to treat the Diamondback 360°
as a single unit of accounting for initial customer orders. As
such, revenues are deferred until the title and risk of loss of
each Diamondback 360° component, consisting of catheters,
46
guidewires, and a control unit, are transferred to the customer
based on the shipping terms. Many initial shipments to customers
also included a loaner control unit, which we provided, until
the new control unit received clearance from the FDA and was
subsequently available for sale. The loaner control units are
company-owned property and we maintain legal title to these
units. Accordingly, we had deferred revenue of $517,000 as of
March 31, 2008, reflecting all component shipments to
customers pending receipt of a customer purchase order and
shipment of a new control unit. We expect all deferred revenue
to be recognized by June 30, 2008.
Cost of Goods Sold. For the nine months ended
March 31, 2008, cost of goods sold was $5.2 million.
This amount represents the cost of materials, labor and overhead
for single-use catheters, guidewires and control units shipped
subsequent to obtaining FDA clearance for the Diamondback
360° in August 2007. Cost of goods sold for the nine months
ended March 31, 2008 includes $126,000 relating to
component shipments for which there is no associated revenue and
$141,000 for stock based compensation. At March 31, 2008,
the legal title and risk of loss of each disposable component
had transferred to the customer and we have no future economic
benefit in these disposables. As a result, the cost of goods
sold related to these disposable units has been recorded in the
nine months ended March 31, 2008. We expect that cost of
goods sold as a percentage of revenues will continue to decrease
as we implement cost reduction initiatives and benefit from
increased volume and related economies of scale.
Selling, General and Administrative
Expenses. Our selling, general and administrative
expenses increased by $19.2 million, from $4.1 million
for the nine months ended March 31, 2007 to
$23.3 million for the nine months ended March 31,
2008. The primary reasons for the increase included the building
of our sales and marketing team, contributing
$10.7 million, and significant consulting and professional
services, contributing $1.3 million. In addition, stock
based compensation increased from $202,000 for the nine months
ended March 31, 2007 to $5.9 million for the nine
months ended March 31, 2008. We expect our selling, general
and administrative expenses to increase significantly due
primarily to the costs associated with expanding our sales and
marketing organization to further commercialize our products.
Research and Development Expenses. Our
research and development expenses increased by
$6.3 million, from $4.4 million for the nine months
ended March 31, 2007 to $10.7 million for the nine
months ended March 31, 2008. Research and development
spending increased as we increased the size of this department
to improve our product, such as the development of a new control
unit, shaft designs and crown designs. In addition, stock based
compensation increased from $20,000 for the nine months ended
March 31, 2007 to $188,000 for the nine months ended
March 31, 2008. We expect our research and development
expenses to increase as we attempt to expand our product
portfolio within the market for the treatment of peripheral
arteries and leverage our core technology into the coronary
market.
Interest Income. Interest income increased by
$266,000, from $746,000 for the nine months ended March 31,
2007 to $1.0 million for the nine months ended
March 31, 2008. The increase was primarily due to higher
average cash and cash equivalents and investment balances.
Average cash and cash equivalent and investment balances were
$19.5 million and $23.8 million for the nine months
ended March 31, 2007 and 2008, respectively.
Interest Expense. Interest expense increased
by $31,000, from $881,000 for the nine months ended
March 31, 2007 to $912,000 for the nine months ended
March 31, 2008. The increase was due to the change in the
fair value of convertible preferred stock warrants.
Impairment of investments. Due to the recent
conditions in the global credit markets that have prevented us
from liquidating our holdings of auction rate securities, we
recorded an other-than-temporary impairment loss of
$1.0 million relating to these securities in our statement
of operations at March 31, 2008. We determined the fair
value of our auction rate securities and quantified the
other-than-temporary impairment loss with the assistance of an
independent third party valuation, which utilized various
valuation methods and considered, among other factors, trades of
similar securities in secondary markets other than the primary
auction rate market, estimates of present value of the auction
rate securities based upon expected cash flows, the likelihood
and potential timing of issuers of the auction rate securities
exercising their redemption rights at par value, and the
likelihood of a return of liquidity to the market for these
securities. To derive estimates of the present value of the
auction rate securities based upon expected cash flows, we used
the securities expected annual interest payments, ranging
from 2.6% to 4.2% of par value; the securities annual
market interest rates, ranging from 4.1% to 5.0%, based on
observed traded, state sponsored, taxable certificates rated AAA
or lower and issued between March 15 and March 31, 2008;
47
and a range of expected terms to liquidity, with an implied
term to liquidity of approximately 2.5 years implied by the
result. In addition, we considered (i) our brokers
estimation of the value of our auction rate securities,
(ii) our current inability to hold these securities for a
period of time sufficient to allow for an unanticipated recovery
in fair value, and (iii) failed auctions and the
anticipation of continued failed auctions for all of our auction
rate securities.
Accretion of Redeemable Convertible Preferred
Stock. Accretion of redeemable convertible
preferred stock was $12.4 million for the nine months ended
March 31, 2007, as compared to $19.4 million for the
nine months ended March 31, 2008. Accretion of redeemable
convertible preferred stock reflects the change in estimated
fair value of preferred stock at the balance sheet dates.
Comparison
of the Fiscal Year Ended June 30, 2006 with Fiscal Year
Ended June 30, 2007
Revenues. We did not generate any revenues
during the fiscal years ended June 30, 2006 or 2007.
Selling, General and Administrative
Expenses. Our selling, general and administrative
expenses increased by $5.0 million, from $1.7 million
in fiscal 2006 to $6.7 million in fiscal 2007. The primary
reasons for the increase included the addition of four officers
to our executive management team, contributing
$1.1 million, the development of our sales and marketing
team, contributing $2.6 million, and consulting services,
contributing $300,000. We recorded stock based compensation of
$327,000 during the fiscal year ended June 30, 2007, while
none was recorded in 2006. The balance of the increase was
spread among our general and administrative accounts and
reflected the overall growth in the business.
Research and Development Expenses. Our
research and development expenses increased by
$5.2 million, from $3.2 million in fiscal 2006 to
$8.4 million in fiscal 2007. Both clinical and regulatory
spending increased substantially as we completed European and
U.S. clinical trials and submitted our 510(k) clearance
application to the FDA. In addition, we incurred significant
research and development costs for projects expected to improve
our product, such as the development of a new control unit and
shaft designs. We recorded stock based compensation of $63,000
during the fiscal year ended June 30, 2007.
Interest Income. Interest income increased by
$825,000, from $56,000 in fiscal 2006 to $881,000 in fiscal
2007. The increase was due to higher average cash, cash
equivalents and short-term investment balances. Average cash,
cash equivalent and short-term investment balances were
$1.6 million and $18.5 million during fiscal 2006 and
2007, respectively.
Interest Expense. Interest expense increased
by $1.3 million, from $48,000 for the fiscal year ended
June 30, 2006 to $1.3 million for the fiscal year
ended June 30, 2007. The increase was due to the change in
the estimated fair value of convertible preferred stock warrants.
Accretion of Redeemable Convertible Preferred
Stock. Accretion of redeemable convertible
preferred stock was $16.8 million for the fiscal year ended
June 30, 2007. Accretion of redeemable convertible
preferred stock reflects the change in estimated fair value of
preferred stock at the balance sheet dates.
Comparison
of the Fiscal Year Ended June 30, 2005 with the Fiscal Year
Ended June 30, 2006
Revenues. We did not generate any revenues
during the fiscal years ended June 30, 2005 or 2006.
Selling, General and Administrative
Expenses. Our selling, general and administrative
expenses increased by $.5 million, from $1.2 million
in fiscal 2005 to $1.7 million in fiscal 2006. This
increase was primarily due to initial sales and marketing costs
and increased rent for office and production facilities.
Research and Development Expenses. Our
research and development expenses increased by $.8 million,
from $2.4 million in fiscal 2005 to $3.2 million in
fiscal 2006. The majority of the research and development
increase was due to additional personnel and related costs,
along with a significant increase in clinical costs related to
our PAD I, PAD II and OASIS trials.
Interest Income. Interest income increased by
$19,000, from $37,000 in fiscal 2005 to $56,000 in fiscal 2006.
The increase was due to higher returns on average cash, cash
equivalents and short-term investment balances.
48
Average cash, cash equivalent and short-term investment balances
were $2.2 million and $1.6 million in fiscal 2005 and
2006, respectively.
Interest Expense. Interest expense increased
by $48,000, from $0 in fiscal 2005 to $48,000 in fiscal 2006.
The increase was due to convertible promissory notes that we
issued in 2006.
Liquidity
and Capital Resources
Our consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course
of business. We had cash and cash equivalents of
$16.1 million at March 31, 2008. During the nine
months ended March 31, 2008 and the year ended June 30,
2007, net cash used in operations amounted to $22.4 million
and $12.3 million, respectively. As of March 31, 2008, we
had an accumulated deficit of $107.0 million. We have
historically funded our operating losses primarily from the
issuance of common and preferred stock and convertible
promissory notes. We have incurred negative cash flows and net
losses since inception. In addition, in February 2008, we were
notified that recent conditions in the global credit markets
have caused insufficient demand for auction rate securities,
resulting in failed auctions for $23.0 million of our
auction rate securities held at March 31, 2008. These
securities are currently not liquid, as we have an inability to
sell the securities due to continued failed auctions. On
March 28, 2008, we obtained a margin loan from a financial
institution in the principal amount of $11.5 million, with
a floating interest rate equal to
30-day
LIBOR, plus 0.25%. The loan is secured by the $23.0 million
par value of our auction rate securities. We intend to repay
this loan with a portion of the proceeds from this offering. We
will need to access the funds borrowed against our auction rate
securities during the quarter ending June 30, 2008, and
expect that we would use all of these funds prior to
September 30, 2008, if other funding is not obtained or the
liquidity of our auction rate securities does not improve. If we
fail to raise sufficient equity or debt capital, management
would implement cost reduction measures, including workforce
reductions, as well as reductions in overhead costs and capital
expenditures. There can be no assurance that these sources will
provide sufficient cash flows to enable us to continue as a
going concern. We currently have no commitments for additional
debt or equity financing and may experience difficulty in
obtaining additional financing on favorable terms, if at all.
All of these factors raise substantial doubt about our ability
to continue as a going concern. Our independent registered
public accountants have included an explanatory paragraph in
their report for our fiscal year ended June 30, 2007 with
respect to our ability to continue as a going concern.
The reported changes in cash and cash equivalents and
investments for the years ended June 30, 2005, 2006 and
2007 and for the nine months ended March 31, 2007 and 2008
are summarized below.
Cash and Cash Equivalents. Cash and cash
equivalents increased by $14.2 million, from
$1.9 million at March 31, 2007 to $16.1 million at
March 31, 2008. Cash and cash equivalents increased by
$6.3 million, from $1.6 million at June 30, 2006
to $7.9 million at June 30, 2007.
Investments. Short-term investments decreased
by $14.3 million, from $14.3 million at March 31,
2007 to $0 at March 31, 2008. Short-term investments
increased by $11.6 million, from $0 at June 30, 2006
to $11.6 million at June 30, 2007.
Our investments include AAA rated auction rate securities issued
primarily by state agencies and backed by student loans
substantially guaranteed by the Federal Family Education Loan
Program. In February 2008, we were informed that there was
insufficient demand for auction rate securities, resulting in
failed auctions for $23.0 million of our auction rate
securities held at March 31, 2008. Currently, these
affected securities are not liquid and will not become liquid
until a future auction for these investments is successful or
they are redeemed by the issuer or they mature. As a result, at
March 31, 2008, we have classified the fair value of our
auction rate securities as a long-term asset. At March 31,
2008, we recorded an other-than-temporary impairment loss of
$1.0 million relating to these securities in our statement
of operations. We determined the fair value of our auction rate
securities and quantified the other-than-temporary impairment
loss with the assistance of an independent third party
valuation, which utilized various valuation methods and
considered, among other factors, trades of similar securities in
secondary markets other than the primary auction rate market,
estimates of present value of the auction rate securities based
upon expected cash flows, the likelihood and potential timing of
issuers of the auction rate securities exercising their
49
redemption rights at par value, and the likelihood of a return
of liquidity to the market for these securities. To derive
estimates of the present value of the auction rate securities
based upon expected cash flows, we used the securities
expected annual interest payments, ranging from 2.6% to 4.2% of
par value; the securities annual market interest rates,
ranging from 4.1% to 5.0%, based on observed traded, state
sponsored, taxable certificates rated AAA or lower and issued
between March 15 and March 31, 2008; and a range of expected
terms to liquidity, with an implied term to liquidity of
approximately 2.5 years implied by the result. In addition, we
considered (i) our brokers estimation of the value of
our auction rate securities, (ii) our current inability to
hold these securities for a period of time sufficient to allow
for an unanticipated recovery in fair value, and
(iii) failed auctions and the anticipation of continued
failed auctions for all of our auction rate securities. We will
need to access the funds borrowed against our auction rate
securities during the quarter ending June 30, 2008 if other
funding is not obtained or the liquidity of our auction rate
securities does not improve. For additional discussion of
liquidity issues relating to our auction rate securities, see
Quantitative and Qualitative Disclosures About Market
Risk.
Operating Activities. Net cash used in
operating activities was $3.3 million, $5.0 million
and $12.3 million in fiscal 2005, 2006 and 2007,
respectively, and $7.3 million and $22.4 million for
the nine months ended March 31, 2007 and 2008, respectively.
Investing Activities. Net cash used in
investing activities was $5,000, $228,000 and $11.9 million
in fiscal 2005, 2006 and 2007, respectively, and
$14.5 million and $12.3 million for the
nine months ended March 31, 2007 and 2008,
respectively. For the nine months ended March 31, 2007, we
purchased and sold investments in the amount of
$23.2 million and $9.0 million, respectively. For the
nine months ended March 31, 2008, we purchased and sold
investments in the amount of $31.3 million and
$20.0 million, respectively. In fiscal 2007, we purchased
and sold investments in the amount of $23.2 million and
$11.8 million, respectively. The balance of cash used in
investing activities primarily related to the purchase of
property and equipment. Purchases of property and equipment used
cash of $7,000, $235,000 and $465,000 in fiscal 2005, 2006 and
2007, respectively, and $333,000 and $715,000 in the nine months
ended March 31, 2007 and 2008, respectively.
Financing Activities. Net cash provided by
financing activities was $1.9 million, $5.0 million
and $30.5 million in fiscal 2005, 2006 and 2007,
respectively, and $22.2 million and $42.8 million in
the nine months ended March 31, 2007 and 2008,
respectively. Cash provided by financing activities during these
periods included:
|
|
|
|
|
net proceeds from the sale of common stock of $2.3 million
in each of fiscal 2005 and 2006;
|
|
|
|
issuance of a note payable to a shareholder of $350,000 in
fiscal 2005;
|
|
|
|
proceeds from the issuance of convertible promissory notes of
$3.1 million in fiscal 2006;
|
|
|
|
|
|
proceeds from the issuance of Series A and
Series A-1
convertible preferred stock of $30.3 million in fiscal 2007
and $22.0 million and $30.3 million in the nine months
ended March 31, 2007 and 2008, respectively;
|
|
|
|
|
|
issuance of convertible preferred stock warrants of
$1.8 million in fiscal 2007;
|
|
|
|
|
|
proceeds from a loan payable of $11.5 million during the
nine months ended March 31, 2008; and
|
|
|
|
|
|
exercise of stock options and warrants of $1.74 million
during the nine months ended March 31, 2008.
|
Cash used in financing activities in these periods included:
|
|
|
|
|
repurchase of common stock of $700,000 in fiscal 2005;
|
|
|
|
|
|
repayment of a note payable to a shareholder of $350,000 in
fiscal 2006;
|
|
|
|
|
|
payment of Series A offering costs of $1.7 million in
the nine months ended March 31, 2007; and
|
|
|
|
|
|
payment on a loan payable of $570,000 during the nine months
ended March 31, 2008.
|
Our future capital requirements will depend on many factors,
including our sales growth, market acceptance of our existing
and future products, the amount and timing of our research and
development expenditures, the timing of our introduction of new
products, the expansion of our sales and marketing efforts and
working capital needs. We expect our long-term liquidity needs
to consist primarily of working capital and capital expenditure
requirements. We believe that our existing cash and cash
equivalents, combined with our existing capital resources, and
the proceeds from this offering will be sufficient to meet our
capital and operating needs for at least 12 months from the
50
consummation of the offering. If this offering is not
consummated or we are unable to raise additional debt or equity
financing on terms acceptable to us, there will continue to be
substantial doubt about our ability to continue as a going
concern. To the extent that funds generated by this offering,
together with existing cash and cash equivalents, are
insufficient to fund our future activities, we may need to raise
additional funds through public or private equity or debt
financing. Although we are currently not a party to any
agreement or letter of intent with respect to potential
investments in, or acquisitions of, businesses, services or
technologies, we may enter into these types of arrangements in
the future, which could also require us to seek additional
equity or debt financing. Additional funds may not be available
on terms favorable to us, or at all. If we are unable to obtain
additional financing or successfully market our products on a
timely basis, we would have to slow our product development,
sales, and marketing efforts and may be unable to continue our
operations.
Contractual Cash Obligations. Our contractual
obligations and commercial commitments as of June 30, 2007
are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(in thousands)
|
|
|
Operating
leases(1)
|
|
$
|
1,722
|
|
|
$
|
346
|
|
|
$
|
733
|
|
|
$
|
643
|
|
|
$
|
0
|
|
Purchase
commitments(2)
|
|
|
2,122
|
|
|
|
2,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,844
|
|
|
$
|
2,468
|
|
|
$
|
733
|
|
|
$
|
643
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The amounts reflected in the table
above for operating leases represent future minimum payments
under a non-cancellable operating lease for our office and
production facility.
|
(2)
|
|
This amount reflects open purchase
orders.
|
Related
Party Transactions
For a description of our related party transactions, see the
discussion under the heading Certain Relationships and
Related Party Transactions.
Off-Balance
Sheet Arrangements
Since inception, we have not engaged in any off-balance sheet
activities as defined in Item 303(a)(4) of
Regulation S-K.
Recent
Accounting Pronouncements
In July 2006, the FASB issued interpretation No. 48,
Accounting for Uncertainty in Income Taxes An
Interpretation of FASB Statement No. 109 (FIN 48).
FIN 48 clarifies the accounting treatment (recognition and
measurement) for an income tax position taken in a tax return
and recognized in a companys financial statement. The new
standard also contains guidance on de-recognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. The provisions of
FIN 48 are effective for fiscal years beginning after
December 15, 2006.
