PART I
This Annual Report on
Form
10-K,
particularly in Item 1. Business and
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations, and the
documents incorporated by reference, include forward-looking
statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange
Act of 1934, as amended. All statements, other than statements
of historical fact, are statements that could be deemed
forward-looking statements, including, but not limited to,
statements regarding our future financial position, business
strategy and plans and objectives of management for future
operations. When used in this prospectus, the words
believe, may, could
will, estimate, continue,
anticipate, intend, expect
and similar expressions are intended to identify forward-looking
statements.
We have based these forward-looking statements largely on our
current expectations and projections about future events and
financial trends that we believe may affect our financial
condition, results of operations, business strategy, short-term
and long-term business operations and objectives, and financial
needs. These forward-looking statements are subject to certain
risks and uncertainties that could cause our actual results to
differ materially from those reflected in the forward-looking
statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in
this report, and in particular, the risks discussed under the
heading Risk Factors and those discussed in other
documents we file with the Securities and Exchange Commission.
Except as required by law, we assume no obligation to update
these forward-looking statements publicly or to update the
reasons actual results could differ materially from those
anticipated in these forward-looking statements, even if new
information becomes available in the future.
In light of these risks, uncertainties and assumptions, the
forward-looking events and circumstances discussed in this
report and in the documents incorporated in this report may not
occur and actual results could differ materially and adversely
from those anticipated or implied in the forward-looking
statements. Accordingly, readers are cautioned not to place
undue reliance on such forward-looking statements.
Overview
We are a medical device company focused on the design,
development and marketing of products for the surgical treatment
of spine disorders. Our product portfolio is focused on
applications for lumbar and cervical spine fusion, a market
estimated to exceed $2.9 billion in the U.S. in 2005.
Our principal product offering includes a minimally disruptive
surgical platform called Maximum Access Surgery, or
MAS
tm
,
as well as classic fusion implants. Our products are used
predominantly in spine fusion surgeries, both to enable access
to the spine and to perform restorative and fusion procedures.
We also focus significant efforts on our research and
development pipeline emphasizing both MAS and motion
preservation products such as total disc replacement and
nucleus-like cervical disc replacement. As of December 31,
2005, we have trained 724 surgeons in the use of our products.
Our MAS platform combines three categories of our product
offerings:
|
|
|
|
|
NeuroVision
®
a proprietary software-driven nerve avoidance system;
|
|
|
|
MaXcess
®
a unique split-blade design retraction system providing enhanced
surgical access to the spine; and
|
|
|
|
Specialized implants, like our
SpheRx
®
pedicle screw system,
CoRoent
®
suite of products and new
ExtenSure
tm
dynamic stabilization and fusion system.
|
We believe our MAS platform provides a unique and comprehensive
solution for safe and reproducible minimally disruptive surgical
treatment of spine disorders by enabling surgeons to access the
spine in a manner that affords direct visibility and avoidance
of critical nerves. Our MAS platform enables a variety of spine
surgery procedures and also uniquely enables an innovative
procedure known as eXtreme Lateral Interbody Fusion, or
XLIF
®
,
in which surgeons access the spine from the side of the
patients body, rather than from the
3
front or back of the body. Our MaXcess instruments provide
access to the spine in a manner that affords direct visibility
and our NeuroVision system allows surgeons to avoid critical
nerves. We believe that the procedures facilitated by our MAS
platform reduce operating times, decrease trauma and blood loss,
and lead to faster overall patient recovery times.
Our classic fusion portfolio is comprised of a range of
products, including bone allografts in our patented saline
packaging, which are human bone that has been processed and
precision shaped for transplant. Our classic fusion portfolio
also includes fusion plates such as our
SmartPlate
®
Gradient
CLP
tm
.
In 2005, we relocated to a 62,000 square foot,
state-of
-the-art
facility, which has a six-suite cadaver operating theatre as
well as warehousing and distribution capabilities. We believe
our new facility positions us for continued momentum in surgeon
training and adoption of our products.
Recent Product Introductions
Since late 2004, we have introduced twelve new products and
product enhancements that have significantly upgraded our MAS
platform and increased our revenue opportunities for each
surgery performed using our products. We have also acquired
complementary and strategic assets and technology. Our
newly-launched products include:
|
|
|
|
|
SpheRx Dual Ball Rod
(DBR
tm
)
a pedicle screw system that allows for instrument-free
compression of the vertebrae, minimizes the incidence of tissue
trauma associated with rod-overhang and effects secure rod
placement with minimal rod migration.
|
|
|
|
SpheRx Pedicle Screw System
a pedicle screw
system designed for a posterior approach involving a minimally
disruptive procedure.
|
|
|
|
SmartPlate Gradient CLP
a dynamic cervical
plate that encompasses a gradient locking mechanism enabling the
screws to be progressively resistant to axial compression. This
allows the plate to settle in concert with the eventual
allograft implant settling that occurs within the disc space
over time, offering a better anatomical fit.
|
|
|
|
MaXcess Micro-Access System
the smallest,
lightest version of our MaXcess retractor systems, designed to
provide access during posterior lumbar and cervical
decompression surgeries. The MaXcess Micro-Access System adds
more surgical applications to our MAS platform by enabling
minimally disruptive maximum access approaches for lumbar
stenosis decompression, foraminal discectomy and posterior
cervical foraminotomy.
|
|
|
|
MaXcess II
a second generation of our
MaXcess retractor that incorporates NeuroVision within the
posterior retraction blade, providing built-in nerve monitoring
capabilities, and features superior and inferior blades that
kick-out at an angle. The superior and inferior
blades spread the tissue closest to the pathology point further
than original MaXcess.
|
|
|
|
ExtenSure
an interspinous dynamic
stabilization and fusion system. This device utilizes an
allograft implant to maintain decompression through a more
natural restoration of the spinal anatomy. ExtenSure was
officially launched with limited availability in September 2005
and we anticipate a full launch in mid-2006.
|
|
|
|
Insulated Pedicle Access System
(I-PAS
tm
)
a surgical instrument used in conjunction with NeuroVision to
determine the safe, percutaneous approach pathway of a pedicle
screw prior to its implantation. I-PAS is the first percutaneous
and dynamic neurophysiologic system on the market to
continuously monitor and alleviate the risk of neurological
injury during pedicle screw placement.
|
|
|
|
CoRoent Large Tapered (LT), CoRoent Large Contoured (LC) and
CoRoent Extra Large Round (XLR)
implants
designed in response to the demand from spine surgeons for
implants with superior anatomical fit that are simple to
position and align. The CoRoent Large Tapered system is designed
to be inserted using a patented Insert and Rotate
technique, which minimizes damage to the surrounding bone. This
procedure allows the surgeon to restore height and stability of
the spine. Each
|
4
|
|
|
|
|
of these CoRoent products is made of PEEK
OPTIMA
®
,
a biocompatible polymer commonly used in implantable devices.
|
|
|
|
NeuroVision Nerve Root Retractor
an
instrument that combines stimulated and free run
electromyography (EMG) to monitor spinal nerves and alert
the surgeon of physiologic changes intraoperatively during nerve
retraction.
|
|
|
|
NeuroVision
we have made significant
enhancements to our NeuroVision nerve avoidance system in the
form of a software upgrade and improved nerve monitoring
capabilities. The software upgrade incorporates a new graphical
user interface that allows for greater ease of use by the
surgical staff. NeuroVision has also been given a new harness
and dual electrodes, or redesigned connectors, to streamline the
application of surface electrodes that relay muscle activity to
the monitoring system.
|
Our Strategy
Our objective is to become a leading provider of creative
medical products that provide comprehensive solutions for the
surgical treatment of spine disorders. We are pursuing the
following business strategies in order to achieve this objective:
|
|
|
|
|
Establish our MAS Platform as a Standard of Care.
We
believe our MAS platform has the potential to become the
standard of care for minimally invasive spine surgery as spine
surgeons continue to adopt our products and recognize their
benefits. We also believe that our MAS platform has the
potential to dramatically improve the clinical results of
minimally invasive spine surgery. We dedicate significant
resources to educating spine surgeons on the clinical benefits
of our products, and we intend to capitalize on patient demand
for minimally disruptive surgical alternatives.
|
|
|
|
Continue to Introduce New Creative Products.
One of our
core competencies is our ability to develop and commercialize
creative spine surgery products. Since our initial public
offering in May 2004, or IPO, we have introduced twelve new
products and product enhancements. We have several additional
products currently under development, including total disc and
nucleus-like replacement devices, MAS platform expansion
products and other implants designed to stabilize the spine. We
believe that these additional products will allow us to
generate, on average, greater revenues per spine surgery
procedure while improving patient care.
|
|
|
|
Establish Exclusive Sales Force with Broad Reach.
We
believe that having a sales force dedicated to selling only our
spine surgery products is critical to achieve continued growth
across product lines, greater market penetration and increased
sales. To that end, we have initiated a process to create an
exclusive sales force comprised partially of Area Business
Managers, or ABMs, who are NuVasive employees responsible for a
defined territory. The remainder of the sales force will be
exclusive independent distributors, each acting as our sole
representative and selling only NuVasive spine products in a
given territory.
|
|
|
|
Provide Tailored Solutions in Response to Surgeon
Needs.
Responding quickly to the needs of spine
surgeons, which we refer to as Absolute
Responsiveness
tm
,
is central to our corporate culture, critical to our success
and, we believe, differentiates us from our competition. We
solicit information and feedback from our surgeon customers and
clinical advisors regarding the utility of and potential
improvements to our products. For example, we have an
on-site
machine shop to
allow us to rapidly manufacture product prototypes and a
state-of
-the-art
cadaver operating theatre to provide clinical training and
validate new ideas through prototype testing.
|
|
|
|
Selectively License or Acquire Complementary Spine Products
and Technologies.
In addition to building our company though
internal product development efforts, we intend to selectively
license or acquire complementary products and technologies. By
acquiring complementary products, we believe we can leverage our
expertise at bringing new products to market and provide
additional selling opportunities for our sales force. Since our
IPO, we have acquired complementary and strategic assets,
including cervical plate technology, which we re-launched as our
SmartPlate Gradient CLP product, surgical embroidery technology,
including an investigational nucleus-like cervical disc
replacement
|
5
|
|
|
|
|
device called
NeoDisc
tm
,
and dynamic stabilization technology, which we launched as our
ExtenSure product.
|
Industry Background and Market
Back pain is the number one cause of healthcare expenditures in
the United States, with a direct cost of more than
$50.0 billion annually for diagnosis, treatment and
rehabilitation. The U.S. market for lumbar and cervical
spine fusion, the focus of our business, was estimated to be
over $2.6 billion in 2004 and over $2.9 billion in
2005.
We believe that the market for spine surgery procedures will
continue to grow because of the following market dynamics:
|
|
|
|
|
Increased Use of Implants.
The use of implants has
evolved into the standard of care in spine surgery. Over the
past five years, there has been a significant increase in the
percentage of spine fusion surgeries using implants and it is
estimated that over 95% of all spine fusion surgeries now
involve implants.
|
|
|
|
Demand for Minimally Invasive Alternatives.
As with other
surgical markets, we anticipate that the broader acceptance of
minimally invasive spine surgery will result in increased demand
for these types of surgical procedures.
|
|
|
|
Favorable Demographics.
The population segment most
likely to experience back pain is expected to increase as a
result of aging baby boomers, people born between 1946 and 1965.
We believe this population segment will demand a quicker return
to activities of daily living following surgery.
|
The spine is the core of the human skeleton, and provides a
crucial balance between structural support and flexibility. It
consists of 29 separate bones called vertebrae that are
connected together by connective tissue to permit a normal range
of motion. The spinal cord, the bodys central nerve
conduit, is enclosed within the spinal column. Vertebrae are
paired into what are called motion segments that move by means
of three joints: two facet joints and one spine disc. The four
major categories of spine disorders are degenerative conditions,
deformities, trauma and tumors. The largest market and the focus
of our business is degenerative conditions of the facet joints
and disc space. These conditions can result in instability and
pressure on the nerve roots as they exit the spinal column,
causing back pain or radiating pain in the arms or legs.
The prescribed treatment for spine disorders depends on the
severity and duration of the disorder. Initially, physicians
will prescribe non-operative procedures including bed rest,
medication, lifestyle modification, exercise, physical therapy,
chiropractic care and steroid injections. In most cases,
non-operative treatment options are effective; however, many
patients require spine surgery. It is estimated that in excess
of one million patients undergo spine surgery each year in the
United States. The most common spine surgery procedures are:
discectomy, the removal of all or part of a damaged disc;
laminectomy, the removal of all or part of a lamina, or thin
layer of bone, to relieve pinching of the nerve and narrowing of
the spinal canal; and fusion, where two or more adjoining
vertebrae are fused together to provide stability. All three of
these procedures require access to the spine. Traditional open
surgical approaches require large incisions to be made in the
back so that surgeons can see the spine and surrounding area.
Most open procedures are invasive, lengthy and complex, and may
result in significant blood loss, extensive dissection of tissue
and lengthy hospitalization and rehabilitation.
Minimally Invasive Surgical Procedures
The benefits of minimally invasive surgery procedures in other
areas of orthopedics have significantly contributed to the
strong and growing demand for minimally invasive surgery of the
spine. Surgeons and hospitals seek spine procedures that result
in fewer operative complications, shorter surgery times and
decreased hospitalization. At the same time, patients seek
procedures that cause less trauma and allow for faster recovery
times. Despite these benefits, the rate of adoption of minimally
invasive surgical procedures has been relatively slow with
respect to the spine.
6
We believe the two principal factors contributing to spine
surgeons slow adoption of minimally invasive alternatives
are: (1) the limited or lack of direct access to and
visibility of the surgical anatomy, as well as (2) the
associated complex instruments that have been required to
perform these procedures. Most minimally invasive systems do not
allow the surgeon to directly view the spine and provide only
restrictive visualization through a camera system or endoscope,
while also requiring the use of complex surgical techniques. In
addition, most minimally invasive systems use complex or highly
customized surgical instruments that require special training
and the completion of a large number of trial cases before the
surgeon becomes proficient using the system.
The NuVasive Solution Maximum Access Surgery
(MAS)
Our MAS platform allows surgeons to perform a wide range of
minimally disruptive procedures, while overcoming the
shortcomings of alternative minimally invasive surgical
techniques. We believe our products improve clinical results and
have both the potential to expand the number of minimally
disruptive procedures performed and become a standard of care in
spine fusion and non-fusion surgery.
Our MAS platform combines 3 product categories:
NeuroVision, MaXcess, and specialized implants. NeuroVision
enables surgeons to avoid neural anatomy while MaXcess affords
direct customized access to the spine for implant delivery.
MaXcess also allows surgeons to use well-established traditional
instruments in a minimally disruptive and less traumatic manner.
We also offer a variety of specialized implants that enable
sufficient structural support while conforming to the anatomical
requirements of the patient.
Our products facilitate minimally disruptive spine applications
of the following traditional spine surgery procedures, among
others:
|
|
|
|
|
Transforaminal lumbar interbody fusion, or TLIF, a lumbar fusion
procedure in which the surgeon utilizes an off-midline approach
through the patients back;
|
|
|
|
Anterior lumbar interbody fusion, or ALIF, a lumbar fusion
procedure in which the surgeon approaches the spine through the
patients abdomen;
|
|
|
|
Posterior lumbar Interbody fusion, or PLIF, in which the surgeon
approaches the spine through the patients back; and
|
|
|
|
Decompression, which is removal of a portion of bone over the
nerve root or disc from under the nerve root to relieve pinching
of the nerve.
|
Importantly, our products also enable innovative procedures such
as an XLIF. The XLIF procedure, which we developed with leading
spine surgeons, allows surgeons to access the spine from the
side of the patients body rather than from the front or
back, which results in less operating time and reduced patient
trauma and blood loss. Notwithstanding these benefits, XLIFs
have historically been viewed by most surgeons as too difficult
to perform due to the number of critical nerves that must be
avoided.
We believe procedures enabled by our MAS platform have
significant benefits, including reduced surgery times, reduced
hospital stays, and less trauma and blood loss for the patient,
resulting in faster overall patient recovery times. A study of
145 XLIF procedures performed in 2003 and 2004 supports our
belief that our MAS platform provides the following benefits:
|
|
|
|
|
Reduced Surgery Times.
XLIF procedures utilizing our MAS
platform, which we refer to as MAS XLIF, have averaged about 70
minutes to perform which we believe is substantially shorter
than it takes to perform an equivalent open procedure.
|
|
|
|
Reduced Hospital Stays.
Hospital stays following a MAS
XLIF procedure have averaged one to two days which we believe is
substantially shorter than the hospital stays associated with an
equivalent open procedure.
|
|
|
|
Reduced Pain and Recovery Times.
Due to smaller incisions
and less trauma and blood loss for the patient, we believe that
the pain and recovery time for patients following a MAS XLIF
procedure is significantly less than with an equivalent open
procedure. In most cases, patients are walking the same day as
surgery following a MAS XLIF.
|
7
NeuroVision utilizes electromyography, or EMG, and proprietary
software algorithms and graphical user interfaces to provide
surgeons with an enhanced nerve avoidance system. Our system
functions by monitoring changes in electrical signals across
muscle groups, which allows us to detect underlying changes in
nerve activity. We connect the instruments that surgeons use to
a computer system that provides real time feedback during
surgery. Our system analyzes and then translates complex
neurophysiologic data into simple, useful information to assist
the surgeons clinical decision-making process. For
example, during a pedicle screw test, in which the integrity of
the bone where the implant is placed is tested, if the insertion
of a screw results in a breach of the bone, a red light and
corresponding numeric value will result so that the surgeon may
reposition the implant to avoid potential nerve impingement or
irritation. If no breach of the bone occurs, a green light and
corresponding numeric value will result. The initial application
of NeuroVision, Screw Test with our
INS-1
®
system, was cleared by the FDA in November 2000 and commercially
launched in 2001.
