As filed with the Securities and Exchange Commission on
February 1, 2006
Registration
No.
333-129497
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 4
TO
Form
S-1
REGISTRATION STATEMENT
under
the Securities Act of 1933
CARDICA, INC.
(Exact name of Registrant as specified in its charter)
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Delaware
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3841
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94-3287832
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(State or other jurisdiction of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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900 Saginaw Drive
Redwood City, California 94063
(650) 364-9975
(Address, including zip code, and telephone number, including
area code, of Registrants principal executive offices)
Bernard Hausen, M.D., Ph.D.
Chief Executive Officer
Cardica, Inc.
900 Saginaw Drive
Redwood City, California 94063
(650) 364-9975
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
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Nancy Wojtas, Esq.
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, California 94304-2155
(650) 843-5000
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Guy Molinari, Esq.
Stephen Thau, Esq.
Heller Ehrman LLP
7 Times Square
New York, NY 10036
(212) 832-8300
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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, 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
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(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
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 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 without notice. We may not sell these securities until
the registration statement filed with the Securities and
Exchange Commission is effective. This prospectus is not an
offer to sell these securities and is not soliciting an offer to
buy these securities in any jurisdiction where the offer or sale
is not
permitted.
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SUBJECT TO
COMPLETION, DATED FEBRUARY 1, 2006
PRELIMINARY PROSPECTUS
3,500,000 Shares
Cardica, Inc.
Common Stock
We are offering 3,500,000 shares of our 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 for our shares will be between $10.00 and
$12.00 per share. Our common stock has been approved for
quotation on the Nasdaq National Market under the symbol
CRDC.
Investing in our common stock involves a high degree of risk.
Before buying any shares, you should carefully consider the risk
factors described in Risk Factors beginning on
page 7 of this prospectus.
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Per Share
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Total
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Public offering price
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$
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$
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Underwriting discount
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$
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$
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Proceeds, before expenses, to Cardica, Inc.
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$
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$
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The underwriters may also purchase up to an additional
525,000 shares from us at the public offering price, less
the underwriting discount, within 30 days after the date of
this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved 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 on or
about ,
2006.
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A.G. Edwards
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Allen & Company LLC
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Montgomery
& Co., LLC
The date of this prospectus
is ,
2006.
TABLE OF CONTENTS
You should rely only on the information contained in this
prospectus. We have not, and the underwriters have not,
authorized any person to provide you with different information.
This prospectus is not an offer to sell, nor is it 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 as of the date on the front cover, but the
information may have changed since that date.
PROSPECTUS SUMMARY
Before you decide whether to invest in our common stock, you
should read the entire prospectus carefully, especially
Risk Factors and the consolidated financial
statements and related notes. References in this prospectus to
we, us and our refer to
Cardica, Inc. unless the context requires otherwise.
Cardica, Inc.
We design and manufacture proprietary automated anastomotic
systems used by surgeons to perform coronary artery bypass
surgery. In coronary artery bypass grafting, or CABG,
procedures, veins or arteries are used to construct
bypass conduits to restore blood flow beyond closed
or narrowed portions of coronary arteries. Our first two
products, the
C-Port
®
Distal Anastomosis System, referred to as the C-Port system, and
the
PAS-Port
®
Proximal Anastomosis System, referred to as the PAS-Port system,
provide cardiovascular surgeons with
easy-to
-use, automated
systems to perform consistent, rapid and reliable connections,
or anastomoses, of the vessels, which surgeons generally view as
the most critical aspect of the CABG procedure. Our C-Port
system received the European Unions CE Mark in April 2004
and 510(k) clearance from the U.S. Food and Drug Administration,
or FDA, in November 2005. Our PAS-Port system received the CE
Mark in March 2003, regulatory approval in Japan in January
2004, and we have received from the FDA conditional approval of
an Investigational Device Exemption to conduct a prospective
randomized clinical trial for 510(k) clearance in the United
States. As of September 30, 2005, more than 2,400 PAS-Port
systems had been sold in Europe and Japan, and it has been used
in over 130 hospitals in Japan.
According to the American Heart Association, approximately
13.2 million Americans have coronary artery disease, and
approximately 653,000 people in the United States die each year
as a result of the disease. Physicians and patients may select
among a variety of treatments to address coronary artery
disease, including pharmaceutical therapy, balloon angioplasty,
stenting, and CABG procedures, with the selection often
depending upon the stage of the disease and the age of the
patient. An independent study comparing CABG and implantation of
conventional stents shows that CABG is the more effective
treatment for coronary artery disease, achieving the best
long-term patient outcomes as measured by survival rate and need
for re-intervention. Moreover, patients with severe and
multi-vessel coronary artery disease often cannot be effectively
treated with methods other than CABG. An estimated 260,000 CABG
procedures will be performed in the United States in 2005, and
we estimate these procedures will require approximately
1.2 million anastomoses.
Our Solutions
The current method of performing an anastomosis in a CABG
procedure utilizes technically demanding, tedious and
time-consuming hand-sewn sutures to connect a bypass graft
vessel to the aorta and to small diameter coronary vessels. By
replacing the hand-sewn sutures with an
easy-to
-use, highly
reliable and reproducible automated system, our C-Port and
PAS-Port systems can, we believe, improve the quality and
consistency of the anastomoses, decrease the time required for
completing the anastomoses, and ultimately contribute to
improved patient outcomes. We have designed our products to
address the needs of surgeons in the following ways:
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Our products minimize trauma to both the graft and target vessel
and can be used without interrupting blood flow in the coronary
artery or clamping the aorta, which can lead to complications.
Our C-Port system creates compliant anastomoses, which
potentially allow the shape and size of the anastomosis to adapt
to changes in blood flow and pressure.
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Our products are easy to use and create anastomoses more rapidly
than hand suturing.
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Our products enable consistent, reproducible anastomoses,
largely independent of surgical technique and skill set. In
comparison with hand-sewn sutures, our systems offer
mechanically governed repeatability and reduced procedural
complexity.
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Our products can help to expedite the CABG procedure,
potentially contributing to reduced operating room time and
associated expenses, partially offset by the increased cost of
our products compared to current alternatives, such as sutures.
To the extent use of our products decreases complications,
post-operative costs of a CABG procedure may be significantly
reduced.
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1
Our Strategy
Our goal is to become the leading provider of automated
anastomotic systems for cardiac bypass surgery and to position
our proprietary technology to become the platform for use in
minimally invasive and eventually endoscopic cardiac procedures.
For CABG to be a more attractive treatment alternative, surgeons
must strive to decrease the invasiveness and trauma associated
with current procedures by introducing endoscopic or keyhole
surgery for CABG, similar to the success seen in laparoscopic or
arthroscopic procedures over the past decade. We believe that
our anastomotic technology will become a key enabling technology
for endoscopic CABG.
The principal elements of our strategy include:
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Driving market adoption of the C-Port and PAS-Port
systems.
We intend to drive commercial adoption of our
C-Port system and, if approved or cleared by the FDA, our
PAS-Port system and future products by marketing them as
integrated anastomotic tools for use in CABG. We believe that
continued collection of clinical data from our product trials as
well as post-marketing studies, together with evidence of the
cost-effective nature of our systems, will be key factors in
driving physician adoption.
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Expanding our sales and marketing effort.
We are
beginning to build a direct sales force to market our C-Port
system targeting top-tier cardiac surgery centers in the United
States. We also intend to increase the number of distributors
carrying our products in Europe and Asia. If we obtain FDA
clearance or approval to market our PAS-Port system or other
products in the field of cardiac surgery, the same sales force
will be responsible for selling these products.
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Capitalizing on our proprietary technology to develop
next-iteration products for endoscopic cardiac
procedures.
We believe that the evolution of minimally
invasive cardiac bypass procedures offering faster
post-operative patient recovery times, long-term graft patency
and a low incidence of adverse outcomes could increase the
number of CABG procedures performed. To help propel the effort
toward more viable cardiac endoscopic procedures, we plan to
develop flexible, next-iteration automated anastomotic systems
designed to facilitate minimally invasive endoscopic CABG.
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Establishing a strong proprietary position.
As of
September 30, 2005, we had 29 issued
U.S. patents, 62 additional patent applications in the
United States and another six patent applications filed in
selected international markets. We plan to continue to invest in
building our intellectual property portfolio.
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Leveraging our core competency to develop innovative
products for other surgical applications.
We believe
that our core technology, which comprises extensive
technological innovations, can be adapted for a variety of
surgical applications and disease indications, and we are
currently developing products for use in other applications,
such as vascular closure.
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Cook Relationship
In December 2005, we entered into a license, development and
commercialization agreement with Cook Incorporated, or Cook,
relating to development of our
X-Port
Vascular Access
Closure Device, or
X-Port,
a product
candidate of ours that we are currently studying in preclinical
animal model studies. Under the agreement, we will develop the
X-Port
with Cook, and
Cook will have exclusive commercialization rights to market the
product for medical procedures anywhere in the body. We will
receive an initial payment of $500,000 after we complete, to
Cooks satisfaction, certain milestones under a development
plan. Cook will also pay us up to a total of an additional
$1.5 million in future milestone payments as development
milestones are achieved. We also will receive a royalty based on
Cooks annual worldwide sales of the
X-Port.
Guidant Relationship
Guidant Investment Corporation, or Guidant Investment, is our
largest investor and our largest creditor. Guidant Corporation,
or Guidant, which is an affiliate of Guidant Investment,
distributed our products in Europe under a distribution
agreement that terminated in September 2004. In addition, we
developed an aortic cutter for Guidants Heartstring
product pursuant to a development agreement with Guidant, and we
manufactured the first 10,000 aortic cutters under this
agreement. Guidant outsourced future production of the aortic
cutter to a third-party contract manufacturer, and we will
receive a modest royalty for each aortic cutter sold in the
future. In the fiscal year ended June 30, 2004,
$0.6 million, or 75% of our revenue, was from Guidant for
distribution of our products in Europe and for services under
the development contract. In the fiscal year ended June 30,
2005,
2
$1.3 million, or 65% of our revenue, was from Guidant for
distribution of our products in Europe, completion of services
under the development contract and manufacturing of the aortic
cutter. We do not anticipate receiving any future revenue from
Guidant for distribution of our products in Europe or for
services under development contracts.
Change to Offering Price Range
The proposed price range of the shares of common stock being
offered has been reduced from $12.00 to $14.00 per share, as
stated in the prospectus previously contained in this
registration statement as filed with the Securities and Exchange
Commission on January 13, 2006, to $10.00 to $12.00 per
share. The primary effect of this change will be that the net
proceeds available to us as a result of the offering will be
reduced from approximately $40.5 million to approximately
$34.0 million (or a reduction from an aggregate of
approximately $46.8 million to an aggregate of
approximately $39.4 million if the underwriters exercise in
full their over-allotment option), based on an assumed initial
public offering price of $11.00 per share and after deducting
underwriting discounts and commissions and offering expenses
payable by us. A $1.00 increase (decrease) in the assumed
initial public offering price of $11.00 per share would increase
(decrease) the net proceeds to us from this offering by
$3.3 million after deducting underwriting discounts and
commissions and estimated offering expenses payable by us,
assuming the number of shares offered by us, as set forth on the
cover page of this prospectus, remains the same.
Risks
Our business is subject to a number of risks, which you should
be aware of before making an investment decision. These risks
are discussed more fully in Risk Factors. We have
only recently begun to commercialize our C-Port and PAS-Port
systems, and it is possible that hospitals or physicians will
not adopt our products for clinical use. Additionally, although
the current iteration of our
C-Port
system received
510(k) clearance from the FDA, we have not obtained FDA
clearance or approval to market any of our other products in the
United States, and even if we obtain FDA clearance or approval,
we may not successfully commercialize any of our products in the
United States. As of September 30, 2005, we had incurred
$51.1 million in net losses since inception. We expect to
continue to incur additional, and possibly increasing, losses
through at least 2006, and we may never become profitable.
Corporate Information
We were incorporated in Delaware in October 1997 as Vascular
Innovations, Inc. and changed our name to Cardica, Inc. in
November 2001. Our principal executive offices are located at
900 Saginaw Drive, Redwood City, California 94063 and our
telephone number is
(650)
364-9975.
We
are located on the world wide web at
cardica.com
. The
information contained on our website is not a part of this
prospectus.
Cardica
®
,
C-Port
®
and
PAS-Port
®
are our registered trademarks and
C-Port
xA
tm
,
C-Port
Flex A
tm
and
X-Port
tm
are our common law trademarks. This prospectus also refers to
trademarks and trade names of other organizations.
3
The Offering
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Common stock offered by us
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3,500,000 shares
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Common stock to be outstanding after this offering
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9,449,337 shares
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Estimated initial public offering price per share
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$10.00 to $12.00
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Use of proceeds
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We intend to use the net proceeds from this offering for sales
and marketing initiatives, research and development activities,
and general corporate purposes. See Use of Proceeds.
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Nasdaq National Market symbol
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CRDC
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The number of shares of our common stock referred to above that
will be outstanding immediately after completion of this
offering is based on 1,695,121 shares of our common stock
outstanding as of November 30, 2005 and also reflects both
the automatic conversion of our preferred stock into
4,254,216 shares of common stock and a one-for-three
reverse split of our common stock and preferred stock effected
January 9, 2006. This number does not include, as of
November 30, 2005:
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897,115 shares of common stock issuable upon exercise of
outstanding options, at a weighted average exercise price of
$2.41 per share;
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156,515 shares of common stock issuable upon the exercise
of outstanding warrants, at a weighted average exercise price of
$10.00 per share;
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up to 106,650 additional shares of our common stock reserved for
issuance under our 1997 Equity Incentive Plan;
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272,727 shares of our common stock that are issuable upon
conversion of an outstanding promissory note to Century Medical
assuming an offering price of $11.00 per share, the midpoint of
the range on the front cover of this prospectus; and
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400,000 shares of common stock reserved for issuance under
our 2005 Equity Incentive Plan.
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In addition, we have agreed to issue an additional
525,000 shares if the underwriters exercise their
over-allotment option in full, which we describe in
Underwriting. If the underwriters exercise this
option in full, 9,974,337 shares of common stock will be
outstanding after this offering.
Unless we indicate otherwise, all information in this prospectus:
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gives effect to the conversion of all outstanding shares of our
preferred stock into 4,254,216 shares of our common stock
upon the completion of this offering;
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does not reflect any conversion or exercise of outstanding
warrants or options to purchase shares of our common stock;
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assumes that the underwriters do not exercise their
over-allotment option to purchase additional shares in the
offering; and
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reflects a one-for-three reverse split of our common stock and
preferred stock effected January 9, 2006.
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4
Summary Financial Data
(In thousands, except share and per share data)
The historical summary financial data set forth below for the
years ended June 30, 2003, 2004 and 2005 are derived from
our audited financial statements included elsewhere in this
prospectus. The statement of operations data for the three-month
periods ended September 30, 2004 and 2005, and the balance
sheet data as of September 30, 2005, have been derived from
our unaudited financial statements included elsewhere in this
prospectus. You should read the information contained in this
table in conjunction with our financial statements and related
notes, Selected Financial Data and
Managements Discussion and Analysis of Financial
Condition and Results of Operations. Our historical
financial results are not necessarily indicative of results to
be expected in future periods.
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Three months
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ended
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Year ended June 30,
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September 30,
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2003
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2004
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2005
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2004
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2005
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(in thousands, except per share data)
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(unaudited)
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Statement of Operations Data:
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Revenue:
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Product revenue, net
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$
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-
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$
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212
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$
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719
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$
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168
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$
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161
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Product revenue from related party, net
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-
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401
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1,027
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744
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7
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Development revenue from related party
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-
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223
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310
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265
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-
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Total net revenue
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-
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836
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2,056
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1,177
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168
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Operating costs and expenses:
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Cost of product revenue (includes related-party costs of $1,377,
$1,180, $306 and $0 in fiscal 2004, fiscal 2005 and the three
months ended September 30, 2004 and 2005, respectively)(1)
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-
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2,105
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2,478
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636
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627
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Research and development(1)
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6,698
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5,826
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6,289
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1,504
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1,166
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Selling, general and administrative(1)
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1,936
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1,809
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3,753
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594
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1,223
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Total operating costs and expenses
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8,634
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9,740
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12,520
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2,734
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3,016
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Loss from operations
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(8,634
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(8,904
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(10,464
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(1,557
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(2,848
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Interest income
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294
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209
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305
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69
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72
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Interest expense (includes related-party interest expense of
$539, $897, $226 and $226 in fiscal 2004, fiscal 2005 and the
three months ended September 30, 2004 and 2005,
respectively)
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(885
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(2,001
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)
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(1,048
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(264
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)
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(264
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)
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Other income (expense) (includes $250 from related party in
fiscal 2005)
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-
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(14
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257
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-
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(4
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Net loss
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$
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(9,225
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$
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(10,710
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$
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(10,950
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)
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$
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(1,752
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)
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$
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(3,044
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Basic and diluted net loss per share
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$
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(7.84
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)
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$
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(8.24
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)
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$
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(7.82
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)
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$
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(1.27
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)
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$
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(2.13
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Shares used in computing basic and diluted net loss per share
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1,176
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1,299
|
|
|
|
1,401
|
|
|
|
1,384
|
|
|
|
1,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted net loss per share (unaudited)(2)
|
|
|
|
|
|
|
|
|
|
$
|
(1.93
|
)
|
|
|
|
|
|
$
|
(0.54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing pro forma basic and diluted net loss
per share (unaudited)(2)
|
|
|
|
|
|
|
|
|
|
|
5,660
|
|
|
|
|
|
|
|
5,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
(1)
|
Includes non-cash stock-based compensation of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
|
|
|
|
ended
|
|
|
|
Year ended June 30,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Cost of product revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
52
|
|
|
$
|
-
|
|
|
$
|
4
|
|
Research and development
|
|
|
67
|
|
|
|
67
|
|
|
|
583
|
|
|
|
(20
|
)
|
|
|
75
|
|
Selling, general and administrative
|
|
|
288
|
|
|
|
145
|
|
|
|
2,010
|
|
|
|
254
|
|
|
|
650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
355
|
|
|
$
|
212
|
|
|
$
|
2,645
|
|
|
$
|
234
|
|
|
$
|
729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
See our financial statements and related notes included
elsewhere in this prospectus for the calculation of pro forma
net loss per share.
|
The following table presents summary balance sheet data on an
actual basis and on a pro forma as adjusted basis. The pro forma
as adjusted numbers reflect:
|
|
|
|
|
the conversion of all of our preferred stock into an aggregate
of 4,259,328 shares of common shares immediately prior to
the closing of this offering; and
|
|
|
|
|
the sale of 3,500,000 shares of our common stock at an
assumed initial public offering price of $11.00 per share, the
midpoint of the range on the front cover of this prospectus,
after deducting underwriting discounts and commissions and
estimated offering expenses payable by us.
|
|
The table does not reflect any conversion of outstanding
warrants into shares of our common stock.
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Actual
|
|
|
As Adjusted
|
|
|
|
|
|
|
|
|
|
|
(in thousands,
|
|
|
|
unaudited)
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
7,103
|
|
|
$
|
41,108
|
|
Working capital
|
|
|
7,096
|
|
|
|
41,101
|
|
Total assets
|
|
|
10,051
|
|
|
|
44,056
|
|
Long term-liabilities
|
|
|
15,328
|
|
|
|
15,328
|
|
Convertible preferred stock
|
|
|
39,683
|
|
|
|
-
|
|
Total stockholders equity (deficit)
|
|
|
(45,983
|
)
|
|
|
27,705
|
|
6
RISK FACTORS
An investment in our common stock is highly risky. You should
carefully consider the following risks, as well as the other
information contained in this prospectus, before you decide
whether to buy our common stock. We believe the risks and
uncertainties described below are the most significant risks we
face. If any of the following events actually occurs, our
business, business prospects, financial condition, cash flow and
results of operations would likely be materially and adversely
affected. In these circumstances, the trading price of our
common stock would likely decline, and you could lose all or
part of your investment.
Risks Related to Our Business
We are dependent upon the success of our current products,
and we have U.S. regulatory clearance for our
C-Port
system only. We
cannot be certain that any of our other products will receive
regulatory clearance or approval or that any of our products,
including the
C-Port
system, will be commercialized in the United States. If we are
unable to commercialize our products in the United States, or
experience significant delays in doing so, our ability to
generate revenue will be significantly delayed or halted, and
our business will be harmed.
We have expended significant time, money and effort in the
development of our current products, the
C-Port
Distal
Anastomosis System, referred to as the
C-Port
system, and the
PAS-Port Proximal Anastomosis System, referred to as the
PAS-Port
system. While
we have regulatory approval for commercial sale of our
C-Port
system in the
United States and in the European Union and of our
PAS-Port
System in the
European Union and Japan, we do not have clearance or approval
in the United States for the
PAS-Port
system, later
iterations of the
C-Port
system or any
other product. While we believe most of our revenue in the near
future will be derived from the sales and distribution of the
C-Port
system, we
anticipate that our ability to increase our revenue in the
longer term will depend on the regulatory clearance or approval
and commercialization of the
PAS-Port
system and
later iterations of the
C-Port
system in the
United States.
If we are not successful in commercializing our
C-Port
system or
obtaining U.S. Food and Drug Administration, or FDA,
clearance or approval of either our later iterations of the
C-Port system or the current iteration of the
PAS-Port
system, or if
FDA clearance or approval of any of our products is
significantly delayed, we may never generate substantial
revenue, our business, financial condition and results of
operations would be materially and adversely affected, and we
may be forced to cease operations. We intend to commence sales
of our
C-Port
system in
the United States in 2006, but sales may not meet our
expectations. Although we have other products under development,
we may never obtain regulatory clearance or approval of those
devices. We may be required to spend significant amounts of
capital or time to respond to requests for additional
information by the FDA or foreign regulatory bodies or may
otherwise be required to spend significant amounts of time and
money to obtain FDA clearance or approval and foreign regulatory
approval. Imposition of any of these requirements could
substantially delay or preclude us from marketing our products
in the United States or foreign countries.
A prior automated cardiac proximal anastomosis system was
introduced by another manufacturer but was withdrawn from the
market, and, as a result, we may experience difficulty in
commercializing our C-Port and PAS-Port systems.
A prior automated proximal anastomosis device was introduced by
another manufacturer in the United States in 2002. The FDA
received reports of apparently device-related adverse events,
and in 2004, the device was voluntarily withdrawn from the
market by the manufacturer. Because of the FDAs experience
with this prior device, the FDA has identified new criteria for
the clinical data required to obtain clearance for a proximal
anastomosis device like the PAS-Port. We may not be able to show
that the PAS-Port satisfies these criteria, and we may therefore
be unable to obtain FDA clearance or approval to market the
device in the United States, which would substantially harm our
business and prospects. Moreover, physicians who have experience
with or knowledge of prior anastomosis devices may be
predisposed against using our C-Port or PAS-Port products, which
could limit our ability to commercialize them if they are
approved by the FDA. If we fail to achieve market adoption, our
business, financial condition and results of operations would be
materially harmed.
7
Lack of third-party coverage and reimbursement for our
products could delay or limit their adoption.
We may experience limited sales growth resulting from
limitations on reimbursements made to purchasers of our products
by third-party payors, and we cannot assure you that our sales
will not be impeded and our business harmed if third-party
payors fail to provide reimbursement that hospitals view as
adequate.
In the United States, our products will be purchased primarily
by medical institutions, which then bill various third-party
payors, such as the Centers for Medicare & Medicaid
Services, or CMS, which administer the Medicare program, and
other government programs and private insurance plans, for the
health care services provided to their patients. The process
involved in applying for coverage and incremental reimbursement
from CMS is lengthy and expensive. Even if our products receive
FDA and other regulatory clearance or approval, they may not be
granted coverage and reimbursement in the foreseeable future, if
at all. Moreover, many private payors look to CMS in setting
their reimbursement policies and amounts. If CMS or other
agencies limit coverage or decrease or limit reimbursement
payments for doctors and hospitals, this may affect coverage and
reimbursement determinations by many private payors.
We cannot assure you that CMS will provide coverage and
reimbursement for our products. If a medical device does not
receive incremental reimbursement from CMS, then a medical
institution would have to absorb the cost of our products as
part of the cost of the procedure in which the products are
used. Acute care hospitals are now generally reimbursed by CMS
for inpatient operating costs under a Medicare hospital
inpatient prospective payment system. Under the Medicare
hospital inpatient prospective payment system, acute care
hospitals receive a fixed payment amount for each covered
hospitalized patient based upon the Diagnosis-Related Group, or
DRG, to which the inpatient stay is assigned, regardless of the
actual cost of the services provided. At this time, we do not
know the extent to which medical institutions would consider
insurers payment levels adequate to cover the cost of our
products. Failure by hospitals and physicians to receive an
amount that they consider to be adequate reimbursement for
procedures in which our products are used could deter them from
purchasing our products and limit our revenue growth. In
addition, pre-determined DRG payments may decline over time,
which could deter medical institutions from purchasing our
products. If medical institutions are unable to justify the
costs of our products, they may refuse to purchase them, which
would significantly harm our business.
We have limited data regarding the safety and efficacy of the
PAS-Port and C-Port and have only recently begun training
physicians in the United States to use the C-Port system. Any
data that is generated in the future may not be positive or
consistent with our existing data, which would affect market
acceptance and the rate at which our devices are adopted.
The
C-Port
and
PAS-Port
systems are
innovative products, and our success depends upon their
acceptance by the medical community as safe and effective. An
important factor upon which the efficacy of the
C-Port
and
PAS-Port
will be
measured is long-term data regarding the duration of patency, or
openness, of the artery or the graft vessel. Equally important
will be physicians perceptions of the safety of our
products. Our technology is relatively new in cardiac bypass
surgery, and the results of short-term clinical experience of
the
C-Port
and
PAS-Port
systems do not
necessarily predict long-term clinical benefit. We believe that
physicians will compare long-term patency for the
C-Port
and
PAS-Port
devices
against alternative procedures, such as hand-sewn anastomoses.
If the long-term rates of patency do not meet physicians
expectations, or if physicians find our devices unsafe, the
C-Port
and
PAS-Port
systems may
not become widely adopted and physicians may recommend
alternative treatments for their patients. In addition, we have
recently begun training physicians in the United States to use
our C-Port system. Any adverse experiences of physicians using
the C-Port system, or adverse outcomes to patients, may deter
physicians from using our products and negatively impact product
adoption.
Our
C-Port
and
PAS-Port
systems were
designed for use with venous grafts. Additionally, while our
indications for use of the
C-Port
system cleared
by the FDA refer broadly to grafts, we have studied the use of
the
C-Port
system only
with venous grafts and not with arterial grafts. Using the
C-Port
system with
arterial grafts may not yield patency rates or material adverse
cardiac event rates comparable to those found in our clinical
trials using venous grafts, which could negatively affect market
acceptance of our
C-Port
system. In
addition, the
8
clips and staples deployed by our products are made of 316L
medical-grade stainless steel, to which some patients are
allergic. These allergies may result in adverse reactions that
negatively affect the patency of the anastomoses or the healing
of the implants and may therefore adversely affect outcomes,
particularly when compared to anastomoses performed with other
materials, such as sutures. Additionally, in the event a
surgeon, during the course of surgery, determines that it is
necessary to convert to a hand-sewn anastomosis and to remove an
anastomosis created by one of our products, the removal of the
implants may result in more damage to the target vessel (such as
the aorta or coronary artery) than would typically be
encountered during removal of a hand-sewn anastomosis. Moreover,
the removal may damage the target vessel to an extent that could
further complicate construction of a replacement hand-sewn or
automated anastomosis, which could be detrimental to patient
outcome. These or other issues, if experienced, could limit
physician adoption of our products.
Even if the data collected from future clinical studies or
clinical experience indicates positive results, each
physicians actual experience with our device outside the
clinical study setting may vary. Clinical studies conducted with
the
C-Port
and
PAS-Port
systems have
involved procedures performed by physicians who are technically
proficient, high-volume users of the
C-Port
and
PAS-Port
systems.
Consequently, both short- and long-term results reported in
these studies may be significantly more favorable than typical
results of practicing physicians, which could negatively impact
rates of adoption of the
C-Port
and PAS-Port
systems.
Even though our
C-Port
product has
received U.S. regulatory clearance, our
PAS-Port
system, as
well as our future products, may still face future development
and regulatory difficulties.
Even though the current iteration of the
C-Port
system has
received U.S. regulatory clearance, the FDA may still
impose significant restrictions on the indicated uses or
marketing of this product or ongoing requirements for
potentially costly post-clearance studies. Any of our other
products, including the
PAS-Port
system and
future iterations of the
C-Port
system, may also
face these types of restrictions or requirements. In addition,
regulatory agencies subject a product, its manufacturer and the
manufacturers facilities to continual review, regulation
and periodic inspections. If a regulatory agency discovers
previously unknown problems with a product, including adverse
events of unanticipated severity or frequency, or problems with
the facility where the product is manufactured, a regulatory
agency may impose restrictions on that product, our
collaborators or us, including requiring withdrawal of the
product from the market. Our products will also be subject to
ongoing FDA requirements for the labeling, packaging, storage,
advertising, promotion, record-keeping and submission of safety
and other post-market information on the product. If our
products fail to comply with applicable regulatory requirements,
a regulatory agency may impose any of the following sanctions:
|
|
|
|
|
warning letters, fines, injunctions, consent decrees and civil
penalties;
|
|
|
|
customer notifications, repair, replacement, refunds, recall or
seizure of our products;
|
|
|
|
operating restrictions, partial suspension or total shutdown of
production;
|
|
|
|
delay in processing marketing applications for new products or
modifications to existing products;
|
|
|
|
withdrawing approvals that have already been granted; and
|
|
|
|
criminal prosecution.
|
To market any products internationally, we must establish and
comply with numerous and varying regulatory requirements of
other countries regarding safety and efficacy. Approval
procedures vary among countries and can involve additional
product testing and additional administrative review periods.
The time required to obtain approval in other countries might
differ from that required to obtain FDA clearance or approval.
The regulatory approval process in other countries may include
all of the risks detailed above regarding FDA clearance or
approval in the United States. Regulatory approval in one
country does not ensure regulatory approval in another, but a
failure or delay in obtaining regulatory approval in one country
may negatively impact the regulatory process in others. Failure
to obtain regulatory approval in other countries or any delay or
setback in obtaining such approval could have the same adverse
effects detailed above regarding FDA clearance or approval in
the United States, including the risk that our products may not
be approved for use under all of the circumstances requested,
which could limit the uses of our products and adversely impact
potential product sales, and that such
9
clearance or approval may require costly, post-marketing
follow-up
studies. If
we fail to comply with applicable foreign regulatory
requirements, we may be subject to fines, suspension or
withdrawal of regulatory approvals, product recalls, seizure of
products, operating restrictions and criminal prosecution.
If we do not achieve our projected development goals in the
time frames we announce and expect, the commercialization of our
product candidates may be delayed and, as a result, our stock
price may decline.
From time to time, we may estimate and publicly announce the
timing anticipated for the accomplishment of various clinical,
regulatory and other product development goals, which we
sometimes refer to as milestones. These milestones may include
an Investigational Device Exemption application to commence our
enrollment of patients in our clinical trials, the release of
data from our clinical trials, receipt of clearances or
approvals from regulatory authorities or other clinical and
regulatory events. These estimates are based on a variety of
assumptions. The actual timing of these milestones can vary
dramatically compared to our estimates, in some cases for
reasons beyond our control. If we do not meet these milestones
as publicly announced, the commercialization of our products may
be delayed and, as a result, our stock price may decline.
Our products may never gain any significant degree of market
acceptance, and a lack of market acceptance would have a
material adverse effect on our business.
We cannot assure you that our products will gain any significant
degree of market acceptance among physicians or patients, even
if necessary regulatory and reimbursement approvals are
obtained. We believe that recommendations by physicians will be
essential for market acceptance of our products; however, we
cannot assure you that any recommendations will be obtained.
Physicians will not recommend the products unless they conclude,
based on clinical data and other factors, that the products
represent a safe and acceptable alternative to other available
options. In particular, physicians may elect not to recommend
using our products in surgical procedures until such time, if
ever, as we successfully demonstrate with long-term data that
our products result in patency rates comparable to or better
than those achieved with hand-sewn anastomoses, and we resolve
any technical limitations that may arise.
We believe graft patency will be a significant factor for
physician recommendation of our products. Although we have not
experienced low patency rates in our clinical trials, graft
patency determined during the clinical trials conducted by us or
other investigators may not be representative of the graft
patency actually encountered during commercial use of our
products. The surgical skill sets of investigators in our
clinical trials may not be representative of the skills of
future product users, which could negatively affect graft
patency. In addition there may have been a selection bias in the
patients, grafts and target vessels used during the clinical
trials that positively affected graft patency. The patients
included in the clinical trials may not be representative of the
general patient population in the United States, which may have
resulted in improved graft patency in patients enrolled in the
clinical trials. Finally, patient compliance in terms of use of
prescribed anticlotting medicines may have been higher in
clinical trials than may occur during commercial use, thereby
negatively affecting graft patency during commercial use.
Widespread use of our products will require the training of
numerous physicians, and the time required to complete training
could result in a delay or dampening of market acceptance. Even
if the safety and efficacy of our products is established,
physicians may elect not to use our products for a number of
reasons beyond our control, including inadequate or no
reimbursement from health care payors, physicians
reluctance to perform anastomoses with an automated device, the
introduction of competing devices by our competitors and pricing
for our products. Failure of our products to achieve any
significant market acceptance would have a material adverse
effect on our business, financial condition and results of
operations.
Because one customer accounts for substantially all of our
revenue, the loss of this significant customer could cause a
substantial decline in our revenue.
We derive virtually all of our revenue from sales to Century
Medical, Inc., or Century, our distributor in Japan. The loss of
Century as a customer would cause a decrease in revenue and,
consequently, an increase in net
10
loss. For the three months ended September 30, 2005, sales
to Century accounted for approximately 90% of our total revenue.
We expect that Century will continue to account for a
substantial portion of our revenue in the near term. As a
result, if we lose Century as a customer, our revenue and net
loss would be adversely affected. In addition, customers that
have accounted for significant revenue in the past may not
generate revenue in any future period. The failure to obtain new
significant customers or additional orders from existing
customers will materially affect our operating results.
If our competitors have products that are approved in advance
of ours, marketed more effectively or demonstrated to be more
effective than ours, our commercial opportunity will be reduced
or eliminated and our business will be harmed.
The market for anastomotic solutions and cardiac bypass products
is competitive. Competitors include a variety of public and
private companies that currently offer or are developing cardiac
surgery products generally and automated anastomotic systems
specifically that would compete directly with ours.
We believe that the primary competitive factors in the market
for medical devices used in the treatment of coronary artery
disease include:
|
|
|
|
|
improved patient outcomes;
|
|
|
|
access to and acceptance by leading physicians;
|
|
|
|
product quality and reliability;
|
|
|
|
ease of use;
|
|
|
|
device cost-effectiveness;
|
|
|
|
training and support;
|
|
|
|
novelty;
|
|
|
|
physician relationships; and
|
|
|
|
sales and marketing capabilities.
|
We may be unable to compete successfully on the basis of any one
or more of these factors, which could have a material adverse
affect on our business, financial condition and results of
operations.
A number of different technologies exist or are under
development for performing anastomoses, including sutures,
mechanical anastomotic devices, suture-based anastomotic devices
and shunting devices. Currently, substantially all anastomoses
are performed with sutures and, for the foreseeable future, we
believe that sutures will continue to be the principal
alternative to our anastomotic products. Sutures are far less
expensive than our automated anastomotic products, and other
anastomotic devices may be less expensive than our own.
Surgeons, who have been using sutures for their entire careers,
may be reluctant to consider alternative technologies, despite
potential advantages. Any resistance to change among
practitioners could delay or hinder market acceptance of our
products, which would have a material adverse effect on our
business.
Cardiovascular diseases may also be treated by other methods
that do not require anastomoses, including, interventional
techniques such as balloon angioplasty with or without the use
of stents, pharmaceuticals, atherectomy catheters and lasers.
Several of these alternative treatments are widely accepted in
the medical community and have a long history of use. In
addition, technological advances with other therapies for
cardiovascular disease, such as drugs, or future innovations in
cardiac surgery techniques could make other methods of treating
this disease more effective or lower cost than bypass
procedures. For example, the number of bypass procedures in the
United States and other major markets has declined in recent
years and is expected to decline in the years ahead because
competing treatments are, in many cases, far less invasive and
provide acceptable clinical outcomes. Many companies working on
treatments that do not require anastomoses may have
significantly greater financial, manufacturing, marketing,
distribution, and technical resources and experience than we
have.
11
Many of our competitors have significantly greater financial
resources and expertise in research and development,
manufacturing, pre-clinical testing, clinical trials, obtaining
regulatory clearance or approval and marketing approved products
than we do. Smaller or early-stage companies may also prove to
be significant competitors, particularly through collaborative
arrangements with large and established companies. Our
competitors may succeed in developing technologies and therapies
that are more effective, better tolerated or less costly than
any that we are developing or that would render our product
candidates obsolete and noncompetitive. Our competitors may
succeed in obtaining clearance or approval from the FDA and
foreign regulatory authorities for their products sooner than we
do for ours. We will also face competition from these third
parties in recruiting and retaining qualified scientific and
management personnel, establishing clinical trial sites and
patient enrollment for clinical trials and in acquiring and
in-licensing
technologies and products complementary to our programs or
advantageous to our business.
We have limited manufacturing experience and may encounter
difficulties in increasing production to provide an adequate
supply to customers.
To date, our manufacturing activities have consisted primarily
of producing limited quantities of our products for use in
clinical studies and for sales in Japan and Europe. We do not
have experience in manufacturing our products in the commercial
quantities that might be required to market our products in the
United States. Production in commercial quantities will require
us to expand our manufacturing capabilities and to hire and
train additional personnel. We may encounter difficulties in
increasing our manufacturing capacity and in manufacturing
commercial quantities, including:
|
|
|
|
|
maintaining product yields;
|
|
|
|
maintaining quality control and assurance;
|
|
|
|
providing component and service availability;
|
|
|
|
maintaining adequate control policies and procedures; and
|
|
|
|
hiring and retaining qualified personnel.
|
Difficulties encountered in increasing our manufacturing could
have a material adverse effect on our business, financial
condition and results of operations.
The manufacture of our products is a complex and costly
operation involving a number of separate processes and
components. In addition, the current unit costs for our
products, based on limited manufacturing volumes, are very high,
and it will be necessary to achieve economies of scale to become
profitable. Certain of our manufacturing processes are labor
intensive, and achieving significant cost reductions will depend
in part upon reducing the time required to complete these
processes. We cannot assure you that we will be able to achieve
cost reductions in the manufacture of our products and, without
these cost reductions, our business may never achieve
profitability.
We have considered, and will continue to consider as
appropriate, manufacturing
in-house
certain
components currently provided by third parties, as well as
implementing new production processes. Manufacturing yields or
costs may be adversely affected by the transition to in-house
production or to new production processes, when and if these
efforts are undertaken, which would materially and adversely
affect our business, financial condition and results of
operations.
Our manufacturing facilities, and those of our suppliers,
must comply with applicable regulatory requirements. Failure to
obtain regulatory approval of our manufacturing facilities would
harm our business and our results of operations.
Our manufacturing facilities and processes are subject to
periodic inspections and audits by various U.S. federal, U.S.
state and foreign regulatory agencies. For example, our
facilities have been inspected by State of California regulatory
authorities pursuant to granting a California Device
Manufacturing License, but not, to date, by the FDA.
Additionally, to market products in Europe, we are required to
maintain ISO 13485:2003 certification and are subject to
periodic surveillance audits. We are currently ISO 13485:2003
certified; however,
12
our failure to maintain necessary regulatory approvals for our
manufacturing facilities could prevent us from manufacturing and
selling our products.
Additionally, our manufacturing processes and, in some cases,
those of our suppliers are required to comply with FDAs
Quality System Regulation, or QSR, which covers the procedures
and documentation of the design, testing, production, control,
quality assurance, labeling, packaging, storage and shipping of
our products, including the
PAS-Port
and
C-Port.
We are also
subject to similar state requirements and licenses. In addition,
we must engage in extensive record keeping and reporting and
must make available our manufacturing facilities and records for
periodic inspections by governmental agencies, including FDA,
state authorities and comparable agencies in other countries. If
we fail a QSR inspection, our operations could be disrupted and
our manufacturing interrupted. Failure to take adequate
corrective action in response to an adverse QSR inspection could
result in, among other things, a shut-down of our manufacturing
operations, significant fines, suspension of product
distribution or other operating restrictions, seizures or
recalls of our device and criminal prosecutions, any of which
would cause our business to suffer. Furthermore, our key
component suppliers may not currently be or may not continue to
be in compliance with applicable regulatory requirements, which
may result in manufacturing delays for our products and cause
our revenue to decline.
If we are unable to establish sales and marketing
capabilities or enter into and maintain arrangements with third
parties to market and sell our products, our business may be
harmed.
We are in the beginning stages of building a sales and marketing
organization, and we have limited experience as a company in the
sales, marketing and distribution of our products. Century is
responsible for marketing and commercialization of the PAS-Port
system in Japan. To promote our current and future products in
the United States and Europe, we must develop our sales,
marketing and distribution capabilities or make arrangements
with third parties to perform these services. Competition for
qualified sales personnel is intense. Developing a sales force
is expensive and time consuming and could delay any product
launch. We may be unable to establish and manage an effective
sales force in a timely or cost-effective manner, if at all, and
any sales force we do establish may not be capable of generating
sufficient demand for our products. To the extent that we enter
into arrangements with third parties to perform sales and
marketing services, our product revenue may be lower than if we
directly marketed and sold our products. We expect to rely on
third-party distributors for substantially all of our
international sales. If we are unable to establish adequate
sales and marketing capabilities, independently or with others,
we may not be able to generate significant revenue and may not
become profitable.
We will need to increase the size of our organization, and we
may experience difficulties in managing this growth.
As of November 30, 2005, we had 42 employees. We will
need to continue to expand our managerial, operational,
financial and other resources to manage and fund our operations
and clinical trials, continue our research and development
activities and commercialize our products. It is possible that
our management and scientific personnel, systems and facilities
currently in place may not be adequate to support this future
growth. Our need to effectively manage our operations, growth
and programs requires that we continue to improve our
operational, financial and management controls, reporting
systems and procedures and to attract and retain sufficient
numbers of talented employees. We may be unable to successfully
implement these tasks on a larger scale and, accordingly, may
not achieve our research, development and commercialization
goals.
We are dependent upon a number of key suppliers, including
single source suppliers, the loss of which would materially harm
our business.
We use or rely upon sole source suppliers for certain components
and services used in manufacturing our products, and we utilize
materials and components supplied by third parties with which we
do not have any long-term contracts. In recent years, many
suppliers have ceased supplying raw materials for use in
implantable medical devices. We cannot assure you that materials
required by us will not be restricted or that we will be able to
obtain sufficient quantities of such materials or services in
the future. Moreover, the continued use by us of materials
manufactured by third parties could subject us to liability
exposure. Because we do not have long-term contracts, none of
our suppliers is required to provide us with any guaranteed
minimum production levels.
13
We cannot quickly replace suppliers or establish additional new
suppliers for some of these components, particularly due to both
the complex nature of the manufacturing process used by our
suppliers and the time and effort that may be required to obtain
FDA clearance or approval or other regulatory approval to use
materials from alternative suppliers. Any significant supply
interruption or capacity constraints affecting our facilities or
those of our suppliers would have a material adverse effect on
our ability to manufacture our products and, therefore, a
material adverse effect on our business, financial condition and
results of operations.
We may in the future be a party to patent litigation and
administrative proceedings that could be costly and could
interfere with our ability to sell our products.
The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property
rights, and companies in the industry have used intellectual
property litigation to gain a competitive advantage. We may
become a party to patent infringement claims and litigation or
interference proceedings declared by the U.S. Patent and
Trademark Office to determine the priority of inventions. The
defense and prosecution of these matters are both costly and
time consuming. Additionally, we may need to commence
proceedings against others to enforce our patents, to protect
our trade secrets or know-how or to determine the
enforceability, scope and validity of the proprietary rights of
others. These proceedings would result in substantial expense to
us and significant diversion of effort by our technical and
management personnel.
We are aware of patents issued to third parties that contain
subject matter related to our technology. We cannot assure you
that these or other third parties will not assert that our
products and systems infringe the claims in their patents or
seek to expand their patent claims to cover aspects of our
products and systems. An adverse determination in litigation or
interference proceedings to which we may become a party could
subject us to significant liabilities or require us to seek
licenses. In addition, if we are found to willfully infringe
third-party patents, we could be required to pay treble damages
in addition to other penalties. Although patent and intellectual
property disputes in the medical device area have often been
settled through licensing or similar arrangements, costs
associated with these arrangements may be substantial and could
include ongoing royalties. We may be unable to obtain necessary
licenses on satisfactory terms, if at all. If we do not obtain
necessary licenses, we may be required to redesign our products
to avoid infringement, and it may not be possible to do so
effectively. Adverse determinations in a judicial or
administrative proceeding or failure to obtain necessary
licenses could prevent us from manufacturing and selling the
C-Port
system,
PAS-Port
system or any
other product we may develop, which would have a significant
adverse impact on our business.
On October 28, 2005, we received a letter from Integrated
Vascular Interventional Technologies, Inc., referred to as IVIT,
advising us for the first time of IVITs effort (thus far
unsuccessful) to provoke an interference in the U.S. Patent
and Trademark Office between one of IVITs patent
applications (serial no. 10/243,543) and a patent currently
held by us (U.S. patent no. 6,391,038) and relating to
the
C-Port
system. We
also learned on that date that IVIT is attempting to provoke an
interference in the U.S. Patent and Trademark Office
between another of its U.S. patent applications (serial
no. 10/706,245) and another of our issued patents
(U.S. Patent No. 6,478,804). IVIT makes no specific
demands in the letter, but alleges that it has an indication of
an allowed claim and that it expects to receive a declaration of
interference regarding that claim, and states that it would be
strategically beneficial for us to discuss this
matter prior to receiving a declaration of interference.
An interference is a proceeding within the U.S. Patent and
Trademark Office to determine priority of invention of the
subject matter of patent claims. The decision to declare an
interference is solely within the power of the Board of Patent
Appeals and Interferences of the U.S. Patent and Trademark
Office, and can be made only after claims in a patent
application are allowed by the examiner and a determination is
made that interfering subject matter exists. As yet, no claims
have been allowed in either of IVITs two patent
applications referenced above.
We believe, after conferring with intellectual property counsel,
that IVITs attempts to provoke an interference are
unlikely to succeed, and we will vigorously defend our patents
against such claims of interference, although there can be no
assurance that we will succeed in doing so. We further believe
that if IVITs patent claims are allowed in their present
form, our products would not infringe such claims. There can be
14
no assurance that IVITs patent claims, if allowed, will be
in their present form, or that our products would not be found
to infringe such claims or any other claims that are issued.
Intellectual property rights may not provide adequate
protection, which may permit third parties to compete against us
more effectively.
We rely upon patents, trade secret laws and confidentiality
agreements to protect our technology and products. Our pending
patent applications may not issue as patents or, if issued, may
not issue in a form that will be advantageous to us. Any patents
we have obtained or will obtain in the future might be
invalidated or circumvented by third parties. If any challenges
are successful, competitors might be able to market products and
use manufacturing processes that are substantially similar to
ours. We may not be able to prevent the unauthorized disclosure
or use of our technical knowledge or other trade secrets by
consultants, vendors or former or current employees, despite the
existence generally of confidentiality agreements and other
contractual restrictions. Monitoring unauthorized use and
disclosure of our intellectual property is difficult, and we do
not know whether the steps we have taken to protect our
intellectual property will be adequate. In addition, the laws of
many foreign countries may not protect our intellectual property
rights to the same extent as the laws of the United States. To
the extent that our intellectual property protection is
inadequate, we are exposed to a greater risk of direct
competition. In addition, competitors could purchase any of our
products and attempt to replicate some or all of the competitive
advantages we derive from our development efforts or design
around our protected technology. If our intellectual property is
not adequately protected against competitors products and
methods, our competitive position could be adversely affected,
as could our business.
We also rely upon trade secrets, technical know-how and
continuing technological innovation to develop and maintain our
competitive position. We require our employees, consultants and
advisors to execute appropriate confidentiality and
assignment-of-inventions agreements with us. These agreements
typically provide that all materials and confidential
information developed or made known to the individual during the
course of the individuals relationship with us be kept
confidential and not disclosed to third parties except in
specific circumstances and that all inventions arising out of
the individuals relationship with us shall be our
exclusive property. These agreements may be breached, and in
some instances, we may not have an appropriate remedy available
for breach of the agreements. Furthermore, our competitors may
independently develop substantially equivalent proprietary
information and techniques, reverse engineer our information and
techniques, or otherwise gain access to our proprietary
technology.
Our products face the risk of technological obsolescence,
which, if realized, could have a material adverse effect on our
business.
The medical device industry is characterized by rapid and
significant technological change. There can be no assurance that
third parties will not succeed in developing or marketing
technologies and products that are more effective than ours or
that would render our technology and products obsolete or
noncompetitive. Additionally, new, less invasive surgical
procedures and medications could be developed that replace or
reduce the importance of current procedures that use our
products. Accordingly, our success will depend in part upon our
ability to respond quickly to medical and technological changes
through the development and introduction of new products. The
relative speed with which we can develop products, complete
clinical testing and regulatory clearance or approval processes,
train physicians in the use of our products, gain reimbursement
acceptance, and supply commercial quantities of the products to
the market are expected to be important competitive factors.
Product development involves a high degree of risk, and we
cannot assure you that our new product development efforts will
result in any commercially successful products. We have
experienced delays in completing the development and
commercialization of our planned products, and there can be no
assurance that these delays will not continue or recur in the
future. Any delays could result in a loss of market acceptance
and market share.
We may not be successful in our efforts to expand our product
portfolio, and our failure to do so could cause our business and
prospects to suffer.
We intend to use our knowledge and expertise in anastomotic
technologies to discover, develop and commercialize new
applications in endoscopic surgery, general vascular surgery or
other markets. However, the
15
process of researching and developing anastomotic devices is
expensive, time-consuming and unpredictable. Our efforts to
create products for these new markets are at a very early stage,
and we may never be successful in developing viable products for
these markets. Even if our development efforts are successful
and we obtain the necessary regulatory and reimbursement
approvals, we cannot assure you that these or our other products
will gain any significant degree of market acceptance among
physicians, patients or health care payors. Accordingly, we
anticipate that, for the foreseeable future, we will be
substantially dependent upon the successful development and
commercialization of anastomotic systems and instruments for
cardiac surgery, mainly the PAS-Port system and the
C-Port
system. Failure
by us to successfully develop and commercialize these systems
for any reason, including failure to overcome regulatory hurdles
or inability to gain any significant degree of market
acceptance, would have a material adverse effect on our
business, financial condition and results of operations.
We may be subject, directly or indirectly, to federal and
state healthcare fraud and abuse laws and regulations and, if we
are unable to fully comply with such laws, could face
substantial penalties.
Our operations may be directly or indirectly affected by various
broad state and federal healthcare fraud and abuse laws,
including the federal healthcare program Anti-Kickback Statute,
which prohibit any person from knowingly and willfully offering,
paying, soliciting or receiving remuneration, directly or
indirectly, to induce or reward either the referral of an
individual, or the furnishing or arranging for an item or
service, for which payment may be made under federal healthcare
programs, such as the Medicare and Medicaid programs. Foreign
sales of our products are also subject to similar fraud and
abuse laws, including application of the U.S. Foreign
Corrupt Practices Act. If our operations, including any
consulting arrangements we may enter into with physicians who
use our products, are found to be in violation of these laws, we
or our officers may be subject to civil or criminal penalties,
including large monetary penalties, damages, fines, imprisonment
and exclusion from Medicare and Medicaid program participation.
If enforcement action were to occur, our business and financial
condition would be harmed.
We could be exposed to significant product liability claims,
which could be time consuming and costly to defend, divert
management attention, and adversely impact our ability to obtain
and maintain insurance coverage. The expense and potential
unavailability of insurance coverage for our company or our
customers could adversely affect our ability to sell our
products, which would adversely affect our business.
The testing, manufacture, marketing, and sale of our products
involve an inherent risk that product liability claims will be
asserted against us. Additionally, we are currently training
physicians in the United States on the use of our C-Port
system. During training, patients may be harmed, which could
also lead to product liability claims. Product liability claims
or other claims related to our products, or their off-label use,
regardless of their merits or outcomes, could harm our
reputation in the industry, reduce our product sales, lead to
significant legal fees, and result in the diversion of
managements attention from managing our business. As of
January 3, 2006, however, we are not aware of any existing
product liability claims.
Although we maintain product liability insurance in the amount
of $5,000,000, we may not have sufficient insurance coverage to
fully cover the costs of any claim or any ultimate damages we
might be required to pay. We may not be able to obtain insurance
in amounts or scope sufficient to provide us with adequate
coverage against all potential liabilities. Any product
liability claims brought against us, with or without merit,
could increase our product liability insurance rates or prevent
us from securing continuing coverage. Product liability claims
in excess of our insurance coverage would be paid out of cash
reserves, harming our financial condition and adversely
affecting our financial condition and operating results.
Some of our customers and prospective customers may have
difficulty in procuring or maintaining liability insurance to
cover their operations and use of the
C-Port
or
PAS-Port
systems.
Medical malpractice carriers are withdrawing coverage in certain
states or substantially increasing premiums. If this trend
continues or worsens, our customers may discontinue using the
C-Port or PAS-Port systems and potential customers may opt
against purchasing the
C-Port
or
PAS-Port
systems due to
the cost or inability to procure insurance coverage.
16
We sell our systems internationally and are subject to
various risks relating to these international activities, which
could adversely affect our revenue.
To date, all of our revenue has been attributable to sales in
international markets. By doing business in international
markets, we are exposed to risks separate and distinct from
those we face in our domestic operations. Our international
business may be adversely affected by changing economic
conditions in foreign countries. Because most of our sales are
currently denominated in U.S. dollars, if the value of the
U.S. dollar increases relative to foreign currencies, our
products could become more costly to the international customer
and, therefore, less competitive in international markets, which
could affect our results of operations. Engaging in
international business inherently involves a number of other
difficulties and risks, including:
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export restrictions and controls relating to technology;
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the availability and level of reimbursement within prevailing
foreign healthcare payment systems;
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pricing pressure that we may experience internationally;
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required compliance with existing and changing foreign
regulatory requirements and laws;
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laws and business practices favoring local companies;
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longer payment cycles;
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difficulties in enforcing agreements and collecting receivables
through certain foreign legal systems;
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political and economic instability;
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potentially adverse tax consequences, tariffs and other trade
barriers;
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international terrorism and anti-American sentiment;
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difficulties and costs of staffing and managing foreign
operations; and
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difficulties in enforcing intellectual property rights.
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Our exposure to each of these risks may increase our costs,
impair our ability to market and sell our products and require
significant management attention. We cannot assure you that one
or more of these factors will not harm our business.
We are dependent upon key personnel, loss of any of which
could have a material adverse affect on our business.
Our future business and operating results depend significantly
on the continued contributions of our key technical personnel
and senior management, including those of our
co-founder,
CEO and
President, Bernard Hausen, M.D., Ph.D. These services
and individuals would be difficult or impossible to replace and
none of these individuals is subject to a post-employment
non-competition agreement. While we are subject to certain
severance obligations to Dr. Hausen, either he or we may
terminate his employment at any time and for any lawful reason
or for no reason. Our business and future operating results also
depend significantly on our ability to attract and retain
qualified management, manufacturing, technical, marketing, sales
and support personnel for our operations. Competition for such
personnel is intense, and there can be no assurance that we will
be successful in attracting or retaining such personnel.
Additionally, although we have key-person life insurance in the
amount of $3.0 million on the life of Dr. Hausen, we
cannot assure you that this amount would fully compensate us for
the loss of Dr. Hausens services. The loss of key
employees, the failure of any key employee to perform or our
inability to attract and retain skilled employees, as needed,
could materially adversely affect our business, financial
condition and results of operations.
Our operations are currently conducted at a single location
that may be at risk from earthquakes, terror attacks or other
disasters.
We currently conduct all of our manufacturing, development and
management activities at a single location in Redwood City,
California, near known earthquake fault zones. We have taken
precautions to safeguard our
17
facilities, including insurance, health and safety protocols,
and off-site storage of computer data. However, any future
natural disaster, such as an earthquake, or a terrorist attack,
could cause substantial delays in our operations, damage or
destroy our equipment or inventory and cause us to incur
additional expenses. A disaster could seriously harm our
business and results of operations. Our insurance does not cover
earthquakes and floods and may not be adequate to cover our
losses in any particular case.
If we use hazardous materials in a manner that causes injury,
we may be liable for damages.
Our research and development and manufacturing activities
involve the use of hazardous materials. Although we believe that
our safety procedures for handling and disposing of these
materials comply with federal, state and local laws and
regulations, we cannot entirely eliminate the risk of accidental
injury or contamination from the use, storage, handling or
disposal of these materials. If one of our employees were
accidentally injured from the use, storage, handling or disposal
of these materials, the medical costs related to his or her
treatment would be covered by our workers compensation
insurance policy. However, we do not carry specific hazardous
waste insurance coverage, and our property and casualty and
general liability insurance policies specifically exclude
coverage for damages and fines arising from hazardous waste
exposure or contamination. Accordingly, in the event of
contamination or injury, we could be held liable for damages or
penalized with fines in an amount exceeding our resources, and
our clinical trials or regulatory clearances or approvals could
be suspended.
We may be subject to fines, penalties or injunctions if we
are determined to be promoting the use of our products for
unapproved or off-label uses.
If our products receive FDA clearance or approval, our
promotional materials and training methods regarding physicians
will need to comply with FDA and other applicable laws and
regulations. If the FDA determines that our promotional
materials or training constitutes promotion of an unapproved
use, it could request that we modify our training or promotional
materials or subject us to regulatory enforcement actions,
including the issuance of a 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 our promotional or training
materials to constitute promotion of an unapproved use, which
could result in significant fines or penalties under other
statutory authorities, such as laws prohibiting false claims for
reimbursement. In that event, our reputation could be damaged
and adoption of the products would be impaired.
Risks Related to Our Finances and Capital Requirements
We have a history of net losses, which we expect to continue
for the foreseeable future, and we are unable to predict the
extent of future losses or when we will become profitable, if at
all.
We incurred net losses since our inception in October 1997. As
of September 30, 2005, our accumulated deficit was
approximately $51.1 million. We expect to incur substantial
additional losses until we can achieve significant commercial
sales of our products, which depend upon a number of factors,
including the successful commercial launch of our
C-Port
system in the
United States and receipt of regulatory clearance or approval
and market adoption of our additional products in the United
States. We commenced commercial sales of the
C-Port
system in Europe
in 2004 and the
PAS-Port
system in
Japan in January 2004, and our short commercialization
experience makes it difficult for us to predict future
performance. Our failure to accurately predict financial
performance may lead to volatility in our stock price.
Our cost of product revenue was 343%, 142%, 70% and 373% of our
net product revenue in our fiscal years ended June 30, 2004
and 2005, and in the three months ended September 30, 2004
and 2005, respectively. We expect to continue to have high costs
of product revenue for the foreseeable future. In addition, if
we obtain regulatory clearance or approval in the United States
for any of our products, we expect that our operating expenses
will increase as we commence our commercialization efforts and
devote resources to our sales and marketing, as well as conduct
other research and development activities. If, over the long
term, we are unable to reduce our cost of producing goods and
expenses relative to our net revenue, we may not achieve
profitability
18
even if we are able to generate significant revenue from sales
of the
C-Port
and
PAS-Port
systems. Our
failure to achieve and sustain profitability would negatively
impact the market price of our common stock.
We currently lack a significant source of product revenue,
and prior agreements with Guidant, which represented 75% of our
revenue in fiscal year 2004 and 65% of our revenue in fiscal
year 2005, have been terminated. We may not become or remain
profitable.
Our ability to become and remain profitable depends upon our
ability to generate product revenue. Our ability to generate
significant continuing revenue depends upon a number of factors,
including:
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achievement of U.S. regulatory clearance or approval for
our additional products;
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successful completion of ongoing clinical trials for our
products; and
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successful sales, manufacturing, marketing and distribution of
our products.
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For the fiscal year ended June 30, 2005, sales of our
products and development activities generated only
$2.1 million of revenue, 65% of which was from Guidant. For
the fiscal year ended June 30, 2004, sales of our products
and development activities generated only $0.8 million of
revenue, 75% of which was from Guidant. Our distribution and
development agreements with Guidant have terminated. We do not
expect to enter into future development contracts with Guidant.
Accordingly, we do not anticipate any future revenue from
development contracts with Guidant. As Guidant outsourced the
manufacture of the aortic cutter to a contract manufacturing
company, we ceased manufacturing the aortic cutter. While we
receive a modest royalty from Guidants sales of the aortic
cutter, we do not anticipate any significant future revenue for
this royalty.
We do not anticipate that we will generate significant product
revenue for the foreseeable future. If we are unable to generate
significant product revenue, we will not become or remain
profitable, and we may be unable to continue our operations.
We will need substantial additional funding and may be unable
to raise capital when needed, which would force us to delay,
reduce or eliminate our research and development programs or
commercialization efforts.
Our development efforts have consumed substantial capital to
date. We believe that our existing cash, cash equivalents and
short-term investments, together with the net proceeds from this
offering, will be sufficient to meet our projected operating
requirements through at least the next 18 months. Because
we do not anticipate that we will generate significant product
revenue for the foreseeable future, if at all, we will need to
raise substantial additional capital to finance our operations
in the future. Our future liquidity and capital requirements
will depend upon, and could increase significantly as a result
of, numerous factors, including:
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market acceptance and adoption of our products;
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our revenue growth;
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the progress of clinical trials;
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the timing and costs of regulatory submissions;
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the timing and costs required to receive both domestic and
international governmental approvals;
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the timing and costs of new product introductions, if FDA
clearance or approval is obtained;
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the extent of our ongoing research and development
programs; and
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the costs of developing marketing and distribution capabilities.