We adopted the provisions of FIN 48 on July 1, 2007.
Previously, we had accounted for tax contingencies in accordance
with SFAS No. 5, Accounting for Contingencies.
As required by FIN 48, which clarifies
SFAS No. 109, Accounting for Income Taxes, we
recognize the financial statement benefit of a tax position only
after determining that the relevant tax authority would more
likely than not sustain the position following an audit. For tax
positions meeting the more-likely-than-not threshold, the amount
recognized in the financial statements is the largest benefit
that has a greater than 50% likelihood of being realized upon
ultimate settlement with the relevant tax authority. At the
adoption date, we applied FIN 48 to all tax positions for
which the statute of limitations remained open. We did not
record any adjustment to the liability for unrecognized income
tax benefits or accumulated deficit for the cumulative effect of
the adoption of FIN 48.
51
In addition, the amount of unrecognized tax benefits as of
July 1, 2007 was zero. There have been no material changes
in unrecognized tax benefits since July 1, 2007, and we do
not anticipate a significant change to the total amount of
unrecognized tax benefits within the next 12 months. We did
not have an accrual for the payment of interest and penalties
related to unrecognized tax benefits as of July 1, 2007.
We are subject to income taxes in the U.S. federal
jurisdiction and various state jurisdictions. Tax regulations
within each jurisdiction are subject to the interpretation of
the related tax laws and regulations and require significant
judgment to apply.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. This standard clarifies the
principle that fair value should be based on the assumptions
that market participants would use when pricing an asset or
liability. Additionally, it establishes a fair value hierarchy
that prioritizes the information used to develop these
assumptions. This standard is effective for financial statements
issued for fiscal years beginning after November 15, 2007.
We are currently evaluating the impact of this statement but
believe that the adoption of SFAS No. 157 will not
have a material impact on our financial position or consolidated
results of operations.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities. This standard provides companies with an option
to report selected financial assets and liabilities at fair
value and establishes presentation and disclosure requirements
designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 is effective as of the
beginning of an entitys first fiscal year beginning after
November 15, 2007, with early adoption permitted for an
entity that has also elected to apply the provisions of
SFAS No. 157. We are currently evaluating the impact
of this statement but believe that the adoption of
SFAS No. 159 will not have a material impact on our
financial position or consolidated results of operations.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations, and
SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB
No. 51. The revised standards continue the movement
toward the greater use of fair values in financial reporting.
SFAS No. 141(R) will significantly change how business
acquisitions are accounted for and will impact financial
statements both on the acquisition date and in subsequent
periods, including the accounting for contingent consideration.
SFAS No. 160 will change the accounting and reporting
for minority interests, which will be recharacterized as
noncontrolling interests and classified as a component of
equity. SFAS No. 141(R) and SFAS No. 160 are
effective for fiscal years beginning on or after
December 15, 2008, with SFAS No. 141(R) to be
applied prospectively while SFAS No. 160 requires
retroactive adoption of the presentation and disclosure
requirements for existing minority interests. All other
requirements of SFAS No. 160 shall be applied
prospectively. Early adoption is prohibited for both standards.
We are currently evaluating the impact of these statements but
expect that the adoption of SFAS No. 141(R) will have
a material impact on how we will identify, negotiate and value
any future acquisitions and a material impact on how an
acquisition will affect our consolidated financial statements,
and that SFAS No. 160 will not have a material impact
on our financial position or consolidated results of operations.
Inflation
We do not believe that inflation has had a material impact on
our business and operating results during the periods presented.
Quantitative
and Qualitative Disclosures About Market Risk
The primary objective of our investment activities is to
preserve our capital for the purpose of funding operations while
at the same time maximizing the income we receive from our
investments without significantly increasing risk or
availability. To achieve these objectives, our investment
policy, as amended in April 2008, allows us to maintain a
portfolio of cash equivalents and investments in a variety of
marketable securities, including money market funds and
U.S. government securities. Our cash and cash equivalents
as of March 31, 2008 include liquid money market accounts.
Due to the short-term nature of these investments, we believe
that there is no material exposure to interest rate risk.
52
All of our investment securities are classified as
available-for-sale and therefore reported on the balance sheet
at fair value. As of March 31, 2008, our investments
included AAA rated auction rate securities issued primarily by
state agencies and backed by student loans substantially
guaranteed by the Federal Family Education Loan Program. Our
auction rate securities are debt instruments with a long-term
maturity and with an interest rate that is reset in short
intervals, primarily every 28 days, through auctions. The
recent conditions in the global credit markets have prevented us
from liquidating our holdings of auction rate securities because
the amount of securities submitted for sale has exceeded the
amount of purchase orders for such securities. When auctions for
these securities fail, the investments may not be readily
convertible to cash until a future auction of these investments
is successful or they are redeemed by the issuer or they mature.
In February 2008, we were informed that there was insufficient
demand for auction rate securities, resulting in failed auctions
for $23.0 million of our auction rate securities held at
March 31, 2008. Currently, these affected securities are
not liquid and will not become liquid until a future auction for
these investments is successful or they are redeemed by the
issuer or they mature. As a result, at March 31, 2008, we
have classified the fair value of the auction rate securities as
a long-term asset. Starting in February 2008, interest rates on
all auction rate securities were reset to temporary
predetermined penalty or maximum rates.
These maximum rates are limited to a maximum amount payable over
a 12 month period generally equal to a rate based on the
trailing
12-month
average of
90-day
treasury bills, plus 120 basis points. As of March 31,
2008, interest rates on our auction rate securities varied from
0% to 18%. This range resulted from adjustments in rates to
achieve maximum allowable amounts over specific periods of time.
We have collected all interest due on our auction rate
securities and have no reason to believe that we will not
collect all interest due in the future. We do not expect to
receive the principal associated with our auction rate
securities until the earlier of a successful auction, their
redemption by the issuer or their maturity. On March 28,
2008, we obtained a margin loan from a financial institution in
the principal amount of $11.5 million, with a floating
interest rate equal to
30-day
LIBOR, plus 0.25%. The loan is secured by the $23.0 million
par value of our auction rate securities. We will need to access
the funds borrowed against our auction rate securities during
the quarter ending June 30, 2008 if other funding is not
obtained or the liquidity of our auction rate securities does
not improve.
At March 31, 2008, we recorded an other-than-temporary
impairment loss of $1.0 million relating to our auction
rate securities in our statement of operations. We determined
the fair value of our auction rate securities and quantified the
other-than-temporary impairment loss with the assistance of an
independent third party valuation, which utilized various
valuation methods and considered, among other factors, trades of
similar securities in secondary markets other than the primary
auction rate market, estimates of present value of the auction
rate securities based upon expected cash flows, the likelihood
and potential timing of issuers of the auction rate securities
exercising their redemption rights at par value, and the
likelihood of a return of liquidity to the market for these
securities. To derive estimates of the present value of the
auction rate securities based upon expected cash flows, we used
the securities expected annual interest payments, ranging
from 2.6% to 4.2% of par value; the securities annual
market interest rates, ranging from 4.1% to 5.0%, based on
observed traded, state sponsored, taxable certificates rated AAA
or lower and issued between March 15 and March 31, 2008; and a
range of expected terms to liquidity, with an implied term to
liquidity of approximately 2.5 years implied by the result. In
addition, we considered (i) our brokers estimation of
the value of our auction rate securities, (ii) our current
inability to hold these securities for a period of time
sufficient to allow for an unanticipated recovery in fair value,
and (iii) failed auctions and the anticipation of continued
failed auctions for all of our auction rate securities. We will
continue to monitor and evaluate the value of our investments
each reporting period for a possible impairment if a decline in
fair value occurs.
In the event that we need to access the funds of our auction
rate securities that have experienced insufficient demand at
auctions, we will not be able to do so without the possible loss
of principal, until a future auction for these investments is
successful or they are redeemed by the issuer or they mature. If
we are unable to sell these securities in the market or they are
not redeemed, then we may be required to hold them to maturity.
We will continue to monitor and evaluate the value of our
investments each reporting period for a possible impairment if a
decline in fair value occurs.
53
BUSINESS
Business
Overview
We are a medical device company focused on developing and
commercializing interventional treatment systems for vascular
disease. Our initial product, the Diamondback 360° Orbital
Atherectomy System, is a minimally invasive catheter system for
the treatment of peripheral arterial disease, or PAD. PAD
affects approximately eight to 12 million people in the
United States, as cited by the authors of the PARTNERS study
published in the Journal of the American Medical Association in
2001. PAD is caused by the accumulation of plaque in peripheral
arteries, most commonly occurring in the pelvis and legs.
However, as reported in an article published in Podiatry Today
in 2006, only approximately 2.5 million of those eight to
12 million people are treated. PAD is a progressive
disease, and if left untreated can lead to limb amputation or
death. In August 2007, the U.S. Food and Drug
Administration, or FDA, granted us 510(k) clearance for use of
the Diamondback 360° as a therapy in patients with PAD. We
commenced a limited commercial introduction of the Diamondback
360° in the United States in September 2007. This limited
commercial introduction intentionally limited the size of our
sales force and the number of customers each member of the sales
force served in order to focus on obtaining quality and timely
product feedback on initial product usages. During the quarter
ended March 31, 2008, we began our full commercial launch.
The Diamondback 360°s single-use catheter
incorporates a flexible drive shaft with an offset crown coated
with diamond grit. Physicians position the crown with the aid of
fluoroscopy at the site of an arterial plaque lesion and remove
the plaque by causing the crown to orbit against it, creating a
smooth lumen, or channel, in the vessel. The Diamondback
360° is designed to differentiate between plaque and
compliant arterial tissue, a concept that we refer to as
differential sanding. The particles of plaque
resulting from differential sanding are generally smaller than
red blood cells and are carried away by the blood stream. The
small size of the particles avoids the need for plaque
collection reservoirs and the delay involved in removing the
collection reservoir when it fills up during the procedure.
Physicians are able to keep the Diamondback 360° in the
artery until the desired vessels have been treated, potentially
reducing the overall procedure time. As the physician increases
the rotational speed of the drive shaft, the crown not only
rotates faster but also, due to centrifugal force, begins to
orbit with an increasing circumference. The Diamondback
360° can create a lumen that is approximately 100% larger
than the actual diameter of the device, for a device-to-lumen
ratio of 1.0 to 2.0. By giving physicians the ability to create
different lumen diameters with a change in rotational speed, the
Diamondback 360° can reduce the need to use multiple
catheters of different sizes to treat a single lesion.
We have conducted three clinical trials involving
207 patients to demonstrate the safety and efficacy of the
Diamondback 360° in treating PAD. In particular, our
pivotal OASIS clinical trial was a prospective 20-center study
that involved 124 patients with 201 lesions and met or
outperformed FDA targets. We were the first, and so far the
only, company to conduct a prospective multi-center clinical
trial with a prior investigational device exemption, or IDE, in
support of a 510(k) clearance for an atherectomy device. We
believe that the Diamondback 360° provides a platform that
can be leveraged across multiple market segments. In the future,
we expect to launch additional products to treat lesions in
larger vessels, provided that we obtain appropriate 510(k)
clearance from the FDA. We also plan to seek premarket approval
(PMA) from the FDA to use the Diamondback 360° to treat
patients with coronary artery disease.
Market
Overview
Peripheral
Artery Disease
PAD is a circulatory problem in which plaque deposits build up
on the walls of arteries, reducing blood flow to the limbs. The
most common early symptoms of PAD are pain, cramping or
tiredness in the leg or hip muscles while walking. Symptoms may
progress to include numbness, tingling or weakness in the leg
and, in severe cases, burning or aching pain in the leg, foot or
toes while resting. As PAD progresses, additional signs and
symptoms occur, including cooling or color changes in the skin
of the legs or feet, and sores on the legs or feet that do not
heal. If untreated, PAD may lead to critical limb ischemia, a
condition in which the amount of oxygenated blood being
54
delivered to the limb is insufficient to keep the tissue alive.
Critical limb ischemia often leads to large non-healing ulcers,
infections, gangrene and, eventually, limb amputation or death.
PAD affects approximately eight to 12 million people in the
United States, as cited by the authors of the PARTNERS study
published in the Journal of the American Medical Association in
2001. According to 2007 statistics from the American Heart
Association, PAD becomes more common with age and affects
approximately 12% to 20% of the population over 65 years
old. An aging population, coupled with increasing incidence of
diabetes and obesity, is likely to increase the prevalence of
PAD. In many older PAD patients, particularly those with
diabetes, PAD is characterized by hard, calcified plaque
deposits that have not been successfully treated with existing
non-invasive treatment techniques. PAD may involve arteries
either above or below the knee. Arteries above the knee are
generally long, straight and relatively wide, while arteries
below the knee are shorter and branch into arteries that are
progressively smaller in diameter.
Despite the severity of PAD, it remains relatively
underdiagnosed. According to an article published in Podiatry
Today in 2006, only approximately 2.5 million of the eight
to 12 million people in the United States with PAD are
diagnosed. Although we believe the rate of diagnosis of PAD is
increasing, underdiagnosis continues due to patients failing to
display symptoms or physicians misinterpreting symptoms as
normal aging. Recent emphasis on PAD education from medical
associations, insurance companies and other groups, coupled with
publications in medical journals, is increasing physician and
patient awareness of PAD risk factors, symptoms and treatment
options. The PARTNERS study advocated increased PAD screening by
primary care physicians.
Physicians treat a significant portion of the 2.5 million
people in the United States who are diagnosed with PAD using
medical management, which includes lifestyle changes, such as
diet and exercise and drug treatment. For instance, within a
reference group of over 1,000 patients from the PARTNERS
study, 54% of the patients with a prior diagnosis of PAD were
receiving antiplatelet medication treatment. While medications,
diet and exercise may improve blood flow, they do not treat the
underlying obstruction and many patients have difficulty
maintaining lifestyle changes. Additionally, many prescribed
medications are contraindicated, or inadvisable, for patients
with heart disease, which often exists in PAD patients. As a
result of these challenges, many medically managed patients
develop more severe symptoms that require procedural
intervention.
Conventional
Interventional Treatments for PAD and Their
Limitations
According to the Millennium Research Group, in 2006 there were
approximately 1.3 million procedural interventions for the
treatment of PAD in the United States, including 227,400
surgical bypass procedures, and 1,080,000 endovascular-based
interventions, such as angioplasty and stenting.
|
|
|
|
|
Surgical Procedures. Bypass surgery and
amputation are the most common surgical interventions that are
used to treat PAD. In bypass surgery, the surgeon reroutes blood
around a lesion using a vessel from another part of the body or
a tube made of synthetic fabric. Bypass surgery has a high risk
of procedure-related complications from blood loss,
post-procedural infection or reaction to general anesthesia. Due
to these complications, patients may have to remain hospitalized
for several days and are exposed to mortality risk. According to
clinical research published by EuroIntervention in 2005, bypass
surgery has a five year survival rate of 60%. Amputation of all
or a portion of a limb may be necessary as critical limb
ischemia progresses to an advanced state, which results in
approximately 160,000 to 180,000 amputations per year in the
United States, according to an article published in Podiatry
Today in July 2007.
|
|
|
|
Catheter-Based Interventions. Minimally
invasive catheter-based interventions include angioplasty,
stenting and atherectomy procedures. Angioplasty involves
inserting a catheter with a balloon tip into the site of
arterial blockage and then inflating the balloon to compress
plaque and expand the artery wall. Stenting involves implanting
and expanding a cylindrical metal tube into the diseased artery
to hold the arterial wall open. Both angioplasty and stenting
can improve blood flow in plaque-lined arteries by opening
lumens and are relatively fast and inexpensive compared to
surgical procedures. However, these techniques are not as
effective in long or calcified lesions or in lesions located
below the knee, nor do they remove any plaque from the artery.
Moreover, most stents are not FDA-approved for use in arteries
in the lower extremities. Additional concerns include the
potential to damage the artery when the balloon is expanded in
angioplasty and the potential for stent fracture during normal
leg movement. Both angioplasty and stenting have also
|
55
|
|
|
|
|
been associated with high rates of restenosis, or re-narrowing
of the arteries, in the months following the procedure.
|
A third category of catheter-based interventions is atherectomy,
which involves removing plaque from the arterial wall by using
cutting technologies or energy sources, such as lasers, or by
sanding with a diamond grit coated crown. Current atherectomy
techniques include cutting atherectomy, laser atherectomy and
rotational atherectomy. Cutting atherectomy devices are guided
into an artery along a catheter to the target lesion, where the
device is manipulated to remove plaque in a back and forth
motion. However, there is a risk that when plaque is cut away
from a vessel wall, the removed plaque will flow into other
parts of the body, where it will block the blood flow by
obstructing the lumen, known as embolization. Laser atherectomy
devices remove plaque through vaporization. Rotational
atherectomy devices remove plaque by abrading the lesion with a
spinning, abrasive burr. Current catheter-based treatments also
require the extensive use of fluoroscopy, which is an imaging
technique to capture real-time images of an artery, but results
in potentially harmful radiological exposure for the physician
and patient.
Current atherectomy technologies have significant drawbacks,
including one or more of the following:
|
|
|
|
|
potential safety concerns, as these methods of plaque removal do
not always discriminate between compliant arterial tissue and
plaque, thus potentially damaging the arterial wall;
|
|
|
|
difficulty treating calcified lesions, diffuse disease and
lesions located below the knee;
|
|
|
|
an inability to create lumens larger than the catheter itself in
a single insertion (resulting in device-to-lumen ratios of 1.00
to 1.00 or worse), necessitating the use of multiple catheters,
which increases the time, complexity and expense of the
procedure;
|
|
|
|
the creation of rough, uneven lumens with deep grooves, which
may impact blood flow dynamics following the procedure;
|
|
|
|
the potential requirement for greater physician skill,
specialized technique or multiple operators to deliver the
catheter and remove plaque;
|
|
|
|
the potential requirement for reservoirs or aspiration to
capture and remove plaque, which often necessitates larger
catheters and adds time, complexity and expense to the procedure;
|
|
|
|
the potential need for ancillary distal embolization protection
devices to prevent large particles of dislodged plaque from
causing distal embolisms or blockages downstream;
|
|
|
|
the potential requirement for large, expensive capital equipment
used in conjunction with the procedure; and
|
|
|
|
the potential requirement for extensive use of fluoroscopy and
increased emitted radiation exposure for physicians and patients
during the procedure.
|
We believe that there is a significant market opportunity for a
technology that opens lumens, similar to the lumen sizes
achieved with angioplasty and stenting, in a simple, fast,
cost-effective procedure that avoids the risks and potential
restenosis associated with those procedures and addresses the
historical limitations of atherectomy technologies.