Surgeons can dynamically link familiar surgical instruments to
NeuroVision, thus creating an interactive set of instruments
that enable the safe navigation of neural anatomy. NeuroVision
can be operated independently by the surgeon eliminating the
need for additional technical support. The systems
proprietary software and easy to use graphical user interface
enables the surgeon to make critical decisions in real time
resulting in safer and faster procedures with the potential for
improved patient outcomes.
We have recently introduced significant enhancements to
NeuroVision in the form of a software upgrade and improved nerve
monitoring capabilities. The software upgrade incorporates a new
graphical user interface that allows for greater ease of use by
the surgical staff. A new harness and dual electrode were
developed for NeuroVision to streamline the application of
surface electrodes that relay muscle activity to the monitoring
system. In addition, we introduced the NeuroVision Nerve Root
Retractor, an instrument that combines stimulated and free run
EMG to monitor spinal nerves and alert the surgeon of
physiologic changes intraoperatively during nerve retraction.
Our MaXcess system consists of instrumentation and specialized
implants that provide maximum access with minimal soft tissue
disruption. MaXcess has a split blade design consisting of three
blades that can be positioned to build the surgical exposure in
the shape and size specific to the surgical requirements rather
than the fixed tube design of other minimally invasive surgical
systems. MaXcess split blade design also provides expanded
access to the spine, which allows surgeons to perform surgical
procedures using instruments that are similar to those used in
open procedures but with a significantly smaller incision. The
ability to use familiar instruments reduces the learning curve
and facilitates the adoption of our products. Our systems
illumination of the operative corridor aids in providing
surgeons with direct visualization of the patients
anatomy, without the need for additional technology or other
special equipment. During the fourth quarter of 2004, we
introduced an extension of our MaXcess product with our
MaXcess-Micro Access System. This brings all of the benefits of
minimally disruptive surgery to both the cervical spine for
posterior application and the lumbar spine for decompression.
In 2005, we introduced MaXcess II, a second generation of
our MaXcess retractor that incorporates NeuroVision within the
posterior retraction blade, providing built-in nerve monitoring
capabilities. MaXcess II features superior and inferior
blades that kick-out at an angle to spread the
tissue closest to the pathology point further than original
MaXcess.
MaXcess allows surgeons to perform a wide range of conventional
spine procedures through a minimally disruptive approach.
MaXcess enables multiple applications designed for each of the
following surgical approaches: TLIF, PLIF, XLIF and
decompression, which is removal of tissue (soft tissue or bone)
over the nerve root or disc from under the nerve root to relieve
pinching of the nerve. We believe that MaXcess, in combination
with NeuroVision and our specialized implants, will allow more
surgeons to use the MAS platform to perform procedures which
offer important clinical benefits. This includes the new and
innovative lateral procedure, XLIF. The XLIF procedure
significantly reduces the time of the surgery and also the
patient tissue trauma and blood loss, resulting in faster
overall patient recovery times. Previously, lateral
8
surgery could only be performed by a handful of very highly
skilled surgeons that needed to be accompanied by a general
surgeon. Now, with our MAS solution, surgeons can successfully
avoid critical nerves and access the spine with minimal soft
tissue disruption.
We believe MaXcess provides the following key benefits compared
to other existing minimally invasive surgical systems:
|
|
|
|
|
Maximizes Access.
The split-blade design enables surgeons
to customize the surgical exposure to the patient and surgical
requirement while maximizing the direct visualization of a
patients anatomy, without additional visualization tools
such as endoscopes, cameras, and microscopes.
|
|
|
|
Uses Conventional Instruments.
MaXcess allows surgeons to
use instruments similar to those used in open procedures and so
requires minimal additional training.
|
|
|
|
Provides Benefits of MAS with Broad Application.
MaXcess
enables surgeons to accomplish a wide range of surgical goals,
such as neural decompression, disc height restoration and bony
fusion, with MAS technology that minimizes operation time and
expedites patient recovery and a return to activities of daily
living.
|
|
|
|
MAS Specialized Implants
|
We have a number of implants designed to be used with our MAS
platform. These implants are used for interbody disc height
restoration for fusion, partial vertebral body replacement and
stabilization of the posterior part of the spine. These implants
include:
|
|
|
|
|
SpheRx and SpheRx DBR our pedicle screw systems;
|
|
|
|
CoRoent our family of unique implants for partial
vertebral body replacement;
|
|
|
|
Allograft precision-machined for lumbar TLIF and
PLIF application; and
|
|
|
|
ExtenSure an interspinous dynamic stabilization and
fusion system that utilizes an allograft implant to maintain
decompression through a more natural restoration of the spinal
anatomy.
|
Our implants are available in a variety of shapes and sizes to
accommodate the anatomical requirements of the patient and the
particular fusion procedure. Our implants are designed for
insertion into the smallest possible space while maximizing
surface area contact for fusion.
Our fixation systems have been uniquely designed to be delivered
through our MaXcess system to provide stabilization of the
posterior spine. These systems enable minimally disruptive
placement of implants and are intended to reduce operating time
and patient morbidity.
Our implants can also be used in procedures not employing our
MAS platform.
Classic Fusion
We have developed a suite of traditional spine surgery products,
which we refer to as classic fusion, including a line of
precision-machined cervical and PLIF allograft implants, a
titanium surgical mesh system, and related instrumentation.
Allograft implant tissue is recovered from deceased human
donors, which is processed into specified sizes and shapes and
sterilized for implantation. Unlike other suppliers of allograft
implants, our patented packaging process allows us to provide a
ready-to
-use structural
graft eliminating the need for refrigeration and re-hydration.
We package all of our allograft implants in a sterile saline
solution. In addition, our allograft packaging and
instrumentation are color-coded to assist the surgeon in
selecting the proper size implant for use with the appropriate
size instrument.
Our classic fusion product offerings also include fusion plates
such as our SmartPlate Gradient CLP, a dynamic cervical plate
that encompasses a gradient locking mechanism which gradually
loads the screws based upon the anatomic requirements. This
allows the plate to settle in concert with the settling of the
allograft implant settling that occurs within the disc space
over time, offering a better anatomical fit.
9
Development Projects
We are developing proprietary total disc replacement devices for
lateral lumbar spine applications and separately for cervical
spine applications. These devices are intended to allow surgeons
to address a patients pain and dysfunction while
maintaining normal range of motion and avoiding future adjacent
level degeneration that can occur after spine fusion. We believe
that the ability to insert a lumbar total disc replacement
device from a lateral approach in a MAS procedure will be unique
to us, but will require premarket approval rather than 510(k)
clearance. We expect the same to be true for our two cervical
devices for which we have recently filed for Investigational
Device Exemptions. The first of these is NeoDisc, a nucleus-like
cervical disc replacement device designed to preserve motion in
the cervical region of the spine and fill the gap between
pre-surgical treatment and total disc replacement (TDR) or
spinal fusion. The design has an elastomeric core with a novel
embroidered jacket to envelop the core in a similar manner as
the annulus with anterior fixation flanges which simulate the
anterior longitudinal ligament. We believe that NeoDisc could be
attractive for use in broad indications and pathologies because
of the relatively simple surgical placement procedure and the
implant is easily revisable. The second is
CerPass
tm
,
our cervical TDR device, which incorporates a
ceramic-on
-ceramic
design that we believe will achieve superior long-term wear
characteristics compared to that of other bearing surfaces.
CerPass also has a self-centering feature, designed
to ensure proper placement.
Research and Development
Our research and development efforts are primarily focused in
the near term on developing further enhancements to our existing
products, launching as well as developing our total disc
product. Our research and development staff consists of 35
people, including four who hold Ph.D. degrees and three who hold
other advanced degrees. Our research and development group has
extensive experience in developing products to treat spine
pathology, and continues to work closely with our clinical
advisors and spine surgeon customers to design products that are
intended to improve patient outcomes, simplify techniques,
shorten procedures, reduce hospitalization and rehabilitation
times and, as a result, reduce costs.
Sales and Marketing
We currently sell our products through a combination of
independent sales agencies and direct sales representatives
employed by us. We historically sold our products through
independent sales agencies that were also free to promote the
sale of competitive products. We are in the process of creating
a sales force that is entirely exclusive to NuVasive in the sale
of spine surgery products. Our efforts will result in a sales
force comprised partially of Area Business Managers, or ABMs,
who are NuVasive employees responsible for a defined territory.
The remainder of the sales force will be exclusive independent
distributors, each acting as our sole representative in a given
territory. The determination of whether to engage an ABM or
exclusive distributor is made on a territory by territory basis,
with a focus on the candidate who brings the best skills,
experience and contacts. Our sales force is managed by a Senior
Vice President of U.S. Sales and five Divisional Sales
Directors, or DSDs. Each DSD is responsible for a portion of the
United States and manages the ABMs and independent distributors
engaged in that territory.
We believe the transition to an exclusive sales force is
important to our continued growth as this effort will result in
a focused sales force with incentives to sell our products
across all product lines. As of February 28, 2006,
approximately 70% of our sales force exclusively sells our spine
surgery products.
Surgeon Training and Education
We devote significant resources to training and educating
surgeons on the specialized skills involved in the proper use of
our instruments and implants. We believe that the most effective
way to introduce and build market demand for our products is by
training spine surgeons in the use of our products. We maintain
a
state-of
-the-art
cadaver operating theatre and training facility at our corporate
headquarters to help promote adoption of our products. In 2005,
we trained 422 spine surgeons in the use of our products. We
intend to continue to focus on training both leading and
community spine surgeons in the United States. We believe
10
that a number of these surgeons will become advocates for our
products and will be instrumental in generating valuable
clinical data and demonstrating the benefits of our products to
the medical community.
Manufacturing and Supply
We rely on third parties for the manufacture of our products and
their components and servicing, and we do not currently maintain
alternative manufacturing sources for NeuroVision, MaXcess or
any other finished goods products. We have identified secondary
sources for these products; however, it would take time for
these alternative vendors to
scale-up
production.
Our outsourcing strategy is targeted at companies that meet FDA,
International Organization for Standardization (ISO), and
quality standards supported by internal policies and procedures.
Supplier performance is maintained and managed through a
corrective action program intended to ensure that all product
requirements are met or exceeded. We believe these manufacturing
relationships minimize our capital investment, help control
costs, and allow us to compete with larger volume manufacturers
of spine surgery products.
Following the receipt of products or product components from our
third-party manufacturers, we conduct inspection and packaging
and labeling, as needed, at our headquarters facility. Under our
existing contracts, we reserve the exclusive right to inspect
and assure conformance of each product and product component to
our specifications. We may consider manufacturing certain
products or product components internally, if and when demand or
quality requirements make it appropriate to do so.
We currently rely on Tissue Banks International, Inc. and US
Tissue and Cell as our only suppliers of allograft implants. Our
agreements with each of these suppliers automatically renew for
successive one-year terms unless otherwise terminated by either
party in accordance with the terms of the respective agreement.
Because implants are processed from human tissue, maintaining a
steady supply is difficult.
In August 2005, we acquired NeoDisc, an investigational
nucleus-like cervical disc replacement device, from Pearsalls
Limited. In connection with that transaction, we entered into a
manufacturing agreement with Pearsalls, pursuant to which
Pearsalls will act as the exclusive manufacturer of NeoDisc,
subject to our right to move manufacturing under certain
circumstances.
We and our third-party manufacturers are subject to the
FDAs quality system regulations, state regulations, such
as the regulations promulgated by the California Department of
Health Services, and regulations promulgated by the European
Union. For tissue products, we are FDA registered and licensed
in the States of California, New York and Florida, the only
states that require licenses. For our implants and instruments,
we are FDA registered, California licensed, CE marked and ISO
certified. CE is an abbreviation for European Compliance. Our
facility and the facilities of our third-party manufacturers are
subject to periodic unannounced inspections by regulatory
authorities, and may undergo compliance inspections conducted by
the FDA and corresponding state agencies. The FDA may impose
enforcement, inspections or audits at any time.
Loaner Equipment
We seek to obtain inventory just in time to satisfy our customer
obligations to meet surgery schedules. This strategy minimizes
backlogs, while increasing inventory turns and maximizing cash
flow. Our pool of MAS platform and classic fusion loaner
equipment that we loan to or place with hospitals continues to
increase as we expand our distribution channels and increase
market penetration of our products. These loaners are important
to the growth of our business and we anticipate additional
investments in our loaner inventory.
Intellectual Property
We rely on a combination of patent, trademark, copyright, trade
secret and other intellectual property laws, nondisclosure
agreements and other measures to protect our intellectual
property rights. We believe that in order to have a competitive
advantage, we must develop and maintain the proprietary aspects
of our technologies. We require our employees, consultants and
advisors to execute confidentiality agreements in
11
connection with their employment, consulting or advisory
relationships with us. We also require our employees,
consultants and advisors who we expect to work on our products
to agree to disclose and assign to us all inventions conceived
during the work day, using our property or which relate to our
business. Despite any measures taken to protect our intellectual
property, unauthorized parties may attempt to copy aspects of
our products or to obtain and use information that we regard as
proprietary.
As of December 31, 2005 we had 38 issued U.S. patents,
20 foreign national patents, and 163 pending patent
applications, including 106 U.S. applications, 13
international (PCT) applications and 44 foreign national
applications. The issued and pending patents cover, among other
things:
|
|
|
|
|
targeting systems;
|
|
|
|
MAS surgical access and spine systems;
|
|
|
|
implants and related instrumentation; and
|
|
|
|
neurophysiology enabled instrumentation and methodology,
including pedicle screw test systems, nerve root retraction
systems and surgical access systems.
|
Our issued patents begin to expire in 2018. We have multiple
patents covering unique aspects and improvements for many of our
products. We do not believe that the expiration of any single
patent is likely to significantly affect our intellectual
property position.
We have undertaken to protect our neurophysiology platform,
including
NeuroVision
®
,
through a comprehensive strategy covering various important
aspects of our neurophysiology-enabled instrumentation,
including, screw test, nerve root retraction, surgical access
and related methodology. Our NeuroVision patent portfolio
includes 5 issued U.S. patents, 8 issued foreign national
patents, 35 U.S. patent applications, including 20
U.S. utility applications, 14 U.S. provisional
applications, and 1 U.S. design application,
5 international (PCT) patent applications, and 22
foreign national applications on this system and related
instrumentation.
We obtained a U.S. Patent with broad claims protecting our
SpheRx
®
pedicle screw system. In addition to this issued patent, we have
several patent applications pending on the SpheRx pedicle screw
system and related instrumentation, including 3
U.S. utility applications, 2 U.S. provisional
applications, 1 international (PCT) application, and 3
foreign national applications.
We acquired a substantial intellectual property portfolio as
part of our purchase of the NeoDisc investigational device from
Pearsalls Limited. This portfolio includes 1 issued
U.S. patent, 10 issued foreign national patents, 5
international (PCT) applications, and 9 foreign national
applications.
The medical device industry is characterized by the existence of
a large number of patents and frequent litigation based on
allegations of patent infringement. Patent litigation can
involve complex factual and legal questions and its outcome is
uncertain. Any claim relating to infringement of patents that is
successfully asserted against us may require us to pay
substantial damages. Even if we were to prevail, any litigation
could be costly and time-consuming and would divert the
attention of our management and key personnel from our business
operations. Our success will also depend in part on our not
infringing patents issued to others, including our competitors
and potential competitors. If our products are found to infringe
the patents of others, our development, manufacture and sale of
such potential products could be severely restricted or
prohibited. In addition, our competitors may independently
develop similar technologies. Because of the importance of our
patent portfolio to our business, we may lose market share to
our competitors if we fail to protect our intellectual property
rights.
As the number of entrants into our market increases, the
possibility of a patent infringement claim against us grows.
While we make an effort to ensure that our products do not
infringe other parties patents and proprietary rights, our
products and methods may be covered by patents held by our
competitors. In addition, our competitors may assert that future
products we may market infringe their patents.
12
A patent infringement suit brought against us or any strategic
partners or licensees may force us or any strategic partners or
licensees to stop or delay developing, manufacturing or selling
potential products that are claimed to infringe a third
partys intellectual property, unless that party grants us
or any strategic partners or licensees rights to use its
intellectual property. In such cases, we may be required to
obtain licenses to patents or proprietary rights of others in
order to continue to commercialize our products. However, we may
not be able to obtain any licenses required under any patents or
proprietary rights of third parties on acceptable terms, or at
all. Even if any strategic partners, licensees or we were able
to obtain rights to the third partys intellectual
property, these rights may be non-exclusive, thereby giving our
competitors access to the same intellectual property.
Ultimately, we may be unable to commercialize some of our
potential products or may have to cease some of our business
operations as a result of patent infringement claims, which
could severely harm our business.
As of December 31, 2005, we have 47 trademark
registrations, both domestic and foreign, including the
following U.S. trademarks: NuVasive, NeuroVision, MaXcess,
XLIF, SpheRx, CoRoent, SmartPlate, Creative Spine Technology,
Triad,
INS-1,
Spine
Evolution Nucleus and SEN. We have 21 trademark applications
pending, both domestic and foreign, for the following
trademarks: MAS, DBR, NeoDisc, ExtenSure, CerPass, I-PAS,
InStim, Absolute Responsiveness, Nerve Avoidance Leader, and
Nuvaplasty.