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Until we can generate significant continuing revenue, if ever,
we expect to satisfy our future cash needs through public or
private equity offerings, debt financings or corporate
collaboration and licensing arrangements, as well as through
interest income earned on cash balances. We cannot be certain
that additional funding will be available on acceptable terms,
or at all. Any corporate collaboration and licensing
arrangements may require us
19
to relinquish valuable rights. If adequate funds are not
available, we may be required to delay, reduce the scope of or
eliminate our commercialization efforts or one or more of our
research and development programs.
If we do not generate sufficient cash flow through increased
revenue or raising additional capital, then we may not be able
to meet our substantial debt obligations that become due in
2008.
As of September 30, 2005, we had an aggregate principal
amount of approximately $13.3 million in long-term notes
payable to Century and Guidant Investment Corporation that
mature in 2008. The accrued interest under the Guidant note due
at maturity in 2008 will be $4.2 million, of which
$1.7 million was recorded as of September 30, 2005.
This substantial indebtedness has and will continue to impact us
by:
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making it more difficult to obtain additional financing; and
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constraining our ability to react quickly in an unfavorable
economic climate.
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Currently we are not generating positive cash flow. Adverse
occurrences related to our product commercialization,
development and regulatory efforts would adversely impact our
ability to meet our obligations to repay the principal amounts
on our notes when due in 2008. If we are unable to satisfy our
debt service requirements, we may not be able to continue our
operations. We may not generate sufficient cash from operations
to repay our notes or satisfy any additional debt obligations
when they become due and may have to raise additional financing
from the sale of equity or debt securities, enter into
commercial transactions or otherwise restructure our debt
obligations. There can be no assurance that any such financing
or restructuring will be available to us on commercially
acceptable terms, if at all. If we are unable to restructure our
obligations, we may be forced to seek protection under
applicable bankruptcy laws. Any restructuring or bankruptcy
could materially impair the value of our common stock.
Existing creditors have rights to our assets that are senior
to our stockholders.
Existing arrangements with our current lenders, Century and
Guidant Investment Corporation, as well as future arrangements
with other creditors, allow or may allow these creditors to
liquidate our assets, which may include our intellectual
property rights, if we are in default or breach of our debt
obligations for a continued period of time. The proceeds of any
sale or liquidation of our assets under these circumstances
would be applied first to any of our debt obligations and would
have priority over any of our capital stock, including any
liquidation preference of the preferred stock. After
satisfaction of our debt obligations, we may have little or no
proceeds left under these circumstances to distribute to the
holders of our capital stock.
Our quarterly operating results and stock price may fluctuate
significantly.
We expect our operating results to be subject to quarterly
fluctuations. The revenue we generate, if any, and our operating
results will be affected by numerous factors, many of which are
beyond our control, including:
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the rate of physician adoption of our products;
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the results of clinical trials related to our products;
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the introduction by us or our competitors, and market acceptance
of, new products;
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the results of regulatory and reimbursement actions;
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the timing of orders by distributors or customers;
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the expenditures incurred in the research and development of new
products; and
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competitive pricing.
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Quarterly fluctuations in our operating results may, in turn,
cause the price of our stock to fluctuate substantially.
20
Risks Related to this Offering
We expect the price of our common stock will fluctuate
substantially and you may not be able to sell your shares at or
above the offering price.
The price for the shares of our common stock sold in this
offering will be determined by negotiation between the
representatives of the underwriters and us. This price may not
reflect the market price of our common stock following this
offering. In addition, the market price of our common stock is
likely to be highly volatile. The public trading price for our
common stock after this offering will be affected by a number of
factors, including:
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market acceptance and adoption of our products;
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regulatory clearance or approvals of our products;
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volume and timing of orders for our products;
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changes in earnings estimates, investors perceptions,
recommendations by securities analysts or our failure to achieve
analysts earning estimates;
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quarterly variations in our or our competitors results of
operations;
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general market conditions and other factors unrelated to our
operating performance or the operating performance of our
competitors;
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the announcement of new products or product enhancements by us
or our competitors;
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announcements related to patents issued to us or our competitors
and to litigation; and
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developments in our industry.
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In addition, the stock prices of many companies in the medical
device industry have experienced wide fluctuations that have
often been unrelated to the operating performance of those
companies. These factors may materially and adversely affect the
market price of our common stock.
There has been no prior public market for our common stock,
and an active trading market may not develop, potentially
lessening the value of your shares and impairing your ability to
sell.
Prior to this offering, there has been no public market for our
common stock. An active trading market may not develop following
completion of this offering or, if developed, may not be
sustained. The lack of an active market may impair the value of
your shares and your ability to sell your shares at the time you
wish to sell them. An inactive market may also impair our
ability to raise capital by selling shares.
If there are substantial sales of our common stock, our stock
price could decline.
If our existing stockholders sell a large number of shares of
our common stock or the public market perceives that existing
stockholders might sell shares of our common stock, the market
price of our common stock could decline significantly. Based on
shares outstanding on November 30, 2005, upon the closing
of this offering, assuming no outstanding options are exercised
prior to the closing of this offering, we will have
approximately 9,605,852 shares of common stock outstanding,
including 156,515 shares of common stock issuable upon the
exercise of outstanding warrants and 4,254,216 shares of
common stock to be issued upon the conversion of our preferred
stock immediately prior to the closing of this offering. All of
the 3,500,000 shares offered under this prospectus will be
freely tradable without restriction or further registration
under the federal
21
securities laws, unless purchased by our affiliates. The
remaining 6,105,852 shares outstanding upon the closing of this
offering will be available for sale pursuant to Rules 144
and 701 as follows:
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2,006,653 shares of common stock will be immediately
eligible for sale in the public market without restriction;
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4,605,504 shares of common stock will be eligible for sale
in the public market under Rule 144 or Rule 701,
beginning 90 days after the effective date of the
registration statement of which this prospectus is a part,
subject to the volume, manner of sale and other limitations
under those rules; and
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the remaining 33,695 shares of common stock will become
eligible under Rule 144 for sale in the public market from
time to time after the effective date of the registration
statement of which this prospectus is a part upon expiration of
their respective holding periods.
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The above does not take into consideration the effect of the
lock-up
agreements
described under Shares Eligible for Future
Sale
Lock-up
Agreements.
Existing stockholders holding an aggregate of
4,410,731 shares of common stock, based upon shares
outstanding as of November 30, 2005, including
156,515 shares underlying outstanding warrants, have rights
with respect to the registration of these shares of common stock
with the Securities and Exchange Commission. See
Description of Capital Stock Registration
Rights. If we register their shares of common stock
following the expiration of the
lock-up
agreements,
they can immediately sell those shares in the public market.
Promptly following this offering, we intend to file a
registration statement covering up to 1,403,765 shares of
common stock that are authorized for issuance under our equity
incentive plans. As of November 30, 2005,
897,115 shares were subject to outstanding options, of
which 453,008 shares were vested. Once we file this
registration statement, the shares covered can be freely sold in
the public market upon issuance, subject to the
lock-up
agreements
referred to above and restrictions on our affiliates. See
Shares Eligible for Future Sale.
Evolving regulation of corporate governance and public
disclosure will result in additional expenses and continuing
uncertainty.
Changing laws, regulations and standards relating to corporate
governance and public disclosure, including the Sarbanes-Oxley
Act of 2002, new SEC regulations and Nasdaq National Market
rules are creating uncertainty for public companies. We are
presently evaluating and monitoring developments with respect to
new and proposed rules and cannot predict or estimate the amount
of the additional compliance costs we may incur or the timing of
such costs. These new or changed laws, regulations and standards
are subject to varying interpretations, in many cases due to
their lack of specificity, and as a result, their application in
practice may evolve over time as new guidance is provided by
courts and regulatory and governing bodies. This could result in
continuing uncertainty regarding compliance matters and higher
costs necessitated by ongoing revisions to disclosure and
governance practices. Maintaining appropriate standards of
corporate governance and public disclosure will result in
increased general and administrative expenses and a diversion of
management time and attention from revenue-generating activities
to compliance activities. In addition, if we fail to comply with
new or changed laws, regulations and standards, regulatory
authorities may initiate legal proceedings against us and our
business and reputation may be harmed.
If you purchase shares of our common stock in this offering,
you will suffer immediate and substantial dilution.
Purchasers of common stock in this offering will pay a price per
share that substantially exceeds the per-share book value of our
tangible assets after subtracting our liabilities as well as the
per-share price paid by our existing stockholders and by persons
who exercise currently outstanding options and warrants to
acquire our stock. Accordingly, after we sell
3,500,000 shares at the initial public offering price of
$11.00 per share, the midpoint of the range on the front
cover of this prospectus, you will experience immediate dilution
of approximately $8.09 per share, representing the
difference between the public offering price and our pro forma
as adjusted net tangible book value per share as of
September 30, 2005 after giving effect to this offering.
Additionally, purchasers of common stock in this offering will
have contributed approximately 49.3% of the
22
aggregate price paid by all purchasers of our stock but will own
only approximately 36.8% of our common stock outstanding after
this offering. See Dilution.
Our principal stockholders and management own a significant
percentage of our stock and will be able to exercise significant
influence over our affairs.
Following the completion of this offering, our executive
officers, current directors and holders of five percent or more
of our common stock will beneficially own approximately 49.6% of
our common stock, based upon ownership and shares outstanding as
of November 30, 2005. We expect that upon the closing of
this offering, that same group will continue to hold a majority
of our outstanding common stock. Therefore, even after this
offering, these stockholders will likely be able to determine
the composition of our board of directors, retain the voting
power to approve all matters requiring stockholder approval and
continue to have significant influence over our operations. The
interests of these stockholders may be different than the
interests of other stockholders on these matters. This
concentration of ownership could also have the effect of
delaying or preventing a change in our control or otherwise
discouraging a potential acquirer from attempting to obtain
control of us, which in turn could reduce the price of our
common stock.
We have broad discretion in the use of the net proceeds from
this offering and may not use them effectively.
Our management will have broad discretion in the application of
the net proceeds from this offering and could spend the proceeds
in ways that do not necessarily improve our results of
operations or enhance the value of our common stock. The failure
by our management to apply these funds effectively could result
in financial losses that could have a material adverse effect on
our business, cause the price of our common stock to decline and
delay product development.
Our future operating results may be below securities
analysts or investors expectations, which could
cause our stock price to decline.
The revenue and income potential of our products and our
business model are unproven, and we may be unable to generate
significant revenue or grow at the rate expected by securities
analysts or investors. In addition, our costs may be higher than
we, securities analysts or investors expect. If we fail to
generate sufficient revenue or our costs are higher than we
expect, our results of operations will suffer, which in turn
could cause our stock price to decline. Our results of
operations will depend upon numerous factors, including:
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FDA or other regulatory clearance or approval of our PAS-Port
system, future iterations of our
C-Port
system or our
other products;
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demand for our products;
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the performance of third-party contract manufacturers and
component suppliers;
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our ability to develop sales and marketing capabilities;
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our ability to develop, introduce and market new or enhanced
versions of our products on a timely basis; and
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our ability to obtain and protect proprietary rights.
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Our operating results in any particular period may not be a
reliable indication of our future performance. In some future
quarters, our operating results may be below the expectations of
securities analysts or investors. If this occurs, the price of
our common stock will likely decline.
23
Anti-takeover defenses that we have in place could prevent or
frustrate attempts to change our direction or management.
Provisions of our certificate of incorporation and bylaws and
applicable provisions of Delaware law may make it more difficult
for or prevent a third party from acquiring control of us
without the approval of our board of directors. These provisions:
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limit who may call a special meeting of stockholders;
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establish advance notice requirements for nominations for
election to our board of directors or for proposing matters that
can be acted upon at stockholder meetings;
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prohibit cumulative voting in the election of our directors,
which would otherwise permit less than a majority of
stockholders to elect directors;
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prohibit stockholder action by written consent, thereby
requiring all stockholder actions to be taken at a meeting of
our stockholders; and
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provide our board of directors with the ability to designate the
terms of and issue a new series of preferred stock without
stockholder approval.
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In addition, Section 203 of the Delaware General
Corporation Law generally prohibits us from engaging in any
business combination with certain persons who own 15% or more of
our outstanding voting stock or any of our associates or
affiliates who at any time in the past three years have owned
15% or more of our outstanding voting stock. These provisions
may have the effect of entrenching our management team and may
deprive you of the opportunity to sell your shares to potential
acquirors at a premium over prevailing prices. This potential
inability to obtain a control premium could reduce the price of
our common stock.
We may become involved in securities class action litigation
that could divert managements attention and harm our
business.
The stock market in general, the Nasdaq National Market and the
market for medical device companies in particular, has
experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating
performance of those companies. Further, the market prices of
securities of medical device companies have been particularly
volatile. These broad market and industry factors may materially
harm the market price of our common stock, regardless of our
operating performance. In the past, following periods of
volatility in the market price of a particular companys
securities, securities class action litigation has often been
brought against that company. We may become involved in this
type of litigation in the future. Litigation often is expensive
and diverts managements attention and resources, which
could materially harm our financial condition and results of
operations.
Our management and auditors have identified a material
weakness in our internal controls that, if not properly
remediated, could result in material misstatements in our
financial statements and the inability of our management to
provide its report on the effectiveness of our internal controls
as required by the Sarbanes-Oxley Act of 2002 as required for
the year ending June 30, 2008, either of which could cause
investors to lose confidence in our reported financial
information and have a negative effect on the trading price of
our stock.
We are not currently required to comply with Section 404 of
the Sarbanes-Oxley Act of 2002, and are therefore not required
to make an assessment of the effectiveness of our internal
control over financial reporting. Further, Ernst &
Young LLP, our independent registered public accounting firm,
has not been engaged to express, nor have they expressed, an
opinion on the effectiveness of our internal control over
financial reporting. However, in connection with our fiscal 2005
financial statement audit, our independent registered public
accounting firm informed us that they had identified a material
weakness in our internal controls as defined by the American
Institute of Certified Public Accountants. A material weakness
is a reportable condition in which our internal controls do not
reduce to a low level the risk that undetected misstatements
caused by error or fraud may occur in amounts that are material
to our audited financial statements.
24
The material weakness reported by our independent registered
public accounting firm relates to having insufficient personnel
resources and lack of sufficient technical accounting expertise
within our accounting function, and inadequate review and
approval procedures to prepare external financial statements.
We are taking remedial measures to improve the effectiveness of
our internal controls. Specifically, we will be:
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strengthening our internal staffing and technical expertise in
financial and SEC accounting and reporting to accommodate our
new status as a stand-alone public company; and
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engaging an outside compliance consulting firm to advise us on
improving our internal controls to take advantage of best
practices.
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We plan to continue to assess our internal controls and
procedures and intend to take further action as necessary or
appropriate to address any other matters we identify, including
to effect compliance with Section 404 of the Sarbanes-Oxley
Act of 2002 when we are required to make an assessment of our
internal controls under Section 404 which is anticipated to
be for fiscal 2008. However, the existence of a material
weakness is an indication that there is a more than remote
likelihood that a material misstatement of our financial
statements will not be prevented or detected in a future period,
and the process of designing and implementing effective internal
controls and procedures is a continuous effort that requires us
to anticipate and react to changes in our business and the
economic and regulatory environments and to expend significant
resources to maintain a system of internal controls that is
adequate to satisfy our reporting obligations as a public
company. We cannot assure you that the measures taken to date or
to be taken in the future will remediate the material weakness
noted by our independent public accounting firm or that we will
implement and maintain adequate controls over our financial
processes and reporting in the future. In addition, we cannot
assure you that additional material weaknesses or significant
deficiencies in our internal controls will not be discovered in
the future.
The standards required for a Section 404 analysis under the
Sarbanes-Oxley Act of 2002 are significantly more stringent than
those for a similar analysis for non-public companies. These
more stringent standards require that our audit committee be
advised and regularly updated on managements review of
internal controls. 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 are not able to timely remedy the material weakness
identified in connection with our fiscal 2005 audit, or if we
are not able to implement the requirements of Section 404
in a timely manner or with adequate compliance, management may
not be able to assess that its internal controls over financial
reporting are effective, which may subject us to adverse
regulatory consequences and could result in a negative reaction
in the financial markets due to a loss of confidence in the
reliability of our financial statements. In addition, if we fail
to develop and maintain effective controls and procedures, we
may be unable to provide the required financial information in a
timely and reliable manner or otherwise comply with the
standards applicable to us as a public company. Any failure by
us to timely provide the required financial information could
materially and adversely impact our financial condition and the
market value of our securities.
We have never paid dividends on our capital stock, and we do
not anticipate paying any cash dividends in the foreseeable
future.
We have paid no cash dividends on any of our classes of capital
stock to date, and we currently intend to return our future
earnings to fund the development and growth of our business. As
a result, capital appreciation, if any, of our common stock will
be your sole source of gain for the foreseeable future.
25
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled
Summary, Risk Factors,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and
Business, contains forward-looking statements.
Forward-looking statements include all statements that are not
statements of historical facts and may relate to, but are not
limited to, expectations of future operating results or
financial performance, capital expenditures, introduction of new
products, regulatory compliance, plans for growth and future
operations, as well as assumptions relating to the foregoing.
These risks and other factors include, but are not limited to,
those listed under Risk Factors. In some cases, you
can identify forward-looking statements by terminology such as
may, will, should,
could, expect, plan,
anticipate, believe,
estimate, predict, intend,
potential, continue or the negative of
these terms or other similar terminology. Forward-looking
statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. These
statements represent only managements beliefs and
assumptions as of the date of this prospectus, and actual events
or results may differ materially.
We believe that it is important to communicate our future
expectations to potential investors. However, there may be
events in the future that we are not able to accurately predict
or control and that may cause actual events or results to differ
materially from the expectations expressed in or implied by our
forward-looking statements. Except as required by applicable
law, including the securities laws of the United States and the
rules and regulations of the SEC, we do not plan to publicly
update or revise any forward-looking statements after we
distribute this prospectus, whether as a result of any new
information, future events or otherwise. Potential investors
should not place undue reliance on our forward-looking
statements. Before you invest in our common stock, you should be
aware that the occurrence of any of the adverse events described
in the Risk Factors section and elsewhere in this
prospectus could harm our business, prospects, operating results
and financial condition. You should read this prospectus and the
documents that we reference and have filed as exhibits to the
registration statement of which this prospectus is a part with
the understanding that we cannot guarantee future results,
levels of activity, performance or achievements.
26
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the shares of
common stock we are offering will be approximately
$34.0 million, based on an estimated offering price of
$11.00 per share, the midpoint of the range on the front
cover of this prospectus. If the underwriters fully exercise the
over-allotment option, the additional net proceeds will be
approximately $5.4 million. Net proceeds
represent the amount we expect to receive after we pay the
underwriting discount and other estimated expenses for this
offering.
The proposed price range of the shares of common stock being
offered has been reduced from $12.00 to $14.00 per share, as
stated in the prospectus previously contained in this
registration statement as filed with the Securities and Exchange
Commission on January 13, 2006, to $10.00 to $12.00 per
share. The primary effect of this change will be that the net
proceeds available to us as a result of the offering will be
reduced from approximately $40.5 million to approximately
$34.0 million (or a reduction from an aggregate of
approximately $46.8 million to an aggregate of
approximately $39.4 million if the underwriters exercise in
full their over-allotment option), based on an assumed initial
public offering price of $11.00 per share and after deducting
underwriting discounts and commissions and offering expenses
payable by us. A $1.00 increase (decrease) in the assumed
initial public offering price of $11.00 per share would increase
(decrease) the net proceeds to us from this offering by
$3.3 million after deducting underwriting discounts and
commissions and estimated offering expenses payable by us,
assuming the number of shares offered by us, as set forth on the
cover page of this prospectus, remains the same.
We expect to use our net proceeds from this offering as follows:
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approximately $8 million to $10 million to continue
the development of our products, including clinical trials and
research programs;
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approximately $6 million to $8 million to build sales
and marketing capabilities; and
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the balance for working capital and other general corporate
purposes.
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The amounts we actually expend in these areas may vary
significantly from our expectations and will depend upon a
number of factors, including operating costs, capital
expenditures and any expenses related to gaining FDA clearance
or approval for our products. Accordingly, management will
retain broad discretion in the allocation of the net proceeds of
this offering. A portion of the net proceeds may also be used to
acquire or invest in complementary businesses, technologies,
services or products. We have no current plans, agreements or
commitments with respect to any such acquisition or investment,
and we are not currently engaged in any negotiations with
respect to any such transaction.
We believe that the net proceeds from this offering, together
with our cash and cash equivalent balances and interest we earn
on these balances, will be sufficient to meet our anticipated
cash requirements through at least the next 18 months.
Pending such uses, the net proceeds of this offering will be
invested in short-term, interest-bearing, investment-grade
securities.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital
stock. We anticipate that we will retain any earnings to support
operations and to finance the growth and development of our
business. Therefore, we do not expect to pay cash dividends in
the foreseeable future. Any future determination relating to our
dividend policy will be made at the discretion of our board of
directors and will depend upon a number of factors, including
earnings, capital requirements, financial condition, prospects
and other factors that our board of directors may deem relevant.
27
CAPITALIZATION
The following table sets forth our capitalization as of
September 30, 2005 on an actual basis and on a pro forma as
adjusted basis reflecting:
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a
one-for
-three reverse
split of our common stock and preferred stock effected
January 9, 2006;
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the conversion of all of our preferred stock into an aggregate
of 4,259,328 shares of common stock immediately prior to
the closing of this offering; and
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the sale of 3,500,000 shares of our common stock at an
assumed initial public offering price of $11.00 per share,
the midpoint of the range on the front cover of this prospectus,
after deducting underwriting discounts and commissions and
estimated offering expenses payable by us.
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You should read this table in conjunction with the sections of
this prospectus entitled Selected Financial Data and
Managements Discussion and Analysis of Financial
Condition and Results of Operations and with our financial
statements and related notes.
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As of September 30, 2005
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Pro Forma
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Actual
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As Adjusted
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(unaudited)
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(in thousands, except
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share and per share data)
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Long-term debt and accrued interest due through
September 30, 2005
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$
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14,911
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$
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14,911
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Convertible preferred stock, $0.001 par value;
15,389,000 shares authorized, 4,259,328 shares issued
and outstanding, actual; 15,389,000 shares authorized, no
shares outstanding, pro forma as adjusted
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39,683
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-
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Stockholders equity (deficit):
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Common stock, $0.001 par value; 24,060,000 shares
authorized, 1,752,903 shares outstanding, actual;
24,060,000 authorized, 9,512,231 shares issued and
outstanding, pro forma as adjusted
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2
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10
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Additional paid-in capital
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6,964
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80,644
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Deferred compensation
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(1,442
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)
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(1,442
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)
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Notes receivable from stockholders
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(454
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)
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(454
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)
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Accumulated deficit
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(51,053
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)
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(51,053
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)
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Total stockholders equity (deficit)
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(45,983
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)
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27,705
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Total capitalization
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$
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8,611
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$
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42,616
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The outstanding share information as of September 30, 2005
in the table above excludes:
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900,088 shares of common stock issuable upon exercise of
outstanding options, at a weighted average exercise price of
$2.31 per share;
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156,515 shares of common stock issuable upon the exercise
of outstanding warrants, at a weighted average exercise price of
$10.00 per share;
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up to 106,990 additional shares of our common stock
reserved for issuance under our 1997 Equity Incentive Plan;
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400,000 shares of common stock for issuance under our 2005
Equity Incentive Plan; and
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272,727 shares of our common stock issuable upon conversion
of an outstanding promissory note to Century Medical, assuming
an offering price of $11.00 per share, the midpoint of the
range on the front cover of this prospectus.
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The table does not reflect any conversion of outstanding common
stock warrants into shares of our common stock as a result of
any deemed cashless exercise of those warrants. See
Description of Capital Stock Warrants.
28
DILUTION
If you invest in our common stock, your interest will be diluted
immediately to the extent of the difference between the public
offering price per share of our common stock and the pro forma
net tangible book value per share of our common stock after this
offering. Our historical net tangible book value
(deficit) as of September 30, 2005 was approximately
$(46.0) million or $(26.23) per share, based on
1,752,903 shares of common stock outstanding as of
September 30, 2005. Historical net tangible book value
(deficit) per share represents the amount of our total
tangible assets reduced by the amount of our total liabilities
and divided by the actual number of shares of common stock
outstanding. Our pro forma net tangible book value
(deficit) as of September 30, 2005 was approximately
$(6.3) million, or $(1.05) per share of our common stock,
based on 6,012,231 shares of common stock outstanding,
after giving effect to the conversion of all outstanding shares
of our convertible preferred stock into common stock upon the
closing of this offering. Pro forma net tangible book value
(deficit) per share as of September 30, 2005
represents the amount of our total tangible assets reduced by
the amount of our total liabilities and divided by the pro forma
number of shares of common stock outstanding before giving
effect to this offering.
After giving effect to our sale of 3,500,000 shares of
common stock offered by this prospectus at an assumed public
offering price of $11.00 per share, the midpoint of the
range on the front cover of this prospectus, and after deducting
underwriting discounts and commission and estimated offering
expenses payable by us, our pro forma as adjusted net tangible
book value (deficit) will be $27.7 million, or
approximately $2.91 per share. This represents an immediate
increase in pro forma net tangible book value (deficit) of
$3.96 per share to existing stockholders and an immediate
dilution in pro forma net tangible book value (deficit) of
$8.09 per share to new investors. Dilution in historical
net tangible book value per share represents the difference
between the amount per share paid by purchasers of shares of our
common stock in this offering and the net tangible book value
per share of our common stock immediately afterwards. The
following table illustrates this per share dilution.
|
|
|
|
|
|
|
|
|
Assumed public offering price per share
|
|
|
|
|
|
$
|
11.00
|
|
Historical net tangible book value (deficit) per share as
of September 30, 2005
|
|
$
|
(26.23
|
)
|
|
|
|
|
Increase per share due to the conversion of all shares of
preferred stock
|
|
|
25.18
|
|
|
|
|
|
Pro forma net tangible book value (deficit) per share
before this offering
|
|
|
(1.05
|
)
|
|
|
|
|
Increase per share attributable to new investors in this offering
|
|
|
3.96
|
|
|
|
|
|
Pro forma as adjusted net tangible book value (deficit) per
share after the offering
|
|
|
|
|
|
|
2.91
|
|
|
|
|
|
|
|
|
Dilution per share to new investors
|
|
|
|
|
|
$
|
8.09
|
|
|
|
|
|
|
|
|
If the underwriters exercise their over-allotment option to
purchase additional shares in this offering in full, our pro
forma net tangible book value after the offering will be
approximately $33.1 million or $3.30 per share,
representing an immediate increase in pro forma net tangible
book value of $29.53 per share to our existing stockholders
and an immediate dilution in pro forma net tangible book value
of $7.70 per share to new investors purchasing shares in
this offering.
The following table sets forth, as of September 30, 2005,
the number of shares of common stock purchased from us, the
total consideration paid and average price per share paid by
existing stockholders and by the new investors, before deducting
underwriting discounts and commissions and estimated offering
expenses payable by us, using an assumed public offering price
of $11.00 per share, the midpoint of the range on the front
cover of this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shares
|
|
|
Total Consideration
|
|
|
|
|
|
|
|
|
|
|
|
Average Price
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Existing stockholders
|
|
|
6,012,231
|
|
|
|
63.2
|
%
|
|
$
|
39,550,257
|
|
|
|
50.7
|
%
|
|
$
|
6.58
|
|
New investors
|
|
|
3,500,000
|
|
|
|
36.8
|
|
|
|
38,500,000
|
|
|
|
49.3
|
|
|
|
11.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,512,231
|
|
|
|
100.0
|
%
|
|
$
|
78,050,257
|
|
|
|
100.0
|
%
|
|
|
8.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
If the underwriters exercise their over-allotment option in
full, our existing stockholders would own 60% and our new
investors would own 40% of the total number of shares of our
common stock outstanding after this offering.
The number of shares of our common stock referred to above that
will be outstanding immediately after completion of this
offering is based on 1,752,903 shares of our common stock
outstanding as of September 30, 2005 and also reflects the
automatic conversion of our preferred stock into
4,259,328 shares of common stock. This number does not
include, as of September 30, 2005:
|
|
|
|
|
900,088 shares of common stock issuable upon exercise of
outstanding options, at a weighted average exercise price of
$2.31 per share;
|
|
|
|
156,515 shares of common stock issuable upon the exercise
of outstanding warrants, at a weighted average exercise price of
$10.00 per share;
|
|
|
|
up to 106,990 additional shares of our common stock reserved for
issuance under our 1997 Equity Incentive Plan;
|
|
|
|
400,000 shares of common stock for issuance under our 2005
Equity Incentive Plan; and
|
|
|
|
|
272,727 shares of our common stock issuable upon conversion
of an outstanding promissory note to Century Medical, based upon
an assumed public offering price of $11.00 per share, the
midpoint of the range on the front cover of this prospectus.
|
|
If all of our outstanding options and warrants as of
September 30, 2005 were exercised, the pro forma as
adjusted net tangible book value per share after this offering
would be $2.97 per share, representing an increase attributable
to new investors of $4.02 per share, and there would be an
immediate dilution of $8.03 per share to new investors.
In addition, we may choose to raise additional capital due to
market conditions or strategic considerations even if we believe
we have sufficient funds for our current or future operating
plans. To the extent that additional capital is raised through
the sale of equity or convertible debt securities, the issuance
of these securities could result in further dilution to our
stockholders.
30
SELECTED FINANCIAL DATA
The following table presents selected historical financial data.
We derived the selected statements of operations data for the
years ended June 30, 2003, 2004 and 2005 and balance sheet
data as of June 30, 2004, and 2005 from our audited
financial statements and notes thereto that are included
elsewhere in this prospectus. The statements of operations data
for the three months ended September 30, 2004 and 2005, and
the balance sheet data as of September 30, 2005, have been
derived from our unaudited financial statements included
elsewhere in this prospectus. Our historic results are not
necessarily indicative of the results that may be expected in
the future. You should read this data together with our
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
|
|
|
|
ended
|
|
|
|
Year ended June 30,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
|
|
|
|
(unaudited)
|
|
Statements of Operation Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue, net
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
212
|
|
|
$
|
719
|
|
|
|
168
|
|
|
|
161
|
|
|
Product revenue from related party, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
401
|
|
|
|
1,027
|
|
|
|
744
|
|
|
|
7
|
|
|
Development revenue from related party
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
223
|
|
|
|
310
|
|
|
|
265
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
836
|
|
|
|
2,056
|
|
|
|
1,177
|
|
|
|
168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue (includes related-party costs of $1,377,
$1,180, $306 and $0 in fiscal 2004, fiscal 2005 and the three
months ended September 30, 2004 and 2005, respectively)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,105
|
|
|
|
2,478
|
|
|
|
636
|
|
|
|
627
|
|
|
Research and development
|
|
|
5,058
|
|
|
|
5,765
|
|
|
|
6,698
|
|
|
|
5,826
|
|
|
|
6,289
|
|
|
|
1,504
|
|
|
|
1,166
|
|
|
Selling, general and administrative
|
|
|
1,166
|
|
|
|
1,635
|
|
|
|
1,936
|
|
|
|
1,809
|
|
|
|
3,753
|
|
|
|
594
|
|
|
|
1,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
6,224
|
|
|
|
7,400
|
|
|
|
8,634
|
|
|
|
9,740
|
|
|
|
12,520
|
|
|
|
2,734
|
|
|
|
3,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(6,224
|
)
|
|
|
(7,400
|
)
|
|
|
(8,634
|
)
|
|
|
(8,904
|
)
|
|
|
(10,464
|
)
|
|
|
(1,557
|
)
|
|
|
(2,848
|
)
|
Interest income
|
|
|
286
|
|
|
|
210
|
|
|
|
294
|
|
|
|
209
|
|
|
|
305
|
|
|
|
69
|
|
|
|
72
|
|
Interest expense (includes related-party interest expense of
$539, $897, $226 and $226 in fiscal 2004, fiscal 2005 and the
three months ended September 30, 2004 and 2005,
respectively)
|
|
|
(65
|
)
|
|
|
(675
|
)
|
|
|
(885
|
)
|
|
|
(2,001
|
)
|
|
|
(1,048
|
)
|
|
|
(264
|
)
|
|
|
(264
|
)
|
Other income (expense) (includes $250 from related party in
fiscal 2005)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(14
|
)
|
|
|
257
|
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,003
|
)
|
|
$
|
(7,865
|
)
|
|
$
|
(9,225
|
)
|
|
$
|
(10,710
|
)
|
|
$
|
(10,950
|
)
|
|
$
|
(1,752
|
)
|
|
$
|
(3,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(6.46
|
)
|
|
$
|
(7.53
|
)
|
|
$
|
(7.84
|
)
|
|
$
|
(8.24
|
)
|
|
$
|
(7.82
|
)
|
|
$
|
(1.27
|
)
|
|
$
|
(2.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
|
|
|
|
ended
|
|
|
|
Year ended June 30,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
|
|
|
|
(unaudited)
|
|
Shares used in computing basic and diluted net loss per share
|
|
|
929
|
|
|
|
1,045
|
|
|
|
1,176
|
|
|
|
1,299
|
|
|
|
1,401
|
|
|
|
1,384
|
|
|
|
1,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted net loss per share (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1.93
|
)
|
|
|
|
|
|
$
|
(0.54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing pro forma basic and diluted net loss
per share (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,660
|
|
|
|
|
|
|
|
5,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
As of
|
|
|
|
|
|
|
September 30,
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
(unaudited)
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
8,381
|
|
|
$
|
21,822
|
|
|
$
|
17,680
|
|
|
$
|
17,224
|
|
|
$
|
8,951
|
|
|
$
|
7,103
|
|
|
Working capital
|
|
|
7,345
|
|
|
|
18,730
|
|
|
|
13,396
|
|
|
|
16,402
|
|
|
|
9,032
|
|
|
|
7,096
|
|
|
Total assets
|
|
|
8,864
|
|
|
|
23,095
|
|
|
|
19,763
|
|
|
|
20,231
|
|
|
|
12,146
|
|
|
|
10,051
|
|
|
Long term-liabilities
|
|
|
508
|
|
|
|
1,984
|
|
|
|
5,129
|
|
|
|
14,359
|
|
|
|
15,156
|
|
|
|
15,328
|
|
|
Convertible preferred stock
|
|
|
16,293
|
|
|
|
35,038
|
|
|
|
35,038
|
|
|
|
39,683
|
|
|
|
39,683
|
|
|
|
39,683
|
|
|
Total stockholders deficit
|
|
|
(9,055
|
)
|
|
|
(17,110
|
)
|
|
|
(25,103
|
)
|
|
|
(35,430
|
)
|
|
|
(43,685
|
)
|
|
|
(45,983
|
)
|
32
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial
condition and results of operations should be read in
conjunction with our financial statements and the related notes
to those statements included elsewhere in this prospectus. In
addition to historical financial information, the following
discussion and analysis contains forward-looking statements that
involve risks, uncertainties and assumptions. Our actual results
and timing of selected events may differ materially from those
anticipated in these forward-looking statements as a result of
many factors, including those discussed under Risk
Factors and elsewhere in this prospectus.
Overview
We design and manufacture proprietary automated anastomotic
systems used by surgeons to perform coronary bypass surgery. In
coronary artery bypass grafting procedures, or CABG, veins or
arteries are used to construct alternative conduits to restore
blood flow beyond closed or narrowed portions of coronary
arteries, bypassing the occluded portion of the
coronary artery that is impairing blood flow to the heart
muscle. Our products provide cardiovascular surgeons with
easy-to-use automated systems to perform consistent, rapid and
reliable connections, or anastomoses, of the vessels, which
surgeons generally view as the most critical aspect of the
bypass procedure. We currently sell our
C-Port
®
Distal Anastomosis System, or
C-Port
system, in
Europe. We are currently training physicians in the United
States to use our or
C-Port
system, and we
plan to commence sales in the United States later this year,
having received 510(k) clearance from the U.S. Food and Drug
Administration, or FDA, in November 2005. We currently sell our
PAS-Port
®
Proximal Anastomosis System, or the
PAS-Port
®
system, in Europe and Japan. Our strategy is to further enhance
and leverage our technology to develop next-iteration automated
anastomotic systems that facilitate the performance of minimally
invasive endoscopic coronary bypass surgery, as well as
automated systems to be used in other surgical applications.
Our first two products are the
C-Port
system and the
PAS-Port
system. The
C-Port
system is used
to perform a distal anastomosis, which is the connection of a
bypass graft vessel to a coronary artery downstream of the
occluded portion of the coronary artery. The
PAS-Port
system is used
to perform a proximal anastomosis, which is the connection of a
bypass graft vessel to the aorta or other source of blood.
From our inception in 1997 until May 2003, our operations
consisted primarily of
start-up
activities,
including developing the
C-Port
and
PAS-Port
systems,
recruiting personnel and raising capital. Clinical trials for
both the
C-Port
system
and
PAS-Port
system
were completed in Europe during the years 2003 through 2005. The
C-Port
system received
510(k) clearance from the FDA in November 2005 and the
CE Mark in April 2004. The PAS-Port system received the
CE Mark in March 2003. Additionally, the PAS-Port system
received regulatory approval to be sold in Japan in January 2004
and has been used in over 130 hospitals in Japan. We have
received conditional approval of an Investigational Device
Exemption, or IDE, from the FDA to conduct a prospective,
randomized clinical trial to assess the safety and efficacy of
our
PAS-Port
system.
See Risk Factors. As of September 30, 2005, we
have sold over 250
C-Port
systems and more
than 2,400
PAS-Port
systems worldwide. We believe the United States represents the
largest single market for our products, and we are beginning to
build a direct sales force in 2006 to sell our C-Port system to
cardiac surgeons. As of September 30, 2005, we have had
limited sales, which have been entirely outside the United
States. We sell our products in Japan through our distributor
Century Medical, Inc., or Century, and in Europe through limited
direct sales activities. We expect our international sales to
remain limited for the foreseeable future.
In December 2005, we entered into a license, development and
commercialization agreement with Cook Incorporated, or Cook,
relating to development of our
X-Port
Vascular Access
Closure Device, or
X-Port,
a product
candidate of ours that we are currently studying in preclinical
animal model studies. Under the agreement, we will develop the
X-Port
with Cook, and
Cook will have exclusive commercialization rights to market the
product for medical procedures anywhere in the body. We will
receive an initial payment of $500,000 after we complete, to
Cooks satisfaction, certain milestones under a development
plan. Cook will also pay us up to a total of an additional
$1.5 million in future milestone payments as development
milestones are achieved. We also will receive a royalty based on
Cooks annual worldwide sales of the
X-Port.
33
Guidant Corporation, referred to as Guidant, is our largest
investor, having invested an aggregate of approximately
$14.0 million in our preferred stock in June 2002 and
August 2003. Additionally, in August 2003, Guidant extended a
line of credit to us for $10.3 million. We have drawn down
this line of credit and currently have a long-term loan of
$10.3 million outstanding from Guidant, due in August 2008.
Interest of 8.75% per year accrues during the life of the
loan and is due at maturity. Guidant distributed our products in
Europe under a distribution agreement that was signed in May
2003, amended in January 2004 and terminated in September 2004.
Guidant terminated the distribution agreement prior to the
expiration of its original term. In addition, we entered into a
development and supply agreement with Guidant to develop an
aortic cutter for Guidants Heartstring product, and we
manufactured the first 10,000 aortic cutters. Guidant has
outsourced future production of the aortic cutter to a
third-party contract manufacturer, and we will receive a modest
royalty for each unit sold in the future, but will no longer
manufacture the aortic cutter.
We have a distribution agreement for Italy and may have
additional distribution agreements for other countries in Europe
in the future; however, we do not anticipate significant product
sales from Europe in part because European healthcare systems
traditionally are difficult to penetrate for new, higher cost
medical products.
We manufacture the
C-Port
and
PAS-Port
systems with
parts we manufacture and components supplied by vendors, which
we then assemble, test and package. For the fiscal year ended
June 30, 2005, we generated net revenue of
$2.1 million, including $396,000 from sales of the aortic
cutter to Guidant, and a net loss of $11.0 million. As of
September 30, 2005, our accumulated deficit was
$51.1 million. Since our inception, we have not been
profitable. We expect to continue to incur net losses for the
foreseeable future.
Critical Accounting Policies and Significant Judgments and
Estimates
Our discussion and analysis of our financial condition and
results of operations is based upon our financial statements,
which have been prepared in accordance with U.S. generally
accepted accounting principles. The preparation of financial
statements requires management to make estimates and judgments
that affect the reported amounts of assets and liabilities,
revenue and expenses, and disclosures of contingent assets and
liabilities at the date of the financial statements. On a
periodic basis, we evaluate our estimates, including those
related to accounts receivable, inventories, and deferred
stock-based compensation. We use authoritative pronouncements,
historical experience and other assumptions as the basis for
making estimates. Actual results could differ materially from
those estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation
of our financial statements.
Revenue Recognition.
We recognize revenue in accordance
with SEC Staff Accounting Bulletin, or SAB, No. 104,
Revenue Recognition.
SAB No. 104
requires that four basic criteria must be met before revenue can
be recognized: (1) persuasive evidence of an arrangement
exists; (2) title has transferred; (3) the fee is
fixed or determinable; and (4) collectibility is reasonably
assured. We generally use contracts and customer purchase orders
to determine the existence of an arrangement. We assess whether
the fee is fixed or determinable based upon the terms of the
agreement associated with the transaction. To determine whether
collection is probable, we assess a number of factors, including
past transaction history with the customer and the
creditworthiness of the customer. If we determine that
collection is not reasonably assured, we would defer the
recognition of revenue until collection becomes reasonably
assured, which is generally upon receipt of payment.
Inventory.
We state our inventories at the lower of cost
(which approximates actual cost on a
first-in,
first-out
basis) or market, computed on a standard cost basis, which
approximates actual cost on a
first-in,
first-out
basis and with market being determined as the lower of
replacement cost or net realizable value. Standard costs are
monitored on a quarterly basis and updated as necessary to
reflect changes in raw material costs and labor and overhead
rates. Inventory reserves are established when conditions
indicate that the selling price could be less than cost due to
physical deterioration, usage, obsolescence, reductions in
estimated future demand and reductions in selling prices.
Inventory reserves are measured as the difference between the
cost of inventory and estimated market value. Inventory reserves
are charged to cost of revenue and establish a lower cost basis
for the inventory. We balance the need to maintain strategic
inventory levels with the risk of obsolescence due to
34
changing technology and customer demand levels. Unfavorable
changes in market conditions may result in a need for additional
inventory reserves that could adversely impact our financial
results.
Clinical Trial Accounting.
Clinical trial costs are a
component of research and development expenses and include fees
paid to participating hospitals and other service providers that
conduct clinical trial activities with patients on our behalf
and, as well as the cost of, clinical trial insurance. The
various costs of the trial are contractually based on the nature
of the services, and we accrue the costs as the services are
provided. Accrued costs are based on estimates of the work
completed under the service agreements, patient enrollment and
past experience with similar contracts. Our estimate of the work
completed and associated costs to be accrued includes our
assessment of information received from our third-party service
providers and the overall status of our clinical trial
activities. If we have incomplete or inaccurate information, we
may underestimate costs associated with various trials at a
given point in time. Although our experience in estimating these
costs is limited, the difference between accrued expenses based
on our estimates and actual expenses have not been material to
date.
Stock-Based Compensation.
We use the intrinsic method of
accounting for employee stock options under Accounting
Principles Board Opinion No. 25,
Accounting for
Stock Issued to Employees,
or APB No. 25, and
present disclosure of pro forma information required under
SFAS No. 123,
Accounting for Stock-Based
Compensation,
or SFAS No. 123, as amended by
SFAS No. 148,
Accounting for Stock-Based
Compensation Transition and Disclosure
an amendment of FASB Statement No. 123
, or
SFAS No. 148. For stock options granted to employees,
no compensation expense is recognized unless the exercise price
is less than fair market value at the date of grant.
The fair value of the common stock for options granted through
September 30, 2005, was originally determined by our board
of directors, with input from management. As disclosed more
fully in Note 1 of the notes of our financial statements,
we granted stock options with an exercise price of $2.85 during
the fiscal year ended June 30, 2005 and for the three-month
period ended September 30, 2005. We did not obtain
contemporaneous valuations by an unrelated valuation specialist
in connection with these grants. Instead we relied on our board
of directors, the members of which we believe have extensive
experience in the medical device market and a majority of which
is comprised of non-employee directors, to determine a
reasonable estimate of the
then-current
fair value
of our common stock. Since there were no outside financings
after August 2003 and since there was no liquidity in our stock
during this period, our board of directors determined the fair
value of our common stock on the date of grant based on several
factors, including the liquidation preferences of our preferred
stock, progress against regulatory and product development
milestones, our financial condition, equity market conditions,
trading ranges of comparable public companies and the likelihood
of achieving a liquidity event such as an initial public
offering or a sale of the company.
Subsequently, we reassessed the valuations of common stock
relating to option grants during the fiscal year ended
June 30, 2005 and for the three-month period ended
September 30, 2005. We used a market-based approach in
determining the reassessed fair value per share of our common
stock as of each grant date. The factors in the preceding
paragraph were taken into account. We also considered the
following factors:
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Guidants termination of our European distribution
agreement in September 2004;
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The FDAs decision to subject our
PAS-Port
system 510(k)
submission to a review by an FDA panel, which met in April 2005
and recommended we obtain additional data, and our decision,
following this recommendation, to withdraw our
PAS-Port 510(k)
submission in May 2005;
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Our submission of an Investigational Device Exemption, or IDE,
to the FDA for the
PAS-Port
system in June
2005 and the FDAs conditional approval of the IDE in July
2005;
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The lack of FDA approval of any of our products;
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The diminished receptivity of the public capital markets to
medical device companies initial public offerings, which
we inferred from the median percentage price reductions for
these companies between filing and pricing of 3.6% in the first
quarter and 16.5% in the second quarter of 2005 and from the
volatility of the initial public offering market for medical
device companies with limited revenue; and
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35
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Our discussions, commencing in July 2005, with potential
underwriters regarding the possibility of pursuing an initial
public offering, and our execution of a letter of intent with
underwriters pertaining to this offering in September 2005.
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In October 2005, our board of directors used a market approach
to determine an appropriate value for our common stock and the
related charge for deferred stock-based compensation. This
approach was used because there were no arms-length cash
transactions in our stock during the prior two years. The cost
approach was not appropriate due to our stockholders
deficit position and long-term debt outstanding exceeding our
assets. The income or discounted cash flow approach was not used
due to the uncertainty and timing of future cash flows and the
high discount rate associated with those uncertainties.
The market approach is based upon the market prices of stock of
companies in the same or similar lines of business as ours and
whose stocks are actively traded in a free and open market.
There are no companies directly comparable with us because we
are the only company in the market with automated anastomosis
devices for cardiac surgery. Since the initial public offering
market for limited or no revenue companies is volatile and since
there are no direct comparables, our board of directors used its
judgment about the appropriate pre-offering value of our common
stock. This value was supported by the market capitalization of
other public medical device companies, some of which have more
revenue than we do. Based upon this approach, our board of
directors estimated our pre-offering value in a public offering
to be approximately $75 million. The board estimated the
fair value of our common stock at that time to be $9.00 per
share. This estimate was based on a discount from a share price
calculated by dividing the $75 million estimated valuation
by fully diluted shares outstanding at the time, including
outstanding option grants and warrants.
In determining the reassessed fair value of our common stock
over the previous 12 months, we started with the $9.00
value and applied it over the prior
12-month
period using
generally a straight-line basis. In reassessing the value of our
common stock, we used a straight-line approach because we
determined that no single event supported incremental movement
in underlying value. We believe this approach is consistent with
valuation methodologies applied by other life science companies
pursuing an initial public offering. Based on the reassessment
process, we determined that the reassessed fair value of our
common stock ranged from $2.85 to $7.50 per share during the
fiscal year ended June 30, 2005 and from $7.50 to $9.00 per
share during the three-month period ended September 30,
2005.
For financial reporting purposes, we have recorded stock-based
compensation representing the difference between the estimated
fair value of common stock and the option exercise price.
Because shares of our common stock have not been publicly
traded, we determined the estimated fair value based upon the
factors described above and changes in valuations of existing
comparable publicly traded medical device companies, trends in
the broad market for medical device stocks and the expected
valuation we would obtain in an initial public offering.
Although it is reasonable to expect that the completion of our
initial public offering will add value to the shares as a result
of increased liquidity and marketability, the amount of
additional value cannot be measured with precision or certainty.
We amortize employee stock-based compensation on a straight-line
basis for equity instruments subject to fixed accounting. We
amortize employee stock-based compensation in accordance with
the provisions of the Financial Accounting Standards Board, or
FASB, Interpretation No. 28,
Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award
Plans
for equity instruments subject to variable
accounting.
We have determined that, for accounting purposes, the estimated
fair market value of our common stock was greater than the
exercise price for certain options granted. As a result, we have
recorded a deferred stock-based compensation charge for these
options of $287,000 for the fiscal year ended June 30,
2005. This expense, which is a non-cash charge, will be
amortized over the period in which the options vest, which is
generally four years. The amortization of this expense
recognized for the fiscal year ended June 30, 2005 was
$22,000. We also recorded deferred stock compensation resulting
from variable accounting for option exercises with non-recourse
promissory notes. Deferred stock compensation related to these
notes, representing compensation related to unvested options,
was $166,000 as of June 30, 2005. We reassessed the
valuations of our common stock for options granted from
July 1, 2005 through September 30, 2005. The
reassessment during the first quarter of fiscal 2006 resulted in
our recording an additional $1.1 million of deferred
stock-based compensation amortization expense. For the period
from July 1, 2005 through September 30, 2005, we did
not obtain
36
contemporaneous valuations by an unrelated valuation specialist
because, at the time of the issuances of the stock options, we
believed our estimates of the fair value of our common stock to
be reasonable.
In December 2005, our board granted options to purchase an
aggregate of 106,560 shares of our common stock, at an
exercise price of $9.75 per share, to our employees and a
new director. Using $13.00 per share as the deemed fair
value of our common stock in December, the December 2005 option
grants would have intrinsic value of $346,000.
Deferred stock-based compensation at September 30, 2005 is
approximately $1.4 million. We expect to record aggregate
amortization of stock-based compensation expenses of $345,000
for the remainder of the fiscal year ending June 30, 2006,
$389,000 for the fiscal year ending June 30, 2007, $364,000
for the fiscal year ending June 30, 2008 and $320,000 for
the fiscal year ending June 30, 2009 and $24,000 for the
fiscal year ending June 30, 2010. This amortization will be
allocated among research and development expenses and general,
selling and administrative expenses, based upon the
employees job function.
We account for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and
Emerging Issues Task Force, or EITF, Issue No. 96-18,
Accounting for Equity Instruments That are Issued to
Other Than Employees for Acquiring, or in Conjunction with
Selling Goods, or Services,
using a fair value
approach. The compensation costs of these arrangements are
subject to remeasurement over the vesting terms as earned. As a
result, the non-cash charge to operations for non-employee
options with vesting or other performance criteria is affected
each reporting period by changes in the estimated fair value of
our common stock. The two factors that most affect these changes
are the fair value of the common stock underlying stock options
for which stock-based compensation is recorded and the
volatility of such fair value. If our estimates of the fair
value of these equity instruments change, it would have the
effect of changing compensation expenses. For options and stock
granted to non-employees, we recorded $149,000, $25,000 and
$38,800 of stock-based compensation expense during the fiscal
years ended June 30, 2004 and 2005 and the three months
ended September 30, 2005 respectively.
In addition, during the fiscal year ended June 30, 2005,
and for the three months ended September 30, 2005, we
recorded a total of $2.0 million and $583,000,
respectively, in stock-based compensation charges related to
certain loans we made during the period from 2000 to 2004 to
enable three directors, each of whom is or was also an officer,
to purchase shares of our common stock. This non-cash
compensation expense is calculated by multiplying the difference
between the option exercise price and the fair market value of
our common stock as determined by our board of directors for the
reporting period, by the number of vested shares purchased with
promissory notes. These loans were made pursuant to recourse
promissory notes that were secured by the underlying shares of
common stock purchased with the proceeds of the loans. Because
we had modified the loans or provided below-market interest
rates on the loans and extended the repayment period, for
accounting purposes the issuances of the shares that were
purchased with the proceeds of the loans were deemed to be
compensatory. Accordingly, we are required to record a non-cash
compensation charge equal to the difference between the purchase
price of the stock and the fair value of the stock securing the
notes in each reporting period during which the notes remain
outstanding.
Results of Operations
Recent Developments
We recently completed our fiscal quarter ended December 31,
2005. We expect our revenue for the three months ended
December 31, 2005 to be between $190,000 and $200,000, as
compared to revenue of $294,000 (including $145,000 from
Guidant) for the three months ended December 31, 2004. We
did not have any revenue from Guidant in the three months ended
December 31, 2005.
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Three Months Ended September 30, 2004 and 2005
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Net Revenue.
Net revenue decreased $1.0 million,
from $1.2 million for the three months ended
September 30, 2004 to $168,000 for the three months ended
September 30, 2005. The decrease in revenue for the
37
three months ended September 30, 2005 reflects the prior
completion in November 2004 of our development contract with
Guidant and termination in September 2004 of our distribution
agreement with Guidant in Europe.
Cost of Product Revenue.
Cost of product revenue consists
of material, labor and overhead. Cost of product revenue
decreased $9,000, from $636,000 for the three months ended
September 30, 2004 to $627,000 for the three months ended
September 30, 2005. The decrease in costs for the three
months ended September 30, 2005 reflects a reduction in the
number of product units sold resulting from the prior completion
of the development contract with Guidant and termination of the
distribution agreement with Guidant in Europe, partially offset
by an increase in inventory write-offs of approximately $211,000
for obsolete PAS-Port systems. We decided to write off our
existing inventory of PAS-Port systems based upon design
improvements to the device that have resulted in a newer version
that we are currently shipping to customers.
Research and Development Expense.
Research and
development expense decreased $338,000, from $1.5 million
for the three months ended September 30, 2004 to
$1.2 million for the three months ended September 30, 2005.
The decrease in expenses for the three months ended
September 30, 2005 was primarily attributable to a decrease
in expenses for the
C-Port
xA system, the
next iteration of our
C-Port
system, and the
aortic cutter including prototype material and consulting costs,
partially offset by increased non-cash stock-based compensation
expenses for the period. Research and development expenses
fluctuate with the stage of development of, the timing of
clinical trials related to, and the status of regulatory
approval of our products.
Selling, General and Administrative Expense.
Selling,
general and administrative expense increased $629,000, from
$594,000 for the three months ended September 30, 2004 to
$1.2 million for the three months ended September 30,
2005. The increase in expenses for the three months ended
September 30, 2005 was attributable to increases in
non-cash stock based compensation, personnel, travel and
professional service expenses.
Interest Income.
Interest income increased $3,000, from
$69,000 for the three months ended September 30, 2004 to
$72,000 for the three months ended September 30, 2005. The
increase in interest income is primarily attributable to higher
interest income due to higher interest rates for the period.
Interest Expense.
Interest expense was $264,000 for both
the three-month periods ended September 30, 2004 and 2005.
Amounts in both periods consisted of interest expense associated
with the $13.3 million of long-term debt.
Other Expense.
Other expense was $4,000 for the
three-month period ended September 30, 2005 compared to
zero for the three months ended September 30, 2004. Other
expense was primarily comprised of a loss from the sale of an
unused asset.
Fiscal Years Ended June 30, 2004 and 2005
Net Revenue.
Net revenue increased $1.2 million,
from $836,000 in fiscal 2004 to $2.1 million in fiscal
2005. A substantial majority of our product sales have been
sales of our
PAS-Port
system. Revenue from Century, our distributor in Japan,
accounted for 33%, and revenue from Guidant accounted for 65% of
total net revenue during fiscal 2005. The increase in net
revenue was attributable to increased product sales of the
PAS-Port
system to
Century and to sales of approximately $396,000 of the aortic
cutter to Guidant. Sales to Century increased in fiscal 2005
relative to fiscal 2004 primarily because we sold the PAS-Port
system to Century for only five months of fiscal 2004 compared
to twelve months in fiscal 2005. Additionally, sales to
Century have fluctuated in the past, and we cannot assure you
that our sales to Century will remain constant or grow. Product
revenue from Guidant includes $510,000 for fiscal 2005,
recognized as the difference between the minimum contractual
purchases due from Guidant and actual purchases through the date
the distribution agreement terminated in September 2004. Since
Guidant terminated our distribution agreement with them in
fiscal 2005, we will not have any product revenue from Guidant
in fiscal 2006, and we expect our product revenue in fiscal 2006
will be lower than our product revenue in fiscal 2005. During
fiscal 2005, we recognized development revenue from Guidant of
$310,000, based on the development and supply agreement that
called for us to develop and manufacture the aortic cutter. We
do not anticipate receiving any additional development revenue
from Guidant. Future production of the aortic cutter has been
outsourced by Guidant to a third-party
38
manufacturer, and we will not receive any future revenue from
Guidant for the manufacture of the aortic cutter. We will
receive a modest royalty for each aortic cutter sold in the
future, but we do not expect these royalties to contribute
significantly to our revenue for the foreseeable future.
Cost of Product Revenue.
Cost of product revenue consists
primarily of material, labor and overhead costs. Cost of product
revenue increased $373,000, from $2.1 million in fiscal
2004 to $2.5 million in fiscal 2005. The increase in costs
was primarily attributable to an increased number of
PAS-Port
systems and
aortic cutters sold during the period. To the extent that sales
of
PAS-Port
and
C-Port
products in
fiscal 2006 do not increase to offset the loss of sales of
aortic cutters, our manufacturing overhead will need to be
allocated across lower sales. Future production of the aortic
cutter has been outsourced by Guidant to a third party
manufacturer.
Research and Development Expense.
Research and
development expenses consist primarily of personnel costs within
our product development, regulatory and clinical groups and the
costs of clinical trials. Research and development expenses
increased $463,000, from $5.8 million in fiscal 2004 to
$6.3 million in fiscal 2005. During fiscal 2005, increases
in non-cash stock compensation expenses and product development
expenses including personnel and prototype materials for the
C-Port
xA and
X-Port
programs were
offset by a decrease in expenses for the
PAS-Port
program
including personnel and tooling expenses. We anticipate that
research and development expenses will increase in absolute
terms in future periods as we conduct new clinical studies for
the
C-Port
xA and the
PAS-Port
systems,
continue to enhance our existing product lines and begin to
develop new applications of our technology. Research and
development expenses fluctuate with the stage of development of,
the timing of clinical trials related to, and the status of
regulatory approval of our products.
Selling, General and Administrative Expense.
Selling,
general and administrative expenses consist primarily of
stock-based compensation charges in fiscal 2005 and costs for
administrative and sales and marketing personnel, intellectual
property and marketing expenses. Selling, general and
administrative expenses increased $2.0 million, from
$1.8 million in fiscal 2004 to $3.8 million in fiscal
2005. During fiscal 2005, we recorded a total of
$2.0 million in non-cash stock-based compensation expenses
related to loans we made to three directors, each of whom is or
was also an officer, to purchase shares of our common stock with
promissory notes. This non-cash compensation expense was
calculated by multiplying the difference between the option
exercise price and the fair market value of our common stock at
the reporting period, by the number of vested shares purchased
with promissory notes. These loans were repaid with common stock
in October 2005, and there will be no additional stock-based
compensation expense for these loans after October 2005. We
expect selling, general and administrative expenses to increase
as we expand our sales and marketing efforts and build our
corporate infrastructure to support the requirements of being a
public company, including costs associated with compliance with
Section 404 of the Sarbanes-Oxley Act of 2002.
Interest Income.
Interest income increased $96,000, from
$209,000 for fiscal 2004, to $305,000 for fiscal 2005. The
increase in interest income is primarily attributable to higher
interest income due to higher interest rates for the period.
Interest Expense.
Interest expense decreased $953,000,
from $2.0 million in fiscal 2004 to $1.0 million in
fiscal 2005. Interest expenses in fiscal 2005 included only
interest expense for the full fiscal year associated with the
$13.3 million of long-term debt. Interest expenses in 2004
included interest expense for a partial year associated with the
$13.3 million of long-term debt and a $1.1 million
charge for the early extinguishment of debt in August 2003. The
$1.1 million charge consisted of issuing to the debt holder
45,745 shares of Series E preferred stock, valued at
$14.10 per share, for $645,000 to pay for future interest
due over the period from August 2003 to June 2005, and $460,000
related to the acceleration of amortization of warrant expense
accounted for as a discount of the debt.
Other Income.
In fiscal 2005, other income of $257,000
consisted primarily of a one-time payment of $250,000 received
from Guidant as a strategic agreement fee.
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Fiscal Years Ended June 30, 2003 and 2004
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Net Revenue.
Net revenue increased from $0 in fiscal 2003
to $836,000 in fiscal 2004 primarily due to initiating sales of
the
PAS-Port
system in
Europe and Japan. Century and Guidant accounted for 25% and 75%,
39
respectively, of total net revenue in fiscal 2004. We commenced
sales in January 2004 to Century following marketing approval of
the
PAS-Port
system by
the Ministry of Health in Japan. We recognized net product
revenue in 2004 of $613,000 in connection with product sales in
Europe and Japan. Also in fiscal 2004, we recognized development
revenue from Guidant of $223,000 as a result of the development
and supply agreement that called for us to develop the aortic
cutter for Guidant.
Cost of Product Revenue.
Cost of product revenue
increased from $0 in fiscal 2003 to $2.1 million in fiscal
2004. The increase was primarily attributable to the initial
sales of the PAS-Port and C-Port systems in fiscal 2004.
Research and Development Expense.
Research and
development expenses decreased $872,000, from $6.7 million
in fiscal 2003 to $5.8 million in fiscal 2004. The decrease
of expenses in fiscal 2004 compared to the previous fiscal year
was primarily attributable to the reallocation, upon
commencement of receipt of product revenue in 2004, to cost of
product revenue of $817,000 of personnel-related costs for
manufacturing overhead included in research and development
expenses in 2003. The decrease was also a result of decreases in
depreciation of $199,000, resulting from allocation of that
portion of depreciation expense to cost of product revenue when
we commenced manufacturing product, and other expenses of
$443,000 offset in part by $223,000 in costs related to the
development of the aortic cutter for Guidant in fiscal 2004.