Our
Solution
The Diamondback 360° represents a new approach to the
treatment of PAD that provides physicians and patients with a
procedure that addresses many of the limitations of traditional
treatment alternatives. The Diamondback 360°s
single-use catheter incorporates a flexible drive shaft with an
offset crown coated with diamond grit. Physicians position the
crown at the site of an arterial plaque lesion and remove the
plaque by causing the crown to orbit against it, creating a
smooth lumen, or channel, in the vessel. The Diamondback
360° is a rotational atherectomy catheter designed to
differentiate between plaque and compliant arterial tissue, a
concept that we refer to as differential sanding.
The particles of plaque resulting from differential sanding are
generally smaller than red blood cells and are carried away by
the blood stream. As the physician increases the rotational
speed of the drive shaft, the crown not only rotates faster but
also, due to centrifugal force, begins to orbit with an
increasing circumference. The Diamondback 360° can create a
lumen that is approximately 100% larger than the
56
actual diameter of the device, for a device-to-lumen ratio of
1.0 to 2.0. By giving physicians the ability to create different
lumen diameters with a change in rotational speed, the
Diamondback 360° can reduce the need to use multiple
catheters of different sizes to treat a single lesion, thus
reducing hospital inventory costs and procedure times.
We believe that the Diamondback 360° offers the following
key benefits:
Strong
Safety Profile
|
|
|
|
|
Differential Sanding Reduces Risk of Adverse
Events. The Diamondback 360° is designed to
differentiate between plaque and compliant arterial tissue. The
diamond grit coated offset crown engages and removes plaque from
the artery wall with minimal likelihood of penetrating or
damaging the fragile, internal elastic lamina layer of the
arterial wall because compliant tissue flexes away from the
crown. Furthermore, the Diamondback 360° rarely penetrates
even the middle inside layer of the artery and the two elastic
layers that border it. The Diamondback 360°s
perforation rates were 1.6% during our pivotal OASIS trial.
Analysis by an independent pathology laboratory of more than 436
consecutive cross sections of porcine arteries treated with the
Diamondback 360° revealed there was minimal to no damage,
on average, to the medial layer, which is typically associated
with restenosis. In addition, the safety profile of the
Diamondback 360° was found to be non-inferior to that of
angioplasty, which is often considered the safest of
interventional methods. This was demonstrated in our OASIS
trial, which had a 4.8% rate of device-related serious adverse
events, or SAEs.
|
|
|
|
Reduces the Risk of Distal Embolization. The
Diamondback 360° sands plaque away from artery walls in a
manner that produces particles of such a small size
generally smaller than red blood cells that they are
carried away by the blood stream. The small size of the
particles avoids the need for plaque collection reservoirs on
the catheter and reduces the need for ancillary distal
protection devices, commonly used with directional cutting
atherectomy, and also significantly reduces the risk that larger
pieces of removed plaque will block blood flow downstream.
|
|
|
|
Allows Continuous Blood Flow During
Procedure. The Diamondback 360° allows for
continuous blood flow during the procedure, except when used in
chronic total occlusions. Other atherectomy devices may restrict
blood flow due to the size of the catheter required or the use
of distal protection devices, which could result in
complications such as excessive heat and tissue damage.
|
Proven
Efficacy
|
|
|
|
|
Efficacy Demonstrated in a 124-Patient Clinical
Trial. Our pivotal OASIS clinical trial was a
prospective 20-center study that involved 124 patients with
201 lesions and performance targets established cooperatively
with the FDA before the trial began. Despite 55% of the lesions
consisting of calcified plaque and 48% of the lesions having a
length greater than three centimeters, the performance of the
device in the OASIS trial met or outperformed the FDAs
efficacy targets.
|
|
|
|
Treats Difficult and Calcified Lesions. The
Diamondback 360° enables physicians to remove plaque from
long, calcified or bifurcated lesions in peripheral arteries
both above and below the knee. Existing PAD devices have
demonstrated limited effectiveness in treating calcified lesions.
|
|
|
|
Orbital Motion Improves Device-to-Lumen
Ratio. The orbiting action of the Diamondback
360° can create a lumen of approximately 2.0 times the
diameter of the crown. The variable device-to-lumen ratio allows
the continuous removal of plaque as the opening of the lumen
increases during the operation of the device. Other rotational
atherectomy catheters remove plaque by abrading the lesion with
a spinning, abrasive burr, which acts in a manner similar to a
drill and only creates a lumen the same size or slightly smaller
than the size of the burr.
|
|
|
|
Differential Sanding Creates Smooth
Lumens. The differential sanding of the
Diamondback 360° creates a smooth surface inside the lumen.
This feature reduces the need to introduce a balloon after
treatment to improve the surface of the artery, which is
commonly done after cutting atherectomy. We believe that the
|
57
|
|
|
|
|
smooth lumen created by the Diamondback 360° increases the
velocity of blood flow and decreases the resistance to blood
flow which may decrease potential for restenosis, or renarrowing
of the arteries.
|
Ease
of Use
|
|
|
|
|
Utilizes Familiar Techniques. Physicians using
the Diamondback 360° employ techniques similar to those
used in angioplasty, which are familiar to interventional
cardiologists, vascular surgeons and interventional radiologists
who are trained in endovascular techniques. The Diamondback
360°s simple user interface requires minimal
additional training and technique. The systems ability to
differentiate between diseased and compliant tissue reduces the
risk of complications associated with user error and potentially
broadens the user population beyond those currently using
atherectomy devices.
|
|
|
|
Single Insertion to Complete Treatment. The
Diamondback 360°s orbital technology and differential
sanding process in most cases allows for a single insertion to
treat lesions. Because the particles of plaque sanded away are
of such small sizes, the Diamondback 360° does not require
a collection reservoir that needs to be repeatedly emptied or
cleaned during the procedure. Rather, the Diamondback 360°
allows for multiple passes of the device over the lesion until
plaque is removed and a smooth lumen is created.
|
|
|
|
Limited Use of Fluoroscopy. The relative
simplicity of our process and predictable crown location allows
physicians to significantly reduce fluoroscopy use, thus
limiting radiation exposure.
|
Cost
and Time Efficient Procedure
|
|
|
|
|
Single Crown Can Create Various Lumen Sizes Limiting Hospital
Inventory Costs. The Diamondback 360°s
orbital mechanism of action allows a single-sized device to
create various diameter lumens inside the artery. Adjusting the
rotational speed of the crown changes the orbit to create the
desired lumen diameter, thereby potentially avoiding the need to
use multiple catheters of different sizes. The Diamondback
360° can create a lumen that is 100% larger than the actual
diameter of the device, for a device-to-lumen ratio of
approximately 1.0 to 2.0.
|
|
|
|
Less Expensive Capital Equipment. The control
unit used in conjunction with the Diamondback 360° has a
current retail list price of $20,000, significantly less than
the cost of capital equipment used with laser atherectomy, which
may cost from $125,000 to more than $150,000.
|
|
|
|
Single Insertion Reduces Procedural
Time. Since the physician does not need to insert
and remove multiple catheters or clean a plaque collection
reservoir to complete the procedure, there is a potential for
decreased procedure time.
|
Our
Strategy
Our goal is to be the leading provider of minimally invasive
solutions for the treatment of vascular disease. The key
elements of our strategy include:
|
|
|
|
|
Drive Adoption with Key Opinion Leaders Through Direct Sales
Organization. We expect to continue to drive
adoption of the Diamondback 360° through our direct sales
force, which targets interventional cardiologists, vascular
surgeons and interventional radiologists. Initially, we plan to
focus primarily on key opinion leaders who are early adopters of
new technology and can assist in peer-to-peer selling. We
commenced a limited commercial introduction in September 2007
and as of April 30, 2008 had 54 direct sales
representatives. We have broadened our commercialization efforts
to a full commercial launch in the quarter ended March 31,
2008 and have added additional sales representatives. As a key
element of our strategy, we focus on educating and training
physicians on the Diamondback 360° through seminars where
industry leaders discuss case studies and treatment techniques
using the Diamondback 360°.
|
|
|
|
|
|
Collect Additional Clinical Evidence on Benefits of the
Diamondback 360°. We are focused on using
clinical evidence to demonstrate the advantages of our system
and drive physician acceptance. We have conducted three clinical
trials to demonstrate the safety and efficacy of the Diamondback
360° in treating PAD, involving 207 patients,
including our pivotal OASIS trial. We have requested clinical
data from each
|
58
|
|
|
|
|
subsequent use of the system following these clinical trials.
These data are tabulated and disseminated internally to our
sales, marketing and research and development departments in an
effort to better understand the systems performance,
identify any potential trends in the data, and drive product
improvements. The data are also presented to groups of
physicians for their education, comments and feedback. We are
considering other clinical studies to further demonstrate the
advantages of the Diamondback 360° but have not yet
undertaken any additional studies.
|
|
|
|
|
|
Expand Product Portfolio within the Market for Treatment of
Peripheral Arteries. We are currently developing
a new product generation to further reduce treatment times and
allow treatment of larger vessels.
|
|
|
|
Leverage Technology Platform into Coronary
Market. We have initiated preclinical studies
investigating the use of the Diamondback 360° in the
treatment of coronary artery disease. We believe that the key
product attributes of the Diamondback 360° will also
provide substantial benefits in treating the coronary arteries,
subject to FDA approval.
|
|
|
|
Pursue Strategic Acquisitions and
Partnerships. In addition to adding to our
product portfolio through internal development efforts, we
intend to explore the acquisition of other product lines,
technologies or companies that may leverage our sales force or
complement our strategic objectives. We may also evaluate
distribution agreements, licensing transactions and other
strategic partnerships.
|
Our
Product
Components
of the Diamondback 360°
The Diamondback 360° consists of a single-use, low-profile
catheter that travels over our proprietary ViperWire guidewire.
The system is used in conjunction with an external control unit.
Catheter. The catheter consists of:
|
|
|
|
|
a control handle, which allows precise movement of the crown and
predictable crown location;
|
|
|
|
a flexible drive shaft with a diamond grit coated offset crown,
which tracks and orbits over the guidewire; and
|
|
|
|
a sheath, which covers the drive shaft and permits delivery of
saline or medications to the treatment area.
|
The crown is available in multiple sizes, including 1.25, 1.50,
1.75, 2.00 and 2.25 mm diameters. The catheter is available in
two lengths, 95 cm and 135 cm, to address procedural approach
and target lesion location.
ViperWire Guidewire. The ViperWire, which is
located within the catheter, maintains device position in the
vessel and is the rail on which the catheter operates. The
ViperWire is available in three levels of firmness.
Control Unit. The control unit incorporates a
touch-screen interface on an easily maneuverable, lightweight
pole. Using an external air supply, the control unit regulates
air pressure to drive the turbine located in the catheter handle
to speeds ranging up to 200,000 revolutions per minute. Saline,
delivered by a pumping mechanism on the control unit, bathes the
device shaft and crown. The constant flow of saline reduces the
risk of heat generation.
59
The following diagram depicts the components of the Diamondback
360°:
Technology
Overview
The two technologies used in the Diamondback 360° are
orbital atherectomy and differential sanding.
Orbital Atherectomy. The system operates on
the principles of centrifugal force. As the speed of the
crowns rotation increases, it creates centrifugal force,
which increases the crowns orbit and presses the diamond
grit coated offset crown against the lesion or plaque, removing
a small amount of plaque with each orbit. The characteristics of
the orbit and the resulting lumen size can be adjusted by
modifying three variables:
|
|
|
|
|
Speed. An increase in speed creates a larger
lumen. Our current system allows the user to choose between
three rotational speeds. The fastest speed can result in a
device-to-lumen ratio of 1.0 to 2.0, for a lumen that is
approximately 100% larger than the actual diameter of the device.
|
|
|
|
Crown Characteristics. The crown can be
designed with various weights (as determined by different
materials and density) and coated with diamond grit of various
width, height and configurations. Our current system offers the
choice between a hollow, lightweight crown and a solid, heavier
crown, which could potentially increase the device-to-lumen
ratio.
|
|
|
|
Drive Shaft Characteristics. The drive shaft
can be designed with various shapes and degrees of rigidity. We
are developing a drive shaft that we call the
Sidewinder, which is a heat-set, pre-bent shaft.
When the guidewire is inserted into the Sidewinder, the shaft is
straightened, allowing for deliverability to the lesion.
However, the propensity of the Sidewinders pre-bent shaft
to return to its bent shape creates a larger diameter orbit,
which will potentially allow for the creation of a larger lumen.
We are also developing a version of our shaft that has a diamond
grit coated tip for ease of penetrating a chronic total
occlusion.
|
We view the Diamondback 360° as a platform that can be used
to develop additional products by adjusting one or more of the
speed, crown and shaft variables.
Differential Sanding. The Diamondback
360°s design allows the device to differentiate
between compliant and diseased arterial tissue. This property is
common with sanding material such as the diamond grit used in
the Diamondback
360o.
The diamond preferentially engages and sands harder material.
The Diamondback 360° also treats soft plaque, which is less
compliant than a normal vessel wall. Arterial lesions tend to be
harder and stiffer than compliant, undiseased tissue, and they
often are calcified, and the Diamondback
360o
sands the lesion but does not damage more compliant parts of the
artery. The mechanism is a function of the centrifugal force
generated by the Diamondback
360o
as it rotates. As the crown moves outward, the centrifugal force
is offset by the counterforce exerted by the arterial wall. If
the tissue is compliant, it flexes away, rather than generating
an opposing force that would allow the Diamondback
360o
to engage and sand the wall. Diseased tissue, particularly
heavily calcified lesions, provides resistance and is able to
generate an opposing force that allows the Diamondback
360o
to engage and sand the plaque. The sanded plaque is broken down
into particles generally smaller than circulating red blood
60
cells that are washed away downstream with the patients
natural blood flow. Of 36 consecutive experiments that we
performed in carbon blocks, animal and cadaver models:
|
|
|
|
|
93.1% of particles were smaller than a red blood cell, with a
99% confidence interval; and
|
|
|
|
99.3% of particles were smaller than the lumen of the
capillaries (which provide the connection between the arterial
and venous system), with a 99% confidence interval.
|
The small particle size minimizes the risk of vascular bed
overload, or a saturation of the peripheral vessels with large
particles, which may cause slow or reduced blood flow to the
foot. We believe that the small size of the particle also allows
it to be managed by the bodys natural cleansing of the
blood, whereby various types of white blood cells eliminate
worn-out cells and other debris in the bloodstream.
One of our competitors claims that its rotational atherectomy
catheter is also able to differentiate between compliant and
diseased tissue.
Applications
The Diamondback 360° can be delivered to the lesion by a
single physician, and on average required three minutes to treat
a lesion in our OASIS trial.
Below-the-Knee Peripheral Artery
Disease. Arteries below the knee have small
diameters and may be diffusely diseased, calcified or both,
limiting the effectiveness of traditional atherectomy devices.
The Diamondback 360° is effective in both diffuse and
calcified vessels as demonstrated in the OASIS trial, where
94.5% of lesions treated were below the knee.
Above-the-Knee Peripheral Artery
Disease. Plaque in arteries above the knee may
also be diffuse and calcific; however, these arteries are
longer, straighter and wider than below-the-knee vessels. While
effective in difficult-to-treat below-the-knee vessels, and
indicated for vessels up to four millimeters in diameter, our
product is also being used to treat lesions above the knee, in
particular, calcified lesions. We intend to seek expanded
labeling from the FDA for treatment of vessels larger than four
millimeters in diameter before the end of 2009. The Millennium
Research Group estimates that there will be approximately
258,600 procedures to treat above-the-knee PAD in 2008 and that
there will be approximately 71,220 procedures to treat
below-the-knee PAD in 2008.
Coronary Artery Disease. Given the many
similarities between peripheral and coronary artery disease, we
have developed and are completing pre-clinical testing of a
modified version of the Diamondback 360° to treat coronary
arteries. We have conducted numerous bench studies and four
pre-clinical animal studies to evaluate the Diamondback
360o
in coronary artery disease. In the bench studies, we evaluated
the system for conformity to specifications and patient safety,
and under conditions of expected clinical use no safety issues
were observed. In three of the animal studies, the system was
used to treat a large number of stented and non-stented arterial
lesions. The system was able to safely debulk lesions without
evidence or observations of significant distal embolization, and
the treated vessels in the animal studies showed only minimal to
no damage. The fourth animal study evaluated the safety of the
system for the treatment of coronary stenosis. There were no
device-related
adverse events associated with system treatment during this
study, with some evidence of injury observed in 17% of the
tissue sections analyzed, although 75% of these injuries were
minimal or mild. A coronary application would require us to
conduct a clinical trial and receive PMA from the FDA. We
participated in a pre-IDE meeting with the FDA and expect to
submit our IDE application following completion of our
pre-clinical testing.
Clinical
Trials and Studies for our Products
We have conducted three clinical trials to demonstrate the
safety and efficacy of the Diamondback 360° in treating
PAD, enrolling a total of 207 patients in our PAD I and PAD
II pilot trials and our pivotal OASIS trial.
61
The common metrics used to evaluate the efficacy of atherectomy
devices for PAD include:
|
|
|
Metric
|
|
Description
|
|
Absolute Plaque Reduction
|
|
Absolute plaque reduction is the difference between the
pre-treatment percent stenosis, or the narrowing of the vessel,
and the post-treatment percent stenosis as measured
angiographically.
|
Target Lesion Revascularization
|
|
Target lesion revascularization rate, or TLR rate, is the
percentage of patients at
follow-up
who have another peripheral intervention precipitated by their
worsening symptoms, such as an angioplasty, stenting or surgery
to reopen the treated lesion site.
|
Ankle Brachial Index
|
|
The Ankle Brachial Index, or ABI, is a measurement that is
useful to evaluate the adequacy of circulation in the legs and
improvement or worsening of leg circulation over time. The ABI
is a ratio between the blood pressure in a patients ankle
and a patients arm, with a ratio above 0.9 being normal.
|
The common metrics used to evaluate the safety of atherectomy
devices for PAD include:
|
|
|
Metric
|
|
Description
|
|
Serious Adverse Events
|
|
Serious adverse events, or SAEs, include any experience that is
fatal or life-threatening, is permanently disabling, requires or
prolongs hospitalization, or requires intervention to prevent
permanent impairment or damage. SAEs may or may not be related
to the device.
|
Perforations
|
|
Perforations occur when the artery is punctured during
atherectomy treatment. Perforations may be nonserious or an SAE
depending on the treatment required to repair the perforation.
|
Inclusion criteria for trials often limit size of lesion and
severity of disease, as measured by the Rutherford Class, which
utilizes a scale of I to VI, with I being mild and VI being most
severe, and the Ankle Brachial Index.