Competition
We are aware of a number of major medical device companies that
have developed or plan to develop products for minimally
invasive spine surgery in each of our current and future product
categories.
Our currently marketed products are, and any future products we
commercialize will be, subject to intense competition. Many of
our current and potential competitors have substantially greater
financial, technical and marketing resources than we do, and
they may succeed in developing products that would render our
products obsolete or noncompetitive. In addition, many of these
competitors have significantly greater operating history and
reputations than we do in their respective fields. Our ability
to compete successfully will depend on our ability to develop
proprietary products that reach the market in a timely manner,
receive adequate reimbursement and are safer, less invasive and
less expensive than alternatives available for the same purpose.
Because of the size of the potential market, we anticipate that
companies will dedicate significant resources to developing
competing products. Below are our primary competitors grouped by
our product categories.
Our NeuroVision system competes with the conventional nerve
monitoring systems offered by Nicolet Biomedical and Axon
Systems. We believe our system competes favorably with
Nicolets and Axons systems on both price and ease of
use for the spine surgeon, with the added advantage that our
NeuroVision System was designed to support surgeon directed
applications. Medtronic Sofamor Danek has also introduced its
NIM system for nerve monitoring. The NIM system is currently not
surgeon directed and requires manual interpretation. Several
companies offer products that compete with our MaXcess system,
SpheRx pedicle screw system and implants, including competitive
offerings by DePuy Spine, Inc., a Johnson & Johnson
company, Medtronic Sofamor Danek and Stryker Spine.
Competition is intense in the fusion product market. We believe
that our most significant competitors are Medtronic Sofamor
Danek, DePuy Spine, Stryker Spine and Synthes-Stratec, Inc.,
each of which has substantially greater sales and financial
resources than we do. Medtronic Sofamor Danek, in particular,
has a broad classic fusion product line. We believe our
differentiation in the market is based on packaging the
allograft in a saline solution, which allows the product to be
used immediately and does not require specialized handling.
We also face competition from a growing number of smaller
companies with more limited product offerings and geographic
reach than our larger competitors. These companies, who
represent intense competition in specified markets, include
Abbott Spine, Inc. (an Abbott Laboratories company), Blackstone
Medical, Inc., Alphatec Spine Inc., Scientx USA, Inc.,
OsteoTec Ltd, and others.
13
Government Regulation
Our products are medical devices and tissues subject to
extensive regulation by the FDA and other regulatory bodies. FDA
regulations govern, among other things, the following activities
that we or our partners perform and will continue to perform:
|
|
|
|
|
product design and development;
|
|
|
|
product testing;
|
|
|
|
product manufacturing;
|
|
|
|
product labeling;
|
|
|
|
product storage;
|
|
|
|
premarket clearance or approval;
|
|
|
|
advertising and promotion; and
|
|
|
|
product sales and distribution.
|
|
|
|
FDAs Premarket Clearance and Approval
Requirements
|
Unless an exemption applies, each medical device we wish to
commercially distribute in the United States will require
either prior 510(k) clearance or prior premarket approval from
the FDA. The FDA classifies medical devices into one of three
classes. Devices deemed to pose lower risk are placed in either
class I or II, which requires the manufacturer to
submit to the FDA a premarket notification requesting permission
for commercial distribution. This process is known as 510(k)
clearance. Some low risk devices are exempt from this
requirement. 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
previously cleared 510(k) device are placed in class III,
requiring premarket approval. Both premarket clearance and
premarket approval applications are subject to the payment of
user fees, paid at the time of submission for FDA review.
To obtain 510(k) clearance, we must submit a premarket
notification demonstrating that the proposed device is
substantially equivalent to a previously cleared 510(k) device
or a device that was in commercial distribution before
May 28, 1976 for which the FDA has not yet called for the
submission of premarket approval applications. The FDAs
510(k) clearance pathway usually takes from three to twelve
months from the date the application is completed, but it can
take significantly longer.
After a device receives 510(k) clearance, any modification that
could significantly affect its safety or effectiveness, or that
would constitute a major change in its intended use, will
require a new 510(k) clearance or could require premarket
approval. The FDA requires each manufacturer to make this
determination initially, but the FDA can review any such
decision and can disagree with a manufacturers
determination. If the FDA disagrees with a manufacturers
determination, the FDA can require the manufacturer to cease
marketing and/or recall the modified device until 510(k)
clearance or premarket approval is obtained. If the FDA requires
us to seek 510(k) clearance or premarket approval for any
modifications to a previously cleared product, we may be
required to cease marketing or recall the modified device until
we obtain this clearance or approval. Also, in these
circumstances, we may be subject to significant regulatory fines
or penalties. We have made and plan to continue to make
additional product enhancements that we believe do not require
new 510(k) clearances.
|
|
|
Premarket Approval Pathway
|
A premarket approval application must be submitted if the device
cannot be cleared through the 510(k) process. A premarket
approval application must be supported by extensive data
including, but not limited to,
14
technical, preclinical, clinical trials, manufacturing and
labeling to demonstrate to the FDAs satisfaction the
safety and effectiveness of the device for its intended use.
After a premarket approval application 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 may
request additional information or clarification of information
already provided. Also during the review period, an advisory
panel of experts from outside the FDA may be convened to review
and evaluate the application and provide recommendations to the
FDA as to the approvability of the device. In addition, the FDA
will conduct a preapproval inspection of the manufacturing
facility to ensure compliance with quality system regulations.
New premarket approval applications or premarket approval
application supplements are required for significant
modifications to the manufacturing process, labeling and design
of a device that is approved through the premarket approval
process. Premarket approval supplements often require submission
of the same type of information as a premarket approval
application, except that the supplement is limited to
information needed to support any changes from the device
covered by the original premarket approval application, and may
not require as extensive clinical data or the convening of an
advisory panel.
A clinical trial is almost always required to support a
premarket approval application and is sometimes required for a
510(k) premarket notification. These trials generally require
submission of an application for an investigational device
exemption to the FDA. The investigational device exemption
application must be supported by appropriate data, such as
animal and laboratory testing results, showing that it is safe
to evaluate the device in humans and that the testing protocol
is scientifically sound. The investigational device exemption
application must be approved in advance by the FDA for a
specified number of subjects, unless the product is deemed a
non-significant risk device and eligible for more abbreviated
investigational device exemption requirements. Clinical trials
for a significant risk device may begin once the investigational
device exemption application is approved by the FDA and the
responsible institutional review boards. Future clinical trials
of our motion preservation designs and interbody implants will
likely require that we obtain an investigational device
exemption from the FDA prior to commencing clinical trials. In
2005, we filed for investigational device exemptions from the
FDA with respect to NeoDisc, our nucleus-like cervical disc
replacement device, and CerPass, our cervical total disc
replacement device. Our clinical trials must be conducted in
accordance with FDA regulations and other federal regulations
concerning human subject protection and privacy. The results of
our clinical trials may not be sufficient to obtain approval of
our product.
|
|
|
Pervasive and Continuing FDA Regulation
|
After a device is placed on the market, numerous regulatory
requirements apply. These include, but are not limited to:
|
|
|
|
|
quality system regulation, which requires manufacturers to
follow design, testing, process control, and other quality
assurance procedures;
|
|
|
|
labeling regulations, which prohibit the promotion of products
for unapproved or off-label uses and impose other
restrictions on labeling; and
|
|
|
|
medical device reporting regulations, which require that
manufacturers report to the FDA if their device may have caused
or contributed to a death or serious injury or malfunctioned in
a way that would likely cause or contribute to a death or
serious injury if it were to recur.
|
Failure to comply with applicable regulatory requirements can
result in enforcement action by the FDA, which may include any
of the following sanctions:
|
|
|
|
|
fines, injunctions, and civil penalties;
|
|
|
|
recall or seizure of our products;
|
|
|
|
operating restrictions, partial suspension or total shutdown of
production;
|
15
|
|
|
|
|
refusing our request for 510(k) clearance or premarket approval
of new products;
|
|
|
|
withdrawing 510(k) clearance or premarket approvals that are
already granted; and
|
|
|
|
criminal prosecution.
|
We are subject to unannounced device inspections by the FDA and
the Food and Drug Branch, as well as other regulatory agencies
overseeing the implementation and adherence of applicable state
and federal tissue licensing regulations. These inspections may
include our subcontractors facilities.
International sales of medical devices are subject to foreign
government regulations, which vary substantially from country to
country. The time required to obtain approval by a foreign
country may be longer or shorter than that required for FDA
approval, and the requirements may differ.
The European Union, which consists of 25 of the major countries
in Europe, has adopted numerous directives and standards
regulating the design, manufacture, clinical trials, labeling,
and adverse event reporting for medical devices. Other
countries, such as Switzerland, have voluntarily adopted laws
and regulations that mirror those of the European Union with
respect to medical devices. Devices that comply with the
requirements of a relevant directive will be entitled to bear CE
conformity marking and, accordingly, can be commercially
distributed throughout Europe. The method of assessing
conformity varies depending on the class of the product, but
normally involves a combination of self-assessment by the
manufacturer and a
third-party
assessment
by a Notified Body. This third-party assessment
consists of an audit of the manufacturers quality system
and technical review of the manufacturers product. In
2001, we successfully passed of initial Notified Body audit,
granting us ISO registration and allowing the CE conformity
marking to be applied to certain of our devices under the
European Union Medical Device Directive.
Third-Party Reimbursement
We expect that sales volumes and prices of our products will
continue to be largely dependent on the availability of
reimbursement from third-party payers, such as governmental
programs, for example, Medicare and Medicaid, private insurance
plans and managed care programs. These third-party payers may
deny reimbursement if they feel that a device is not the most
cost-effective treatment available, or was used for an
unapproved indication. Also, third-party payers are increasingly
challenging the prices charged for medical products and
services. In international markets, reimbursement and healthcare
payment systems vary significantly by country and many countries
have instituted price ceilings on specific product lines. There
can be no assurance that our products will be considered
cost-effective by third-party payers, that reimbursement will be
available or, if available, that the third-party payers
reimbursement policies will not adversely affect our ability to
sell our products profitably.
Particularly in the United States, third-party payers carefully
review, and increasingly challenge, the prices charged for
procedures and medical products. In addition, an increasing
percentage of insured individuals are receiving their medical
care through managed care programs, which monitor and often
require pre-approval of the services that a member will receive.
Many managed care programs are paying their providers on a
capitated basis, which puts the providers at financial risk for
the services provided to their patients by paying them a
predetermined payment per member per month. The percentage of
individuals covered by managed care programs is expected to grow
in the United States over the next decade.
We believe that the overall escalating cost of medical products
and services has led to, and will continue to lead to, increased
pressures on the healthcare industry to reduce the costs of
products and services. There can be no assurance that
third-party reimbursement and coverage will be available or
adequate, or that future legislation, regulation, or
reimbursement policies of third-party payers will not adversely
affect the demand for our products or our ability to sell these
products on a profitable basis. The unavailability or inadequacy
of third-party payer coverage or reimbursement could have a
material adverse effect on our business, operating results and
financial condition.
16
Clinical Advisory Board
We have established a clinical advisory board led by Randal
Betz, M.D. of Philadelphia, Pennsylvania that we call the
Spine Evolution Nucleus, or
SEN
®
.
This group consists of orthopedic and neurological spine surgeon
thought leaders. The SEN consults with us on long-term product
planning, research, development and marketing initiatives.
Significant pioneering clinical developments have been
contributed to us by Luiz Pimenta, M.D. from Sao
Paulo, Brazil and other members of the SEN.
Employees
As of December 31, 2005, we had 137 employees, of which 34
were employed in research and development, 6 in clinical and
regulatory, 25 in general and administrative and operations and
72 in sales and marketing. None of our employees is represented
by a labor union and we believe our employee relations are good.
Corporate Information
Our business was incorporated in Delaware in July 1997. Our
principal executive offices are located at 4545 Towne Centre
Court, San Diego, California 92121, and our telephone
number is (858) 909-1800. Our website is located at
www.nuvasive.com.
We file our annual reports on
Form
10-K,
quarterly reports on
Form
10-Q
and
current reports on
Form
8-K,
and any
amendments to those reports, electronically with the Securities
and Exchange Commission (the Commission). We make
these reports available free of charge on our website under the
investor relations page as soon as reasonably practicable after
we electronically file such material with, or furnish it to, the
Commission. All such reports were made available in this fashion
during 2005.
This report may refer to brand names, trademarks, service marks
or trade names of other companies and organizations, and these
brand names, trademarks, service marks and trade names are the
property of their respective holders.
An investment in our common stock involves a high degree of
risk. You should consider carefully the risks and uncertainties
described below together with all other information contained or
incorporated by reference in this report before you decide to
invest in our common stock. If any of the following risks
actually occurs, our business, financial condition, results of
operations and our future growth prospects could be materially
and adversely affected. Under these circumstances, the trading
price of our common stock could decline, and you may lose all or
part of your investment.
Risks Related to Our Business and Industry
|
|
|
Our failure to build an effective and dedicated
distribution network for our products could significantly impair
our ability to increase sales of our products.
|
We have only been selling our products since 2001. We currently
sell a significant majority of our products in the United States
through distribution arrangements with a network of independent
agents and sales representatives managed by our sales managers.
As a result, we are dependent upon the sales and marketing
efforts of our third-party sales agencies. We pay these agents
and sales representatives a commission based on their product
sales. We are currently engaged in significant efforts to
convince agents and sales representatives to exclusively sell
our spine surgery products. We believe this is important in
increasing our product sales as exclusivity brings greater focus
from sales agents and a greater commitment to generate sales of
our full product line. These efforts require us to offer higher
commissions, sometimes for extended periods of time. As a
result, these efforts can result in significantly increased
expenses and may therefore negatively impact our results of
operations. In addition, if we are unable to convince some of
our established third-party sales agencies to exclusively sell
our spine surgery products, we would have to try to
17
transition this business to exclusive agents. There is a risk
that sales revenue could be lost in connection with such a
transition.
Our efforts to build a dedicated sales force also include
initiatives to hire sales representatives who work directly for
us. We have little experience in establishing a direct sales
force, so there is a risk that this sales force will not succeed
in growing sales of our products. Although we believe the cost
of a direct sales force will be comparable to that of
independent agents, there is also a risk that the cost may turn
out to be higher.
The establishment and development of a broader and more
dedicated distribution network and sales force is expensive and
time consuming. Because of the intense competition for their
services, we may be unable to identify additional qualified
sales representatives and independent sales agencies. Further,
we may not be able to enter into agreements with them on
commercially reasonable terms, if at all. Even if we do enter
into agreements with additional sales representatives and/or
independent sales agencies, these parties may not be successful
in marketing and selling our products. Our business, financial
condition and results of operations will be adversely affected
if the marketing and sales efforts of our direct sales
representatives and independent sales agencies are unsuccessful.
|
|
|
Pricing pressure from our competitors and sources of
medical reimbursement may impact our ability to sell our
products at prices necessary to expand our operations and reach
profitability.
|
The market for spine surgery products is large and growing at a
significant rate. This has attracted numerous new companies and
technologies, and encouraged more established companies to
intensify competitive pressure. New entrants to our markets
include companies owned partially by spine surgeons, who have
significant market knowledge and access to the surgeons who use
our products. As a result of this increased competition, we
believe there will be growing pricing pressure in the near
future. If competitive forces drive down the price we are able
to charge for our products, our profit margins will shrink,
which will hamper our ability to invest in and grow our business.
Further, successful sales of our products will depend on the
availability of adequate reimbursement from third-party payors.
Healthcare providers, such as hospitals that purchase medical
devices for treatment of their patients, generally rely on
third-party payors to reimburse all or part of the costs and
fees associated with the procedures performed with these
devices. Spine surgeons are unlikely to use our products if they
do not receive reimbursement adequate to cover the cost of their
involvement in the surgical procedures. We also believe that
future reimbursement may be subject to increased restrictions
both in the United States and in international markets. Future
legislation, regulation or reimbursement policies of third-party
payors may adversely affect the demand for our existing products
or our products currently under development and limit our
ability to sell our products on a profitable basis.
To the extent we sell our products internationally, market
acceptance may depend, in part, upon the availability of
reimbursement within prevailing healthcare payment systems.