Research and development expenses fluctuate with the stage of
development of, the timing of clinical trials related to, and
the status of regulatory approval of our products.
Selling, General and Administrative Expense.
Selling,
general and administrative expenses decreased $127,000, from
$1.9 million in fiscal 2003 to $1.8 million in fiscal
2004. The decrease was primarily attributable to lower personnel
costs offset in part by higher regulatory consulting costs.
Interest Income.
Interest income decreased $85,000, from
$294,000 in fiscal 2003 to $209,000 in fiscal 2004. The decrease
in interest income in fiscal 2004 was primarily attributable to
lower cash and short-term investment balances available for
investing.
Interest Expense.
Interest expense increased
$1.1 million, from $885,000 in fiscal 2003 to
$2.0 million in fiscal 2004. The increase in interest
expense in fiscal 2004 was primarily due to higher interest
expenses on larger average loan balances outstanding during the
year from our loans from Guidant and Century, and a
$1.1 million charge for the early extinguishment of debt in
August 2003. The $1.1 million charge consisted primarily of
issuing to the debt holder 45,745 shares of Series E
preferred stock, valued at $14.10 per share, for $645,000
to pay for interest due and $460,000 related to the acceleration
of amortization of warrant expense accounted for as a discount
of the debt.
Income Taxes
Due to uncertainty surrounding the realization of deferred tax
assets through future taxable income, we have provided a full
valuation allowance and no benefit has been recognized for the
net operating loss and other deferred tax assets. Accordingly,
deferred tax asset valuation allowances have been established as
of June 30, 2004 and 2005 to reflect these uncertainties.
As of June 30, 2005, we had net operating loss
carry-forwards to reduce future taxable income, if any, of
approximately $44.3 million for federal income tax purposes
and $35.1 million available to reduce future taxable
income, if any, for California state income taxes. The net
operating loss carry-forwards begin to expire by 2013 and 2008
for federal and California income taxes, respectively. We also
had federal and state research and development credit
carry-forwards of approximately $700,000 and $500,000,
respectively, at June 30, 2005. The federal credits will
expire starting in 2013 if not utilized. Utilization of the net
operating loss carry-forward may be subject to an annual
limitation due to the ownership percentage change limitations
provided by the Internal Revenue Code of 1986 and similar state
provisions. The annual limitation may result in the expiration
of the net operating loss before utilization if certain changes
in our ownership occur. This offering may result in a change in
ownership percentages that will result in a limitation of our
operating loss carry-forwards.
40
Liquidity and Capital Resources
As of September 30, 2005, our accumulated deficit was
$51.1 million. We currently invest our cash and cash
equivalents in large money market funds consisting of debt
instruments of the U.S. government, its agencies and
high-quality corporate issuers. We place our short-term
investments primarily in U.S. government bonds and
commercial paper. Since inception, we have financed our
operations primarily through private sales of convertible
preferred stock resulting in aggregate net proceeds of
$38.9 million and from long-term notes payable of
$13.3 million.
As of September 30, 2005, we did not have any off-balance
sheet liabilities. We had cash, cash equivalents and short-term
investments of $7.1 million.
The following table discloses aggregate information, as of
June 30, 2005, about our contractual obligations and the
periods in which payments are due, excluding the convertible
preferred stock to be converted into common stock in connection
with this offering:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
More than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Operating lease real estate
|
|
$
|
1,408
|
|
|
$
|
429
|
|
|
$
|
939
|
|
|
$
|
40
|
|
|
$
|
-
|
|
Sponsored research agreement
|
|
|
158
|
|
|
|
-
|
|
|
|
158
|
|
|
|
-
|
|
|
|
-
|
|
Convertible notes payable, including interest
|
|
|
3,470
|
|
|
|
150
|
|
|
|
3,320
|
|
|
|
-
|
|
|
|
-
|
|
Notes payable and accrued interest
|
|
|
14,496
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,496
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,532
|
|
|
$
|
579
|
|
|
$
|
4,417
|
|
|
$
|
14,536
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The long-term commitments under operating leases shown above
consist of payments related to our real estate leases for our
headquarters in Redwood City, California expiring in 2008.
The long-term commitment under the Sponsored Research Agreement
shown above consists of anticipated payments to Stanford
University for use of their animal laboratory facility expiring
December 31, 2006. The agreement is renewable and has been
renewed annually for the past five years.
The subordinated convertible notes payable were issued in
connection with our Japan Distribution Agreement with Century.
The subordinated convertible notes bear interest at 5% per
year, payable quarterly, and are due in June 2008. The
subordinated convertible notes are convertible at the option of
the holder into common stock at the price of our initial public
offering at any time within six months after our initial public
offering. The holder of the subordinated convertible notes has a
continuing security interest in all of our personal property and
assets, including intellectual property.
The notes payable and accrued interest are for a loan agreement
with Guidant Investment Corporation, or Guidant Investment, with
principal of $10.3 million and accrued interest as of
June 30, 2005 of $1.4 million and future interest of
$2.8 million at maturity. The notes bear interest at the
rate of 8.75% per year and principal and all accrued
interest are due in August 2008. The holder of the notes has a
first priority security interest in all our personal property
and assets, including intellectual property.
As of June 30, 2005, we had entered into letters of credit
totaling $500,000 securing our operating lease. A certificate of
deposit in the amount of $500,000 has been recorded as
restricted cash at June 30, 2005 related to this letter of
credit.
41
Summary liquidity and cash flow data is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the
|
|
|
|
|
|
Three Months
|
|
|
|
As of and for the Fiscal Year
|
|
|
Ended
|
|
|
|
Ended June 30,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
17,680
|
|
|
$
|
17,224
|
|
|
$
|
8,951
|
|
|
$
|
15,607
|
|
|
$
|
7,103
|
|
Working capital
|
|
|
13,396
|
|
|
|
16,402
|
|
|
|
9,032
|
|
|
|
15,002
|
|
|
|
7,096
|
|
Net cash used in operating activities
|
|
|
(8,922
|
)
|
|
|
(7,776
|
)
|
|
|
(7,417
|
)
|
|
|
(1,310
|
)
|
|
|
(1,838
|
)
|
Net cash provided by (used in) investing activities
|
|
|
(12,157
|
)
|
|
|
(1,795
|
)
|
|
|
7,129
|
|
|
|
286
|
|
|
|
982
|
|
Net cash provided by financing activities
|
|
|
5,537
|
|
|
|
8,116
|
|
|
|
14
|
|
|
|
6
|
|
|
|
8
|
|
Net cash used in operating activities for the three-month period
ended September 30, 2005 was $1.8 million, which was
primarily attributable to our net loss of $3.0 million
adjusted for non-cash stock based compensation expenses of
$729,000 and an increase of $226,000 in accrued interest payable
to related party on the $10.3 million note payable. Net
cash used in operating activities for the fiscal years ended
June 30, 2003, 2004 and 2005, was $8.9 million,
$7.8 million and $7.4 million, respectively. The use
of cash for the fiscal year ended June 30, 2003, was
attributable to our net loss adjusted for depreciation and
non-cash stock-based compensation charges, offset by an increase
in restricted cash balances for the facility lease of our new
headquarters. The use of cash for the fiscal year ended
June 30, 2004, was attributable to our net loss adjusted
for depreciation and non-cash stock-based compensation charges,
offset by an increase in non-current liabilities as a result of
$539,000 of interest payable on the note to Guidant Investment.
The net use of cash for the fiscal year ended June 30,
2005, was attributable to our net loss adjusted for depreciation
and non-cash stock-based compensation charges, offset by an
increase in non-current liabilities as a result of $897,000 of
interest payable on the note to Guidant Investment.
Net cash provided by investing activities was $1.0 million
for the three-month period ended September 30, 2005 due to
the sale of available-for-sale securities of $2.0 million,
offset in part by purchases of available-for-sale securities of
$1.0 million during the period. Net cash used in investing
activities was $1.8 million for the fiscal year ended
June 30, 2004, due to an increase in purchases of
available-for-sale investments as a result of additional cash
available from the sale of convertible preferred stock of
$4.0 million during the year, partially offset by purchases
of property and equipment of $914,000. Net cash provided by
investment activities was $7.1 million for the fiscal year
ended June 30, 2005, resulting from an increase in proceeds
from the sale of available-for-sale investments and decrease in
purchases of short-term investments offset by purchases of
property and equipment of $882,000.
Net cash provided by financing activities was $8,000 for the
three-month period ended September 30, 2005, reflecting
funds received upon the exercise of employee stock options
during the period. Net cash provided by financing activities in
the fiscal year ended June 30, 2004, of $8.1 million
was primarily attributable to proceeds from the sale of
convertible preferred stock of $4.0 million to Guidant
Investment and proceeds from notes payable to Guidant Investment
of $10.3 million, less the repayment of a note payable and
interest of $6.3 million. Net cash provided by financing
activities of $14,000 in fiscal 2005 was attributable to cash
received from stock option exercises.
Our future capital requirements depend upon numerous factors.
These factors include but are not limited to the following:
|
|
|
|
|
revenue generated by sales of our products;
|
|
|
|
costs associated with our sales and marketing initiatives and
manufacturing activities;
|
|
|
|
rate of progress and cost of our research and development
activities;
|
|
|
|
costs of obtaining and maintaining FDA and other regulatory
clearances and approvals for our products;
|
|
|
|
securing, maintaining and enforcing intellectual property rights;
|
42
|
|
|
|
|
effects of competing technological and market
developments; and
|
|
|
|
number and timing of any acquisitions and other strategic
transactions we may undertake.
|
We believe that our current cash, cash equivalents and
short-term investments, along with the cash we expect to
generate from operations and our net proceeds from this
offering, will be sufficient to meet our anticipated cash needs
for working capital and capital expenditures for at least the
next 18 months. If these sources of cash and the net
proceeds from this offering are insufficient to satisfy our
liquidity requirements, we may seek to sell additional equity or
debt securities, obtain a credit facility or enter into
development or license agreements with third parties. The sale
of additional equity or convertible debt securities could result
in dilution to our stockholders. If additional funds are raised
through the issuance of debt securities, these securities could
have rights senior to those associated with our common stock and
could contain covenants that would restrict our operations. Any
licensing or strategic agreements we enter into may require us
to relinquish valuable rights. Additional financing may not be
available at all, or in amounts or upon terms acceptable to us.
If we are unable to obtain this additional financing, we may be
required to reduce the scope of our planned product development
and marketing efforts.
Quantitative and Qualitative Disclosures About Market Risk
We invest our excess cash primarily in auction rate securities.
We do not utilize derivative financial instruments, derivative
commodity instruments or other market risk-sensitive
instruments, positions or transactions to any material extent.
Accordingly, we believe that, while the instruments we hold are
subject to changes in the financial standing of the issuer of
such securities, we are not subject to any material risks
arising from changes in interest rates, foreign currency
exchange rates, commodity prices, equity prices or other market
changes that affect market risk sensitive instruments. Due to
the short-term nature of these investments, a 1% change in
market interest rates would not have a significant impact on the
total value of our portfolio as of June 30, 2005.
Although substantially all of our sales and purchases are
denominated in U.S. dollars, future fluctuations in the
value of the U.S. dollar may affect the price
competitiveness of our products outside the United States. We do
not believe, however, that we currently have significant direct
foreign currency exchange rate risk and have not hedged
exposures denominated in foreign currencies.
Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs, an amendment of ARB No. 43,
Chapter 4.
SFAS No. 151 clarifies the
accounting for abnormal amounts of idle facility expense,
freight, handling costs and wasted material.
SFAS No. 151 is effective for inventory costs incurred
during fiscal years beginning in the Companys first
quarter of fiscal year 2006. The Company does not believe the
adoption of SFAS No. 151 will have a material effect
on its consolidated financial position, results of operations or
cash flows.
On December 16, 2004, the FASB issued SFAS 123(R),
which is a revision of SFAS No. 123. SFAS 123(R)
supersedes APB No. 25, and amends SFAS No. 95,
Statement of Cash Flows. Generally, the approach in
SFAS 123(R) is similar to the approach described in
SFAS No. 123. However, SFAS 123(R) requires all
share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on
their fair values. Under SFAS 123(R), pro forma disclosure
is no longer an alternative. We are required to apply the
prospective transition method no later than July 1, 2007 or
upon becoming a public company. We must continue to account for
any equity awards outstanding at the required effective date
using the accounting principles originally applied to those
awards (e.g., the provisions of Opinion 25 and its related
interpretative guidance). As permitted by SFAS 123, we
currently account for share-based payments to employees using
APB 25s intrinsic value method. Accordingly, the
adoption of SFAS 123(R)s fair value method will have
a significant impact on our results of operations, although it
will have no impact on our overall financial position. The
impact of adoption of SFAS 123(R) cannot be predicted at
this time because it will depend on levels of share-based
payments granted in the future.
43
BUSINESS
Overview
We design and manufacture proprietary automated anastomotic
systems used by surgeons to perform coronary artery bypass
surgery. In coronary artery bypass grafting procedures, or CABG,
veins or arteries are used to construct alternative conduits to
restore blood flow beyond narrowed or occluded portions of
coronary arteries, bypassing the narrowed or
occluded portion of the artery that is impairing blood flow to
the heart muscle. Our first two products, the
C-Port
®
Distal Anastomosis System, referred to as the C-Port system, and
the
PAS-Port
®
Proximal Anastomosis System, referred to as the PAS-Port system,
provide cardiovascular surgeons with
easy-to
-use automated
systems to perform consistent, rapid and reliable connections,
or anastomoses, of the vessels, which surgeons generally view as
the most critical aspect of the bypass procedure. We received
510(k) clearance from the FDA to market our
C-Port
system in the
United States in November 2005. We currently sell both the
C-Port system and the PAS-Port system in Europe, and we sell the
PAS-Port system in Japan through our distributor, Century
Medical, Inc., referred to as Century. Our strategy is to
further enhance and leverage our technology to develop
additional automated anastomotic systems that facilitate the
performance of minimally invasive endoscopic coronary bypass
surgery, as well as automated systems to be used in other
surgical applications, such as vascular closure.
The current method of performing an anastomosis in a CABG
procedure utilizes a tedious and time-consuming hand-sewn
suturing technique to connect a bypass graft to the aorta at one
end, the proximal end, and to a small-diameter coronary artery
at the other end, the distal end. We estimate that approximately
1.2 million of these blood vessel connections are performed
annually in the United States. Proper vessel alignment and
suture tension among the many individually placed fine stitches
are critical for optimal bypass graft blood flow and function.
By replacing the hand-sewn sutures with an
easy-to
-use, highly
reliable and consistent automated system, the time required for
completing the anastomoses can be reduced. We believe that our
automated systems can also improve the quality and consistency
of the anastomoses, which we believe will ultimately contribute
to improved patient outcomes.
Our C-Port system is used to perform a distal anastomosis, which
is the connection of a bypass graft vessel to the coronary
artery downstream of the narrowed or occluded coronary artery.
The C-Port system received the CE Mark in April 2004, which is
required for marketing in the European Union, and 510(k)
clearance from the FDA in November 2005, which is required
for marketing in the United States. The C-Port system is
currently being sold on a limited basis to selected customers in
Europe. We are currently training physicians in the
United States to use our
C-Port
system, and we
plan to commence sales in the United States later this
year. As of September 30, 2005, we had sold over 250 C-Port
systems internationally. In addition, we are currently designing
the next iteration of our C-Port system intended for use in
endoscopic coronary bypass surgery.
Our PAS-Port system is used to perform a proximal anastomosis,
which is the connection of a bypass graft vessel to the aorta,
the source of blood for the bypass. The PAS-Port system received
the CE Mark in March 2003 and regulatory approval from Japanese
regulatory authorities in January 2004 for distribution in
Japan. The PAS-Port system is being sold in Japan through
Century. According to Century, the PAS-Port system has been used
in Japan in over 130 hospitals and has an estimated 15% market
share of all proximal anastomoses performed in beating heart
surgery using a vein as the bypass graft. As of
September 30, 2005, more than 2,400 PAS-Port systems had
been sold in Europe and Japan. We have recently obtained
conditional approval of an Investigational Device Exemption,
referred to as an IDE, from the FDA to perform a randomized,
prospective clinical trial in centers in the United States and
in Europe to study the safety and efficacy of the PAS-Port
system.
Industry Background
Coronary
Artery Disease
According to the American Heart Association, approximately
13.2 million Americans have coronary artery disease, and
approximately 653,000 people in the United States die each year
as a result of the disease. Coronary artery disease, sometimes
referred to as atherosclerosis, is a degenerative disease
resulting from the
44
deposit of cholesterol and other fatty materials on the interior
walls of blood vessels, forming a
build-up
known as
plaque. The accumulation of plaque, usually over decades, causes
the vessel to become inelastic and progressively narrows the
interior of the artery, impairing its ability to supply blood
and oxygen to the heart muscle. When there is insufficient blood
flow to the heart muscle, an injury may occur, often resulting
in chest pain, or angina, a heart attack or even death. Coronary
artery disease is caused by aging and is exacerbated by dietary
and environmental factors, as well as by genetic predisposition.
As a patient ages, the disease will typically advance and become
more diffuse, compromising the coronary artery system more
globally and occluding more small-diameter vessels.
Current Treatment Alternatives for Coronary Artery Disease
Physicians and patients may select among a variety of treatments
to address coronary artery disease, with the selection often
depending upon the stage and severity of the disease and the age
of the patient. In addition to changes in patient lifestyle,
such as smoking cessation, weight reduction, diet changes and
exercise programs, the principal existing treatments for
coronary artery disease include the following:
Medical
Treatment with Pharmaceuticals
Before the advent of interventional cardiology or bypass
surgery, medical treatment with pharmaceuticals was the only
form of therapy available to patients with coronary heart
disease. In patients with less severe disease, pharmaceuticals
remain the primary treatment approach and include drugs such as
platelet adhesion inhibitors or drugs that reduce the blood
cholesterol or triglyceride levels. The objective for medical
treatment with pharmaceutical agents is to reduce the incidence,
progression or exacerbation of coronary artery disease and its
associated symptoms. For more serious disease, however,
pharmacological therapy alone is often inadequate.
Interventional
Cardiology Techniques
Coronary Angioplasty.
Percutaneous transluminal coronary
angioplasty, commonly referred to as balloon angioplasty, is a
surgical procedure that involves the dilation of the obstructed
artery with a balloon catheter. To perform an angioplasty, the
surgeon maneuvers a flexible balloon catheter to the site of the
blockage in the coronary artery, inflates the balloon,
compressing the plaque and stretching the artery wall to create
a larger channel for blood flow. The balloon is then deflated
and removed. Angioplasty is generally successful in increasing
immediate blood flow and, relative to current surgical
procedures, offers the benefits of shorter periods of
hospitalization, quicker recovery times, reduced patient
discomfort and lower cost. However, angioplasty does not always
provide prolonged efficacy: independent studies indicate that
25% to 40% of vessels treated with balloon angioplasty return to
their pre-treatment, narrowed size, a process known as
restenosis, within six months following the procedure.
Restenosis is primarily the result of cell proliferation in
response to the injury caused by the angioplasty
procedure.
Stents.
High rates of restenosis following treatment by
balloon angioplasty led to the introduction of stents, mesh-like
metallic tubes that are placed within the narrowed portion of
the coronary vessel to hold the vessel open after the
angioplasty balloon has been removed. Although clinical outcomes
for procedures using stents reflect an improvement over balloon
angioplasty alone, the effectiveness of stents is still limited
by restenosis, which occurs in about 10% to 35% of cases within
six months of the procedure.
Recently, some manufacturers have introduced drug-eluting
stents, which incorporate, on the surface of the stent,
specially formulated, slow-release drugs designed to prevent
restenosis. According to published studies, currently marketed
drug-eluting stents have been shown in clinical trials to reduce
the rate of restenosis, within the first nine months after
placement, to less than 10%. Market adoption of drug-eluting
stents has been rapid, and industry observers predict that
drug-eluting stents will capture approximately 90% of the stent
market within three years.
Despite the advancements and market success of drug-eluting
stents and angioplasty therapies, these interventional
procedures may be less effective than CABG in addressing diffuse
progressive coronary artery disease. In this advanced stage of
coronary artery disease, intervention is required for multiple
vessels, many of
45
which are less than two millimeters in internal diameter, a
diameter unsuited for angioplasty and stenting. In addition,
stents have been shown to be difficult to place in patients with
coronary lesions in sections with vessel branches and in
patients with narrowings in the left main coronary artery.
Bypass Surgery.
CABG involves the construction of an
alternative path to bypass a narrowed or occluded coronary
artery and restore blood flow from the aorta to an area past the
occlusion. This procedure can be accomplished using either veins
or arteries as bypass grafts. Veins are typically harvested from
the patients leg, while arteries are taken from either the
patients arm (radial artery) or chest wall (mammary
artery). One end of the harvested vessel is then generally
attached to the aorta for blood inflow, and the opposite end is
attached to the target coronary vessel. If a mammary artery is
used as the bypass graft, it must be dissected from the chest
wall, leaving one end in place, while the opposite end is
attached to the target vessel, providing uninterrupted blood
flow from the arterial circulation. Once in place, these grafts
provide sufficient blood flow to bypass the narrowed or occluded
portion of the coronary artery. (See Figure Below).
Over the last decade approximately 90% of patients undergoing
first time CABG surgery received a mammary artery as a bypass
graft vessel, a graft that does not require a proximal
anastomosis, in addition to other bypass grafts such as veins
and radial arteries. When the left anterior descending or LAD,
artery is obstructed, CABG is most commonly performed by
grafting the left internal mammary artery, or LIMA, to the LAD.
When other coronary arteries are obstructed, saphenous vein
grafts are typically used as the bypass vessel. A study shows
that patients who undergo a CABG procedure typically receive at
least three bypass grafts, of which we believe a majority are
performed using one artery and two veins as the bypass graft
vessels.
Although CABG surgery is generally a highly invasive and even
traumatic procedure, an independent study comparing CABG and
implantation of conventional stents has shown that CABG is the
more effective treatment for coronary artery disease, achieving
the best long-term patient outcomes as measured by survival rate
and need for intervention. Studies have shown that following
CABG, grafts can remain patent, or open, and functional for as
long as 10 years in approximately 50% of venous grafts and
approximately 90% of arterial grafts. In addition, CABG
procedures can be used to treat diffuse, end-stage coronary
artery disease states that are not amenable to treatment by
angioplasty or stents.
According to an independent analysis by Medtech Insight, a
division of Windhover Information, entitled Emerging
U.S. Markets for Myocardial Revascularization, Repair, and
Regeneration Products and Technologies, dated
November 2004, an estimated 260,000 CABG procedures will be
performed in 2005 in the United States, as compared to
approximately 280,000 procedures in 2004. We believe that the
decrease in CABG procedures is primarily attributable to the
increase in other interventional cardiology procedures,
including the
46
increased use of drug-eluting stents. The average CABG surgery
requires approximately three bypass grafts per patient, and a
majority of grafts require an anastomotic connection at both
ends of the graft. Assuming an average of approximately five
anastomoses per CABG procedure, we estimate that approximately
1.2 million of these blood vessel connections are performed
in connection with CABG procedures annually in the United
States. We believe approximately two-thirds of the procedures
are performed using veins as the bypass graft.
Types of CABG Procedures
There are currently three types of CABG, two of which are
commonly performed:
Conventional On-Pump CABG Procedures.
Conventional
on-pump CABG procedures are particularly invasive and traumatic
to the patient, typically requiring the surgeon to open the
patients chest cavity by splitting the sternum and to
place the patient on a pump to circulate the blood throughout
the body. Redirecting the blood flow to a pump enables the
surgeon to clamp the aorta and stop the heart, which results in
a motionless and bloodless field in which the surgeon can
perform the difficult and tedious task of manually suturing the
small vessels to one another. The absence of blood flow and
motion are important factors in ensuring precision and providing
positive clinical outcomes; however, the use of a pump for
circulation exposes the patients blood to foreign
surfaces, which has been shown to increase the incidence of
bleeding and short-term neurocognitive defects. Additionally,
stopping the heart may result in impairment or damage to the
heart muscle. Moreover, clamping of the aorta has been shown, in
clinical studies, to cause the release of particles into the
blood stream that may produce blockages in other parts of the
body, such as the brain. Blockages in the brain can lead to
neurological damage, including strokes. Clamping the aorta also
carries the risk of injury to the vessel wall with later
bleeding complications. Notwithstanding these potential problems
the majority of CABG procedures performed today use this on-pump
technique.
Off-Pump CABG Procedures.
In 1995, a new method of
performing CABG was introduced that avoids the use of external
pumps, requiring the surgeon to perform the anastomosis while
the heart is beating. The clinical literature suggests that this
procedure, termed off-pump coronary artery bypass, or OPCAB,
offers several benefits, including reductions in bleeding,
kidney dysfunction, short-term neurocognitive dysfunction and
length of hospital stay. OPCAB is currently used in
approximately 25% of all CABG procedures performed in the United
States.
Notwithstanding these advantages, the technical challenges
inherent in OPCAB have impeded its widespread adoption. Because
the patients heart is beating during the procedure, the
surgeon is required to perform the delicate anastomosis on a
target vessel, which could be as narrow as one millimeter in
internal diameter, while the vessel is moving with each heart
contraction. The technical demands of the procedure, together
with the longer learning curve required to achieve surgical
proficiency, may also initially adversely affect long-term graft
patency and completion of revascularization. In addition,
surgeons will still typically be required to place a partially
occluding clamp on the ascending aorta to hand suture the
proximal vein graft anastomosis. As a result, even in OPCAB
procedures, patients still face the risk of the serious adverse
effects associated with the application of aortic clamps.
Minimally Invasive Endoscopic Procedures.
Recently, a
very small number of CABG procedures have been performed using
minimally invasive endoscopic procedures to reduce patient
trauma. In this approach, the sternum is left intact and the
surgery is performed through small access ports. The anastomoses
are performed on selected, readily reachable vessels using
special surgical instruments, and this procedure requires
special surgical skills. Although endoscopic procedures offer
the promise of faster post-operative patient recovery times,
rapid ambulation, long-term graft patency and a low incidence of
adverse outcomes, there are a number of challenges to wide-scale
realization of that potential, in particular, the absence of a
method to enable surgeons to perform reproducible and effective
anastomoses that can be rapidly deployed through small
incisions. Currently, it is estimated that fewer than 3% of CABG
patients are eligible for minimally invasive endoscopic
techniques.
Surgical
Techniques for Anastomoses
The current method of performing anastomoses, the most critical
aspect of CABG procedures, typically employs tedious and
time-consuming hand-sewn placement of individual stitches with a
continuous suture to
47
connect the bypass graft to the aorta or coronary vessels.
Conventional anastomosis can require ten to 25 minutes to
suture, depending upon the size of the vessels. Proper vessel
alignment and suture tension among the many individually placed
fine stitches are critical for optimal bypass graft blood flow
and function. Furthermore, long-term clinical outcomes may be
improved if the anastomosis is compliant, that is,
if its shape and size can adapt to changes in flow and blood
pressure by placement of many single sutures rather than one
continuous suture. However, most surgeons prefer the use of a
continuous suture because placement of individual sutures may be
more technically challenging and time-consuming. Whether the
surgeon elects to operate on the patient on- or off-pump, a
hand-sewn proximal anastomosis generally requires clamping of
the aorta and therefore carries with it the risk of neurological
damage and other serious adverse effects. Recently, new
technology has been introduced that allows the surgeon to
perform hand-sewn proximal anastomoses to the aorta without
clamping of the aorta. These facilitating devices temporarily
cover the opening in the aortic wall from the inside while the
surgeon places the stitches to create the anastomosis and are
removed after the anastomosis has been completed to allow blood
flow into the bypass graft. We believe these systems, in their
current implementations, are not suitable for endoscopic bypass
surgery.
The laborious and time-consuming nature of manually applied
sutures and the limitations associated with their use, together
with advances occurring in coronary surgical procedures, have
fueled the need for
easy-to
-use, fast and
highly reliable automated systems to expedite and standardize
the performance of anastomoses in CABG procedures. Although a
number of companies have attempted to develop automated systems
to perform anastomoses, to date only one system, which is for
use in performing a proximal anastomosis, is currently
commercially available in the United States.
Our Solutions
We design and manufacture proprietary automated anastomotic
systems used by surgeons to perform anastomoses during on- or
off-pump CABG procedures. We believe that by enabling consistent
and reliable anastomoses of the vessels at this most critical
step in CABG surgery through a fast, automated process, our
products can improve the quality and consistency of these
anastomoses, which we believe will ultimately contribute to
improved patient outcomes. We have designed our products to meet
the needs of surgeons, including:
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Physiological features.
Our clips use medical
grade stainless steel that is identical to that used in
conventional coronary stents, which is known to be compatible
with the human body (in the absence of allergies to certain
components of medical grade stainless steel). Our products
minimize trauma to both the graft and target vessel during
loading and deployment, thereby reducing the risk of scar
formation and associated narrowings or occlusions. Additionally,
our PAS-Port system can be used without clamping the aorta,
which has been shown to be a cause of adverse events, including
neurological complications. In addition, our C-Port system
creates compliant anastomoses, which potentially allow the shape
and size of the anastomosis to adapt to changes in flow and
blood pressure.
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Handling features.
Our anastomotic systems can
create anastomoses more rapidly than hand suturing, resulting in
a surgical procedure that can be performed more quickly. For
example the
PAS-Port
system can be
set-up
and deployed in approximately three minutes compared with
approximately ten to 25 minutes for a hand-sewn
anastomosis. In addition, the system is easy to use, typically
requiring only a few hours of training to become technically
proficient in the technique. The C-Port system is compatible
with coronary arteries as small as one millimeter in internal
diameter, which is typically the lower limit of target vessels
considered to be candidates for revascularization. The C-Port
system can also be deployed at various angles, allowing access
to all coronary targets during both on- and off-pump procedures.
Both the C-Port system and the PAS-Port system are designed as
integrated products, where all steps necessary to create an
anastomosis are performed by a single tool, with one user
interface. The need for target vessel preparation is minimal for
the PAS-Port system, a feature that is especially important in
patients undergoing a second or third coronary bypass procedure
with the presence of significant scarring in and around the
heart and aorta.
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Standardized results.
Our products enable
consistent, reproducible anastomoses, largely independent of
surgical technique and skill set, using a wide range in quality
of graft tissues. In comparison with hand-sewn sutures, our
systems offer mechanically-governed repeatability and reduced
procedural complexity.
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Reduced costs.
Because our products can help to
expedite the CABG procedure, we believe that they may contribute
to reduced operating room time and associated expenses,
partially offset by the increased cost of our products compared
to current alternatives, such as sutures. Additionally, our
C-Port system creates anastomoses rapidly and does not require
the interruption of blood flow. It may reduce some of the
technical challenges inherent in performing anastomosis in
off-pump procedures, which may advance adoption of the off-pump
approach. By helping more surgeons perform off-pump CABG, the
need for a costly pump may also be reduced or eliminated,
thereby potentially reducing the total costs of the procedure.
Finally, to the extent complications such as strokes or injury
to the heart muscle decrease, post-operative costs of a CABG
procedure may be significantly reduced.
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Our Strategy
Our goal is to become the leading provider of automated
anastomotic systems for cardiac bypass surgeries. Although CABG
may offer the most effective treatment for many patients with
coronary artery disease, patients are often deterred by the
invasiveness and trauma associated with the procedure. As a
result, some patients may opt to accept less invasive
procedures, such as balloon angioplasty and coronary stent
implantation, even though the procedure may result in a less
favorable outcome for that patient. For CABG to be a more
attractive treatment alternative, surgeons must strive to
decrease the invasiveness and trauma associated with current
procedures by introducing endoscopic or keyhole surgery for
CABG, similar to the success seen in laparoscopic or
arthroscopic procedures over the past decade. However, for
endoscopic CABG to be widely adopted, several challenges must be
overcome, including, most significantly, the development and
successful implementation of innovative technology that safely
accomplishes the most critical step in this procedure, the
anastomosis. We believe that our anastomotic technology will
become a key enabling technology for endoscopic CABG.
We believe we must follow a step-by-step process of technology
development and market introduction to achieve our goals. In the
first step, we must show strong clinical evidence that our
products are safe and effective in an open chest setting, an
environment in which the surgeon currently feels most
comfortable. Anastomotic systems are disruptive technology and,
to gain the trust and confidence of cardiac surgeons, we must
carefully familiarize them with these systems. If we are
successful in this first step of the process and the surgical
community has started to adopt this technology in open chest
surgery, the second step would involve introducing follow-on
products that have been tested in a closed chest setting and
have incorporated all the features necessary to safely and
effectively perform this type of procedure.
The principal elements of our strategy to achieve our vision and
goals include:
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Driving market adoption of the C-Port and PAS-Port
Systems.
We intend to drive commercial adoption of our
C-Port
system and, if
cleared or approved by the FDA, our PAS-Port system and future
products by marketing them as integrated anastomotic tools for
use in both on- and off-pump CABG procedures. We believe
clinical data from our product trials and evidence of the
cost-effective nature of our systems compared with alternatives
will be key factors in driving physician adoption of our
products. We intend to continue to seek to obtain persuasive
clinical data on patient outcomes, procedure times and costs and
quality of outcome through post-marketing studies, registry
trials and physician-initiated studies to further drive market
adoption.
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Expanding our sales and marketing effort.
We are
beginning to build a direct sales force to market and sell the
C-Port
system in the
United States. We expect our U.S. sales force will include
clinical specialists who are skilled in training cardiovascular
surgeons in the use of our products. We plan to initially target
selected top-tier cardiac surgery centers and to conduct
intensive focused marketing and training of surgeons affiliated
with those centers. Through this effort, we will seek to
capitalize on their reputations in the cardiac surgical
community to increase both confidence in and demand for our
products. We also intend to increase the number of distributors
carrying our products in Europe and Asia. If we obtain
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FDA clearance or approval of the PAS-Port system or other
products in the field of cardiac surgery, the same sales force
will be responsible for selling these products.
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Capitalizing on our proprietary technology to develop
next-iteration products for endoscopic cardiac
procedures.
We believe that the evolution of endoscopic
CABG procedures, which would offer faster post-operative patient
recovery times, long-term graft patency and a low incidence of
adverse outcomes, could increase the number of CABG procedures
performed. To help propel the effort toward more viable cardiac
endoscopic procedures, we plan to develop flexible,
next-iteration automated anastomotic systems designed to
facilitate minimally invasive endoscopic CABG. We have received
a grant from the National Institute of Health, or NIH, which
will, in part, support us in our efforts to reach the goal of
developing products for use in endoscopic surgery.
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Establishing a strong proprietary position.
As of
September 30, 2005, we had 29 issued
U.S. patents, 62 additional patent applications in the
United States and another six patent applications filed in
selected international markets. We plan to continue to invest in
building our intellectual property portfolio.
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Leveraging our core competency to develop innovative
products for other surgical applications.
We believe
that our core technology, which comprises extensive
technological innovations, can be adapted for a variety of
surgical applications and disease indications. For example, we
are currently developing products for use in other applications,
such as vascular closure. We plan to continue to seek market
opportunities in related fields to develop additional products
that leverage our core strengths in surgical stapling and
closure.
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Our Products
We have developed three proprietary systems to perform
anastomoses, the C-Port system, the
C-Port
xA Distal
Anastomosis System, or
C-Port
xA system, and
the PAS-Port system. The
C-Port
system automates
a distal anastomosis between the graft vessel and target artery.
This system has been studied using veins rather than arteries as
the graft vessel and has received FDA 510(k) clearance for the
creation of anastomoses between grafts and target vessels
generally. The
C-Port
xA system, developed as an iteration of the
C-Port
system, has been
studied in animals using veins and arteries as the bypass graft
vessel, and we have submitted a 510(k) application for the
C-Port xA
system
in December 2005. The
PAS-Port
system
automates the performance of a proximal anastomosis between a
graft vessel, typically a saphenous vein, and the aorta. A study
shows that patients who undergo a CABG procedure typically
receive at least three bypass grafts, of which we believe a
majority are performed using one artery and two veins as the
bypass graft vessels.
C-Port
®
Distal Anastomosis System
Our C-Port system, which may be used in either on- or off-pump
CABG procedures, is designed to perform an
end-to
-side distal
anastomosis by attaching the end of a bypass vein graft to a
coronary artery downstream of an occlusion or narrowing. The
system uses miniature stainless steel staples to securely attach
the bypass graft to the coronary artery. As depicted in
Figure 2, the individually placed staples inserted by the
C-Port system mimic individual sutures, expeditiously and easily
creating a compliant anastomosis. In contrast to a non-compliant
hand-sewn anastomosis using a continuous suture, the compliant
nature of the C-Port anastomosis potentially allows the
anastomosis to adapt to changes in blood flow or pressure. Our
C-Port system is effective in creating compliant anastomoses in
vessels as small as one millimeter in internal diameter. In
addition, the C-Port system has been designed to:
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perform an
end-to
-side
anastomosis without interruption of native coronary blood flow,
which is not possible in a conventional hand-sewn anastomosis
during off-pump surgery without the use of a temporarily placed
vascular shunt;
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be compatible with vein grafts of diameters between
4 millimeters and 6 millimeters and wall thicknesses
less than 1.4 millimeters;
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achieve nearly complete alignment of the natural blood lining
surfaces of the coronary artery and the vein graft to minimize
scarring and potential occlusion of the anastomosis; and
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minimize the amount of foreign material in the blood stream that
may cause clotting and subsequent graft failure.
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Figure 1: C-Port Distal Anastomosis System
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Figure 2: C-Port Anastomosis
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In preparing to deploy the
C-Port
system, the
surgeon cuts the end of the bypass graft as he would for a
hand-sewn anastomosis and attaches the graft to four hooks
situated on the base of the cartridge. The surgeon then creates
a small incision in the target coronary artery and inserts the
anvil, a small metal structure of one millimeter diameter.
Pressing the button on the C-Port system handle, the surgeon
lowers the cartridge with the graft attached onto the target
coronary artery and then deploys the staples through the graft
and coronary artery against the anvil. The staples are formed on
the anvil surface, joining the coronary artery and graft. In
addition, a small knife located inside the anvil is released to
cut the coronary artery from the inside out to create an opening
in the coronary wall through which the blood can flow. Following
completion of the anastomosis, the surgeon removes the anvil
from the coronary artery and manually stitches the small opening
initially created to insert the anvil.
The
C-Port
system is
currently approved for use in Europe, and in November 2005, we
received 510(k) clearance to market the
C-Port
system in the
United States.
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C-Port
tm
xA Anastomosis System
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Figure 3: C-Port xA Anastomosis System
The
C-Port
xA system is
our next-iteration
C-Port
system. We have
applied for 510(k) clearance of the
C-Port
xA system for
the same intended use as the
C-Port
system. The
C-Port
xA system
features several modifications designed to improve the safety
and reliability of the system, including a change from a
spring-driven to a gas release-driven stapling mechanism,
optimizing the staple configuration to further stabilize the
graft; incorporation of non-traumatic vessel clamps to better
position the graft vessel for anastomosis; and incorporation of
safety mechanisms to minimize the chance of unintentional staple
deployment. The
C-Port
xA
51
system is also designed to deploy more staples around the
periphery of the anastomosis than the original
C-Port
system to help
ensure leak-proof sealing without the need for additional
stitches at either end of the anastomosis, as may currently be
required with the
C-Port
system.
PAS-Port
®
Proximal Anastomosis System
Our PAS-Port system is a fully automated device used to perform
an
end-to
-side proximal
anastomosis between a saphenous vein and the aorta. To complete
a proximal anastomosis, the cardiac surgeon simply loads the
bypass graft vessel into the PAS-Port system, places the end of
the delivery device against the aorta and turns the knob on the
opposite end of the delivery tool. The device first creates an
opening in the aorta and subsequently securely attaches the
bypass graft to the aortic wall, using a medical grade stainless
steel implant that is formed into its final shape by the
delivery tool. The innovative design of the PAS-Port system
allows the surgeon to load the bypass graft and rapidly complete
the anastomosis, typically in approximately three minutes, with
little or no injury to the bypass graft vessel or the aorta.
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Figure 4:
PAS-Port
®
Proximal Anastomosis System
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Figure 5: Cross-Section of PAS-Port anastomosis
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An important advantage of our PAS-Port system is that, in
contrast to conventional hand-sewn proximal anastomoses, the
vascular connections created can be performed without clamping
the aorta, potentially avoiding the associated risks such as
neurological complications. Surgeons use our PAS-Port system in
conventional CABG procedures and in OPCAB. While we are not
aware of any patients who required additional surgery to correct
leakage from an anastomosis performed with our
PAS-Port
system, the
design of the
PAS-Port
requires an additional stitch intra-operatively to obtain
hemostasis (absence of bleeding in the anastomosis site) in
approximately 5% to 10% of the deployments. Additional stitches
may be required intra-operatively in an individual anastomosis
depending on the quality of the target and graft vessels,
adequacy of target site preparation and quality of the loading
of the graft to the deployment cartridge. We will be working on
adaptations to the PAS-Port system for use in endoscopic
applications.
The PAS-Port system is approved for sale and marketed in Europe
and Japan. As of September 30, 2005, over 2,400 PAS-Port
systems had been sold, primarily in Japan. In addition, we have
recently obtained conditional approval from the FDA for an
Investigational Device Exemption to conduct a prospective,
randomized, multi-center and multi-national clinical trial to
evaluate the safety and efficacy of the PAS-Port system.
Future Product Programs
Our product research and development efforts are focused on
building innovative devices that enhance our current products or
leverage our core competency in mechanical clip formation for
applications in endoscopic
52
CABG and other medical fields. We currently have active programs
to design and develop the following products:
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Endoscopic Anastomosis System (C-Port Flex A
System)
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Figure 6: C-Port Flex A Anastomosis System
The
C-Port
Flex A
Anastomosis System, or the
C-Port
Flex A system,
includes modifications to the
C-Port
xA system that
are designed to enable automated anastomoses to be performed as
part of
robot-facilitated
CABG
procedures. The
C-Port
Flex A system includes all the features and benefits of the
C-Port
xA system and
has a flexible, rather than rigid, shaft. The flexible shaft is
designed to allow the working end of the device that creates the
anastomosis to be inserted through a 12-millimeter diameter port
to access the chest cavity and heart. The device would then be
loaded with the bypass graft vessel inside or outside the chest
cavity and deployed to create the anastomosis to the coronary
artery. This product is designed to enable technology for
completion of robotically assisted, including endoscopic, CABG
surgery through four or five relatively small incisions between
the ribs. Avoiding both the incision through the sternum and the
use of a pump should significantly reduce patient trauma and
accelerate post-operative recovery. We are currently conducting
preclinical animal-model studies with the C-Port Flex A,
supported in part by a grant from the NIH.
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X-Port
tm
Vascular Access Closure Device
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We believe that our proprietary technology used in our automated
vascular anastomosis systems may provide an innovative, simple
mechanical solution to close the vascular access sites used in
interventional vascular procedures. We are currently designing
the
X-Port
tm
Vascular Access Closure Device, or X-Port, to address this
clinical need.
Similar to our other products, the X-Port consists of a
deployment tool and a vascular clip. At the end of an
interventional vascular procedure, the surgeon would insert the
deployment tool into a standard introducer sheath and then
simply press a button to deploy a micro-stainless steel clip
over the opening in the vessel wall, sealing off the vascular
access site.
Currently, vascular closure is accomplished by one of two
methods, manual compression or alternative vascular closure
devices. Simple manual compression, the most frequently used
method of closure, is a time-consuming process that requires the
patient to lie flat while pressure is manually applied directly
to the access site for an average of 25 minutes. Once this
initial period of compression is completed, the patient must
continue to remain immobile for up to another four to
24 hours, depending upon the amount of anticoagulant drug
therapy used during and after the procedure. Manual compression
causes patient discomfort, is resource intensive and can
increase the duration of the patients hospitalization. As
a result, a variety of devices have been developed and
commercialized to replace manual compression. Most of these
products substantially decrease the duration of hospitalization,
time to ambulation and, in most instances, patient discomfort.
It is estimated that approximately 8.5 million diagnostic
and interventional catheterization procedures will be performed
worldwide in 2005. In each of these procedures, the access site
must be closed by one of these closure methods. It is estimated
that in approximately 45% of these patients a device is
employed. The
53
worldwide market for femoral artery closure devices is estimated
to be approximately $500 million in 2005 and is estimated
to increase to approximately $790 million by 2008.
We have targeted this rapidly growing market because we believe
that, by integrating many of the desired features into a single
product, the
X-Port,
if
it is successfully developed and receives regulatory clearance
or approval, may be well-positioned to outperform existing
vascular access closure devices. The
X-Port
is designed to
have the following advantages:
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a simple user interface;
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placement through the same introducer sheath used for the
interventional procedure;
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minimal amount of foreign material in the vessel wall with only
a fraction of this material exposed to blood;
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a low manufactured cost; and
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scalable to various sizes of introducer sheaths.
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We are currently conducting preclinical animal-model studies of
the X-Port to assess its safety and efficacy.
Agreement with Cook Incorporated
On December 9, 2005, we entered into an agreement with Cook
Incorporated, or Cook, to develop the
X-Port.
Under the
agreement, we and Cook will jointly develop the
X-Port,
under the
direction of a Development Committee that includes
representatives from each party. Cook receives an exclusive,
worldwide, royalty-bearing license, with the right to grant
sublicences, to make, have made, use, sell, offer for sale and
import the
X-Port
for
medical procedures in any part of the body. The parties may also
agree to perform research on the product in new formats, in
which case Cook would reimburse us for work we perform in
connection with such research.
We will receive an initial payment of $500,000 after we
complete, to Cooks satisfaction, certain tasks under an
agreed upon development plan. Cook will also pay us up to a
total of an additional $1.5 million in the form of
milestone payments that become due upon achievement of certain
development milestones. Additionally, we will receive a royalty
based on Cooks annual worldwide sales of the
X-Port.
This royalty is
reduced if Cook sells a designated number of product units per
calendar year for a defined period of time, and may also be
reduced if patents are not issued covering the product in
certain countries within a defined period of time. Certain
minimum royalty payments are required under the agreement, which
may be reduced during time periods in which certain product
improvements are being developed because product sales are
unexpectedly low for reasons other than Cooks failure to
commercialize diligently the product.
Cook must use commercially reasonable efforts to develop a
production version of the product, and to apply for a CE mark
and for FDA approval of the product, at its own expense.
Additionally, Cook must use commercially reasonable efforts to
commercialize the product following regulatory approval. We must
supply a certain number of product units for Cooks use in
development of the product. Cook has the right to manufacture
the product during later stages of development, and has the
obligation to supply the product for commercial purposes. The
term of the agreement will expire on December 9, 2025,
subject to renewal by mutual agreement between Cook and us. Cook
may terminate the agreement for convenience at any time, and
either party may terminate the agreement for uncured material
breach by the other party.
If the agreement is terminated either by Cook for convenience,
or by us for Cooks material breach, then Cook must pay to
us a pro-rated payment for work performed by us under the
development plan prior to such termination, not to exceed an
amount equal to the milestone payments made during the term of
the agreement plus $300,000. Additionally, in such case, Cook
must transfer to us certain technology and regulatory filings
and assist us in other respects to enable us to develop,
manufacture and commercialize the product, and Cook agrees not
to sue us under certain intellectual property rights as
necessary to allow us to continue, on our own or with or through
third parties, to make, use, sell, offer for sale and import the
product anywhere in the world for use in medical procedures in
the body. In such case, for five years after such termination
(unless a court does not determine that our termination for
Cooks breach was proper), Cook cannot grant to any
competitor of ours a license under Cooks intellectual
property rights to facilitate the competitor in making, using,
selling, offering for
54
sale or importing the
X-Port
or any
improvement anywhere in the world for use in medical procedures
in the body.
If Cook terminates the agreement for our breach after it has
paid to us all of the milestone payments, then Cooks
license survives such termination, subject to its continuing
obligation to pay royalties to us. If Cook terminates the
agreement for material breach by us in failing to meet any of
the milestones defined in the agreement, then we must repay the
initial fee and the milestone payments, less certain costs we
incurred in developing the product.
Cook has the first right to enforce the X-Port intellectual
property against third parties, and Cook bears all expenses
associated with such enforcement unless we choose to
participate. We may undertake such enforcement if Cook permits
us to do so. In the event that a third party takes legal action
to assert intellectual property rights against us and/or Cook
with regard to the
X-Port
product, then
Cook may offset against the total royalty payment due to us a
portion of any monies expended by Cook in defending against the
action.
Clinical Trial Summary and Timeline
The C-Port system received the CE Mark in April 2004 and the
PAS-Port system received the CE Mark in March 2003. The PAS-Port
system also received regulatory approval to be sold in Japan in
January 2004. We plan to submit the C-Port xA for regulatory
approval in Europe and Japan as well.
United
States
We commenced our European pivotal clinical trial to study our
PAS-Port system in 2002. In 2001 and 2002, the FDA approved two
proximal anastomosis devices for sale in the United States, the
Symmetry system developed by St. Jude Medical and the
CorLink system developed by Bypass, Inc. and Johnson &
Johnson. The design of the pivotal clinical trial for the
PAS-Port was based on the trial designs of these two predicate
devices. We submitted the results of our pivotal clinical trial
for the PAS-Port system to the FDA in an application for 510(k)
clearance in 2003. After receiving reports of apparently
device-related adverse events with the Symmetry device, the FDA
revisited the criteria for a 510(k) clearance of subsequent
anastomosis products. The FDA sponsored a special panel meeting
on March 19, 2004 to redefine objective performance
criteria for safety and efficacy of anastomosis products, which
are significantly more rigorous than when we submitted our data.
Following redefinition of the objective performance criteria, we
resubmitted pooled data from two trials evaluating safety and
efficacy of the PAS-Port system to the FDA. In April of 2005,
the FDA asked the Circulatory System Devices Panel to consider
the data submitted on the PAS-Port system. The panel concurred
that vascular anastomotic devices have great potential and the
data regarding the PAS-Port system looked promising. The
majority of panel members, however, believed that more robust
data were required. Following this recommendation from the
panel, we withdrew our 510(k) submission. To collect data to
address the new criteria, we obtained a conditional approval of
an Investigational Device Exemption, or IDE, for a new
randomized prospective clinical trial to be conducted in the
United States and Europe.
We commenced our pivotal clinical trial to study our C-Port
system in 2003 and submitted the data from this trial in an
application for 510(k) clearance in 2004. We received 510(k)
clearance from the FDA to market the
C-Port
system in the
United States in November 2005. In December 2005, we submitted
an application for 510(k) clearance of the
C-Port
xA system using
the
C-Port
as a
predicate device.
55
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International Clinical Studies
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Number and
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Enrollment
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Location of
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Completion
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of
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Regulatory
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Objective
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C-Port Pivotal Trial
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5 European Sites
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February 2004
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133
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Determine safety and efficacy of distal anastomotic device
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12 months
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CE Mark
received in
Europe
510(k)
clearance
obtained in United
States
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PAS-Port
European
Pivotal
Trial
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3 European Sites
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September 2002
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Determine safety and efficacy of proximal anastomotic device
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24 months
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CE Mark
received in
Europe
IDE
conditionally
approved in
United
States
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PAS- Port II Trial
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4 European Sites
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February 2004
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Increase data pool for study of safety and efficacy with an improved PAS-Port device
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12 months
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The C-Port system pivotal trial was designed to prospectively
assess the safety and effectiveness of the C-Port system in
creating an anastomosis between a coronary artery and a vein
graft harvested from the patient. The primary effectiveness
endpoint was angiographic evidence of patency at six months
and absence of major adverse cardiac events, or MACE, at one
year.
Patient enrollment for the C-Port system pivotal clinical trial
began in July 2003. Ultimately, 133 patients met the
criteria for enrollment in this multi-center, prospective,
non-randomized clinical trial conducted in four hospitals in
Germany and one hospital in Switzerland. In this study, surgeons
successfully used the C-Port system for anastomosis for 113, or
approximately 85%, of these patients. Of the remaining
20 patients, three died for reasons that were unrelated to
the device, 16 were converted to hand-sewn anastomoses, and the
coronary target vessel for one patient was deemed unsuitable
after intra-operative site assessment. Intra-operative
conversion to a hand-sewn anastomosis was necessary for 16
grafts due to a variety of factors. We believe inadequate target
site preparation and excessive coronary wall thickness (>
0.75 mm) were responsible for the need to convert to
hand-sewn anastomoses for seven patients, inadequate site
preparation was responsible for the need to convert to hand-sewn
anastomoses for five patients, inadequate inter-operative
coronary run-off was responsible for the need to convert to
hand-sewn anastomoses for three patients (including two
exhibiting inadequate flow), and excessive graft thickness
(> 1.4 mm) was responsible for the need to convert
to hand-sewn anastomosis for one patient. We do not believe any
of the conversions were directly or indirectly associated with
C-Port
device use or
failures. In 45 of these patients (40%), the C-Port systems were
used in small diameter coronary arteries with an internal
diameter of 1.5 millimeters. At six and 12 months
following the surgical procedure involving the C-Port system,
105 patients and 107 patients, respectively, were
available for clinical follow-up. Graft patency was assessed
angiographically prior to discharge and again at six months
following the procedure. The six-month assessment indicated
patent grafts in 92.1% of the patients assessed
angiographically. By contrast, an analysis of published data
studying hand-sewn anastomoses generally showed average patency
of approximately 84% at six months following the procedure in
more than 28,000 bypass grafts collectively studied. At 12
months, two of the implanted patients did not reenroll for
evaluation and, of the remaining 111 patients implanted, nine
had died and none of the others had suffered myocardial
infarction or required revascularization of the target vessel.
After submitting the results from the clinical trial and
implementing corrections to resolve the minor mechanical
reliability problems, the C-Port system received the CE Mark and
was approved for sale in Europe and, in November 2005, received
510(k) clearance from the FDA for marketing in the United States.
56
PAS-Port
European Pivotal Trial
The PAS-Port European pivotal trial was designed to
prospectively assess the safety and effectiveness of the
PAS-Port system in creating an anastomosis between an aorta and
a vein graft harvested from the patient. We sought to
demonstrate rates of patency at six months that were at least as
favorable as those for hand-sewn anastomoses as well as absence
of MACE at two years. Based on the FDAs criteria as
defined in March 2004, quantitative angiography was to be used
to assess patency of grafts connected with an anastomotic device
at a minimum of six months after surgery. Following March 2004,
the FDA expects an average vein graft patency rate of at least
85% with a specified statistical confidence level. For the
FDAs purposes, graft patency is defined as less than 50%
stenosis, or narrowing, at the site of the mechanical
anastomosis, and patency must be determined by angiography and
evaluated by an independent core laboratory.
We enrolled 55 patients in this study, which commenced in
June 2002. This multi-center, prospective, non-randomized
clinical trial was conducted at three sites in Europe, two in
Germany and one in Switzerland.
Of the 55 patients enrolled in the study, 47 patients,
or approximately 85%, were successfully implanted with an
aggregate of 50 PAS-Port implants. In eight patients, the
PAS-Port deployments were unsuccessful either due to technical
errors with the PAS-Port or technique errors by the surgeons.
Patients who were not successfully implanted with the PAS-Port
device were successfully converted to hand-sewn anastomoses
without compromise to long-term patient outcome.
Graft patency was assessed angiographically prior to discharge
and again at six months post-procedure. Angiograms were
evaluated by a core laboratory at Stanford University Medical
Center for independent analysis. The original study called for
follow-up
at three and
six months. The study was later amended to obtain a
two-year
follow-up
evaluation to
meet FDA requirements for long-term follow-up. Clinical
follow-up
at three
months was available on all 47 PAS-Port implanted patients, on
44 patients (93.6%) with PAS-Port implants at
six months and on 42 PAS-Port implanted patients (89.4%) at
two years. Angiograms were obtained at six months on
39 patients (42 PAS-Port grafts). Stress
electrocardiograms, or ECG, tests were obtained at two years on
36 patients with 38 PAS-Port grafts.
The angiographic observed rate of patency of the PAS-Port system
at six months was 85.7% for the patients available for
evaluation. Five patients with five PAS-Port grafts were
evaluated by magnetic resonance imaging, or MRI, and these
grafts were shown to be patent. Including this data, the overall
patency was 87.2% at six months. At 24 months, three
of the implanted patients did not reenroll for evaluation and,
of the remaining 44 patients implanted, two had died, one had a
myocardial infarction, and none required revascularization of
the target vessel.
This trial demonstrated favorable long-term
(24-month)
clinical
outcomes for the patients implanted with the PAS-Port implant,
including an overall patency rate after six months of
87.2%. Historical data compiled from many studies indicates a
84.1% patency rate for grafts anastomosed using hand-sewn
suturing techniques and studied six months after surgery. This
clinical trial also revealed minor mechanical reliability
problems with the PAS-Port system that prevented successful
implantation in several patients. After submitting the results
from the clinical trial and implementing corrections to address
the mechanical reliability problems, the product received the CE
Mark and was approved for sale in Europe.
PAS-Port II
Trial
To gain further clinical experience with the PAS-Port system,
the PAS-Port device was also used in 54 of the 133 patients
enrolled in the C-Port pivotal trial described above. In
patients receiving more than one vein graft, the study protocol
allowed usage of the PAS-Port system in additional vein grafts
in which the C-Port system was not used.
Of the patients in the C-Port pivotal trial, 50 patients
were successfully implanted with an aggregate of
59 PAS-Port implants and discharged from the hospital.
Clinical
follow-up
was
available on 47 (94%) of these patients at three months and on
46 (92%) of these patients at six and 12 months. The
original protocol called for
follow-up
at three and
six months. The protocol was later amended to include a
12-month
follow-up
evaluation to
meet FDA requirements for long-term follow-up. Angiograms were
obtained at six month
follow-up
on
57
38 patients having an aggregate of 47 PAS-Port grafts.
Stress ECG tests were obtained at 12 months on
42 patients (51 PAS-Port grafts).
Angiograms were performed at six months and demonstrated average
patency rates for the PAS-Port grafts of approximately 95.7%. At
12 months, two patients did not reenroll for evaluation, and of
the remaining 46 patients implanted, two patients had died,
three required revascularization of the target vessel and none
had suffered myocardial infarction.
Based on the PAS-Port European pivotal trial and the additional
data gathered during the PAS-Port II trial, we believe we
have confirmed the safety and effectiveness of the PAS-Port
system; however, our data did not achieve the level of
statistical confidence required to obtain FDA clearance at that
time. As discussed under Clinical Trial Summary and
Timeline Regulatory Status, United States
above, the Circulatory System Devices Panel determined that
additional data is required before a conclusion as to safety and
effectiveness could be formed by the FDA. We cannot assure you
that additional data we obtain will be as favorable as the data
discussed above or will establish the safety or efficacy of our
PAS-Port system.
Post-Marketing
Surveillance
Post-marketing studies are conducted to provide data regarding
disease treatment outcomes. These studies often collect acute,
procedural, safety and long-term efficacy data. Acute data from
post-marketing studies on CABG procedures often describe the
amount of stenosis immediately pre- and post-procedure, and
provide data as to procedure-related morbidity, such as heart
attack or stroke. Long-term efficacy data collected weeks,
months or years after a procedure can be measured in terms of
patency or re-intervention rates. Reintervention, also referred
to as revascularization, rates measure the number of grafts that
have required treatment within a defined period of time because
of narrowing or occlusion.
Studies are subject to a number of factors that can influence
results, making it difficult to draw general conclusions. The
rate of graft occlusion and the need for re-intervention may be
influenced by factors unrelated to the method of treatment, such
as the type of artery in which the stenosis is located or a
patients overall health. Because of the relatively small
number of treated patients, these factors can influence the
meaningfulness of clinical study results. Consequently, findings
from one study should not be used to predict limitations or
benefits of a particular means of treatment.
The PAS-Port system has been marketed in Europe since March 2003
and in Japan since January 2004. Since commercial launch, we
have sold more than 2,400 PAS-Port systems. We have obtained
data on the performance of the PAS-Port system from three
different sources:
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Cardica sponsored European PAS-Port Registry
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Investigator sponsored single center, prospective, randomized
trial (Heartcenter Leipzig)
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European PAS-Port Registry.
A multi-center patient
registry for the PAS-Port system was compiled from data reported
by five centers in Europe, which reported data on
95 patients implanted with 123 PAS-Port devices between
April 2003 and March 2004. The registry was designed to collect
information on the performance of the delivery system during the
formation of the anastomosis and to assess any device-related
adverse events in the short-term following the procedure. There
were no defined exclusion criteria; therefore, this registry was
conducted in a patient population that we believe had a greater
extent of underlying coronary artery disease, co-existing
cardiac conditions, previous coronary interventions or surgery
and other adverse health factors than the patient populations in
our clinical studies. Acute procedural success was demonstrated
by a successful PAS-Port system deployment rate of approximately
95%. There were no reports of re-operation for revision or
bleeding associated with a PAS-Port anastomosis. Average
clinical
follow-up
in
these patients was at seven months following surgery. In
these
follow-up
evaluations, there were no PAS-Port-related patient deaths and
only approximately 6.1% of grafts demonstrated stenosis or
occlusion.
Investigator-Sponsored Single Center Randomized Trial.
In
June 2005, data was presented at the annual meeting of the
International Society for Minimally Invasive Cardiac Surgery
describing results from a single
58
center, prospective, randomized clinical trial comparing the
PAS-Port system to hand-sewn anastomosis in patients requiring
CABG. The primary outcome variable in this study was one-year
graft patency assessed by computer tomography. An aggregate of
99 patients were enrolled in the study, of whom 51 were enrolled
to receive anastomoses performed using the PAS-Port system and
48 were enrolled to receive anastomoses completed by hand-sewn
sutures. Of the 48 patients originally enrolled for
hand-sewing, five patients were converted to a PAS-Port
anastomosis due to presence of severely calcified aortas, which
makes hand-sewing more challenging, and one PAS-Port patient was
converted to a hand-sewn anastomosis. At discharge, 55
PAS-Port-implanted patients and 39 hand-sutured patients had CT
scans. These scans demonstrated graft patency of 100% in
PAS-Port grafts and 97.4% in hand-sewn grafts. At
12 months, the patency rates of 32 patients with
PAS-Port anastomoses and 15 patients with hand-sewn
anastomoses were 96.8% and 86.7%, respectively.