PAD I
Feasibility Trial
Our first trial was a two-site, 17-patient feasibility clinical
trial in Europe, which we refer to as PAD I, that began in
March 2005. Patients enrolled in the trial had lesions that were
less than 10 cm in length in arteries between 1.5 mm and 6.0 mm
in diameter, with Rutherford Class scores of IV or lower.
Patients were evaluated at the time of the procedure and at
30 days following treatment. The purpose of PAD I was to
obtain the first human clinical experience and evaluate the
safety of the Diamondback 360°. This was determined by
estimating the cumulative incidence of patients experiencing one
or more SAEs within 30 days post-treatment.
The results of PAD I were presented at the Transcatheter
Therapeutics conference, or TCT, in 2005 and published in
American Journal of Cardiology. Results confirmed that the
Diamondback 360° and orbital atherectomy were safe and
established that the Diamondback 360° could be used to
treat vessels in the range of 1.5 mm to 4.0 mm, which are found
primarily below the knee. Also, PAD I showed that effective
debulking, or removal of plaque, could be accomplished and the
resulting device-to-lumen ratio was approximately 1.0 to 2.0.
The SAE rate in PAD I was 6% (one of 17 patients).
62
PAD II
Feasibility Trial
After being granted the CE Mark in May 2005, we began a
66-patient European clinical trial at seven sites, which we
refer to as PAD II, in August 2005. All patients had stenosis in
vessels below the femoral artery of between 1.5 mm and 4.0 mm in
diameter, with at least 50% blockage. The primary objectives of
this study were to evaluate the acute (30 days or less)
risk of experiencing an SAE post procedure and provide evidence
of device effectiveness. Effectiveness was confirmed
angiographically and based on the percentage of absolute plaque
reduction.
The PAD II results demonstrated safe and effective debulking in
vessels with diameters ranging from 1.5 mm to 4.0 mm with a mean
absolute plaque reduction of 55%. The SAE rate in PAD II was 9%
(six of 66 patients), which did not differ significantly
from existing non-invasive treatment options.
OASIS
Pivotal Trial
We received an IDE to begin our pivotal United States trial,
OASIS, in September 2005. OASIS was a 124-patient, 20-center,
prospective trial that began enrollment in January 2006.
Patients included in the trial had:
|
|
|
|
|
an ABI of less than 0.9;
|
|
|
|
a Rutherford Class score of V or lower; and
|
|
|
|
treated arteries of between 1.5 mm and 4.0 mm or less in
diameter via angiogram measurement, with a
well-defined
lesion of at least 50% diameter stenosis and lesions of no
greater than 10.0 cm in length.
|
The primary efficacy study endpoint was absolute plaque
reduction of the target lesions from baseline to immediately
post procedure. The primary safety endpoint was the cumulative
incidence of SAEs at 30 days.
In the OASIS trial, 94.5% of lesions treated were below the
knee, an area where lesions have traditionally gone untreated
until they require bypass surgery or amputation. Of the lesions
treated in OASIS, 55% were comprised of calcified plaque which
presents a challenge to proper expansion and apposition of
balloons and stents, and 48% were diffuse, or greater then 3 cm
in length, which typically requires multiple balloon expansions
or stent placements. Competing atherectomy devices are often
ineffective with these difficult to treat lesions.
The average time of treatment in the OASIS trial was three
minutes per lesion, which compares favorably to the treatment
time required by other atherectomy devices. We believe
physicians using other atherectomy devices require approximately
ten to 20 minutes of treatment time to achieve desired
results, although treatment times may vary depending upon the
nature of the procedure, the condition of the patient and other
factors. The following table is a summary of the OASIS trial
results:
|
|
|
|
|
Item
|
|
FDA Target
|
|
OASIS Result
|
|
Absolute Plaque Reduction
|
|
55%
|
|
59.4%
|
SAEs at 30 days
|
|
8% mean, with an upper bound of 16%
|
|
4.8% mean, device-related 9.7% mean, overall
|
TLR
|
|
20% or less
|
|
2.4%
|
Perforations
|
|
N/A
|
|
1 serious perforation
|
ABI at baseline
|
|
N/A
|
|
0.68 ± 0.2*
|
ABI at 30 days
|
|
N/A
|
|
0.9 ± 0.18*
|
ABI at 6 months
|
|
N/A
|
|
0.83 ± 0.23*
|
|
|
|
*
|
|
Mean ± Standard Deviation
|
We submitted our OASIS data and received 510(k) clearance from
the FDA for use of the Diamondback 360°, including the
initial version of the control unit, with a hollow crown as a
therapy for patients with PAD in August 2007. The FDAs
labeling requirements reflected the inclusion criteria for the
OASIS trial listed above. We received 510(k) clearances in
October 2007 for the updated control unit used with the
Diamondback 360° and in November
63
2007 for the Diamondback 360° with a solid crown. In
May 2005, we received the CE mark, allowing for the
commercial use of the Diamondback 360° within the European
Union; however, our current plans are to focus sales in the
United States.
Sales and
Marketing
We market and sell the Diamondback 360° through a direct
sales force in the United States. As of April 30, 2008, we
had a
67-person
direct sales force, including 54 district sales managers, eight
area sales managers, three sales directors, a national training
manager, a director of field operations, a director of customer
operations, and a customer service specialist, all of whom
report to our Vice President of Sales. Upon receiving 510(k)
clearance from the FDA on August 30, 2007, we began limited
commercialization of the Diamondback 360° in September
2007. We commenced our full commercial launch in the quarter
ended March 31, 2008.
While we sell directly to hospitals, we have targeted our
initial sales and marketing efforts to thought-leading
interventional cardiologists, vascular surgeons and
interventional radiologists with experience using similar
catheter-based procedures, such as angioplasty and cutting or
laser atherectomy. Physician referral programs and peer-to-peer
education are other key elements of our sales strategy. Patient
referrals come from general practitioners, podiatrists,
nephrologists and endocrinologists.
We target our marketing efforts to practitioners through
physician education, medical conferences, seminars, peer
reviewed journals and marketing materials. Our sales and
marketing program focuses on:
|
|
|
|
|
educating physicians regarding the proper use and application of
the Diamondback 360°;
|
|
|
|
developing relationships with key opinion leaders; and
|
|
|
|
facilitating regional referral marketing programs.
|
We are not marketing our products internationally and we do not
expect to do so in the near future; however, we will continue to
evaluate international opportunities.
Research
and Development
As of April 30, 2008, we had 27 employees in our
research and development department, comprised primarily of
scientists, engineers and physicians, all of whom report to our
Executive Vice President. Our research and development efforts
are focused in the development of products to penetrate our
three key target markets: below-the-knee, above-the knee and
coronary vessels. Research and development expenses for fiscal
2005, fiscal 2006 and fiscal 2007 were $2.4 million,
$3.2 million and $8.4 million, respectively, and for
the nine months ended March 31, 2007 and 2008 were
$4.4 million and $10.7 million, respectively.
Manufacturing
We use internally-manufactured and externally-sourced components
to manufacture the Diamondback 360°. Most of the
externally-sourced components are available from multiple
suppliers; however, a few key components, including the diamond
grit coated crown, are single sourced. We assemble the shaft,
crown and handle components
on-site, and
test, pack, seal and label the finished assembly before sending
the packaged product to a contract sterilization facility. The
sterilization facility sends samples to an independent
laboratory to test for sterility. Upon return from the
sterilizer, product is held in inventory prior to shipping to
our customers.
The current floor plan at our manufacturing facility allows for
finished goods of approximately 8,000 units of the
Diamondback 360° and for approximately 50 control units.
The manufacturing areas, including the shaft manufacturing and
the controlled-environment assembly areas, are equipped to
accommodate approximately 30,000 units per shift annually.
We are registered with the FDA as a medical device manufacturer.
We have opted to maintain quality assurance and quality
management certifications to enable us to market our products in
the member states of the European Union, the European Free Trade
Association and countries that have entered into Mutual
Recognition Agreements
64
with the European Union. We are ISO 13485:2003 certified, and
our renewal is due by December 2009. During our time of
commercialization, we have not had any instances requiring
consideration of a recall.
Third-Party
Reimbursement and Pricing
Third-party payors, including private insurers, and government
insurance programs, such as Medicare and Medicaid, pay for a
significant portion of patient care provided in the United
States. The single largest payor in the United States is the
Medicare program, a federal governmental health insurance
program administered by the Centers for Medicare and Medicaid
Services, or CMS. Medicare covers certain medical care expenses
for eligible elderly and disabled individuals, including a large
percentage of the population with PAD who could be treated with
the Diamondback 360°. In addition, private insurers often
follow the coverage and reimbursement policies of Medicare.
Consequently, Medicares coverage and reimbursement
policies are important to our operations.
CMS has established Medicare reimbursement codes describing
atherectomy products and procedures using atherectomy products,
and many private insurers follow these policies. We believe that
physicians and hospitals that treat PAD with the Diamondback
360° will generally be eligible to receive reimbursement
from Medicare and private insurers for the cost of the
single-use catheter and the physicians services.
The continued availability of insurance coverage and
reimbursement for newly approved medical devices is uncertain.
The commercial success of our products in both domestic and
international markets will be dependent on whether third-party
coverage and reimbursement is available for patients that use
our products and our monitoring services. Medicare, Medicaid,
health maintenance organizations and other third-party payors
are increasingly attempting to contain healthcare costs by
limiting both coverage and the level of reimbursement of new
medical devices, and, as a result, they may not continue to
provide adequate payment for our products. To position our
device for acceptance by third-party payors, we may have to
agree to a lower net sales price than we might otherwise charge.
The continuing efforts of governmental and commercial
third-party payors to contain or reduce the costs of healthcare
may limit our revenue.
In some foreign markets, pricing and profitability of medical
devices are subject to government control. In the United States,
we expect that there will continue to be federal and state
proposals for similar controls. Also, the trends toward managed
healthcare in the United States and proposed legislation
intended to reduce the cost of government insurance programs
could significantly influence the purchase of healthcare
services and products and may result in lower prices for our
products or the exclusion of our products from reimbursement
programs.
Competition
The medical device industry is highly competitive, subject to
rapid change and significantly affected by new product
introductions and other activities of industry participants. The
Diamondback 360° competes with a variety of other products
or devices for the treatment of vascular disease, including
stents, balloon angioplasty catheters and atherectomy catheters,
as well as products used in vascular surgery. Large competitors
in the stent and balloon angioplasty market segments include
Abbott Laboratories, Boston Scientific, Cook,
Johnson & Johnson and Medtronic. We also compete
against manufacturers of atherectomy catheters including, among
others, ev3, Spectranetics and Boston Scientific, as well as
other manufacturers that may enter the market due to the
increasing demand for treatment of vascular disease. Several
other companies provide products used by surgeons in peripheral
bypass procedures. Other competitors include pharmaceutical
companies that manufacture drugs for the treatment of mild to
moderate PAD and companies that provide products used by
surgeons in peripheral bypass procedures. We are not aware of
any competing catheter systems either currently on the market or
in development that also use an orbital motion to create lumens
larger than the catheter itself.
Because of the size of the peripheral and coronary market
opportunities, competitors and potential competitors have
historically dedicated significant resources to aggressively
promote their products. We believe that the Diamondback
360° competes primarily on the basis of:
|
|
|
|
|
safety and efficacy;
|
|
|
|
predictable clinical performance;
|
65
|
|
|
|
|
ease of use;
|
|
|
|
price;
|
|
|
|
physician relationships;
|
|
|
|
customer service and support; and
|
|
|
|
adequate third-party reimbursement.
|
Patents
and Intellectual Property
We rely on a combination of patent, copyright and other
intellectual property laws, trade secrets, nondisclosure
agreements and other measures to protect our proprietary rights.
As of April 30, 2008, we held 20 issued U.S. patents
and have 15 U.S. patent applications pending, as well as 27
issued foreign patents and 20 foreign patent applications, each
of which corresponds to aspects of our U.S. patents and
applications. Our issued U.S. patents expire between 2010
and 2021, and our most important patent, U.S. Patent
No. 6,494,890, is due to expire in 2017. Our issued patents
and patent applications relate primarily to the design and
operation of certain interventional atherectomy devices,
including the Diamondback 360°. These patents and
applications include claims covering key aspects of certain
rotational atherectomy devices including the design, manufacture
and therapeutic use of certain atherectomy abrasive heads, drive
shafts, control systems, handles and couplings. As we continue
to research and develop our atherectomy technology, we intend to
file additional U.S. and foreign patent applications
related to the design, manufacture and therapeutic uses of
atherectomy devices. In addition, we hold two registered
U.S. trademarks and have three U.S. trademark
applications pending.
We also rely on trade secrets, technical know-how and continuing
innovation to develop and maintain our competitive position. We
seek to protect our proprietary information and other
intellectual property by requiring our employees, consultants,
contractors, outside scientific collaborators and other advisors
to execute non-disclosure and assignment of invention agreements
on commencement of their employment or engagement. Agreements
with our employees also forbid them from bringing the
proprietary rights of third parties to us. We also require
confidentiality or material transfer agreements from third
parties that receive our confidential data or materials.
Government
Regulation of Medical Devices
Governmental authorities in the United States at the federal,
state and local levels and in other countries extensively
regulate, among other things, the research, development,
testing, manufacture, labeling, promotion, advertising,
distribution, marketing and export and import of medical devices
such as the Diamondback 360°. Failure to obtain approval to
market our products under development and to meet the ongoing
requirements of these regulatory authorities could prevent us
from marketing and continuing to market our products.
United
States
The Federal Food, Drug, and Cosmetic Act, or FDCA, and the
FDAs implementing regulations govern medical device design
and development, preclinical and clinical testing, premarket
clearance or approval, registration and listing, manufacturing,
labeling, storage, advertising and promotion, sales and
distribution, export and import, and post-market surveillance.
Medical devices and their manufacturers are also subject to
inspection by the FDA. The FDCA, supplemented by other federal
and state laws, also provides civil and criminal penalties for
violations of its provisions. We manufacture and market medical
devices that are regulated by the FDA, comparable state agencies
and regulatory bodies in other countries.
Unless an exemption applies, each medical device we wish to
commercially distribute in the United States will require
marketing authorization from the FDA prior to distribution. The
two primary types of FDA marketing authorization are premarket
notification (also called 510(k) clearance) and premarket
approval (also called PMA approval). The type of marketing
authorization applicable to a device 510(k)
clearance or PMA approval is generally linked to
classification of the device. The FDA classifies medical devices
into one of three classes (Class I, II or
III) based on the degree of risk FDA determines to be
associated with a device and the extent of control deemed
necessary to ensure the devices safety and effectiveness.
Devices requiring fewer controls because they are deemed to pose
lower
66
risk are placed in Class I or II. Class I devices are
deemed to pose the least risk and are subject only to general
controls applicable to all devices, such as requirements for
device labeling, premarket notification, and adherence to the
FDAs current good manufacturing practice requirements, as
reflected in its Quality System Regulation, or QSR.
Class II devices are intermediate risk devices that are
subject to general controls and may also be subject to special
controls such as performance standards, product-specific
guidance documents, special labeling requirements, patient
registries or postmarket surveillance. Class III devices
are those for which insufficient information exists to assure
safety and effectiveness solely through general or special
controls, and include life-sustaining, life-supporting or
implantable devices, and devices not substantially
equivalent to a device that is already legally marketed.
Most Class I devices and some Class II devices are
exempted by regulation from the 510(k) clearance requirement and
can be marketed without prior authorization from FDA.
Class I and Class II devices that have not been so
exempted are eligible for marketing through the 510(k) clearance
pathway. By contrast, devices placed in Class III generally
require PMA approval prior to commercial marketing. The PMA
approval process is generally more stringent, time-consuming and
expensive than the 510(k) clearance process.
510(k) Clearance. To obtain 510(k) clearance
for a medical device, an applicant must submit a premarket
notification to the FDA demonstrating that the device is
substantially equivalent to a predicate device
legally marketed in the United States. A device is substantially
equivalent if, with respect to the predicate device, it has the
same intended use and has either (i) the same technological
characteristics or (ii) different technological
characteristics and the information submitted demonstrates that
the device is as safe and effective as a legally marketed device
and does not raise different questions of safety or
effectiveness. A showing of substantial equivalence sometimes,
but not always, requires clinical data. Generally, the 510(k)
clearance process can exceed 90 days and may extend to a
year or more.
After a device has received 510(k) clearance for a specific
intended use, any modification that could significantly affect
its safety or effectiveness, such as a significant change in the
design, materials, method of manufacture or intended use, will
require a new 510(k) clearance or PMA approval (if the device as
modified is not substantially equivalent to a legally marketed
predicate device). The determination as to whether new
authorization is needed is initially left to the manufacturer;
however, the FDA may review this determination to evaluate the
regulatory status of the modified product at any time and may
require the manufacturer to cease marketing and recall the
modified device until 510(k) clearance or PMA approval is
obtained. The manufacturer may also be subject to significant
regulatory fines or penalties.
We received 510(k) clearance for use of the Diamondback
360° as a therapy in patients with PAD in the United States
on August 22, 2007. We received additional 510(k)
clearances for the control unit used with the Diamondback
360° on October 25, 2007 and for the solid crown
version of the Diamondback 360° on November 9, 2007.
Premarket Approval. A PMA application requires
the payment of significant user fees and must be supported by
valid scientific evidence, which typically requires extensive
data, including technical, preclinical, clinical and
manufacturing data, to demonstrate to the FDAs
satisfaction the safety and efficacy of the device. A PMA
application must also include a complete description of the
device and its components, a detailed description of the
methods, facilities and controls used to manufacture the device,
and proposed labeling. After a PMA application is submitted and
found to be sufficiently complete, the FDA begins an in-depth
review of the submitted information. During this review period,
the FDA may request additional information or clarification of
information already provided. Also during the review period, an
advisory panel of experts from outside the FDA may be convened
to review and evaluate the application and provide
recommendations to the FDA as to the approvability of the
device. In addition, the FDA will conduct a pre-approval
inspection of the manufacturing facility to ensure compliance
with the FDAs Quality System Regulations, or QSR, which
requires manufacturers to follow design, testing, control,
documentation and other quality assurance procedures.