Reimbursement and healthcare payment systems in international
markets vary significantly by country, and include both
government sponsored healthcare and private insurance.
|
|
|
We are in a highly competitive market segment and face
competition from large, well-established medical device
manufacturers as well as new market entrants.
|
The market for spine surgery products and procedures is
intensely competitive, subject to rapid change and significantly
affected by new product introductions and other market
activities of industry participants. With respect to
NeuroVision, our nerve avoidance system, we compete with
Medtronic Sofamor Danek, Inc., a wholly owned subsidiary of
Medtronic, Inc., and Nicolet Biomedical, a VIASYS Healthcare
company, both of which have significantly greater resources than
we do. With respect to MaXcess, our minimally disruptive
surgical system, our largest competitors are Medtronic Sofamor
Danek, Inc., DePuy Spine, Inc., a Johnson & Johnson
company, and Synthes-Stratec, Inc. We compete with many of the
same companies with respect to our other products. At any time,
these companies may develop alternative treatments, products or
procedures for the treatment of spine disorders that compete
directly or indirectly with our products. Many of our larger
18
competitors are either publicly traded or divisions or
subsidiaries of publicly traded companies, and enjoy several
competitive advantages over us, including:
|
|
|
|
|
significantly greater name recognition;
|
|
|
|
established relations with spine surgeons, hospitals, other
healthcare providers and third-party payors;
|
|
|
|
large and established distribution networks with significant
international presence;
|
|
|
|
products supported by long-term clinical data;
|
|
|
|
greater experience in obtaining and maintaining United States
Food and Drug Administration, or FDA, and other regulatory
approvals or clearances for products and product enhancements;
|
|
|
|
more expansive portfolios of intellectual property
rights; and
|
|
|
|
greater financial and other resources for product research and
development, sales and marketing and litigation.
|
In addition, the spine industry is becoming increasingly crowded
with new market entrants, including companies owned at least
partially by spine surgeons. Many of these new competitors focus
on a specific product or market segment, making it more
difficult for us to increase our overall market position. If
these companies become successful, we expect that competition
will become even more intense, leading to greater pricing
pressure and making it more difficult for us to expand.
|
|
|
To be commercially successful, we must convince spine
surgeons that our products are an attractive alternative to
existing surgical treatments of spine disorders.
|
We believe spine surgeons may not widely adopt our products
unless they determine, based on experience, clinical data and
published peer reviewed journal articles, that our products
provide benefits or an attractive alternative to conventional
modalities of treating spine disorders. Surgeons may be slow to
change their medical treatment practices for the following
reasons, among others:
|
|
|
|
|
lack of experience with our products;
|
|
|
|
lack of evidence supporting additional patient benefits;
|
|
|
|
perceived liability risks generally associated with the use of
new products and procedures;
|
|
|
|
limited availability of reimbursement within healthcare payment
systems;
|
|
|
|
costs associated with the purchase of new products and
equipment; and
|
|
|
|
the time that must be dedicated for training.
|
In addition, we believe recommendations and support of our
products by influential surgeons are essential for market
acceptance and adoption. If we do not receive support from such
surgeons or have favorable long-term data, surgeons and
hospitals may not use our products. In such circumstances, we
may not achieve expected revenues and may never become
profitable.
|
|
|
Our future success depends on our ability to timely
develop and introduce new products or product enhancements that
will be accepted by the market.
|
It is important to our business that we continue to build a more
complete product offering to surgeons and hospitals. As such,
our success will depend in part on our ability to develop and
introduce new products and enhancements to our existing products
to keep pace with the rapidly changing spine market. We cannot
assure you that we will be able to successfully develop, obtain
regulatory approval for or market new products or that any of
our future products will be accepted by the surgeons who use our
products or the payors who financially
19
support many of the procedures performed with our products. The
success of any new product offering or enhancement to an
existing product will depend on several factors, including our
ability to:
|
|
|
|
|
properly identify and anticipate surgeon and patient needs;
|
|
|
|
develop and introduce new products or product enhancements in a
timely manner;
|
|
|
|
develop products based on technology that we acquire, such as
the technology recently acquired from Pearsalls Limited, RSB
Spine LLC, and RiverBend Design LLC;
|
|
|
|
avoid infringing upon the intellectual property rights of third
parties;
|
|
|
|
demonstrate, if required, the safety and efficacy of new
products with data from preclinical studies and clinical trials;
|
|
|
|
obtain the necessary regulatory clearances or approvals for new
products or product enhancements;
|
|
|
|
provide adequate training to potential users of our products;
|
|
|
|
receive adequate reimbursement; and
|
|
|
|
develop an effective and dedicated marketing and distribution
network.
|
If we do not develop new products or product enhancements in
time to meet market demand or if there is insufficient demand
for these products or enhancements, our results of operations
will suffer.
|
|
|
We may encounter difficulties in integrating acquired
products, technologies or businesses, which could adversely
affect our business.
|
We recently acquired assets from each of Pearsalls Limited, RSB
Spine LLC, and RiverBend Design LLC, and may in the future
acquire technology, products or businesses related to our
current or future business. We have limited experience in
acquisition activities and may have to devote substantial time
and resources in order to complete any future acquisitions.
Further, these past and potential acquisitions entail risks,
uncertainties and potential disruptions to our business. For
example, we may not be able to successfully integrate an
acquired companys operations, technologies, products and
services, information systems and personnel into our business.
Further, products we acquire, such as the cervical plate we
acquired from RSB Spine LLC and the ExtenSure product
acquired from RiverBend Design LLC, may not provide the intended
complementary fit with our existing products. In addition,
certain acquired technology, such as that acquired from
Pearsalls Limited, requires significant additional development
work and efforts to obtain regulatory clearance or approval. An
acquisition may further strain our existing financial and
managerial controls, and divert managements attention away
from our other business concerns. In connection with
in-process
research and
development activities, we would likely experience an increase
in development expenses and capital expenditures. There may also
be unanticipated costs and liabilities associated with an
acquisition that could adversely affect our operating results.
|
|
|
We are dependent on single source suppliers and
manufacturers for certain of our products and components, and
the loss of any of these suppliers or manufacturers, or their
inability to supply us with an adequate supply of materials
could harm our business.
|
We rely on third-party suppliers and manufacturers to
manufacture and supply our products. To be successful, our
contract manufacturers must be able to provide us with products
and components in substantial quantities, in compliance with
regulatory requirements, in accordance with agreed upon
specifications, at acceptable cost and on a timely basis. Our
anticipated growth could strain the ability of suppliers to
deliver an increasingly large supply of products, materials and
components. Manufacturers often experience difficulties in
scaling up production, including problems with production yields
and quality control and assurance, especially with products such
as allograft which is processed human tissue. If we are unable
to obtain sufficient quantities of high quality components to
meet customer demand on a timely basis, we could lose customers,
our reputation may be harmed and our business could suffer.
20
We currently use one or two manufacturers for each of our
devices or components. Our dependence on one or two
manufacturers involves several risks, including limited control
over pricing, availability, quality and delivery schedules. If
any one or more of our manufacturers cease to provide us with
sufficient quantities of our components in a timely manner or on
terms acceptable to us, or cease to manufacture components of
acceptable quality, we would have to seek alternative sources of
manufacturing. We could incur delays while we locate and engage
alternative qualified suppliers and we might be unable to engage
alternative suppliers on favorable terms. Any such disruption or
increased expenses could harm our commercialization efforts and
adversely affect our ability to generate revenue.
Further, Tissue Banks International, Inc. and U.S. Tissue
and Cell (formerly Intermountain Tissue Center) collectively
supply us with all of our allograft implants, and will continue
to be our only sources for the foreseeable future. The
processing of human tissue into allograft implants is very labor
intensive and it is therefore difficult to maintain a steady
supply stream. In addition, due to seasonal changes in mortality
rates, some scarce tissues used for our allograft implants are
at times in particularly short supply. We cannot be certain that
our supply of allograft implants from Tissue Banks International
and U.S. Tissue and Cell will be available at current
levels or will be sufficient to meet our needs. If we are no
longer able to obtain allograft implants from these sources in
amounts sufficient to meet our needs, we may not be able to
locate and engage replacement sources of allograft implants on
commercially reasonable terms, if at all. Any interruption of
our business caused by the need to locate additional sources of
allograft implants could significantly harm our revenues, which
could cause the market price of our common stock to decline.
Additionally, Invibio, Inc. is our exclusive supplier of
polyetheretherketone, which comprises our PEEK partial vertebral
body product called CoRoent. We have a supply agreement with
Invibio, pursuant to which we have agreed to purchase our entire
supply of polyetheretherketone from Invibio. In addition, we
have an exclusive supply arrangement with Peak Industries, Inc.,
pursuant to which Peak Industries is our exclusive supplier of
NeuroVision systems. In the event Peak Industries ceases to
supply us, which it may do at any time, we would be forced to
locate a suitable alternative supplier. We believe the
start-up
time to
establish a new supply of NeuroVision would be approximately 16
to 20 weeks. We have established an inventory of
NeuroVision systems to help us bridge any downtime in the event
Peak Industries ceases to supply us; however, this inventory may
be depleted before we are able to engage an alternate supplier.
Any inability to meet our customers demands for
NeuroVision systems could lead to decreased sales and harm our
reputation, which could cause the market price of our common
stock to decline.
|
|
|
Any failure in our efforts to train spine surgeons could
significantly reduce the market acceptance of our
products.
|
There is a learning process involved for spine surgeons to
become proficient in the use of our products. It is critical to
the success of our commercialization efforts to train a
sufficient number of spine surgeons and to provide them with
adequate instruction in the use of our products. This training
process may take longer than expected and may therefore affect
our ability to increase sales. Convincing surgeons to dedicate
the time and energy necessary for adequate training is
challenging, and we cannot assure you we will be successful in
these efforts. If surgeons are not properly trained, they may
misuse or ineffectively use our products. This may also result
in unsatisfactory patient outcomes, patient injury, negative
publicity or lawsuits against us, any of which could have an
adverse effect on our business.
Although we believe our training methods regarding surgeons are
conducted in compliance with FDA and other applicable
regulations, if the FDA determines that our training constitutes
promotion of an unapproved use, they could request that we
modify our training or subject us to regulatory enforcement
actions, including the issuance of a warning letter, injunction,
seizure, civil fine and criminal penalty.
|
|
|
We are dependent on the services of Alexis V. Lukianov and
Keith Valentine, and the loss of either of them could harm our
business.
|
Our continued success depends in part upon the continued service
of Alexis V. Lukianov, our Chairman and Chief Executive Officer,
and Keith Valentine, our President, who are critical to the
overall management
21
of NuVasive as well as to the development of our technology, our
culture and our strategic direction. We have entered into
employment agreements with Messrs. Lukianov and Valentine,
but neither of these agreements guarantees the service of the
individual for a specified period of time. The loss of either
Messr. Lukianov or Valentine could have a material adverse
effect on our business, results of operations and financial
condition. We have not obtained and do not expect to obtain any
key-person life insurance policies.
|
|
|
If we fail to properly manage our anticipated growth, our
business could suffer.
|
The rapid growth of our business has placed a significant strain
on our managerial, operational and financial resources and
systems. To execute our anticipated growth successfully, we must
attract and retain qualified personnel and manage and train them
effectively. We will be dependent on our personnel and third
parties to effectively market our products to an increasing
number of surgeons. We will also depend on our personnel to
develop next generation technologies.
Further, our anticipated growth will place additional strain on
our suppliers and manufacturers, resulting in increased need for
us to carefully monitor quality assurance. Any failure by us to
manage our growth effectively could have an adverse effect on
our ability to achieve our development and commercialization
goals.
In January 2005, we relocated our operations to a different
facility in San Diego, California. Although this new
facility allows for growth in our business and enables us to
more effectively train surgeons in the use of our products, it
has significantly increased our operating expenses. For example,
our monthly lease payments approximately doubled and we also pay
increased maintenance costs for this facility. If we do not
generate additional business opportunities, these additional
expenses could negatively affect our results of operations.
|
|
|
If we fail to obtain, or experience significant delays in
obtaining, FDA clearances or approvals for our future products
or product enhancements, our ability to commercially distribute
and market our products could suffer.
|
Our medical devices are subject to rigorous regulation by the
FDA and numerous other federal, state and foreign governmental
authorities. The process of obtaining regulatory clearances or
approvals to market a medical device, particularly from the FDA,
can be costly and time consuming, and there can be no assurance
that such clearances or approvals will be granted on a timely
basis, if at all. In particular, the FDA permits commercial
distribution of a new medical device only after the device has
received clearance under Section 510(k) of the Federal
Food, Drug and Cosmetic Act, or is the subject of an approved
premarket approval application, or PMA. The FDA will clear
marketing of a medical device through the 510(k) process if it
is demonstrated that the new product is substantially equivalent
to other 510(k)-cleared products. The PMA process is more
costly, lengthy and uncertain than the 510(k) clearance process.
A PMA application must be supported by extensive data,
including, but not limited to, technical, preclinical, clinical
trial, manufacturing and labeling data, to demonstrate to the
FDAs satisfaction the safety and efficacy of the device
for its intended use.
Our failure to comply with such regulations could lead to the
imposition of injunctions, suspensions or loss of regulatory
approvals, product recalls, termination of distribution, or
product seizures. In the most egregious cases, criminal
sanctions or closure of our manufacturing facilities are
possible.
To date, all of our products, unless exempt, have been cleared
through the 510(k) process. We have no experience in obtaining
premarket approval. We expect that our total disc replacement
devices currently under development, including CerPass, our
investigational cervical total disc replacement device, and
NeoDisc, our investigational nucleus-like cervical disc
replacement device, will have to go through the PMA process.
These devices have not yet reached the clinical trial stage and
we cannot assure you whether successful clinical trials will be
conducted or completed or regulatory approval will ultimately be
obtained for these devices. Moreover, clinical trials typically
have durations of several years and competing products may be
introduced while our devices are undergoing clinical trials.
This could reduce the potential demand for our products and
negatively
22
impact our business prospects. Our competitors new
products and technologies may be more effective or less
expensive than our products or render our products obsolete.
Further, pursuant to FDA regulations, we can only market our
products for cleared or approved uses. Certain of our products
may be used by physicians for indications other than those
cleared or approved by the FDA, but we cannot promote the
products for such off-label uses. 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 promotional or training
materials to constitute promotion of an unapproved use, which
could result in significant fines or penalties under other
statutory authorities.
Foreign governmental authorities that regulate the manufacture
and sale of medical devices have become increasingly stringent
and, to the extent we market and sell our products in foreign
countries, we may be subject to rigorous regulation in the
future. In such circumstances, we would rely significantly on
our foreign independent sales agencies to comply with the
varying regulations, and any failures on their part could result
in restrictions on the sale of our products in foreign countries.
|
|
|
The safety of our products is not yet supported by
long-term clinical data and may therefore prove to be less safe
and effective than initially thought.
|
We obtained clearance to offer almost all of our products that
require FDA clearance or approval through the FDAs 510(k)
clearance process. The FDAs 510(k) clearance process is
less rigorous than the PMA process and requires less supporting
clinical data. As a result, we currently lack the breadth of
published long-term clinical data supporting the safety of our
products and the benefits they offer that might have been
generated in connection with the PMA process. For these reasons,
spine surgeons may be slow to adopt our products, we may not
have comparative data that our competitors have or are
generating and we may be subject to greater regulatory and
product liability risks. Further, future patient studies or
clinical experience may indicate that treatment with our
products does not improve patient outcomes. Such results would
reduce demand for our products, significantly reduce our ability
to achieve expected revenues and could prevent us from becoming
profitable. Moreover, if future results and experience indicate
that our products cause unexpected or serious complications or
other unforeseen negative effects, we could be subject to
significant legal liability and harm to our business reputation.
The spine medical device market has been particularly prone to
costly product liability litigation.
|
|
|
If we or our suppliers fail to comply with the FDAs
quality system regulations, the manufacture of our products
could be delayed.
|
We and our suppliers are required to comply with the FDAs
quality system regulations, which cover the methods and
documentation of the design, testing, production, control,
quality assurance, labeling, packaging, storage and shipping of
our products. The FDA enforces the quality system regulation
through inspections. If we or one of our suppliers fail a
quality system regulations inspection or if any corrective
action plan is not sufficient, the manufacture of our products
could be delayed. We underwent an FDA inspection in August 2003
regarding our allograft implant business, and another FDA
inspection in April 2004 regarding our medical device
activities. In connection with these inspections, the FDA
requested minor corrective actions, which we believe we have
taken, but there can be no assurance the FDA will not subject us
to further enforcement action. The FDA may impose additional
inspections or audits at any time.
|
|
|
Modifications to our marketed products may require new
510(k) clearances or premarket approvals, or may require us to
cease marketing or recall the modified products until clearances
are obtained.
|
Any modification to a 510(k)-cleared device that could
significantly affect its safety or efficacy, or that would
constitute a major change in its intended use, requires a new
510(k) clearance or, possibly, premarket approval. The FDA
requires every manufacturer to make this determination in the
first instance, but the FDA
23
may review any manufacturers decision. The FDA may not
agree with any of our decisions regarding whether new clearances
or approvals are necessary. If the FDA requires us to seek
510(k) clearance or premarket approval for any modification to a
previously cleared product, we may be required to cease
marketing or to recall the modified product until we obtain
clearance or approval, and we may be subject to significant
regulatory fines or penalties. Further, our products could be
subject to recall if the FDA determines, for any reason, that
our products are not safe or effective. Any recall or FDA
requirement that we seek additional approvals or clearances
could result in delays, fines, costs associated with
modification of a product, loss of revenue and potential
operating restrictions imposed by the FDA.
Risks Related to Our Financial Results and Need for
Financing
|
|
|
We have a limited operating history, have incurred
significant operating losses since inception and expect to
continue to incur losses, and we cannot assure you that we will
achieve profitability.
|
We were incorporated in Delaware in 1997, and have since focused
primarily on research and development and on seeking regulatory
clearances to market our products. We began commercial sales in
2001 and have several product offerings in both MAS and classic
fusion. We have yet to demonstrate that we can generate
sufficient sales of our products to become profitable. The
extent of our future operating losses and the timing of
profitability are highly uncertain, and we may never achieve
profitability. At December 31, 2005, we had an accumulated
deficit of approximately $108.8 million. It is possible
that we will never generate sufficient revenues from product
sales to achieve profitability. Even if we do achieve
significant revenues from our product sales, we expect that
increased operating expenses will result in significant
operating losses in the near term as we, among other things:
|
|
|
|
|
pay the acquisition costs (i.e., purchase price and related
expenses) and continued development and regulatory costs related
to our recent acquisition of assets and technology from each of
RSB Spine LLC and Pearsalls Limited, especially with
respect to the significant ongoing development and regulatory
expenses associated with the assets acquired from Pearsalls
Limited;
|
|
|
|
grow our internal and third-party sales and marketing forces to
expand the penetration of our products in the United States, and
expend significant sums in connection with our efforts to
convince independent agents and sales representatives to
exclusively sell our spine surgery products;
|
|
|
|
increase our research and development efforts to improve upon
our existing products and develop new product candidates, such
as the potential products resulting from the assets acquired
from Pearsalls Limited; and
|
|
|
|
perform clinical research and trials on our existing products
and product candidates.
|
As a result of these activities, we may never become profitable.