Worldwide Market Survey.
We performed a post-market
survey with five European centers and four Japanese centers
using the PAS-Port system. The primary outcome variable
evaluated in this survey was the incidence of myocardial
ischemia and MACE in patients with PAS-Port devices. The
surgeons using the PAS-Port system were asked to submit adverse
outcomes of all patients that had received a PAS-Port implant.
This study included 449 patients, and 496 PAS-Port implants
were successfully implanted. During the
follow-up
period, which
was approximately one year for most patients, 11 patients
died. During this
follow-up
period, six,
or approximately 1.3% of patients returned to the treating
center for evaluation of recurrent chest pain. Stress-induced
myocardial ischemia detected following CABG surgery may be
unrelated to any of the bypass grafts installed, or the method
used to perform the anastomoses on the grafts, during surgery
but rather a function of progression of the native coronary
artery disease.
We intend to continue to gather additional clinical data for our
products to further support our sales and marketing efforts. We
believe these studies will primarily consist of registry trials
and physician-initiated studies.
Sales and Marketing
Our initial products focus on the needs of cardiovascular
surgeons worldwide. We are beginning to build a direct sales
force in the United States to sell our
C-Port
system, which
received 510(k) clearance in November 2005. Our sales force will
initially target selected influential surgeons in high volume
cardiac surgery centers. Approximately half of all
U.S. CABG procedures are performed at 225 cardiac surgery
centers. We plan to selectively target institutions within this
group of centers and to conduct intensive focused marketing and
training for the C-Port system and for our products that receive
FDA clearance or approval in the future. Through this effort, we
hope to generate wider demand for our products by training
well-respected clinical supporters of our products and
leveraging their reputations in the clinical community. In
addition, we intend to promote our systems at major medical
conventions and through other marketing efforts such as
seminars, workshops, brochures and internet-based training. We
will also work with our investigators to present the results of
our clinical trials at cardiovascular meetings.
We currently distribute our PAS-Port system in Japan through our
exclusive distributor, Century Medical, Inc., or Century. In the
fiscal year ended June 30, 2005, sales to Century comprised
approximately 33% of our net revenue. Century has a direct sales
organization of approximately 16 representatives who are
responsible for the development of the anastomotic device market
and directly contact cardiac surgeons. Century provides clinical
training and support for end-users in Japan. We provide Century
with promotional support, ongoing clinical training,
representation at trade shows and guidance in Centurys
sales and marketing efforts. Our agreement with Century expires
in July 2009. The agreement renews automatically for a second
five-year term if Century meets certain sales milestones. Either
party may terminate this agreement if the other party defaults
in performance of material obligations and such default is not
cured within a specified period or if the other party becomes
insolvent or subject to bankruptcy proceedings. In addition, we
may terminate the agreement within 90 days following a
change of control by payment of a specified termination fee.
Guidant distributed our products in Europe under a distribution
agreement that terminated in September 2004. Guidant accounted
for 75% of our total revenue in fiscal year 2004 and 65% of our
total revenue in fiscal year 2005. The revenue generated from
the distribution agreement in Europe was $0.4 million, or
48% of fiscal year 2004 revenue, and $1.0 million, or 50%
of fiscal year 2005 revenue.
59
We are currently building a distribution network in Europe for
both our PAS-Port and C-Port systems. We have currently engaged
SIC Systems as our exclusive distributor in Italy, and we may
engage additional distributors in several other European
countries; however, we do not anticipate significant product
sales from Europe in part because their healthcare systems are
difficult to penetrate for new higher cost medical products. We
are continuing to sell to selected customers and will continue
to evaluate further opportunities to expand our distribution
network in Europe and in other parts of the world where the
healthcare economics are conducive to the introduction and
adoption of new medical device technologies.
Competition
The market for medical devices used in the treatment of coronary
artery disease is intensely competitive, subject to rapid
change, and significantly affected by new product introductions
and other market activities of industry participants. We believe
the principal competitive factors in the market for medical
devices used in the treatment of coronary artery disease include:
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improved patient outcomes;
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access to and acceptance by leading physicians;
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product quality and reliability;
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ease of use;
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device cost-effectiveness;
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training and support;
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novelty;
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physician relationships; and
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sales and marketing capabilities.
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There are numerous potential competitors in the medical device,
biotechnology and pharmaceutical industries, such as Boston
Scientific Corporation, Edwards Lifesciences Corporation,
Guidant Corporation, Johnson & Johnson, Inc.,
Medtronic, Inc. and St. Jude Medical, that are targeting
the treatment of coronary artery disease broadly. Each of these
companies has significantly greater financial, clinical,
manufacturing, marketing, distribution and technical resources
and experience than we have. In addition, new companies have
been, and are likely to continue to be, formed to pursue
opportunities in our market.
The landscape of active competitors in the market for
anastomotic solutions is currently limited. Medtronic, with its
recent acquisition of Coalescent Surgical, obtained the only
marketed proximal anastomotic system in United States, the
Spyder, which deploys a series of nitinol-based U-Clips to
attach a graft to the aorta. Several companies market systems
designed to facilitate or stabilize proximal anastomoses, such
as Guidants Heartstring Aortic Occluder and Novare
Surgical Systems Enclose anastomotic assist device.
St. Jude Medical previously had a commercially available
proximal anastomotic system that was marketed both in the United
States and Europe; however, St. Jude Medical voluntarily
withdrew this product from the market in 2004.
Johnson & Johnson has obtained FDA clearance for a
proximal system that has been developed by Bypass Inc.
Our
C-Port
system is
the only automated anastomosis device for distal anastomosis
cleared for marketing in the United States as of
November 10, 2005. The only currently marketed facilitating
device for distal anastomosis is the U-Clip, which substitutes
clips for sutures, but still requires manual application of
typically 12 to 14 individually placed clips per anastomosis by
the surgeon.
Currently, the vast majority of anastomoses are performed with
sutures and, for the foreseeable future, sutures will continue
to be the principal competitor for alternative anastomotic
solutions. The sutures used for anastomoses in CABG procedures
are far less expensive than automated anastomotic systems, and
surgeons, who have been using sutures for their entire careers,
may be reluctant to consider alternative technologies, despite
potential advantages.
60
In addition, cardiovascular diseases may also be treated by
other methods that do not require anastomoses, including
interventional techniques such as balloon angioplasty and use of
drug-eluting stents, pharmaceuticals, atherectomy catheters and
lasers. Further, technological advances with other therapies for
cardiovascular disease such as drugs, local gene therapy or
future innovations in cardiac surgery techniques could make
other methods of treating this disease more effective or less
expensive than CABG procedures.
Our X-Port system, if developed and approved, would compete in
the market for femoral artery closure devices. Two large
competitors, St. Jude Medical and Abbott Vascular Devices,
currently control over 80% of this market. St Jude
Medicals Angioseal vascular closure device, which is
licensed from Kensey-Nash, is based on a collagen plug and has
the leading market share. Other FDA-cleared products in this
market include Abbott Vascular Devices suture-based
Perclose and nitinol-based StarClose devices and
Medtronics Angiolink Stapler. In addition to these large
existing and potential competitors, there are a number of
venture capital-backed private companies that are developing
devices and technologies for this market.
Manufacturing
Our headquarters provides space for our manufacturing
operations, sterile products manufacturing, packaging, storage
and shipping, as well as for our research and development
laboratories and general administrative facilities. We believe
that our current facilities will be sufficient to meet our
manufacturing needs for at least the next two years.
We believe our manufacturing operations are in compliance with
regulations mandated by the FDA and the European Union. Our
facility is ISO 13485:2003 certified. In connection with
our CE mark approval and compliance with European quality
standards, our facility was initially certified in June 2002 and
has been inspected annually thereafter.
There are a number of critical components and sub-assemblies
required for manufacturing the C-Port and PAS-Port systems that
we purchase from third-party suppliers. The vendors for these
materials are qualified through stringent evaluation and
monitoring of their performance over time. We audit our critical
component manufacturers on a regular basis and at varied
intervals based on the nature and complexity of the components
they provide and the risk associated with the components
failure.
We use or rely upon sole source suppliers for certain components
and services used in manufacturing our products, and we utilize
materials and components supplied by third parties, with which
we do not have any long-term contracts. In recent years, many
suppliers have ceased supplying raw materials for use in
implantable medical devices. We cannot quickly establish
additional or replacement suppliers for certain components or
materials, due to both the complex nature of the manufacturing
processes employed by our suppliers and the time and effort that
may be required to obtain FDA clearance or other regulatory
approval to use materials from alternative suppliers. Any
significant supply interruption or capacity constraints
affecting our facilities or those of our suppliers would affect
our ability to manufacture and distribute our products.
Third-Party Reimbursement
Sales of medical products are increasingly dependent in part on
the availability of reimbursement from third-party payors such
as government and private insurance plans. Currently, payors
provide coverage and reimbursement for CABG procedures only when
they are medically necessary. Our technology will be used
concomitantly in CABG procedures. We realize though that Cardica
technologies will bring added costs to medical providers and may
not be reimbursed separately by third-party payors at rates
sufficient to allow us to sell our products on a competitive and
profitable basis.
We believe the majority of bypass graft patients in the United
States will be Medicare beneficiaries. Further, private payors
often consider Medicares coverage and payment decisions
when developing their own policies. The Centers for Medicare
& Medicaid Services, referred to as CMS, is the agency
within the Department of Health and Human Services that
administers Medicare and will be responsible for reimbursement
decisions for the Cardica devices when used to treat Medicare
beneficiaries during CABG surgery.
61
Once a device has received approval or clearance for marketing
by the FDA, there is no assurance that Medicare will cover the
device and related services. In some cases, CMS may place
certain restrictions on the circumstances in which coverage will
be available. In making such coverage determinations, CMS
considers, among other things, peer-reviewed publications
concerning the effectiveness of the technology, the opinions of
medical specialty societies, input from the FDA, the National
Institutes of Health, and other government agencies. We cannot
assure you that once our products are commercially available,
they will be covered by Medicare and other third-party payors.
Limited coverage of our products could have a material adverse
effect on our business, financial condition and results of
operations.
In general, Medicare makes a predetermined, fixed payment amount
for its beneficiaries receiving covered inpatient services in
acute care hospitals. This payment methodology is part of the
inpatient prospective payment system, or IPPS. For acute care
hospitals, under IPPS, payment for an inpatient stay is based on
diagnosis-related groups, or DRGs, which include reimbursement
for all covered medical services and medical products that are
provided during a hospital stay. Additionally, a relative weight
is calculated for each individual DRG which represents the
average resources required to care for cases in that particular
DRG relative to the average resources required to treat cases in
all DRGs. Generally, DRG relative weights are adjusted annually
to reflect changes in medical practice in a budget neutral
manner.
CMS has made no decisions with respect to DRG assignment when
patients undergo CABG procedures in which our products would be
used, and there can be no assurance that the DRG to which such
patients will be assigned will result in Medicare payment levels
that are considered by hospitals to be adequate to support
purchase of our products.
Under current CMS reimbursement policies, CMS offers a process
to obtain add-on payment for a new medical technology when the
existing DRG prospective payment rate is inadequate. To obtain
add-on payment, a technology must be considered new,
demonstrate substantial improvement in care and exceed certain
payment thresholds. Add-on payments are made for no less than
two years and no more than three years. We must demonstrate
the safety and effectiveness of our technology to the FDA in
addition to CMS requirements before add-on payments can be made.
Further, Medicare coverage is based on our ability to
demonstrate the treatment is reasonable and
necessary for Medicare beneficiaries. The process involved
in applying for additional reimbursement for new medical
technologies from CMS is lengthy and expensive. Our products may
not be awarded additional or separate reimbursement in the
foreseeable future, if at all. Moreover, many private payors
look to CMS in setting their reimbursement policies and payment
amounts. If CMS or other agencies limit coverage and decrease or
limit reimbursement payments for hospitals and physicians, this
may affect coverage and reimbursement determinations by many
private payors.
Medicare policies allow Medicare contractors discretion to cover
items involving Category B investigational devices. However,
even with items or services involving Category B devices,
Medicare coverage may be denied if any other coverage
requirements are not met, for example if the treatment is not
medically necessary for the specific Medicare beneficiary. In
our conditionally approved IDE, the PAS-Port system has been
classified by the FDA as a Category B1 device. To that end,
the five planned U.S. investigational sites for our
upcoming trial may be able to seek specific CMS reimbursement
for use of the PAS-Port.
For classification of physician services, the American Medical
Association, referred to as the AMA, has developed a coding
system known as the Current Procedural Terminology, or CPT. CPT
codes are established by the AMA and adopted by the Medicare
program in the Healthcare Common Procedure Coding System, to
describe and develop payment amounts for physician services.
Physician services are reimbursed by Medicare based on a
physician fee schedule whereby payment is based generally on the
number of relative value units assigned by CMS to
the service furnished by the physician. No decision has been
made concerning whether existing CPT codes would be appropriate
for use in coding anastomosis procedures when our products are
used or if new CPT codes and payment are required. We cannot
assure you that codes used for submitting claims for anastomosis
procedures using our products will result in incremental payment
to physicians. CPT codes are used by many other third-party
payors in addition to Medicare. Failure by physicians to receive
what they consider to be adequate reimbursement for anastomosis
procedures in which our products are used could have a material
adverse effect on our business, financial condition and results
of operations.
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Research and Development
As of November 30, 2005, we had 16 employees in our
research and development department. We currently have a
preclinical program to develop smaller devices designed for
endoscopic use and for use with automated surgical robotic
systems. Future research and development efforts will involve
continued enhancements to and cost reductions for our current
C-Port
and PAS-Port
systems. We are also exploring the development of other products
that can be derived from our core technology platform and
intellectual property. Research and development expenses for
fiscal years ended June 30, 2003, 2004 and 2005 were
$6.7 million, $5.8 million and $6.3 million,
respectively. In August, 1999, we entered into a Sponsored
Research Agreement with Stanford University to study the
efficacy of our products in-vivo in Stanfords animal lab.
The original expiration date of the Agreement was June 15,
2000, and the agreement has been amended to extend the study
through December 31, 2006. The total cost of the agreement
to us is projected to be approximately $1.2 million, of
which we have already paid approximately $1.0 million as of
September 30, 2005. We expect research and development
efforts and expenses to increase in absolute dollar terms as we
enhance the capabilities of our current products and explore new
applications and indications for our automated anastomosis
technology platform.
Patents and Intellectual Property
We believe our competitive position will depend significantly
upon our ability to protect our intellectual property. Our
policy is to seek to protect our proprietary position by, among
other methods, filing U.S. and foreign patent applications
related to our technology, inventions and improvements that are
important to the development of our business. As of
September 30, 2005, we have 29 issued U.S. patents, 62
additional U.S. patent applications and another six patent
applications filed in select international markets. Our issued
patents expire between 2018 and 2023.
We also rely upon trade secrets, technical know-how and
continuing technological innovation to develop and maintain our
competitive position. We typically require our employees,
consultants and advisors to execute confidentiality and
assignment of inventions agreements in connection with their
employment, consulting or advisory relationships with us. There
can be no assurance, however, that these agreements will not be
breached or that we will have adequate remedies for any breach.
Furthermore, no assurance can be given that competitors will not
independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our
proprietary technology, or that we can meaningfully protect our
rights in unpatented proprietary technology.
Patent applications in the United States and in foreign
countries are maintained in secrecy for a period of time after
filing, which results in a delay between the actual discoveries
and the filing of related patent applications and the time when
discoveries are published in scientific and patent literature.
Patents issued and patent applications filed relating to medical
devices are numerous, and there can be no assurance that current
and potential competitors and other third parties have not filed
or in the future will not file applications for, or have not
received or in the future will not receive, patents or obtain
additional proprietary rights relating to products, devices or
processes used or proposed to be used by us. We are aware of
patents issued to third parties that contain subject matter
related to our technology. We believe that the technologies we
employ in our products and systems do not infringe the valid
claims of any such patents. There can be no assurance, however,
that third parties will not seek to assert that our devices and
systems infringe their patents or seek to expand their patent
claims to cover aspects of our products and systems.
The medical device industry in general, and the industry segment
that includes products for the treatment of cardiovascular
disease in particular, has been characterized by substantial
litigation regarding patents and other intellectual property
rights. Any such claims, regardless of their merit, could be
time-consuming and expensive to respond to and could divert our
technical and management personnel. We may be involved in
litigation to defend against claims of infringement by other
patent holders, to enforce patents issued to us, or to protect
our trade secrets. If any relevant claims of third-party patents
are upheld as valid and enforceable in any litigation or
administrative proceeding, we could be prevented from practicing
the subject matter claimed in such patents, or would be required
to obtain licenses from the patent owners of each such patent,
or to redesign its products, devices or processes to avoid
infringement. There can be no assurance that such licenses would
be available or, if
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available, would be available on terms acceptable to us or that
we would be successful in any attempt to redesign our products
or processes to avoid infringement. Accordingly, an adverse
determination in a judicial or administrative proceeding or
failure to obtain necessary licenses could prevent us from
manufacturing and selling our products, which would have a
material adverse effect on our business, financial condition and
results of operations. We intend to vigorously protect and
defend our intellectual property. Costly and time-consuming
litigation brought by us may be necessary to enforce patents
issued to us, to protect trade secrets or know-how owned by us
or to determine the enforceability, scope and validity of the
proprietary rights of others. See Risk Factors.
On October 28, 2005, we received a letter from Integrated
Vascular Interventional Technologies, Inc., referred to as IVIT,
advising us for the first time of IVITs effort (thus far
unsuccessful) to provoke an interference in the U.S. Patent
and Trademark Office between one of IVITs patent
applications (serial no. 10/243,543) and a patent currently
held by us (U.S. patent no. 6,391,038) and relating to
the C-Port system. We also learned on that date that IVIT is
attempting to provoke an interference in the U.S. Patent
and Trademark Office between another of its U.S. patent
applications (serial no. 10/706,245) and another of our issued
patents (U.S. Patent No. 6,478,804). IVIT makes no
specific demands in the letter, but alleges that it has an
indication of an allowed claim and that it expects to receive a
declaration of interference regarding that claim, and states
that it would be strategically beneficial for us to
discuss this matter prior to receiving a declaration of
interference.
An interference is a proceeding within the U.S. Patent and
Trademark Office to determine priority of invention of the
subject matter of patent claims. The decision to declare an
interference is solely within the power of the Board of Patent
Appeals and Interferences of the U.S. Patent and Trademark
Office, and can be made only after claims in a patent
application are allowed by the examiner and a determination is
made that interfering subject matter exists. As yet, no claims
have been allowed in either of IVITs two patent
applications referenced above.
We believe, after conferring with intellectual property counsel,
that IVITs attempts to provoke an interference are
unlikely to succeed, and we will vigorously defend our patents
against such claims of interference, although there can be no
assurance that we will succeed in doing so. We further believe
that if IVITs patent claims are allowed in their present
form, our products would not infringe such claims. There can be
no assurance that IVITs patent claims, if allowed, will be
in their present form, or that our products would not be found
to infringe such claims or any other claims that are issued.
Government Regulation
The FDA and other regulatory bodies extensively regulate the
research, development, manufacture, labeling, distribution and
marketing of our products. Our current products are regulated by
the FDA as medical devices, and we are required to obtain review
and clearance or approval from the FDA prior to commercializing
our devices in the United States. As discussed above under the
heading Clinical Trial Summary and Timeline, we
obtained 510(k) clearance for marketing our C-Port system in the
United States in November 2005. In addition, we have obtained
conditional approval of an IDE for the PAS-Port system from the
FDA to study this product in the United States and abroad in a
prospective, randomized trial. We cannot assure you that we will
obtain clearance or approval from the FDA for the PAS-Port,
future iterations of the C-Port system or any other products.
FDA regulations govern nearly all of the activities that we
perform, or that are performed on our behalf, to ensure that
medical products distributed domestically or exported
internationally are safe and effective for their intended uses.
The activities that the FDA regulates include the following:
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product design, development and manufacture;
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product safety, testing, labeling and storage;
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pre-clinical testing in animals and in the laboratory;
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clinical investigations in humans;
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marketing applications, such as 510(k) notifications and PMA
applications;
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record keeping and document retention procedures;
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advertising and promotion;
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product marketing, distribution and recalls; and
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post-marketing surveillance and medical device reporting,
including reporting of deaths, serious injuries, device
malfunctions or other adverse events.
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FDAs Premarket Clearance and Approval
Requirements.
Unless an exemption applies, each medical
device distributed commercially in the United States will
require either prior 510(k) clearance or premarket approval,
referred to as a PMA, from the FDA. The FDA classifies medical
devices into one of three classes. Class I devices are
subject to only general controls, such as establishment
registration and device listing, labeling, medical devices
reporting, and prohibitions against adulteration and
misbranding. Class II medical devices generally require
prior 510(k) clearance before they may be commercially marketed
in the United States. The FDA will clear marketing of a medical
device through the 510(k) process if the FDA is satisfied that
the new product has been demonstrated to be substantially
equivalent to another legally marketed device, or predicate,
device, and otherwise meets the FDAs requirements.
Class II devices are also subject to general controls and
may be subject to performance standards and other special
controls. Devices deemed by the FDA to pose the greatest risk,
such as life-sustaining, life-supporting or implantable devices,
or devices deemed not substantially equivalent to a predicate
device, are placed in Class III, generally requiring
submission of a PMA supported by clinical trial data.
510(k) Clearance Pathway.
To obtain 510(k)
clearance, we must submit a notification to the FDA
demonstrating that our proposed device is substantially
equivalent to a predicate device, i.e., a device that was in
commercial distribution before May 28, 1976, a device that
has been reclassified from Class III to Class I or
Class II, or a 510(k)-cleared device. The FDAs 510(k)
clearance process generally takes from three to 12 months
from the date the application is submitted, but can take
significantly longer. If the FDA determines that the device, or
its intended use, is not substantially equivalent to a
previously-cleared device or use, the device is automatically
placed into Class III, requiring the submission of a PMA.
Any modification to a 510(k)-cleared device that would
constitute a major change in its intended use, design or
manufacture, requires a new 510(k) clearance and may even, in
come circumstances, require a PMA, if the change raises complex
or novel scientific issues. The FDA requires every manufacturer
to make the determination regarding the need for a new 510(k)
submission in the first instance, but the FDA may review any
manufacturers decision. If the FDA disagrees with a
manufacturers determination, the FDA can require the
manufacturer to cease marketing and/or recall the device until
510(k) clearance or PMA is obtained. If the FDA requires us to
seek 510(k) clearance or PMAs for any modifications, we may be
required to cease marketing and/or recall the modified device,
if already in distribution, until 510(k) clearance or PMA is
obtained and we could be subject to significant regulatory fines
or penalties. Furthermore, our products could be subject to
voluntary recall if we or the FDA determines, for any reason,
that our products pose a risk of injury or are otherwise
defective. Moreover, the FDA can order a mandatory recall if
there is a reasonable probability that our device would cause
serious adverse health consequences or death. Delays in receipt
or failure to receive clearances or approvals, the loss of
previously received clearances or approvals, or the failure to
comply with existing or future regulatory requirements could
reduce our sales, profitability and future growth prospects.
Premarket Approval Pathway.
A PMA must be
submitted to the FDA if the device cannot be cleared through the
510(k) process. The PMA process is much more demanding than the
510(k) notification process. A PMA must be supported by
extensive data, including but not limited to data obtained from
preclinical or clinical studies or relating to manufacturing and
labeling to demonstrate to the FDAs satisfaction the
safety and effectiveness of the device.
After a PMA is complete, the FDA begins an in-depth review of
the submitted information, which generally takes between one and
three years, but may take significantly longer. During this
review period, the FDA will typically request additional
information or clarification of the information already
provided. Also, 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. The FDA may or may not accept the panels
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recommendation. In addition, the FDA will conduct a pre-approval
inspection of the manufacturing facility to ensure compliance
with Quality System Regulation, or QSR. New PMA applications or
PMA supplements are required for significant modifications to
the device, including, for example, certain types of
modifications to the devices indication for use,
manufacturing process, labeling and design. PMA supplements
often require submission of the same type of information as a
PMA application, except that the supplement is limited to
information needed to support any changes from the device
covered by the original PMA application and may not require as
extensive clinical data or the convening of an advisory panel.
Clinical Trials.
Clinical trials are generally
required to support a PMA application and are sometimes required
for 510(k) clearance. To perform a clinical trial in the United
States for a significant risk device, prior submission of an
application for an IDE to the FDA is required. An IDE amendment
must also be submitted before initiating a new clinical study
under an existing IDE, such as initiating a pivotal trial
following the conclusion of a feasibility trial. The IDE
application must be supported by appropriate data, such as
animal and laboratory testing results, and any available data on
human clinical experience, showing that it is safe to test the
device in humans and that the testing protocol is scientifically
sound. The animal and laboratory testing must meet the
FDAs good laboratory practice requirements.
The IDE and any IDE supplement for a new trial must be approved
in advance by the FDA for a specific number of patients.
Clinical trials conducted in the United States for significant
risk devices may not begin until the IDE application or IDE
supplement is approved by the FDA and the appropriate
institutional review boards, or IRBs, overseeing the welfare of
the research subjects and responsible for that particular
clinical trial. If the product is considered a non-significant
risk device under FDA regulations, only the patients
informed consent and IRB approval are required. Under its
regulations, the agency responds to an IDE or an IDE amendment
for a new trial within 30 days. The FDA may approve the IDE
or amendment, grant an approval with certain conditions, or
identify deficiencies and request additional information. It is
common for the FDA to require additional information before
approving an IDE or amendment for a new trial, and thus final
FDA approval on a submission may require more than the initial
30 days. The FDA may also require that a small-scale
feasibility study be conducted before a pivotal trial may
commence. In a feasibility trial, the FDA limits the number of
patients, sites and investigators that may participate.
Feasibility trials are typically structured to obtain
information on safety and to help determine how large a pivotal
trial should be to obtain statistically significant results.
Clinical trials are subject to extensive recordkeeping and
reporting requirements. Our clinical trials must be conducted
under the oversight of an IRB for the relevant clinical trial
sites and must comply with FDA regulations, including but not
limited to those relating to good clinical practices. We are
also required to obtain the patients informed consent in
form and substance that complies with both FDA requirements and
state and federal privacy and human subject protection
regulations. We, the FDA or the IRB may suspend a clinical trial
at any time for various reasons, including a belief that the
risks to study subjects outweigh the anticipated benefits. Even
if a trial is completed, the results of clinical testing may not
adequately demonstrate the safety and efficacy of the device or
may otherwise not be sufficient to obtain FDA approval to market
the product in the United States. Similarly, in Europe the
clinical study must be approved by a local ethics committee and
in some cases, including studies with high-risk devices, by the
ministry of health in the applicable country.
Educational Grants.
The FDA permits a device
manufacturer to provide financial support, including support by
way of grants, to third parties for the purpose of conducting
medical educational activities. If these funded activities are
considered by the FDA to be independent of the manufacturer,
then the activities fall outside the restrictions on off-label
promotion to which the manufacturer is subject.
The FDA considers several factors in determining whether an
educational event or activity is independent from the
substantive influence of the device manufacturer and therefore
nonpromotional, including the following:
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whether the intent of the funded activity is to present clearly
defined educational content, free from commercial influence or
bias;
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whether the third-party grant recipient and not the manufacturer
has maintained control over selecting the faculty, speakers,
audience, activity content and materials;
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whether the program focuses on a single product of the
manufacturer without a discussion of other relevant existing
treatment options;
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whether there was meaningful disclosure to the audience, at the
time of the program, regarding the manufacturers funding
of the program, any significant relationships between the
provider, presenters, or speakers and the supporting
manufacturer, and whether any unapproved uses will be
discussed; and
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whether there are legal, business, or other relationships
between the supporting manufacturer and the provider or its
employees that could permit the supporting manufacturer to exert
influence over the content of the program.
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Pervasive and Continuing Regulation.
There are
numerous regulatory requirements governing the approval and
marketing of a product. These include:
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product listing and establishment registration, which helps
facilitate FDA inspections and other regulatory action;
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QSR, which requires manufacturers, including third-party
manufacturers, to follow stringent design, testing, control,
documentation and other quality assurance procedures during all
aspects of the manufacturing process;
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labeling regulations and FDA prohibitions against the promotion
of products for uncleared, unapproved or off-label use or
indication;
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clearance or approval of product modifications that could
significantly affect safety or efficacy or that would constitute
a major change in intended use;
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medical device reporting regulations, which require that
manufacturers comply with FDA requirements to report if their
device may have caused or contributed to an adverse event, a
death or serious injury or malfunctioned in a way that would
likely cause or contribute to a death or serious injury if the
malfunction were to recur;
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post-approval restrictions or conditions, including
post-approval study commitments;
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post-market surveillance regulations, which apply when necessary
to protect the public health or to provide additional safety and
effectiveness data for the device; and
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notices of correction or removal and recall regulations.
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Advertising and promotion of medical devices are also regulated
by the Federal Trade Commission and by state regulatory and
enforcement authorities. Recently, some promotional activities
for FDA-regulated products have been the subject of enforcement
action brought under healthcare reimbursement laws and consumer
protection statutes. In addition, under the federal Lanham Act
and similar state laws, competitors and others can initiate
litigation relating to advertising claims.
We have registered with the FDA as a medical device
manufacturer. The FDA has broad post-market and regulatory
enforcement powers. We are subject to unannounced inspections by
the FDA to determine our compliance with the QSR, and other
regulations, and these inspections may include the manufacturing
facilities of our suppliers.
Failure by us or by our suppliers to comply with applicable
regulatory requirements can result in enforcement action by the
FDA or state authorities, which may include any of the following
sanctions:
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warning letters, fines, injunctions, consent decrees and civil
penalties;
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customer notifications, repair, replacement, refunds, recall or
seizure of our products;
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operating restrictions, partial suspension or total shutdown of
production;
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delay in processing marketing applications for new products or
modifications to existing products;
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mandatory product recalls;
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withdrawing approvals that have already been granted; and
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criminal prosecution.
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Fraud and Abuse and False Claims.
We are directly
and indirectly subject to various federal and state laws
governing our relationship with healthcare providers and
pertaining to healthcare fraud and abuse, including
anti-kickback laws. In particular, the federal healthcare
program 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,
arranging for or recommending a good or service, for which
payment may be made in whole or part under federal healthcare
programs, such as the Medicare and Medicaid programs. Penalties
for violations include criminal penalties and civil sanctions
such as fines, imprisonment and possible exclusion from
Medicare, Medicaid and other federal healthcare programs. The
Anti-Kickback Statute is broad and prohibits many arrangements
and practices that are lawful in businesses outside of the
healthcare industry. In implementing the statute, the Office of
Inspector General of the U.S. Department of Health and
Services, or OIG, has issued a series of regulations, known as
the safe harbors. These safe harbors set forth
provisions that, if all their applicable requirements are met,
will assure healthcare providers and other parties that they
will not be prosecuted under the Anti-Kickback Statute. The
failure of a transaction or arrangement to fit precisely within
one or more safe harbors does not necessarily mean that it is
illegal or that prosecution will be pursued. However, conduct
and business arrangements that do not fully satisfy each
applicable element of a safe harbor may result in increased
scrutiny by government enforcement authorities, such as the OIG.
The Federal False Claims Act imposes civil liability on any
person or entity who submits, or causes the submission of a
false or fraudulent claim to the United States Government.
Damages under the Federal False Claims Act can be significant
and consist of the imposition of fines and penalties. The
Federal False Claims Act also allows a private individual or
entity with knowledge of past or present fraud on the federal
government to sue on behalf of the government to recover the
civil penalties and treble damages. The U.S. Department of
Justice on behalf of the government has successfully enforced
the Federal False Claims Act against pharmaceutical
manufacturers. Federal suits have alleged that pharmaceutical
manufacturers whose marketing and promotional practices were
found to have included the off-label promotion of drugs or the
payment of prohibited kickbacks to doctors violated the Federal
False Claims Act on the grounds that these prohibited activities
resulted in the submission of claims to federal and state
healthcare entitlement programs such as Medicaid, resulting in
the payment of claims by Medicaid for the off-label use of the
drug that was not a use of the drug otherwise covered by
Medicaid. Such manufacturers have entered into settlements with
the federal government under which they paid amounts and entered
into corporate integrity agreements that require, among other
things, substantial reporting and remedial actions.
The Federal authorities, and state equivalents, may likewise
seek to enforce the False Claims Act against medical device
manufacturers. We believe that our marketing practices are not
in violation of the Federal False Claims Act or state
equivalents, but we cannot assure you that the federal
authorities will not take action against us and, if such action
were successful, we could be required to pay significant fines
and penalties and change our marketing practices. Such
enforcement could have a significant adverse effect on our
ability to operate.
We engage in a variety of activities that are subject to these
laws and that have come under particular scrutiny in recent
years by federal and state regulators and law enforcement
entities. These activities have included, consulting
arrangements with cardiothoracic surgeons, grants for training
and other education, grants for research, and other interactions
with doctors.
International Regulation.
International sales of
medical devices are subject to foreign governmental regulations,
which vary substantially from country to country. The time
required to obtain certification or approval by a foreign
country may be longer or shorter than that required for FDA
clearance or approval, and the requirements may differ.
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The primary regulatory body in Europe is the European Union,
which has adopted numerous directives and has promulgated
voluntary standards regulating the design, manufacture and
labeling of and clinical trials and adverse event reporting for
medical devices. Devices that comply with the requirements of a
relevant directive will be entitled to bear CE conformity
marking, indicating that the device conforms with the essential
requirements of the applicable directives and, accordingly, can
be commercially distributed throughout the member states of the
European Union and other countries that comply with or mirror
these directives. The method for assessing conformity varies
depending upon the type and class of the product, but normally
involves a combination of self-assessment by the manufacturer
and a third-party assessment by a notified body, which is an
independent and neutral institution appointed by a country to
conduct the conformity assessment. This third-party assessment
may consist of an audit of the manufacturers quality
system and specific testing of the manufacturers device.
Such an assessment is required for a manufacturer to
commercially distribute the product throughout these countries.
International Standards Organization, or ISO, 9001 and
ISO 13845 certifications are voluntary standards.
Compliance establishes the presumption of conformity with the
essential requirements for the CE Mark. We have the
authorization to affix the CE Mark to the PAS-Port and C-Port
devices and to commercialize the devices in the European Union
for coronary artery bypass grafting.
In Japan, medical devices must be approved prior to importation
and commercial sale by the Ministry of Health, Labor and
Welfare, or MHLW. Manufacturers of medical devices outside of
Japan must utilize a contractually bound
In-Country
Caretaker,
or ICC, to submit an application for device approval to the
MHLW. The MHLW evaluates each device for safety and efficacy. As
part of its approval process, the MHLW may require that the
product be tested in Japanese laboratories. The approval process
for products such as our existing anastomotic products is
typically 13 to 14 months. Other medical devices may
require a longer review period for approval. Once approved, the
manufacturer may import the device into Japan for sale by the
manufacturers contractually bound importer or distributor.
After a device is approved for importation and commercial sale
in Japan, the MHLW continues to monitor sales of approved
products for compliance with labeling regulations, which
prohibit promotion of devices for unapproved uses and reporting
regulations, which require reporting of product malfunctions,
including serious injury or death caused by any approved device.
Failure to comply with applicable regulatory requirements can
result in enforcement action by the MHLW, which may include
fines, injunctions, and civil penalties, recall or seizure of
our products, operating restrictions, partial suspension or
total shutdown of sales in Japan, or criminal prosecution.
We have received approval from the MHLW to distribute our
PAS-Port system in Japan. We will be required to submit
applications with respect to all new products and product
enhancements for review and approval by the MHLW. Our contract
with Century, our distributor in Japan, has a multi-year term
and is renewable for additional multi-year terms upon mutual
agreement of the parties.
In addition to MHLW oversight, the regulation of medical devices
in Japan is also governed by the Japanese Pharmaceutical Affairs
Law, or PAL. PAL was substantially revised in July 2002, and the
new provisions were implemented in stages through April 2005.
Revised provisions of the approval and licensing system of
medical devices in Japan, which constitutes the core of import
regulations, came into effect on April 1, 2005. The revised
law changes class categorizations of medical devices in relation
to risk, introduces a third-party certification system,
strengthens safety countermeasures for biologically derived
products, and reinforces safety countermeasures at the time of
resale or rental. The revised law also abolishes the ICC system
and replaces it with the primary distributor system.
Under the PAL in effect prior to April 1, 2005,
manufacturers of medical devices outside of Japan were required
to utilize an ICC to obtain on their behalf approval of each
product by the MHLW prior to the sale or distribution of their
products in Japan. Under the revised PAL, manufacturers outside
of Japan must now appoint a primary distributor
located in Japan that holds a primary distributor license for
medical devices to provide primary distribution services,
including conducting quality assurance and safety control tasks,
for each product at the time an application for the approval of
each such product is submitted to the MHLW. Century Medical
serves as the primary distributor for Cardica. As an
interim measure, an ICC licensed under the PAL in effect prior
to April 1, 2005 will be deemed to be the primary
distributor under the revised PAL if that ICC had a license to
import and distribute the relevant medical devices that was
applied for and obtained under the old PAL. We are unable at
this time to determine the impact of such changes on our
69
approved products or future products. We do not anticipate that
these changes will have a material impact on our existing level
of third-party reimbursement for sales of our products in Japan.
Employees
As of November 30, 2005, we had 42 employees,
including 16 employees in manufacturing, one employee in
sales and marketing, four employees in clinical, regulatory and
quality assurance, five employees in general and administrative
and 16 employees in research and development. We believe
that our future success will depend upon our continued ability
to attract, hire and retain qualified personnel. None of our
employees is represented by a labor union or party to a
collective bargaining agreement, and we believe our employee
relations are good.
Facilities
We currently lease approximately 29,000 square feet in
Redwood City, California, containing approximately
9,000 square feet of manufacturing space, 7,000 square
feet used for research and development and 3,000 square
feet devoted to administrative offices. Our facility is leased
through August 2008. We believe that our existing facility
should meet our needs for at least the next 24 months. Our
facility is subject to periodic inspections by state and federal
regulatory authorities.
Litigation
We are not party to any material pending or threatened
litigation.
70
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information concerning
our executive officers and directors as of November 30,
2005:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
|
Position
|
|
|
|
|
|
|
Bernard A. Hausen, M.D., Ph.D.
|
|
|
45
|
|
|
President, Chief Executive Officer, Chief Medical Officer and
Director
|
Robert Y. Newell
|
|
|
57
|
|
|
Vice President, Finance & Operations, Chief Financial
Officer
|
David C. Casal, Ph.D.
|
|
|
51
|
|
|
Vice President, Clinical and Regulatory Affairs
|
Douglas T. Ellison
|
|
|
42
|
|
|
Vice President, Sales and Marketing
|
Bryan D. Knodel, Ph.D.
|
|
|
45
|
|
|
Vice President, Research and Development
|
J. Michael Egan(1)(2)
|
|
|
52
|
|
|
Chairman of the Board
|
Kevin T. Larkin(3)
|
|
|
56
|
|
|
Director
|
Richard P. Powers(1)(2)(3)
|
|
|
61
|
|
|
Director
|
Robert C. Robbins, M.D.(2)
|
|
|
48
|
|
|
Director
|
John Simon, Ph.D.
|
|
|
62
|
|
|
Director
|
Stephen A. Yencho, Ph.D.
|
|
|
44
|
|
|
Director
|
William H. Younger, Jr.(1)(3)
|
|
|
55
|
|
|
Director
|
|
|
(1)
|
Member of the Audit Committee
|
(2)
|
Member of the Compensation Committee
|
(3)
|
Member of the Nominating Committee
|
Bernard A. Hausen, M.D., Ph.D.
has been our
President and Chief Executive Officer since December 2000.
Dr. Hausen co-founded the Company in October 1997 and has
served as a director and our Chief Medical Officer since
inception. Dr. Hausen received a medical degree from
Hannover Medical School in Germany in 1988 and was trained there
as a general and cardiothoracic surgeon. Upon completion of his
training, he received a Ph.D. degree in Medical Physiology in
1999. From 1996 to 2000, he was employed as a Senior Research
Scientist in the Laboratory for Transplantation Immunology of
the Department of Cardiothoracic Surgery at Stanford University.
Until Dr. Hausen became our full-time employee in October
of 2000, he remained responsible for all surgery-related
research in that laboratory.
Robert Y. Newell
has been our Vice President, Finance,
and Chief Financial Officer since March 2003 and was appointed
Vice President, Finance and Operations, in July 2005. From
January 2000 to February 2003 he was Vice President, Finance and
Chief Financial Officer for Omnicell, Inc., a hospital supply
and medication management company. Mr. Newell holds a
B.A. degree in Mathematics from the College of
William & Mary and an M.B.A. degree from the
Harvard Business School.
David C. Casal
joined us in November 2005 as our Vice
President, Clinical and Regulatory Affairs. From October 2004 to
November 2005, Mr. Casal was Vice President, Clinical,
Regulatory and Quality Affairs of Pulmonx, a medical device
company. From February 2003 to October 2004, Mr. Casal was Vice
President, Clinical, Regulatory and Quality Affairs of
Microgenics, a biotechnology company. From September 1999 to
January 2003, Mr. Casal was Vice President, Clinical, Regulatory
and Quality Affairs of Intuitive Surgical, a surgical robot
company. Mr. Casal holds a B.A. degree in American Diplomatic
History, an M.S. degree in Physiology and a Ph.D. degree in
Cardiovascular Epidemiology from the University of Minnesota.
Additionally, Mr. Casal was a NIH Post-Doctoral Fellow in the
Division of Lipid Metabolism at the University of California,
San Diego.
Douglas T. Ellison
joined us in December 2004 as our Vice
President of Sales and Marketing. From June 2004 to December
2004, Mr. Ellison consulted for medical device companies.
From June 2001 until June 2004
71
Mr. Ellison was Vice President of Sales of Artemis Medical,
Inc., a medical device company. From December 1997 until June
2001, Mr. Ellison held sales and sales management positions
with Heartport, Inc., a medical device company focused on
minimally-invasive cardiac surgery. Mr. Ellison holds a
B.S.C.E. degree from Purdue University.
Bryan D. Knodel
joined Cardica as our Vice President of
Research and Development in July 2005. Since January 1998, he
has been president of Bryan D. Knodel, Inc., a consulting firm
specializing in medical device design and product development.
From April 2001 until June 2005, Mr. Knodel consulted for
us in product development. From 1992 to 1997, he was a principal
engineer with Ethicon Endo-Surgery, a Johnson & Johnson
company developing medical devices for less invasive surgery.
Mr. Knodel holds B.S., M.S. and Ph.D. degrees in Mechanical
Engineering from the University of Illinois.
J. Michael Egan
has served as the Chairman of the
Board and a director since August 2000. From April 1996 through
May 2004, Mr. Egan was President and CEO of Bluebird
Development, LLC, a financial partnership with Kobayashi
Pharmaceutical Company, an Osaka, Japan-based major distributor
of medical devices in Asia. Mr. Egan is a director of
several privately held companies and of Western Technology
Investment, a registered investment company. Mr. Egan holds
a B.A. degree in Business Administration from Colorado
College.
Kevin T. Larkin
joined our board in December 2005. He has
been President, Chief Executive Officer and a director of
TherOx, a medical device company, since May 2001. From July 1998
until April 2001, Mr. Larkin was President and Chief Executive
Officer of CardioVasc, a medical device company. Mr. Larkin also
has held senior sales and marketing management positions with
Ventritex, Medtronic and Cordis.
Richard P. Powers
has been a director and chairman of our
Audit Committee since October 2005. From October 2001 to the
present, Mr. Powers has been Vice President and Chief
Financial Officer of Corgentech Inc., a biotechnology company.
From March 1999 to August 2000, Mr. Powers served as
Executive Vice President and Chief Financial Officer of Eclipse
Surgical Technologies, Inc., a medical device company. From
February 1996 to March 1999, Mr. Powers served as Executive
Vice President and Chief Financial Officer of CardioGenesis
Corporation, a medical device company. From January 1981 to
August 1995, Mr. Powers held a number of senior management
positions at Syntex Corporation, a biopharmaceutical company,
including Senior Vice President and Chief Financial Officer.
Mr. Powers also currently serves on the board of directors
of HemoSense Inc., a manufacturer of blood monitoring equipment.
Mr. Powers holds a B.S. degree in Accounting from Canisius
College and an M.B.A. degree from the University of Rochester,
New York.
Robert C. Robbins, M.D.
has been a director since
January 2001 and has been one of our scientific advisors since
October 1997. Dr. Robbins is the Chairman of the Department
of Cardiothoracic Surgery at the Stanford University School of
Medicine, where he has been a member of the faculty since 1993.
Dr. Robbins is also the director of the Stanford
Cardiovascular Institute. Previously, Dr. Robbins was a
Pediatric Fellow of Cardiothoracic Surgery at Emory University,
and Royal Childrens Hospital in Melbourne, Australia.
Dr. Robbins is a former guest editor for the Surgical
Supplement of Circulation and is a manuscript reviewer for a
number of periodicals, including the New England Journal of
Medicine and the Annals of Thoracic Surgery. He is also on the
editorial board for the Journal of Thoracic and Cardiovascular
Surgery. Dr. Robbins is certified by the American Board of
Surgery and American Board of Thoracic Surgery. Dr. Robbins
holds a B.S. degree from Millsaps College and an M.D. degree
from the University of Mississippi Medical Center.
Dr. Robbins completed his residency in Cardiothoracic
Surgery at Stanford.
John Simon, Ph.D.
has been a director since June
2001. Mr. Simon is a Managing Director of the investment
banking firm, Allen & Company LLC, where he has been
employed for over 25 years. He currently serves on the
board of directors for Neurogen Corporation, as well as on the
boards of several privately held companies. Mr. Simon holds
a B.S. degree in Chemistry from The College of
William & Mary, a Ph.D. degree in Chemical Engineering
from Rice University, and both an M.B.A. degree in finance and a
J.D. degree from Columbia University.
Stephen A. Yencho, Ph.D.
has been a director since
inception. Dr. Yencho co-founded Cardica in October 1997
with Dr. Hausen. From October 1997 through December 2000,
Dr. Yencho was our chief executive officer.
72
From December 2000 through July 2003, Dr. Yencho was our
Chief Technology Officer, and Dr. Yencho provided
consulting services to us until February 2004. Since February
2004, Dr. Yencho has been engaged in the development of
early stage ventures separate from us. Dr. Yencho holds a
B.S. degree in Mechanical Engineering from the University of
Illinois and an M.S. degree in Manufacturing Systems Engineering
from Stanford University. In addition, Dr. Yencho was
sponsored by a Hewlett Packard Fellowship in the Ph.D. program
in Precision Machinery Engineering at the University of Tokyo.
He holds a Ph.D. degree in Materials Science and Engineering
from Stanford University.
William H. Younger, Jr.
has been a director since
August 2000. Mr. Younger is a managing director of the
general partner of Sutter Hill Ventures, a venture capital firm,
where he has been employed since 1981. Mr. Younger holds a
B.S. degree in Electrical Engineering from the University of
Michigan and an M.B.A. degree from Stanford University.
Mr. Younger is also a director of Omnicell, Inc., as well
as of several privately held companies.
Board Composition
Upon the completion of this offering, we will have an authorized
board of directors consisting of eight members. We expect to be
compliant with the independence criteria for boards of directors
under applicable law at the time this offering is completed, and
we will continue to evaluate our compliance with these criteria
over time. To the extent we determine necessary, we will seek to
appoint additional independent directors.
The amended and restated certificate of incorporation that will
be in effect upon the closing of this offering provides that the
authorized number of directors may be changed only by resolution
of the board of directors.
Voting Agreement
Our current directors have been elected pursuant to a voting
agreement that we entered into with some of the holders of our
common stock and holders of our preferred stock and related
provisions of our certificate of incorporation in effect at the
time of their election. The holders of our common stock have
designated Messrs. Hausen and Yencho for election to our
board of directors. The holders of our convertible preferred
stock have designated Messrs. Younger and Simon for
election to our board of directors. The holders of our common
stock and convertible preferred stock, voting together as a
single class on an as-converted basis, have designated
Messrs. Egan, Larkin, Powers and Robbins. Upon the
completion of this offering, the voting agreement will terminate
in its entirety and none of our stockholders will have any
special rights regarding the election or designation of board
members.
Board Committees
Our board of directors has an audit committee, a compensation
committee and a nominating committee.
Audit Committee.
Our audit committee currently consists
of Richard Powers, as chairman, J. Michael Egan and William
Younger. The Committee has designated Richard Powers to be our
audit committee financial expert, as currently defined under
applicable SEC rules. We expect that the composition of our
audit committee will comply with the applicable requirements of
the Sarbanes-Oxley Act of 2002 and the rules and regulations of
the SEC and Nasdaq at the time of completion of this offering,
although we will be required by Nasdaq rules to add one
additional independent director to this committee within one
year after this offering. We anticipate adding at least one
independent director within the required time period, and we
will add that member to our audit committee at that time. We
intend to continue to evaluate the requirements applicable to us
and we will comply with future requirements to the extent they
become applicable to us. The functions of our audit committee
include, among other things:
|
|
|
|
|
appointment, compensation and retention of our independent
accountants and oversight of their work;
|
|
|
|
review of our financial statements and financial reporting and
the adequacy of those disclosures;
|
73
|
|
|
|
|
discussions with management and our independent accountants
regarding the quality of accounting principles, reasonableness
of significant judgments and estimates, propriety of certain
critical accounting policies and the scope and effectiveness of
internal controls;
|
|
|
|
consideration of certain audit adjustments and resolution of any
disagreements with our independent accountants regarding
financial reporting;
|
|
|
|
approval of related-party transactions;
|
|
|
|
pre-approval of audit and non-audit services to be rendered by
our independent accountants; and
|
|
|
|
establishment of procedures for the receipt, retention, and
treatment of complaints received by us regarding accounting,
internal accounting controls, and auditing matters.
|
Our independent accountants will regularly meet privately with
the audit committee and have unrestricted access to this
committee.
Compensation Committee.
Our compensation committee
currently consists of Robert Robbins as chairman, Richard Powers
and J. Michael Egan, and we expect to expand this committee when
we obtain the services of additional independent directors. The
functions of this committee include:
|
|
|
|
|
evaluation of and recommendation to the board for approval of
compensation plans and programs, including equity plans;
|
|
|
|
oversight of our compensation policies, plans and programs,
including administration of our equity compensation plans;
|
|
|
|
review and determination of the compensation to be paid to our
officers and directors;
|
|
|
|
approval of our overall compensation strategy, including review
of performance goals and obligations relevant to the
compensation of our officers; and
|
|
|
|
review and approval of the terms of any employment or severance
agreements.
|
Nominating Committee.
Our nominating committee currently
consists of Richard Powers, as chairman, Kevin Larkin and
William Younger. The functions of this committee include:
|
|
|
|
|
identifying, reviewing, evaluating and recommending candidates
to become members of our board of directors;
|
|
|
|
reviewing and recommending incumbent directors for reelection;
|
|
|
|
monitoring the size of our board of directors;
|
|
|
|
considering recommendations for director nominees submitted by
our stockholders and establishing policies and procedures
regarding such recommendations;
|
|
|
|
making any disclosures required by applicable law in the course
of exercising its authority;
|
|
|
|
recommending annually chairmanship and membership of each
committee of our board of directors;
|
|
|
|
conducting an annual self-evaluation; and
|
|
|
|
periodically reviewing and assessing the adequacy of its charter
and recommending changes to our board of directors.
|
Compensation Committee Interlocks and Insider
Participation
None of the members of our compensation committee has at any
time been one of our officers or employees. None of our
executive officers currently serves, or in the past year has
served, as a member of the board of directors or compensation
committee of any entity that has one or more executive officers
serving on our board of directors or compensation committee. For
information with respect to transactions between us and any
member of the compensation committee, see Certain
Relationships and Related-Party Transactions.
74
Director Compensation
Our non-employee directors are reimbursed for certain of their
out-of
-pocket expenses
incurred in connection with attending board and committee
meetings. In the past, we have not provided cash compensation to
any director for his or her service as a director, other than an
annual payment of $50,000 paid to Mr. Egan for his service
as chairman of the Board starting in fiscal 2006. Additionally,
we have in the past made loans to Drs. Hausen and Yencho
and Mr. Egan that may be considered to have been made at
below-market interest rates. These loans have been repaid in
full as of the date of this prospectus. These loans are
described more fully in Certain Relationships and
Related-Party Transactions. On October 13, 2005, we
granted a fully vested restricted stock award consisting of
3,333 shares to Richard Powers.
Additionally, in the past we have granted options to some of our
directors for their service as directors, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Number of
|
|
|
Price Per
|
|
Name
|
|
Date of Grant
|
|
|
Shares
|
|
|
Share
|
|
|
|
|
|
|
|
|
|
|
|
J. Michael Egan
|
|
|
July 21, 2000
|
|
|
|
196,684
|
|
|
$
|
1.35
|
|
|
|
|
January 31, 2002
|
|
|
|
39,337
|
|
|
$
|
1.35
|
|
|
|
|
March 5, 2003
|
|
|
|
16,666
|
|
|
$
|
2.25
|
|
|
|
|
March 24, 2004
|
|
|
|
16,666
|
|
|
$
|
2.85
|
|
Kevin Larkin
|
|
|
December 15, 2005
|
|
|
|
13,333
|
|
|
$
|
9.75
|
|
Richard Powers
|
|
|
October 13, 2005
|
|
|
|
13,333
|
|
|
$
|
9.00
|
|
Robert C. Robbins
|
|
|
April 21, 1998
|
|
|
|
25,000
|
|
|
$
|
0.30
|
|
|
|
|
February 26, 2001
|
|
|
|
6,666
|
|
|
$
|
1.35
|
|
|
|
|
January 31, 2002
|
|
|
|
13,333
|
|
|
$
|
1.35
|
|
|
|
|
March 24, 2005
|
|
|
|
25,000
|
|
|
$
|
2.85
|
|
William H. Younger, Jr.
|
|
|
April 12, 1999
|
|
|
|
2,333
|
|
|
$
|
0.75
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
368,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Robbins, M.D., is also one of our scientific
advisors. Dr. Robbins has received $2,000 in connection
with his attending a meeting we had with the FDA. Additionally,
in connection with his being a scientific advisor,
Dr. Robbins received an option grant exercisable for
3,333 shares of our common stock that is now fully vested.
The exercise price of this option is $1.35 per share.
75
Executive Compensation
The following table sets forth summary information concerning
compensation of our chief executive officer and each of our four
other most highly compensated executive officers as of the end
of the last fiscal year. We refer to these persons as our named
executive officers elsewhere in this prospectus.
Summary Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
|
|
|
|
|
|
Compensation
|
|
|
Long-Term Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
|
Underlying
|
|
|
All Other
|
|
Name and Position
|
|
Salary
|
|
|
Bonus
|
|
|
Options/SARs
|
|
|
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bernard Hausen, M.D., Ph.D.
|
|
$
|
236,250
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
15,990
|
(1),(2)
|
|
Chief Executive Officer and Chief Medical Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Newell
|
|
|
183,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,089
|
(1)
|
|
Chief Financial Officer and Vice President, Finance and
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas Ellison
|
|
|
110,833
|
|
|
|
86,667
|
|
|
|
100,000
|
|
|
|
3,784
|
(1),(3)
|
|
Vice President of Sales and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian DuBois(4)
|
|
|
160,155
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38,816
|
(1),(5)
|
|
Former Vice President of Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Larry Pool(6)
|
|
|
146,559
|
|
|
|
-
|
|
|
|
-
|
|
|
|
36,399
|
(1),(7)
|
|
Former Vice President of Quality and Regulatory Compliance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes amounts paid for group term life insurance.
|
|
(2)
|
Includes $1,490 paid for life insurance and deemed compensation
related to a below-market rate loan described in Certain
Relationships and Related-Party Transactions.
|
|
(3)
|
Includes $3,500 paid for a car allowance.
|
|
(4)
|
Mr. DuBois employment with us terminated on
July 1, 2005.
|
|
(5)
|
Includes a severance payment of $38,500.
|
|
(6)
|
Mr. Pools employment with us terminated on
July 1, 2005.
|
|
(7)
|
Includes a severance payment of $35,438.
|
Option Grants in Last Fiscal Year
In our fiscal year ended June 30, 2005, referred to as
fiscal 2005, we granted options to purchase an aggregate of
148,264 shares of our common stock to our employees,
directors and consultants, all of which were granted under our
1997 Equity Incentive Plan.
76
The following table sets forth certain information with respect
to stock options granted to each of our named executive officers
during fiscal 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
of Total
|
|
|
|
|
|
|
Potential Realizable
|
|
|
|
|
|
Options
|
|
|
|
|
|
|
Value at Assumed
|
|
|
|
Number of
|
|
|
Granted
|
|
|
|
|
|
|
Annual Rates of Stock
|
|
|
|
Securities
|
|
|
to
|
|
|
Exercise
|
|
|
|
|
Price Appreciation for
|
|
|
|
Underlying
|
|
|
Employees
|
|
|
Price
|
|
|
|
|
Option Term ($) (2)
|
|
|
|
Options
|
|
|
in Fiscal
|
|
|
Per
|
|
|
Expiration
|
|
|
|
|
Name
|
|
Granted
|
|
|
Year (1)
|
|
|
Share
|
|
|
Date
|
|
|
5%
|
|
|
10%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bernard Hausen, M.D., Ph.D.
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Robert Newell
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Douglas Ellison
|
|
|
100,000
|
(3)
|
|
|
89.2
|
%
|
|
$
|
2.85
|
|
|
|
2/1/2015
|
|
|
|
1,506,784
|
|
|
|
2,568,117
|
|
Brian DuBois
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Larry Pool
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1)
|
Based on options to purchase an aggregate of 112,162 shares
granted to employees during fiscal 2005.
|
|
|
(2)
|
The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by rules of the SEC, and do not
represent our estimate or projection of our future common stock
prices. The potential realizable values are calculated based on
an assumed initial public offering price of $11.00 per
share, the midpoint of the range on the front cover of this
prospectus, and assume that (i) the common stock
appreciates at the indicated rate for the entire
10-year
term of the
option, and (ii) the option is exercised at the exercise
price and sold on the last day of the option term at the
appreciated price. Actual gains, if any, on stock option
exercises are dependent on the future performance of our common
stock and overall stock market conditions. The amounts reflected
in the table may not necessarily be realized.
|
|
|
(3)
|
Option vests as follows: 25% of the shares subject to the option
vest on December 1, 2005, and the remaining shares vest
ratably over the following 36 months. Upon a change of
control, 50% of the then unvested shares will vest. If within
one month prior to or 13 months following a change of
control Mr. Ellisons employment is terminated without
cause or Mr. Ellison resigns for good reason, the remaining
unvested shares will become immediately and fully vested. See
Management Change in Control Agreements.
|
Aggregated Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values
The following table sets forth certain information concerning
the number and value of unexercised options held by each of the
named executive officers as of June 30, 2005. No options
were exercised by the named executive officers in fiscal 2005.
These options have an early-exercise provision that permits
exercise of the options prior to full vesting, subject to
repurchase of the shares issued on early exercise by us if the
executive officers employment terminates. The amount
described in the column captioned Value of Unexercised
In-The-
77
Money Options at June 30, 2005 represents the
difference between the per share exercise price of stock options
and $11.00, which is the midpoint of the range on the front
cover of this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
Value of Unexercised
|
|
|
|
|
|
|
|
Underlying Unexercised
|
|
|
In-the-Money Options at
|
|
|
|
Number of
|
|
|
|
|
Options at June 30, 2005
|
|
|
June 30, 2005
|
|
|
|
Shares
|
|
|
Value
|
|
|
|
|
|
|
|
Name
|
|
Acquired
|
|
|
Realized
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bernard Hausen, M.D., Ph.D.
|
|
|
-
|
|
|
$
|
-
|
|
|
|
133,332
|
|
|
|
-
|
|
|
$
|
1,136,656
|
|
|
$
|
-
|
|
Robert Newell
|
|
|
-
|
|
|
|
-
|
|
|
|
32,666
|
|
|
|
-
|
|
|
|
282,228
|
|
|
|
|
|
Douglas Ellison
|
|
|
-
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
815,000
|
|
|
|
|
|
Brian DuBois(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
64,384
|
|
|
|
-
|
|
|
|
592,906
|
|
|
|
|
|
Larry Pool(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
53,331
|
|
|
|
-
|
|
|
|
481,246
|
|
|
|
|
|
|
|
|
(1)
|
Mr. DuBoiss employment with us terminated on July 1,
2005. As a result, unvested options to purchase
14,297 shares were canceled. As of the date of Mr.
Duboiss termination, taking account of the canceled
shares, he had outstanding options to purchase 50,087 shares of
common stock, and the value of his unexercised in-the-money
options on such date was $471,774.
|
|
|
|
(2)
|
Mr. Pools employment with us terminated on July 1,
2005. As a result, unvested options to purchase 16,695 shares
were canceled. As of the date of Mr. Pools termination,
taking account of the canceled shares, he had outstanding
options to purchase 36,636 shares of common stock, and the value
of his unexercised in-the-money options was $338,431.
|
|
Benefit Agreement
Dr. Hausen has entered into a benefit agreement that
provides that, if at any time Dr. Hausens employment
is terminated by us without cause or if Dr. Hausen resigns
for good reason, we would be obligated to pay Dr. Hausen
severance equal to 12 months of salary. Subject only to our
obligation to pay this severance amount under the circumstances
described, Dr. Hausens employment by us is at
will, which means that either he or we may terminate his
employment with us at any time and for any reason or for no
reason.
Employee Benefit Plans
|
|
|
1997 Equity Incentive Plan
|
In November 1997, our board of directors adopted, and our
stockholders approved, the 1997 Equity Incentive Plan, referred
to as the 1997 Plan. Upon the closing of this offering, the 1997
Plan will terminate so that no further stock awards may be
thereafter granted under the 1997 Plan. Although the 1997 Plan
will terminate, all outstanding options thereunder will continue
to be governed by their existing terms.