FDA review of a PMA application is required by statute to take
no longer than 180 days, although the process typically
takes significantly longer, and may require several years to
complete. The FDA can delay, limit or deny approval of a PMA
application for many reasons, including:
|
|
|
|
|
the systems may not be safe or effective to the FDAs
satisfaction;
|
|
|
|
the data from preclinical studies and clinical trials may be
insufficient to support approval;
|
67
|
|
|
|
|
the manufacturing process or facilities used may not meet
applicable requirements; and
|
|
|
|
changes in FDA approval policies or adoption of new regulations
may require additional data.
|
If the FDA evaluations of both the PMA application and the
manufacturing facilities are favorable, the FDA will either
issue an approval letter or an approvable letter, which usually
contains a number of conditions that must be met in order to
secure final approval of the PMA. When and if those conditions
have been fulfilled to the satisfaction of the FDA, the agency
will issue a PMA approval letter authorizing commercial
marketing of the device for certain indications. If the
FDAs evaluation of the PMA or manufacturing facilities is
not favorable, the FDA will deny approval of the PMA or issue a
not approvable letter. The FDA may also determine that
additional clinical trials are necessary, in which case the PMA
approval may be delayed for several months or years while the
trials are conducted and then the data submitted in an amendment
to the PMA. Even if a PMA application is approved, the FDA may
approve the device with an indication that is narrower or more
limited than originally sought. The agency can also impose
restrictions on the sale, distribution or use of the device as a
condition of approval, or impose post approval requirements such
as continuing evaluation and periodic reporting on the safety,
efficacy and reliability of the device for its intended use.
New PMA applications or PMA supplements may be required for
modifications to the manufacturing process, labeling, device
specifications, materials or design of a device that is approved
through the PMA process. PMA approval supplements often require
submission of the same type of information as an initial PMA
application, except that the supplement is limited to
information needed to support any changes from the device
covered by the original PMA application and may not require as
extensive clinical data or the convening of an advisory panel.
We plan to seek PMA to use the Diamondback 360° as a
therapy in treating patients with coronary artery disease.
Clinical Trials. Clinical trials are almost
always required to support a PMA application and are sometimes
required for a 510(k) clearance. These trials generally require
submission of an application for an IDE to the FDA. The IDE
application must be supported by appropriate data, such as
animal and laboratory testing results, showing that it is safe
to test the device in humans and that the testing protocol is
scientifically sound. The IDE application must be approved in
advance by the FDA for a specified number of patients, unless
the product is deemed a non-significant risk device and eligible
for more abbreviated IDE requirements. Generally, clinical
trials for a significant risk device may begin once the IDE
application is approved by the FDA and the study protocol and
informed consent are approved by appropriate institutional
review boards at the clinical trial sites.
FDA approval of an IDE allows clinical testing to go forward but
does not bind the FDA to accept the results of the trial as
sufficient to prove the products safety and efficacy, even
if the trial meets its intended success criteria. With certain
exceptions, changes made to an investigational plan after an IDE
is approved must be submitted in an IDE supplement and approved
by FDA (and by governing institutional review boards when
appropriate) prior to implementation.
All clinical trials must be conducted in accordance with
regulations and requirements collectively known as good clinical
practice. Good clinical practices include the FDAs IDE
regulations, which describe the conduct of clinical trials with
medical devices, including the recordkeeping, reporting and
monitoring responsibilities of sponsors and investigators, and
labeling of investigation devices. They also prohibit promotion,
test marketing or commercialization of an investigational device
and any representation that such a device is safe or effective
for the purposes being investigated. Good clinical practices
also include the FDAs regulations for institutional review
board approval and for protection of human subjects (such as
informed consent), as well as disclosure of financial interests
by clinical investigators.
Required records and reports are subject to inspection by the
FDA. The results of clinical testing may be unfavorable or, even
if the intended safety and efficacy success criteria are
achieved, may not be considered sufficient for the FDA to grant
approval or clearance of a product. The commencement or
completion of any clinical
68
trials may be delayed or halted, or be inadequate to support
approval of a PMA application or clearance of a premarket
notification for numerous reasons, including, but not limited
to, the following:
|
|
|
|
|
the FDA or other regulatory authorities do not approve a
clinical trial protocol or a clinical trial (or a change to a
previously approved protocol or trial that requires approval),
or place a clinical trial on hold;
|
|
|
|
patients do not enroll in clinical trials or follow up at the
rate expected;
|
|
|
|
patients do not comply with trial protocols or experience
greater than expected adverse side effects;
|
|
|
|
institutional review boards and third-party clinical
investigators may delay or reject the trial protocol or changes
to the trial protocol;
|
|
|
|
third-party clinical investigators decline to participate in a
trial or do not perform a trial on the anticipated schedule or
consistent with the clinical trial protocol, investigator
agreements, good clinical practices or other FDA requirements;
|
|
|
|
third-party organizations do not perform data collection and
analysis in a timely or accurate manner;
|
|
|
|
regulatory inspections of the clinical trials or manufacturing
facilities, which may, among other things, require corrective
action or suspension or termination of the clinical trials;
|
|
|
|
changes in governmental regulations or administrative actions;
|
|
|
|
the interim or final results of the clinical trial are
inconclusive or unfavorable as to safety or efficacy; and
|
|
|
|
the FDA concludes that the trial design is inadequate to
demonstrate safety and efficacy.
|
Continuing Regulation. After a device is
approved and placed in commercial distribution, numerous
regulatory requirements continue to apply. These include:
|
|
|
|
|
establishment registration and device listing upon the
commencement of manufacturing;
|
|
|
|
the QSR, which requires manufacturers, including third-party
manufacturers, to follow design, testing, control, documentation
and other quality assurance procedure during medical device
design and manufacturing processes;
|
|
|
|
labeling regulations, which prohibit the promotion of products
for unapproved or off-label uses and impose other
restrictions on labeling and promotional activities;
|
|
|
|
medical device reporting regulations, which require that
manufacturers report to the FDA if a device may have caused or
contributed to a death or serious injury or malfunctioned in a
way that would likely cause or contribute to a death or serious
injury if malfunctions were to recur; and
|
|
|
|
corrections and removal reporting regulations, which require
that manufacturers report to the FDA field corrections and
product recalls or removals if undertaken to reduce a risk to
health posed by the device or to remedy a violation of the FDCA
caused by the device that may present a risk to health.
|
In addition, the FDA may require a company to conduct postmarket
surveillance studies or order it to establish and maintain a
system for tracking its products through the chain of
distribution to the patient level.
Failure to comply with applicable regulatory requirements,
including those applicable to the conduct of clinical trials,
can result in enforcement action by the FDA, which may lead to
any of the following sanctions:
|
|
|
|
|
warning letters or untitled letters;
|
|
|
|
fines, injunctions and civil penalties;
|
|
|
|
product recall or seizure;
|
|
|
|
unanticipated expenditures;
|
|
|
|
delays in clearing or approving or refusal to clear or approve
products;
|
|
|
|
withdrawal or suspension of FDA approval;
|
69
|
|
|
|
|
orders for physician notification or device repair, replacement
or refund;
|
|
|
|
operating restrictions, partial suspension or total shutdown of
production or clinical trials; and
|
|
|
|
criminal prosecution.
|
We and our contract manufacturers, specification developers and
suppliers are also required to manufacture our products in
compliance with current Good Manufacturing Practice, or GMP,
requirements set forth in the QSR. The QSR requires a quality
system for the design, manufacture, packaging, labeling,
storage, installation and servicing of marketed devices, and
includes extensive requirements with respect to quality
management and organization, device design, buildings,
equipment, purchase and handling of components, production and
process controls, packaging and labeling controls, device
evaluation, distribution, installation, complaint handling,
servicing and record keeping. The FDA enforces the QSR through
periodic announced and unannounced inspections that may include
the manufacturing facilities of subcontractors. If the FDA
believes that we or any of our contract manufacturers or
regulated suppliers is not in compliance with these
requirements, it can shut down our manufacturing operations,
require recall of our products, refuse to clear or approve new
marketing applications, institute legal proceedings to detain or
seize products, enjoin future violations or assess civil and
criminal penalties against us or our officers or other
employees. Any such action by the FDA would have a material
adverse effect on our business.
Fraud
and Abuse
Our operations will be directly, or indirectly through our
customers, subject to various state and federal fraud and abuse
laws, including, without limitation, the FDCA, federal
Anti-Kickback Statute and False Claims Act. These laws may
impact, among other things, our proposed sales, marketing and
education programs. In addition, these laws require us to screen
individuals and other companies, suppliers and vendors in order
to ensure that they are not debarred by the federal
government and therefore prohibited from doing business in the
healthcare industry.
The federal Anti-Kickback Statute prohibits persons from
knowingly and willfully soliciting, offering, receiving or
providing remuneration, directly or indirectly, in exchange for
or to induce either the referral of an individual, or the
furnishing or arranging for a good or service, for which payment
may be made under a federal healthcare program such as the
Medicare and Medicaid programs. Several courts have interpreted
the statutes intent requirement to mean that if any one
purpose of an arrangement involving remuneration is to induce
referrals of federal healthcare covered business, the statute
has been violated. The Anti-Kickback Statute is broad and
prohibits many arrangements and practices that are lawful in
businesses outside of the healthcare industry. Many states have
also adopted laws similar to the federal Anti-Kickback Statute,
some of which apply to the referral of patients for healthcare
items or services reimbursed by any source, not only the
Medicare and Medicaid programs.
The federal False Claims Act prohibits persons from knowingly
filing or causing to be filed a false claim to, or the knowing
use of false statements to obtain payment from, the federal
government. Various states have also enacted laws modeled after
the federal False Claims Act.
In addition to the laws described above, the Health Insurance
Portability and Accountability Act of 1996 created two new
federal crimes: healthcare fraud and false statements relating
to healthcare matters. The healthcare fraud statute prohibits
knowingly and willfully executing a scheme to defraud any
healthcare benefit program, including private payors. The false
statements statute prohibits knowingly and willfully falsifying,
concealing or covering up a material fact or making any
materially false, fictitious or fraudulent statement in
connection with the delivery of or payment for healthcare
benefits, items or services.
Voluntary industry codes, federal guidance documents and a
variety of state laws address the tracking and reporting of
marketing practices relative to gifts given and other
expenditures made to doctors and other healthcare professionals.
In addition to impacting our marketing and educational programs,
internal business processes will be affected by the numerous
legal requirements and regulatory guidance at the state, federal
and industry levels.
International
Regulation
International sales of medical devices are subject to foreign
government regulations, which may vary substantially from
country to country. The time required to obtain approval in a
foreign country may be longer or shorter than that required for
FDA approval and the requirements may differ. For example, the
primary regulatory
70
environment in Europe with respect to medical devices is that of
the European Union, which includes most of the major countries
in Europe. Other countries, such as Switzerland, have
voluntarily adopted laws and regulations that mirror those of
the European Union with respect to medical devices. The European
Union has adopted numerous directives and standards regulating
the design, manufacture, clinical trials, labeling and adverse
event reporting for medical devices. Devices that comply with
the requirements of a relevant directive will be entitled to
bear the CE conformity marking, indicating that the device
conforms to the essential requirements of the applicable
directives and, accordingly, can be commercially distributed
throughout European Union, although actual implementation of the
these directives may vary on a
country-by-country
basis. The method of assessing conformity varies depending on
the class of the product, but normally involves a combination of
submission of a design dossier, self-assessment by the
manufacturer, a third-party assessment and, review of the design
dossier by a Notified Body. This
third-party
assessment generally consists of an audit of the
manufacturers quality system and manufacturing site, as
well as review of the technical documentation used to support
application of the CE mark to ones product and possibly
specific testing of the manufacturers product. An
assessment by a Notified Body of one country within the European
Union is required in order for a manufacturer to commercially
distribute the product throughout the European Union. We
obtained CE marking approval for sale of the Diamondback
360° in May 2005.
Employees
As of April 30, 2008, we had 165 employees, including
40 employees in manufacturing, 67 employees in sales,
six employees in marketing, four employees in clinicals,
12 employees in general and administrative,
27 employees in research and development, and nine
employees in management. None of our employees are represented
by a labor union or parties to a collective bargaining
agreement, and we believe that our employee relations are good.
Facilities
Our principal executive offices are located in a
47,000 square foot facility located in St. Paul, Minnesota.
We have leased this facility through November 2012 with an
option to renew through November 2017. This facility
accommodates our research and development, sales, marketing,
manufacturing, finance and administrative activities. We believe
that our current premises are adequate for our current and
anticipated future needs through the next 12 months.
Legal
Proceedings
Shturman
Legal Proceedings
We are party to two legal proceedings relating to a dispute with
Dr. Leonid Shturman, our founder, and Shturman Medical
Systems, Inc., or SMS, a company owned by Dr. Shturman. The
proceedings relate to a Stock Purchase Agreement dated
June 30, 1998 between us and SMS, and
Dr. Shturmans employment agreement with us, dated
January 7, 2000. Pursuant to the Stock Purchase Agreement,
SMS purchased all the stock of our former Russian subsidiary,
ZAO Shturman Cardiology Systems, Russia. In exchange, SMS agreed
to transfer to us all present and future intellectual property
and know-how associated with atherectomy products and associated
accessory products that were developed by SMS and the Russian
subsidiary. Pursuant to the employment agreement,
Dr. Shturman was required to assign to us certain
inventions made by him. On or about November 2006, we
discovered that Dr. Shturman had sought patent protection
in the United Kingdom and with the World Intellectual Property
Organization as the sole inventor for technology relating to the
use of counterbalance weights with rotational atherectomy
devices, or the counterbalance technology, which we believe
should have been assigned to us under the Stock Purchase
Agreement and the employment agreement.
On August 16, 2007, we served and filed a Demand for
Arbitration against SMS alleging that we are the rightful owner
of the counterbalance technology, such technology must be
assigned to us, and SMSs failure to assign these
applications violated the assignment provision of the Stock
Purchase Agreement. On September 28, 2007, SMS filed a
Statement of Answer and Motion to Dismiss alleging that the
Stock Purchase Agreement had expired, thus ending
Dr. Shturmans obligation to assign atherectomy
technology. Following a hearing, the panel ruled on May 5,
2008 that the technology in question was developed pursuant to
the Stock Purchase Agreement and working relationship agreements
between the parties, and that SMS breached the agreements by
failing to transfer the technology to us in 2002. The panel
ordered SMS to transfer to us its interest in the technology.
SMS may attempt to appeal the decision.
71
Also on August 16, 2007, we filed a complaint in the
U.S. District Court in Minnesota against Dr. Shturman
for a breach of his employment agreement. Specifically, under
the employment agreement, Dr. Shturman was obligated to
assign any inventions for the diagnosis or treatment of coronary
or periphery vessels that were disclosed to patent attorneys or
otherwise documented by Dr. Shturman during the employment
term. We allege that Dr. Shturman researched and recorded
the counterbalance technology during the term of his employment
agreement and we are seeking judgment against Dr. Shturman
for breach of the employment agreement and a declaratory
judgment that we are the rightful owner of the counterbalance
technology. On October 31, 2007, Dr. Shturman filed an
answer and counterclaim against us and other co-defendants
asserting conversion, theft and unjust enrichment for the
alleged illegal removal and transport to the United States of
two drive shaft winding devices purportedly developed by
Shturman Cardiology Systems, Russia, as well as raising certain
affirmative defenses. We filed our answer on November 16,
2007. Currently, the parties are engaged in discovery. We are
defending this litigation vigorously and believe that
Dr. Shturmans counterclaims and affirmative defenses
are without merit.
ev3
Legal Proceedings
On December 28, 2007, ev3 Inc., ev3 Endovascular, Inc. and
FoxHollow Technologies, Inc., together referred to as the
Plaintiffs, filed a complaint in the Ramsey County District
Court for the State of Minnesota against us and Sean Collins and
Aaron Lew, who are former employees of FoxHollow currently
employed by us, as well as against unknown former employees of
Plaintiffs currently employed by us, referred to in the
complaint as John Does 1-10. The complaint asserts that
Messrs. Lew and Collins and John Does 1-10 violated
provisions of their employment agreements with FoxHollow
relating to FoxHollow confidential information. The complaint
also asserts that defendants Lew and John Does 1-10 violated
provisions of their employment agreements with FoxHollow barring
them from soliciting FoxHollow employees for a period of one
year following their departures from FoxHollow. The complaint
also alleges that Collins and Lew violated a common law duty of
loyalty to FoxHollow. The complaint further alleges that we,
Collins, Lew and John Does 1-10 misappropriated trade secrets of
the Plaintiffs, unfairly competed with the Plaintiffs, and
conspired to improperly solicit employees of FoxHollow or ev3
and to misappropriate trade secrets or confidential information
of FoxHollow or ev3. Finally, the complaint asserts that we
tortiously interfered with the alleged agreements between
FoxHollow and Collins, Lew and John Does 1-10.
The complaint stated that Plaintiffs were seeking an injunction
preventing Messrs. Collins and Lew and John Does 1-10 from
violating the terms of their agreements with FoxHollow;
preventing all defendants from maintaining, using, or disclosing
any information belonging to Plaintiffs and requiring them to
return any such information to Plaintiffs; preventing us from
employing Messrs. Collins and Lew and John Does 1-10 for a
period of one year; preventing all defendants from contacting
certain of Plaintiffs customers (referred to as Key
Opinion Leaders and Thought Leaders) for one
year; and, preventing us and our employees from soliciting or
hiring any of Plaintiffs current employees for a period of
one year. The complaint also stated that Plaintiffs were seeking
recovery of monetary damages in an amount greater than $50,000
and payment of their attorneys fees and costs.
We are defending this litigation vigorously. However, if we are
not successful in this litigation, we could be required to pay
substantial damages and could be subject to equitable relief
that could include a requirement that we terminate the
employment of certain employees, including certain key sales
personnel who were formerly employed by FoxHollow. In any event,
the defense of this litigation, regardless of the outcome, could
result in substantial legal costs and diversion of our
managements time and efforts from the operation of our
business.