Even if we do achieve profitability, we may not be able to
sustain or increase profitability on an ongoing basis. In
addition, our independent distributors are entitled to certain
payments in the event their services are terminated in
connection with (or shortly following) a change of control of
our company. These payments are the responsibility of our
successor, but may represent an additional significant expense
or reduce the price paid in connection with any such event.
|
|
|
Our quarterly financial results are likely to fluctuate
significantly because our sales prospects are uncertain.
|
Our quarterly operating results are difficult to predict and may
fluctuate significantly from period to period, particularly
because our sales prospects are uncertain. These fluctuations
will also affect our annual operating results and may cause
those results to fluctuate unexpectedly from year to year. The
level of our revenues and results of operations at any given
time will be based primarily on the following factors:
|
|
|
|
|
our ability to drive increased sales of our products to
hospitals and surgeons;
|
|
|
|
our ability to establish and maintain an effective and dedicated
sales force;
|
|
|
|
pricing pressure applicable to our products, including adverse
third-party reimbursement outcomes;
|
24
|
|
|
|
|
results of clinical research and trials on our existing products
and products in development and our ability to obtain FDA
approval or clearance;
|
|
|
|
the mix of our products sold (i.e., profit margins differ
between our products);
|
|
|
|
timing of new product offerings, acquisitions, licenses or other
significant events by us or our competitors;
|
|
|
|
the ability of our suppliers to timely provide us with an
adequate supply of materials and components;
|
|
|
|
the evolving product offerings of our competitors and the
potential introduction of new and competing technologies;
|
|
|
|
regulatory approvals and legislative changes affecting the
products we may offer or those of our competitors; and
|
|
|
|
interruption in the manufacturing or distribution of our
products.
|
Many of the products we may seek to develop and introduce in the
future will require FDA approval or clearance, without which we
cannot begin to commercialize them in the United States, and
commercialization of them outside of the United States would
likely require other regulatory approvals and import licenses.
As a result, it will be difficult for us to forecast demand for
these products with any degree of certainty. In addition, we
will be increasing our operating expenses as we build our
commercial capabilities. Accordingly, we may experience
significant, unanticipated quarterly losses. Because of these
factors, our operating results in one or more future quarters
may fail to meet the expectations of securities analysts or
investors.
Risks Related to Our Intellectual Property and Potential
Litigation
|
|
|
Our ability to protect our intellectual property and
proprietary technology through patents and other means is
uncertain.
|
Our success depends significantly on our ability to protect our
proprietary rights to the technologies used in our products. We
rely on patent protection, as well as a combination of
copyright, trade secret and trademark laws, and nondisclosure,
confidentiality and other contractual restrictions to protect
our proprietary technology. However, these legal means afford
only limited protection and may not adequately protect our
rights or permit us to gain or keep any competitive advantage.
For example, our pending U.S. and foreign patent applications
may not issue as patents in a form that will be advantageous to
us or may issue and be subsequently successfully challenged by
others and invalidated. In addition, our pending patent
applications include claims to material aspects of our products
and procedures that are not currently protected by issued
patents. Both the patent application process and the process of
managing patent disputes can be time consuming and expensive.
Competitors may be able to design around our patents or develop
products which provide outcomes which are comparable to ours.
Although we have taken steps to protect our intellectual
property and proprietary technology, including entering into
confidentiality agreements and intellectual property assignment
agreements with our officers, employees, consultants and
advisors, such agreements may not be enforceable or may not
provide meaningful protection for our trade secrets or other
proprietary information in the event of unauthorized use or
disclosure or other breaches of the agreements. Furthermore, the
laws of some foreign countries may not protect our intellectual
property rights to the same extent as do the laws of the United
States.
In the event a competitor infringes upon our patent or other
intellectual property rights, enforcing those rights may be
costly, difficult and time consuming. Even if successful,
litigation to enforce our intellectual property rights or to
defend our patents against challenge could be expensive and time
consuming and could divert our managements attention. We
may not have sufficient resources to enforce our intellectual
property rights or to defend our patents against a challenge.
In addition, certain product categories, including pedicle
screws, have been the subject of significant litigation in
recent years. Since we sell pedicle screws and recently
introduced our SpheRx pedicle screw system, any related
litigation could harm our business.
25
The medical device industry is characterized by the existence of
a large number of patents and frequent litigation based on
allegations of patent infringement. Patent litigation can
involve complex factual and legal questions and its outcome is
uncertain. Any claim relating to infringement of patents that is
successfully asserted against us may require us to pay
substantial damages. Even if we were to prevail, any litigation
could be costly and time-consuming and would divert the
attention of our management and key personnel from our business
operations. Our success will also depend in part on our not
infringing patents issued to others, including our competitors
and potential competitors. If our products are found to infringe
the patents of others, our development, manufacture and sale of
such potential products could be severely restricted or
prohibited. In addition, our competitors may independently
develop similar technologies. Because of the importance of our
patent portfolio to our business, we may lose market share to
our competitors if we fail to protect our intellectual property
rights.
As the number of entrants into our market increases, the
possibility of a patent infringement claim against us grows.
While we make an effort to ensure that our products do not
infringe other parties patents and proprietary rights, our
products and methods may be covered by patents held by our
competitors. In addition, our competitors may assert that future
products we may market infringe their patents.
A patent infringement suit brought against us or any strategic
partners or licensees may force us or any strategic partners or
licensees to stop or delay developing, manufacturing or selling
potential products that are claimed to infringe a third
partys intellectual property, unless that party grants us
or any strategic partners or licensees rights to use its
intellectual property. In such cases, we may be required to
obtain licenses to patents or proprietary rights of others in
order to continue to commercialize our products. However, we may
not be able to obtain any licenses required under any patents or
proprietary rights of third parties on acceptable terms, or at
all. Even if any strategic partners, licensees or we were able
to obtain rights to the third partys intellectual
property, these rights may be non-exclusive, thereby giving our
competitors access to the same intellectual property.
Ultimately, we may be unable to commercialize some of our
potential products or may have to cease some of our business
operations as a result of patent infringement claims, which
could severely harm our business.
|
|
|
We are subject to litigation regarding cadavers we
purchased that originated from the University of California at
Los Angeles.
|
For a period of time, we purchased cadavers for surgeon training
purposes from a broker who is now being investigated for his
practices in obtaining those cadavers from the University of
California, Los Angeles, or UCLA. We previously received
inquiries and document requests from the FDA and the State of
California regarding this investigation. Although we have been
informed that we are not a subject of this investigation, we
have been named as a defendant, along with the Regents of the
University of California, The David Geffen School of Medicine at
UCLA, Ernest V. Nelson, Henry G. Reid, and Johnson &
Johnson, in multiple civil class action lawsuits relating to the
underlying events. The lawsuits have been consolidated in a
single court in the Superior Court of the State of California,
County of Los Angeles. The lawsuits generally allege fraud,
negligence and unfair business practices in connection with the
use and distribution of the donated cadavers, and further allege
that the cadavers were improperly sold. These lawsuits may
result in significant legal fees and could be a diversion of
managements time and other resources. If the claims
contained in the lawsuit are successfully asserted against us,
our financial performance and cash position could be negatively
impacted and the market price of our shares may decline.
|
|
|
If we become subject to product liability claims, we may
be required to pay damages that exceed our insurance
coverage.
|
Our business exposes us to potential product liability claims
that are inherent in the testing, manufacture and sale of
medical devices for spine surgery procedures. Spine surgery
involves significant risk of serious complications, including
bleeding, nerve injury, paralysis and even death. In addition,
we sell allograft implants, derived from cadaver bones, which
pose the potential risk of biological contamination. If any such
contamination is found to exist, sales of allograft products
could decline.
26
Currently, we maintain product liability insurance in the amount
of $10 million. Any product liability claim brought against
us, with or without merit, could result in the increase of our
product liability insurance rates or the inability to secure
coverage in the future. In addition, if our product liability
insurance proves to be inadequate to pay a damage award, we may
have to pay the excess out of our cash reserves, if such
reserves are not sufficient, which may harm our financial
condition. If longer-term patient results and experience
indicate that our products or any component cause tissue damage,
motor impairment or other adverse effects, we could be subject
to significant liability. Finally, even a meritless or
unsuccessful product liability claim could harm our reputation
in the industry, lead to significant legal fees and could result
in the diversion of managements attention from managing
our business.
|
|
|
Any claims relating to our making improper payments to
physicians for consulting services, or other potential
violations of regulations governing interactions between us and
healthcare providers, could be time consuming and costly.
|
We frequently engage spine surgeons as consultants to assist us
with scientific research and development and to help us evaluate
technologies. We are subject to federal and state laws and
regulations governing our relationships with physicians and
other health care providers. In April 2005, the United States
Department of Justice expanded its investigation into the
relationships between medical device companies and health care
providers. The investigation originally appeared to focus on
Medtronic Sofamor Danek, Inc., but the Department of Justice has
apparently since issued subpoenas to DePuy Spine, Inc., a
Johnson & Johnson company, Biomet, Smith &
Nephew, Stryker and Zimmer Holdings, all orthopedic device
manufacturers, relating to the consulting process and procedures
tied to fees that such companies have paid to physicians as
consultants. Although we have not been contacted by the
Department of Justice in respect of this investigation, we could
become a subject of the investigation and be forced to incur
significant costs as a result.
The regulations governing the interactions between medical
device companies and health care providers continue to evolve.
Compliance with these regulations is costly, especially as
accepted methods of compliance are developed. We expect to
continue to incur costs related to compliance with these new
measures, such as the requirement to comply with the new
California Prescription Drug Marketing Act.
|
|
|
We or our suppliers may be the subject of claims for
non-compliance with FDA regulations in connection with the
processing or distribution of allograft implants.
|
It is possible that allegations may be made against us or
against donor recovery groups or tissue banks, including those
with which we have a contractual relationship, claiming that the
acquisition or processing of tissue for allograft implants does
not comply with applicable FDA regulations or other relevant
statutes and regulations. Allegations like these could cause
regulators or other authorities to take investigative or other
action against us, or could cause negative publicity for us or
our industry generally. These actions or any negative publicity
could cause us to incur substantial costs, divert the attention
of our management from our business, harm our reputation and
cause the market price of our shares to decline.
Risks Related to the Securities Markets and Ownership of Our
Common Stock
|
|
|
We expect that the price of our common stock will
fluctuate substantially, potentially adversely affecting the
ability of investors to sell their shares.
|
The market price of our common stock is likely to be volatile
and may fluctuate substantially due to many factors, including:
|
|
|
|
|
volume and timing of orders for our products;
|
|
|
|
the introduction of new products or product enhancements by us
or our competitors;
|
|
|
|
disputes or other developments with respect to intellectual
property rights or other potential legal actions;
|
27
|
|
|
|
|
our ability to develop, obtain regulatory clearance or approval
for, and market new and enhanced products on a timely basis;
|
|
|
|
quarterly variations in our or our competitors results of
operations;
|
|
|
|
sales of large blocks of our common stock, including sales by
our executive officers and directors;
|
|
|
|
announcements of technological or medical innovations for the
treatment of spine pathology;
|
|
|
|
changes in governmental regulations or in the status of our
regulatory approvals, clearances or applications;
|
|
|
|
changes in the availability of third-party reimbursement in the
United States or other countries;
|
|
|
|
the acquisition or divestiture of products, assets or technology;
|
|
|
|
changes in earnings estimates or recommendations by securities
analysts; and
|
|
|
|
general market conditions and other factors, including factors
unrelated to our operating performance or the operating
performance of our competitors.
|
Market price fluctuations may negatively affect the ability of
investors to sell our shares at consistent prices.
|
|
|
Recent changes in the required accounting treatment for
stock options will have a material negative impact on our
financial statements and may affect our stock price.
|
In December 2004, the Financial Accounting Standards Board, or
FASB, issued SFAS No. 123R, pursuant to which we must
measure all stock-based compensation awards, including grants of
employee stock options, using a fair value-based method and
record such expense in our consolidated financial statements.
Currently, we disclose such expenses on a pro forma basis in the
notes to our consolidated financial statements, but we do not
record a charge for employee stock option expense in the
financial statements. We began complying with
SFAS No. 123R as of January 1, 2006; as a result
our reported earnings will decrease, which may affect our stock
price.
|
|
|
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.
|
|
|
Anti-takeover provisions in our organizational documents
and Delaware law may discourage or prevent a change of control,
even if an acquisition would be beneficial to our stockholders,
which could affect our stock price adversely and prevent
attempts by our stockholders to replace or remove our current
management.
|
Our certificate of incorporation and bylaws contain provisions
that could delay or prevent a change of control of our company
or changes in our board of directors that our stockholders might
consider favorable. Some of these provisions:
|
|
|
|
|
authorize the issuance of preferred stock which can be created
and issued by the board of directors without prior stockholder
approval, with rights senior to those of the common stock;
|
28
|
|
|
|
|
provide for a classified board of directors, with each director
serving a staggered three-year term;
|
|
|
|
prohibit our stockholders from filling board vacancies, calling
special stockholder meetings, or taking action by written
consent;
|
|
|
|
prohibit our stockholders from making certain changes to our
certificate of incorporation or bylaws except with
66
2
/
3
%
stockholder approval; and
|
|
|
|
require advance written notice of stockholder proposals and
director nominations.
|
In addition, we are subject to the provisions of
Section 203 of the Delaware General Corporation Law, which
may prohibit certain business combinations with stockholders
owning 15% or more of our outstanding voting stock. These and
other provisions in our certificate of incorporation, our bylaws
and Delaware law could make it more difficult for stockholders
or potential acquirers to obtain control of our board of
directors or initiate actions that are opposed by our
then-current board of directors, including delay or impede a
merger, tender offer, or proxy contest involving our company.
Any delay or prevention of a change of control transaction or
changes in our board of directors could cause the market price
of our common stock to decline.
We do not intend to pay cash dividends.
We have never declared or paid cash dividends on our capital
stock. We currently intend to retain all available funds and any
future earnings for use in the operation and expansion of our
business and do not anticipate paying any cash dividends in the
foreseeable future. In addition, the terms of any future debt or
credit facility may preclude us from paying any dividends. As a
result, capital appreciation, if any, of our common stock will
be our stockholders source of potential gain for the
foreseeable future.
|
|
Item 1B.
|
Unresolved Staff Comments
|
None.
Our headquarters were relocated in January 2005 to an
approximately 62,000 square foot facility in
San Diego, California that is leased to us until August
2012. We intend to lease additional space in 2006 to accommodate
our growing business.
|
|
Item 3.
|
Legal Proceedings.
|
As described in our Quarterly Reports on
Form
10-Q
for the
periods ending June 30, 2005 and September 30, 2005,
we are involved in a series of related lawsuits involving
families of decedents who donated their bodies through
UCLAs willed body program. This litigation is still
ongoing. The complaint alleges that the head of UCLAs
willed body program, Henry G. Reid, and a third party, Ernest V.
Nelson, improperly sold some of the donated cadavers to the
defendants (including NuVasive). Plaintiffs allege the following
causes of action: (i) breach of fiduciary duty,
(ii) negligence, (iii) fraud, (iv) negligent
misrepresentation, (v) negligent infliction of emotional
distress, (vi) intentional infliction of emotional
distress, (vii) intentional interference with human
remains, (viii) negligent interference with human remains,
(ix) violation of California Business and Professions Code
Section 17200 and (x) injunctive and declaratory
relief.
Although the outcome of this lawsuit cannot be determined with
certainty, we believe that we acted within the relevant law in
procuring the cadavers for our clinical research and intend to
vigorously defend ourselves against the claims contained in the
complaint.
In addition, we are subject to certain legal actions that have
arisen in connection with our transition to an exclusive sales
force. One former independent distributor of our products,
Synergy Orthopedic Products, LLC, has filed a claim for damages
with respect to our termination of our business relationship
with it. This case was filed on December 20, 2005, in the
Superior Court of California, County of Orange. In addition, one
potential distributor, nuSpine Medical Technologies, Inc., with
whom we engaged in negotiations regarding a distributorship, has
filed a claim for damages. This case was filed on
January 6, 2006, in the Franklin County
29
Common Pleas Court, Columbus, Ohio. We intend to vigorously
defend ourselves against the claims contained in these
complaints and we believe that we acted within the relevant law
in terminating our relationships and/or negotiations with the
plaintiffs.
Although the outcomes of these lawsuits cannot be determined
with certainty, we believe that the ultimate outcomes will not
have a significant adverse effect on our business, financial
condition or results of operations.
|
|
Item 4.
|
Submission of Matters to a Vote of Security
Holders.
|
No matter was submitted to a vote of our security holders during
the quarter ended December 31, 2005.