Stock Awards.
The 1997 Plan provides for the grant of
incentive stock options, nonstatutory stock options, restricted
stock purchase awards and stock bonus awards, also known
collectively as stock awards, which may be granted to employees,
including officers, non-employee directors, and consultants.
Share Reserve.
As of November 30, 2005, the
aggregate number of shares of common stock that may be issued
pursuant to stock awards under the 1997 Plan is
1,915,000 shares, of which options to
purchase 897,115 shares of common stock were
outstanding at a weighted average exercise price of
$2.41 per share and 106,650 shares of common stock
remained available for future grant. In July 2005, we granted
options to purchase an aggregate of 198,450 shares of our common
stock with an exercise price of $2.85 per share and a deemed
fair value of $8.40 per share, based upon the reassessment
discussed previously under Managements Discussion
and Analysis. Of these, options to purchase 40,000 shares,
70,227 shares, and 20,000 shares were granted to Bernard Hausen,
Bryan Knodel and Robert Newell, respectively.
78
If a stock award granted under the 1997 Plan expires or
otherwise terminates without being exercised in full, the shares
of common stock not acquired pursuant to the award become
available for subsequent issuance under the 2005 Equity
Incentive Plan described below. The shares of common stock that
remain available for future grant under the 1997 Plan
immediately prior to its termination will become available for
grant under the 2005 Equity Incentive Plan, as described below.
Changes to Capital Structure.
In the event that there is
a specified type of change in our capital structure, such as a
stock split, reorganization, recapitalization, stock dividend,
combination of shares or the like, appropriate adjustments will
be made to the number of shares and exercise price or strike
price, if applicable, of all outstanding stock awards.
Corporate Transactions.
In the event of certain
significant corporate transactions, such as a sale of
substantially all of our assets, a merger or consolidation in
which we are not the surviving entity or a reverse merger in
which we are the surviving entity but our common stock
outstanding immediately prior to the transaction is converted
into other property, all outstanding stock awards under the 1997
Plan may be assumed, continued or substituted for by any
surviving or acquiring entity (or its parent company). If the
surviving or acquiring entity (or its parent company) elects not
to assume, continue or substitute for such stock awards, then
with respect to any outstanding stock award that has not
terminated prior to the effective date of the corporate
transaction, the vesting and exercisability provisions of such
stock awards will be accelerated in full and such awards will be
terminated if not exercised prior to the effective date of the
corporate transaction. The completion of this offering will not
constitute a change of control, change of capital structure or
significant corporate transaction for purposes of our 1997 Plan.
2005
Equity Incentive Plan
In October 2005, our board of directors adopted, and in December
2005 our stockholders approved, the 2005 Equity Incentive Plan,
referred to as the EIP. The EIP will become effective
immediately upon the date of the underwriting agreement
pertaining to this offering and will terminate on
October 12, 2015, unless sooner terminated by our board of
directors.
Stock Awards.
The EIP provides for the grant of incentive
stock options, nonstatutory stock options, stock purchase
awards, stock bonus awards, stock appreciation rights, stock
unit awards and other forms of equity compensation, referred to
collectively as stock awards, which may be granted to employees,
including officers, non-employee directors, and consultants. The
board of directors or its delegate will, in its sole discretion,
determine the criteria that will be used in selecting recipients
of receive stock awards under the EIP.
Share Reserve.
Following this offering, the aggregate
number of shares of common stock that may be issued initially
pursuant to stock awards under the EIP is 400,000 shares,
plus any shares subject to a stock award granted under the 1997
Plan that expires or otherwise terminates without having been
exercised in full following the closing of this offering and any
shares that remain available for future grant under the 1997
Plan immediately prior to its termination.
No person may be granted awards covering more than
200,000 shares of common stock under the EIP during any
calendar year pursuant to an appreciation-only stock award. An
appreciation-only stock award is a stock award whose value is
determined by reference to an increase over an exercise or
strike price of at least 100% of the fair market value of our
common stock on the date of grant. A stock option with an
exercise price equal to the value of the stock on the date of
grant is an example of an appreciation-only award. This
limitation is designed to help assure that any tax deductions to
which we would otherwise be entitled upon the exercise of an
appreciation-only stock award or upon the subsequent sale of
shares purchased under such an award, will not be subject to the
$1 million limitation on the income tax deductibility of
compensation paid per covered executive officer imposed under
Section 162(m) of the Internal Revenue Code.
Shares issued under the EIP may again become available for the
grant of new awards under the EIP if shares are:
|
|
|
|
|
forfeited to or repurchased by us prior to becoming fully vested;
|
|
|
|
withheld to satisfy income and employment withholding taxes;
|
79
|
|
|
|
|
used to pay the exercise price of an option in a net exercise
arrangement;
|
|
|
|
tendered to us to pay the exercise price of an option; of
|
|
|
|
cancelled pursuant to an exchange or repricing program.
|
In addition, if a stock award granted under the EIP expires or
otherwise terminates without being exercised in full, the shares
of common stock not acquired pursuant to the award again become
available for subsequent issuance under the EIP. Shares issued
under the EIP may be previously unissued shares or reacquired
shares we have bought on the market or otherwise. As of the date
of this prospectus, no shares of common stock have been issued
under the EIP.
Administration.
Our board of directors has delegated its
authority to administer the EIP to our compensation committee.
Subject to the terms of the EIP, our board of directors or an
authorized committee, referred to as the plan administrator,
determines recipients, dates of grant, the numbers and types of
equity awards to be granted and the terms and conditions of the
equity awards, including the period of their exercisability and
vesting. Subject to the limitations set forth below, the plan
administrator will also determine the exercise price of options
granted, the purchase price of stock purchase awards and the
strike price of stock appreciation rights.
The plan administrator has the authority to:
|
|
|
|
|
reduce the exercise price of any outstanding option;
|
|
|
|
cancel any outstanding option and to grant in exchange one or
more of the following:
|
new options covering the same or a different
number of shares of common stock,
new stock awards,
cash; and/or
other valuable consideration; or
|
|
|
|
|
engage in any action that is treated as a repricing under
generally accepted accounting principles.
|
Stock Options.
The plan administrator determines the
exercise price for a stock option, within the terms and
conditions of the EIP and applicable law, provided that the
exercise price of an incentive or nonstatutory stock option
cannot be less than 100% of the fair market value of our common
stock on the date of grant. Options granted under the EIP vest
at the rate specified by the plan administrator.
Generally, the plan administrator determines the term of stock
options granted under the EIP, up to a maximum of ten years
(except in the case of some incentive stock options, as
described below). Unless the terms of an optionees stock
option agreement provide otherwise, if an optionees
service relationship with us, or any of our affiliates, ceases
for any reason other than disability, death or following a
change in control, the optionee may exercise any vested options
for a period of three months following the cessation of service.
If an optionees service relationship with us, or any of
our affiliates, ceases due to disability or death (or an
optionee dies within a specified period following cessation of
service), the optionee or a beneficiary may exercise any vested
options for a period of 12 months, in the event of
disability, and 18 months, in the event of death. In no
event, however, may an option be exercised beyond the expiration
of its term.
Acceptable consideration for the purchase of common stock issued
upon the exercise of a stock option will be determined by the
plan administrator and may include (i) cash or check,
(ii) a broker-assisted cashless exercise, (iii) the
tender of common stock previously owned by the optionee,
(iv) a net exercise of the option, (v) a deferred
payment arrangement, and (vi) other legal consideration
approved by the plan administrator.
Unless the plan administrator provides otherwise, options
generally are not transferable except by will, the laws of
descent and distribution, or pursuant to a domestic relations
order. An optionee may designate a beneficiary, however, who may
exercise the option following the optionees death.
Tax Limitations on Incentive Stock Option Grants.
Incentive stock options may be granted only to our employees.
The aggregate fair market value, determined at the time of
grant, of shares of our common stock with respect to incentive
stock options that are exercisable for the first time by an
optionee during any calendar year under all of our stock plans
may not exceed $100,000. No incentive stock option may be
granted to any person
80
who, at the time of the grant, owns or is deemed to own stock
possessing more than 10% of our total combined voting power or
that of any of our affiliates unless the option exercise price
is at least 110% of the fair market value of the stock subject
to the option on the date of grant and the term of the incentive
stock option does not exceed five years from the date of grant.
Stock Purchase Awards.
The purchase price for stock
purchase awards will not be less than the par value of our
common stock. The purchase price for a stock purchase award may
be payable:
|
|
|
|
|
in cash or by check;
|
|
|
|
according to a deferred payment arrangement; or
|
|
|
|
in consideration of the recipients past or future services
performed for us or our affiliates.
|
Shares of common stock acquired under a stock purchase award
may, but need not, be subject to a share repurchase option in
our favor in accordance with a vesting schedule to be determined
by the plan administrator. Rights to acquire shares under a
stock purchase award may be transferred only upon such terms and
conditions as set by the plan administrator.
Stock Bonus Awards.
A stock bonus award may be granted in
consideration for the recipients past or future services
performed for us or our affiliates or any other form of legal
consideration. Shares of common stock acquired under a stock
bonus award may, but need not, be subject to forfeiture to us in
accordance with a vesting schedule to be determined by the plan
administrator. Rights to acquire shares under a stock bonus
award may be transferred only upon such terms and conditions as
set by the plan administrator.
Stock Unit Awards.
Payment of any purchase price may be
made in any form permitted under applicable law; however, we
will settle a payment due to a recipient of a stock unit award
by cash, delivery of stock, a combination of cash and stock as
deemed appropriate by the plan administrator, or in any other
form of consideration set forth in the stock unit award
agreement. Additionally, dividend equivalents may be credited in
respect to shares covered by a stock unit award. Except as
otherwise provided in the applicable award agreement, stock
units that have not vested will be forfeited upon the
participants cessation of continuous service for any
reason.
Stock Appreciation Rights.
The plan administrator
determines the strike price for a stock appreciation right. Upon
the exercise of a stock appreciation right, we will pay the
participant an amount equal to the product of (i) the
excess of the per share fair market value of our common stock on
the date of exercise over the strike price, multiplied by
(ii) the number of shares of common stock with respect to
which the stock appreciation right is exercised. A stock
appreciation right granted under the EIP vests at the rate
specified in the stock appreciation right agreement as
determined by the plan administrator.
The plan administrator determines the term of stock appreciation
rights granted under the EIP. If a participants service
relationship with us, or any of our affiliates, ceases, then the
participant, or the participants beneficiary, may exercise
any vested stock appreciation right for three months (or such
longer or shorter period specified in the stock appreciation
right agreement) after the date such service relationship ends.
In no event, however, may an option be exercised beyond the
expiration of its term.
Other Equity Awards.
The plan administrator may grant
other awards related to our common stock. The plan administrator
will set the number of shares under the award, the purchase
price, if any, the timing of exercise and vesting and any
repurchase rights associated with such awards.
Changes to Capital Structure.
In the event that there is
a specified type of change in our capital structure, such as a
merger, consolidation, reorganization, recapitalization,
reincorporation, stock dividend, dividend in property other than
cash, stock split, liquidating dividend, combination of shares,
exchange of shares, change in corporate structure or other
transaction not involving the receipt of consideration by us,
appropriate adjustments will be made to:
|
|
|
|
|
the number of shares reserved under the EIP;
|
|
|
|
the maximum number of shares by which the share reserve may
increase automatically each year;
|
|
|
|
the maximum number of appreciation-only stock awards that can be
granted in a calendar year; and
|
|
|
|
the number of shares and exercise price or strike price, if
applicable, of all outstanding stock awards.
|
81
Corporate Transactions.
In the event of specified
significant corporate transactions, such as a sale of all or
substantially all of our assets, a sale of at least 90% of our
outstanding securities, a merger in which we are not the
surviving entity, or a merger in which we are the surviving
entity but our common stock outstanding immediately prior to the
transaction is exchanged or converted into other property, all
outstanding stock awards under the EIP may be assumed, continued
or substituted for by any surviving or acquiring entity (or its
parent company). If the surviving or acquiring entity (or its
parent company) elects not to assume, continue or substitute for
such stock awards, then:
|
|
|
|
|
with respect to any such stock awards that are held by
individuals whose service with us or our affiliates has not
terminated more than three months prior to the effective date of
the corporate transaction, the vesting and exercisability
provisions of such stock awards will be accelerated in full and
such awards will be terminated if not exercised prior to the
effective date of the corporate transaction; and
|
|
|
|
all other outstanding stock awards will terminate if not
exercised prior to the effective date of the corporate
transaction.
|
Our board of directors may also provide that the holder of an
outstanding stock award not assumed in the corporate transaction
will surrender such stock award in exchange for a payment equal
to the excess of (i) the value of the property that the
optionee would have received upon exercise of the stock award,
over (ii) the exercise price otherwise payable in
connection with the stock award.
Changes in Control.
Our board of directors has the
discretion to provide that a stock award under the EIP will
immediately vest as to all or any portion of the shares subject
to the stock award (i) immediately upon the occurrence of
specified
change-in
-control
transactions, whether or not such stock award is assumed,
continued or substituted by a surviving or acquiring entity in
the transaction, or (ii) in the event a participants
service with us or a successor entity is terminated actually or
constructively within a designated period following the
occurrence of specified change in control transactions. Stock
awards held by participants under the EIP will not vest on such
an accelerated basis unless specifically provided by the
participants applicable award agreement.
401(k) Plan
We maintain a retirement savings plan, or 401(k) Plan, for the
benefit of our eligible employees. Our 401(k) Plan is intended
to qualify as a defined contribution arrangement under
Sections 401(a), 401(k) and 501(a) of the Internal Revenue
Code. Employees eligible to participate in our 401(k) Plan are
those employees who have completed one month of service in a
plan year and have attained the age of 21. Participants may
elect to defer a percentage of their eligible pretax earnings
each year up to the maximum contribution permitted by the
Internal Revenue Code. All assets of our 401(k) Plan are
currently invested, subject to participant-directed elections,
in a variety of mutual funds chosen from time to time by us.
Distribution of a participants vested interest generally
occurs upon termination of employment, including by reason of
retirement, death or disability.
Change-in
-Control
Arrangements
Options granted to Dr. Hausen, Mr. Newell,
Mr. Casal, Mr. Ellison and Mr. Knodel are subject
to accelerated vesting such that 50% of the then-unvested shares
subject to the options shall become vested upon a change of
control, and 100% of the then-unvested shares subject to the
options held by each shall become vested if, within one month
prior to or 13 months following a change of control, such
officer is terminated without cause or resigns for good reason.
Except as otherwise noted above, all options to purchase common
stock issued to our named executive officers may be subject to
accelerated vesting upon a change of control, as described in
Management Employee Benefit Plans.
82
CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS
We describe below transactions and series of transactions that
have occurred since July 1, 2002 to which we were a party
in which:
|
|
|
|
|
the amounts involved exceeded or will exceed $60,000; and a
|
|
|
|
director, executive officer, holder of more than 5% of our
common stock or any member of their immediate family had or will
have a direct or indirect material interest.
|
Compensation arrangements with our named executive officers are
described under the caption Management
Executive Compensation.
Equity Transactions
Since July 1, 2002, the following directors, executive
officers, entities affiliated with directors, and other holders
of more than 5% of our securities purchased from us securities
at the purchase prices or with the exercise prices and in the
amounts, and as of the dates, set forth below. Shares purchased
by all affiliated persons and entities have been aggregated. For
additional details, if any, relating to all shares beneficially
owned by each of these purchasers, please refer to the
information under the caption Principal
Stockholders. Each share of preferred stock will convert
automatically into one share of common stock upon the closing of
this offering.
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Series E
|
|
Name
|
|
Stock
|
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
Directors
|
|
|
|
|
|
|
|
|
|
J. Michael Egan
|
|
|
33,332
|
(1)
|
|
|
-
|
|
|
Executive Officers
|
|
|
|
|
|
|
|
|
|
Robert Y. Newell
|
|
|
35,666
|
(2)
|
|
|
-
|
|
|
Other 5% Stockholders
|
|
|
|
|
|
|
|
|
|
Guidant Investment Corporation
|
|
|
-
|
|
|
|
283,688
|
(3)
|
|
|
(1)
|
Acquired 16,666 shares pursuant to the exercise of options
on May 21, 2003, and 16,666 shares pursuant to the
exercise of options on April 30, 2004. The per share
exercise prices were $2.25 and $2.85, respectively.
|
|
(2)
|
Acquired 33,333 shares pursuant to the exercise of options
on January 15, 2004, and 2,333 shares pursuant to the
exercise of options on April 1, 2003. The per share
exercise prices were $2.25 and $0.75, respectively.
|
|
(3)
|
Acquired on August 19, 2003, at a per share price of
$14.10, in connection with the strategic agreement described
below.
|
Strategic Agreements
Pursuant to an agreement dated August 19, 2003, between us
and Guidant Investment Corporation, a California corporation,
referred to as Guidant Investment, Guidant Investment loaned to
us an aggregate of $10.3 million with simple interest
calculated at a rate of 8.75% per annum accruing during the
life of the loan that is payable at maturity. In connection with
this loan, we granted Guidant Investment a right to negotiate
exclusively for our acquisition and also agreed not to enter
into any change of control transaction during the period between
the signing of the strategic agreement and November 2004. The
exclusive negotiation right terminated in November 2004. As of
September 30, 2005, the principal and interest outstanding
under this loan was $11.9 million. The loan is secured by
our assets, including our intellectual property.
Under a distribution agreement dated May 2003 and amended in
January 2004 with Guidant Corporation, or Guidant, Guidant
distributed our C-Port and PAS-Port products in Europe. This
agreement was terminated by Guidant in September 2004. Revenue
from Guidant under this agreement was $401,000 and $631,000 in
fiscal 2004 and 2005, respectively.
83
In addition, on December 4, 2003, we entered into a
development and supply agreement with Guidant to develop and
manufacture an aortic cutter for Guidants Heartstring
product. Future production of the aortic cutter has been
outsourced by Guidant to a third-party manufacturer, and we will
receive a modest royalty for each unit sold in the future, but
will no longer manufacture the aortic cutter for Guidant.
Revenue from Guidant under this agreement was $223,000 and
$706,000 in fiscal 2004 and 2005, respectively.
Amended and Restated Investor Rights Agreement
We, Guidant Investment and some of our other preferred
stockholders and warrant holders, including stockholders
affiliated with members of our board of directors, have entered
into an amended and restated investor rights agreement pursuant
to which these stockholders will have registration rights with
respect to their shares of common stock following this offering.
For a further description of this agreement, see
Description of Capital Stock Registration
Rights. The amended and restated investor rights agreement
also provides that we must notify Guidant if we receive a
written indication that a third party desires to acquire us or
certain core aspects of our technology. Additionally, we must
provide Guidant with an opportunity to negotiate a similar
transaction, Guidants notification and negotiation rights
under this agreement will terminate upon the effective date of
the registration statement of which this prospectus forms a
part. Under the agreement, Guidant has the right to designate a
representative to attend all meetings of our board of directors
in a non-voting capacity.
Limitations on Liability and Indemnification
Our amended and restated certificate of incorporation provides
that the liability of our directors for monetary damages shall
be eliminated to the fullest extent permissible under the
General Corporation Law of the State of Delaware. This provision
does not eliminate a directors duty of care and, in
appropriate circumstances, equitable remedies such as an
injunction or other forms of non-monetary relief would remain
available. Each director will continue to be subject to
liability for any breach of the directors duty of loyalty
to us or our stockholders and for acts or omissions not in good
faith or involving intentional misconduct or knowing violations
of law, for unlawful payment of dividends or stock repurchases
or for any transaction in which the director derived an improper
personal benefit. This provision also does not affect a
directors responsibilities under any other laws, such as
the federal securities laws or other state or federal laws.
Our amended and restated bylaws provide that we will indemnify
our directors and executive officers, and may indemnify our
other officers, employees and agents, to the fullest extent
permitted by the General Corporation Law of the State of
Delaware. Under our amended and restated bylaws, we are also
empowered to enter into indemnification agreements with our
directors, officers and other agents and to purchase insurance
on behalf of any person whom we are required or permitted to
indemnify. We have procured and intend to maintain a
directors and officers liability insurance policy
that insures such persons against the costs of defense,
settlement or payment of a judgment under certain circumstances.
We have entered into an indemnification agreement with Stephen
Yencho. Under this agreement, we are required to indemnify
Dr. Yencho against all expenses, judgments, fines,
settlements and other amounts actually and reasonably incurred
in connection with any actual or threatened proceeding, if he
may be made a party to such proceeding because he is or was one
of our directors or officers. We are obligated to pay these
amounts only if Dr. Yencho acted in good faith and in a
manner that he reasonably believed to be in, or not opposed to,
our best interests. The indemnification agreement also sets
forth procedures that will apply in the event of a claim for
indemnification. We are also obligated to advance expenses,
subject to an undertaking to repay amounts advanced if
Dr. Yencho is ultimately determined not to be entitled to
indemnification.
There is no pending litigation or proceeding naming any of our
directors or officers as to which indemnification is being
sought, nor are we aware of any pending or threatened litigation
that may result in claims for indemnification by any director or
officer.
Loans to Executive Officers and Directors
Certain of our officers and directors had the loans set forth in
the two tables below outstanding with us, as of
September 30, 2005. These loans were paid in full in
October 2005. During the fiscal year ended June 30, 2005,
84
and for the three months ended September 30, 2005, we
recorded a total of $2.0 million and $583,000,
respectively, in stock-based compensation charges related to
certain loans we made during the period from 2000 to 2004 to
enable three directors, each of whom is or was also an officer,
to purchase shares of our common stock. This non-cash
compensation expense is calculated by multiplying the difference
between the option exercise price and the fair market value of
our common stock as determined by our board of directors for the
reporting period, by the number of vested shares purchased with
promissory notes. These loans were made pursuant to recourse
promissory notes that were secured by the underlying shares of
common stock purchased with the proceeds of the loans. Because
we had modified the loans or provided below-market interest
rates on the loans and extended the repayment period, for
accounting purposes the issuances of the shares that were
purchased with the proceeds of the loans were deemed to be
compensatory. Accordingly, we are required to record a non-cash
compensation charge equal to the difference between the purchase
price of the stock and the fair value of the stock securing the
notes in each reporting period during which the notes remain
outstanding.
Loans
Entered Into Prior to January 1, 2003
The loans described in the table below were evidenced by
recourse promissory notes and used to purchase the number of
shares of our common stock upon the exercise of stock options.
The shares purchased upon exercise secured the various loans.
Effective January 1, 2003, these loans were amended to
increase the principal amounts to the aggregate amounts of
principal and interest then due, and the increased principal
amounts are set forth in the table above. Also effective
January 1, 2003, the interest rates on these loans were
reduced to 1.58%, which was below the then-current applicable
federal rate, or AFR, for short-term loans with interest that
compounds annually. Because the interest rate was below the
then-current AFR, the named individuals may be deemed to have
compensation equal to the difference between the amount of
interest that actually accrued on these loans and the amount of
interest that would have accrued had the loans bore interest at
the then-current AFR, which amount is shown under the heading
Deemed Compensation.
In October 2005, each of the named individuals tendered to us
shares of our common stock, valued at $9.00 per share
(which was the fair value of one share of our common stock on
October 13, 2005, as determined in good faith by our board
of directors), in full payment of principal and interest due
under the applicable loans.
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|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
Amended
|
|
|
Number of
|
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|
|
|
Largest
|
|
|
|
|
Outstanding
|
|
|
Balance as of
|
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|
|
|
|
Principal
|
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|
Shares
|
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Amended
|
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Outstanding
|
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|
Deemed
|
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|
Balance as of
|
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|
the Date of
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Officer or
|
|
Date of
|
|
|
Amount as of
|
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|
Purchased
|
|
|
Interest
|
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|
Balance since
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|
Compensation
|
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|
September 30,
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|
this
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Director
|
|
Original Loan
|
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January 1, 2003
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|
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with Loan
|
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|
Rate
|
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July 1, 2004
|
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(1)
|
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|
2005
|
|
|
Prospectus
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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J. Michael Egan
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August 10, 2000
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$
|
154,365
|
|
|
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98,342
|
|
|
|
1.58
|
%
|
|
$
|
161,379
|
|
|
$
|
32,519
|
|
|
$
|
161,169
|
|
|
$
|
-
|
|
J. Michael Egan
|
|
|
February 28, 2002
|
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55,977
|
|
|
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39,337
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|
|
|
1.58
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%
|
|
|
58,521
|
|
|
|
13,008
|
|
|
|
58,445
|
|
|
|
-
|
|
Bernard Hausen
|
|
|
July 12, 2001
|
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|
75,626
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|
|
|
50,000
|
|
|
|
1.58
|
%
|
|
|
79,062
|
|
|
|
16,534
|
|
|
|
78,959
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|
|
|
-
|
|
Bernard Hausen
|
|
|
February 28, 2002
|
|
|
|
116,047
|
|
|
|
81,550
|
|
|
|
1.58
|
%
|
|
|
121,319
|
|
|
|
26.966
|
|
|
|
121,162
|
|
|
|
-
|
|
Stephen Yencho
|
|
|
February 28, 2002
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|
|
|
11,307
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|
|
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7,812
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|
|
|
1.58
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%
|
|
|
11,893
|
|
|
|
3,445
|
|
|
|
11,878
|
|
|
|
-
|
|
|
|
(1)
|
Amount of deemed compensation has been calculated using an
assumed interest rate of 11.58%, which is the rate we believe
would have been applicable to these loans had they been made by
lending institutions.
|
85
Loans
Entered Into Following January 1, 2003
The loans described in the table below were evidenced by
recourse promissory notes and used to purchase the number of
shares of our common stock, indicated in the table below, upon
the exercise of stock options. These loans bore interest at
rates that may be deemed below market rates. Because the
interest rate may be below market rates, the named individuals
may be deemed to have compensation equal to the difference
between the amount of interest actually accrued on these loans
and the amount that would have accrued had the loans bore
interest at a market rate, which amount is shown under the
heading Deemed Compensation. The shares purchased
upon exercise secured the various loans. In October 2005, each
of the named individuals tendered to us shares of our common
stock, valued at $9.00 per share (which was the fair value
of one share of our common stock on October 13, 2005, as
determined in good faith by our board of directors), in full
payment of principal and interest due under the applicable loans.
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
Largest
|
|
|
|
|
Outstanding
|
|
|
Balance as of
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
Outstanding
|
|
|
Deemed
|
|
|
Balance as of
|
|
|
the Date of
|
|
Officer or
|
|
Date of
|
|
|
Principal
|
|
|
Purchased
|
|
|
Interest
|
|
|
Balance since
|
|
|
Compensation
|
|
|
September 30,
|
|
|
this
|
|
Director
|
|
Original Loan
|
|
|
Amount
|
|
|
with Loan
|
|
|
Rate
|
|
|
July 1, 2004
|
|
|
(1)
|
|
|
2005
|
|
|
Prospectus
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J. Michael Egan
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May 21, 2003
|
|
|
$
|
37,450
|
|
|
|
16,666
|
|
|
|
1.58
|
%
|
|
$
|
38,916
|
|
|
$
|
9,194
|
|
|
$
|
38,865
|
|
|
$
|
-
|
|
J. Michael Egan
|
|
|
April 30, 2004
|
|
|
|
47,450
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|
|
|
16,666
|
|
|
|
1.58
|
%
|
|
|
48,583
|
|
|
|
11,648
|
|
|
|
48,519
|
|
|
|
-
|
|
Stephen Yencho(2)
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|
|
April 21, 2003
|
|
|
|
73,416
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|
|
|
50,000
|
|
|
|
1.58
|
%
|
|
|
76,386
|
|
|
|
16,534
|
|
|
|
76,286
|
|
|
|
-
|
|
|
|
(1)
|
Amount of deemed compensation has been calculated using an
assumed interest rate of 11.58%, which is the rate we believe
would have been applicable to these loans had they been made by
lending institutions.
|
|
(2)
|
Loan was not for purchase of shares, but was secured by the
shares.
|
Change of Control Vesting Provisions
Stock options held by our named executive officers and
Messrs. Knodel and Casal are subject to accelerated vesting
upon a change of control, as described under
Management
Change-in
-Control
Arrangements.
Severance Obligations
Dr. Hausen is entitled to severance pay as described under
Management Benefit Agreement.
Severance and Consulting Agreements with Officers
We entered severance agreements with Messrs. DuBois and
Pool and with James Zuegel, another of our officers whose
employment with us terminated in July 2005. Pursuant to these
agreements, Messrs. DuBois, Pool and Zuegel also executed
releases of claims against us, and we paid them each severance
equal to three months of their pre-termination base salary.
Under these agreements, each is entitled to receive additional
payments of up to three months base salary starting in October
2005 unless and until each secures employment, and as of the
date of this prospectus, Messrs. DuBois, Pool and Zuegel
have secured employment. Additionally, we entered into
consulting agreements with each of Messrs. Dubois, Pool and
Zuegel under which the post-termination option exercise period
for each option they hold was extended from three to
12 months. These consulting agreements each have a term of
one year.
Agreements with Allen & Company LLC
Pursuant to a letter of intent dated September 12, 2005,
between us and Allen & Company LLC, Allen &
Company LLC has agreed to act as underwriters, along with A.G.
Edwards & Sons, Inc., on a firm commitment basis in the
offering of our common stock to the public at the offering price
less the underwriting discounts and commissions set forth on the
cover page of this prospectus and described more fully under
Underwriting. One of our directors, John Simon, is
affiliated with Allen & Company LLC. As of
November 30, 2005, entities and persons affiliated with
Allen & Company Incorporated, including John Simon,
owned an aggregate of 969,291 shares of our common stock,
including 32,146 shares of common stock issuable upon the
exercise by Allen & Company Incorporated of a warrant.
Shares held of record by Allen & Company Incorporated
as set forth herein include an aggregate of 373,503 shares
held by Allen & Company Incorporated for the benefit of
86
certain other investors that were transferred into the names of
such beneficial stockholders after November 30, 2005.
Allen & Company Incorporated may be deemed to be an
affiliate of Allen & Company LLC.
Under the terms of the letter of intent, we made an initial
payment to the underwriters of $25,000 as an advance against
out-of
-pocket expenses
incurred in connection with this offering. Additionally if this
offering is terminated, we are obligated to reimburse the
underwriters for actual, documented
out-of
-pocket expenses,
including the fees and disbursements of counsel, up to an
additional $75,000.
Sutter Hill Loan to Director
Prior to November 30, 2005, one of our directors,
Mr. Egan, had an outstanding loan in the principal amount
of $154,764 with one of our principal stockholders, Sutter Hill
Ventures. This loan had an interest rate of 1.81%, compounded
annually, and was made pursuant to a full recourse promissory
note entered into on January 1, 2003. The proceeds of the
loan were used to purchase shares of our common stock upon the
exercise of stock options. The shares purchased upon exercise
secured the loan. In November 2005, Mr. Egan tendered to
entities affiliated with Sutter Hill Ventures 18,000 shares
of Common Stock, valued at $9.00 per share (which was the fair
market value of one share of our common stock on
October 13, 2005, as determined in good faith by our board
of directors) and $974 in full payment of principal and interest
due under this loan. Another of our directors, Mr. Younger,
is affiliated with Sutter Hill Ventures. As of November 30,
2005, individuals and entities affiliated with Sutter Hill
Ventures owned 987,997 shares of our common stock, on an
as-converted basis, including 2,333 shares of common stock
issuable upon exercise of stock options. See Principal
Stockholders.
Transactions with a Relative of an Executive Officer
Timothy Knodel is the son of Bryan Knodel, our Vice President of
Research and Development. Timothy Knodel is an employee of Bryan
D. Knodel, Inc., which has been an independent contractor for us
for over four years. We have paid Timothy Knodel $89,500 and
$86,750 in the fiscal years ended June 30, 2004 and 2005,
respectively, for his services as an independent contractor. We
have paid to Bryan D. Knodel, Inc., $234,000, $438,000 and
$443,000, inclusive of the amounts paid to Timothy Knodel, in
the fiscal years ended June 30, 2003, 2004 and 2005,
respectively. Timothy Knodel has been an employee of Bryan D.
Knodel, Inc. for nearly eight years as a design engineer and,
prior to Bryan Knodels joining us as an employee, Bryan
Knodel was also an employee of Bryan D. Knodel, Inc. Both Bryan
Knodel and Timothy Knodel have provided engineering consulting
services to us as part of our relationship with Bryan
D. Knodel, Inc. On July 1, 2005, Bryan Knodel joined
us as an employee. To continue receiving the engineering
consulting services from Timothy Knodel, we continue to retain
Bryan D. Knodel, Inc. as a consultant. In this ongoing
relationship, Timothy Knodel is the only employee of Bryan D.
Knodel, Inc. that provides engineering consulting services to us.
We engage, and may from time to time in the future engage, other
relatives of our executive officers and directors to perform
services for us. However, except as set forth herein, none of
these relationships has involved payments in excess of $60,000
in the fiscal years ended June 30, 2003, 2004, or 2005.
Loan from Affiliate of Director
In March 2000, we entered into, and in December 2002 amended, a
Master Loan and Security Agreement with an affiliate of Western
Technology Investment, or WTI, of which our director J. Michael
Egan is also a director. The amendment provided us with the
ability to borrow up to a maximum of $5.0 million in
working capital financing and $0.5 million in equipment
financing under individual notes payable based upon our
financing requirements. In conjunction with this agreement and
amendment, we issued various warrants exercisable to purchase an
aggregate of 124,369 shares of our preferred stock, valued
at $1.0 million to the lender. The value of the warrants
was recorded as a discount of the debt.
During fiscal year 2004, we paid in full the entire balance of
all notes payable and the associated accrued interest earlier
than the contractual maturity dates. As a result of paying the
obligations in full early, we recorded a charge in the amount of
$1.1 million consisting primarily of issuing to the debt
holder a total of 45,745 shares of Series E preferred
stock, valued at $14.10 per share, totaling $645,000 to pay for
interest due on the notes payable and $460,000 related to the
acceleration of the amortization of warrant expense originally
recorded as a discount of the debt.
87
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect
to beneficial ownership of common stock as of November 30,
2005 by each of our directors, each of our named executive
officers, each person who is known by us to own beneficially
more than 5% of our issued and outstanding shares of common
stock, assuming conversion of all preferred stock, and by our
directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules
of the SEC. The percentage of ownership indicated in the
following table is based on 5,949,337 shares of common
stock outstanding on November 30, 2005 and
9,449,337 shares of common stock outstanding immediately
following the completion of this offering. In computing the
number of shares beneficially owned by a person and the
percentage ownership of that person, shares of common stock
subject to options or warrants held by that person that are
currently exercisable or exercisable within 60 days of
November 30, 2005 are deemed outstanding, but are not
deemed outstanding for computing the percentage ownership of any
other person. To our knowledge, except as set forth in the
footnotes to this table and subject to applicable community
property laws, each person named in the table has sole voting
and investment power with respect to the shares set forth
opposite such persons name. Except as otherwise indicated,
the address of each of the persons in this table is
c/o Cardica, Inc., 900 Saginaw Drive, Redwood City,
California 94063.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
Percentage of
|
|
|
|
|
|
Shares
|
|
|
Shares
|
|
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
|
Number of Shares
|
|
|
Before the
|
|
|
After the
|
|
Beneficial Owner
|
|
Beneficially Owned
|
|
|
Offering
|
|
|
Offering
|
|
|
|
|
|
|
|
|
|
|
|
Guidant Investment Corporation
|
|
|
1,147,245
|
|
|
|
19.3
|
%
|
|
|
12.1%
|
|
Entities and Persons Affiliated with Sutter
Hill Ventures
|
|
|
987,997
|
(1)
|
|
|
16.6
|
|
|
|
10.6
|
|
Allen & Company Incorporated
|
|
|
969,291
|
(2)
|
|
|
16.2
|
|
|
|
10.2
|
|
Bernard A. Hausen, M.D., Ph.D.
|
|
|
640,367
|
(3)
|
|
|
10.5
|
|
|
|
6.7
|
|
Brian R. Dubois
|
|
|
60,451
|
(4)
|
|
|
1.0
|
|
|
|
*
|
|
Douglas T. Ellison
|
|
|
100,000
|
(5)
|
|
|
1.7
|
|
|
|
1.0
|
|
Robert Y. Newell
|
|
|
99,665
|
(6)
|
|
|
1.7
|
|
|
|
1.0
|
|
Larry D. Pool
|
|
|
36,635
|
(7)
|
|
|
*
|
|
|
|
*
|
|
J. Michael Egan
|
|
|
222,311
|
(8)
|
|
|
3.7
|
|
|
|
2.4
|
|
Kevin Larkin
|
|
|
31,891
|
(9)
|
|
|
*
|
|
|
|
*
|
|
Richard P. Powers
|
|
|
16,666
|
(10)
|
|
|
*
|
|
|
|
*
|
|
Robert C. Robbins, M.D.
|
|
|
78,332
|
(11)
|
|
|
1.3
|
|
|
|
*
|
|
John Simon, Ph.D.
|
|
|
969,291
|
(12)
|
|
|
16.2
|
|
|
|
10.2
|
|
Stephen A. Yencho, Ph.D.
|
|
|
554,138
|
|
|
|
9.3
|
|
|
|
5.9
|
|
William H. Younger, Jr.
|
|
|
785,758
|
(13)
|
|
|
13.2
|
|
|
|
8.3
|
|
All executive officers and directors as a group
|
|
|
3,611,641
|
(14)
|
|
|
55.5
|
|
|
|
36.1
|
|
|
|
|
|
*
|
Indicates less than 1%.
|
|
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(1)
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Consists of: (a) 671,180 shares held by Sutter Hill
Ventures, a California Limited Partnership (Sutter Hill
Ventures), (b) 6,538 shares held by Sutter Hill
Entrepreneurs Fund (AI) L.P. (SHAI),
(c) 16,555 shares held by Sutter Hill
Entrepreneurs Fund (QP) L.P. (SHQP),
(d) 202,239 shares held by individuals affiliated with
Sutter Hill Ventures and entities affiliated with such
individuals, (e) 5,000 shares of Common Stock owned by
William H. Younger, one of our directors,
(f) 2,333 shares subject to stock options exercisable
within 60 days after November 30, 2005 held by
Mr. Younger, (g) 37,116 shares held by William H.
Younger, Trustee of the Younger Living Trust;
(h) 24,874 shares held by William H.
Younger, Jr., Trustee, The Younger Living Trust U/ A/
D 1/20/95, (i) 19,782 shares held by SHV Profit Sharing
Plan, a retirement trust, for the benefit of Mr. Younger
and (j) 2,380 shares held by Mr. Youngers
children for which Mr. Younger disclaims beneficial
ownership. Mr. Younger has shared voting and dispositive
power with respect to the shares held by William H. Younger,
Trustee of the Younger Living Trust and by William H.
Younger, Jr., Trustee, The Younger Living Trust U/ A/
D 1/20/95. Mr. Younger, Sutter Hill Ventures, SHAI and SHQP
do not have any voting or dispositive power with respect to the
shares held by individuals
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88
|
|
|
affiliated with Sutter Hill Ventures and entities affiliated
with such individuals referenced under part (d) of this
note. Mr. Younger shares voting and dispositive power with
respect to the shares held by Sutter Hill Ventures, SHAI and
SHQP with the following natural persons: David L. Anderson, G.
Leonard Baker, Jr., Tench Coxe, Gregory P. Sands, James C.
Gaither, James N. White, Jeffrey W. Bird and David E. Sweet. As
a result of the shared voting and dispositive powers referenced
herein, each of Sutter Hill Ventures, SHAI, SHQP, and
Messrs. Younger and David L. Anderson, G. Leonard
Baker, Jr., Tench Coxe, Gregory P. Sands, James C. Gaither,
James N. White, Jeffrey W. Bird and David E. Sweet may be deemed
to beneficially own the shares held by the Sutter Hill Ventures,
SHAI, SHQP. In November 2005, Mr. Egan transferred to entities
affiliated with Sutter Hill Ventures an aggregate of
18,000 shares, as described under Certain
Relationships and Related Party Transactions. The table
reflects the effects of this transfer.
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(2)
|
Shares held of record by Allen & Company Incorporated
as set forth herein include an aggregate of 373,503 shares
held by Allen & Company Incorporated for the benefit of
certain other investors that were transferred into the names of
such beneficial stockholders after November 30, 2005. Also
includes 32,146 shares issuable upon the exercise of a
warrant that is exercisable by Allen & Company
Incorporated within 60 days after November 30, 2005.
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(3)
|
Includes 3,398 shares subject to repurchase as of
November 30, 2005 and 173,332 shares subject to stock
options that are exercisable within 60 days after
November 30, 2005.
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(4)
|
Includes 50,087 stock options that are exercisable within
60 days after November 30, 2005. As of July 1,
2005, Mr. DuBois is no longer our employee.
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(5)
|
Consists of shares subject to stock options that are exercisable
within 60 days after November 30, 2005.
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|
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(6)
|
Includes 52,666 shares subject to stock options that are
exercisable within 60 days after November 30, 2005 and
2,333 shares that are held by Newell Family Trust, U/A/D
10/12/99, of which Mr. Newell is Co-Trustee.
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(7)
|
Consists of 36,635 stock options that are exercisable within
60 days after November 30, 2005. As of July 1,
2005, Mr. Pool is no longer our employee.
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(8)
|
Includes 15,277 shares subject to repurchase as of
November 30, 2005. In November 2005, Mr. Egan transferred
to entities affiliated with Sutter Hill Ventures an aggregate of
18,000 shares, as described under Certain
Relationships and Related Party Transactions. The table
reflects the effects of this transfer.
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(9)
|
Includes 13,333 shares subject to options granted to Mr.
Larkin in December 2005 that are exercisable within 60 days
after November 30, 2005.
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(10)
|
Includes 13,333 shares subject to stock options that are
exercisable within 60 days after November 30, 2005.
|
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(11)
|
Includes 73,332 shares subject to stock options that are
exercisable within 60 days after November 30, 2005.
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(12)
|
Shares held of record by Allen & Company Incorporated
as set forth herein include an aggregate of 373,503 shares
held by Allen & Company Incorporated for the benefit of
certain other investors that were transferred into the names of
such beneficial stockholders after November 30, 2005.
Consists of 937,145 shares held by Allen & Company
Incorporated, with which Mr. Simon is affiliated, and the
warrants referenced in footnote (2) above.
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(13)
|
Includes all shares referenced under footnote (1) other
than the 202,239 shares held by individuals affiliated with
Sutter Hill Ventures and entities affiliated with such
individuals. In November 2005, Mr. Egan transferred to entities
affiliated with Sutter Hill Ventures an aggregate of
18,000 shares, as described under Certain
Relationships and Related Party Transactions. The table
reflects the effects of this transfer.
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|
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(14)
|
Includes 556,130 shares issuable upon exercise of stock
options and warrants beneficially owned by all executive
officers and directors that are exercisable within 60 days
after November 30, 2005, including 95,655 shares
issuable upon exercise of stock options held by Bryan Knodel, an
executive officer of ours who is not a named executive officer.
Also includes 17,567 shares beneficially owned by
Mr. Knodel. Does not include shares beneficially owned by
named executive officers who are not currently employed by us
(See notes 4 and 7). See notes (3), (5), (6), and
(8) through (13) above.
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89
DESCRIPTION OF CAPITAL STOCK
The following is a summary of the material terms of our
capital stock. For more detail, please see our amended and
restated certificate of incorporation and our amended and
restated bylaws, which are exhibits to the registration
statement of which this prospectus forms a part.
Upon the completion of this offering, we will be authorized to
issue up to 50,000,000 shares of common stock, par value
$0.001, and up to 5,000,000 shares of undesignated
preferred stock, par value $0.001.
General
Outstanding Shares
As of November 30, 2005, we had 167 stockholders, and,
after giving effect to the conversion of all outstanding
preferred stock into common stock, 5,949,337 shares of
common stock issued and outstanding. In addition, as of
November, 30, 2005, options to
purchase 897,115 shares of common stock were
outstanding, and warrants to purchase 156,515 shares
of common stock were also outstanding. Based on our outstanding
capital stock as of November 30, 2005, upon completion of
this offering, there will be 9,449,337 shares of common
stock outstanding, assuming no exercise of the
underwriters over-allotment option or exercise of
outstanding warrants or stock options.
Voting Rights
Each holder of our common stock is entitled to one vote for each
share on all matters submitted to a vote of the stockholders,
including the election of directors. Under our amended and
restated certificate of incorporation and amended and restated
bylaws, our stockholders will not have cumulative voting rights.
As a result, the holders of a majority of the shares of common
stock entitled to vote in any election of directors will be able
to elect all of the directors standing for election.
Dividends
Subject to limitations under Delaware law and preferences that
may be applicable to any then outstanding preferred stock that
we may designate and issue in the future, holders of common
stock are entitled to receive ratably those dividends, if any,
as may be declared from time to time by the board of directors
out of legally available funds.
Liquidation
In the event we liquidate, dissolve or wind up, holders of
common stock will be entitled to share ratably in the net assets
legally available for distribution to stockholders after the
payment of all our debts and other liabilities and the
satisfaction of any liquidation preference granted to the
holders of any then outstanding shares of preferred stock that
we may designate and issue in the future.
Rights and Preferences
Holders of common stock have no preemptive, conversion or
subscription rights. There are no redemption or sinking fund
provisions applicable to our common stock. The rights,
preferences and privileges of holders of common stock are
subject to, and may be adversely affected by, the rights of the
holders of shares of any series of preferred stock that we may
designate and issue in the future.
Fully Paid and Nonassessable
All outstanding shares of our common stock are, and all shares
of common stock to be issued pursuant to this offering will be,
fully paid and nonassessable.
90
Preferred Stock
Following the offering, our board of directors will have the
authority, without further action by our stockholders, to issue
up to 5,000,000 shares of preferred stock in one or more
series, to establish from time to time the number of shares to
be included in each such series, to fix the rights, preferences
and privileges of the shares of each wholly unissued series and
any qualifications, limitations and restrictions on those
shares. Our board of directors may also increase or decrease the
number of shares of any series, but not below the number of
shares of that series then outstanding, without any further vote
or action by our stockholders.
Our board of directors may authorize the issuance of preferred
stock with voting or conversion rights that adversely affect the
voting power or other rights of the holders of our common stock.
The issuance of preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate
purposes, could, among other things, have the effect of
delaying, deterring or preventing a change in control and may
adversely affect the market price of the common stock and the
voting and other rights of the holders of common stock. After
the closing of this offering, no shares of our preferred stock
will be outstanding.
Warrants
In connection with equipment leasing and other credit facility
arrangements, we have issued to entities affiliated with Venture
Lending and Leasing, Inc. warrants to purchase (i) up to an
aggregate of 12,270 shares of common stock, with an
exercise price of $4.89 per share, (ii) up to an
aggregate of 52,082 shares of common stock, with an
exercise price of $8.40 per share, and (iii) up to an
aggregate of 60,017 shares of common stock, with an
exercise price of $11.58 per share. These warrants will
expire on March 17, 2010, July 5, 2008 and
October 31, 2010, respectively.
In connection with a financing, we have issued to
Allen & Company Incorporated a warrant to purchase up
to an aggregate of 32,146 shares of common stock, with an
exercise price of $11.58 per share. This warrant will
expire on June 13, 2009.
These warrants contain customary provisions providing for
adjustments of the exercise price and the number of shares of
stock underlying the warrant upon the occurrence of any
recapitalization, reclassification, stock dividend, stock split,
stock combination or similar transactions. Each of these
warrants has a net exercise provision under which its holder
may, in lieu of payment of the exercise price in cash, surrender
the warrant and receive a net amount of shares based on the fair
market value of our common stock at the time of exercise of the
warrant after deduction of the aggregate exercise price.
Other than one warrant issued to Venture Lending and Leasing,
Inc. to purchase 60,017 shares of common stock, the
warrants described above provide that they will automatically be
net exercised upon our sale or acquisition in a
transaction in which the consideration received for our common
stock is valued at a per-share price in excess of the respective
warrant exercise prices and is paid in cash or in securities of
a publicly traded company, subject to additional requirements
described in the warrants.
Delaware Anti-Takeover Law and Certain Provisions of our
Certificate of Incorporation and Bylaws
Delaware Law
We are governed by Section 203 of the Delaware General
Corporation Law. In general, Section 203 prohibits a public
Delaware corporation from engaging in a business
combination with an interested stockholder for
a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A
business combination includes mergers, asset sales
or other transactions resulting in a financial benefit to the
stockholder. An interested stockholder is a person
who, together with affiliates and associates, owns, or within
three years did own, 15% or more of the corporations
outstanding voting stock. These provisions may have the effect
of delaying, deterring or preventing a change in control.
91
Certificate of Incorporation and Bylaws
Our amended and restated certificate of incorporation and
bylaws, which will be effective following the completion of this
offering, include a number of provisions that may have the
effect of deterring hostile takeovers or delaying or preventing
changes in control or management, including transactions in
which stockholders might receive a premium for their shares or
transactions that stockholders might otherwise deem to be in
their best interests. As a result, these provisions could
adversely affect the price of our common stock. These provisions
include the following:
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Our board of directors can issue up to 5,000,000 shares of
preferred stock, with any rights or preferences, including the
right to approve or not approve an acquisition or other change
in control, without stockholder approval;
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Our amended and restated certificate of incorporation provides
that all stockholder actions following the completion of this
offering must be effected at a duly called meeting of
stockholders and not by written consent, which may make it more
difficult for stockholders to take action quickly;
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Our bylaws provide that stockholders seeking to present
proposals before a meeting of stockholders or to nominate
candidates for election as directors at a meeting of
stockholders must provide timely notice in writing satisfying
specified content requirements;
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|
Our amended and restated certificate of incorporation provides
that all vacancies, including any newly created directorships,
may, except as otherwise required by law, be filled by the
affirmative vote of a majority of our directors then in office,
even if less than a quorum. In addition, our amended and
restated certificate of incorporation provides that our board of
directors may fix the number of directors by resolution;
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Our amended and restated certificate of incorporation does not
provide for cumulative voting for our directors, the absence of
which may make it more difficult for stockholders owning less
than a majority of our stock to elect any directors to our
board; and
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The provisions within our amended and restated certificate of
incorporation relating to the corporate actions described above
may be amended only with the approval of
66
2
/
3
%
of our outstanding voting stock, and our amended and restated
bylaws may be amended either by the board of directors or by the
approval of
66
2
/
3
%
of our outstanding voting stock.
|
Registration Rights
Demand Registration Rights
Beginning 180 days following the closing of this offering,
the holders of an aggregate of 4,254,216 shares of our
common stock and the holders of warrants to purchase an
aggregate of 156,515 shares of our common stock may require
us, upon written request from holders of a majority of these
shares, and on not more than three occasions, to file a
registration statement under the Securities Act of 1933 with
respect to their shares.
Piggyback Registration Rights
Following this offering, if we propose to register any of our
securities under the Securities Act of 1933, either for our own
account or for the account of other stockholders, these holders
of registration rights will be entitled to notice of the
registration and will be entitled to include their shares of
common stock in the registration statement. These registration
rights are subject to specified conditions and limitations,
including the right of the underwriters to limit the number of
shares included in any such registration under certain
circumstances. The holders of these rights have waived their
rights to have their shares included in this offering.
Registration on
Form S-3
Beginning 12 months following the effective date of this
offering, the holders of these registration rights will be
entitled, upon their written request, to have such shares
registered by us on a
Form S-3
registration statement
92
at our expense, provided that the requested registration has an
anticipated aggregate offering size to the public of at least
$1,000,000 and that we have not already effected three
registrations on Form
S-3.
Expenses of Registration
We will pay all expenses relating to any demand, piggyback or
Form
S-3
registrations, other than underwriting fees, discounts,
allowances and commissions, subject to specified conditions and
limitations.
Expiration of Registration Rights
The registration rights granted to these holders under the
Amended and Restated Investor Rights Agreement will terminate on
the third anniversary of this offering. Additionally, as to any
holder of registration rights, the holders rights under
this agreement expire at such time, following this offering, as
the holder, together with its affiliates, holds less than 1% of
our outstanding stock and all shares of our stock held by the
holder, together with its affiliates, may be sold pursuant to
Rule 144 during any
90-day
period.
Nasdaq National Market Listing
Our common stock has been approved for quotation on The Nasdaq
National Market under the symbol CRDC.
Transfer Agent and Registrar
Upon the closing of this offering, the transfer agent and
registrar for our common stock will be Computershare Trust
Company, N.A.
93
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our
common stock. Market sales of shares or the availability of
shares for sale may decrease the market price of our common
stock prevailing from time to time. As described below, only a
portion of our outstanding shares of common stock will be
available for sale shortly after this offering due to
contractual and legal restrictions on resale. Nevertheless,
sales of substantial amounts of common stock in the public
market after these restrictions lapse, or the perception that
such sales could occur, could adversely affect the market price
of the common stock and could impair our future ability to raise
capital through the sale of our equity securities.
We will have 9,449,337 shares of common stock outstanding
after the completion of this offering (9,974,337 shares if
the underwriters over-allotment is exercised in full). Of
those shares, the 3,500,000 shares of common stock sold in
the offering (4,025,000 shares if the underwriters
over-allotment option is exercised in full) will be freely
transferable without restriction, unless purchased by persons
deemed to be our affiliates as that term is defined
in Rule 144 under the Securities Act. Any shares purchased
by an affiliate may not be resold except pursuant to an
effective registration statement or an applicable exemption from
registration, including an exemption under Rule 144
promulgated under the Securities Act. The remaining
5,949,337 shares of common stock to be outstanding
immediately following the completion of this offering are
restricted, which means they were originally sold in
offerings that were not registered under the Securities Act.
These restricted shares may only be sold through registration
under the Securities Act or under an available exemption from
registration, such as provided through Rule 144.
All of our officers, directors and holders of more than 1% of
our securities have entered into
lock-up
agreements
pursuant to which they have agreed, subject to limited
exceptions, not to offer, sell, or otherwise transfer or dispose
of, directly or indirectly, any shares of common stock or
securities convertible into or exchangeable or exercisable for
shares of common stock for a period of 180 days from the
date of this prospectus without the prior written consent of
A.G. Edwards & Sons, Inc. After the
180-day
lock-up
period, these
shares may be sold, subject to applicable securities laws. A.G.
Edwards & Sons, Inc., in its sole discretion and at any
time without notice, may release any or all of the securities
subject to the
lock-up
agreements. When determining whether to release shares from the
lock-up
agreements,
A.G. Edwards & Sons, Inc. will consider, among other
factors, the stockholders reasons for requesting the
release, the number of shares for which the release is being
requested and market conditions at the time. There are no
agreements between the representatives and any of our affiliates
or other stockholders or option holders releasing them from
these
lock-up
agreements prior to the expiration of the
180-day
period. The
lock-up
period may be
extended under certain circumstances as more completely
described under Underwriting.
After the offering, the holders of approximately
4,410,731 shares of our common stock (including
156,515 shares issuable upon exercise of outstanding
warrants) will be entitled to registration rights. For more
information on these registration rights, see the section
captioned Description of Capital Stock
Registration Rights.
In general, under Rule 144, as currently in effect,
beginning 90 days after the effective date of this
offering, a person (or persons whose shares are aggregated),
including an affiliate, who has beneficially owned shares of our
common stock for one year or more, may sell in the open market
within any three-month period a number of shares that does not
exceed the greater of:
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one percent of the then outstanding shares of our common stock
(approximately 94,493 shares immediately after the
offering); or
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the average weekly trading volume in the common stock on The
Nasdaq National Market during the four calendar weeks preceding
the sale.
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Sales under Rule 144 are also subject to certain
limitations on the manner of sale, notice requirements and the
availability of our current public information. A person (or
persons whose shares are aggregated) who is deemed not to have
been our affiliate at any time during the 90 days preceding
a sale by him or her and who has beneficially owned his or her
shares for at least two years, may sell the shares in the public
market under
94
Rule 144(k) without regard to the volume limitations,
manner of sale provisions, notice requirements or the
availability of current public information we refer to above.
Any of our employees, officers, directors or consultants who
purchased his or her shares before the completion of this
offering or who hold options as of that date pursuant to a
written compensatory plan or contract are entitled to rely on
the resale provisions of Rule 701, which permits
non-affiliates to sell their Rule 701 shares without
having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144
commencing 90 days after completion of an initial public
offering. Neither Rule 144 nor Rule 701 supersedes the
contractual obligations of our security holders set forth in the
lock-up
agreements
described above.
Subject to the
lock-up
agreements, the shares of our common stock that will become
eligible for sale without registration pursuant to Rule 144
or Rule 701 under the Securities Act are as follows:
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2,006,653 shares will be immediately eligible for sale in
the public market without restriction pursuant to
Rule 144(k);
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4,065,504 shares will be eligible for sale in the public
market under Rule 144 or Rule 701 beginning
90 days after the date of this prospectus, subject to
volume, manner of sale, and other limitations under those
rules; and
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the remaining 33,695 shares will become eligible for sale
in the public market from time to time after the effective date
of the registration statement of which this prospectus is a part
upon the expiration of their respective holding periods.
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Upon completion of this offering, we intend to file a
registration statement on
Form
S-8
under the
Securities Act to register shares of common stock reserved for
issuance under the 1997 Plan and the EIP, thus permitting the
resale of these shares by non-affiliates in the public market
without restriction under the Securities Act. This registration
statement will become effective immediately upon filing.
95
UNDERWRITING
Subject to the terms and conditions of the underwriting
agreement among us and the underwriters, each underwriter has
severally agreed to purchase from us the following respective
number of shares of common stock at the offering price less the
underwriting discounts and commissions set forth on the cover
page of this prospectus.
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Underwriter
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Shares
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A.G. Edwards & Sons, Inc.
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Allen & Company LLC
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Montgomery & Co., LLC
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Total
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3,500,000
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The underwriting agreement provides that the obligations of the
underwriters are subject to certain conditions precedent and
that the underwriters will purchase all such shares of the
common stock if any of these shares are purchased. The
underwriters are obligated to take and pay for all of the shares
of common stock offered hereby, other than those covered by the
over-allotment option described below, if any are taken.
The underwriters have advised us that they propose to offer the
shares of common stock to the public at the offering price set
forth on the cover page of this prospectus and to certain
dealers at such price less a concession not in excess of
$ per
share. The underwriters may allow, and such dealers may
re-allow, a concession not in excess of
$ per
share to certain other dealers. If all the shares are not sold
at the initial offering price, the underwriters may change the
offering price and other selling terms.
Pursuant to the underwriting agreement, we have granted to the
underwriters an option, exercisable for 30 days after the
date of this prospectus, to purchase up to
525,000 additional shares of common stock from us at the
offering price, less the underwriting discounts and commissions
set forth on the cover page of this prospectus, solely to cover
over-allotments.
To the extent that the underwriters exercise such option, each
underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of
such additional shares as the number set forth next to the
underwriters name in the preceding table bears to the
total number of shares in the table, and we will be obligated,
pursuant to the option, to sell such shares to the underwriters.
We, our directors, senior executive officers and certain
stockholders have agreed that during the 180 days after the
date of this prospectus, subject to limited exceptions, they
will not, without the prior written consent of A.G.
Edwards & Sons, Inc., directly or indirectly, issue,
sell, offer, agree to sell, grant any option or contract for the
sale of, pledge, make any short sale of, maintain any short
position with respect to, establish or maintain a put
equivalent option (within the meaning of
Rule
16a-1(h)
under the Exchange Act) with respect to, enter into any swap,
derivative transaction or other arrangement (whether any such
transaction is to be settled by delivery of common stock, other
securities, cash or other consideration) that transfers to
another, in whole or in part, any of the economic consequences
of ownership, or otherwise dispose of, any shares of our common
stock (or any securities convertible into, exercisable for or
exchangeable for our common stock or any interest therein or any
capital stock of our subsidiary). These
lock-up
agreements will
cover 5,718,275 shares of our outstanding common stock in
the aggregate. A.G. Edwards may, in its sole discretion, allow
any of these parties to dispose of common stock or other
securities prior to the expiration of the
180-day
period. There
are, however, no agreements between A.G. Edwards and the parties
that would allow them to do so as of the date of this prospectus.
The
180-day
restricted
period described above is subject to extension such that, in the
event that either (1) during the last 17 days of the
180-day
restricted
period, we issue an earnings release or material news or a
material event relating to us occurs or (2) prior to the
expiration of the
180-day
restricted
period, we announce that we will release earnings results during
the
16-day
period
beginning on the last day of the
180-day
period, the
lock-up restrictions described above will, subject
to limited exceptions, continue to apply until the
96
expiration of the
18-day
period beginning
on the earnings release or the occurrence of the material news
or material event.
Prior to the offering, there has been no public market for the
common stock. The initial public offering price for the shares
of common stock included in this offering has been determined by
negotiation among us and the representatives. Among the factors
considered in determining the price were:
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The history of and prospects for our business and the industry
in which we operate;
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An assessment of our management;
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Our past and present revenues and earnings;
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The prospects for growth of our revenues and earnings; and
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Currently prevailing conditions in the securities markets,
including current market valuations of publicly traded companies
which are comparable to us.
|
The representatives have advised us that they do not intend to
confirm sales to any account over which they exercise
discretionary authority.
The following table summarizes the discounts and commissions to
be paid to the underwriters by us in connection with this
offering. These amounts are shown assuming both no exercise and
full exercise of the underwriters option to purchase
additional shares of common stock.
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|
|
|
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|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
No Exercise
|
|
|
Full Exercise
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting discounts paid by us
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
We expect to incur expenses of approximately $1.8 million
in connection with this offering.
We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of
1933.
Until the distribution of the common stock is completed, rules
of the Securities and Exchange Commission may limit the ability
of the underwriters and certain selling group members to bid for
and purchase the common stock. As an exception to these rules,
the underwriters are permitted to engage in certain transactions
that stabilize, maintain or otherwise affect the price of the
common stock.
In connection with this offering, the underwriters may engage in
stabilizing transactions, over-allotment transactions, syndicate
covering transactions and penalty bids in accordance with
Regulation M under the Securities Act of 1934.
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Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a
specified maximum.