Also on December 28, 2007, the Plaintiffs made two motions
to the court. The first motion was for an ex parte order
requiring preservation of documents, which the court granted on
December 28, 2007. The second motion was for a broad
temporary restraining order, which the court granted in part and
denied in part in an order dated January 10, 2008. The
court denied the request for an injunction requiring us to
terminate the employment of Messrs. Collins and Lew and of
approximately nine former employees of one or more of the
Plaintiffs who were hired by us in early 2008. The court also
denied the request for an injunction barring us from contacting
physicians who may also be FoxHollow Key Opinion Leaders or
Thought Leaders. In the same order, the court enjoined former
employees of ev3 or FoxHollow who are now employed with us from
disclosing trade secrets of ev3 or FoxHollow. The court also
directed that any of our employees who were both formerly
employed with any of the Plaintiffs and who signed a FoxHollow
employment agreement must not disclose the identity of FoxHollow
Key Opinion Leaders or Thought Leaders or use this information
to aid us. The court further ordered that any of these persons
must not
72
maintain, use or disclose any confidential information about the
FoxHollow Key Opinion Leaders or Thought Leaders that was
received while they were employed with FoxHollow. It also
directed that if any former employees of the Plaintiffs had
already disclosed or used the identity of FoxHollow Key Opinion
Leaders or Thought Leaders, they were required to advise the
persons to whom they made the disclosure in writing that this
information is confidential and may not be used by them or
disclosed to anyone. The court also ordered that if any employee
of ours who was formerly employed by FoxHollow or ev3 contacts
any physician who is a FoxHollow Key Opinion Leader or Thought
Leader, he must be able to trace, document and account, with
specificity, how he or she was able to identify such prospect
through information, records or documents obtained outside his
or her employment with Plaintiffs. The court further directed
that any of our employees who were formerly employed by
FoxHollow or ev3 and who are subject to a FoxHollow employee
nonsolicitation agreement must not be involved in soliciting or
recruiting any current employee of the Plaintiffs to leave that
employment or to accept employment with us. In the memorandum
accompanying the January 10, 2008 order, the court noted
that Mr. Collins admitted he took confidential sales
information just prior to the conclusion of his employment with
Plaintiffs in violation of his employment agreement, and noted
that Mr. Collins has indicated a willingness to return that
information to Plaintiffs.
On April 30, 2008, the court issued a Scheduling Order,
which sets forth a series of deadlines for phases of the case.
The Scheduling Order also provides that the case shall proceed
to mediation. The parties are directed to select a qualified
neutral by July 11, 2008 and to complete mediation by
September 19, 2008. The discovery phase of the lawsuit is
scheduled to terminate on September 19, 2008. Any
dispositive motions in the case must be heard by
October 24, 2008. The Scheduling Order provides that a
pre-trial/settlement conference will take place on
December 29, 2008. If necessary, at the conclusion of the
pre-trial/settlement conference, a trial date may be set during
the three-week trial block commencing February 9, 2009 and
ending February 27, 2009.
The Plaintiffs recently disclosed that they intend to file and
serve an amended complaint. We anticipate that the amended
complaint will be served and filed in the near future and we
believe that the amended complaint will add additional
defendants to the case, all of whom are our employees and were
formerly employed by one or more of the Plaintiffs. In the
proposed amended complaint, Plaintiffs seek to assert a variety
of claims against these additional defendants that are similar
to the claims that are already part of the case.
Our Diamondback 360° is, at least in some applications,
considered to be a direct competitor with one of
Plaintiffs products. Our current Chief Executive Officer,
Vice President of Sales, Vice President of Marketing and Vice
President of Business Development were formerly employed by
FoxHollow. These officers remain subject to confidentiality
provisions in their employment agreements with FoxHollow, but
the employee nonsolicitation provisions in their agreements with
FoxHollow have expired. Currently, 33 of the 67 members of our
sales department, or 49.3%, were formerly employed by one or
more of the Plaintiffs.
We believe the January 10, 2008 court order and the
continuing confidentiality obligations of our officers and
employees who were subject to employment agreements with
FoxHollow will have no material impact on our sales efforts and
the efforts of our management. We have undertaken an effort to
document and account, with specificity, how our employees
identified each of our existing physician customers through
information, records or documents that did not originate with
FoxHollow, and we have implemented procedures to document how we
identify each new physician customer. We believe all of our
existing physician customers were identified through appropriate
sources such as publicly-available information, employees
preexisting physician relationships and referrals from existing
physician customers. In addition, we do not believe the court
order will impose any materially adverse restriction on
identifying and contacting new physician prospects since these
physicians are typically well-known in their industry and are
easily identified through appropriate sources. Accordingly, we
do not anticipate that the court order will materially impact
our sales efforts.
73
MANAGEMENT
Executive
Officers and Directors
The name, age and position of each of our directors and
executive officers as of April 30, 2008 are as follows:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Glen D.
Nelson, M.D.(3)
|
|
|
71
|
|
|
Chairman
|
David L. Martin
|
|
|
43
|
|
|
President, Chief Executive Officer and Director
|
Laurence L. Betterley
|
|
|
54
|
|
|
Chief Financial Officer
|
James E. Flaherty
|
|
|
54
|
|
|
Chief Administrative Officer and Secretary
|
Michael J. Kallok, Ph.D.
|
|
|
60
|
|
|
Chief Scientific Officer, Director
|
John Borrell
|
|
|
41
|
|
|
Vice President of Sales
|
Brian Doughty
|
|
|
44
|
|
|
Vice President of Marketing
|
Robert J. Thatcher
|
|
|
53
|
|
|
Executive Vice President
|
Paul Tyska
|
|
|
50
|
|
|
Vice President of Business Development
|
Paul Koehn
|
|
|
45
|
|
|
Vice President of Manufacturing
|
Brent G.
Blackey(1)
|
|
|
49
|
|
|
Director
|
John H.
Friedman(2)
|
|
|
55
|
|
|
Director
|
Geoffrey O.
Hartzler, M.D.(1)(3)
|
|
|
61
|
|
|
Director
|
Roger J.
Howe, Ph.D.(2)
|
|
|
65
|
|
|
Director
|
Gary M.
Petrucci(2)
|
|
|
66
|
|
|
Director
|
Christy
Wyskiel(1)
|
|
|
36
|
|
|
Director
|
|
|
|
(1)
|
|
Member of the Audit Committee.
|
(2)
|
|
Member of the Compensation
Committee.
|
(3)
|
|
Member of the Nominating and
Governance Committee.
|
David L. Martin, President, Chief Executive Officer and
Director. Mr. Martin has been our
President and Chief Executive Officer since February 2007, and a
director since August 2006. Mr. Martin also served as our
Interim Chief Financial Officer from January 2008 to April 2008.
Prior to joining us, Mr. Martin was Chief Operating Officer
of FoxHollow Technologies, Inc. from January 2004 to February
2006, Executive Vice President of Sales and Marketing of
FoxHollow Technologies, Inc. from January 2003 to January 2004,
Vice President of Global Sales and International Operations at
CardioVention Inc. from October 2001 to May 2002, Vice President
of Global Sales for RITA Medical Systems, Inc. from March 2000
to October 2001 and Director of U.S. Sales, Cardiac Surgery
for Guidant Corporation from September 1999 to March 2000.
Mr. Martin has also held sales and sales management
positions for The Procter & Gamble Company and Boston
Scientific Corporation. Mr. Martin currently serves as a
director of AccessClosure, Inc. and Apieron Inc., two
privately-held medical device companies. Our new Chief Financial
Officer, when appointed, will report directly to
Mr. Martin, and Mr. Martin will resign as Interim
Chief Financial Officer.
Laurence L. Betterley, Chief Financial
Officer. Mr. Betterley joined us in April
2008 as our Chief Financial Officer. Previously, Mr. Betterley
was Chief Financial Officer at Cima NanoTech, Inc. from May 2007
to April 2008, Senior Vice President and Chief Financial Officer
of PLATO Learning, Inc. from June 2004 to January 2007, Senior
Vice President and Chief Financial Officer of Diametrics
Medical, Inc. from 1996 to 2003, and Chief Financial Officer of
Cray Research Inc. from 1994 to 1996.
James E. Flaherty, Chief Administrative Officer and
Secretary. Mr. Flaherty has been our
Chief Administrative Officer since January 14, 2008.
Mr. Flaherty was our Chief Financial Officer from March
2003 to January 14, 2008. As Chief Administrative Officer,
Mr. Flaherty reports directly to our Chief Executive
Officer and has responsibility for information technology,
facilities, legal matters, financial analysis of business
74
development opportunities and business operations.
Mr. Flaherty is assisting with our public offering process,
including financial matters, and is assisting with the
transition of our new Chief Financial Officer. As our Chief
Financial Officer, Mr. Flaherty had primary responsibility
for the preparation of historical financial statements, but he
no longer has any such responsibility. Prior to joining us,
Mr. Flaherty served as an independent financial consultant
from 2001 to 2003 and Chief Financial Officer of Zomax
Incorporated from 1997 to 2001. Mr. Flaherty served as
Chief Financial Officer of Racotek, Inc. from 1990 to 1996, of
Time Management Corporation from 1986 to 1990, and of Nugget Oil
Corp. from 1980 to 1985. Mr. Flaherty was an accountant at
Coopers & Lybrand from 1975 to 1980. On June 9,
2005, the Securities and Exchange Commission filed a civil
injunctive action charging Zomax Incorporated with violations of
federal securities law by filing a materially misstated
Form 10-Q
for the period ended June 30, 2000. The SEC further charged
that in a conference call with analysts, certain of Zomaxs
executive officers, including Mr. Flaherty, misrepresented
or omitted to state material facts regarding Zomaxs
prospects of meeting quarterly revenue and earnings targets, in
violation of federal securities law. Without admitting or
denying the SECs charges, Mr. Flaherty consented to
the entry of a court order enjoining him from any violation of
certain provisions of federal securities law. In addition,
Mr. Flaherty agreed to disgorge $16,770 plus prejudgment
interest and pay a $75,000 civil penalty.
Michael J. Kallok, Ph.D., Chief Scientific Officer
and Director. Dr. Kallok has been our
Chief Scientific Officer since February 2007 and a director
since December 2002. Dr. Kallok was our Chief Executive
Officer from December 2002 to February 2007. Dr. Kallok
previously held positions at Medtronic Inc., Angeion
Corporation, Myocor, Inc. and Boston Scientific Corporation.
Dr. Kallok is also founder and president of his own
consulting business, Medical Device Consulting, Inc.
John Borrell, Vice President of
Sales. Mr. Borrell joined us in July
2006 as Vice President of Sales and Marketing. When
Mr. Doughty was named Vice President of Marketing in August
2007, Mr. Borrell became our Vice President of Sales.
Previously, he was employed as Director of Sales of FoxHollow
Technologies, Inc. from October 2003 to April 2006.
Mr. Borrell has more than 15 years of sales and sales
management experience and has held various positions with
Novoste Corporation (now NOVT Corporation), Medtronic Vascular,
Inc., Heartport, Inc. and Johnson & Johnson.
Brian Doughty, Vice President of
Marketing. Mr. Doughty joined us in
December 2006 as Director of Marketing and was named Vice
President of Marketing in August 2007. Prior to joining us,
Mr. Doughty was Director of Marketing at
EKOS Corporation from February 2005 to December 2006,
National Sales Initiatives Manager of FoxHollow Technologies,
Inc. from September 2004 to February 2005, National Sales
Operations Director at Medtronic from August 2000 to September
2004, and Sales Team Leader for Johnson and Johnson from
December 1998 to August 2000. Mr. Doughty has also held
sales and sales management positions for Ameritech Information
Systems.
Robert J. Thatcher, Executive Vice
President. Mr. Thatcher joined us as
Senior Vice President of Sales and Marketing in October 2005 and
became our Vice President of Operations in September 2006.
Mr. Thatcher became our Executive Vice President in August
2007. Previously, Mr. Thatcher was Senior Vice President of
TriVirix Inc. from October 2003 to October 2005.
Mr. Thatcher has more than 29 years of medical device
experience in both large and
start-up
companies. Mr. Thatcher has held various sales management,
marketing management and general management positions at
Medtronic, Inc., Schneider USA, Inc. (a former division of
Pfizer Inc.), Boston Scientific Corporation and several startup
companies.
Paul Tyska, Vice President of Business
Development. Mr. Tyska joined us in
August 2006 as Vice President of Business Development.
Previously, Mr. Tyska was employed at FoxHollow
Technologies, Inc. since July 2003 where he most recently served
as National Sales Director from February 2006 to August 2006.
Mr. Tyska has held various positions with Guidant
Corporation, CardioThoracic Systems, Inc., W. L.
Gore & Associates and ATI Medical Inc.
Paul Koehn, Vice President of
Manufacturing. Mr. Koehn joined us in
March 2007 as Director of Manufacturing and was promoted to Vice
President of Manufacturing in October 2007. Previously,
Mr. Koehn was Vice President of Operations for Sewall
Gear Manufacturing from 2000 to September 2007 and before
joining Sewall Gear, Mr. Koehn held various quality
and manufacturing management roles with Dana Corporation.
75
Glen D.
Nelson, M.D. Dr. Nelson has been a
member of our board of directors since 2003 and our Chairman
since August 2007. Dr. Nelson was a member of the board of
directors of Medtronic, Inc. from 1980 until 2002.
Dr. Nelson joined Medtronic as Executive Vice President in
1986, and he was elected Vice Chairman in 1988, a position held
until his retirement in 2002. Before joining Medtronic,
Dr. Nelson practiced surgery from 1969 to 1986.
Dr. Nelson was Chairman of the Board and Chief Executive
Officer of American MedCenters, Inc. from
1984 to 1986. Dr. Nelson also was Chairman,
President and Chief Executive Officer of the Park Nicollet
Medical Center, a large multi-specialty group practice in
Minneapolis, from 1975 to 1986. Dr. Nelson is on the board
of directors of DexCom, Inc. and The Travelers Companies, Inc.,
both publicly-held companies, and also serves as a director for
ten private companies.
Brent G. Blackey. Mr. Blackey has
been a member of our board of directors since 2007. Since 2004,
Mr. Blackey has served as the President and Chief Operating
Officer for Holiday Companies. Between 2002 and 2004
Mr. Blackey was a Senior Partner at the accounting firm of
Ernst & Young LLP. Prior to 2002, Mr. Blackey
served most recently as a Senior Partner at the accounting firm
of Arthur Anderson LLP. Mr. Blackey serves on the board of
directors of Datalink Corporation, and also serves on the Board
of Overseers for the University of Minnesota, Carlson School of
Management.
John H. Friedman. Mr. Friedman has
been a member of our board of directors since 2006.
Mr. Friedman is the Managing Partner of the Easton Capital
Investment Group, a private equity firm. Prior to founding
Easton Capital, Mr. Friedman was the founder and Managing
General Partner of Security Pacific Capital Investors, a
$200-million
private equity fund geared towards expansion financings and
recapitalizations, from 1989 to 1992. Prior to joining Security
Pacific, Mr. Friedman was a Managing Director and Partner
at E.M. Warburg, Pincus & Co., Inc. from 1981 to 1989.
Mr. Friedman has also served as a Managing Director of
Atrium Capital Corp., an investment firm. Mr. Friedman
currently serves on the board of directors of Renovis, Inc., a
publicly-held company, and on the boards of directors of Trellis
Bioscience, Inc., Xoft, Inc., Sanarus Inc., Genetix
Pharmaceuticals, Inc. and PlaySpan Inc., all of which are
privately-held companies. Mr. Friedman is also Co-Chairman
of the Cold Spring Harbor Presidents Council.
Geoffrey O.
Hartzler, M.D. Dr. Hartzler has
been a member of our board of directors since 2002.
Dr. Hartzler commenced practice as a cardiologist in 1974,
serving from 1980 to 1995 as a Consulting Cardiologist with the
Mid America Heart Institute of St. Lukes Hospital in
Kansas City, Missouri. Dr. Hartzler has co-founded three
medical product companies including Ventritex Inc. Most recently
he served as Chairman of the Board of IntraLuminal Therapeutics,
Inc. from 1997 to 2004 and Vice Chairman from 2004 to 2006.
Dr. Hartzler has also served as a consultant or director to
over a dozen business entities, some of which are medical device
companies.
Roger J. Howe, Ph.D. Dr. Howe
has been a member of our board of directors since 2002. Over the
past 22 years, Dr. Howe has founded four successful
start-up
ventures in the technology, information systems and medical
products business sectors. Most recently, Dr. Howe served
as Chairman of the Board and Chief Financial Officer of Reliant
Technologies, Inc., a medical laser company, from 2001 to 2005.
From 1996 to 2001, Dr. Howe served as Chief Executive
Officer of Metrix Communications, Inc., a business-to-business
software development company that he founded. Dr. Howe
currently serves on the boards of directors of Stemedica Cell
Technologies, Inc., BioPharma Scientific, Inc., Americas
Back & Neck Clinic, Inc. and Reliant Pictures
Corporation, all of which are privately-held companies.
Gary M. Petrucci. Mr. Petrucci has
been a member of our board of directors since 1992. Since August
2006, Mr. Petrucci has been Senior Vice
President Investments at UBS Financial Services,
Inc. Previously, Mr. Petrucci was an Investment Executive
with Piper Jaffray & Co. from 1968 until Piper
Jaffrays retail brokerage unit was sold to UBS Financial
Services in August 2006. Mr. Petrucci served on the board
of directors of Piper Jaffray & Co. from 1981 to 1995.
Mr. Petrucci achieved the Fred Sirianni Award 14 times
since the award began 25 years ago honoring the top
producing Investment Executive at Piper Jaffray. In January
2005, this award was renamed in his honor. Mr. Petrucci
received the 2002 Outstanding Alumni award from St. Cloud State
University. Mr. Petrucci is serving as a member on the
boards of directors of Americas Back & Neck
Clinic, Inc., National Urology Board, Stemedica Cell
Technologies, Inc. and the University of Minnesota Landscape
Arboretum.
Christy Wyskiel. Ms. Wyskiel has
been a member of our board of directors since 2006. Since 2004,
Ms. Wyskiel has served as a Managing Director in the
healthcare group of Maverick Capital, Ltd., where she has
76
worked since 2002. Maverick Capital, Ltd. currently manages more
than $11 billion in assets. Prior to joining Maverick,
Ms. Wyskiel served as an Equity Analyst at T. Rowe Price
Associates, Inc. where she focused on the medical device
industry. Ms. Wyskiel also served as a Healthcare Associate
and Analyst in the investment banking department of Cowen and
Company, LLC. Ms. Wyskiel plans to resign from the board
immediately prior to this offering.
Board
Composition
Our bylaws provide that the board of directors shall consist of
one or more members, and the shareholders shall determine the
number of directors at each regular meeting. Each director
serves for a term that expires at the next regular meeting of
the shareholders and until his successor is elected and
qualified.
Our board of directors has determined that seven of our nine
directors are independent directors, as defined under the
applicable regulations of the SEC and under the applicable rules
of the Nasdaq Stock Market LLC. The independent directors are
Messrs. Nelson, Blackey, Friedman, Hartzler, Howe and
Petrucci and Ms. Wyskiel.
Currently, each of our directors serves on our board of
directors pursuant to a stockholders agreement and provisions of
our articles of incorporation relating to our preferred stock.