PART II
|
|
Item 5.
|
Market for the Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
|
Common Stock Market Price
Our common stock is traded on the Nasdaq National Market under
the symbol NUVA. Our common stock began trading on
the Nasdaq National Market on May 13, 2004, the date of our
initial public offering. The following table presents, for the
periods indicated, the high and low intra-day sale prices per
share of our common stock during the periods indicated, as
reported on NASDAQ.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
2004:
|
|
|
|
|
|
|
|
|
Second Quarter (from May 13, 2004)
|
|
$
|
12.15
|
|
|
$
|
10.29
|
|
Third Quarter
|
|
|
11.31
|
|
|
|
8.97
|
|
Fourth Quarter
|
|
|
11.60
|
|
|
|
8.74
|
|
2005:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
14.17
|
|
|
$
|
9.86
|
|
Second Quarter
|
|
|
17.46
|
|
|
|
12.04
|
|
Third Quarter
|
|
|
21.08
|
|
|
|
16.05
|
|
Fourth Quarter
|
|
|
19.75
|
|
|
|
15.57
|
|
We had approximately 250 stockholders of record as of
December 31, 2005. We believe that the number of beneficial
owners is substantially greater than the number of record
holders because a large portion of our common stock is held of
record through brokerage firms in street name.
Dividend Policy
We have never declared or paid any cash dividends on our capital
stock. We currently intend to retain future earnings, if any,
for development of our business and do not anticipate that we
will declare or pay cash dividends on our capital stock in the
foreseeable future.
30
|
|
Item 6.
|
Selected Financial Data.
|
The selected consolidated financial data set forth in the table
below has been derived from our audited financial statements.
The data set forth below should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our audited
financial statements and notes thereto appearing elsewhere in
this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
61,789
|
|
|
$
|
38,403
|
|
|
$
|
22,655
|
|
|
$
|
12,260
|
|
|
$
|
2,564
|
|
Gross profit
|
|
|
49,397
|
|
|
|
28,175
|
|
|
|
15,864
|
|
|
|
6,957
|
|
|
|
1,210
|
|
Total operating expenses
|
|
|
80,891
|
|
|
|
42,815
|
|
|
|
25,847
|
|
|
|
21,812
|
|
|
|
18,696
|
|
Net loss
|
|
|
(30,339
|
)
|
|
|
(14,210
|
)
|
|
|
(10,127
|
)
|
|
|
(15,110
|
)
|
|
|
(17,902
|
)
|
Beneficial conversion of convertible debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(320
|
)
|
Net loss attributable to common stockholders
|
|
$
|
(30,339
|
)
|
|
$
|
(14,210
|
)
|
|
$
|
(10,127
|
)
|
|
$
|
(15,110
|
)
|
|
$
|
(18,222
|
)
|
Net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(1.24
|
)
|
|
$
|
(0.91
|
)
|
|
$
|
(6.30
|
)
|
|
$
|
(13.20
|
)
|
|
$
|
(23.88
|
)
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
32,829
|
|
|
$
|
62,656
|
|
|
$
|
6,139
|
|
|
$
|
7,251
|
|
|
$
|
8,415
|
|
Total assets
|
|
|
71,490
|
|
|
|
80,752
|
|
|
|
22,371
|
|
|
|
14,932
|
|
|
|
16,617
|
|
Long-term liabilities
|
|
|
1,665
|
|
|
|
13
|
|
|
|
1,224
|
|
|
|
329
|
|
|
|
1,795
|
|
Total stockholders equity
|
|
|
58,136
|
|
|
|
71,397
|
|
|
|
10,070
|
|
|
|
9,384
|
|
|
|
9,466
|
|
|
|
Item 7.
|
Managements Discussion and Analysis of Financial
Condition and Results of Operations
|
Forward-Looking Statements May Prove Inaccurate
You should read the following discussion of our financial
condition and results of operations in conjunction with the
consolidated financial statements and the notes to those
statements included in this report. This discussion may contain
forward-looking statements that involve risks and uncertainties.
Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of certain
factors, such as those set forth under heading Risk
Factors, and elsewhere in this report.
Overview
Background.
We are a medical device company focused on
the design, development and marketing of products for the
surgical treatment of spine disorders. Our product portfolio is
focused on applications for lumbar and cervical spine fusion, as
well as dynamic stablization. Our principal product offering
includes a minimally disruptive surgical platform called Maximum
Access Surgery, or MAS, as well as classic fusion implants
comprised of bone allografts in our patented saline packaging
and internal fixation products. Our products are used
predominantly in spine fusion surgeries, both to enable access
to the spine and to perform restorative and fusion procedures.
As of December 31, 2005, we have trained 724 surgeons in
the use of our products.
Since inception, we have been unprofitable. We incurred net
losses of approximately $10.1 million in 2003,
$14.2 million in 2004 and $30.3 million in 2005. As of
December 31, 2005, we had an accumulated deficit of
$108.8 million.
31
Revenues.
From inception to December 31, 2005, we
have recognized $137.7 million in revenue from sales of our
products. Our revenues are derived from the sale of medical
products in two principal classifications:
|
|
|
MAS.
Our MAS platform combines three categories of our
product offerings:
|
|
|
|
|
|
NeuroVision a proprietary software-driven nerve
avoidance system;
|
|
|
|
MaXcess a unique split-blade design retraction
system providing enhanced surgical access to the spine; and
|
|
|
|
Specialized implants, like our SpheRx pedicle screw system,
CoRoent suite of products and new ExtenSure dynamic
stabilization and fusion system.
|
|
|
|
Classic Fusion.
Our classic fusion revenues primarily
consist of the sales of bone allograft, metal cage implants and
fusion plates.
|
The majority of our revenues are derived from the sale of
disposables and implants and we expect this trend to continue in
the near term. To date, we have derived less than 5% of our
total revenues from the sale of MAS instrument sets, MaXcess
devices, and NeuroVision systems. We do not expect these sales
to contribute significantly to our revenues in the future
because we intend to continue to (i) loan NeuroVision,
MaXcess and surgical instrument sets to hospitals and surgeons
who purchase our disposables and implants for use in individual
procedures or (ii) place NeuroVision, MaXcess and surgical
instrument sets with hospitals for an extended period at no
up-front cost to them provided they commit to minimum monthly
purchases of our disposables and implants. In the event a
hospital or surgeon does not meet its minimum monthly purchase
commitments, our sole remedy is to remove our products.
Our implants and disposables are sold and shipped from our
facility or from limited disposable inventories stored at our
distributors sites. We invoice hospitals a fee for using
certain instruments and for any disposables or implants upon
receiving notice of product use or implantation. For
NeuroVision, we generally place the system in hospitals free of
charge and allow it to remain
on-site
provided the
hospital orders a minimum monthly quantity of our nerve
avoidance disposable products. In addition, we have a program
pursuant to which we loan, from a pool of fixed assets,
NeuroVision, MaXcess and surgical instrument sets to hospitals
without charge to support individual surgical procedures.
Sales and Marketing.
Substantially all of our operations
are located in the United States and substantially all of our
sales to date have been generated in the United States. We
distribute our products through a sales force comprised of
independent agencies and our own sales personnel. Our sales
force provides a delivery and consultative service to our
surgeon and hospital customers and receive commissions based on
sales and product placements in their territories. The
commissions are reflected in our statement of operations in the
selling and marketing expense line. We expect to continue to
expand our distribution channel. Since the second quarter of
2005, we have been engaged in a process to create a sales force
of independent distributors and our own employees that is
exclusive to us with respect to the sale of spine products.
These efforts are ongoing and we expect to incur increased sales
and marketing expenses as we hire additional sales personnel and
incentivize new and existing representatives to exclusively sell
our products.
Critical Accounting Policies
Our discussion and analysis of our financial condition and
results of operations is based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States
(GAAP) and regulations of the Securities and Exchange
Commission. The preparation of these financial statements
requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses.
On an ongoing basis, we evaluate our estimates including those
related to bad debts, inventories, long-term assets and income
taxes. We base our estimates on historical experience and on
various other assumptions we believe to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
not readily apparent from other sources. Actual results may
differ from these estimates.
32
We believe the following accounting policies to be critical to
the judgments and estimates used in the preparation of our
consolidated financial statements.
Revenue Recognition.
We follow the provisions of the
Securities and Exchange Commissions Staff Accounting
Bulletin (SAB) No. 104,
Revenue Recognition,
which sets forth guidelines for the timing of revenue
recognition based upon factors such as passage of title,
installation, payment and customer acceptance. We recognize
revenue when all four of the following criteria are met:
(i) persuasive evidence that an arrangement exists;
(ii) delivery of the products and/or services has occurred;
(iii) the selling price is fixed or determinable; and
(iv) collectibility is reasonably assured. Specifically,
revenue from the sale of implants and disposables is recognized
upon receipt of written acknowledgement that the product has
been used in a surgical procedure or upon shipment to
third-party customers who immediately accept title. Revenue from
the sale of NeuroVision units and instrument sets is recognized
upon receipt of a purchase order and the subsequent shipment to
customers who immediately accept title.
Allowance for Doubtful Accounts.
We maintain an allowance
for doubtful accounts for estimated losses resulting from the
inability of our customers to make required payments. The
allowance for doubtful accounts is reviewed quarterly and is
estimated based on the aging of account balances, collection
history and known trends with current customers. As a result of
this review, the allowance is adjusted on a specific
identification basis. Increases to the allowance for doubtful
accounts result in a corresponding expense. We maintain a
relatively large customer base that mitigates the risk of
concentration with one customer. However, if the overall
condition of the healthcare industry were to deteriorate, or if
the historical data used to calculate the allowance provided for
doubtful accounts does not reflect our future ability to collect
outstanding receivables, resulting in an impairment of our
customers ability to make payments, significant additional
allowances could be required.
Excess and Obsolete Inventory.
We calculate an inventory
reserve for estimated obsolescence and excess inventory based
upon historical turnover and assumptions about future demand for
our products and market conditions. Our allograft implants have
a four-year shelf life and are subject to demand fluctuations
based on the availability and demand for alternative implant
products. Our MAS inventory, which consists primarily of
instruments, disposables and specialized implants, is at risk of
obsolescence following the introduction and development of new
or enhanced products. Our estimates and assumptions for excess
and obsolete inventory are reviewed and updated on a quarterly
basis. The estimates we use for demand are also used for
near-term capacity planning and inventory purchasing and are
consistent with our revenue forecasts. Future product
introductions and related inventories may require additional
reserves based upon changes in market demand or introduction of
competing technologies. Increases in the reserve for excess and
obsolete inventory result in a corresponding expense to cost of
goods sold.
Long-term Assets.
Property, plant and equipment is
carried at cost less accumulated depreciation. Depreciation is
computed using the straight-line method based on the estimated
useful lives of two to seven years for machinery and equipment
and three years for loaner equipment. Maintenance and repairs
are expensed as incurred. Intangible assets consist of purchased
technology and are amortized on a straight-line basis over their
estimated useful lives of 17 years, the life of the related
patents. We evaluate our long-term assets for indications of
impairment whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. If this
evaluation indicates that the value of the long-term asset may
be impaired, we make an assessment of the recoverability of the
net carrying value of the asset over its remaining useful life.
If this assessment indicates that the long-term asset is not
recoverable, we reduce the net carrying value of the related
asset to fair value and may adjust the remaining depreciation or
amortization period. We have not recognized any impairment
losses on long-term assets through December 31, 2005.
Accounting for Income Taxes.
Significant management
judgment is required in determining our provision for income
taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. We have
recorded a full valuation allowance on our net deferred tax
assets as of December 31, 2005 due to uncertainties related
to our ability to utilize our deferred tax assets in the
foreseeable future.
33
The above listing is not intended to be a comprehensive list of
all of our accounting policies. In many cases, the accounting
treatment of a particular transaction is specifically dictated
by generally accepted accounting principles (GAAP). See our
consolidated financial statements and notes thereto included in
this report, which contain accounting policies and other
disclosures required by GAAP.
Results of Operations
Total revenues.
Total revenues for the eight-quarter
period ending December 31, 2005, by revenue classification
are summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1-04
|
|
|
Q2-04
|
|
|
Q3-04
|
|
|
Q4-04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
|
|
(000s)
|
|
|
Rev
|
|
|
(000s)
|
|
|
Rev
|
|
|
(000s)
|
|
|
Rev
|
|
|
(000s)
|
|
|
Rev
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MAS
|
|
$
|
4,804
|
|
|
|
63
|
%
|
|
$
|
6,171
|
|
|
|
70
|
%
|
|
$
|
8,042
|
|
|
|
79
|
%
|
|
$
|
9,118
|
|
|
|
77
|
%
|
|
Classic Fusion
|
|
|
2,784
|
|
|
|
37
|
%
|
|
|
2,638
|
|
|
|
30
|
%
|
|
|
2,142
|
|
|
|
21
|
%
|
|
|
2,704
|
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
7,588
|
|
|
|
100
|
%
|
|
$
|
8,809
|
|
|
|
100
|
%
|
|
$
|
10,184
|
|
|
|
100
|
%
|
|
$
|
11,822
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1-05
|
|
|
Q2-05
|
|
|
Q3-05
|
|
|
Q4-05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
|
|
(000s)
|
|
|
Rev
|
|
|
(000s)
|
|
|
Rev
|
|
|
(000s)
|
|
|
Rev
|
|
|
(000s)
|
|
|
Rev
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MAS
|
|
$
|
9,923
|
|
|
|
76
|
%
|
|
$
|
12,557
|
|
|
|
84
|
%
|
|
$
|
11,664
|
|
|
|
77
|
%
|
|
$
|
14,839
|
|
|
|
80
|
%
|
|
Classic Fusion
|
|
|
3,141
|
|
|
|
24
|
%
|
|
|
2,479
|
|
|
|
16
|
%
|
|
|
3,470
|
|
|
|
23
|
%
|
|
|
3,716
|
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
13,064
|
|
|
|
100
|
%
|
|
$
|
15,036
|
|
|
|
100
|
%
|
|
$
|
15,134
|
|
|
|
100
|
%
|
|
$
|
18,555
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by Classification.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2004 to 2005
|
|
|
2003 to 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
$ Change
|
|
|
% Change
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
MAS
|
|
$
|
48,983
|
|
|
$
|
28,135
|
|
|
$
|
12,069
|
|
|
$
|
20,848
|
|
|
|
74
|
%
|
|
$
|
16,066
|
|
|
|
133
|
%
|
% of total revenue
|
|
|
79
|
%
|
|
|
73
|
%
|
|
|
53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classic Fusion
|
|
$
|
12,806
|
|
|
$
|
10,268
|
|
|
$
|
10,586
|
|
|
$
|
2,538
|
|
|
|
25
|
%
|
|
$
|
(318
|
)
|
|
|
(3
|
)%
|
% of total revenue
|
|
|
21
|
%
|
|
|
27
|
%
|
|
|
47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MAS revenues have increased over time due primarily to continued
market acceptance of our MAS products, including MaXcess,
MaXcess II and NeuroVision disposables, and purchases of
our MAS implants. Consistent with our strategy, we expect our
MAS products will continue to be a significant contributor to
our total revenue for the foreseeable future.
Classic fusion revenues increased in 2005 due primarily to
increased sales of lumbar allograft and our cervical plate,
SmartPlate Gradient CLP. The decreases as a percent of total
revenue are due primarily to new product introductions in the
MAS category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2004 to 2005
|
|
|
2003 to 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
$ Change
|
|
|
% Change
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
$
|
12,392
|
|
|
$
|
10,228
|
|
|
$
|
6,791
|
|
|
$
|
2,164
|
|
|
|
21
|
%
|
|
$
|
3,437
|
|
|
|
51
|
%
|
% of total revenue
|
|
|
20
|
%
|
|
|
27
|
%
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
Cost of goods sold consists of purchased goods and overhead
costs. Cost of goods sold, as a percent of revenue, for our MAS
products ranged from 20% to 25% in 2003 and 2004 and 10% to 20%
in 2005. Cost of goods sold, as a percent of revenue, for our
classic fusion products ranged from 35% to 50% in 2003, and 35%
to 40% in 2004 and in 2005. Contributing to the cost of goods
sold in the classic fusion category in 2005 is our cervical
plate product, which has cost of goods sold, as a percent of
revenue, of approximately 20%.
The increase in cost of goods sold in total dollars in each year
presented is due primarily to increased product sales,
specifically the related material costs. In addition, in the
second quarter of 2005, we recorded an additional charge to cost
of goods sold for the write-off in connection with the
acquisition of assets from RSB Spine LLC of approximately
$497,000 related to our own cervical plate under development.
Increases and decreases in cost of goods sold as a percentage of
total revenues in each year presented are due primarily to a
shift in product mix to MAS products which have a higher margin
than our classic fusion products, offset by the additional
charge noted above. Our overall cost of goods sold and gross
profit are subject to fluctuation based on the mix between MAS
and classic fusion products.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2004 to 2005
|
|
|
2003 to 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
$ Change
|
|
|
% Change
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
$
|
37,701
|
|
|
$
|
19,740
|
|
|
$
|
12,609
|
|
|
$
|
17,961
|
|
|
|
91
|
%
|
|
$
|
7,131
|
|
|
|
57
|
%
|
% of total revenue
|
|
|
61
|
%
|
|
|
51
|
%
|
|
|
56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing expenses consist primarily of employee and
distributor commissions and personnel costs related to sales,
marketing and customer support, along with tradeshow and surgeon
training expenses. In the second quarter of 2005, we began a
program to transition our sales force toward exclusivity which
has resulted in higher commissions as a percent of revenue for
the year. We expect this trend to continue.