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Over-allotment transactions involve sales by the underwriters of
the shares of common stock in excess of the number of shares the
underwriters are obligated to purchase, which creates a
syndicate short position. The short position may be either a
covered short position or a naked short position. In a covered
short position, the number of shares over-allotted by the
underwriters is not greater than the number of shares they may
purchase in the over-allotment option. In a naked short
position, the number of shares involved is greater than the
number of shares in the over-allotment. The underwriters may
close out any short position by either exercising their
over-allotment option and/or purchasing shares of common stock
in the open market.
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Syndicate covering transactions involve purchases of the shares
of common stock in the open market after the distribution has
been completed in order to cover syndicate short positions. In
determining the source of the shares of common stock to close
out the short position, the underwriters will consider, among
other things, the price of shares of common stock available for
purchase in the open market as compared
|
97
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|
to the price at which they may purchase shares of common stock
through the over-allotment option. If the underwriters sell more
shares of common stock than could be covered by the
overallotment option, a naked short position, the position can
only be closed out by buying shares of common stock in the open
market. A naked short position is more likely to be created if
the underwriters are concerned that there could be downward
pressure on the price of the shares of common stock in the open
market after pricing that could adversely affect investors who
purchase in the offering.
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|
Penalty bids permit representatives to reclaim a selling
concession from a syndicate member when the shares of common
stock originally sold by the syndicate member are purchased in a
stabilizing or syndicate covering transaction to cover syndicate
short positions.
|
Similar to other purchase transactions, the underwriters
purchases to cover the syndicate short sales may have the effect
of raising or maintaining the market price of the shares of
common stock or preventing or retarding a decline in the market
price of the shares of common stock. As a result, the price of
the shares of common stock may be higher than the price that
might otherwise exist in the open market.
The underwriters will deliver a prospectus to all purchasers of
shares of common stock in the short sales. The purchases of
shares of common stock in short sales are entitled to the same
remedies under the federal securities laws as any other
purchaser of shares of common stock covered by this prospectus.
Passive market making may stabilize or maintain the market price
of our common stock at a level above that which might otherwise
prevail and, if commenced, may be discontinued at any time.
The underwriters are not obligated to engage in any of the
transactions described above. If they do engage in any of these
transactions, they may discontinue them at any time.
As of November 30, 2005, Allen & Company
Incorporated owned 969,291 shares of our common stock,
including 32,146 shares of common stock issuable upon the
exercise by Allen & Company Incorporated of a warrant.
Shares held of record by Allen & Company Incorporated
as set forth herein include an aggregate of 373,503 shares
held by Allen & Company Incorporated for the benefit of
certain other investors that were transferred into the names of
such beneficial stockholders after November 30, 2005.
Additionally, one of our directors, John Simon, is affiliated
with Allen & Company LLC. See Certain
Relationships and Related-Party Transactions. Accordingly,
prior to this offering, Allen & Company Incorporated
held more than 10% of our stock. Therefore, consistent with the
National Association of Securities Dealers Rules regarding
Conflict of Interest, Allen & Company has a conflict in
acting as an underwriter in this offering. For this reason, A.G.
Edwards & Sons, Inc. has agreed to act as a
qualified independent underwriter as such role is
defined by Rule 2720 of the National Association of
Securities Dealers Conduct Rules. In offerings in which an
underwriter has (or may have) a conflict, these provisions
require, among other things, that the initial public offering
price be no higher than that recommended by a qualified
independent underwriter who must participate in the
preparation of the registration statement and the prospectus and
who must exercise the usual standards of due
diligence with respect thereto. The initial offering price
for any shares of common stock to be sold in the offering will
be no higher than the price recommended by A.G.
Edwards & Sons, Inc. in its capacity as qualified
independent underwriter. A.G. Edwards & Sons, Inc. is
not receiving compensation for acting as qualified independent
underwriter.
Our common stock has been approved for quotation on The Nasdaq
National Market under the symbol CRDC.
From time to time in the ordinary course of their respective
businesses, some of the underwriters and their affiliates may in
the future engage in commercial banking or investment banking
transactions with our affiliates and us.
No Public Offering Outside the United States
No action has been or will be taken in any jurisdiction (except
in the United States) that would permit a public offering of our
shares or the possession, circulation or distribution of this
prospectus or any other material relating to us or our shares in
any jurisdiction where action for that purpose is required.
Accordingly, our shares
98
may not be offered or sold, directly or indirectly, and neither
this prospectus nor any other offering material or
advertisements in connection with our shares may be distributed
or published, in or from any country or jurisdiction except in
compliance with any applicable rules and regulations of any such
country or jurisdiction.
Purchasers of the shares offered by this prospectus may be
required to pay stamp taxes and other charges in accordance with
the laws and practices of the country of purchase in addition to
the offering price on the cover page of this prospectus.
LEGAL MATTERS
The validity of the shares of common stock offered hereby has
been passed upon for us by Cooley Godward LLP. GC&H
Investments, LLC, an investment fund affiliated with Cooley
Godward LLP, owns an aggregate of 20,641 shares of our
common stock, and Cooley Godward LLP owns an aggregate of
4,333 shares of our common stock. Heller Ehrman LLP is
counsel for the underwriters in connection with this offering.
EXPERTS
Ernst & Young LLP, independent registered public
accounting firm, has audited our financial statements at
June 30, 2004 and 2005, and for each of the three years in
the period ended June 30, 2005, as set forth in their
report included in this prospectus. We have included our
financial statements in this prospectus and elsewhere in the
registration statement in reliance on Ernst & Young
LLPs report, given on their authority as expert in
auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on
Form
S-1
under the
Securities Act with the SEC with respect to the shares of stock
we are offering by this prospectus. This prospectus, which is a
part of the registration statement, does not include all of the
information contained in the registration statement or the
exhibits filed therewith. For further information about us and
the common stock offered by this prospectus, please see the
registration statement and its exhibits. Statements contained in
this prospectus as to the contents of any contract or any other
document that is filed as an exhibit to the registration
statement are not necessarily complete. If a contract or
document has been filed as an exhibit to the registration
statement, we refer you to the copy of the contract or document
that has been filed.
You can read our SEC filings, including the registration
statement, over the Internet at the SECs web site at
www.sec.gov
. You may also read and copy any document we
file with the SEC at its public reference facilities at
100 F Street, NE, Washington, DC 20549. You may also
obtain copies of the documents at prescribed rates by writing to
the Public Reference Section of the SEC at 100 F Street, NE,
Washington, DC 20549. Please call the SEC at
1-800-SEC-0330
for
further information on the operation of the public reference
facilities.
Upon completion of this offering, we will become subject to the
information and periodic reporting requirements of the
Securities Exchange Act and, in accordance therewith, will file
periodic reports, proxy statements and other information with
the SEC. Such periodic reports, proxy statements and other
information will be available for inspection and copying at the
public reference room and on the Website of the SEC referred to
above. We maintain a website on the worldwide web at
cardica.com
. The reference to our Web address does not
constitute incorporation by reference of the information
contained at such site.
99
Cardica, Inc.
Index to Financial Statements
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Page
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F-2
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F-3
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F-6
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F-7
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F-9
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F-11
|
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F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Cardica, Inc.
We have audited the accompanying balance sheets of Cardica, Inc.
as of June 30, 2004 and 2005, and the related statements of
operations, convertible preferred stock and stockholders
deficit, and cash flows for each of the three years in the
period ended June 30, 2005. These financial statements are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. We were not engaged to perform an audit
of the Companys internal control over financial reporting.
Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Cardica, Inc. at June 30, 2004 and 2005, and the results
of its operations and its cash flows for each of the three years
in the period ended June 30, 2005, in conformity with
U.S. generally accepted accounting principles.
Palo Alto, California
September 8, 2005
except for Note 13, as to which the date is
January 9, 2006
F-2
Cardica, Inc.
Balance Sheets
(in thousands, except share and per share data)
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|
Pro Forma
|
|
|
|
|
|
|
|
Stockholders
|
|
|
|
June 30,
|
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|
|
|
Equity at
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,225
|
|
|
$
|
1,951
|
|
|
$
|
1,103
|
|
|
|
|
|
|
Short-term investments
|
|
|
14,999
|
|
|
|
7,000
|
|
|
|
6,000
|
|
|
|
|
|
|
Accounts receivable
|
|
|
58
|
|
|
|
104
|
|
|
|
166
|
|
|
|
|
|
|
Accounts receivable from related party
|
|
|
131
|
|
|
|
5
|
|
|
|
3
|
|
|
|
|
|
|
Inventories
|
|
|
470
|
|
|
|
526
|
|
|
|
330
|
|
|
|
|
|
|
Stockholder note receivable
|
|
|
-
|
|
|
|
73
|
|
|
|
73
|
|
|
|
|
|
|
Interest receivable from stockholders
|
|
|
-
|
|
|
|
20
|
|
|
|
23
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
138
|
|
|
|
345
|
|
|
|
421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
18,021
|
|
|
|
10,024
|
|
|
|
8,119
|
|
|
|
|
|
Property and equipment, net
|
|
|
1,615
|
|
|
|
1,611
|
|
|
|
1,422
|
|
|
|
|
|
Stockholder note receivable
|
|
|
73
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Interest receivable from stockholders
|
|
|
12
|
|
|
|
1
|
|
|
|
-
|
|
|
|
|
|
Restricted cash
|
|
|
510
|
|
|
|
510
|
|
|
|
510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
20,231
|
|
|
$
|
12,146
|
|
|
$
|
10,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities, Convertible Preferred Stock and
Stockholders Deficit
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
196
|
|
|
$
|
244
|
|
|
$
|
376
|
|
|
|
|
|
|
Accrued compensation
|
|
|
139
|
|
|
|
133
|
|
|
|
136
|
|
|
|
|
|
|
Other accrued liabilities
|
|
|
223
|
|
|
|
431
|
|
|
|
309
|
|
|
|
|
|
|
Accrued clinical trial fees
|
|
|
684
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Deferred other income-related party
|
|
|
250
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Current portion of leasehold improvement obligation
|
|
|
127
|
|
|
|
122
|
|
|
|
122
|
|
|
|
|
|
|
Deferred rent
|
|
|
-
|
|
|
|
62
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,619
|
|
|
|
992
|
|
|
|
1,023
|
|
|
|
|
|
Deferred rent
|
|
|
174
|
|
|
|
214
|
|
|
|
191
|
|
|
|
|
|
Notes payable to related party
|
|
|
10,250
|
|
|
|
10,250
|
|
|
|
10,250
|
|
|
|
|
|
Interest payable to related party
|
|
|
539
|
|
|
|
1,436
|
|
|
|
1,661
|
|
|
|
|
|
Subordinated convertible note
|
|
|
3,000
|
|
|
|
3,000
|
|
|
|
3,000
|
|
|
|
|
|
Leasehold improvement obligation
|
|
|
369
|
|
|
|
255
|
|
|
|
225
|
|
|
|
|
|
Other non-current liabilities
|
|
|
27
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
F-3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
Stockholders
|
|
|
June 30,
|
|
|
|
|
Equity at
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock, $0.001 par
value: 227,658 shares authorized, issued and outstanding at
June 30, 2004, 2005 and September 30, 2005
(unaudited), aggregate liquidation preference of $683 at
June 30, 2004, 2005 and September 30, 2005
(unaudited); no shares outstanding pro forma (unaudited)
|
|
$
|
683
|
|
|
$
|
683
|
|
|
$
|
683
|
|
|
$
|
|
|
Series B convertible preferred stock, $0.001 par
value: 566,667 shares authorized; 528,602 shares
issued and outstanding at June 30, 2004, 2005 and
September 30, 2005 (unaudited), aggregate liquidation
preference of $2,585 at June 30, 2004 and 2005 and
September 30, 2005 (unaudited); no shares outstanding pro forma
(unaudited)
|
|
|
2,585
|
|
|
|
2,585
|
|
|
|
2,585
|
|
|
|
|
|
Series C convertible preferred stock, $0.001 par
value: 1,833,334 shares authorized; 1,566,311 shares
issued and outstanding at June 30, 2004, 2005 and
September 30, 2005 (unaudited) aggregate liquidation
preference of $13,157 at June 30, 2004, 2005 and
September 30, 2005 (unaudited); no shares outstanding pro
forma (unaudited)
|
|
|
13,157
|
|
|
|
13,157
|
|
|
|
13,157
|
|
|
|
|
|
Series D convertible preferred stock, $0.001 par value;
2,166,667 shares authorized; 1,607,324 shares issued
and outstanding at June 30, 2004, 2005 and
September 30, 2005 (unaudited), aggregate liquidation
preference of $18,613 at June 30, 2004, 2005 and
September 30, 2005 (unaudited); no shares outstanding pro
forma (unaudited)
|
|
|
18,613
|
|
|
|
18,613
|
|
|
|
18,613
|
|
|
|
|
|
Series E convertible preferred stock, $0.001 par value:
335,334 shares authorized; 329,433 shares issued and
outstanding at June 30, 2004, 2005 and September 30,
2005 (unaudited), aggregate liquidation preference of $4,645 at
June 30, 2004, 2005 and September 30, 2005
(unaudited); no shares outstanding pro forma (unaudited)
|
|
|
4,645
|
|
|
|
4,645
|
|
|
|
4,645
|
|
|
|
|
|
F-4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
Stockholders
|
|
|
|
June 30,
|
|
|
|
|
Equity at
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Stockholders deficit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 24,060,000 shares
authorized, 1,739,989 1,748,960 and 1,752,903 shares issued
and outstanding at June 30, 2004, 2005 and
September 30, 2005 (unaudited), respectively, and
24,060,000 shares authorized, 6,012,231 shares
outstanding pro forma (unaudited)
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
|
|
6
|
|
|
Additional paid-in capital
|
|
|
2,055
|
|
|
|
5,202
|
|
|
|
6,964
|
|
|
|
46,643
|
|
|
Deferred stock compensation
|
|
|
-
|
|
|
|
(431
|
)
|
|
|
(1,442
|
)
|
|
|
(1,442
|
)
|
|
Notes receivable from stockholders
|
|
|
(428
|
)
|
|
|
(449
|
)
|
|
|
(454
|
)
|
|
|
(454
|
)
|
|
Accumulated deficit
|
|
|
(37,059
|
)
|
|
|
(48,009
|
)
|
|
|
(51,053
|
)
|
|
|
(51,053
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(35,430
|
)
|
|
|
(43,685
|
)
|
|
|
(45,983
|
)
|
|
$
|
(6,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, convertible preferred stock and
stockholders deficit
|
|
$
|
20,231
|
|
|
$
|
12,146
|
|
|
$
|
10,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-5
Cardica, Inc.
Statements of Operations
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
|
|
|
|
ended
|
|
|
|
Year ended June 30,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue, net
|
|
$
|
-
|
|
|
$
|
212
|
|
|
$
|
719
|
|
|
$
|
168
|
|
|
$
|
161
|
|
|
Product revenue from related party, net
|
|
|
-
|
|
|
|
401
|
|
|
|
1,027
|
|
|
|
744
|
|
|
|
7
|
|
|
Development revenue from related party
|
|
|
-
|
|
|
|
223
|
|
|
|
310
|
|
|
|
265
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
-
|
|
|
|
836
|
|
|
|
2,056
|
|
|
|
1,177
|
|
|
|
168
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue (includes related party costs of $1,377,
$1,180, $306 and $0 in fiscal 2004, fiscal 2005 and the three
months ended September 30, 2004 and 2005, respectively)
|
|
|
-
|
|
|
|
2,105
|
|
|
|
2,478
|
|
|
|
636
|
|
|
|
627
|
|
|
Research and development
|
|
|
6,698
|
|
|
|
5,826
|
|
|
|
6,289
|
|
|
|
1,504
|
|
|
|
1,166
|
|
|
Selling, general and administrative
|
|
|
1,936
|
|
|
|
1,809
|
|
|
|
3,753
|
|
|
|
594
|
|
|
|
1,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
8,634
|
|
|
|
9,740
|
|
|
|
12,520
|
|
|
|
2,734
|
|
|
|
3,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(8,634
|
)
|
|
|
(8,904
|
)
|
|
|
(10,464
|
)
|
|
|
(1,557
|
)
|
|
|
(2,848
|
)
|
Interest income
|
|
|
294
|
|
|
|
209
|
|
|
|
305
|
|
|
|
69
|
|
|
|
72
|
|
Interest expense (includes related party interest expense of
$539, $897, $226 and $226 in fiscal 2004, fiscal 2005 and the
three months ended September 30, 2004 and 2005,
respectively)
|
|
|
(885
|
)
|
|
|
(2,001
|
)
|
|
|
(1,048
|
)
|
|
|
(264
|
)
|
|
|
(264
|
)
|
Other income (includes $250 from related party in fiscal 2005)
|
|
|
-
|
|
|
|
(14
|
)
|
|
|
257
|
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,225
|
)
|
|
$
|
(10,710
|
)
|
|
$
|
(10,950
|
)
|
|
$
|
(1,752
|
)
|
|
$
|
(3,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(7.84
|
)
|
|
$
|
(8.24
|
)
|
|
$
|
(7.82
|
)
|
|
$
|
(1.27
|
)
|
|
$
|
(2.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per share
|
|
|
1,176
|
|
|
|
1,299
|
|
|
|
1,401
|
|
|
|
1,384
|
|
|
|
1,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted net loss per share (unaudited)
|
|
|
|
|
|
|
|
|
|
$
|
(1.93
|
)
|
|
|
|
|
|
$
|
(0.54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing pro forma basic and diluted net loss
per share (unaudited)
|
|
|
|
|
|
|
|
|
|
|
5,660
|
|
|
|
|
|
|
|
5,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-6
Cardica, Inc.
Statements of Convertible Preferred Stock and
Stockholders Deficit
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
|
Notes
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Deferred
|
|
|
Receivable
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Paid-In
|
|
|
Stock
|
|
|
from
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Stockholder
|
|
|
Deficit
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 1, 2002
|
|
|
3,929,895
|
|
|
$
|
35,038
|
|
|
|
|
1,418,661
|
|
|
$
|
2
|
|
|
$
|
457
|
|
|
$
|
-
|
|
|
$
|
(445
|
)
|
|
$
|
(17,124
|
)
|
|
$
|
(17,110
|
)
|
|
Issuance of common stock at $0.30 to $2.25 per share upon
exercise of employee stock options for cash
|
|
|
-
|
|
|
|
-
|
|
|
|
|
69,356
|
|
|
|
-
|
|
|
|
77
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
77
|
|
|
Issuance of common stock to employees at $2.25 per share
upon early exercise of stock options for promissory note
|
|
|
-
|
|
|
|
-
|
|
|
|
|
16,666
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Issuance of common stock to non- employees at $1.35 to
$2.25 per share for services throughout 2003
|
|
|
-
|
|
|
|
-
|
|
|
|
|
52,142
|
|
|
|
-
|
|
|
|
90
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
90
|
|
|
Issuance of stock options to non-employees throughout 2003 for
services
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
67
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
67
|
|
|
Warrants issued in October 2002 in conjunction with notes payable
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
685
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
685
|
|
|
Additional Series D convertible preferred stock issuance
costs
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
Repayment of stockholder notes receivable for cash
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
67
|
|
|
|
-
|
|
|
|
67
|
|
|
Increase of stockholder notes receivable due to accrued interest
which was converted into principal of notes
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(40
|
)
|
|
|
-
|
|
|
|
(40
|
)
|
|
Stock-based compensation expense related to variable accounting
of certain employee stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
288
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
288
|
|
|
Net loss and comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,225
|
)
|
|
|
(9,225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2003
|
|
|
3,929,895
|
|
|
|
35,038
|
|
|
|
|
1,556,825
|
|
|
|
2
|
|
|
|
1,663
|
|
|
|
-
|
|
|
|
(420
|
)
|
|
|
(26,349
|
)
|
|
|
(25,104
|
)
|
|
Issuance of common stock at $0.30 to $2.25 per share upon
exercise of employee stock options for cash
|
|
|
-
|
|
|
|
-
|
|
|
|
|
160,960
|
|
|
|
-
|
|
|
|
200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
200
|
|
|
Issuance of common stock at $2.25 to $2.85 per share upon
exercise of stock options for promissory notes
|
|
|
-
|
|
|
|
-
|
|
|
|
|
16,666
|
|
|
|
-
|
|
|
|
12
|
|
|
|
-
|
|
|
|
(12
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Issuance of common stock to non- employees at $2.25 and
$2.85 per share for services throughout 2004
|
|
|
-
|
|
|
|
-
|
|
|
|
|
8,142
|
|
|
|
-
|
|
|
|
22
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22
|
|
|
Issuance of stock options to non-employees through 2004 for
services
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
127
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
127
|
|
|
Issuance of Series E convertible preferred stock at
$14.10 per share to related party for cash in August 2003,
including issuance costs of $50
|
|
|
283,688
|
|
|
|
4,000
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(50
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(50
|
)
|
|
Issuance of Series E convertible preferred stock at
$14.10 per share for prepayment of interest due on notes
payable
|
|
|
45,745
|
|
|
|
645
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Repurchase of common stock at $1.35 per share in January
2004
|
|
|
-
|
|
|
|
-
|
|
|
|
|
(2,604
|
)
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
Stock-based compensation expense related to variable accounting
of certain employee stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
85
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
85
|
|
|
Net loss and comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,710
|
)
|
|
|
(10,710
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2004
|
|
|
4,259,328
|
|
|
|
39,683
|
|
|
|
|
1,739,989
|
|
|
|
2
|
|
|
|
2,055
|
|
|
|
-
|
|
|
|
(428
|
)
|
|
|
(37,059
|
)
|
|
|
(35,430
|
)
|
Issuance of common stock at $2.25 to $2.85 per share upon
exercise of stock options for promissory notes
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21
|
|
|
|
-
|
|
|
|
(21
|
)
|
|
|
-
|
|
|
|
-
|
|
Issuance of common stock at $1.35 to $2.85 per share upon
exercise of employee stock options for cash
|
|
|
-
|
|
|
|
-
|
|
|
|
|
8,971
|
|
|
|
-
|
|
|
|
14
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
Stock-based compensation expense related to variable accounting
of certain employee stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,009
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,009
|
|
Stock-based compensation expense related to modifications of
certain employee stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
590
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
590
|
|
Issuance of stock options to non- employees through 2005 for
services
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25
|
|
Early exercise of stock options no longer subject to repurchase
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35
|
|
Deferred stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
453
|
|
|
|
(453
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Amortization of deferred stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22
|
|
Net loss and comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,950
|
)
|
|
|
(10,950
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2005
|
|
|
4,259,328
|
|
|
$
|
39,683
|
|
|
|
|
1,748,960
|
|
|
$
|
2
|
|
|
$
|
5,202
|
|
|
$
|
(431
|
)
|
|
$
|
(449
|
)
|
|
$
|
(48,009
|
)
|
|
$
|
(43,685
|
)
|
F-7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock at $2.25 to $2.85 per share upon
exercise of stock options for promissory note (unaudited)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
-
|
|
Issuance of common stock at $1.35 to $2.85 per share upon
exercise of employee stock options for cash (unaudited)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
8,561
|
|
|
|
-
|
|
|
|
14
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
Repurchase of common stock at $1.35 per share in September 2005
(unaudited)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
(4,618
|
)
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6
|
)
|
Stock-based compensation expense related to variable accounting
of certain employee stock options (unaudited)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
-
|
|
|
|
583
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
583
|
|
Early exercise of stock options no longer subject to repurchase
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9
|
|
Issuance of stock options to non- employee through 2006 for
services (unaudited)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
-
|
|
|
|
38
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38
|
|
Deferred stock-based compensation (unaudited)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,119
|
|
|
|
(1,119
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Amortization of deferred stock-based compensation (unaudited)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
108
|
|
|
|
-
|
|
|
|
-
|
|
|
|
108
|
|
Net loss and comprehensive loss (unaudited)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,044
|
)
|
|
|
(3,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2005 (unaudited)
|
|
|
4,259,328
|
|
|
$
|
39,683
|
|
|
|
|
1,752,903
|
|
|
$
|
2
|
|
|
$
|
6,964
|
|
|
$
|
(1,442
|
)
|
|
$
|
(454
|
)
|
|
$
|
(51,053
|
)
|
|
$
|
(45,983
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-8
Cardica, Inc.
Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
|
|
|
|
ended
|
|
|
|
Year ended June 30,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,225
|
)
|
|
$
|
(10,710
|
)
|
|
$
|
(10,950
|
)
|
|
$
|
(1,752
|
)
|
|
$
|
(3,044
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
669
|
|
|
|
672
|
|
|
|
850
|
|
|
|
187
|
|
|
|
203
|
|
|
Amortization of debt discount
|
|
|
140
|
|
|
|
460
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Loss on disposal of property and equipment
|
|
|
-
|
|
|
|
205
|
|
|
|
24
|
|
|
|
-
|
|
|
|
3
|
|
|
Amortization of deferred stock-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
22
|
|
|
|
-
|
|
|
|
108
|
|
|
Stock-based compensation on grants of stock options to
non-employees
|
|
|
68
|
|
|
|
127
|
|
|
|
25
|
|
|
|
(23
|
)
|
|
|
38
|
|
|
Stock-based compensation related to issuance of common shares
for consulting services rendered
|
|
|
90
|
|
|
|
22
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Stock-based compensation on grants of stock options to employees
|
|
|
288
|
|
|
|
85
|
|
|
|
2,599
|
|
|
|
257
|
|
|
|
583
|
|
|
Conversion of interest to preferred stock on prepayment of note
payable
|
|
|
-
|
|
|
|
645
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
-
|
|
|
|
(58
|
)
|
|
|
(46
|
)
|
|
|
(4
|
)
|
|
|
(62
|
)
|
|
|
Accounts receivable from related party
|
|
|
-
|
|
|
|
(131
|
)
|
|
|
126
|
|
|
|
(512
|
)
|
|
|
2
|
|
|
|
Prepaid expenses and other current assets
|
|
|
(87
|
)
|
|
|
42
|
|
|
|
(207
|
)
|
|
|
8
|
|
|
|
(76
|
)
|
|
|
Inventories
|
|
|
(160
|
)
|
|
|
(310
|
)
|
|
|
(56
|
)
|
|
|
(6
|
)
|
|
|
196
|
|
|
|
Interest receivable from stockholders
|
|
|
(3
|
)
|
|
|
(9
|
)
|
|
|
(9
|
)
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
Other non-current assets
|
|
|
24
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Restricted cash
|
|
|
(500
|
)
|
|
|
72
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Accounts payable and other accrued liabilities
|
|
|
(270
|
)
|
|
|
258
|
|
|
|
(419
|
)
|
|
|
321
|
|
|
|
19
|
|
|
|
Accrued compensation
|
|
|
44
|
|
|
|
5
|
|
|
|
(7
|
)
|
|
|
(10
|
)
|
|
|
3
|
|
|
|
Deferred rent
|
|
|
-
|
|
|
|
174
|
|
|
|
102
|
|
|
|
26
|
|
|
|
(5
|
)
|
|
|
Deferred other income from related party
|
|
|
-
|
|
|
|
250
|
|
|
|
(250
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
Leasehold improvement obligation
|
|
|
-
|
|
|
|
(117
|
)
|
|
|
(118
|
)
|
|
|
(26
|
)
|
|
|
(30
|
)
|
|
|
Interest payable to related party
|
|
|
-
|
|
|
|
539
|
|
|
|
897
|
|
|
|
226
|
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(8,922
|
)
|
|
|
(7,776
|
)
|
|
|
(7,417
|
)
|
|
|
(1,310
|
)
|
|
|
(1,838
|
)
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(757
|
)
|
|
|
(914
|
)
|
|
|
(882
|
)
|
|
|
(313
|
)
|
|
|
(21
|
)
|
|
Leasehold improvement reimbursement by landlord
|
|
|
-
|
|
|
|
118
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Proceeds from sale of equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
-
|
|
|
|
3
|
|
|
Purchases of short-term investments
|
|
|
(16,250
|
)
|
|
|
(3,089
|
)
|
|
|
(13,076
|
)
|
|
|
(4,401
|
)
|
|
|
(1,000
|
)
|
|
Proceeds from sales of short-term investments
|
|
|
4,850
|
|
|
|
2,090
|
|
|
|
21,075
|
|
|
|
5,000
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(12,157
|
)
|
|
|
(1,795
|
)
|
|
|
7,129
|
|
|
|
286
|
|
|
|
982
|
|
F-9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
|
|
|
|
ended
|
|
|
|
Year ended June 30,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of convertible preferred stock, net of
issuance costs
|
|
|
(3
|
)
|
|
|
3,950
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Proceeds from issuance of common stock pursuant to the exercise
of stock options for cash
|
|
|
42
|
|
|
|
198
|
|
|
|
14
|
|
|
|
6
|
|
|
|
14
|
|
|
Repurchase of common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6
|
)
|
|
Proceeds from repayment of stockholder notes receivable
|
|
|
67
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Proceeds from early exercise of stock options
|
|
|
-
|
|
|
|
63
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Issuance of stockholder promissory note
|
|
|
-
|
|
|
|
(73
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Proceeds from notes payable
|
|
|
5,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Proceeds from notes payable from related party
|
|
|
-
|
|
|
|
10,250
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Proceeds from subordinated convertible note
|
|
|
3,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Repayment of principal on notes payable
|
|
|
(3,069
|
)
|
|
|
(6,272
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
5,537
|
|
|
|
8,116
|
|
|
|
14
|
|
|
|
6
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(15,542
|
)
|
|
|
(1,455
|
)
|
|
|
(274
|
)
|
|
|
(1,018
|
)
|
|
|
(848
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
19,222
|
|
|
|
3,680
|
|
|
|
2,225
|
|
|
|
2,225
|
|
|
|
1,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
3,680
|
|
|
$
|
2,225
|
|
|
$
|
1,951
|
|
|
$
|
1,207
|
|
|
$
|
1,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
745
|
|
|
$
|
328
|
|
|
$
|
150
|
|
|
$
|
38
|
|
|
$
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred stock-based compensation
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
453
|
|
|
$
|
70
|
|
|
$
|
1,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants in conjunction with notes payable
|
|
$
|
140
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note receivable from exercise of stock options
|
|
$
|
37
|
|
|
$
|
47
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest converted to principal on modified notes
|
|
$
|
40
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold improvements paid for directly by landlord
|
|
$
|
-
|
|
|
$
|
422
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-10
Cardica, Inc.
Notes to Financial Statements
(Information as of September 30, 2005 and for the three
months ended
September 30, 2004 and 2005 is unaudited)
|
|
Note 1.
|
Organization and Summary of Significant Accounting
Policies
|
Organization
Cardica, Inc. (the Company) was incorporated in the
state of Delaware on October 15, 1997, as Vascular
Innovations, Inc. On November 26, 2001, the Company changed
its name to Cardica, Inc. The Company designs, manufactures and
markets proprietary automated anastomotic systems used in
surgical procedures. The Companys first product, the
PAS-Port
system,
received the CE Mark for sales in Europe in March 2003, and
regulatory approval for sales in Japan in January 2004. The
second product, the
C-Port
system, received
the CE Mark for sales in Europe in April 2004 and 510(k)
clearance in the United States in November 2005.
Need to Raise Additional Capital
The Company has incurred significant net losses and negative
cash flows from operations since its inception. At
September 30, 2005, the Company had an accumulated deficit
of $51.1 million. At September 30, 2005, management
believed that currently available cash, cash equivalents and
short-term investments together with existing financing
agreements would provide sufficient funds to enable the Company
to meet its obligations through at least July 1, 2006.
Management plans to continue to finance the Companys
operations with a combination of equity issuances, debt
arrangements and in the longer term, product sales and
royalties. If adequate funds are not available, the Company may
be required to delay, reduce the scope of, or eliminate one or
more of its development programs or obtain funds through
collaborative arrangements with others that may require the
Company to relinquish rights to certain of its technologies,
product candidates or products that the Company would otherwise
seek to develop or commercialize itself.
Use of Estimates
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles generally
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements. Actual
results could differ from these estimates.
Reclassifications
Certain amounts of revenue reported as an offset to research and
development expense in the previous fiscal year have been
reclassified to conform to the 2005 presentation. Certain
balance sheet and cash flow amounts in prior fiscal years have
been reclassified to conform to the 2005 presentation. Such
reclassifications had no effect on previously reported results
of operations, total assets or accumulated deficit.
Unaudited Interim Results
The accompanying balance sheet as of September 30, 2005,
the statements of operations and of cash flows for the three
months ended September 30, 2004 and 2005 and the statement
of stockholders equity (deficit) for the three months
ended September 30, 2005 are unaudited. The unaudited
interim financial statements have been prepared on the same
basis as the annual financial statements and, in the opinion of
management, reflect all adjustments, which include only normal
recurring adjustments, necessary to state fairly the
Companys financial position at September 30, 2005 and
results of operations and cash flows for the three months ended
September 30, 2004 and 2005. The financial data and other
information disclosed in these notes to financial statements
related to the three-month periods are unaudited. The results
for the three months ended September 30, 2005 are not
necessarily indicative of the results to be expected for the
fiscal year ending June 30, 2006 or for any other interim
period or for any future year.
F-11
Cardica, Inc.
Notes to Financial Statements (Continued)
(Information as of September 30, 2005 and for the three
months ended
September 30, 2004 and 2005 is unaudited)
Unaudited Pro Forma Stockholders Equity
The Company has filed a registration statement with the
Securities and Exchange Commission to sell shares of its common
stock to the public. As of September 30, 2005, if the
initial public offering is completed under the terms presently
anticipated, all of the Series A, Series B,
Series C, Series D, and Series E convertible
preferred stock outstanding at the time of the offering will
convert into 4,259,328 shares of common stock, assuming a
one-for-one conversion ratio. Unaudited pro forma
stockholders equity, as adjusted for the assumed
conversion of the preferred stock, is set forth on the
accompanying balance sheets.
Cash and Cash Equivalents
The Companys cash and cash equivalents are maintained in
checking, money market and mutual fund investment accounts. For
purposes of the statement of cash flows, the Company considers
all highly liquid investments with maturities remaining on the
date of purchase of three months or less to be cash equivalents.
The carrying amount reported in the balance sheets approximates
fair value.
Available-for-Sale Securities
The Company has classified its investments in marketable
securities as available-for-sale. Such investments are reported
at market value, and unrealized gains and losses, if any, are
excluded from earnings and are reported in other comprehensive
income (loss) as a separate component of stockholders
equity until realized. The cost of securities sold is based on
the specific-identification method. Interest on securities
classified as available-for-sale is included in interest income.
The net realized gains and losses on sales of available-for-sale
securities were not material in fiscal years 2003, 2004 and 2005
and the three month periods ended September 30, 2004 and
2005.
There are no unrealized gains or losses on available-for-sale
securities in the periods presented.
Available-for-sale securities at June 30, 2004 and 2005 and
September 30, 2005 consist primarily of auction rate
securities. The underlying contractual maturities of the auction
rate securities are greater than one year. Although maturities
may extend beyond one year, it is managements intent that
these securities will be used for current operations, and
therefore, are classified as short-term. The Companys
auction rate securities have settlement dates within at least
35 days from purchase date.
Restricted Cash
Under a facility-operating lease for its facility in Redwood
City, California, the Company is required to secure a letter of
credit with a restricted cash balance with the Companys
bank. A certificate of deposit of $500,000 has been recorded as
restricted cash in the accompanying balance sheets at
June 30, 2004 and 2005 related to the letter of credit (see
Note 5).
A certificate of deposit of $10,000 has been recorded as
restricted cash in the accompanying balance sheets at
June 30, 2004 and 2005 related to the deposit on the
company credit card.
Fair Value of Financial Instruments
The carrying amounts of certain of the Companys financial
instruments, including cash and cash equivalents and
investments, approximate fair value due to their short
maturities. Based on borrowing rates currently available to the
Company for loans and capital lease obligations with similar
terms, the carrying value of the Companys debt obligations
approximates fair value.
F-12
Cardica, Inc.
Notes to Financial Statements (Continued)
(Information as of September 30, 2005 and for the three
months ended
September 30, 2004 and 2005 is unaudited)
Concentrations of Credit Risk and Certain Other Risks
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents, available-for-sale securities and accounts
receivable. The Company places its cash and cash equivalents and
available-for-sale securities with high-credit quality financial
institutions. The Company is exposed to credit risk in the event
of default by the institutions holding the cash and cash
equivalents, and available-for-sale securities to the extent of
the amounts recorded on the balance sheet.
The Company sells its products to hospitals in Europe and to
distributors in Japan who in turn sells the product to
hospitals. The Company does not require collateral to support
credit sales. The Company has had no credit losses to date.
One customer individually accounted for 86% of total revenue
during the three month period ended September 30, 2004, and
68% of total accounts receivable as of September 30, 2004.
One customer individually accounted for 90% of total revenue
during the three month period ended September 30, 2005 and
89% of total accounts receivable as of September 30, 2005.
Two customers individually accounted for 65% and 33% of total
revenue during the fiscal year ended June 30, 2005, and 4%
and 79% of total accounts receivable as of June 30, 2005.
Two customers individually accounted for 75% and 25% of total
revenue during the fiscal year ended June 30, 2004, and 69%
and 29% of total accounts receivable as of June 30, 2004.
The Company had no revenue prior to the fiscal year ended
June 30, 2004.
The Company depends upon a number of key suppliers, including
single source suppliers, the loss of which would materially harm
the Companys business. Single source suppliers are relied
upon for certain components and services used in manufacturing
the products. The Company does not have long-term contracts with
any of the suppliers; rather, purchase orders are submitted for
each order. Because long-term contracts do not exist, none of
the suppliers are required to provide the company any guaranteed
minimum quantities.
Inventories
Inventories are recorded at the lower of standard cost (which
approximates actual cost on a
first-in,
first-out
basis) or market. The Company periodically assesses the
recoverability of all inventories, including raw materials,
work-in
-process and
finished goods, to determine whether adjustments for impairment
are required. Inventory that is obsolete or in excess of
forecasted usage is written down to its estimated realizable
value based on assumptions about future demand and market
conditions.
Property and Equipment
Property and equipment are stated at cost and depreciated on a
straight-line basis over the estimated useful lives of the
related assets, which are generally three to five years for all
property and equipment categories. Amortization of leasehold
improvements is computed using the straight-line method over the
shorter of the remaining lease term or the estimated useful life
of the related assets. Upon sale or retirement of assets, the
costs and related accumulated depreciation and amortization are
removed from the balance sheet and the resulting gain or loss is
reflected in the statement of operations.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, including property and
equipment, for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the assets
may not be fully recoverable. An impairment loss would be
recognized when estimated undiscounted future cash flows expected
F-13
Cardica, Inc.
Notes to Financial Statements (Continued)
(Information as of September 30, 2005 and for the three
months ended
September 30, 2004 and 2005 is unaudited)
to result from the use of the asset and its eventual disposition
are less than its carrying amount. Impairment, if any, is
assessed using discounted cash flows. Through September 30,
2005, there have been no indications of impairment, and the
Company has recorded no such losses.
Revenue Recognition
The Company recognizes revenue in accordance with SEC Staff
Accounting Bulletin, or SAB, No. 104,
Revenue
Recognition
. SAB No. 104 requires that four
basic criteria must be met before revenue can be recognized:
(1) persuasive evidence of an arrangement exists;
(2) title has transferred; (3) the fee is fixed or
determinable; and (4) collectibility is reasonably assured.
The Company generally uses contracts and customer purchase
orders to determine the existence of an arrangement. The Company
assesses whether the fee is fixed or determinable based upon the
terms of the agreement associated with the transaction. To
determine whether collection is probable, the Company assesses a
number of factors, including past transaction history with the
customer and the creditworthiness of the customer. If the
Company determines that collection is not reasonably assured,
the recognition of revenue is deferred until collection becomes
reasonably assured, which is generally upon receipt of payment.
Customers have the right to return products that are defective.
There are no other return rights. The Company includes shipping
and handling costs in cost of product revenue.
The Company entered into a Development and Supply Agreement with
Guidant Corporation for the development and commercialization of
an aortic cutter. The Company received advance payments which
were classified as deferred revenues-related party on the
balance sheet until such time that the Company commenced
development activities under the agreement. The Company
recognized revenues as determined by its performance under the
agreement.
Guidant terminated its distribution agreement with the Company
for product sales of the
PAS-Port
and
C-Port
systems
manufactured by the Company. The Company recognized as product
sales related-party the difference between the minimum
contractual purchases due from Guidant and actual purchases
through the termination date.
Research and Development
Research and development expenses consist of costs incurred for
internally sponsored research and development, direct expenses,
and research-related overhead expenses. Research and development
costs are charged to research and development expense as
incurred.
Clinical Trials
The Company accrues and expenses costs for clinical trial
activities performed by third parties based upon estimates of
the percentage of work completed over the life of the individual
study in accordance with agreements established with contract
research organizations and clinical trial sites. The Company
determines the estimates through discussion with internal
clinical personnel and outside service providers as to progress
or stage of completion of trials or services and the agreed upon
fee to be paid for such services. Costs of setting up clinical
trial sites for participation in the trials are expensed
immediately as research and development expenses. Clinical trial
site costs related to patient enrollment are accrued as patients
are entered into the trial and reduced by any initial payment
made to the clinical trial site when the first patient is
enrolled.
Income Taxes
The Company utilizes the liability method of accounting for
income taxes as required by SFAS No. 109,
Accounting for Income Taxes
. Under this method, deferred
tax assets and liabilities are determined based on
F-14
Cardica, Inc.
Notes to Financial Statements (Continued)
(Information as of September 30, 2005 and for the three
months ended
September 30, 2004 and 2005 is unaudited)
differences between financial reporting and tax reporting bases
of assets and liabilities and are measured using enacted tax
rates and laws that are expected to be in effect when the
differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
Segments
The Company operates in one segment. Management uses one
measurement of profitability and does not segregate its business
for internal reporting. All long-lived assets are maintained in
the United States.
Net Loss per Common Share
Basic net loss per share is calculated by dividing the net loss
by the weighted-average number of common shares outstanding for
the period less the weighted average unvested common shares
subject to repurchase and without consideration for potential
common shares. Diluted net loss per share is computed by
dividing the net loss by the weighted-average number of common
shares outstanding for the period less the weighted average
unvested common shares subject to repurchase and dilutive
potential common shares for the period determined using the
treasury-stock method. For purposes of this calculation,
preferred stock, options and warrants to purchase stock are
considered to be potential common shares and are only included
in the calculation of diluted net loss per share when their
effect is dilutive.
The unaudited pro forma basic and diluted net loss per share
calculations assume the conversion of all outstanding shares of
preferred stock into shares of common stock using the
as-if-converted method as of June 30, 2005 and
September 30, 2005 or the date of issuance, if later (in
thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
|
|
|
|
ended
|
|
|
|
Year ended June 30,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Historical
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,225
|
)
|
|
$
|
(10,710
|
)
|
|
$
|
(10,950
|
)
|
|
$
|
(1,752
|
)
|
|
$
|
(3,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
1,483
|
|
|
|
1,640
|
|
|
|
1,747
|
|
|
|
1,741
|
|
|
|
1,753
|
|
Less: Weighted-average unvested common shares subject to
repurchase
|
|
|
(184
|
)
|
|
|
(119
|
)
|
|
|
(73
|
)
|
|
|
(98
|
)
|
|
|
(35
|
)
|
Less: Vested common shares outstanding exercised with promissory
notes subject to variable accounting
|
|
|
(123
|
)
|
|
|
(222
|
)
|
|
|
(273
|
)
|
|
|
(259
|
)
|
|
|
(288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted net loss per share
|
|
|
1,176
|
|
|
|
1,299
|
|
|
|
1,401
|
|
|
|
1,384
|
|
|
|
1,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(7.84
|
)
|
|
$
|
(8.24
|
)
|
|
$
|
(7.82
|
)
|
|
$
|
(1.27
|
)
|
|
$
|
(2.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-15
Cardica, Inc.
Notes to Financial Statements (Continued)
(Information as of September 30, 2005 and for the three
months ended
September 30, 2004 and 2005 is unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
|
|
|
|
ended
|
|
|
|
Year ended June 30,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Pro forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
$
|
(10,950
|
)
|
|
|
|
|
|
$
|
(3,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used above
|
|
|
|
|
|
|
|
|
|
|
1,401
|
|
|
|
|
|
|
|
1,430
|
|
Pro forma adjustments to reflect assumed weighted-average effect
of conversion of preferred stock (unaudited)
|
|
|
|
|
|
|
|
|
|
|
4,259
|
|
|
|
|
|
|
|
4,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute pro forma basic and diluted net loss per
share (unaudited)
|
|
|
|
|
|
|
|
|
|
|
5,660
|
|
|
|
|
|
|
|
5,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted net loss per share (unaudited)
|
|
|
|
|
|
|
|
|
|
$
|
(1.93
|
)
|
|
|
|
|
|
$
|
(0.54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding securities not included in historical diluted net
loss per share calculation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock
|
|
|
3,930
|
|
|
|
4,259
|
|
|
|
4,259
|
|
|
|
4,259
|
|
|
|
4,259
|
|
Options to purchase common stock
|
|
|
690
|
|
|
|
655
|
|
|
|
766
|
|
|
|
650
|
|
|
|
900
|
|
Vested common shares outstanding exercised with promissory notes
subject to variable accounting
|
|
|
123
|
|
|
|
222
|
|
|
|
273
|
|
|
|
259
|
|
|
|
288
|
|
Warrants to purchase common stock and preferred stock
|
|
|
157
|
|
|
|
157
|
|
|
|
157
|
|
|
|
157
|
|
|
|
157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,900
|
|
|
|
5,293
|
|
|
|
5,455
|
|
|
|
5,325
|
|
|
|
5,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-Based Compensation
The Company has elected to follow the intrinsic-value method in
accordance with Accounting Principles Board (APB)
Opinion No. 25,
Accounting for Stock Issued to Employees
(APB 25), and related interpretations,
including Financial Accounting Standards Board Interpretation
No. 44,
Accounting for Certain Transactions involving
Stock Compensation
, in accounting for its employee stock
options. Under APB 25, no compensation expense is recorded
for stock option grants to employees with an exercise price
equal to the estimated fair value of the underlying stock as
determined by the Companys Board of Directors at the date
of grant. The Company has adopted the disclosure-only provisions
of Statement of Financial Accounting Standards
(SFAS) No. 123,
Accounting for Stock-Based
Compensation
(SFAS 123), as amended by
SFAS 148,
Accounting for Stock-Based
Compensation Transition and Disclosure.
Options granted to non-employees, including lenders and
consultants, are accounted for in accordance with the provisions
of SFAS No. 123 and Emerging Issues Task Force
(EITF) Consensus
No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services
. The Company applies the Black-Scholes
method to determine the estimated fair value of such
F-16
Cardica, Inc.
Notes to Financial Statements (Continued)
(Information as of September 30, 2005 and for the three
months ended
September 30, 2004 and 2005 is unaudited)
awards, which are periodically remeasured as they vest. The
resulting value is recognized as an expense over the period of
services received or the term of the related financing.
During the fiscal year ended June 30, 2005 and three month
period ended September 30, 2005, certain stock options were
granted with exercise prices that were below the estimated fair
value of the common stock at the date of grant. In accordance
with APB Opinion No. 25, a deferred stock-based
compensation expense of $287,000 was recorded during the fiscal
year ended June 30, 2005 and $1.1 million during the
three month period ended September 30, 2005. The deferred
stock compensation will be amortized over the related vesting
terms of the options. The Company recorded a deferred
stock-based compensation expense of $22,000 for the fiscal year
ended June 30, 2005 and $108,000 for the three months ended
September 30, 2005. The Company also records deferred stock
compensation resulting from variable accounting for options
exercises with non-recourse promissory notes. Deferred stock
compensation related to these notes, representing compensation
related to unvested options, was $166,000 as of June 30,
2005 and $202,000 as of September 30, 2005.
The fair value of the common stock for options granted through
September 30, 2005, was originally determined by the
Companys board of directors, with input from management.
The Company did not obtain contemporaneous valuations by an
unrelated valuation specialist. Subsequently, the Company
reassessed the valuations of common stock relating to option
grants during the fiscal year ended June 30, 2005 and for
the three-month period ended September 30, 2005. The
Company granted stock options with an exercise price of $2.85
during the fiscal year ended June 30, 2005 and for the
three-month period ended September 30, 2005. In addition,
the Company determined that the reassessed fair value of its
common stock increased from $2.85 to $7.50 per share during
the fiscal year ended June 30, 2005 and increased from
$7.50 to $9.00 per share during for the three-month period ended
September 30, 2005.
As of September 30, 2005, the expected future amortization
expense for deferred stock compensation during each of the
following periods is as follows (in thousands):
|
|
|
|
|
Fiscal year ending June 30,
|
|
|
|
|
2006 (remaining)
|
|
$
|
345
|
|
2007
|
|
|
389
|
|
2008
|
|
|
364
|
|
2009
|
|
|
320
|
|
2010
|
|
|
24
|
|
|
|
|
|
|
|
$
|
1,442
|
|
|
|
|
|
F-17
Cardica, Inc.
Notes to Financial Statements (Continued)
(Information as of September 30, 2005 and for the three
months ended
September 30, 2004 and 2005 is unaudited)
The following table illustrates the effect on the Companys
net loss if the Company had applied the fair value recognition
provisions of SFAS 123 to stock-based employee compensation
(in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
|
|
|
|
ended
|
|
|
|
Year ended June 30,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Net loss as reported
|
|
$
|
(9,225
|
)
|
|
$
|
(10,710
|
)
|
|
$
|
(10,950
|
)
|
|
$
|
(1,752
|
)
|
|
$
|
(3,044
|
)
|
Add: stock-based employee compensation expense included in net
loss as reported
|
|
|
288
|
|
|
|
85
|
|
|
|
2,621
|
|
|
|
257
|
|
|
|
691
|
|
Less: total stock-based employee compensation determined under
the fair-value method for all awards
|
|
|
(56
|
)
|
|
|
(56
|
)
|
|
|
(89
|
)
|
|
|
(14
|
)
|
|
|
(78
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(8,993
|
)
|
|
$
|
(10,681
|
)
|
|
$
|
(8,418
|
)
|
|
|
(1,509
|
)
|
|
|
(2,431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted as reported
|
|
$
|
(7.84
|
)
|
|
$
|
(8.24
|
)
|
|
$
|
(7.82
|
)
|
|
$
|
(1.27
|
)
|
|
$
|
(2.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted pro forma
|
|
$
|
(7.65
|
)
|
|
$
|
(8.22
|
)
|
|
$
|
(6.00
|
)
|
|
$
|
(1.09
|
)
|
|
$
|
(1.70
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The resulting effect on the net loss pursuant to SFAS 123
is not likely to be representative of the effects on net loss
and loss per share pursuant to SFAS 123 in future years,
since future years are likely to include additional grants.
The fair value of these options was estimated at the date of
grant using the minimum-value method with the following
weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
|
|
|
|
ended
|
|
|
|
Year ended June 30,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Risk-free interest rate
|
|
|
2.96%
|
|
|
|
2.86%
|
|
|
|
3.51%
|
|
|
|
3.21%
|
|
|
|
4.01%
|
|
Dividend yield
|
|
|
0.00%
|
|
|
|
0.00%
|
|
|
|
0.00%
|
|
|
|
0.00%
|
|
|
|
0.00%
|
|
Weighted-average expected life
|
|
|
4 years
|
|
|
|
4 years
|
|
|
|
4 years
|
|
|
|
4 years
|
|
|
|
4 years
|
|
Recent Accounting Pronouncements
In March 2004, the EITF reached a consensus on EITF
No. 03-1,
The
Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments
. EITF
No. 03-1
provides
guidance regarding disclosures about unrealized losses on
available-for-sale debt and equity securities accounted for
under SFAS No. 115,
Accounting for Certain
Investments in Debt and Equity Securities
. The guidance for
evaluating whether an investment is other-than-temporarily
impaired should be applied in other-than-temporary impairment
evaluations made in reporting periods beginning after
June 15, 2004. In September 2004, the EITF delayed the
effective date for the measurement and recognition guidance. We
are in the process of evaluating the effect of adopting the
measurement and recognition provisions of EITF
No. 03-1.
F-18
Cardica, Inc.
Notes to Financial Statements (Continued)
(Information as of September 30, 2005 and for the three
months ended
September 30, 2004 and 2005 is unaudited)
In December 2004, the FASB issued SFAS 123(R), which is a
revision of SFAS No. 123. SFAS 123(R) supersedes
APB No. 25, and amends SFAS No. 95, Statement of
Cash Flows. Generally, the approach in SFAS 123(R) is
similar to the approach described in SFAS No. 123.
However, SFAS 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values.
Under SFAS 123(R), pro forma disclosure is no longer an
alternative. The Company is required to apply the prospective
transition method no later than July 1, 2007 or upon
becoming a public company. The Company must continue to account
for any equity awards outstanding at the required effective date
using the accounting principles originally applied to those
awards (e.g., the provisions of Opinion 25 and its related
interpretative guidance). As permitted by SFAS 123, the
Company currently accounts for share-based payments to employees
using APB 25s intrinsic value method and, as such,
generally recognizes no compensation cost for employee stock
options. Accordingly, the adoption of SFAS 123(R)s
fair value method will have a significant impact on the
Companys result of operations, although it will have no
impact on its overall financial position. The impact of adoption
of SFAS 123(R) cannot be predicted at this time because it
will depend on levels of share-based payments granted in the
future.
In November 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 151,
Inventory
Costs, an amendment of ARB No. 43, Chapter 4
.
SFAS No. 151 clarifies the accounting for abnormal
amounts of idle facility expense, freight, handling costs and
wasted material. SFAS No. 151 is effective for
inventory costs incurred during fiscal years beginning in the
Companys first quarter of fiscal year 2006. The Company
does not believe the adoption of SFAS No. 151 will
have a material effect on its financial position, results of
operations or cash flows.
|
|
Note 2.
|
Short-Term Investments
|
Short-term investments consist of auction rate preferred
securities and are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Fair market value
|
|
$
|
14,999
|
|
|
$
|
7,000
|
|
|
$
|
6,000
|
|
Cost basis
|
|
|
14,999
|
|
|
|
7,000
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Contractual maturities or settlement dates of securities at
June 30, 2004 and 2005 and September 30, 2005
(unaudited) are within one year.
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Raw materials
|
|
$
|
348
|
|
|
$
|
280
|
|
|
$
|
260
|
|
Work in progress
|
|
|
17
|
|
|
|
194
|
|
|
|
65
|
|
Finished goods
|
|
|
105
|
|
|
|
52
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
470
|
|
|
$
|
526
|
|
|
$
|
330
|
|
|
|
|
|
|
|
|
|
|
|
F-19
Cardica, Inc.
Notes to Financial Statements (Continued)
(Information as of September 30, 2005 and for the three
months ended
September 30, 2004 and 2005 is unaudited)
|
|
Note 4.
|
Property and Equipment
|
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Computer hardware and software
|
|
$
|
362
|
|
|
$
|
375
|
|
|
$
|
377
|
|
Office furniture and equipment
|
|
|
144
|
|
|
|
154
|
|
|
|
154
|
|
Machinery and equipment
|
|
|
1,899
|
|
|
|
2,832
|
|
|
|
2,835
|
|
Leasehold improvements
|
|
|
461
|
|
|
|
461
|
|
|
|
461
|
|
Construction in process
|
|
|
174
|
|
|
|
11
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,040
|
|
|
|
3,833
|
|
|
|
3,838
|
|
Less: accumulated depreciation and amortization
|
|
|
(1,425
|
)
|
|
|
(2,222
|
)
|
|
|
(2,416
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,615
|
|
|
$
|
1,611
|
|
|
$
|
1,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5.
|
Leases and Commitments
|
The Company entered into an agreement in April 2003 for office
space under a non-cancelable operating lease through July 2008.
The operating lease has a renewal option at the end of the lease
for an additional three years. Pursuant to the terms of the
operating lease agreement, the Company placed funds in the
amount of $500,000 in a certificate of deposit account. The
amount is restricted until the expiration of the lease agreement
in July 2008 and is recorded as non-current restricted cash.
Future minimum lease payments under the non-cancelable operating
leases having initial terms in excess of one year as of
June 30, 2005, are as follows (in thousands):
|
|
|
|
|
|
|
|
Operating
|
|
|
|
Leases
|
|
|
|
|
|
Fiscal Year ending June 30,
|
|
|
|
|
|
2006
|
|
$
|
429
|
|
|
2007
|
|
|
461
|
|
|
2008
|
|
|
478
|
|
|
2009
|
|
|
40
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
1,408
|
|
|
|
|
|
Rent expense for the fiscal years ended June 30, 2003, 2004
and 2005 and the three months ended September 30, 2004 and
2005, was $320,000, $260,000, $249,000, $60,000 and $46,000,
respectively. Deferred rent under the facility operating lease
amounted to $174,000, $276,000 and $271,000 at June 30,
2004, 2005 and September 30, 2005, respectively.
Sponsored Research
In August 1999, the Company entered into a Sponsored Research
Agreement (Research Agreement) with an academic
institution. The Research Agreement allows the academic
institution to perform research for the Company on a
best-efforts basis leading to the delivery of a final research
report to the Company, with funds not expended under the
agreement to be returned to the Company. The Research Agreement
was amended in 2005
F-20
Cardica, Inc.
Notes to Financial Statements (Continued)
(Information as of September 30, 2005 and for the three
months ended
September 30, 2004 and 2005 is unaudited)
to increase the maximum obligation under the agreement to
$1.2 million and extend the expiration date to
December 31, 2006. The Company incurred expenses totaling
$96,000, $130,000, $136,000, $52,000 and $26,000 in the fiscal
years ended June 30, 2003, 2004 and 2005 and the three
months ended September 30, 2004 and 2005, respectively. The
Company had an accrued liability of $547,000 and a prepaid
expense of $150,000 and $124,000 at June 30, 2004 and 2005
and September 30, 2005, respectively. The remaining
obligation for services to be rendered through December 31,
2006, under the Research Agreement as of September 30,
2005, is approximately $158,000.
|
|
Note 6.
|
Related Party Transactions
|
Financing Activities
In June 2002, the Company issued to Guidant Investment
Corporation (Guidant Investment) a total of
863,557 shares of Series D convertible preferred stock
at $11.58 per share resulting in cash proceeds of
approximately $10.0 million to the Company.
In August 2003, the Company issued to Guidant Investment a total
of 283,688 shares of Series E convertible preferred
stock at $14.10 per share resulting in cash proceeds of
approximately $4.0 million to the Company.
Loan and Strategic Agreements
In March 2000, the Company entered into, and in December 2002
amended, a Master Loan and Security Agreement with an affiliate
of Western Technology Investment, of which the Companys
director, J. Michael Egan, is also a director. See Note 8
for more information on notes payable and warrants issued under
the Master Loan and Security Agreement.
In August 2003, the Company entered into a Loan Agreement with
Guidant Investment. This agreement provided the Company with a
five-year loan of $10.3 million. The Company borrowed
$5.0 million in August 2003, and borrowed an additional
$5.3 million in February 2004. As the note holder, Guidant
Investment has a first priority security interest in all
personal property and assets of the Company, including
intellectual property. The Loan Agreement provides for principal
and accrued interest payment at a loan maturity date of August
2008. The interest rate on the notes is 8.75% per annum,
calculated on actual principal outstanding based on actual days
elapsed. As of June 30, 2004, 2005 and September 30,
2005, the Company had accrued interest payable to related party
of $539,000, $1.4 million and $1.7 million,
respectively, on the accompanying balance sheet for this
obligation.
In August 2003, in connection with this loan, Guidant Investment
was granted a right to negotiate exclusively for the acquisition
of the Company, and the Company also agreed not to enter into
any change of control transaction during the period between the
signing of the strategic agreement and November 2004. The
Company received a strategic agreement fee of $250,000 and
recorded the amount in the accompanying balance sheet as of
June 30, 2004 as deferred other income from a related
party. The Company recorded the $250,000 as other income in the
statement of operations during the fiscal year ended
June 30, 2005 upon expiration of the strategic agreement in
October 2004.
Development and Supply Agreement
In December 2003, the Company entered into a Development and
Supply Agreement with Guidant Corporation (Guidant)
for the development and commercialization of an aortic cutter
for Guidant, the Heartstring product. The agreement called for
the Company to develop and manufacture aortic cutters. Future
production of the aortic cutter has been outsourced by Guidant
to a third-party manufacturer, and the Company will receive
royalties quarterly for each unit sold in the future. As of
June 30, 2005, no royalties have been
F-21
Cardica, Inc.
Notes to Financial Statements (Continued)
(Information as of September 30, 2005 and for the three
months ended
September 30, 2004 and 2005 is unaudited)
received under this agreement. In addition, the Company was
entitled to receive payments of $488,000 for development
activities pertaining to the development of the product. In June
2004, the agreement was amended to include further development
efforts for incremental consideration of $45,000. The Company
recognized development revenue of $223,000 and $310,000, for the
fiscal years ended June 30, 2004 and 2005, respectively.
The Company also recognized product revenue from the sale of
aortic cutters to Guidant of $396,000 in the fiscal year ended
June 30, 2005. No product revenue was recognized in fiscal
2004 for the aortic cutter.
Distribution Agreement Termination
In September 2004, Guidant terminated its distribution agreement
with the Company for product sales in Europe of the
PAS-Port
and
C-Port
systems. The
agreement called for minimum purchases by Guidant and upon
termination the Company recorded $510,000 in net product revenue
in the year ended June 30, 2005 as the difference between
the minimum contractual purchases due from Guidant and actual
purchases through the termination date. Guidant paid the Company
the $510,000 in October 2004. There are no additional payments
due the Company related to the termination of the distribution
agreement.
|
|
Note 7.
|
Subordinated Convertible Note
|
In June 2003, the Company entered into a distribution agreement
with Century Medical, Inc. (CMI). CMI issued a
subordinated convertible note to the Company in the amount of
$3.0 million. The subordinated convertible notes are
convertible at the option of the holder into common stock at the
price of the Companys initial public offering at any time
within 180 days after the initial public offering. The
holder of the subordinated convertible notes has a continuing
security interest in all of the Companys personal property
and assets, including intellectual property. Interest is
compounded annually at 5% and is payable quarterly in arrears on
January 31, April 30, July 31, and
October 31 of each year. The principal of the note is due
in June 2008. The Company made interest payments of $131,000 and
$150,000 in the fiscal years ended June 30, 2004 and 2005,
respectively. The interest payable at June 30, 2004 and
2005 and September 30, 2005 was $25,000.