The provisions of the stockholders agreement and our articles of
incorporation relating to the nomination and election of
directors will terminate upon the closing of this offering, but
members previously elected to our board of directors pursuant to
these agreements will continue to serve as directors until their
resignation or until their successors are duly elected by our
shareholders.
Board
Committees
Our board of directors has designated an audit committee, a
compensation committee and a nominating and corporate governance
committee. In addition, from time to time, the board of
directors may designate special committees when necessary to
address specific issues.
Audit
Committee
The audit committee of our board of directors is a standing
committee of, and operates under a written charter adopted by,
our board of directors. Our audit committee currently consists
of Messrs. Blackey and Hartzler and Ms. Wyskiel. Each
member of our audit committee satisfies the Nasdaq independence
standards and the independence standards of
Rule 10A-3(b)(1)
of the Securities Exchange Act. Ms. Wyskiel plans to resign
from the audit committee and our board of directors immediately
prior to this offering, and the board plans to seek a
replacement for Ms. Wyskiel. We intend to use the Nasdaq
phase-in provisions applicable to audit committee composition
and the board will appoint an audit committee member that
satisfies both Nasdaq independence standards and the
independence standards of
Rule 10A-3(b)(1)
of the Securities Exchange Act to replace Ms. Wyskiel prior
to the expiration of the phase-in period. Our board of directors
has determined that each member of our audit committee possesses
the financial qualifications required of audit committee members
set forth in the rules and regulations of Nasdaq and under the
Securities Exchange Act. Our board of directors also determined
that Mr. Blackey is an audit committee financial expert as
defined under the applicable rules of the SEC. In making this
determination our board of directors considered
Mr. Blackeys previous employment experience,
including his experience as an audit partner at
Ernst & Young LLP and Arthur Andersen LLP, and his
experience as the Chief Operating Officer of Holiday Companies.
The functions of our audit committee include, among other things:
|
|
|
|
|
reviewing and pre-approving the engagement of our independent
registered public accounting firm to perform audit services and
any permissible non-audit services;
|
|
|
|
evaluating the qualifications, independence and performance of
our independent registered public accounting firm;
|
|
|
|
reviewing and monitoring the integrity of our financial
statements;
|
|
|
|
reviewing and approving all related-party transactions;
|
77
|
|
|
|
|
reviewing with our independent registered public accounting firm
and management the performance of our internal audit function,
financial reporting process, systems of internal controls over
financial reporting and disclosure of controls and
procedures; and
|
|
|
|
establishing procedures for the receipt, retention and treatment
of complaints received by us regarding financial controls,
accounting or auditing matters.
|
Our independent registered public accounting firm and other key
committee advisors have regular contact with our audit
committee. Following each committee meeting, the audit committee
reports to the full board of directors.
Compensation
Committee
The compensation committee of our board of directors is a
standing committee of, and operates under a written charter
adopted by, our board of directors. Our compensation committee
currently consists of Messrs. Howe, Petrucci and Friedman.
Mr. Friedman serves as the chair of this committee. The
function of the compensation committee is described in
Compensation Discussion and Analysis Role of
Compensation Committee.
Nominating
and Corporate Governance Committee
The nominating and corporate governance committee of our board
of directors is a standing committee of, and operates under a
written charter adopted by, our board of directors. Our
nominating and corporate governance committee currently consists
of Messrs. Nelson and Hartzler, who serve as the co-chairs
of this committee. The functions of this committee include,
among other things:
|
|
|
|
|
identifying individuals qualified to become members of the board
of directors;
|
|
|
|
recommending director nominees for each annual meeting of
shareholders and director nominees to fill any vacancies that
may occur between meetings of the shareholders; and
|
|
|
|
reviewing and updating our corporate governance standards and
performing those functions specified therein and in the
committee charter.
|
Compensation
Committee Interlocks and Insider Participation
No member of our compensation committee has ever been an
executive officer or employee of ours. None of our executive
officers currently serves, or has served during the last
completed fiscal year, on the compensation committee or board of
directors of any other entity that has one or more executive
officers serving as a member of our board of directors or
compensation committee. We have had a compensation committee for
one year. Prior to establishing the compensation committee, our
full board of directors made decisions relating to compensation
of our executive officers.
Code of
Ethics and Business Conduct
The board of directors has approved a Code of Ethics and
Business Conduct that applies to all of our employees, directors
and officers, including its principal executive officer,
principal financial officer, principal accounting officer and
controller. The Code of Ethics and Business Conduct addresses
such topics as protection and proper use of our assets,
compliance with applicable laws and regulations, accuracy and
preservation of records, accounting and financial reporting,
conflicts of interest and insider trading. We plan to make our
Code of Ethics and Business Conduct available on our website at
www.csi360.com prior to the completion of this offering.
Director
Compensation
The non-employee members of our board of directors are
reimbursed for travel, lodging and other reasonable expenses
incurred in attending board or committee meetings. Upon initial
election to the board of directors, each non-employee director
has been granted an option to purchase 60,000 shares of our
common stock. In subsequent years, each non-employee director
has received an annual stock option grant to purchase a quantity
of our common stock that is determined by our board of directors
on an annual basis. For fiscal year 2008, each of our
non-employee
78
directors was granted options to purchase 30,000 shares of
our common stock. The board has, in the past, granted additional
options to our board chairman and each of our committee chairs
for services in those capacities.
The following table provides summary information concerning the
compensation of each non-employee director during the fiscal
year ended June 30, 2007.
|
|
|
|
|
Name
|
|
Option
Awards(1)(2)(3)
|
|
|
Brent G.
Blackey(4)
|
|
$
|
|
|
John H.
Friedman(5)
|
|
|
5,611
|
|
Geoffrey O.
Hartzler, M.D.(6)
|
|
|
16,540
|
|
Roger J.
Howe, Ph.D.(6)
|
|
|
16,540
|
|
Glen D.
Nelson, M.D.(6)
|
|
|
21,148
|
|
Gary M.
Petrucci(6)
|
|
|
24,810
|
|
Christy
Wyskiel(5)
|
|
|
5,611
|
|
|
|
|
(1)
|
|
The value of options in this table
includes (a) the dollar amount we recognized for financial
statement reporting purposes in accordance with
SFAS No. 123(R) for stock options granted in fiscal
year 2007 and (b) the dollar amount that we would have
recognized for financial statement reporting purposes in fiscal
2007 under the disclosure provisions of SFAS No. 123
for awards of stock options granted prior to fiscal 2007. For a
discussion of valuation assumptions and additional
SFAS No. 123(R) disclosures, see Note 5 to our
consolidated financial statements regarding stock compensation
at
page F-17
of this prospectus. The value of options in this table includes
the compensation cost for fiscal year 2007 of option awards
granted in and prior to fiscal year 2007.
|
|
|
|
(2)
|
|
Our stock option agreements provide
that in the event of a change of control, the vesting of all
options will accelerate and the options will be immediately
exercisable as of the effective date of the change of control.
Change of control is defined as the sale by the
company of substantially all of its assets and the consequent
discontinuance of its business, or in the event of a merger,
exchange or liquidation of the company.
|
(3)
|
|
The aggregate number of shares
subject to outstanding option awards held by each of the
directors listed in the table above as of June 30, 2007 was
as follows: Mr. Blackey no shares,
Mr. Friedman 60,000 shares,
Dr. Hartzler 115,000 shares,
Dr. Howe 155,000 shares,
Dr. Nelson 105,000 shares,
Mr. Petrucci 310,000 shares and
Ms. Wyskiel 60,000 shares.
|
(4)
|
|
Mr. Blackey was elected to our
board of directors on October 9, 2007.
|
(5)
|
|
In connection with their initial
election to the board of directors, Mr. Friedman and
Ms. Wyskiel were each granted a five-year option to
purchase 60,000 shares of our common stock at $5.71 per
share on August 15, 2006, such option to vest one-third on
each of the first three anniversaries of the date of grant. The
grant date fair value of the option award granted to each of
Mr. Friedman and Ms. Wyskiel, computed in accordance
with SFAS No. 123(R), was $19,260. The options held by
Mr. Friedman are held for the benefit of Easton Capital
Partners, LP. The options held by Ms. Wyskiel are held for
the benefit of Maverick Fund II, Ltd., Maverick Fund,
L.D.C. and Maverick Fund USA, Ltd.
|
(6)
|
|
As compensation for their continued
board service, on December 19, 2006 each of
Messrs. Hartzler, Howe, Nelson and Petrucci were granted
options to purchase 20,000 shares of our common stock at
$5.71 per share. Mr. Petrucci was granted an option to
purchase an additional 10,000 shares in connection with his
service as chairman of the board. The grant date fair value of
the option award granted to each of Drs. Hartzler, Howe and
Nelson, computed in accordance with SFAS No. 123(R), was
$16,540. The grant date fair value of the option award granted
to Mr. Petrucci, computed in accordance with SFAS
No. 123(R), was $24,810.
|
79
COMPENSATION
DISCUSSION AND ANALYSIS
In the following Compensation Discussion and Analysis, we
describe the material elements of the compensation awarded to,
earned by or paid to our Chief Executive Officer, Chief
Financial Officer and the other three most highly compensated
executive officers as determined in accordance with SEC rules,
who are collectively referred to as the named executive
officers. This discussion focuses primarily on the fiscal
2007 information contained in the tables and related footnotes
and narrative discussion but also describes compensation actions
taken during other periods to the extent it enhances the
understanding of our executive compensation disclosure for 2007.
Compensation
Objectives and Philosophy
The primary objectives of our compensation programs are to:
|
|
|
|
|
attract and retain talented and dedicated executives to manage
and lead our company;
|
|
|
|
align the interests of our executives and shareholders by
implementing cash incentive and equity programs designed to
reward the achievement of corporate and individual objectives
that promote growth in our business; and
|
|
|
|
motivate individuals to work as a team for the success of the
company by fairly recognizing the contributions of each
individual, including their experience, abilities and
performance, to our collective success.
|
To achieve these objectives, our compensation committee
recommends executive compensation packages to our board of
directors that are generally based on a mix of salary, cash
incentive payments and equity awards. Our compensation committee
has not adopted any formal guidelines for allocating total
compensation between equity and cash compensation, but attempts
to recommend equity and cash amounts that are competitive with
the amounts paid by other growth stage medical device companies.
We believe that performance and equity-based compensation are
important components of the total executive compensation package
for maximizing shareholder value while, at the same time,
attracting, motivating and retaining high-quality executives.
Setting
Executive Compensation
The compensation committee makes recommendations regarding the
elements of executive compensation and determines the level of
each element, the mix among the elements and total compensation
based upon the objectives and philosophies set forth above, and
by considering a number of factors, including:
|
|
|
|
|
each executives position within the company and the level
of responsibility;
|
|
|
|
the skills and experience required by an executives
position;
|
|
|
|
the executives individual experience and qualifications;
|
|
|
|
the competitive environment for comparable executive talent
having similar experience, skills and responsibilities;
|
|
|
|
company performance compared to specific objectives;
|
|
|
|
the executives current and historical compensation levels;
|
|
|
|
the executives length of service to our company;
|
|
|
|
compensation equity and consistency across all executive
positions; and
|
|
|
|
the executives existing holdings and rights to acquire
equity.
|
As a means of assessing the competitive market for executive
talent, we have consulted with Lyons, Benenson &
Company, a third-party compensation consulting firm, on
competitive compensation for companies of comparable size and
stage of development. Although the compensation committee seeks
to recommend executive compensation at levels it believes to be
competitive, this is only one factor in the committees
overall compensation recommendations and is not used as a
stand-alone benchmarking tool. We will continue to seek
information and guidance from a compensation consultant from
time to time in the future.
80
Executive
Compensation Components for 2007
The principal elements of our executive compensation program for
2007 were:
|
|
|
|
|
base salary;
|
|
|
|
annual cash incentive compensation;
|
|
|
|
equity-based compensation, in the form of stock options; and
|
|
|
|
employment benefits and limited perquisites.
|
In allocating compensation across these elements, the
compensation committee does not follow any strict policy or
guidelines. However, consistent with the general compensation
objectives and philosophies outlined above, the compensation
committee seeks to place a meaningful percentage of an
executives compensation at risk based on creating
long-term shareholder value. For example, the compensation
committee sets each executives annual incentive
compensation at a level designed to motivate the executive to
achieve goals consistent with our long term business objectives,
typically by establishing annual incentive opportunities ranging
from 40% to 100% of the executives base salary. The
compensation committee believes this allocation of cash
compensation between base salary and annual incentive
compensation strikes the appropriate balance between
guaranteeing executives an income adequate to satisfy living
expenses and providing an incentive for the achievement of our
goals. Equity-based compensation is also compensation at risk,
since the equity increases in value only if we are successful in
achieving our business goals, and serves to provide an incentive
over a longer term. The compensation committees judgment
of the appropriate mix of compensation elements is also
influenced by information they have reviewed as to the
allocations made by other medical products companies at a
similar stage of development and the experience of our
compensation committee members. The 2007 compensation for three
of our named executive officers was determined in the context of
negotiating the terms under which they would join us as new
employees. John Borrell joined us as Vice President of Sales and
Marketing in July 2006, Paul Tyska joined us as Vice President
of Business Development in August 2006, and David Martin joined
us as Chief Executive Officer in February 2007.
Base
Salary
Base salary is an important element of our executive
compensation program as it provides executives with a fixed,
regular, non-contingent earnings stream to support annual living
and other expenses. As a component of total compensation, we
generally set base salaries at levels believed to attract and
retain an experienced management team that will successfully
grow our business and create shareholder value. We also utilize
base salaries to reward individual performance and contributions
to our overall business objectives, but seek to do so in a
manner that does not detract from the executives incentive
to realize additional compensation through our performance-based
compensation programs and stock options.
Our employment agreement with David Martin provides that his
annual base salary for calendar 2007 shall be $370,000 and that
his base salary for subsequent years shall be determined by the
board of directors. We offered this amount as part of a package
of compensation for Mr. Martin sufficient to induce him to
join us. The compensation package for Mr. Martin is
designed to provide annual cash compensation, including both
base salary and potential cash incentive earnings, sufficient to
meet his current needs, although less than the annual cash
compensation Mr. Martin received at his previous employer
and, we believe, less than Mr. Martin likely could have
obtained with other, more established employers. The equity
portion of Mr. Martins compensation package, as
described below, was designed to provide sufficient potential
growth in value to induce Mr. Martin to join us despite the
lower cash compensation.
We paid each of John Borrell and Paul Tyska at an annual base
salary rate of $200,000 during fiscal 2007. The base salaries
for each of Mr. Borrell and Mr. Tyska were negotiated
as part of a compensation packages offered to induce them to
join us. Mr. Borrell joined us in July 2006 as Vice
President of Sales and Marketing and Mr. Tyska joined as
Vice President of Business Development in August 2006. In each
case the base salary was set at an amount that we believed to be
generally consistent with the base salaries paid by other growth
stage medical device companies for similar positions, but
substantially less than the total cash compensation each of
Mr. Borrell and Mr. Tyska received with their previous
employers and, we believe, less than each of Mr. Borrell
and Mr. Tyska likely
81
could have obtained with other, more established employers. In
order to induce Mr. Borrell and Mr. Tyska to accept
positions with us despite lower base salaries, we agreed that
each would also have the opportunity to earn performance-based
incentive compensation, as described below, as well as equity
awards. We believed that it was appropriate to make a
significant portion of Mr. Borrells cash compensation
(a higher percentage than most other executives) subject to the
achievement of performance objectives because of the
particularly important role the Vice President of Sales and
Marketing would play in the commercial introduction of our first
product.
Each of Michael J. Kallok, James E. Flaherty and Robert Thatcher
have served as officers from the dates listed below. Their
fiscal 2006 and 2007 base salary rates and the percentage
changes from 2006 to 2007 are set forth below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Base Salary Rates
|
|
Name
|
|
Start Date
|
|
Fiscal 2006
|
|
Fiscal 2007
|
|
% Change
|
|
|
James E. Flaherty
|
|
|
3/11/03
|
|
$
|
148,315
|
|
$
|
185,000
|
|
|
25
|
%
|
Michael J. Kallok, Ph.D.
|
|
|
12/1/02
|
|
|
210,000
|
|
|
250,000
|
|
|
19
|
|
Robert J. Thatcher
|
|
|
10/17/05
|
|
|
175,000
|
|
|
185,573
|
|
|
6
|
|
The increased base salary for Mr. Flaherty was awarded in
recognition of his efforts in obtaining financing for our
business, including the sales of Series A convertible
preferred stock completed on July 19, 2006 and
July 28, 2006, and his assumption of additional
responsibilities such as oversight of our information technology
systems. The increased base salary for Dr. Kallok was
awarded in recognition of Dr. Kalloks efforts in
advancing our clinical trials, including the PAD II trial in
Europe and the preparation for the OASIS trial in the United
States, as well as Dr. Kalloks leadership during his
tenure as Chief Executive Officer. Mr. Thatchers
increase in base salary was intended primarily as a
cost-of-living adjustment. In each case, the compensation
committee also considered the range of compensation it believed
to be paid by companies in our industry at a similar stage of
development for the same position, the responsibility of the
position as compared to other positions within our management
team, and the tenure of the employee with us. The compensation
committee did not attempt to assign values to particular
elements of performance or the other factors considered and
considered all of these factors generally in making its judgment
regarding base salaries.
Our compensation committee will review our Chief Executive
Officers salary annually at the end of each calendar year.
The committee may recommend adjustments to the Chief Executive
Officers base salary based upon the committees
review of his current base salary, incentive cash compensation
and equity-based compensation, as well as his performance and
comparative market data.
Our compensation committee reviews other executives
salaries throughout the year, with input from the Chief
Executive Officer. The committee may recommend adjustments to
each other named executive officers base salary based upon
the Chief Executive Officers recommendation and the
reviewed executives responsibilities, experience and
performance, as well as comparative market data.
In utilizing comparative data, the compensation committee seeks
to recommend salaries for each executive at a level that is
appropriate after giving consideration to experience for the
relevant position and the executives performance. We
review performance for both our company (based upon achievement
of strategic initiatives) and each individual executive. Based
upon these factors, the committee may recommend adjustments to
base salaries to better align individual compensation with
comparative market compensation, to provide merit-based
increases based upon individual or company achievement, or to
account for changes in roles and responsibilities.
Annual
Cash Incentive Compensation
Before Mr. Martin joined us as Chief Executive Officer we
generally paid annual bonus compensation to our executive
officers based on the executives performance during the
year, the position and level of responsibility of the executive
and the performance of our company, with particular focus on the
executives contribution to that performance. Because we
had no revenues, the elements of company performance considered
typically included progress in product development and clinical
testing and achievement of financing goals. Payments were made
based on the evaluation by our board and compensation committee
of a broad range of information relating to individual and
company performance rather than the achievement of specific
goals. All of our executive officers
82
were eligible to receive these discretionary annual bonuses,
including James E. Flaherty, Michael J. Kallok,
Robert J. Thatcher, John Borrell and Paul Tyska. For the
first two quarters of fiscal 2007, the bonus amounts for Messrs.