The year-over-year increases in sales and marketing expenses in
2005 and 2004 resulted primarily from (i) increased
commissions of $9.1 million and $4.2 million in 2005
and 2004, respectively, reflecting the increased sales volume
and, to a lesser extent, the higher commission rate in the
second half of 2005; (ii) increased royalties of $787,000
and $362,000 in 2005 and 2004, respectively, reflecting the
increased sales volume; (iii) additional employee-related
and consulting costs of $4.1 million and $1.4 million
in 2005 and 2004, respectively; (iv) increased promotional
materials costs of $465,000 and $135,000 in 2005 and 2004,
respectively; and (v) increased shipping costs of
$1.0 million and $209,000 in 2005 and 2004, respectively,
each of which is attributable to increases in sales and the
number of sales representatives; and (vi) increased
expenses related to surgeon training of $1.5 million and
$951,000 in 2005 and 2004, respectively, reflecting the increase
in number of surgeons trained in each year.
We expect to increase our expenditures on sales and marketing
for the foreseeable future. These increased amounts will be
directed towards hiring direct sales agents and additional sales
management training personnel, expanding and training our
distribution channels, promoting awareness of our products and
providing training to surgeons. These amounts will also be used
to compensate our sales force, including both independent and
direct sales agents, and to continue our transition to an
exclusive sales force.
|
|
|
Research and Development.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2004 to 2005
|
|
|
2003 to 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
$ Change
|
|
|
% Change
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
$
|
10,386
|
|
|
$
|
7,144
|
|
|
$
|
5,511
|
|
|
$
|
3,242
|
|
|
|
45
|
%
|
|
$
|
1,633
|
|
|
|
30
|
%
|
% of total revenue
|
|
|
17
|
%
|
|
|
19
|
%
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expense consists primarily of product
research and development, regulatory and clinical functions, and
employee-related
expenses. During the year ended December 31, 2005, we
released
35
nine new or expanded products, five of which were released in
the third quarter. The year-over-year increases in research and
development costs primarily reflect increases in employee
related and consultant expenses of $2.0 million in 2005 and
$1.2 million in 2004. In each year, additional personnel
have been hired to support our product pipleline, including the
SpheRx pedicle screw system, Cerpass total disc replacement
investigational device and, in 2005, NeoDisc nucleus-like
replacement device under development. Expenses for materials to
support product development increased by $1.2 million in
2005 compared to 2004 and $150,000 in 2004 compared to 2003. We
expect research and development costs to continue to increase
for the foreseeable future in support of our ongoing development
activities and planned clinical trial activities.
|
|
|
General and Administrative.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2004 to 2005
|
|
|
2003 to 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
$ Change
|
|
|
% Change
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
$
|
16,867
|
|
|
$
|
9,788
|
|
|
$
|
6,984
|
|
|
$
|
7,079
|
|
|
|
72
|
%
|
|
$
|
2,804
|
|
|
|
40
|
%
|
% of total revenue
|
|
|
27
|
%
|
|
|
25
|
%
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses consist primarily of
employee related expenses for our administrative functions,
third party professional service fees, facilities and insurance
expenses. The increases described below are primarily a result
of growth in our overall business and the activities to support
that growth. Specifically, we became a public company in May
2004 and incur certain expenses related to accounting, audit and
tax services, insurance and certain other costs we did not incur
as a private company. In particular, we have incurred additional
consulting, audit and tax services expenses of $1.4 million
in 2005 primarily related to compliance with the Sarbanes-Oxley
Act of 2002. In addition, to support increased business activity
and personnel, we relocated our corporate headquarters to a
larger facility in January 2005.
For the year ended December 31, 2005, the increase in
general and administrative expenses over 2004 was due primarily
to the following increases: facilities rent and related
expenses, including equipment costs and depreciation, of
$2.5 million associated with our larger corporate
headquarters and company growth; consulting, audit and tax
services of $2.4 million;
employee-related
expenses of $1.7 million, additional allowances for
uncollectible accounts receivable of $558,000 and legal costs of
$371,000, all as a result of company growth.
For the year ended December 31, 2004, the increase in
general and administrative expenses over 2003 was due primarily
to the following increases: facilities rent and related
expenses, including equipment costs and depreciation, of
$565,000; consulting, audit and tax services of $934,000;
employee related expenses of $876,000; and legal costs of
$235,000, all as a result of company growth.
We expect general and administrative costs to continue to
increase for the foreseeable future. These increased amounts
will be directed towards hiring additional personnel and systems
to support the planned growth of the Company.
Beginning in 2006, we will present a combined sales, general and
administrative expense in our consolidated statement of
operations. This line item will combine the sales and marketing
expenses and general administrative expenses, each currently
presented separately.
|
|
|
Interest and Other Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2004 to 2005
|
|
|
2003 to 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
$ Change
|
|
|
% Change
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
$
|
1,155
|
|
|
$
|
430
|
|
|
$
|
(144
|
)
|
|
$
|
725
|
|
|
|
169
|
%
|
|
$
|
574
|
|
|
|
399
|
%
|
% of total revenue
|
|
|
2
|
%
|
|
|
1
|
%
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income, net consists primarily of interest
income. The increases in net interest income in the years
presented is primarily due to interest earned on the investment
of proceeds received from our initial public offering.
36
Through December 31, 2005 and as permitted by Statement of
Financial Accounting Standards No. 123 (SFAS 123),
Accounting for Stock-Based Compensation
, we elected to
use the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25 (APB 25),
Accounting for Stock Issued to Employees
, to measure
compensation expense for stock-based awards to employees.
Accordingly, we generally recognized no compensation expense
with respect to stock-based awards to employees and directors as
awards are generally issued with exercise prices equal to the
fair value of the common stock on the grant date. Under
APB 25, if the exercise price of our employee and director
stock options is less than the estimated fair value of the
underlying stock on the date of grant, we record deferred
compensation for the difference.
Prior to our initial public offering completed on May 13,
2004, we established the exercise price based on the fair value
of our stock at the date of grant as determined by our board of
directors. In determining the fair value of the common stock,
the board of directors considered (i) the advancement of
our technology, (ii) our financial position and
(iii) the fair value of our preferred stock as determined
in arms-length transactions. With respect to certain
options granted during 2003 and 2004, we recorded deferred
stock-based compensation of $771,000 and $7,791,000,
respectively, for the incremental difference at the grant date
between the fair value per share determined by the board of
directors and the deemed fair value per share determined solely
for financial reporting purposes in conjunction with our initial
public offering. Deferred stock-based compensation is recognized
and amortized on an accelerated basis in accordance with
Financial Accounting Standards Board Interpretation No. 28
Accounting for Stock Appreciation Rights and Other Variable
Stock Option Award Plans
, (FIN 28) over the vesting
period of the related options, generally four years. At
December 31, 2005, the balance of deferred stock-based
compensation related to the options described in this paragraph
is $1.2 million.
Option or stock awards issued to non-employees are recorded at
their fair value as determined in accordance with SFAS 123,
Accounting for Stock-based Compensation
, and Emerging
Issues Task Force (EITF) 96-18,
Accounting for Equity
Instruments That are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling Goods and
Services
, and are periodically revalued as the options vest
and are recognized as expense over the related service period.
Beginning in the first quarter of 2006, we will adopt Statement
of Financial Accounting Standards No. 123R,
Share-Based
Compensation
(SFAS 123R), which supersedes Accounting
Principles Board (APB) Opinion No. 25,
Accounting
for Stock Issued to Employees
, and its related
implementation guidance. SFAS 123R focuses primarily on
accounting for transactions in which an entity obtains employee
services through share-based payment transactions.
SFAS 123R requires us to measure the cost of employee
services received in exchange for the award of equity
instruments based on the fair value of the award at the date of
grant. The cost of such instruments will be recognized over the
period during which an employee is required to provide services
in exchange for the award. The adoption of SFAS 123R will
have a significant adverse impact on our earnings; however, it
will not impact our cash flows.
37
The following table includes the historical stock-based
compensation recorded in each year presented and the incremental
pro forma stock-based compensation as if we had applied a
fair-value-based method similar to the method we have selected
and permitted under SFAS 123R to measure the expense for
employee awards during the years presented. See Note 1 of
the consolidated financial statements for a complete description
of the methods used to compute the pro forma stock-based
compensation under the fair value method as required by
SFAS No. 123, as amended.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Stock-based compensation expense included in net loss related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees
|
|
$
|
2,052
|
|
|
$
|
4,916
|
|
|
$
|
285
|
|
|
Non-employees, including restricted stock issued
|
|
|
988
|
|
|
|
925
|
|
|
|
458
|
|
|
Restricted stock issued
|
|
|
|
|
|
|
302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation included in net loss
|
|
|
3,040
|
|
|
|
6,143
|
|
|
|
743
|
|
Incremental pro forma stock-based compensation for employee
awards
|
|
|
3,157
|
|
|
|
2,254
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,197
|
|
|
$
|
8,397
|
|
|
$
|
782
|
|
|
|
|
|
|
|
|
|
|
|
We expect our total stock-based compensation computed under
FAS 123R to increase over prior year levels due to
continued granting of stock options to employees and
non-employees and the requirement to include the cost, on a fair
value basis, of all options granted in our statement of
operations.
|
|
|
In-Process Research and Development
|
We recorded an in-process research and development
(IPRD) charge of $12.9 million related to our
acquisition of the technology assets of Pearsalls Limited in the
third quarter of 2005. At the date of the acquisition, the
projects associated with the IPRD efforts had not yet reached
technological feasibility and the research and development in
process had no alternative future uses. Accordingly, the amounts
were charged to expense on the acquisition date.
Valuation of IPRD.
The value assigned to acquired
in-process technology is determined by identifying products
under research in areas for which technological feasibility had
not been established. The value of the in-process technology was
determined using a discounted cash flow model similar to the
income approach, focusing on the income producing capabilities
of the in-process technologies. Under this approach, the value
is determined by estimating the revenue contribution generated
by each of the identified technologies. Revenue estimates were
based on (i) individual product revenues,
(ii) anticipated growth rates, (iii) anticipated
product development and introduction schedules,
(iv) product sales cycles, and (v) the estimated life
of a products underlying technology. From the revenue
estimates, operating expense estimates, including costs of
sales, general and administrative, selling and marketing, and
income taxes, were deducted to arrive at operating income.
Revenue growth rates were estimated by management for the
product and gave consideration to relevant market sizes and
growth factors, expected industry trends, the anticipated nature
and timing of new product introductions by us and our
competitors, individual product sales cycles and the estimated
life of the products underlying technology. Operating
expense estimates reflect NuVasives historical expense
ratios. Additionally, these projects will require continued
research and development after they have reached a state of
technological and commercial feasibility. The resulting
operating income stream was discounted to reflect its present
value at the date of acquisition.
The rate used to discount the net cash flows from purchased
in-process technology is our weighted-average cost of capital
(WACC), taking into account our required rates of return from
investments in various areas of the enterprise and reflecting
the inherent uncertainties in future revenue estimates from
technology investments including the uncertainty surrounding the
successful development of the acquired in-process technology,
the useful life of such technology, the profitability levels of
such technology, if any, and the uncertainty of technological
advances, all of which are unknown at this time.
38
|
|
|
Business Combination and Asset Acquisitions
|
On June 3, 2005, we acquired intellectual property and
related assets for cervical plate technology from RSB Spine LLC
(RSB), a privately owned company focused on spine technology
(the RSB Acquisition), providing us with cervical
plate technology that received FDA 510(K) clearance and was
first commercialized in 2004. We made a closing payment of
$7.3 million, consisting of $3.8 million in cash and
$3.5 million in unregistered common stock which has since
been registered for resale. In addition, the acquisition
agreement provides for additional payments of $1.2 million
over a period of four years and contingent payments over a
period of 12 years based upon the sale of the products
derived from the cervical plate technology. We re-launched the
cervical plate under our own product name (the SmartPlate
Gradient CLP) in July 2005. The RSB Acquisition and its impact
to our consolidated statement of position and results of
operations are fully described in Note 2 to the
consolidated financial statements included in this report.
On August 4, 2005, we acquired technology and assets from
Pearsalls Limited, a privately-owned company based in the United
Kingdom (Pearsalls). The acquired assets include an
investigational nucleus-like cervical disc replacement device
called
NeoDisc
tm
.
Also acquired was all of Pearsalls intellectual property
related to embroidery technology for use in surgical implants.
We made a closing payment of $12.0 million, consisting of
$5.0 million in cash and $7.0 million in unregistered
common stock which has since been registered for resale. In
addition, the transaction provides for us to make additional
milestone payments totaling up to $31.5 million as progress
is made towards FDA approval for marketing of the NeoDisc
investigational device. Finally, Pearsalls will receive a
royalty of 5% on NeoDisc product sales. Additional payments made
on attainment of milestones will be charged to research and
development expense as incurred. Royalty payments will be
charged to sales and marketing expense as incurred. This
transaction and its impact to our consolidated statement of
position and results of operations are fully described in
Note 3 to the consolidated financial statements included in
this report.
On August 12, 2005, we acquired assets and intellectual
property from RiverBend Design LLC (RiverBend), pursuant to the
terms of an Intellectual Property Purchase Agreement. The
acquired intellectual property includes a patent application and
related technology and know-how for use in developing dynamic
stabilization products. We made a closing payment to RiverBend
of 51,308 unregistered shares of common stock. In addition, we
will make royalty payments to RiverBend based on sales of
products based on the acquired technology. The purchase price of
$1.0 million has been allocated to purchased technology and
is being amortized over a useful life of 17 years.
Liquidity and Capital Resources
Since our inception in 1997, we have incurred significant losses
and as of December 31, 2005, we had an accumulated deficit
of approximately $108.8 million. We have not yet achieved
profitability, and anticipate we will continue to incur net
losses for the foreseeable future. We expect our research and
development, sales and marketing and general and administrative
expenses will continue to grow and, as a result, we will need to
generate significant net sales to achieve profitability. To
date, our operations have been funded primarily with proceeds
from the sale of our equity securities. Gross proceeds from our
preferred stock sales, which occurred from inception through
2003, total $74.4 million. In May 2004, we closed our
initial public offering, resulting in net proceeds to us of
approximately $68.1 million. On February 7, 2006, we
completed the sale of 7,829,120 shares of our common stock
resulting in total net proceeds of approximately
$142.3 million.
Cash, cash equivalents and short-term investments was
$19.5 million at December 31, 2005 and
$59.2 million at December 31, 2004. The decrease was
due primarily to cash used (i) to fund our operations of
$19.9 million, (ii) for the RSB Acquisition and the
acquisition of assets from Pearsalls of $8.8 million in the
aggregate, and (iii) for purchases of fixed assets of
$12.7 million.
Net cash used in operating activities was $19.9 million in
2005 compared to $8.6 million in 2004. The increase of net
cash used in operating activities of $11.3 million was
primarily due to increased inventory purchases to support the
launch of nine products in 2005 of $5.4 million and
increases in cash used for accounts receivable of
$2.2 million and accounts payable of $2.5 million as a
result of company growth.
39
Net cash provided by investing activities was $22.1 million
in 2005 compared to $52.7 million used in 2004. The
increase in net cash provided by investing activities of
$74.8 million is primarily due to increased proceeds from
the sale of short-term investments, net of purchases, of
$90.3 million, reduced by our increased investment in fixed
assets of $6.5 million and cash paid for the RSB Spine LLC
acquisition and the acquisition of assets from Pearsalls Limited
totaling $8.8 million.
Net cash provided by financing activities was $1.7 million
in 2005 compared to $64.2 million in 2004. The decrease in
2005 is primarily due to the net proceeds from the initial
public offering of $68.1 million offset by payments on
notes payable and capital leases of $6.4 million, both of
which occurred in the 2004 period.
We believe our current cash and cash equivalents together with
our short-term investments, the net proceeds of our sale of
common stock in February 2006 of $142.3 million and the
cash to be generated from expected product sales, will be
sufficient to meet our projected operating requirements for at
least the next 12 months.
Contractual Obligations and Commitments
We are committed under operating leases and other contractual
obligations. A significant majority of our operating lease
commitments are related to our corporate headquarters lease
which continues through August 2012. The rent expense related to
our corporate headquarters lease will be recorded on a
straight-line basis in accordance with generally accepted
accounting principles.
The following summarizes our long-term contractual obligations
and commitments as of December 31, 2005
(in
thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1 to 3 Years
|
|
|
4 to 5 Years
|
|
|
After 5 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
8,717
|
|
|
$
|
1,236
|
|
|
$
|
3,906
|
|
|
$
|
2,654
|
|
|
$
|
921
|
|
Deferred consideration payments under acquisition agreements
|
|
|
1,200
|
|
|
|
300
|
|
|
|
900
|
|
|
|
|
|
|
|
|
|
Other contractual obligations(1)
|
|
|
3,069
|
|
|
|
510
|
|
|
|
1,227
|
|
|
|
637
|
|
|
|
695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,986
|
|
|
$
|
2,046
|
|
|
$
|
6,033
|
|
|
$
|
3,291
|
|
|
$
|
1,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
These amounts include a total of $630,000 to be paid as minimum
royalties and the remainder is to be paid to clinical advisors.
|
In connection with the acquisition of RSB Spine LLC, we are
contingently obligated to make additional annual payments as
follows: (i) additional consideration over a period of
12 years based upon sales of the products derived from the
cervical plate technology; and (ii) up to $400,000 payable
in equal annual installments through June 2009 for the right of
first refusal on all additional existing technologies and any
future technology that may be developed by RSB in the five years
following the closing date the acquisition.
In connection with the acquisition of technology and assets from
Pearsalls Limited, we are contingently obligated to make
additional payments to Pearsalls totaling up to
$31.5 million as progress is made towards FDA approval for
marketing of the NeoDisc product.