In March 2000, the Company entered into, and in December 2002
amended, a Master Loan and Security Agreement with a financial
institution. The amendment provided the Company with the ability
to borrow up to a maximum of $5.0 million in working
capital financing and $0.5 million in equipment financing
under individual notes payable based upon the Companys
financing requirements. In conjunction with this agreement and
amendment, the Company issued various warrants exercisable to
purchase an aggregate of 124,369 shares of preferred stock
of the Company, valued at $1.0 million to the lender. The
value of the warrants was recorded as a discount of the debt.
During fiscal year 2004, the Company paid in full the entire
balance of all notes payable and the associated accrued interest
earlier than the contractual maturity dates. As a result of
paying the obligations in full early, the Company recorded a
charge in the amount of $1.1 million consisting primarily
of issuing to the debt holder a total of 45,745 shares of
Series E preferred stock, valued at $14.10 per share,
totaling $645,000 to pay for future interest that would have
been due on the notes payable over the period from August 2003
to June 2005, and $460,000 related to the acceleration of the
amortization of warrant expense originally recorded as a
discount of the debt.
F-22
Cardica, Inc.
Notes to Financial Statements (Continued)
(Information as of September 30, 2005 and for the three
months ended
September 30, 2004 and 2005 is unaudited)
Note 9. Stockholders
(Deficit)
Convertible Preferred Stock
The Company initially recorded the Series A, B, C, D and E
convertible preferred stock (preferred stock) at
their fair values on the dates of issuance. A redemption event
will only occur upon the liquidation, winding up, change in
control or sale of substantially all of the assets of the
Company. As the redemption event is outside of the control of
the Company, all shares of preferred stock have been presented
outside of permanent equity in accordance with EITF topic
D-98,
Classification
and Measurement of Redeemable Securities
. Further, the
Company has also elected not to adjust the carrying values of
the preferred stock to the redemption value of such shares,
since it is uncertain whether or when a redemption event will
occur. Subsequent adjustments to increase the carrying values to
the redemption values will be made if it becomes probable that
such redemption will occur.
Each share of Series A, B, C, D and E convertible preferred
stock (collectively, the preferred stock) is
convertible, at the option of the holder, into shares of common
stock. Conversion of the Preferred Stock is subject to a
conversion rate determined by dividing the original issue price
of the Preferred Stock by the conversion price in effect at the
time of conversion. The initial conversion prices are equal to
the original issue prices and are subject to adjustment as
specified in the Articles of Incorporation. Conversion is
automatic upon the closing of an underwritten public offering
pursuant to an effective registration statement under the
Securities Act of 1933 which results in gross offering proceeds
of not less than $25,000,000, or upon the approval of the
holders of at least 50% of the outstanding shares of the
Preferred Stock. The Preferred Stock has voting rights on an
as-if
-converted-to
-common-stock
basis. Series A, B, C, D and E preferred stockholders are
entitled to noncumulative dividends if declared by the Board of
Directors and in preference to common stock dividends. No
dividends have been declared or paid by the Company through
June 30, 2005.
In the event of the liquidation, dissolution or sale of the
Company, the Series A, B, C, D and E preferred stock are
subject to liquidation preferences of $3.00, $4.89, $8.40,
$11.58 and $14.10, respectively, per share plus all declared but
unpaid dividends. After liquidation preference distributions to
Series A, B, C, D and E preferred stockholders have been
paid, the remaining assets of the Company available for
distribution to stockholders shall be distributed among the
holders of common stock.
For as long as at least 1,500,000 shares of the Preferred
Stock remain outstanding (subject to adjustment for any stock
split, reverse stock split or similar transaction), the holders
of the Preferred Stock, voting as a separate class, shall be
entitled to elect two members of the Companys Board of
Directors. The holders of the Companys common stock,
voting as a separate class, shall be entitled to elect two
members of the Companys Board of Directors. The holders of
common stock and Preferred Stock, voting together as a single
class on an as-if-converted basis, shall be entitled to elect
all remaining members of the Board of Directors.
Notes Receivable from Stockholders
From inception October 17, 1997, to June 30, 2002, the
Company issued six promissory notes to three officers allowing
them to exercise their stock options. These full-recourse notes,
with aggregate principal of $444,000, had annual rates of
interest between 6.6% and 8.15% and were repayable commencing
August 2003. In August 2002, one of the notes was paid in cash
to the Company by an officer and in April 2003, the note was
reissued to the officer. In January 2003, the Company modified
the terms of the remaining five notes by reducing the interest
rate of each note to 1.58% and extending the repayment date to
January 2006. Accrued interest of $40,000, as of the date of
modification, was added into the new principal of the notes. The
modification of the notes triggered variable accounting of the
options exercised with the notes and resulted in
F-23
Cardica, Inc.
Notes to Financial Statements (Continued)
(Information as of September 30, 2005 and for the three
months ended
September 30, 2004 and 2005 is unaudited)
stock-based compensation expense of $288,000, $85,000,
$2.0 million and $624,000, which the Company has charged to
general and administrative and research and development expense
in the accompanying statements of operations for fiscal years
ended June 30, 2003, 2004, 2005 and for the three months
ended September 30, 2005, respectively. As of June 30,
2005, $449,000 of notes receivable from stockholders remained
outstanding. Interest receivable on all promissory notes of
$12,000, $21,000 and $23,000, was recorded in the accompanying
balance sheets as of June 30, 2004, 2005 and
September 30, 2005, respectively. An additional stockholder
note receivable of $73,000 is classified on the balance sheet as
a current asset. The notes were repaid in October 2005 (See
Note 13).
In May 2003 and April 2004, the Company issued promissory notes
to an officer allowing him to early exercise options to purchase
a total of 33,333 shares of the Companys common
stock. These recourse notes, with principal of $37,000 and
$47,000, bear interest at an annual rate of 1.58% and are
repayable commencing May 2006 and April 2007, respectively. In
accordance with the provision of EITF
No. 00-23,
Issues Related to the Accounting for Stock Compensation Under
APB Opinion No. 25 and FASB Interpretation No. 44
,
the early exercises of these options are not treated as a
substantive exercise for financial reporting purposes.
The loans were made pursuant to recourse promissory notes that
were secured by the underlying shares of common stock purchased
with the proceeds of the loans. Because the Company has modified
the loans or provided below-market interest rates on the loans
and extended the repayment period, for accounting purposes the
issuances of the shares that were purchased with the proceeds of
the loans were deemed to be compensatory. Accordingly, the
Company is required to record a non-cash compensation charge
equal to the difference between the purchase price of the stock
and the fair value of the stock securing all such notes in each
reporting period during which the notes remain outstanding.
Shares Reserved
Shares of common stock reserved for future issuance are as
follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Stock options outstanding
|
|
|
766,251
|
|
|
|
900,088
|
|
Shares available for grant under stock option plan
|
|
|
244,771
|
|
|
|
106,990
|
|
Warrants for Series B preferred stock
|
|
|
12,270
|
|
|
|
12,270
|
|
Warrants for Series C preferred stock
|
|
|
52,082
|
|
|
|
52,082
|
|
Warrants for Series D preferred stock
|
|
|
60,017
|
|
|
|
60,017
|
|
Warrants for common stock
|
|
|
32,146
|
|
|
|
32,146
|
|
Conversion of convertible preferred stock
|
|
|
4,259,376
|
|
|
|
4,259,328
|
|
|
|
|
|
|
|
|
|
|
|
5,426,913
|
|
|
|
5,422,921
|
|
|
|
|
|
|
|
|
Stock Options
The 1997 Equity Incentive Plan (the Plan) was
adopted in November 1997 and provides for the issuance of stock
options. As of June 30, 2005, the Company had reserved an
aggregate of 1,915,000 shares of common stock for issuance
under the Plan.
Stock options granted under the Plan may either be incentive
stock options, nonstatutory stock options, stock bonuses or
rights to acquire restricted stock. Incentive stock options may
be granted to employees with exercise prices of no less than the
fair value, and nonstatutory options may be granted to
employees, directors or
F-24
Cardica, Inc.
Notes to Financial Statements (Continued)
(Information as of September 30, 2005 and for the three
months ended
September 30, 2004 and 2005 is unaudited)
consultants at exercise prices of no less than 85% of the fair
value of the common stock on the date of grant, as determined by
the Board of Directors. If, at the time the Company grants an
option, the optionee directly or by attribution owns stock
possessing more than 10% of the total combined voting power of
all classes of stock of the Company, the option price shall be
at least 110% of the fair value and shall not be exercisable
more than five years after the date of grant. Options may be
granted with vesting terms as determined by the Board of
Directors. Except as noted above, options expire no more than
10 years after the date of grant, or earlier if employment
is terminated.
Common stock options may include a provision whereby the holder,
while an employee, director or consultant, may elect at any time
to exercise the option as to any part or all of the shares
subject to the option prior to the full vesting of the option.
Any unvested shares so purchased are subject to repurchase by
the Company at its option and at a price equal to the original
purchase price of the stock. This right of repurchase will lapse
with respect to the unvested shares, and each optionee shall
vest in his or her option shares, as follows: a minimum of 25%
of the option shares upon completion of one year of service
measured from the vesting commencement date, and the balance of
the option shares in a series of successive equal monthly
installments upon the optionees completion of each of the
next 36 months of service thereafter. In accordance with
guidance in Issue 33b of
EITF 00-23,
the
Company does not consider the stock issued upon exercise of an
unvested stock option substantively exercised, and the cash paid
for the exercise price is considered a deposit or a prepayment
of the exercise price that is recognized by the Company as a
liability. As the underlying shares vest, the deposit liability
is reclassified as equity. At June 30, 2004, 2005 and
September 30, 2005, respectively, 114,288, 46,143 and
30,351 shares of common stock were acquired through the
early exercise of options, of which 59,472, 32,695 and
23,222 shares of common stock as of June 30, 2004,
2005 and September 30, 2005, respectively, are subject to
the Companys right of repurchase and are excluded from
shareholders equity since these shares have not vested.
Option activity under this Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
Weighted-Average
|
|
|
|
Available for
|
|
|
Number
|
|
|
Exercise Price Per
|
|
|
|
Grant
|
|
|
of Shares
|
|
|
Share
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 1, 2002
|
|
|
22,421
|
|
|
|
485,581
|
|
|
$
|
1.23
|
|
|
Shares reserved
|
|
|
500,000
|
|
|
|
-
|
|
|
|
-
|
|
|
Options granted
|
|
|
(373,617
|
)
|
|
|
373,617
|
|
|
|
2.25
|
|
|
Options exercised
|
|
|
-
|
|
|
|
(138,170
|
)
|
|
|
1.47
|
|
|
Options canceled
|
|
|
31,085
|
|
|
|
(31,085
|
)
|
|
|
1.44
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2003
|
|
|
179,889
|
|
|
|
689,943
|
|
|
|
1.68
|
|
|
Options granted
|
|
|
(218,467
|
)
|
|
|
218,467
|
|
|
|
2.85
|
|
|
Options exercised
|
|
|
-
|
|
|
|
(185,775
|
)
|
|
|
1.77
|
|
|
Options canceled
|
|
|
67,714
|
|
|
|
(67,714
|
)
|
|
|
1.92
|
|
|
Unvested stock options canceled
|
|
|
2,604
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2004
|
|
|
31,740
|
|
|
|
654,921
|
|
|
|
2.01
|
|
|
Shares reserved
|
|
|
333,333
|
|
|
|
-
|
|
|
|
-
|
|
|
Options granted
|
|
|
(148,264
|
)
|
|
|
148,264
|
|
|
|
2.85
|
|
|
Options exercised
|
|
|
-
|
|
|
|
(8,972
|
)
|
|
|
1.62
|
|
|
Options canceled
|
|
|
27,962
|
|
|
|
(27,962
|
)
|
|
|
2.19
|
|
|
|
|
|
|
|
|
|
|
|
F-25
Cardica, Inc.
Notes to Financial Statements (Continued)
(Information as of September 30, 2005 and for the three
months ended
September 30, 2004 and 2005 is unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
Weighted-Average
|
|
|
|
Available for
|
|
|
Number
|
|
|
Exercise Price Per
|
|
|
|
Grant
|
|
|
of Shares
|
|
|
Share
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2005
|
|
|
244,771
|
|
|
|
766,251
|
|
|
|
2.16
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted (unaudited)
|
|
|
(198,661
|
)
|
|
|
198,661
|
|
|
|
2.85
|
|
|
Options exercised (unaudited)
|
|
|
-
|
|
|
|
(8,562
|
)
|
|
|
1.65
|
|
|
Options cancelled (unaudited)
|
|
|
56,262
|
|
|
|
(56,262
|
)
|
|
|
2.34
|
|
|
Unvested stock options cancelled (unaudited)
|
|
|
4,618
|
|
|
|
-
|
|
|
|
1.35
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2005 (unaudited)
|
|
|
106,990
|
|
|
|
900,088
|
|
|
$
|
2.31
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about options
outstanding, vested and exercisable at September 30, 2005
(unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Remaining
|
|
|
Number
|
|
|
|
Number
|
|
|
Contractual
|
|
|
Vested and
|
|
Exercise Price
|
|
Outstanding
|
|
|
Life
|
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
$0.30
|
|
|
25,000
|
|
|
|
2.42
|
|
|
|
25,000
|
|
$0.75
|
|
|
7,000
|
|
|
|
3.53
|
|
|
|
7,000
|
|
$1.20
|
|
|
8,333
|
|
|
|
4.64
|
|
|
|
8,333
|
|
$1.35
|
|
|
190,500
|
|
|
|
5.82
|
|
|
|
186,554
|
|
$2.25
|
|
|
171,807
|
|
|
|
7.50
|
|
|
|
107,738
|
|
$2.85
|
|
|
497,448
|
|
|
|
9.25
|
|
|
|
100,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
900,088
|
|
|
|
|
|
|
|
434,697
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average estimated fair value of options granted to
employees at fair value, under the minimum value method, during
the fiscal years ended June 30, 2003, 2004 and 2005 was
$0.24, $0.30 and $0.33, respectively. The weighted-average
estimated fair value of options granted to employees at below
fair value during the years ended June 30, 2003, 2004 and
2005 was none, none and $2.52, respectively. The
weighted-average estimated fair value of options granted to
employees at below fair value during the three months ended
September 30, 2005 was $5.97.
For all options granted in fiscal years 2003, 2004 and 2005 to
consultants, the Black-Scholes option pricing method was applied
using the following weighted-average assumptions for 2003, 2004
and 2005: volatility of 100%; a risk-free interest rate of
2.19%, 4.28% and 4.23%, respectively; a contractual option life
of
8-10 years,
7-10 years
and
6-10 years,
respectively, and no dividend yield. The Company determined
compensation expense related to these options for the fiscal
years ended June 30, 2003, 2004 and 2005, and the three
months ended September 30, 2005, to be $67,000, $127,000,
$25,000 and $38,000, respectively, which has been reflected in
the statements of operations. In accordance with SFAS 123
and
EITF 96-18,
options granted to consultants are periodically revalued as such
stock options vest.
Deferred Stock-Based Compensation
The fair value of the common stock for options granted through
September 30, 2005, was originally estimated by the
Companys board of directors, with input from management.
The Company did not obtain
F-26
Cardica, Inc.
Notes to Financial Statements (Continued)
(Information as of September 30, 2005 and for the three
months ended
September 30, 2004 and 2005 is unaudited)
contemporaneous valuations by an unrelated valuation specialist.
Subsequently, the Company reassessed the valuations of common
stock relating to option grants during the fiscal year ended
June 30, 2005 and for the three-month period ended
September 30, 2005. The Company granted stock options with
an exercise price of $2.85 during the fiscal year ended
June 30, 2005 and for the three-month period ended
September 30, 2005. The Company determined that the fair
value of its common stock increased from $2.85 to $7.50 per
share during the fiscal year ended June 30, 2005 and
increased from $7.50 to $9.00 per share during for the
three-month period ended September 30, 2005.
During the fiscal year ended June 30, 2005 and the
three-month period ended September 30, 2005, the Company
issued options to certain employees under the 1997 Plan with
exercise prices below the estimated fair value of the
Companys common stock at the date of grant, determined
with hindsight. In accordance with the requirements of APB
No. 25, the Company has recorded deferred stock-based
compensation for the difference between the exercise price of
the stock option and the estimated fair value of the
Companys stock at the date of grant. This deferred
stock-based compensation is amortized to expense on a
straight-line basis over the period during which the
Companys right to repurchase the stock lapses or the
options vest, generally four years. During the fiscal year ended
June 30, 2005 and the three month period ended
September 30, 2005, the Company has recorded deferred
stock-based compensation related to these options of
approximately $287,000 and $1.1 million, respectively.
Additionally, the Company has recorded deferred stock-based
compensation of $166,000 for stockholder notes as of
June 30, 2005 and $160,000 as of September 30, 2005,
which are subject to variable accounting. The deferred stock
compensation will be amortized over the related vesting terms of
the options. The Company recorded deferred stock-based
compensation expense of $22,000 and $108,000 for the fiscal year
ended June 30, 2005 and the three months ended
September 30, 2005, respectively.
Common Stock Subject to Repurchase
In connection with the issuance of common stock to employees and
the exercise of options pursuant to the Companys 1997
Stock Option/ Stock Issuance Plan, employees entered into
restricted stock purchase agreements with the Company. Under the
terms of these agreements, the Company has a right to repurchase
any unvested shares at the original exercise price of the
shares. With continuous employment with the company, the
repurchase rights generally lapse at a rate of 25% at the end of
the first year and at a rate of 1/36th of the remaining
purchased shares for each continuous month of service
thereafter. As of June 30, 2005 and September 30,
2005, a total of 37,806 and 24,794 shares, respectively,
were subject to repurchase by the Company.
Warrants
The following table summarizes all outstanding stock warrants as
of September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise Price
|
|
|
|
Warrant to Purchase:
|
|
Date Issued
|
|
|
Shares
|
|
|
Per Share
|
|
|
Expiration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Series B
|
|
|
March 2000
|
|
|
|
12,270
|
|
|
$
|
4.89
|
|
|
|
March 2010
|
|
Preferred Series C
|
|
|
July 2001
|
|
|
|
52,082
|
|
|
|
8.40
|
|
|
|
July 2008
|
|
Common
|
|
|
June 2002
|
|
|
|
32,146
|
|
|
|
11.58
|
|
|
|
June 2009
|
|
Preferred Series D
|
|
|
December 2002
|
|
|
|
60,017
|
|
|
|
11.58
|
|
|
|
October 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
156,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-27
Cardica, Inc.
Notes to Financial Statements (Continued)
(Information as of September 30, 2005 and for the three
months ended
September 30, 2004 and 2005 is unaudited)
There is no provision for income taxes because the Company has
incurred operating losses. Deferred income taxes reflect the net
tax effects of net operating loss and tax credit carryovers and
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Companys deferred tax assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
Net operating loss carry-forwards
|
|
$
|
14,253
|
|
|
$
|
17,149
|
|
Research credits
|
|
|
650
|
|
|
|
1,203
|
|
Capitalized research and development expenses
|
|
|
-
|
|
|
|
548
|
|
Other
|
|
|
791
|
|
|
|
559
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
15,694
|
|
|
|
19,459
|
|
Valuation allowance
|
|
|
(15,694
|
)
|
|
|
(19,459
|
)
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
As of June 30, 2005, the Company had federal net operating
loss carry-forwards of approximately $44.3 million. The
Company also had federal and state research and development tax
credit carry-forwards of approximately $0.7 million and
$0.5 million respectively. The net operating loss and tax
credit carry-forwards will expire at various dates beginning in
2013, if not utilized. As of June 30, 2005, the Company had
a state net operating loss carry-forward of approximately
$35.1 million, which expires beginning in 2008.
Utilization of the net operating loss and tax credit
carry-forwards may be subject to a substantial annual limitation
due to the ownership change limitations provided by the Internal
Revenue Code of 1986, as amended, that are applicable if the
Company experiences an ownership change, which may
occur, for example, as a result of the Companys initial
public offering and other sales of the Companys stock and
similar state provisions. The annual limitation may result in
the expiration of net operating losses and credits before
utilization.
As of June 30, 2004 and 2005, the Company had deferred tax
assets of approximately $15.7 million and
$19.5 million, respectively. Realization of the deferred
tax assets is dependent upon future taxable income, if any, the
amount and timing of which are uncertain. Accordingly, the net
deferred tax assets have been fully offset by a valuation
allowance. The net valuation allowance increased by
approximately $4.6 million and $3.8 million during the
years ended June 30, 2004 and 2005, respectively.
|
|
Note 11.
|
Employee Benefit Plan
|
In January 2001, the Company adopted a 401(k) Profit Sharing
Plan that allows voluntary contributions by eligible employees.
Employees may elect to contribute up to the maximum allowed
under the Internal Revenue Service regulations. The Company may
make discretionary contributions as determined by the Board of
Directors. No amount was contributed by the Company to the plan
during the fiscal years ended June 30, 2003, 2004 and 2005
or three months ended September 30, 2005.
From time to time, the Company enters into contracts that
require the Company, upon the occurrence of certain
contingencies, to indemnify parties against third-party claims.
These contingent obligations primarily relate to (i) claims
against the Companys customers for violation of
third-party intellectual property rights caused by the
Companys products; (ii) claims resulting from
personal injury or property damage resulting from
F-28
Cardica, Inc.
Notes to Financial Statements (Continued)
(Information as of September 30, 2005 and for the three
months ended
September 30, 2004 and 2005 is unaudited)
the Companys activities or products; (iii) claims by
the Companys office lessor arising out of the
Companys use of the premises; and (iv) agreements
with the Companys officers and directors under which the
Company may be required to indemnify such persons for
liabilities arising out of their activities on behalf of the
Company. Because the obligated amounts for these types of
agreements usually are not explicitly stated, the overall
maximum amount of these obligations cannot be reasonably
estimated. No liabilities have been recorded for these
obligations on the Companys balance sheets as of
June 30, 2004, 2005 or September 30, 2005.
|
|
Note 13.
|
Subsequent Events
|
Initial Public Offering
On September 20, 2005, the Board of Directors authorized
management of the Company to file a registration statement with
the Securities and Exchange Commission permitting the Company to
sell shares of its common stock to the public. The registration
statement was filed November 4, 2005. If the initial public
offering is closed under the terms presently anticipated, all of
the redeemable convertible preferred stock outstanding will
automatically convert into shares of common stock.
2005 Equity Incentive Plan
On October 13, 2005, the Board of Directors adopted, and on
December 27, 2005 the stockholders approved, the 2005
Equity Incentive Plan (the 2005 Plan). The 2005 Plan
will become effective upon the completion of the Companys
initial public offering and provides for the granting of
incentive stock options, nonstatutory stock options, stock
appreciation rights, stock awards and cash awards to employees
and consultants.
A total of 400,000 shares of common stock have been
authorized for issuance pursuant to the 2005 Plan, plus any
shares which have been reserved but not issued under the 1997
Plan or issued and forfeited after the date of the initial
public offering, plus any shares repurchased at or below the
original purchase price and any options which expire or become
unexercisable after the initial public offering, thereafter plus
all shares of common stock restored by the Board of Directors
pursuant to the provision of the 2005 Plan that permits options
to be settled on a net appreciation basis.
Settlement of Stockholder Notes
In October 2005, the Company entered into agreements with three
of its directors, including its chief executive officer and the
chairman of the board, pursuant to which these directors agreed
to tender to the Company shares of common stock owned by the
directors, valued at $9.00 per share, in full payment of
the principal and interest due under the six promissory notes
described in footnote 9.
Notice of Potential Patent Interference
On October 28, 2005, the Company received a letter from
Integrated Vascular Interventional Technologies, Inc.
(IVIT) advising the Company of IVITs effort to
provoke an interference in the U.S. Patent and Trademark
Office between one of IVITs patent applications (serial
no. 10/243,543) and a patent currently held by the Company
(U.S. patent no. 6,391,038) relating to the Companys
C-Port
®
distal anastomosis system. The Company also learned that IVIT is
attempting to provoke another interference in the
U.S. Patent and Trademark Office between another of its
U.S. patent applications (serial no. 10/706,245) and
another of the Companys issued patents (U.S. Patent
No. 6,478,804). IVIT makes no specific demands in the
letter, but alleges that it has
F-29
Cardica, Inc.
Notes to Financial Statements (Continued)
(Information as of September 30, 2005 and for the three
months ended
September 30, 2004 and 2005 is unaudited)
an indication of an allowed claim and that it expects to receive
a declaration of interference regarding that claim. An
interference is a proceeding within the U.S. Patent and
Trademark Office to determine priority of invention of the
subject matter of patent claims. The decision to declare an
interference is solely within the power of the Board of Patent
Appeals and Interferences of the U.S. Patent and Trademark
Office, and can be made only after claims in a patent
application are allowed by the examiner and a determination is
made that interfering subject matter exists. As of this date, no
claims have been allowed in either of IVITs patent
applications.
The Company believes that IVITs attempts to provoke an
interference are unlikely to succeed and will vigorously defend
its patents against such claims of interference, although there
can be no assurance that the Company will succeed in doing so.
The Company further believes that if IVITs patent claims
are allowed in their present form, the Companys products
would not infringe such claims. There can be no assurance that
IVITs patent claims, if allowed, will be in their present
form, or that the Companys products would not be found to
infringe such claims or any other claims that are issued.
Reverse Stock Split
On December 12, 2005 the Board of Directors approved, and
on January 6, 2006 the stockholders approved, a
one-for-three reverse split of the Companys issued or
outstanding shares of common stock and preferred stock and, on
January 9, 2006 the Company filed an amended and restated
certificate of incorporation effecting the reverse stock split.
All issued or outstanding common stock, preferred stock and per
share amounts contained in the financial statements have been
retroactively adjusted to reflect this reverse stock split.
Agreement with Cook Incorporated
On December 9, 2005, the Company and Cook Incorporated
(Cook) signed a License, Development and
Commercialization Agreement relating the Companys X-Port
vascular access closure device. The agreement gives Cook
exclusive worldwide rights to manufacture and sell the X-Port,
after certain development milestones are achieved by the
Company. The Company will receive an initial payment of $500,000
if certain development milestones are achieved and up to a total
of $1.5 million in future milestone payments if milestones
relating to development are achieved and will receive royalties
if Cook successfully commercializes the X-Port.
F-30
3,500,000 Shares
Cardica, Inc.
Common Stock
|
|
A.G. Edwards
|
Allen & Company LLC
|
Montgomery
& Co., LLC
The date of this prospectus
is ,
2006
Until ,
2006, all dealers that buy, sell or trade the common stock may
be required to deliver a prospectus, regardless of whether they
are participating in the offering. 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.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
|
|
ITEM 13.
|
Other Expenses of Issuance and Distribution.
|
The following table sets forth the costs and expenses, other
than underwriting discounts and commissions, payable by Cardica
in connection with the sale of the common stock being registered
hereby. All amounts are estimates except the SEC Registration
Fee and the NASD filing fee.
|
|
|
|
|
|
|
|
Amount to be Paid
|
|
|
|
|
|
SEC registration fee
|
|
$
|
6,029
|
|
NASD filing fee
|
|
|
4,500
|
|
Nasdaq National Market listing fee
|
|
|
100,000
|
|
Blue Sky fees and expenses
|
|
|
7,500
|
|
Printing and Engraving expenses
|
|
|
180,000
|
|
Legal fees and expenses
|
|
|
650,000
|
|
Accounting fees and expenses
|
|
|
700,000
|
|
Transfer Agent and Registrar fees
|
|
|
30,000
|
|
Miscellaneous
|
|
|
121,971
|
|
|
|
|
|
|
Total
|
|
|
1,800,000
|
|
|
|
|
|
|
|
ITEM 14.
|
Indemnification of Directors and Officers.
|
As permitted by Section 145 of the Delaware General
Corporation Law, the registrants bylaws provide that
(a) the registrant (i) is required to indemnify its
directors and executive officers to the fullest extent not
prohibited by the Delaware General Corporation Law,
(ii) may, in its discretion, indemnify other officers,
employees and agents as set forth in the Delaware General
Corporation Law, (iii) is required to advance all expenses
incurred by its directors and executive officers in connection
with certain legal proceedings (subject to certain exceptions),
(iv) the registrant is authorized to enter into
indemnification agreements with its directors, officers,
employees and agents and (v) may not retroactively amend
the amended and restated bylaws provisions relating to indemnity
and (b) the rights conferred in the amended and restated
bylaws are not exclusive.
The registrant has entered into an agreement with one of its
directors that requires the registrant to indemnify such person
against expenses, judgments, fines, settlements and other
amounts that such person actually and reasonably incurred
(including expenses of a derivative action) in connection with
any proceeding, whether actual or threatened, to which any such
party may be made a party by reason of the fact that such person
is or was a director or officer of the registrant or any of its
affiliated enterprises, provided such person acted in good faith
and in a manner such person reasonably believed to be in or not
opposed to the best interests of the registrant. The
indemnification agreement also sets forth procedures that will
apply in the event of a claim for indemnification. The
registrant is also obligated to advance expenses, subject to an
undertaking to repay amounts advanced if such director is
ultimately determined not to be entitled to indemnification. The
indemnification agreements also set forth certain procedures
that will apply in the event of a claim for indemnification
thereunder.
The Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement also provides for indemnification by the
underwriters of the registrant and its officers and directors
for certain liabilities arising under the Securities Act of
1933, as amended (the Securities Act), or otherwise.
See also the undertakings set out in response to Item 17
herein.
II-1
|
|
ITEM 15.
|
Sales of Unregistered Securities.
|
Since September 1, 2002, the registrant has issued and sold
the unregistered securities described below. All shares of
preferred stock referenced below will convert into
401,354 shares of common stock upon the completion of the
offering described in this registration statement.
(1) The registrant has issued an aggregate of
269,029 shares of its common stock to employees, directors
and consultants for cash consideration in the aggregate amount
of $436,843 upon the exercise of stock options granted under its
1997 Equity Incentive Plan, 7,430 shares of which have been
repurchased.
(2) The registrant has granted stock options to employees,
directors and consultants under its 1997 Equity Incentive Plan
exercisable for an aggregate of 998,558 shares of common
stock, of which options covering an aggregate of
195,406 shares terminated or expired, and an aggregate of
269,029 shares were issued upon the exercise of stock
options, as set forth in (1) above.
(3) In December 2002, the registrant issued a warrant to
purchase 60,017 shares of Series D Preferred
Stock to Venture Lending & Leasing III, LLC at
$11.58 per share in connection with credit facility
arrangements. As of the date hereof, the warrant has not been
exercised.
(4) In September 2002, the registrant issued
30,000 shares of its common stock to consultants in
consideration of services rendered for an aggregate amount of
$67,500 under its 1997 Equity Incentive Plan.
(5) In January 2003, the registrant issued an aggregate of
14,000 shares of its common stock to consultants in
consideration of services rendered for an aggregate amount of
$31,500 under its 1997 Equity Incentive Plan.
(6) In June 2003, the registrant issued an aggregate of
8,142 shares of its common stock to consultants in
consideration of services rendered for an aggregate amount of
$18,320 under its 1997 Equity Incentive Plan.
(7) In June 2003, the registrant issued a warrant to
purchase 11,904 shares of Series C Preferred
Stock to Venture Lending & Leasing II, Inc. at
$8.40 per share in connection with credit facility
arrangements. As of the date hereof, the warrant has not been
exercised.
(8) In September 2003, the registrant issued an aggregate
of 4,070 shares of its common stock to consultants in
consideration of services rendered for an aggregate amount of
$11,603.30 under its 1997 Equity Incentive Plan.
(9) In August 2003, the registrant sold an aggregate of
329,433 shares of our Series E Preferred Stock, to
three accredited investors at $14.10 per share, for an
aggregate purchase price of $4,645,010 consisting of cash
consideration of $4,000,001 and the $645,009 for the forgiveness
of debt.
(10) In December 2003, the registrant issued an aggregate
of 4,070 shares of its common stock to consultants on
consideration of services rendered for an aggregate amount of
$11,603 under its 1997 Equity Incentive Plan.
(11) In October 2005, the registrant issued an aggregate of
3,333 shares of its common stock to one of its directors,
Richard Powers, in consideration of services rendered for an
aggregate amount of $29,997 under its 1997 Equity Incentive Plan.
The registrant claimed exemption from registration under the
Securities Act for the sales and issuances in the transactions
described in paragraphs (1), (2), (4), (5), (6),
(10) and (11) above under Rule 701 promulgated
under the Securities Act on the basis that these issuances were
made pursuant to a written compensatory benefits plan, as
provided by Rule 701.
With respect to the grant of stock options described in
paragraph (2) above, exemption from registration under
the Securities Act was also claimed by the registrant to be
unnecessary on the basis that none of such transactions involved
a sale of a security as such term is used in
Section 2(3) of the Securities Act.
The sales and issuances of securities in the remaining
transactions described in paragraphs (3), (7) and
(9) of this Item 15 were deemed exempt from
registration under the Securities Act in reliance on
Rule 506 of Regulation D promulgated thereunder as
transactions not involving any public offering. All of the
purchasers of securities in these transactions represented to
the registrant that they were accredited investors as defined
under the Securities Act, that they acquired the securities for
investment purposes only and not with a view to the distribution
thereof and as to its experience in business matters.
Appropriate legends were affixed to the stock certificates
issued in such transactions. The recipient acknowledged either
that the recipient received adequate information about the
registrant or had access, through business relationships, to
such information.
II-2
|
|
ITEM 16.
|
Exhibits and Financial Statement Schedules.
|
(a) Exhibits.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
|
|
1
|
.1
|
|
Form of Underwriting Agreement.
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of the
Registrant as currently in effect.#
|
|
3
|
.2
|
|
Amended and Restated Certificate of Incorporation of the
Registrant to be effective upon closing of the offering.#
|
|
3
|
.3
|
|
Bylaws of the Registrant as currently in effect.#
|
|
3
|
.4
|
|
Bylaws of the Registrant to be effective upon closing of the
offering.#
|
|
3
|
.5
|
|
Specimen Common Stock certificate of the Registrant.
|
|
4
|
.1
|
|
Warrant dated March 17, 2000 exercisable for
36,810 shares of common stock (on a pre-split basis).#
|
|
4
|
.2
|
|
Warrant dated July 5, 2001 exercisable for
31,251 shares of common stock (on a pre-split basis).#
|
|
4
|
.3
|
|
Warrant dated July 5, 2001 exercisable for
124,999 shares of common stock (on a pre-split basis).#
|
|
4
|
.4
|
|
Warrant dated June 13, 2002 exercisable for
96,439 shares of common stock (on a pre-split basis).#
|
|
4
|
.5
|
|
Warrant dated October 31, 2002 exercisable for
180,052 shares of common stock (on a pre-split basis).#
|
|
5
|
.1
|
|
Opinion of Cooley Godward LLP regarding legality.
|
|
10
|
.1
|
|
1997 Equity Incentive Plan and forms of related agreements and
documents.#
|
|
10
|
.2
|
|
2005 Equity Incentive Plan and forms of related agreements and
documents.#
|
|
10
|
.3
|
|
Amended and Restated Investor Rights Agreement, dated
August 19, 2003, by and among the Registrant and certain
stockholders.#
|
|
10
|
.4
|
|
Benefit Agreement with Bernard Hausen, M.D., Ph.D.+
|
|
10
|
.5
|
|
Office Lease Agreement dated April 25, 2003, and First
Amendment to Office Lease Agreement dated January 21, 2004.#
|
|
10
|
.6
|
|
Distribution Agreement by and between Cardica, Inc. and Century
Medical, Inc. dated June 16, 2003.#
|
|
10
|
.7
|
|
Subordinated Convertible Note Agreement with Century
Medical, Inc. dated June 16, 2003, and Amendment No. 1
thereto, dated August 6, 2003.#
|
|
10
|
.8
|
|
Note issued pursuant to Subordinated Convertible
Note Agreement with Century Medical, Inc.#
|
|
10
|
.9
|
|
Agreement by and between the Company and the Guidant Investment
Corporation, dated August 19, 2003.#
|
|
10
|
.10
|
|
Intellectual Property Security Agreement by the Company in favor
of Guidant, dated August 19, 2003.#
|
|
10
|
.11
|
|
Notes issued pursuant to Omnibus Agreement.#
|
|
10
|
.12
|
|
Allen & Company LLC letter of intent dated
September 12, 2005.#
|
|
10
|
.13
|
|
License, Development and Commercialization Agreement by and
between Cardica, Inc. and Cook Incorporated, dated
December 9, 2005.
|
|
21
|
.1
|
|
Subsidiaries of Registrant.#
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm.
|
|
23
|
.2
|
|
Consent of Cooley Godward LLP (See Exhibit 5.1).
|
|
24
|
.1
|
|
Power of Attorney (see page II-5).#
|
|
|
|
Portions of this exhibit (indicated by asterisks) have been
omitted pursuant to a request for confidential treatment and
this exhibit has been filed separately with the SEC.
|
|
|
+
|
Indicates management contract or compensatory plan.
|
II-3
(b) Financial Statement Schedules
None.
The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the Purchase Agreement
certificates in such denominations and registered in such names
as required by the underwriters to permit prompt delivery to
each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions
described in Item 14 or otherwise, the Registrant has been
advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
|
|
|
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
|
|
|
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
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II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in Redwood City, State of California, on the
1st day of February, 2006.
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Bernard A. Hausen, M.D., Ph.D.
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President and Chief Executive Officer
|
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and on the dates indicated:
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Name and Signature
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Title
|
|
Date
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|
|
|
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*
Bernard A.
Hausen, M.D., Ph.D.
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President, Chief Executive Officer and Director
(Principal Executive Officer)
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February 1, 2006
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/s/ Robert Y. Newell
Robert Y. Newell
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Chief Financial Officer
(Principal Financial and Accounting Officer)
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February 1, 2006
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*
J. Michael Egan
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Director
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|
February 1, 2006
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|
*
Kevin T. Larkin
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Director
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|
February 1, 2006
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*
Richard P. Powers
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Director
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February 1, 2006
|
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*
Robert C. Robbins, M.D.
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Director
|
|
February 1, 2006
|
|
*
John Simon, Ph.D.
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Director
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|
February 1, 2006
|
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*
Stephen A. Yencho, Ph.D.
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Director
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February 1, 2006
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*
William H. Younger, Jr.
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Director
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February 1, 2006
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* By
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/s/ Robert Y. Newell
Robert Y. Newell
under power of attorney.
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II-5
EXHIBIT INDEX
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Exhibit
|
|
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Number
|
|
Description
|
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|
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1
|
.1
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Form of Underwriting Agreement.
|
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3
|
.1
|
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Amended and Restated Certificate of Incorporation of the
Registrant as currently in effect.#
|
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3
|
.2
|
|
Amended and Restated Certificate of Incorporation of the
Registrant to be effective upon closing of the offering.#
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3
|
.3
|
|
Bylaws of the Registrant as currently in effect.#
|
|
3
|
.4
|
|
Bylaws of the Registrant to be effective upon closing of the
offering.#
|
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3
|
.5
|
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Specimen Common Stock certificate of the Registrant.
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4
|
.1
|
|
Warrant dated March 17, 2000 exercisable for
36,810 shares of common stock (on a pre-split basis).#
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4
|
.2
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Warrant dated July 5, 2001 exercisable for
31,251 shares of common stock (on a pre-split basis).#
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4
|
.3
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|
Warrant dated July 5, 2001 exercisable for
124,999 shares of common stock (on a pre-split basis).#
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4
|
.4
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Warrant dated June 13, 2002 exercisable for
96,439 shares of common stock (on a pre-split basis).#
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4
|
.5
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Warrant dated October 31, 2002 exercisable for
180,052 shares of common stock (on a pre-split basis).#
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5
|
.1
|
|
Opinion of Cooley Godward LLP regarding legality.
|
|
10
|
.1
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1997 Equity Incentive Plan and forms of related agreements and
documents.#
|
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10
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.2
|
|
2005 Equity Incentive Plan and forms of related agreements and
documents.#
|
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10
|
.3
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Amended and Restated Investor Rights Agreement, dated
August 19, 2003, by and among the Registrant and certain
stockholders.#
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10
|
.4
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Benefit Agreement with Bernard Hausen, M.D., Ph.D.+
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10
|
.5
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Office Lease Agreement dated April 25, 2003, and First
Amendment to Office Lease Agreement dated January 21, 2004.#
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10
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.6
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Distribution Agreement by and between Cardica, Inc. and Century
Medical, Inc. dated June 16, 2003.#
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10
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.7
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Subordinated Convertible Note Agreement with Century
Medical, Inc. dated June 16, 2003, and Amendment No. 1
thereto, dated August 6, 2003.#
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10
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.8
|
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Note issued pursuant to Subordinated Convertible
Note Agreement with Century Medical, Inc.#
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10
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.9
|
|
Agreement by and between the Company and the Guidant Investment
Corporation, dated August 19, 2003.#
|
|
10
|
.10
|
|
Intellectual Property Security Agreement by the Company in favor
of Guidant, dated August 19, 2003.#
|
|
10
|
.11
|
|
Notes issued pursuant to Omnibus Agreement.#
|
|
10
|
.12
|
|
Allen & Company LLC letter of intent dated
September 12, 2005.#
|
|
10
|
.13
|
|
License, Development and Commercialization Agreement by and
between Cardica, Inc. and Cook Incorporated, dated
December 9, 2005.
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|
21
|
.1
|
|
Subsidiaries of Registrant.#
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|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm.
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23
|
.2
|
|
Consent of Cooley Godward LLP (See Exhibit 5.1).
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24
|
.1
|
|
Power of Attorney (see page II-5).#
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|
|
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Portions of this exhibit (indicated by asterisks) have been
omitted pursuant to a request for confidential treatment and
this exhibit has been filed separately with the SEC.
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|
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+
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Indicates management contract or compensatory plan.
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Exhibit 1.1
___ Shares
Common Stock
($0.001 Par Value)
UNDERWRITING AGREEMENT
, 2006
A.G. Edwards & Sons, Inc.
As Representative of the Several Underwriters
c/o
A.G. Edwards & Sons, Inc.
One
North Jefferson Avenue
St.
Louis, Missouri 63103
The undersigned, Cardica, Inc., a Delaware corporation (the Company) hereby addresses you as
the representative (the Representative) of each of the persons, firms and corporations listed on
Schedule I hereto (collectively, the Underwriters) and hereby confirms its agreement with the
several Underwriters as follows:
1.
Description of Shares
. The Company proposes to issue and sell to the Underwriters ___
shares of its Common Stock, par value $0.001 per share (such ___shares of Common Stock are herein
collectively referred to as the Firm Shares). Solely for the purpose of covering over-allotments
in the sale of the Firm Shares, the Company further proposes to grant to the Underwriters the right
to purchase up to an additional
shares of Common Stock (the Option Shares), as provided in
Section 3 of this Agreement. The Firm Shares and the Option Shares are herein sometimes referred
to as the Shares and are more fully described in the Prospectus hereinafter defined.
2.
Purchase, Sale and Delivery of Firm Shares
. On the basis of the representations,
warranties and agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to the Underwriters, and each such Underwriter agrees, severally
and not jointly, (a) to purchase from the Company at a purchase price of $ per share, the number
of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto and (b) to
purchase from the Company any additional number of Option Shares which such Underwriter may become
obligated to purchase pursuant to Section 3 hereof.
The Company will deliver definitive certificates for the Firm Shares at the office of A.G.
Edwards & Sons, Inc., 55 Water Street, New York,
New York 10041 (Edwards Office), or such other
place as you and the Company may mutually agree upon, for the accounts of the
Underwriters against payment to the Company of the purchase price for the Firm Shares sold by it to
the several Underwriters by wire transfer of immediately available funds payable to the order of
the Company, and delivered to One North Jefferson Avenue, St. Louis, Missouri 63103, or at such
other place as may be agreed upon between you and the Company (the Place of Closing), at 10:00
a.m., New York time, on
, 2006, or at such other time and date not later than five full
business days thereafter as you and the Company may agree, such time and date of payment and
delivery being herein called the Closing Date.
The certificates for the Firm Shares so to be delivered will be made available to you for
inspection at Edwards Office (or such other place as you and the Company may mutually agree upon)
at least one full business day prior to the Closing Date and will be in such names and
denominations as you may request at least forty-eight hours prior to the Closing Date.
It is understood that an Underwriter, individually, may (but shall not be obligated to) make
payment on behalf of the other Underwriters whose funds shall not have been received prior to the
Closing Date for Shares to be purchased by such Underwriter. Any such payment by an Underwriter
shall not relieve the other Underwriters of any of their obligations hereunder.
It is understood that the Underwriters propose to offer the Shares to the public upon the
terms and conditions set forth in the Registration Statement hereinafter defined.
The Company acknowledges and agrees that the Underwriters have acted, and are acting, solely
in the capacity of an arms-length contractual counterparty to the Company with respect to the
offering of the Shares contemplated hereby (including in connection with determining the terms of
the offering) and not as a financial advisor or a fiduciary to, or an agent of, the Company or any
other person. Additionally, none of the Underwriters has advised, or is advising, the Company or
any other person as to any legal, tax, investment, accounting or regulatory matters in any
jurisdiction with respect to the transactions contemplated hereby. The Company shall consult with
its own advisors concerning such matters and shall be responsible for making its own independent
investigation and appraisal of the transactions contemplated hereby, and the Underwriters shall
have no responsibility or liability to the Company with respect thereto. Any review by the
Underwriters of the Company, the transactions contemplated hereby or other matters relating to such
transactions has been and will be performed solely for the benefit of the Underwriters and has not
been and shall not be on behalf of the Company or any other person. It is understood that the
offering price was arrived at through arms-length negotiations between the Underwriters. The
Company acknowledges and agrees that the Underwriters are acting as independent contractors, and
any duties of the Underwriters arising out of this Agreement and the transactions completed hereby
shall be contractual in nature and expressly set forth herein. Notwithstanding anything in this
Underwriting Agreement to the contrary, the Company acknowledges that the Underwriters may have
financial interests in the success of the offering contemplated hereby that are not limited to the
difference between the price to the public and the purchase price paid to the Company by the
Underwriters for the Shares and the Underwriters
2
have no obligation to disclose, or account to the Company for, any of such additional financial
interests. The Company hereby waives and releases, to the fullest extent permitted by law, any
claims that the Company may have against the Underwriters with respect to any breach or alleged
breach of fiduciary duty.
A.G. Edwards & Sons, Inc., without compensation will act as qualified independent
underwriter (in such capacity, the QIU) within the meaning of Rule 2720 of the Conduct Rules of
the NASD in connection with the offering of the Shares. The Company will indemnify and hold
harmless the QIU against any losses, claims, damages or liabilities, joint or several, to which the
QIU may become subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon the QIUs acting (or
alleged failing to act) as such qualified independent underwriter and will reimburse the QIU for
any legal or other expenses reasonably incurred by the QIU in connection with investigating or
defending any such loss, claim, damage, liability or action as such expenses are incurred;
provided, however, that the Company shall not be liable in any such case to the extent that any
such loss, claim, damage, liability or action is the result of gross negligence or willful
misconduct of the QIU.
3.
Purchase, Sale and Delivery of the Option Shares
. The Company hereby grants an option to
the Underwriters to purchase up to [___] Option Shares on the same terms and conditions as the Firm
Shares; provided, however, that such option may be exercised only for the purpose of covering any
over-allotments which may be made by them in the sale of the Firm Shares. No Option Shares shall
be sold or delivered unless the Firm Shares previously have been, or simultaneously are, sold and
delivered.
The option is exercisable on behalf of the several Underwriters by you, as Representative, at
any time, and from time to time, before the expiration of 30 days from the date of the Prospectus
(or, if such 30th day shall be a Saturday or Sunday or a holiday, on the next day thereunder when
The Nasdaq National Market is open for trading), for the purchase of all or part of the Option
Shares covered thereby, by notice given by you to the Company in the manner provided in Section 13
hereof, setting forth the number of Option Shares as to which the Underwriters are exercising the
option, and the date of delivery of said Option Shares, which date shall not be more than five
business days after such notice unless otherwise agreed to by the parties. You may terminate the
option at any time, as to any unexercised portion thereof, by giving written notice to the Company
to such effect.
You, as Representative, shall make such allocation of the Option Shares among the Underwriters
as may be required to eliminate purchases of fractional Shares.
Delivery of the Option Shares with respect to which the option shall have been exercised
shall be made to or upon your order at Edwards Office (or at such other place as you and the
Company may mutually agree upon), against payment by you of the per
share purchase price specified in Section 2(a) multiplied by the
number of Option Shares specified in the notice given by you to the
Company by wire transfer of immediately available funds. Such payment and delivery shall be made
at 10:00 a.m., New York time, on the date designated in the notice given by you as above provided
for (which may be the same as the Closing Date), unless some other date and
3
time are agreed upon, which date and time of payment and delivery are called the Option Closing Date. The
certificates for the Option Shares so to be delivered will be made available to you for inspection
at Edwards Office at least one full business day prior to the Option Closing Date and will be in
such names and denominations as you may request at least forty-eight hours prior to the Option
Closing Date. On the Option Closing Date, the Company shall provide the Underwriters such
representations, warranties, agreements, opinions, letters, certificates and covenants with respect
to the Option Shares as are required to be delivered on the Closing Date with respect to the Firm
Shares.
4.
Representations, Warranties and Agreements of the Company
. (a) The Company represents and
warrants to and agrees with each Underwriter as of the date hereof and as of the Closing Date and
each Option Closing Date, if any, that:
(i) A registration statement (Registration No. 333-129497) on Form S-1 with respect to
the Shares, including a preliminary prospectus, and such amendments to such registration
statement as may have been required to the date of this Agreement, has been prepared by the
Company pursuant to and in conformity with the requirements of the Securities Act of 1933,
as amended (the
1933 Act
), and the rules and regulations thereunder (the
1933
Act Rules and Regulations
) of the Securities and Exchange Commission (the
SEC
) and has been filed with the SEC under the 1933 Act. Copies of such
registration statement, including any amendments thereto, each related preliminary
prospectus (meeting the requirements of Rule 430 or 430A of the 1933 Act Rules and
Regulations) contained therein, and the exhibits, financial statements and schedules thereto
have heretofore been delivered by the Company to you. If such registration
statement has become effective under the 1933 Act, a final prospectus containing information
permitted to be omitted at the time of effectiveness by Rule 430A of the 1933 Act Rules and
Regulations will be filed promptly by the Company with the SEC in accordance with Rule
424(b) of the 1933 Act Rules and Regulations. The term Registration Statement as used
herein means the registration statement as amended at the time it becomes effective under
the 1933 Act (the
Effective Date
), including financial statements and all exhibits
and, if applicable, the information deemed to be included by Rule 430A of the 1933 Act Rules
and Regulations. If an abbreviated registration statement is prepared and filed with the SEC in accordance
with Rule 462(b) under the 1933 Act (an
Abbreviated Registration Statement
), the
term Registration Statement as used in this Agreement includes the Abbreviated
Registration Statement.
4
The term
Prospectus
as used herein means (i) the prospectus in the form first used to confirm sales of Shares (or in the form
first made available to the Underwriters by the Company to meet the requests of purchasers
pursuant to Rule 173 under the Securities Act). The term
Preliminary Prospectus
as used herein shall mean each preliminary prospectus as contemplated by Rule 430 or 430A of
the 1933 Act Rules and Regulations included at any time in the Registration Statement. For
purposes of this Agreement,
free writing prospectus
has the meaning set forth in
Rule 405 under the Securities Act,
Time of Sale Prospectus
means the preliminary
prospectus together with the free writing prospectuses, if any, each identified in
Schedule II
hereto and
broadly available road show
means a bona fide
electronic road show as defined in Rule 433(h)(5) under the Securities Act that has been
made available without restriction to any person. The Preliminary Prospectus, if any, and
the Prospectus delivered to the Underwriters for use in connection with the offering of the
Shares and the Time of Sale Prospectus will be identical to the respective version thereof
created to be transmitted to the SEC for filing via the Electronic Data Gathering Analysis
and Retrieval System (
EDGAR
), except to the extent permitted by Regulation S-T.
For purposes of this Agreement, the words amend, amendment, amended, supplement or
supplemented with respect to the Registration Statement or the Prospectus shall mean
amendments or supplements to the Registration Statement or the Prospectus, as the case may
be.
(ii) Neither the SEC nor any state or other jurisdiction or other regulatory body has
issued, and neither is, to the knowledge of the Company, threatening to issue, any stop
order under the 1933 Act or other order suspending the effectiveness of the Registration
Statement (as amended or supplemented) or preventing or suspending the use of any
Preliminary Prospectus, Time of Sale Prospectus or the Prospectus or suspending the
qualification or registration of the Shares for offering or sale in any jurisdiction nor
instituted or, to the knowledge of the Company, threatened to institute proceedings for any
such purpose. No proceeding under Section 8A of the 1933 Act shall have commenced or to the
knowledge of the Company be threatened related to the use of any Preliminary Prospectus,
Time of Sale Prospectus, the Prospectus or the offering of the Shares. Each Preliminary
Prospectus at its date of issue, the Registration Statement, the Time of Sale Prospectus and
the Prospectus and any amendments or supplements thereto, contain or will contain, as the
case may be, all statements which are required to be stated therein by, and in all material
respects conform or will conform, as the case may be, to the requirements of, the 1933 Act
and the 1933 Act Rules and Regulations. Neither the Registration Statement nor any
amendment thereto, as of the applicable effective date, contains or will contain, as the
case may be, any untrue statement of a material fact or omits or will omit to state any
material fact required to be stated therein or necessary to make the statements therein, not
misleading, and neither any Preliminary Prospectus, the
5
Time of Sale Prospectus, the
Prospectus nor any supplement thereto contains or will contain, as the case may be, any untrue statement of a material fact or omits or will omit
to state any material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not misleading, and
each broadly available road show, if any, when considered together with the Time of Sale
Prospectus, does not contain any untrue statement of material fact or omit to state a
material fact necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; provided, however, that the Company makes no
representation or warranty as to information contained in or omitted from the Registration
Statement, the Prospectus or the Time of Sale Prospectus, or any such amendment or
supplement, in reliance upon, and in conformity with, written information furnished to the
Company relating to the Underwriters by or on behalf of the Underwriters expressly for use
in the preparation thereof (as provided in Section 14 hereof). There is no contract,
agreement, understanding or arrangement, whether written or oral, or document required to be
described in the Registration Statement, Time of Sale Prospectus or Prospectus or to be
filed as an exhibit to the Registration Statement which is not described or filed as
required.
(iii) This Agreement has been duly authorized, executed and delivered by the Company
and constitutes a valid and legally binding obligation of the Company enforceable against
the Company in accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar
laws relating to or affecting creditors rights generally and by general principles of
equity (the Exceptions).
(iv) The Company has been duly organized and is validly existing as a corporation in
good standing under the laws of the state of Delaware, with full corporate power and
authority to own, lease and operate its properties and conduct its business as described in
the Prospectus and Time of Sale Prospectus and to execute and deliver, and perform the
Companys obligations under, this Agreement; the Company is duly qualified to do business as
a foreign corporation in good standing in each state or other jurisdiction in which its
ownership or leasing of property or conduct of business legally requires such qualification,
except where the failure to be so qualified, individually or in the aggregate, would not
have a Material Adverse Effect. The term Material Adverse Effect as used herein means any
material adverse effect on the condition (financial or other), net worth, business, affairs,
management, prospects, results of operations or cash flow of the Company.
(v) The Company has not sustained since the date of the latest audited financial
statements included in the Prospectus and Time of Sale Prospectus any material loss or
interference with its business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or governmental
6
action, order or decree. otherwise than as set forth in the Prospectus and Time of Sale Prospectus and,
since the respective dates as of which information is given in the Prospectus and Time of
Sale Prospectus, there has not been any change in the capital stock or long-term debt of the
Company or any material adverse change, or any development involving a prospective material
adverse change, in or affecting the general affairs, management, financial position,
stockholders equity or results of operations of the Company, otherwise than as set forth in
the Prospectus and Time of Sale Prospectus.
(vi) The issuance and sale of the Shares and the execution, delivery and performance by
the Company of this Agreement, and the consummation of the transactions herein contemplated,
will not conflict with or result in a breach or violation of any of the terms or provisions
of, or constitute a default under, or result in the creation or imposition of any lien,
charge or encumbrance upon any properties or assets of the Company under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or instrument to which the
Company is a party or by which the Company is bound or to which any of the properties or
assets of the Company is subject, except to such extent as, individually or in the
aggregate, does not have a Material Adverse Effect, nor will such action result in any
violation of the provisions of the Companys certificate of incorporation or bylaws or any
statute, rule, regulation or other law, or any order or judgment, of any court or
governmental agency or body having jurisdiction over the Company or any of its properties;
and no consent, approval, authorization, order, registration or qualification of or with any
such court or governmental agency or body is required for the execution, delivery and
performance of this Agreement, the issuance and sale of the Shares or the consummation of
the transactions contemplated hereby, except such as have been, or will be prior to the
Closing Date, obtained under the 1933 Act or as may be required by the National Association
of Securities Dealers, Inc. (the NASD) and such consents, approvals, authorizations,
registrations or qualifications as may be required under state securities or blue sky laws
in connection with the purchase and distribution of the Shares by the Underwriters.
(vii) The Company has duly and validly authorized capital stock as set forth in the
Prospectus and Time of Sale Prospectus; all outstanding shares of Common Stock of the
Company and the Shares conform, or when issued will conform, to the description thereof in
the Prospectus and Time of Sale Prospectus and have been, or, when issued and paid for in
the manner described herein will be, duly authorized, validly issued, fully paid and
non-assessable; and the issuance of the Shares to be purchased from the Company hereunder is
not subject to preemptive or other similar rights, or any restriction upon the voting or
transfer thereof pursuant to applicable law or the Companys certificate of incorporation,
by-laws or governing documents or any agreement to which the Company is a party or by which
it is bound. All corporate action required to be taken by the Company for the
authorization, issuance and sale of the Shares has been duly and validly taken. Except as
disclosed in the Prospectus and Time of Sale Prospectus, there are no
7
outstanding
subscriptions, rights, warrants, options, calls, convertible securities,
commitments of sale or rights related to or entitling any person to purchase or otherwise to
acquire any shares of, or any security convertible into or exchangeable or exercisable for,
the capital stock of, or other ownership interest in, the Company.
(viii) The statements set forth in the Prospectus and Time of Sale Prospectus
describing the Shares and this Agreement, insofar as they purport to describe the provisions
of the laws and documents referred to therein, are accurate, complete and fair.
(ix) The Company is in possession of all franchises, grants, authorizations, licenses,
certificates, permits, easements, consents, orders and approvals (Permits) from all state,
federal, foreign and other regulatory authorities, and has satisfied the requirements
imposed by regulatory bodies, administrative agencies or other governmental bodies, agencies
or officials, that are required for the Company lawfully to own, lease and operate its
properties and conduct its businesses as described in the Prospectus and Time of Sale
Prospectus, and, the Company is conducting its business in compliance with all of the
Permits, laws, rules and regulations of each jurisdiction in which it conducts its business,
including without limitation all applicable rules and regulations of the Food and Drug
Administration (the FDA), and all applicable laws, statutes, ordinances, rules or
regulations (including, without limitation, the Federal Food, Drug and Cosmetic Act, as
amended and similar foreign laws and regulations) enforced by the FDA or equivalent foreign
authorities, in each case with such exceptions, individually or in the aggregate, as would
not have a Material Adverse Effect; the Company has filed all notices, reports, documents or
other information (Notices) required to be filed under applicable laws, rules and
regulations, in each case, with such exceptions, individually or in the aggregate, as would
not have a Material Adverse Effect; and, except as otherwise specifically described in the
Prospectus and Time of Sale Prospectus, the Company has not received any notification from
any court or governmental body, authority or agency, relating to the revocation or
modification of any such Permit or, to the effect that any additional authorization,
approval, order, consent, license, certificate, permit, registration or qualification
(Approvals) from such regulatory authority is needed to be obtained by any of them, in any
case where it could be reasonably expected that obtaining such Approvals or the failure to
obtain such Approvals, individually or in the aggregate, would have a Material Adverse
Effect.
(x) The Company has filed all necessary federal, state and foreign income and franchise
tax returns and paid all taxes shown as due thereon; all such tax returns are complete and
correct in all material respects; all tax liabilities are adequately provided for on the
books of the Company except to such extent as would not have a Material Adverse Effect; the
Company has made all necessary payroll tax payments and are current and up-to-date; and the
Company has no knowledge of any tax proceeding or action pending or threatened against the
Company which, individually or in the aggregate, would have a Material Adverse Effect.
8
(xi) Except as disclosed in the Prospectus and Time of Sale Prospectus, the Company
owns or possesses sufficient trademarks, trade names, patent rights, copyrights, domain
names, licenses, approvals, trade secrets and other similar rights (collectively,
Intellectual Property Rights) reasonably necessary to conduct its business as now
conducted and as described in the Prospectus and Time of Sale Prospectus. Except as
disclosed in the Prospectus and Time of Sale Prospectus, the Intellectual Property Rights
owned by the Company and, to the knowledge of the Company, the Intellectual Property Rights
licensed to the Company have not been adjudged invalid or unenforceable, in whole or in
part, and there is no pending or, to the Companys knowledge, threatened action, suit,
proceeding or claim by others challenging the validity or scope of any such Intellectual
Property Rights. Except as disclosed in the Prospectus and Time of Sale Prospectus, there is
no pending or, to the knowledge of the Company, threatened action, suit, proceeding or claim
by others challenging the Companys rights in or to any Intellectual Property Rights owned
or used by the Company, and the Company is unaware of any facts which would form a
reasonable basis for any such claim. The Company has not received any notice of a claim of
infringement, misappropriation or conflict with Intellectual Property Rights of others,
which infringement, misappropriation or conflict, if the subject of an unfavorable decision,
would have a material adverse effect on the Company, and the Company is unaware of any
facts, which form a reasonable basis for any such claim. Except as otherwise disclosed in
the Prospectus and Time of Sale Prospectus, the Company is not a party to or bound by any
options, licenses or agreements with respect to the Intellectual Property Rights of any
other person or entity that are required to be set forth in the Prospectus and Time of Sale
Prospectus. None of the technology or intellectual property used by the Company in its
business has been obtained or is being used by the Company in violation of any contractual
obligation binding on the Company or, to the Companys knowledge, any of its officers,
directors or employees or otherwise in violation of the rights of any persons. The Company
has duly and properly filed or caused to be filed with the U. S. Patent and Trademark Office
(the PTO) or foreign and international patent authorities all patent applications
disclosed in the Prospectus and Time of Sale Prospectus as owned by the Company (the
Company Patent Applications). To the knowledge of the Company, the Company has complied
with the PTOs duty of candor and disclosure for the Company Patent Applications and has
made no material misrepresentation during prosecution of the Company Patent Applications.