Flaherty, Kallok and Thatcher were determined entirely at the
discretion of the board and compensation committee, while the
bonus amounts for Messrs. Borrell and Tyska were based upon
provisions contained in their employment agreements providing
that each executive is entitled to receive incentive pay equal
to a designated percentage of his base salary, payable quarterly
and based on performance objectives. Under the terms of his
employment agreement, Mr. Borrell is eligible to receive a cash
bonus up to $200,000 per year based upon quarterly objectives to
be determined. Mr. Tyskas employment agreement provides
that he is eligible to participate in a bonus program that is
targeted to pay out $100,000 per year based on achieving results
based upon agreed-upon objectives.
Shortly after Mr. Martin joined us in February 2007 and
upon his recommendation, the compensation committee established
an incentive program for calendar 2007, which included the third
and fourth quarters of fiscal 2007 and the first two quarters of
fiscal 2008, designed to reward named executive officers with
quarterly payments for achieving specific individual goals
related to financial growth, product development and
commercialization and operational improvement.
Under the terms of the incentive program, the compensation
committee set an annual target bonus amount for each officer
expressed as a percentage of that officers base salary.
The percentage assigned to each officer was dependent in part on
the position and responsibilities of the officer, and in the
case of new hires in fiscal 2007, consistent with prior
commitments made to such new hires. For each officer other than
the Chief Executive Officer, the compensation committee
delegated to the Chief Executive Officer the authority to set
individual quarterly objectives that had to be achieved to earn
the bonus. Each officer that achieved the quarterly objectives
was entitled to receive partial payment of the annual target
amount, typically 25% each quarter. We believe that quarterly
objectives provide an incentive to maintain the rapid pace of
growth of our business at its current stage.
The objectives reflected specific tasks for which the individual
executive was responsible that were consistent with our overall
fiscal year operating plan established by our board of
directors. The specific objectives established for each of our
named executive officers for the quarters ended March 31,
2007 and June 30, 2007 are set forth below:
Michael
J. Kallok, Ph.D.
|
Objectives
|
Perform and submit to FDA by May 15 a statistical analysis in
support of our 510(k) application.
|
File application for critical limb ischemia Investigational
Device Exemption by May 31.
|
Complete analysis of particle size and other matters by June 30.
|
|
James E.
Flaherty
|
Objectives
|
Complete installation of new Enterprise Resource Planning system
by June 30.
|
Complete venture debt financing by June 30.
|
Make adequate progress with respect to multiple financing
options by June 30.
|
|
John
Borrell
|
Objectives
|
Meet with product development team bi-weekly to communicate
feedback from the field.
|
Install scheduled reporting and communications process within
the sales department and across other departments.
|
Complete timely follow up of patients from OASIS trial.
|
|
83
Robert J.
Thatcher
|
Objectives
|
Advance all product development projects to meet June
30 milestones.
|
Hire a Director of Quality by May 30.
|
|
Paul
Tyska
|
Objectives
|
Present OASIS data to potential strategic partners by
June 30.
|
Obtain six site installations for critical limb ischemia study
by June 30.
|
Obtain participation in early adoption of the Diamondback
3600
by six key opinion leaders by June 30.
|
|
Following the end of fiscal 2007, Mr. Martin and the
compensation committee concluded that each of the executive
officers listed above had substantially satisfied all of the
objectives and we paid the full target bonus amount to each
officer. The compensation committee did not assign values to
individual objectives or otherwise quantify the bonus amount
payable with respect to any particular objective or group of
objectives.
Generally, the objectives require performance at levels intended
to positively impact shareholder value and reflect moderately
aggressive to aggressive goals that are attainable, but require
strong performance. Our Chief Executive Officer and compensation
committee retain the discretion to increase or decrease a named
executive officers quarterly or annual bonus payout to
recognize either inferior or superior individual performance in
cases where this performance is not fully represented by the
achievement or non-achievement of the pre-established
objectives. For example, our compensation committee reserves the
right to award an officer 100% of his or her annual target bonus
even if that officer had not achieved any quarterly objectives.
Neither the Chief Executive Officer nor the compensation
committee exercised discretion to award any bonus with respect
to fiscal 2007 in circumstances where applicable performance
objectives had not been substantially met.
The compensation committee evaluated whether the Chief Executive
Officer had earned his 2007 annual target bonus amount only at
the end of the calendar year based on our overall progress
relative to our business plan. The compensation committee did
not establish specific individual objectives for Mr. Martin
under the incentive program for 2007 because the committee
concluded that defining appropriate objectives would be
difficult given that Mr. Martin was new in his position.
The committee decided that our overall results would be a more
effective indicator of Mr. Martins success as Chief
Executive Officer than any specific quarterly objectives that
might be established for Mr. Martin. Accordingly, shortly after
Mr. Martin joined us, the compensation committee agreed,
consistent with Mr. Martins employment agreement, that Mr.
Martin would have the opportunity to earn incentive pay of up to
25% of his base salary at the end of calendar 2007, provided his
performance was satisfactory to the compensation committee. In
December 2007, the compensation committee concluded that Mr.
Martin had performed well during calendar 2007 and awarded him a
bonus of $92,500, 100% of his target bonus for 2007.
The following sets forth for each of our named executive
officers the target incentive compensation as a percentage of
base salary and total bonus payments for fiscal 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fiscal 2007
|
|
|
|
|
|
|
Bonus and
|
|
|
|
|
|
|
Non-Equity
|
|
|
|
Target Incentive Compensation as
|
|
|
Incentive Plan
|
|
Name
|
|
% of Base Salary
|
|
|
Payments
|
|
|
David L.
Martin(1)
|
|
|
25
|
%
|
|
$
|
0
|
|
James E. Flaherty
|
|
|
40
|
|
|
|
76,562
|
|
Michael J. Kallok, Ph.D.
|
|
|
40
|
|
|
|
100,000
|
|
John Borrell
|
|
|
100
|
|
|
|
200,000
|
|
Paul Tyska
|
|
|
50
|
|
|
|
83,333
|
|
Robert J. Thatcher
|
|
|
40
|
|
|
|
86,695
|
|
(footnote on next page)
84
|
|
|
(1)
|
|
While Mr. Martin did not receive
any bonus or non-equity incentive plan compensation in fiscal
2007, in Mr. Martins employment agreement dated December
19, 2006, we made a commitment to pay Mr. Martin at the end of
calendar 2007 incentive compensation of up to 25% of his base
salary, provided that Mr. Martins performance was
acceptable. We deemed this commitment to be a grant of
non-equity incentive plan compensation made in fiscal 2007, and
paid Mr. Martin $92,500, the full 25%, in satisfaction of this
grant in December 2007, which was in fiscal 2008. This award
was based, in part, upon Mr. Martins performance in the
third and fourth quarters of fiscal 2007.
|
For David Martin, John Borrell and Paul Tyska the percentage of
base salary that would be available as incentive compensation
was negotiated as a term of their employment agreements at the
time of their joining us. For James E. Flaherty, Michael J.
Kallok and Robert J. Thatcher, the compensation committee
determined that 40% of base salary represented an appropriate
short term cash incentive, based on the experience and judgment
of the members of the compensation committee. In determining
these percentages, the compensation committees philosophy
was to reduce fixed compensation costs in favor of variable
compensation costs tied to performance, where possible.
In February 2008, the board adopted a new incentive plan for
calendar 2008, which includes the third and fourth quarters of
fiscal 2008 and the first two quarters of fiscal 2009. This plan
conditions the payment of incentive compensation to all
participants, including Mr. Martin, upon our achievement of
revenue and gross margin financial goals. None of our named
executive officers is subject to individual goals under this
plan. Under this plan, our named executive officers are eligible
to receive annual cash incentive compensation with target bonus
levels ranging from 50%, in the case of our President and Chief
Executive Officer, to 40%, in the case of our other named
executive officers, of their yearly base salaries. Participants
are eligible to earn 50% to 150% of their target bonus amount
depending upon our performance relative to the plan criteria.
The plan criteria are the same for all of our named executive
officers. This plan is designed to reward the executive officers
for achieving and surpassing the financial goals set by the
compensation committee and board of directors. We believe that
the financial goals are aggressive but attainable if our
performance is strong.
The target percentages of base salary and threshold, target and
maximum bonuses of our named executive officers under this new
plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target %
|
|
|
|
|
|
|
|
|
|
|
|
|
of Base
|
|
|
Threshold
|
|
|
|
|
|
Maximum
|
|
Name
|
|
Salary
|
|
|
Bonus
|
|
|
Target Bonus
|
|
|
Bonus
|
|
|
David L. Martin
|
|
|
50
|
%
|
|
$
|
98,750
|
|
|
$
|
197,500
|
|
|
$
|
296,250
|
|
Laurence L.
Betterley(1)
|
|
|
40
|
%
|
|
$
|
45,000
|
|
|
$
|
90,000
|
|
|
$
|
135,000
|
|
James E. Flaherty
|
|
|
40
|
%
|
|
$
|
43,600
|
|
|
$
|
87,200
|
|
|
$
|
130,800
|
|
Michael J. Kallok, Ph.D.
|
|
|
40
|
%
|
|
$
|
51,000
|
|
|
$
|
102,000
|
|
|
$
|
153,000
|
|
John
Borrell(2)
|
|
|
40
|
%
|
|
$
|
40,000
|
|
|
$
|
80,000
|
|
|
$
|
120,000
|
|
Paul
Tyska(2)
|
|
|
40
|
%
|
|
$
|
40,000
|
|
|
$
|
80,000
|
|
|
$
|
120,000
|
|
Robert J. Thatcher
|
|
|
40
|
%
|
|
$
|
43,600
|
|
|
$
|
87,200
|
|
|
$
|
130,800
|
|
|
|
|
(1)
|
|
Mr. Betterleys actual
bonus will be adjusted proportionally to reflect his start date
of April 14, 2008.
|
|
|
|
(2)
|
|
These named executive officers will
also be paid sales commissions on a monthly basis according to a
formula based on sales levels.
|
Stock
Option Awards
Consistent with our compensation philosophies related to
performance-based compensation, long-term shareholder value
creation and alignment of executive interests with those of
shareholders, we make periodic grants of long-term compensation
in the form of stock options to our named executive officers, to
our other executive officers and across our organization
generally.
For our named executive officers, we believe that stock options
offer the best incentives and tax attributes (by deferring taxes
until the holder is ready to exercise and sell) necessary to
motivate and retain them to enhance overall enterprise value.
Stock options provide named executive officers with the
opportunity to purchase our common stock at a price fixed on the
grant date regardless of future market price. A stock option
becomes valuable only if our common stock price increases above
the option exercise price and the holder of the option remains
employed during the period required for the option shares to
vest. This provides an incentive for an option holder to
85
remain employed by us. In addition, stock options link a
significant portion of an employees compensation to
shareholders interests by providing an incentive to
achieve corporate goals and increase shareholder value.
In connection with the negotiations to hire Mr. Martin, our
Chief Executive Officer, we agreed in principle that
Mr. Martin would be granted options to purchase a number of
shares which, when combined with shares subject to options that
he had already received as a board member and consultant, would
equal approximately 5.5% of our then outstanding common stock.
Our compensation committee and board of directors believed,
based on their collective experience with other medical device
companies, that 5.5% was within the range of equity compensation
amounts typically granted at the Chief Executive Officer level
by companies of comparable size and stage of development.
They also believed that equity compensation at 5.5% was a key
element necessary to make the entire compensation package
offered to Mr. Martin sufficiently attractive to induce him
to join our company.
For named executive officers other than our Chief Executive
Officer, our compensation committee consulted Lyons,
Benenson & Company, a third-party compensation
consulting firm, to determine competitive levels of stock option
grants for officers in comparable positions with companies of
comparable size and stage of development. Based on the guidance
from Lyons and the experience of our compensation committee
members, the compensation committee has identified target levels
of option grants for each of our officers. Furthermore, the
compensation committee considered each named executive
officers role and responsibilities, ability to influence
long term value creation, retention and incentive factors and
current stock and option holdings at the time of grant, as well
as individual performance, which is a significant factor in the
committees decisions. We granted options in fiscal 2007 to
each of our officers to bring the total number of shares subject
to options held by each such officer, including shares subject
to any previously granted options, closer to the levels
identified by the compensation committee as appropriate for that
position, while also taking into consideration performance of
the officer and the limitations imposed by number of shares
authorized for issuance under our 2003 Stock Option Plan. The
compensation committee did not consider specific performance
objectives but generally concluded that each of our executive
officers had performed well and deserved option grants intended
to move their equity ownership closer to the compensation
committees targeted levels.
From time to time we may make one-time grants to recognize
promotion or consistent long-term contribution, or for specific
incentive purposes. We also granted stock options to our named
executive officers in connection with their initial employment.
Following the end of fiscal 2007, we granted the following stock
options to our named executive officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
Underlying
|
|
|
|
|
Name
|
|
Grant Date
|
|
|
Options
|
|
|
Exercise Price
|
|
|
David L. Martin
|
|
|
12/12/07
|
|
|
|
375,000
|
|
|
$
|
7.86
|
|
|
|
James E. Flaherty
|
|
|
8/07/07
|
|
|
|
35,000
|
|
|
$
|
5.11
|
|
|
|
|
12/12/07
|
|
|
|
50,000
|
|
|
$
|
7.86
|
|
|
|
Michael J. Kallok, Ph.D.
|
|
|
12/12/07
|
|
|
|
50,000
|
|
|
$
|
7.86
|
|
|
|
|
12/31/07
|
|
|
|
488,215
|
|
|
$
|
7.86
|
|
|
|
John Borrell
|
|
|
8/07/07
|
|
|
|
35,000
|
|
|
$
|
5.11
|
|
|
|
|
12/12/07
|
|
|
|
100,000
|
|
|
$
|
7.86
|
|
|
|
Paul Tyska
|
|
|
8/07/07
|
|
|
|
35,000
|
|
|
$
|
5.11
|
|
|
|
|
12/12/07
|
|
|
|
50,000
|
|
|
$
|
7.86
|
|
|
|
Robert J. Thatcher
|
|
|
8/07/07
|
|
|
|
35,000
|
|
|
$
|
5.11
|
|
|
|
|
12/12/07
|
|
|
|
50,000
|
|
|
$
|
7.86
|
|
Although we do not have any detailed stock retention or
ownership guidelines, our board of directors and the
compensation committee generally encourage our executives to
have a financial stake in our company in order to
86
align the interests of our shareholders and management, and view
stock options as a means of furthering this goal. We will
continue to evaluate whether to implement a stock ownership
policy for our officers and directors.
Additional information regarding the stock option grants made to
our named executive officers for fiscal 2007 is available in the
Summary Compensation Table for Fiscal Year 2007 on page 88,
and in the Outstanding Equity Awards at Fiscal Year-end for
Fiscal Year 2007 Table on page 90.
Limited
Perquisites; Other Benefits
It is generally our policy not to extend significant perquisites
to our executives beyond those that are available to our
employees generally, such as 401(k) plan, health, dental and
life insurance benefits. We have given car allowances to certain
named executives and moving allowances for executives who have
relocated.
Chief
Financial Officer Compensation
Laurence Betterley commenced employment as our Chief Financial
Officer on April 14, 2008. Pursuant to the terms of his
employment agreement, Mr. Betterley receives an annual base
salary of $225,000 and is entitled to participate in our
incentive plan for calendar 2008, with a target bonus of 40% of
his base salary. Mr. Betterley also received a grant of
75,000 shares of restricted stock under the 2007 Plan,
which shares vest in three annual installments of
25,000 shares each, beginning on April 14, 2009. Under
the terms of this employment agreement, we will pay
Mr. Betterley an amount equal to 12 months of his then
current base salary and 12 months of our share of health
insurance costs if Mr. Betterley is terminated by us
without cause, or if Mr. Betterley terminates his
employment for good reason, as defined in the agreement. As a
condition to receiving his severance benefits,
Mr. Betterley is required to execute a release of claims
agreement in favor of us.
Role of
Our Compensation Committee
Our compensation committee was appointed by our board of
directors, and consists entirely of directors who are
outside directors for purposes of
Section 162(m) and non-employee directors for
purposes of
Rule 16b-3
under the Exchange Act. Our compensation committee is comprised
of Messrs. Petrucci, Howe and Friedman. The functions of
our compensation committee include, among other things:
|
|
|
|
|
recommending the annual compensation packages, including base
salaries, incentive compensation, deferred compensation and
stock-based compensation, for our executive officers;
|
|
|
|
recommending cash incentive compensation plans and deferred
compensation plans for our executive officers, including
corporate performance objectives;
|
|
|
|
administering our stock incentive plans, and subject to board
approval in the case of executive officers, approving grants of
stock, stock options and other equity awards under such plans;
|
|
|
|
reviewing and making recommendations regarding the terms of
employment agreements for our executive officers;
|
|
|
|
reviewing and discussing the compensation discussion and
analysis with management; and
|
|
|
|
following the completion of this offering, preparing the
compensation committee report to be included in our annual proxy
statement.
|
All compensation committee recommendations regarding
compensation to be paid or awarded to our executive officers are
subject to approval by a majority of the independent directors
serving on our board of directors.
Our Chief Executive Officer may not be present during any board
or compensation committee voting or deliberations with respect
to his compensation. Our Chief Executive Officer may, however,
be present during any other voting or deliberations regarding
compensation of our other executive officers, but may not vote
on such items of business. In 2007, our compensation committee
met without the Chief Executive Officer present to review and
determine the compensation of our Chief Executive Officer, with
input from him and our third-party compensation consultant on
his annual salary and cash incentive compensation for the year.
For all other executive officers in 2007, the compensation
committee met with our Chief Executive Officer to consider and
determine executive
87
compensation, based on recommendations by our Chief Executive
Officer and our third-party compensation consultant.
Summary
Compensation Table for Fiscal Year 2007
The following table provides information regarding the
compensation earned during the fiscal year ended June 30,
2007 by the two individuals who served as our Chief Executive
Officer during fiscal 2007 (including David Martin, our current
Chief Executive Officer, and Michael Kallok, our former Chief
Executive Officer), our Chief Financial Officer and each of our
other three most highly compensated executive officers. We refer
to these persons as our named executive officers
elsewhere in this prospectus.