Except as disclosed in the Prospectus and Time of Sale Prospectus, to the Companys
knowledge, the Company Patent Applications disclose patentable subject matters, and the
Company has not been notified of any inventorship challenges nor has any interference been
declared or provoked nor is any material fact known by the Company that would preclude the
issuance of patents with respect to the Company Patent Applications or would render such
patents, if issued, invalid or unenforceable.
9
(xii) The Company has title in fee simple to all items of real property and title to
all personal property owned by it, in each case free and clear of all liens, encumbrances,
restrictions and defects except such as are described in the Prospectus and Time of Sale
Prospectus or do not materially affect the value of such property and do not interfere with
the use made and proposed to be made of such property; and any property held under lease or
sublease by the Company is held under valid, subsisting and enforceable leases or subleases
with such exceptions as are not material and do not interfere with the use made and proposed
to be made of such property by the Company; and the Company has no notice or knowledge of
any material claim of any sort which has been, or may be, asserted by anyone adverse to the
Companys rights as lessee or sublessee under any lease or sublease described above, or
affecting or questioning the Companys rights to the continued possession of the leased or
subleased premises under any such lease or sublease in conflict with the terms thereof.
(xiii) Except as described in the Prospectus and Time of Sale Prospectus, to the
Companys knowledge, there is no factual basis for any action, suit or other proceeding
involving the Company or any of its material assets for any failure of the Company, or any
predecessor thereof, to comply with any requirements of federal, state or local regulation
relating to air, water, solid waste management, hazardous or toxic substances, or the
protection of health, safety or the environment, which would, individually or in the
aggregate, result in a Material Adverse Effect. Except as described in the Prospectus and
Time of Sale Prospectus, none of the property owned or leased by the Company is, to the
knowledge of the Company, contaminated with any waste or hazardous or toxic substances, and
the Company may not be deemed an owner or operator of a facility or vessel which owns,
possesses, transports, generates or disposes of a hazardous substance as those terms are
defined in §9601 of the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, 42 U.S.C. §9601
et seq
.
(xiv) No labor disturbance exists with the employees of the Company or is imminent
which, individually or in the aggregate, would have a Material Adverse Effect. None of the
employees of the Company is represented by a union and, to the knowledge of the Company, no
union organizing activities are taking place. The Company has not violated any federal,
state or local law or foreign law relating to discrimination in hiring, promotion or pay of
employees, nor any applicable wage or hour laws, or the rules and regulations thereunder, or
analogous foreign laws and regulations, which would, individually or in the aggregate,
result in a Material Adverse Effect.
(xv) The Company is in compliance in all material respects with all presently
applicable provisions of the Employee Retirement Income Security Act of 1974, as amended,
including the regulations and published interpretations thereunder (ERISA); no reportable
event (as defined in ERISA) has occurred with respect to any pension
10
plan (as defined in ERISA) for which the Company would have any liability; the
Company has not incurred and does not expect to incur liability under (i) Title IV of ERISA
with respect to termination of, or withdrawal from, any pension plan or (ii) Sections 412
or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and
published interpretations thereunder (the Code); and each pension plan for which the
Company would have any liability that is intended to be qualified under Section 401(a) of
the Code is so qualified in all material respects, and nothing has occurred, whether by
action or by failure to act, which would cause the loss of such qualification.
(xvi) The Company maintains insurance of the types and in the amounts generally deemed
adequate for its business, including, but not limited to, directors and officers
insurance, insurance covering real and personal property owned or leased by the Company
against theft, damage, destruction, acts of vandalism and all other risks customarily
insured against, all of which insurance is in full force and effect. The Company has not
been refused any insurance coverage sought or applied for, and the Company has no reason to
believe that it will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be necessary to
continue its business at a cost that would not have a Material Adverse Effect.
(xvii) The Company is not, or with the giving of notice or lapse of time or both would
not be, in default or violation with respect to its certificate of incorporation or by-laws.
The Company is not, or with the giving of notice or lapse of time or both would not be, in
default in the performance or observance of any material obligation, agreement, covenant or
condition contained in any indenture, mortgage, deed of trust, loan agreement, lease or
other agreement or instrument to which the Company is a party or by which the Company is
bound or to which any of the properties or assets of the Company is subject, or in violation
of any statutes, laws, ordinances or governmental rules or regulations or any orders or
decrees to which it is subject, which default or violation, individually or in the
aggregate, would have a Material Adverse Effect.
(xviii) Other than as set forth in the Prospectus and Time of Sale Prospectus, there
are no legal or governmental proceedings pending to which the Company is a party or of which
any property of the Company is the subject that, if determined adversely to the Company,
would individually or in the aggregate have a Material Adverse Effect or which would
materially and adversely affect the consummation of the transactions contemplated hereby or
which is required to be disclosed in the Prospectus and Time of Sale Prospectus; to the
Companys knowledge, no such proceedings are threatened or contemplated by the Company.
11
(xix) The Company is not and, after giving effect to the offering and sale of the
Shares, will not be a holding company, or a subsidiary company of a holding company, or an affiliate of a holding company or of a subsidiary company, as such
terms are defined in the Public Utility Holding Company Act of 1935, as amended (the 1935
Act).
(xx) The Company is not and, after giving effect to the offering and sale of the
Shares, will not be an investment company or an entity controlled by an investment
company, as such terms are defined in the Investment Company Act of 1940, as amended (the
1940 Act).
(xxi) Ernst & Young LLP, the accounting firm which has certified the financial
statements filed with and as a part of the Registration Statement, is an independent
registered public accounting firm within the meaning of the 1933 Act and the 1933 Act Rules
and Regulations and the rules and regulations of the Public Company Accounting Oversight
Board (PCAOB) of the United States. Except as described in the Prospectus and Time of
Sale Prospectus, the Company maintains a system of internal accounting controls sufficient
to provide reasonable assurance that: (1) transactions are executed in accordance with
managements general or specific authorization; (2) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (3) access to assets is
permitted only in accordance with managements general or specific authorization; and (4)
the recorded accounts for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect thereto. The financial statements
and schedules of the Company, including the notes thereto, filed with and as a part of the
Registration Statement, Prospectus or Time of Sale Prospectus, accurately and fairly present
in all material respects the financial condition of the Company as of the respective dates
thereof and the results of operations and changes in financial position and statements of
cash flow for the respective periods covered thereby, all in conformity with generally
accepted accounting principles applied on a consistent basis throughout the periods involved
except as otherwise disclosed therein. All adjustments necessary for a fair presentation of
results for such periods have been made. The selected financial data included in the
Registration Statement, Prospectus and Time of Sale Prospectus present fairly the
information shown therein and have been compiled on a basis consistent with that of the
audited financial statements. Any operating or other statistical data included in the
Registration Statement, Prospectus and Time of Sale Prospectus comply in all material
respects with the 1933 Act and the 1933 Act Rules and Regulations and present fairly the
information shown therein and are based on or derived from sources which the Company
reasonably and in good faith believes are reliable and accurate, and such data agree with
the sources from which they are derived. All non-GAAP financial information included in the
Registration Statement, Prospectus and Time of Sale Prospectus complies with the
requirements of Regulation G and Item 10 of
12
Regulation S-K under the 1933 Act. The pro
forma financial statements and the related notes thereto included in the Registration
Statement, the Prospectus and Time of Sale Prospectus present fairly the information shown therein, have been prepared in accordance with the
SECs rules and guidelines with respect to pro forma financial statements and have been
properly compiled on the basis described therein, and the assumptions used in the
preparation thereof are reasonable and the adjustments used therein are appropriate to give
effect to the transactions and circumstances referred to therein.
(xxii) Except as disclosed in the Prospectus and Time of Sale Prospectus, no holder of
any security of the Company has any right to require registration of shares of Common Stock
or any other security of the Company because of the filing of the Registration Statement or
the consummation of the transactions contemplated hereby and, except as disclosed in the
Prospectus and Time of Sale Prospectus, no person has the right to require registration
under the 1933 Act of any shares of Common Stock or other securities of the Company. No
person has the right, contractual or otherwise, to cause the Company to permit such person
to underwrite the sale of any of the Shares. Except for this Agreement and the agreement
between the Company and Allen & Co. Incorporated filed as an exhibit to the Registration
Statement, there are no contracts, agreements or understandings between the Company and any
person that would give rise to a valid claim against the Company or any Underwriter for a
brokerage commission, finders fee or like payment in connection with the issuance, purchase
and sale of the Shares.
(xxiii) The Company has not distributed and, prior to the later to occur of (i) the
Closing Date or the Option Closing Date, if any, and (ii) completion of the distribution of
the Shares, will not distribute any offering material in connection with the offering and
sale of the Shares other than the Registration Statement, the Preliminary Prospectus, the
Prospectus and the Time of Sale Prospectus.
(xxiv) The Company has not taken and will not take, directly or indirectly, any action
designed to or which would reasonably be expected to cause or result in stabilization or
manipulation of the price of the Companys Common Stock, and the Company is not aware of any
such action taken or to be taken by affiliates of the Company.
(xxv) [Reserved]
(xxvi) [Reserved]
(xxvii) Except as discussed with the Companys auditors and audit committee and as
disclosed in the Prospectus, (i) there are no significant deficiencies or material
weaknesses in the design or operation of internal control over financial reporting and (ii)
13
there is, and there has been, no fraud, whether or not material, that involves management or
other employees who have a role in the Companys internal control over financial reporting.
(xxviii) Since the date of the end of the last fiscal year for which audited financial
statements are included in the Prospectus, there have been no significant changes in
internal control over financial reporting or in other factors that could significantly
affect internal control over financial reporting, except for any corrective actions with
regard to significant deficiencies and material weaknesses.
(xxix) No relationship, direct or indirect, exists between or among the Company and
any director, officer or stockholder of the Company, or any member of his or her immediate
family, or any customers or suppliers which is required to be described in the Registration
Statement, the Prospectus and the Time of Sale Prospectus which is not so described and
described as required in material compliance with such requirement. There are no
outstanding loans, advances (except normal advances for business expenses in the ordinary
course of business) or guarantees of indebtedness by the Company to or for the benefit of
any of the officers or directors of the Company or any member of their respective immediate
families, except as disclosed in the Registration Statement, the Prospectus and the Time of
Sale Prospectus. As of the date of the filing of the Registration Statement, the Company
has not, in violation of the Sarbanes-Oxley Act, directly or indirectly, extended or
maintained credit, arranged for the extension of credit, or renewed an extension of credit,
in the form of a personal loan to or for any director or executive officer of the Company.
(xxx) To the knowledge of the Company, no change in any laws or regulations is pending
which could reasonably be expected to be adopted and if adopted, could reasonably be
expected to have, individually or in the aggregate with all such changes, a Material Adverse
Effect, except as set forth in or contemplated in the Prospectus.
(xxxi) The minute books of the Company have been made available to the Underwriters and
contain a complete summary of all meetings and other actions of the directors and
stockholders of the Company in all material respects, and reflect all transactions referred
to in such minutes accurately in all material respects.
(xxxii) Neither the Company, nor any director, officer, agent, employee or other person
associated with or acting on behalf of the Company, has, directly or indirectly, used any
corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense
relating to political activity; made any direct or indirect unlawful payment to any foreign
or domestic government official or employee or to foreign or domestic political parties or
campaigns from corporate funds; violated or is in violation of any provision of the Foreign
Corrupt Practices Act of 1977; or made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment.
14
(xxxiii) The operations of the Company are and have been conducted at all times in
compliance in all material respects with applicable financial recordkeeping and reporting
requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the
money laundering statutes of all jurisdictions, the rules and regulations thereunder and any
related or similar rules, regulations or guidelines, issued, administered or enforced by any
governmental agency (collectively, the Money Laundering Laws) and no action, suit or
proceeding by or before any court or governmental agency, authority or body or any
arbitrator involving the Company with respect to the Money Laundering Laws is pending, or to
the knowledge of the Company, threatened.
(xxxiv) Neither the Company nor, to the knowledge of the Company, any director,
officer, agent, employee or affiliate of the Company is currently subject to any U.S.
sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury
Department (OFAC); and the Company will not directly or indirectly use the proceeds of the
offering, or lend, contribute or otherwise make available such proceeds to any subsidiary,
joint venture partner or other person or entity, which, to the Companys knowledge, will use
such proceeds for the purpose of financing the activities of any person currently subject to
any U.S. sanctions administered by OFAC.
(xxxv) Except as disclosed in the Prospectus and Time of Sale Prospectus, no customer
of or supplier to the Company has ceased purchases or shipments of merchandise to the
Company or indicated, to the Companys knowledge, an interest in decreasing or ceasing its
purchases from sales to the Company or otherwise modifying its relationship with the
Company, other than in the normal and ordinary course of business consistent with past
practices in a manner which would not, singly or in the aggregate, result in a Material
Adverse Effect.
(xxxvi) To the Companys knowledge, the human clinical trials, animal studies and other
preclinical tests conducted by the Company or in which the Company has participated or that
are described in the Registration Statement, Prospectus and Time of Sale Prospectus or the
results of which are referred to in the Registration Statement, Prospectus or Time of Sale
Prospectus, and such studies and tests conducted on behalf of the Company or that the
Company has relied on or intends to rely on in support of regulatory clearance or approval
by the FDA or foreign regulatory agencies, were and, if still pending, are being conducted
in all material respects in accordance with experimental protocols, procedures and controls
generally used by qualified experts in the preclinical or clinical study of medical devices
as applied to comparable products to those commercialized or being developed by the Company;
the descriptions of the results of such studies, tests and trials contained in the
Registration Statement, Prospectus and Time of Sale Prospectus fairly and accurately present
in all material respects such studies, tests
15
and trials, and except as set forth in the
Registration Statement, Prospectus and Time of Sale Prospectus, the Company has no knowledge
of any other trials, studies or tests, the results of which the Company believes reasonably
call into question the clinical trial results described or referred to in the Registration Statement, Prospectus and Time of Sale
Prospectus when viewed in the context in which such results are described and the clinical
state of development; and the Company has not received any notices or correspondence from
the FDA or any other domestic or foreign governmental agency requiring the termination,
suspension or modification (other than such modifications as are normal in the regulations
or any such modifications which are material and have been disclosed to you) of any animal
studies, preclinical tests or clinical trials conducted by or on behalf of the Company or in
which the Company has participated that are described in the Registration Statement,
Prospectus and Time of Sale Prospectus or the results of which are referred to in the
Registration Statement, Prospectus or Time of Sale Prospectus. No device that is the
subject of a 510(k) clearance or foreign regulatory approval held by or on behalf of the
Company has been or is the subject of a recall or product withdrawal, Warning Letter,
adverse inspectional findings by regulatory authorities or other material adverse
communication from a regulatory authority, except as has been set forth in the Registration
Statement, Prospectus and Time of Sale Prospectus. No investigational device exemption
filed by or on behalf of the Company with the FDA has been terminated by the FDA, and
neither the FDA nor any applicable foreign regulatory agency has commenced, or, to the
knowledge of the Company, threatened to initiate, any action to place a clinical hold order
on, or otherwise delay or suspend, proposed or ongoing clinical investigations conducted or
proposed to be conducted by or on behalf of the Company.
(xxxvii) To the Companys knowledge, all the operations of the Company are in
compliance with applicable FDA laws and regulations, including current Good Manufacturing
Practices, and the Company complies with applicable FDA laws and regulations for the export
of its products and is in compliance with applicable foreign regulatory requirements and
standards, in each case except to the extent that the failure to be in compliance with such
regulations and standards would not have a material adverse effect on the Company.
16
(b) Any certificate signed by any officer of the Company and delivered to you or to counsel
for the Underwriters shall be deemed a representation and warranty by the Company to each
Underwriter as to the matters covered thereby.
5.
Additional Covenants
. The Company covenants and agrees with the several Underwriters that:
(a) The Company will timely transmit copies of the Prospectus, and any amendments or
supplements thereto, and any free writing prospectus, as applicable, to the SEC for filing pursuant
to Rule 424(b) or Rule 433 of the 1933 Act Rules and Regulations, as applicable.
(b) The Company will deliver to the Representative, and to counsel for the Underwriters (i)
four signed copies of the Registration Statement as originally filed, including copies of exhibits
thereto and of any amendments and
supplements to the Registration Statement and (ii) a signed copy of each consent and certificate
included or incorporated by reference in, or filed as an exhibit to, the Registration Statement as
so amended or supplemented; the Company will deliver to the Underwriters through the Representative
as soon as practicable after the date of this Agreement as many copies of the Prospectus, Time of
Sale Prospectus and each free writing prospectus (to the extent not previously delivered) as the
Representative may reasonably request for the purposes contemplated by the 1933 Act; the Company will promptly advise the Representative of any request of the SEC
for amendment of the Registration Statement or for supplement to the Prospectus and Time of Sale
Prospectus or for any additional information, and of the issuance by the SEC or any state or other
jurisdiction or other regulatory body of any stop order under the 1933 Act or other order
suspending the effectiveness of the Registration Statement (as amended or supplemented) or
preventing or suspending the use of any Preliminary Prospectus, the Prospectus or Time of Sale
Prospectus or suspending the qualification or registration of the Shares for offering or sale in
any jurisdiction, and of the institution or threat of any proceedings therefor, of which the
Company shall have received notice or otherwise have knowledge prior to the completion of the
distribution of the Shares; and the Company will use its best efforts to prevent the issuance of
any such stop order or other order and, if issued, to secure the prompt removal thereof.
(c) The Company will not file any amendment or supplement to the Registration Statement, the
Prospectus, Time of Sale Prospectus or any free writing prospectus (or any other
17
prospectus
relating to the Shares filed pursuant to Rule 424(b) of the 1933 Act Rules and Regulations that
differs from the Prospectus as filed pursuant to such Rule 424(b)), of which the Underwriters shall
not previously have been advised and furnished with a copy or to which the Underwriters shall have
reasonably objected or which is not in compliance with the 1933 Act
Rules and Regulations; and the Company will promptly notify you after it shall have received notice
thereof of the time when any amendment to the Registration Statement becomes effective or when any
supplement to the Prospectus has been filed. The Company will furnish to you a copy of each
proposed free writing prospectus to be prepared by or on behalf of, used by, or referred to by the
Company and not to use or refer to any proposed free writing prospectus to which you reasonably
object. The Company will not take any action that would result in an Underwriter or the Company
being required to file with the Commission pursuant to Rule 433(d) under the 1933 Act a free
writing prospectus prepared by or on behalf of the Underwriter that the Underwriter otherwise would
not have been required to file thereunder.
(d) If the Time of Sale Prospectus is being used to solicit offers to buy the Shares at a time
when the Prospectus is not yet available to prospective purchasers and any event shall occur or
condition exist as a result of which it is necessary to amend or supplement the Time of Sale
Prospectus in order to make the statements therein, in the light of the circumstances, not
misleading, or if any event shall occur or condition exist as a result of which the Time of Sale
Prospectus conflicts with the information contained in the Registration Statement then on file, or
if, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Time
of Sale Prospectus to comply with applicable law, forthwith to prepare, file with the Commission
and furnish, at its own expense, to the Underwriters and to any dealer upon request, either
amendments or supplements to the Time of Sale Prospectus so that the statements in the Time of Sale
Prospectus as so amended or supplemented will not, in the light of the circumstances when delivered
to a prospective purchaser, be misleading or so that the Time of Sale Prospectus, as amended or
supplemented, will no longer conflict with the Registration Statement, or so that the Time of Sale
Prospectus, as amended or supplemented, will comply with applicable law.
(e) During the period when a prospectus relating to any of the Shares is required to be
delivered under the 1933 Act by any Underwriter or dealer, the Company will comply, at its own
expense, with all requirements imposed by the 1933 Act and the 1933 Act Rules and Regulations, as
now and hereafter amended, and by the rules and regulations of the SEC thereunder, as from time to
time in force, so far as necessary to permit the continuance of sales of or dealing in the Shares
during such period in accordance with the provisions hereof and as contemplated by the Prospectus
and Time of Sale Prospectus.
(f) If, during the period when the Prospectus or Time of Sale Prospectus (or in lieu thereof
the notice referred to in Rule 173(a) under the 1933 Act) relating to any of the Shares is
18
required
to be delivered under the 1933 Act by any Underwriter or dealer, (i) any event relating to or
affecting the Company or of which the Company shall be advised in writing by the Representative
shall occur as a result of which, in the opinion of the Company or the Representative, the
Prospectus and the Time of Sale Prospectus as then amended or supplemented would include any untrue
statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, (ii) any event shall occur as a result of which any free
writing prospectus conflicted with or would conflict with the information in the Registration
Statement as set forth in Rule 433 under the 1933 Act, or (iii) it shall be necessary to amend or
supplement the Registration Statement, the Prospectus or the Time of Sale Prospectus to comply with
the 1933 Act, the 1933 Act Rules and Regulations, the 1934 Act or the 1934 Act Rules and
Regulations, the Company will forthwith at its expense prepare and file with the SEC, and furnish
to the Representative a reasonable number of copies of, such amendment or supplement or other
filing that will correct such statement or omission or effect such compliance.
(g) During the period when the Prospectus or Time of Sale Prospectus (or in lieu thereof the
notice referred to in Rule 173(a) under the 1933 Act) relating to any of the Shares is required to
be delivered under the 1933 Act by any Underwriter or dealer, the Company will furnish such proper
information as may be lawfully required and otherwise cooperate in qualifying the Shares for offer
and sale under the securities or blue sky laws of such jurisdictions as the Representative may
reasonably designate and will file and make in each year such statements or reports as are or may
be reasonably required by the laws of such jurisdictions;
provided, however
, that the Company shall
not be required to qualify as a foreign corporation or to qualify as a dealer in
securities or to file a general consent to service of process under the laws of any jurisdiction.
(h) In accordance with Section 11(a) of the 1933 Act and Rule 158 of the 1933 Act Rules and
Regulations, the Company will make generally available to its security holders and to holders of
the Shares, as soon as practicable, an earning statement (which need not be audited) in reasonable
detail covering the 12 months beginning not later than the first day of the month next succeeding
the month in which occurred the effective date (within the meaning of Rule 158) of the Registration
Statement.
(i) The Company will furnish to its security holders annual reports containing financial
statements audited by independent registered public accountants and quarterly reports containing
financial statements and financial information which may be unaudited. The Company will, for a
period of five years from the Closing Date, upon written request of the Underwriters, deliver to
the Underwriters at their principal executive offices a reasonable number of copies of annual
reports, quarterly reports, current reports and copies of all other documents, reports and
information furnished by the Company to its shareholders or filed with any securities exchange or
market pursuant to the requirements of such exchange or market or with the SEC pursuant to the 1933
Act or the 1934 Act. The Company will deliver to the Underwriters upon
19
written request similar
reports with respect to any significant subsidiaries, as that term is defined in the 1933 Act Rules
and Regulations, which are not consolidated in the Companys financial statements. Any report,
document or other information required to be furnished under this paragraph (h) shall be furnished
as soon as practicable after such report, document or information becomes available.
(j) During the period beginning from the date of this Agreement and continuing to and
including the earlier of (i) the termination of trading restrictions on the Shares, as determined
by the Underwriters, and (ii) 90 days after the Closing Date, the Company will not, without the
prior written consent of the Representative, offer for sale, sell or enter into any agreement to
sell, or otherwise dispose of, any equity securities of the Company, except for (A) the Shares, (B)
any shares of Common Stock issued upon exercise of warrants or notes outstanding as of the date
hereof described in the Prospectus or (C) any options issued pursuant to any stock or option plan
described in the Prospectus or any Common Stock issued upon exercise thereof.
(k) The Company will apply the proceeds from the sale of the Shares as set forth in the
description under Use of Proceeds in the Prospectus, which description complies in all respects
with the requirements of Item 504 of Regulation S-K and will file such reports with the SEC with
respect to the sale of the Shares and the application of the proceeds therefrom as may be required
by the 1933 Act or the 1934 Act or by the applicable rules and regulations thereunder.
(l) The Company will promptly provide you with copies of all correspondence to and from, and
all documents issued to and by, the SEC in connection with the registration of the Shares under the
1933 Act.
(m) Prior to the Closing Date (and, if applicable, the Option Closing Date), the Company will
furnish to you, as soon as they have been prepared, copies of any unaudited interim financial
statements of the Company for any periods subsequent to the periods covered by the financial
statements appearing in the Registration Statement and the Prospectus.
(n) Prior to the Closing Date (and, if applicable, the Option Closing Date), the Company will
not issue any press releases or other communications directly or indirectly and will hold no press
conferences with respect to the Company, the financial condition, results of operations, business,
properties, assets or liabilities of the Company, or the offering of the Shares, without your prior
written consent.
(o) The Company will use its best efforts to obtain approval for, and maintain the quotation
of the Shares on, The Nasdaq National Market.
(p) The Company will cause its directors and officers and each holder of shares of Common
Stock or securities convertible into or exercisable or exchangeable for, shares of
20
Common Stock, to
furnish to you, on or prior to the date of this Agreement, a letter, in form substantially as set
forth on Attachment 1.
(q) The Company will maintain and keep accurate books and records reflecting its assets and
maintain internal accounting controls which provide reasonable assurance that (1) transactions are
executed in accordance with managements general or specific authorization, (2) transactions are
recorded as necessary to permit the preparation of the Companys consolidated financial statements in conformity with generally accepted accounting principles and to maintain
accountability for the assets of the Company, (3) access to the assets of the Company is permitted
only in accordance with managements general or specific authorization, and (4) the recorded
accounts of the assets of the Company are compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(r) If the Company elects to rely on Rule 462(b) under the 1933 Act, the Company shall both
file an Abbreviated Registration Statement with the SEC in compliance with Rule 462(b) and pay the
applicable fees in accordance with Rule 111 of the 1933 Act by the earlier of (i) 9:00 p.m., New
York time, on the date of this Agreement, and (ii) the time that confirmations are given or sent,
as specified by Rule 462(b)(2).
(s) If at any time during the 90-day period after the Registration Statement becomes
effective, any rumor, publication or event relating to or affecting the Company shall occur as a
result of which in your opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written notice from you
advising the Company to the effect set forth above, forthwith prepare, consult with you concerning
the substance of, and disseminate a press release or other public statement, reasonably
satisfactory to you, responding to or commenting on such rumor, publication or event.
(t) During a period of 180 days from the Effective Date, the Company shall not, without the
consent of A.G. Edwards & Sons, Inc., file a registration statement under the 1933 Act except for
any registration statement registering shares under any employee benefit plan described on the
Prospectus.
(u) The Company will have engaged, prior to the Closing Date, Computershare Trust Company,
N.A. or another institution reasonably satisfactory to A.G. Edwards & Sons, Inc., to act as
transfer agent and registrar following the Closing Date.
(v) The Company will comply with all applicable securities and other applicable laws, rules
and regulations, including, without limitation, the Sarbanes-Oxley Act of 2002, and will use its
best efforts to cause the Companys directors and officers, in their capacities as such, to comply
with such laws, rules and regulations, including, without limitation, the provisions of the
Sarbanes-Oxley Act of 2002.
21
(w) The Company will establish and maintain disclosure controls and procedures and internal
control over financial reporting as are currently required (as such terms are defined in Rule
13a-15 and 15d-15 under the 1934 Act); the Companys disclosure controls and procedures (i) will be
designed to ensure that information required to be disclosed by the Company in the reports that it
files or submits under the 1934 Act is accumulated and communicated to management, including the
principal executive and principal financial officer of the Company, or persons performing similar functions, as appropriate to allow timely decisions regarding
required disclosure, and that such information is recorded, processed, summarized and reported,
within the time periods specified in the 1934 Act Rules and Regulations; (ii) will be evaluated for
effectiveness; and as required by the 1934 Act Rules and Regulations and (iii) will be effective in
all material respects to perform the functions for which they were established.
6.
Conditions of Underwriters Obligations
. The several obligations of the Underwriters to
purchase and pay for the Shares, as provided herein, shall be subject to the accuracy, as of the
date hereof and as of the Closing Date (and, if applicable, the Option Closing Date), of the
representations and warranties of the Company contained herein, to the performance by the Company
of its covenants and obligations hereunder, and to the following additional conditions:
(a) The Registration Statement and all post-effective amendments thereto shall have become
effective not later than 1:00 p.m., New York time, on the date hereof, or, with your consent, at a
later date and time, not later than ___p.m., New York time, on the first business day following
the date hereof, or at such later date and time as may be approved by the Representative; if the
Company has elected to rely on Rule 462(b) under the 1933 Act, the Abbreviated Registration
Statement shall have become effective not later than the earlier of (x) 10:00 p.m. New York time,
on the date hereof, or (y) at such later date and time as may be approved by the Representative.
All filings required by Rule 424 and Rule 430A of the 1933 Act Rules and Regulations shall have
been made within the applicable time period prescribed for such
filing by the 1933 Act Rules and Regulations. No stop order suspending the effectiveness of the Registration Statement, as amended
from time to time, shall have been issued and no proceeding for that purpose shall have been
initiated or, to the knowledge of the Company or any Underwriter, threatened or contemplated by the
SEC, and any request of the SEC for additional information (to be included in the Registration
Statement or the Prospectus or otherwise) shall have been complied with to the reasonable
satisfaction of the Underwriters.
(b) No Underwriter shall have advised the Company on or prior to the Closing Date (and, if
applicable, the Option Closing Date), that the Registration Statement, Prospectus or Time of Sale
Prospectus or any amendment or supplement thereto contains an untrue statement of fact which, in
the opinion of counsel to the Underwriters, is material, or omits to state a fact which, in the
opinion of such counsel, is material and is required to be stated therein or is necessary to make
the statements therein, in light of the circumstances under which they were made, not misleading.
22
(c) On the Closing Date (and, if applicable, the Option Closing Date), you shall have received
the opinion of Cooley Godward LLP, counsel for the Company, addressed to you and dated the Closing
Date (and, if applicable, the Option Closing Date), in form and substance reasonably satisfactory
to the Underwriters.
(d) You shall have received on the Closing Date (and, if applicable, the Option Closing Date)
an opinion of Brian Schar, internal intellectual property counsel for the Company, dated the Closing Date (and, if applicable, the Option Closing Date), in form and substance reasonably
satisfactory to the Underwriters.
(e) You shall have received on the Closing Date (and, if applicable, the Option Closing Date)
an opinion of Hyman, Phelps & McNamara, P.C., special regulatory counsel to the Company, in form
and substance reasonably satisfactory to the Underwriters.
(f) You shall have received on the Closing Date (and, if applicable, the Option Closing Date),
from Heller Ehrman LLP, counsel to the Underwriters, such opinion or opinions, dated the Closing
Date (and, if applicable, the Option Closing Date) with respect to such matters as you may
reasonably require; and the Company shall have furnished to such counsel such documents as they
reasonably request for the purposes of enabling them to review or pass on the matters referred to
in this Section 6 and in order to evidence the accuracy, completeness and satisfaction of the
representations, warranties and conditions herein contained.
(g) You shall have received at or prior to the Closing Date from Heller Ehrman LLP a
memorandum or memoranda, in form and substance satisfactory to you, with respect to the
qualification for offering and sale by the Underwriters of the Shares under state securities or
Blue Sky laws of such jurisdictions as the Underwriters may have designated to the Company.
(h) On the business day immediately preceding the date of this Agreement and on the Closing
Date (and, if applicable, the Option Closing Date), you shall have received from Ernst & Young LLP,
a letter or letters, dated the date of this Agreement and the Closing Date (and, if applicable, the
Option Closing Date), respectively, in form and substance satisfactory to you, confirming that they
are independent registered public accountants with respect to the Company within the meaning of the
1933 Act and the 1933 Act Rules and Regulations and the rules and regulations of the PCAOB, and
stating the conclusions and findings of such firm with respect to the financial information and
other matters ordinarily covered by accountants comfort letters to underwriters in connection
with registered public offerings.
(i) Except as contemplated in the Prospectus and Time of Sale Prospectus, (i) the Company
shall not have sustained since the date of the latest audited financial statements included in
the Prospectus and Time of Sale Prospectus any loss or interference with its
23
business from fire,
explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute
or court or governmental action, order or decree; and (ii) subsequent to the respective dates as of
which information is given in the Registration Statement, the Prospectus and Time of Sale
Prospectus, the Company shall not have incurred any liability or obligation, direct or contingent,
or entered into any transactions, and there shall not have been any change in the capital stock or
short-term or long-term debt of the Company or any change, or any development involving or which
would reasonably be expected to involve a prospective change in the condition (financial or other),
net worth, business, affairs, management, prospects, results of operations or cash flow of the Company, the effect of which, in any such case described in clause (i) or (ii), is
in your judgment so material or adverse as to make it impracticable or inadvisable to proceed with
the public offering or the delivery of the Shares being delivered on such Closing Date (and, if
applicable, the Option Closing Date) on the terms and in the manner contemplated in the Prospectus
and Time of Sale Prospectus.
(j) On or after the date hereof (i) no downgrading shall have occurred in the rating accorded
the Companys debt securities by any nationally recognized statistical rating organization, as
that term is defined by the SEC for purposes of Rule 436(g)(2) under the 1933 Act, and (ii) no such
organization shall have publicly announced that it has under surveillance or review, with possible
negative implications, its rating of any of the Companys debt securities.
(k) There shall not have occurred any of the following: (i) a suspension or material
limitation in trading in securities generally on the New York Stock Exchange or the American Stock
Exchange or The Nasdaq National Market or the establishing on such exchanges or market by the SEC
or by such exchanges or markets of minimum or maximum prices which are not in force and effect on
the date hereof; (ii) a suspension or material limitation in trading in the Companys securities on
The Nasdaq National Market or the establishing on such market by the SEC or by such market of
minimum or maximum prices which are not in force and effect on the date hereof; (iii) a general
moratorium on commercial banking activities declared by either federal or any state authorities;
(iv) the outbreak or escalation of hostilities or acts of terrorism involving the United States or
the declaration by the United States of a national emergency or war, which in your judgment makes
it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares
in the manner contemplated in the Prospectus and Time of Sale Prospectus; or (v) any calamity or
crisis, change in national, international or world affairs, including without limitation as a
result of terrorist activities after the date hereof, act of God, change in the international or
domestic markets, or change in the existing financial, political or economic conditions in the
United States or elsewhere, which in your judgment makes it impracticable or inadvisable to proceed
with the public offering or the delivery of the Shares in the manner contemplated in the Prospectus
and Time of Sale Prospectus.
(l) You shall have received certificates, dated the Closing Date (and, if applicable, the
Option Closing Date) and signed by the Chief Executive Officer and the Chief Financial Officer of
the Company, in their capacities as such, stating that:
24
(i) the condition set forth in Section 6(a) has been fully satisfied;
(ii) they have carefully examined the Registration Statement, the Prospectus and the
Time of Sale Prospectus as amended or supplemented and nothing has come to their attention
that would lead them to believe that either the Registration Statement, Prospectus or Time
of Sale Prospectus, or any amendment or supplement thereto as of
their respective effective or
issue dates, contained, and the Prospectus and Time of Sale
Prospectus as amended or supplemented at the Closing Date, and Option
Closing Date, if applicable, contains any untrue
statement of a material fact, or omits to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading;
(iii) since the Effective Date, there has occurred no event required to be set forth in
an amendment or supplement to the Registration Statement, the Prospectus or the Time of Sale
Prospectus which has not been so set forth, and there has been no issuer free writing
prospectus required to be filed under Rule 433(d) of the 1933 Act that has not been so filed;
(iv) all representations and warranties made herein by the Company are true and correct
at the Closing Date, and Option Closing Date, if applicable, with the same effect as if made on and as of such date, and
all agreements herein to be performed or complied with by the Company
on or prior to such date have been duly performed and complied with by the Company;
(v) The Company has not sustained since the date of the latest audited financial
statements included in the Prospectus and Time of Sale Prospectus any material loss or
interference with its business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or governmental action, order or
decree;
(vi) except as disclosed in the Prospectus and Time of Sale Prospectus, subsequent to
the respective dates as of which information is given in the Registration Statement, the
Prospectus and Time of Sale Prospectus, the Company has not incurred any liabilities or
obligations, direct or contingent, other than in the ordinary course of business, or entered
into any transactions not in the ordinary course of business, which in either case are
material to the Company; and there has not been any change in the capital stock or material
increase in the short-term debt or long-term debt of the Company or any material adverse
change or any development involving or which may reasonably be expected to involve a
prospective material adverse change, in the condition (financial or other), net worth,
business, affairs, management, prospects, results of operations or cash
25
flow of the Company;
and there has been no dividend or distribution of any kind, paid or made by the Company on
any class of its capital stock;
(vii)
there has not been any change or decrease specified in paragraph 6 of the
letter or letters delivered to the Underwriters referred to in Section 6(h) above, except
those changes and decreases that are disclosed therein; and
(viii) covering such other matters as you may reasonably request.
(m) The Company shall not have failed, refused, or been unable, at or prior to the Closing
Date (and, if applicable, the Option Closing Date) to have performed any agreement on its part to
be performed or any of the conditions herein contained and required to be performed or satisfied by
it at or prior to such Closing Date.
(n) The Company shall have furnished to you at the Closing Date (and, if applicable, the
Option Closing Date) such further information, opinions, certificates, letters and documents as you
may have reasonably requested.
(o) The Company shall have not received any Warning Letter, notice of product withdrawal,
adverse inspectional findings or other material adverse communication from FDA or a foreign
regulatory authority.
(p) The Shares shall have been approved for trading upon official notice of issuance on The
Nasdaq National Market.
(q) You shall have received duly and validly executed letter agreements referred to in Section
5(p) hereof.
(r) The NASD shall have confirmed that it has not raised any objection with respect to the
fairness and reasonableness of the underwriting terms and conditions.
All such opinions, certificates, letters and documents will be in compliance with the
provisions hereof only if they are satisfactory in form and substance to you and to Heller Ehrman
LLP, counsel for the several Underwriters. The Company will furnish you with such signed and
conformed copies of such opinions, certificates, letters and documents as you may request.
If any of the conditions specified above in this Section 6 shall not have been satisfied at or
prior to the Closing Date (and, if applicable, the Option Closing Date) or waived by you in
writing, this Agreement may be terminated by you on notice to the Company.
7.
Indemnification and Contribution
. (a) The Company will indemnify and hold harmless each
Underwriter for and against any losses, damages or liabilities, joint or several, to
26
which such
Underwriter may become subject, under the 1933 Act or otherwise, insofar as such losses, damages or
liabilities (or actions or claims in respect thereof) arise out of or are based upon (i) an untrue
statement or alleged untrue statement of a material fact contained (A) in any Preliminary
Prospectus, the Registration Statement, the Prospectus, the Time of Sale Prospectus, any issuer
free writing prospectus as defined in Rule 433(h) under the 1933 Act, any Company information that
the Company has filed, or is required to file, pursuant to Rule 433(d) of the 1933 Act, or any
other prospectus relating to the Shares, or any amendment or supplement thereto, (B) in any blue
sky application or other document executed by the Company or based on any information furnished in
writing by the Company, filed in any state or other jurisdiction to qualify
any or all of the Shares under the securities laws thereof (the Blue Sky Application) or (C) in
any materials or information provided to investors by, or with the approval of, the Company in
connection with the marketing of the offering of the Shares (Marketing Materials), including any
road show or investor presentations made to investors by the Company (whether in person or
electronically), (ii) the omission or alleged omission to state in any Preliminary Prospectus, the
Registration Statement, the Prospectus, the Time of Sale Prospectus, any issuer free writing
prospectus as defined in Rule 433(h) under the 1933 Act, any Company information that the Company
has filed, or is required to file, pursuant to Rule 433(d) of the 1933 Act, or any other prospectus
relating to the Shares, or any amendment or supplement thereto or in any Blue Sky Application or in
any Marketing Materials a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (iii) any act or failure to act or any alleged act or failure
to act by any Underwriter in connection with, or relating in any manner to, the Shares or the
offering contemplated hereby, and that is included as part of or referred to in any loss, damage or
liabilities (or actions or claims in respect thereof) arising out of or based upon matters covered
by clause (i) or (ii) above (provided that the Company shall not be liable under this clause (iii)
to the extent that it is determined in a final judgment by a court of competent jurisdiction that
such loss, damage or liabilities (or actions or claims in respect thereof) resulted directly from
any such acts or failures to act undertaken or omitted to be taken by such Underwriter through its
gross negligence or willful misconduct), and will reimburse each Underwriter promptly upon demand
for any legal or other expenses incurred by such Underwriter in connection with investigating,
preparing, pursuing or defending against or appearing as a third party witness in connection with
any such loss, damage, liability or action or claim, including, without limitation, any
investigation or proceeding by any governmental agency or body, commenced or threatened, including
the reasonable fees and expenses of counsel to the indemnified party, as such expenses are incurred
(including such losses, damages, liabilities or expenses to the extent of the aggregate amount paid
in settlement of any such action or claim, provided that (subject to
Section 7(c) hereof) any such
settlement is effected with the written consent of the Company);
provided, however,
that the
Company shall not be liable in any such case to the extent, but only to the extent, that any such
loss, damage or liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in any Preliminary Prospectus, the Registration
Statement, the Prospectus, the Time of Sale Prospectus or any issuer free writing prospectus or any
other prospectus relating to the Shares, or any such amendment or supplement, or in any Blue Sky
Application or in any Marketing
27
Materials, in reliance upon and in conformity with written
information relating to the Underwriter furnished to the Company by you or by any Underwriter
through you, expressly for use in the preparation thereof (as provided in Section 14 hereof).
(b) Each Underwriter, severally and not jointly, will indemnify and hold harmless the Company
for and against any losses, damages or liabilities to which the Company may become subject, under
the 1933 Act or otherwise, insofar as such losses, damages or liabilities (or actions or claims in
respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of
a material fact contained in any Preliminary Prospectus, the Registration Statement, the Prospectus, the Time of Sale Prospectus, any issuer free writing prospectus as defined in Rule
433(h) under the 1933 Act, any Company information that the Company has filed, or is required to
file, pursuant to Rule 433(d) of the 1933 Act, or any other prospectus relating to the Shares, the
Marketing Materials or any amendment or supplement thereto, the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made in any Preliminary
Prospectus, the Registration Statement, the Prospectus, the Time of Sale Prospectus, any issuer
free writing prospectus as defined in Rule 433(h) under the 1933 Act, any Company information that
the Company has filed, or is required to file, pursuant to Rule 433(d) of the 1933 Act, or any
other prospectus relating to the Shares, the Marketing Materials, or any such amendment or
supplement, in reliance upon and in conformity with written information relating to the Underwriter
furnished to the Company by you or by any Underwriter through you, expressly for use in the
preparation thereof (as provided in Section 14 hereof), and will reimburse the Company for any
legal or other expenses incurred by the Company, as the case may be, in connection with
investigating or defending any such action or claim as such expenses are incurred (including such
losses, damages, liabilities or expenses to the extent of the aggregate amount paid in settlement
of any such action or claim, provided that (subject to Section 7(c) hereof) any such settlement is
effected with the written consent of the Underwriters).
(c) Promptly after receipt by an indemnified party under Section 7(a) or 7(b) hereof of notice
of the commencement of any action, such indemnified party shall, if a claim in respect thereof is
to be made against an indemnifying party under Section 7(a) or 7(b) hereof, notify each such
indemnifying party in writing of the commencement thereof, but the failure so to notify such
indemnifying party shall not relieve such indemnifying party from any liability except to the
extent that it has been prejudiced in any material respect by such failure or from any liability
that it may have to any such indemnified party otherwise than under Section 7(a) or 7(b) hereof.
In case any such action shall be brought against any such indemnified party and it shall notify
each indemnifying party of the commencement thereof, each such indemnifying party shall be entitled
to participate therein and, to the extent that it shall wish, jointly with any other indemnifying
party under Section 7(a) or 7(b) hereof similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the consent of such
indemnified party, be counsel to such indemnifying party), and, after notice from such
28
indemnifying
party to such indemnified party of its election so to assume the defense thereof, such indemnifying
party shall not be liable to such indemnified party under Section 7(a) or 7(b) hereof for any legal
expenses of other counsel or any other expenses, in each case subsequently incurred by such
indemnified party, in connection with the defense thereof other than reasonable costs of
investigation. The indemnified party shall have the right to employ its own counsel in any such
action, but the fees and expenses of such counsel shall be at the expense of such indemnified party
unless (i) the employment of counsel by such indemnified party at the expense of the indemnifying
party has been authorized by the indemnifying party, (ii) the indemnified party shall have been
advised by such counsel that there may be a conflict of interest between the indemnifying party
and the indemnified party in the conduct of the defense, or certain aspects of the defense, of such
action (in which case the indemnifying party shall not have the right to direct the defense of such
action with respect to those matters or aspects of the defense on which a conflict exists or may
exist on behalf of the indemnified party) or (iii) the indemnifying party shall not in fact have
employed counsel reasonably satisfactory to such indemnified party to assume the defense of such
action, in any of which events such fees and expenses to the extent applicable shall be borne, and
shall be paid as incurred, by the indemnifying party. If at any time such indemnified party shall
have requested such indemnifying party under Section 7(a) or 7(b) hereof to reimburse such
indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be
liable for any settlement of the nature contemplated by Section 7(a) or 7(b) hereof effected
without its written consent if (i) such settlement is entered into more than 45 days after receipt
by such indemnifying party of such request for reimbursement, (ii) such indemnifying party shall
have received notice of the terms of such settlement at least 30 days prior to such settlement
being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified
party in accordance with such request for reimbursement prior to the date of such settlement. No
such indemnifying party shall (i) without the written consent of such indemnified party, effect the
settlement or compromise of, or consent to the entry of any judgment with respect to, any pending
or threatened action, claim or proceeding in respect of which indemnification or contribution may
be sought hereunder (whether or not such indemnified party is an actual or potential party to such
action, claim or proceeding) unless such settlement, compromise or judgment (A) includes an
unconditional release of such indemnified party from all liability arising out of such action,
claim or proceeding and (B) does not include a statement as to or an admission of fault,
culpability or a failure to act, by or on behalf of any such indemnified party or (ii) be liable
for any settlement or any such action effected without its written
consent, which consent shall not be unreasonably withheld or delayed, but if settled with the
consent of the indemnifying party or if there be a final judgment of the plaintiff in any such
action, the indemnifying party agrees to indemnify and hold harmless any indemnified party from and
against any loss or liability by reason of such settlement or judgment. In no event shall such
indemnifying parties be liable for the fees and expenses of more than one counsel, in addition to
any local counsel, for all such indemnified parties in connection with any one action or separate
but similar or related actions in the same jurisdiction arising out of the same general allegations
or circumstances.
29
(d) If the indemnification provided for in this Section 7 is unavailable to or insufficient to
indemnify or hold harmless an indemnified party under Section 7(a) or 7(b) hereof in respect of any
losses, damages or liabilities (or actions or claims in respect thereof) referred to therein, then
each indemnifying party under Section 7(a) or 7(b) hereof shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, damages or liabilities (or actions or
claims in respect thereof) in such proportion as is appropriate to reflect the relative benefits
received by the Company, on the one hand, and the Underwriters, on the other hand, from the
offering of the Shares. If, however, the allocation provided by the immediately preceding sentence
is not permitted by applicable law or if the indemnified party failed to give the notice required
under Section 7(c) hereof and such indemnifying party was prejudiced in a material
respect by such failure, then each such indemnifying party shall contribute to such amount paid or
payable by such indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault, as applicable, of the Company, on the one hand, and
the Underwriters, on the other hand, in connection with the statements or omissions that resulted
in such losses, damages or liabilities (or actions or claims in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by, as applicable, the
Company, on the one hand, and the Underwriters, on the other hand, shall be deemed to be in the
same proportion as the total net proceeds from such offering (before deducting expenses) received
by the Company bears to the total underwriting discounts and commissions received by the
Underwriters. The relative fault, as applicable, of the Company, on the one hand, and the
Underwriters, on the other hand, shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or alleged omission to
state a material fact relates to information supplied by the Company, on the one hand, or the
Underwriters, on the other hand, and the parties relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company and the Underwriters
agree that it would not be just and equitable if contribution pursuant to this Section 7(d) were
determined by
pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the equitable
considerations referred to above in this Section 7(d). The amount paid or payable by such an
indemnified party as a result of the losses, damages or liabilities (or actions or claims in
respect thereof) referred to above in this Section 7(d) shall be deemed to include any legal or
other expenses incurred by such indemnified party in connection with investigating or defending any
such action or claim. Notwithstanding the provisions of this Section 7(d), no Underwriter shall be
required to contribute any amount in excess of total discounts and commissions received by such
Underwriter with respect to the Shares exceeds the amount of any damages that such Underwriter has
otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or
alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The obligations of the Underwriters in this Section 7(d) to
contribute are several in proportion to their respective underwriting obligations with respect to
the Shares and not joint.
30
(e) The obligations of the Company under this Section 7 shall be in addition to any liability
that the Company may otherwise have and shall extend, upon the same terms and conditions, to each
officer, director, employee, agent or other representative and to each person, if any, who controls
any Underwriter within the meaning of the 1933 Act; and the obligations of the Underwriters under
this Section 7 shall be in addition to any liability that the respective Underwriters may otherwise
have and shall extend, upon the same terms and conditions, to each officer and director of the
Company who signed the Registration Statement and to each person, if any, who controls the Company
within the meaning of the 1933 Act.
(f) The parties to this Agreement hereby acknowledge that they are sophisticated business
persons who were represented by counsel during the negotiations regarding the provisions hereof,
including, without limitation, the provisions of this Section 7, and are fully informed regarding
such provisions. They further acknowledge that the provisions of this Section 7 fairly allocate
the risks in light of the ability of the parties to investigate the Company and its business in
order to assure that adequate disclosure is made in the Registration Statement, any Preliminary
Prospectus, the Prospectus, and any supplement or amendment thereof,
as required by the 1933 Act, any issuer free writing prospectus as
defined in Rule 433(h) under the 1933 Act, any Company information
that the Company has filed, or is required to file, pursuant to Rule
433(d) of the 1933 Act, or any other prospectus relating to the
Shares, the Marketing Materials, or any such amendment or supplement.
8.
Representations and Agreements to Survive Delivery
. The respective representations,
warranties, agreements and statements of the Company and the Underwriters, as set forth in this
Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall remain
operative and in full force and effect regardless of any investigation (or any statement as to the
results thereof) made by or on behalf of any Underwriter or any controlling person of any
Underwriter, the Company or any of its officers, directors or any controlling persons, and shall
survive delivery of and payment for the Shares hereunder.
9.
Substitution of Underwriters
. (a) If any Underwriter shall default in its obligation to
purchase the Shares which it has agreed to purchase hereunder, you may in your discretion arrange
for you or another party or other parties to purchase such Shares on the terms contained herein.
If within thirty-six hours after such default by any Underwriter you do not arrange for the
purchase of such Shares, then the Company shall be entitled to a further period of thirty-six hours
within which to procure another party or parties reasonably satisfactory to you to purchase such
Shares on such terms. In the event that, within the respective prescribed periods, you notify the
Company that you have so arranged for the purchase of such Shares, or the Company notifies you that
they have so arranged for the purchase of such Shares, you or the Company shall have the right to
postpone the Closing Date for a period of not more than seven days, in order to effect whatever
changes may thereby be made necessary in the Registration Statement, the Prospectus or the Time of
Sale Prospectus, or in any other documents or arrangements, and the Company agrees to file promptly
any amendments to the Registration Statement, the Prospectus or the Time of Sale Prospectus which
in your opinion may thereby be made necessary. The term Underwriter as used in this Agreement
shall include any persons
31
substituted under this Section 9 with like effect as if such person had
originally been a party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting
Underwriter or Underwriters made by you and the Company as provided in subsection (a) above, the
aggregate number of Shares which remains unpurchased does not exceed one-eleventh of the total
Shares to be sold on the Closing Date, then the Company shall have the right to require each
non-defaulting Underwriter to purchase the Shares which such Underwriter agreed to purchase
hereunder and, in addition, to require each non-defaulting Underwriter to purchase its pro rata
share (based on the number of Shares which such Underwriter agreed to purchase hereunder) of the Shares of such defaulting Underwriter or Underwriters for which such
arrangements have not been made; but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
(c) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting
Underwriter or Underwriters made by you and the Company as provided in subsection (a) above, the
number of Shares which remains unpurchased exceeds one-eleventh of the total Shares to be sold on
the Closing Date, or if the Company shall not have exercised the right described in subsection (b) above
to require the non-defaulting Underwriters to purchase Shares of the defaulting Underwriter or
Underwriters, then this Agreement (or, with respect to the Option Closing Date, the obligations of
the Underwriters to purchase and of the Company to sell the Option Shares) shall thereupon
terminate, without liability on the part of any non-defaulting Underwriter or the Company except
for the expenses to be borne by the Company and the Underwriters as provided in Section 11 hereof
and the indemnity and contribution agreements in Section 7 hereof; but nothing herein shall relieve
a defaulting Underwriter from liability for its default.
10.
Effective Date and Termination
. (a) This Agreement shall become effective at 1:00 p.m.,
New York time, on the first business day following the effective date of the Registration
Statement, or at such earlier time after the effective date of the Registration Statement as you in
your discretion shall first release the Shares for offering to the public; provided, however, that
the provisions of Section 7 and 11 shall at all times be effective. For the purposes of this
Section 10(a), the Shares shall be deemed to have been released to the public upon release by you
of the publication of a newspaper advertisement relating to the Shares or upon release of
telegrams, facsimile transmissions or letters offering the Shares for sale to securities dealers,
whichever shall first occur.
(b) This Agreement may be terminated by you at any time before it becomes effective in
accordance with Section 10(a) by notice to the Company; provided, however, that the provisions of
this Section 10 and of Section 7 and Section 11 hereof shall at all times be effective. In the
event of any termination of this Agreement pursuant to Section 9 or this Section
32
10(b) hereof, the Company shall not then be under any liability to any Underwriter except as provided in Section 7 or
Section 11 hereof.
(c) This Agreement may be terminated by you at any time at or prior to the Closing Date by
notice to the Company if any condition specified in Section 6 hereof shall not have been satisfied
on or prior to the Closing Date. Any such termination shall be without liability of any party to
any other party except as provided in Sections 7 and 11 hereof.
(d) This Agreement also may be terminated by you, by notice to the Company, as to any
obligation of the Underwriters to purchase the Option Shares, if any condition specified in Section 6 hereof shall not have been satisfied at or prior to the Option Closing Date or as
provided in Section 9 of this Agreement.
If you terminate this Agreement as provided in Sections 10(b), 10(c) or 10(d), you shall
notify the Company by telephone or telegram, confirmed by letter.
11.
Costs and Expenses
. The Company, whether or not the transactions contemplated hereby are
consummated or this Agreement is prevented from becoming effective under Section 10 hereof or is
terminated, will bear and pay the costs and expenses incident to the registration of the Shares and
public offering thereof, including, without limitation, (a) all expenses (including stock transfer
taxes) incurred in connection with the delivery to the several Underwriters of the Shares, the
filing fees of the SEC, the fees and expenses of the Companys counsel and accountants and the fees
and expenses of counsel for the Company, (b) the preparation, printing, filing, delivery and
shipping of the Registration Statement, each Preliminary Prospectus, the Prospectus, the Time of
Sale Prospectus, any free writing prospectus prepared by or on behalf of, used by or referred to by
the Company and any amendments or supplements thereto and the printing, delivery and shipping of this Agreement and other
underwriting documents, including the Agreement Among Underwriters, the Selected Dealer Agreement,
Underwriters Questionnaires and Powers of Attorney and Blue Sky Memoranda, and any instruments or
documents related to any of the foregoing, (c) the furnishing of copies of such documents to the Underwriters, (d) the registration
or qualification of the Shares for offering and sale under the securities laws of the various
states and other jurisdictions, including the fees and disbursements of counsel to the Underwriters
relating to such registration or qualification and in connection with preparing any Blue Sky
Memoranda or related analysis, (e) the filing fees of the NASD (if any) and fees and disbursements
of counsel to the Underwriters relating to any review of the offering by the NASD, (f) all printing
and engraving costs related to preparation of the certificates for the Shares, including transfer
agent and registrar fees, (g) all fees and expenses relating to the authorization of the Shares for
trading on The Nasdaq National Market, (h) the costs and expenses of the Company relating to any
investor presentations and any road show undertaken in connection with the marketing of the offering
of the Shares, including, without limitation, expenses associated
33
with the preparation or
dissemination of any electronic road show, expenses associated with the production of road show
slides and graphics, fees and expenses of any consultants engaged in connection with the road show
presentations, travel and lodging expenses of the representatives and officers of the Company and
any such consultants, and the cost of any aircraft chartered in connection with the road show
(i) all of the other costs and expenses incident to the performance by the Company of the
registration and offering of the Shares, and (j) any incremental fees
and expenses of the QIU in its capacity as such.
If this Agreement is terminated by you in accordance with the provisions of Section 10(c), the
Company shall reimburse the Underwriters for all of their out-of-pocket expenses, including the
fees and disbursements of counsel to the Underwriters.
12.
Covenants of the Underwriters
. Each Underwriter severally covenants with the Company not
to take any action that would result in the Company being required to file with the Commission
under Rule 433(d) a free writing prospectus prepared by or on behalf of such Underwriter that
otherwise would not be required to be filed by the Company thereunder, but for the action of the
Underwriter.
13.
Notices
. All notices or communications hereunder, except as herein otherwise specifically
provided, shall be in writing and if sent to the Underwriters shall be mailed, delivered, sent by
facsimile transmission, or telegraphed and confirmed c/o A.G. Edwards & Sons, Inc. at One North
Jefferson Avenue, St. Louis, MO 63103, Attention: Richard H. Giles,
Managing Director, Corporate Finance, facsimile
number (314) 955-7110, with a copy to Doug Kelly, Attention: General Counsel, facsimile
number (314) 955-5913, or if sent to the Company shall be mailed,
delivered, sent by facsimile transmission, or telegraphed and confirmed to the Company at
, facsimile number (___) ___-
.
14.
Information Furnished by Underwriters.
The statements set forth in fifth paragraph on the
cover of the prospectus and the statements in the first paragraph, second paragraph, the second and
third sentences of third paragraph, and the fifth, ninth, tenth,
thirteenth, fourteenth, fifteenth,
sixteenth, seventeenth, eighteenth, nineteenth and twenty first paragraphs under the caption Underwriting in
the Prospectus constitute the only information furnished by or on behalf of the Underwriters
through you as such information is referred to in Section 4(a)(ii) and Section 7 hereof.
15.
Parties
. This Agreement shall inure to the benefit of and be binding upon the
Underwriters, the Company, and, to the extent provided in Sections 7 and 8, the officers and
directors of the Company or any Underwriter and their respective heirs, executors, administrators
and successors. Nothing expressed or mentioned in this Agreement is intended or shall be
construed to give any person, corporation or other entity any legal or equitable right, remedy or
claim under or in respect of this Agreement or any provision herein contained; this Agreement
34
and all conditions and provisions hereof being intended to be and being for the sole and exclusive
benefit of the parties hereto and their respective successors and, with respect to said Sections 7
and 8, said controlling persons and said officers and directors, and for the benefit of no other
person, corporation or other entity. No purchaser of any of the Shares from any Underwriter shall
be construed a successor or assign by reason merely of such purchase.
In all dealings hereunder, you shall act on behalf of each of the several Underwriters, and
the parties hereto shall be entitled to act and rely upon any statement, request, notice or
agreement on behalf of the Underwriters, made or given by you jointly or by A.G. Edwards & Sons, Inc. on behalf of you as the representative, as if the same shall have been made or given in
writing by the Underwriters.
16.
Counterparts
. This Agreement may be executed by any one or more of the parties hereto in
any number of counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same instrument.
17.
Pronouns
. Whenever a pronoun of any gender or number is used herein, it shall, where
appropriate, be deemed to include any other gender and number.
18.
Time of Essence.
Time shall be of the essence of this Agreement.
19.
Headings.
The headings herein are inserted for convenience of reference only and are not
intended to be part of, or to affect the meaning or interpretation of, this Agreement.
20.
Applicable Law
. This Agreement shall be governed by, and construed in accordance with,
the laws of the State of New York, without giving effect to the choice of law or conflict of laws
principles thereof.
21.
Entire Agreement
. This Agreement, together with any contemporaneous written agreements
and any prior written agreements (to the extent not superseded by this Agreement) that relate to
the offering of the Shares, represents the entire agreement between the Company and the
Underwriters with respect to the preparation of any preliminary prospectus, the Time of Sale
Prospectus, the Prospectus, any issuer free writing prospectus, the
Marketing Materials, the conduct of the offering, and the purchase and sale of the Shares.
35
[Signature
Page Follows]
If the foregoing is in accordance with your understanding, please so indicate in the space
provided below for that purpose, whereupon this letter shall constitute a binding agreement among
the Company and the Underwriters.
36
CARDICA, INC.
Accepted in St. Louis,
Missouri as of the date
first above written, on
behalf of ourselves and each
of the several Underwriters
named in Schedule I hereto.
A.G. EDWARDS & SONS, INC.
As Representative of the Several
Underwriters named on Schedule I hereto
By: A.G. EDWARDS & SONS, INC.
37
SCHEDULE I
|
|
|
Name
|
|
Number of Shares
|
A.G. Edwards & Sons, Inc.
|
|
|
Allen & Company LLC
|
|
|
Montgomery & Co., LLC
|
|
|
|
|
|
Total
|
|
|
38
SCHEDULE II
FREE WRITING PROSPECTUSES
39