The expected timing of payments of the obligations discussed
above is estimated based on current information. Timing of
payment and actual amounts paid may be different depending on
the time of receipt of services or changes to agreed-upon
amounts for some obligations. Amounts disclosed as contingent or
milestone-based obligations depend on the achievement of the
milestones or the occurrence of the contingent events and can
vary significantly.
|
|
Item 7A.
|
Quantitative and Qualitative Disclosures About Market
Risk.
|
Our exposure to interest rate risk at December 31, 2005, is
related to our investment portfolio which consists largely of
debt instruments of the U.S. government and its agencies
and in high quality corporate
40
issuers. Due to the short-term nature of these investments, we
have assessed that there is no material exposure to interest
rate risk arising from our investments. Fixed rate investments
and borrowings may have their fair market value adversely
impacted from changes in interest rates.
We have operated mainly in the United States of America, and the
majority of our sales since inception have been made in
U.S. dollars. Accordingly, we have not had any material
exposure to foreign currency rate fluctuations.
|
|
Item 8.
|
Financial Statements and Supplementary Data.
|
The consolidated financial statements and supplementary data
required by this item are set forth at the pages indicated in
Item 15.
|
|
Item 9.
|
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
|
Not applicable
|
|
Item 9A.
|
Controls and Procedures
|
Disclosure Controls and Procedures.
We maintain
disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our reports under
the Securities Exchange Act of 1934, as amended (Exchange Act)
is recorded, processed, summarized and reported within the
timelines specified in the SECs rules and forms, and that
such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and
operated, can only provide reasonable assurance of achieving the
desired control objectives, and in reaching a reasonable level
of assurance, management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible
controls and procedures.
Under the supervision and with the participation of our
management, including our Chief Executive Officer and our Chief
Financial Officer, we carried out an evaluation of the
effectiveness of the Companys disclosure controls and
procedures (as such term is defined in SEC
Rules 13a 15(e) and 15d 15(e)) as
of December 31, 2005. Based on such evaluation, our
management has concluded as of December 31, 2005, the
Companys disclosure controls and procedures are effective.
Managements Report on Internal Control over Financial
Reporting.
Internal control over financial reporting refers
to the process designed by, or under the supervision of, our
Chief Executive Officer and Chief Financial Officer, and
effected by our board of directors, management and other
personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
accounting principles generally accepted in the United States.
Management has used the framework set forth in the report
entitled
Internal Control Integrated Framework
published by the Committee of Sponsoring Organizations
(COSO) of the Treadway Commission to evaluate the
effectiveness of the Companys internal control over
financial reporting. Management has concluded that the
Companys internal control over financial reporting was
effective as of December 31, 2005. Ernst & Young
LLP, the Companys independent registered public accounting
firm, has issued an attestation report on managements
assessment of the Companys internal control over financial
reporting which is included herein.
Changes in Internal Control over Financial Reporting.
There has been no change to our internal control over financial
reporting during our most recent fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Stockholders
NuVasive, Inc.
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control over
Financial Reporting, that NuVasive, Inc. maintained effective
internal control over financial reporting as of
December 31, 2005, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). NuVasive, Inc.s management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on managements assessment and an
opinion on the effectiveness of the companys internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that NuVasive, Inc.
maintained effective internal control over financial reporting
as of December 31, 2005, is fairly stated, in all material
respects, based on the COSO criteria. Also, in our opinion,
NuVasive, Inc. maintained, in all material respects, effective
internal control over financial reporting as of
December 31, 2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of NuVasive, Inc. as of
December 31, 2005 and 2004, and the related consolidated
statements of operations, stockholders equity and cash
flows for each of the three years in the period ended
December 31, 2005 of NuVasive, Inc. and our report dated
March 4, 2006 expressed an unqualified opinion thereon.
San Diego, California
March 4, 2006
42
|
|
Item 9B.
|
Other Information.
|
None
PART IV
|
|
Item 15.
|
Exhibits and Financial Statement Schedules.
|
(a) The following documents are filed as a part of this
report:
|
|
|
(1) Report of Ernst & Young LLP, Independent
Registered Public Accounting Firm
|
|
|
|
Consolidated Balance Sheets as of December 31, 2005 and 2004
|
|
|
Consolidated Statements of Operations for the years ended
December 31, 2005, 2004 and 2003
|
|
|
Consolidated Statements of Stockholders Equity for the
years ended December 31, 2005, 2004 and 2003
|
|
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2004 and 2003
|
|
|
Notes to Consolidated Financial Statements
|
|
|
|
(2) Financial Statement Schedules:
Schedule II Valuation Accounts
|
43
|
|
|
All other financial statement schedules have been omitted
because they are not applicable, not required or the information
required is shown in the financial statements or the notes
thereto.
|
|
|
|
(3) Exhibits. See subsection (b) below.
|
(b) Exhibits. The following exhibits are filed as part of
this report:
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
|
|
2
|
.1(1)
|
|
Asset Purchase Agreement, dated as of June 3, 2005, by and
between NuVasive, Inc. and RSB Spine LLC
|
|
|
2
|
.2(2)
|
|
Asset Purchase Agreement, dated as of August 4, 2005, by
and among NuVasive, Inc., Pearsalls Limited and American Medical
Instruments Holdings, Inc.
|
|
|
2
|
.3(3)
|
|
Intellectual Property Purchase Agreement, dated as of
August 12, 2005, by and between NuVasive, Inc. and
RiverBend Design LLC
|
|
|
3
|
.1(4)
|
|
Restated Certificate of Incorporation
|
|
|
3
|
.2(4)
|
|
Restated Bylaws
|
|
|
4
|
.1(5)
|
|
Second Amended and Restated Investors Rights Agreement,
dated July 11, 2002, by and among NuVasive, Inc. and the
other parties named therein
|
|
|
4
|
.2(5)
|
|
Amendment No. 1 to Second Amended and Restated
Investors Rights Agreement, dated June 19, 2003, by
and among NuVasive, Inc. and the other parties named therein
|
|
|
4
|
.3(5)
|
|
Amendment No. 2 to Second Amended and Restated
Investors Rights Agreement, dated February 5, 2004,
by and among NuVasive, Inc. and the other parties named therein
|
|
|
4
|
.4(2)
|
|
Registration Rights Agreement, dated as of August 4, 2005,
between NuVasive, Inc. and Pearsalls Limited
|
|
|
4
|
.5
|
|
Specimen Common Stock Certificate
|
|
|
10
|
.1(5)#
|
|
1998 Stock Option/ Stock Issuance Plan
|
|
|
10
|
.2(5)#
|
|
Form of Notice of Grant of Stock Option under our 1998 Stock
Option/ Stock Issuance Plan
|
|
|
10
|
.3(5)#
|
|
Form of Stock Option Agreement under our 1998 Stock Option/
Stock Issuance Plan, and form of addendum thereto
|
|
|
10
|
.4(5)#
|
|
Form of Stock Purchase Agreement under our 1998 Stock Option/
Stock Issuance Plan
|
|
|
10
|
.5(6)#
|
|
Form of Stock Issuance Agreement under our 1998 Stock Option/
Stock Issuance Plan
|
|
|
10
|
.6(6)#
|
|
Form of Stock Issuance Agreement issued to consultants and
distributors, under our 1998 Stock Option/ Stock Issuance Plan,
on April 21, 2004, and May 4, 2004
|
|
|
10
|
.7(7)#
|
|
2004 Equity Incentive Plan
|
|
|
10
|
.8(7)#
|
|
Form of Stock Option Award Notice under our 2004 Equity
Incentive Plan
|
|
|
10
|
.9(7)#
|
|
Form of Option Exercise and Stock Purchase Agreement under our
2004 Equity Incentive Plan
|
|
|
10
|
.10(7)#
|
|
Forms of Restricted Stock Grant Notice and Restricted Stock
Agreement under our 2004 Equity Incentive Plan
|
|
|
10
|
.11(7)#
|
|
Form of Restricted Stock Unit Award Agreement under our 2004
Equity Incentive Plan
|
|
|
10
|
.12(7)#
|
|
2004 Employee Stock Purchase Plan
|
|
|
10
|
.13(5)#
|
|
Employment Letter Agreement, dated July 12, 1999, as
amended on January 20, 2004, between NuVasive, Inc. and
Alexis V. Lukianov
|
|
|
10
|
.14(5)#
|
|
Bonus Agreement, dated February 25, 2000, between NuVasive,
Inc. and Alexis V. Lukianov
|
|
|
10
|
.15(5)#
|
|
Employment Agreement, dated December 20, 2002, as amended
on January 20, 2004, between NuVasive, Inc. and Kevin C.
OBoyle
|
|
|
10
|
.16(5)#
|
|
Employment Agreement, dated January 20, 2004, between
NuVasive, Inc. and Keith Valentine
|
|
|
10
|
.17(5)#
|
|
Employment Agreement, dated January 20, 2004, between
NuVasive, Inc. and Patrick Miles
|
|
|
10
|
.18(5)#
|
|
Employment Agreement, dated January 20, 2004, between
NuVasive, Inc. and James J. Skinner
|
44
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
|
|
|
10
|
.19(5)#
|
|
Employment Agreement, dated January 20, 2004, between
NuVasive, Inc. and G. Bryan Cornwall
|
|
|
10
|
.20(5)#
|
|
Employment Agreement, dated January 20, 2004, between
NuVasive, Inc. and Jonathan D. Spangler
|
|
|
10
|
.21(8)#
|
|
Employment Agreement, dated December 5, 2005, between
NuVasive, Inc. and Jeffrey P. Rydin
|
|
|
10
|
.22(8)#
|
|
Employment Agreement, dated December 5, 2005, between
NuVasive, Inc. and Jason M. Hannon
|
|
|
10
|
.23(5)#
|
|
Form of Indemnification Agreement between NuVasive, Inc. and
each of our directors and officers
|
|
|
10
|
.24(5)
|
|
Patent Purchase Agreement, dated June 21, 2002, by and
among NuVasive, Inc. and Drs. Anthony Ross and Peter
Guagliano
|
|
|
10
|
.25(5)
|
|
Intellectual Property Purchase Agreement, dated October 10,
2002, between NuVasive, Inc. and Spine Partners, LLC
|
|
|
10
|
.26(3)
|
|
Intellectual Property Purchase Agreement Addendum, dated as of
August 12, 2005, by and between NuVasive, Inc. and Spine
Partners, LLC
|
|
|
10
|
.27(7)
|
|
Development, Production and Marketing Services Agreement, dated
December 30, 1999, as amended, by and between NuVasive,
Inc. and Tissue Banks International, Inc.
|
|
|
10
|
.28(7)
|
|
Supply Agreement, dated January 21, 2002, by and between
NuVasive, Inc. and Intermountain Tissue Center
|
|
|
10
|
.29(7)
|
|
Clinical Advisor, Patent Purchase and Development Agreement,
dated March 31, 2004, by and between NuVasive, Inc. and
James L. Chappuis
|
|
|
10
|
.30(9)
|
|
Sublease, dated October 12, 2004, by and between NuVasive,
Inc. and Gateway, Inc.
|
|
|
10
|
.31(10)
|
|
Supply Agreement, dated January 14, 2005, by and between
NuVasive, Inc. and Blood and Tissue Center of Central Texas
|
|
|
10
|
.32(2)
|
|
Exclusive Manufacturing Agreement, dated as of August 4,
2005, by and between NuVasive, Inc. and Pearsalls Limited
|
|
|
10
|
.33(11)
|
|
Master Technology and Services Agreement, dated
September 2, 2005, and Master Technology and Services
Agreement Amendment #1, dated December 16, 2005, each
by and between NuVasive, Inc. and Medidata Solutions, Inc.
|
|
|
10
|
.34(12)#
|
|
Description of 2005 performance bonus arrangements for our chief
executive officer and certain of our other officers
|
|
|
10
|
.35(13)#
|
|
Description of 2006 annual salaries for our chief executive
officer and certain of our other officers
|
|
|
10
|
.36(14)#
|
|
Summary of the 2005 bonus payments to and description of 2006
performance bonus arrangements for our chief executive officer
and certain of our other officers
|
|
|
21
|
.1
|
|
List of subsidiaries of NuVasive, Inc.
|
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm
|
|
|
31
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act
of 1934, as amended
|
|
|
31
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act
of 1934, as amended
|
|
|
32
|
.1
|
|
Certification of the Chief Executive Officer pursuant to
Rule 13a-14(b) of the Securities Exchange Act of 1934, as
amended, and 18 U.S.C. section 1350
|
|
|
32
|
.2
|
|
Certification of the Chief Financial Officer pursuant to
Rule 13a-14(b) of the Securities Exchange Act of 1934, as
amended, and 18 U.S.C. section 1350
|
|
|
|
|
(1)
|
Incorporated by reference to our Current Report on
Form
8-K
filed
with the Securities and Exchange Commission (the
Commission) on June 9, 2005.
|
45
|
|
|
|
(2)
|
Incorporated by reference to our Current Report on
Form
8-K
filed
with the Commission on August 10, 2005.
|
|
|
(3)
|
Incorporated by reference to our Current Report on
Form
8-K
filed
with the Commission on August 17, 2005.
|
|
|
(4)
|
Incorporated by reference to our Quarterly Report on
Form
10-Q
filed
with the Commission on August 13, 2004.
|
|
|
(5)
|
Incorporated by reference to our Registration Statement on
Form
S-1
(File
No.
333-113344)
filed with the Commission on March 5, 2004.
|
|
|
(6)
|
Incorporated by reference to Amendment No. 4 to our
Registration Statement on
Form
S-1
(File No.
333-113344)
filed with the Commission on May 11, 2004.
|
|
|
(7)
|
Incorporated by reference to Amendment No. 1 to our
Registration Statement on
Form
S-1
(File No.
333-113344)
filed with the Commission on April 8, 2004.
|
|
|
(8)
|
Incorporated by reference to our Current Report on
Form
8-K
filed
with the Commission on December 7, 2005.
|
|
|
(9)
|
Incorporated by reference to our Quarterly Report on
Form
10-Q
filed
with the Commission on November 15, 2004.
|
|
|
(10)
|
Incorporated by reference to our Current Report on
Form
8-K
filed
with the Commission on January 21, 2005.
|
|
(11)
|
Incorporated by reference to our Current Report on
Form
8-K
filed
with the Commission on December 22, 2005.
|
|
(12)
|
Incorporated by reference to our Current Report on
Form
8-K
filed
with the Commission on August 2, 2005.
|
|
(13)
|
Incorporated by reference to our Current Report on
Form
8-K
filed
with the Commission on January 9, 2006.
|
|
(14)
|
Incorporated by reference to our Current Report on
Form
8-K
filed
with the Commission on March 13, 2006.
|
|
|
|
|
|
The Commission has granted confidential treatment to us with
respect to certain omitted portions of this
exhibit (indicated by asterisks). We have filed separately
with the Commission an unredacted copy of the exhibit.
|
|
|
#
|
Indicates management contract or compensatory plan.
|
46
SUPPLEMENTAL INFORMATION
Copies of the Registrants Proxy Statement for the Annual
Meeting of Stockholders to be held on May 24, 2006, and
copies of the form of proxy to be used for such Annual Meeting,
will be furnished to the SEC prior to the time they are
distributed to the Registrants Stockholders.
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
By:
|
/s/ Alexis V. Lukianov
|
|
|
|
|
|
Alexis V. Lukianov
|
|
Chairman and Chief Executive Officer
|
|
(Principal Executive Officer)
|
Date: March 15, 2006
|
|
|
|
|
Kevin C. OBoyle
|
|
Executive Vice President and
|
|
Chief Financial Officer
|
|
(Principal Financial Officer)
|
Date: March 15, 2006
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Alexis V.
Lukianov and Kevin C. OBoyle, jointly and severally, his
or her
attorneys-in
-fact, each
with the power of substitution, for him or her in any and all
capacities, to sign any amendments to this Report on
Form
10-K,
and to
file the same, with exhibits thereto and other documents in
connection therewith with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of
said
attorneys-in
-fact,
or his or her substitute or substitutes may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Alexis V. Lukianov
Alexis V. Lukianov
|
|
Chairman and Chief Executive Officer (Principal Executive
Officer)
|
|
March 15, 2006
|
|
/s/ Kevin C. OBoyle
Kevin C. OBoyle
|
|
Executive Vice President and
Chief Financial Officer (Principal Financial and Accounting
Officer)
|
|
March 15, 2006
|
|
/s/ Jack R. Blair
Jack R. Blair
|
|
Director
|
|
March 15, 2006
|
|
/s/ James C. Blair
James C. Blair
|
|
Director
|
|
March 15, 2006
|
48
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Peter C. Farrell
Peter C. Farrell
|
|
Director
|
|
March 15, 2006
|
|
/s/ Robert J. Hunt
Robert J. Hunt
|
|
Director
|
|
March 15, 2006
|
|
/s/ Lesley H. Howe
Lesley H. Howe
|
|
Director
|
|
March 15, 2006
|
|
/s/ Hansen Yuan
Hansen Yuan
|
|
Director
|
|
March 15, 2006
|
49
NUVASIVE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
50
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
NuVasive, Inc.
We have audited the accompanying consolidated balance sheets of
NuVasive, Inc. as of December 31, 2005 and 2004, and the
related consolidated statements of operations,
stockholders equity and cash flows for each of the three
years in the period ended December 31, 2005. Our audits
also included the financial statement schedule listed in the
Index at Item 15(a). These financial statements and
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as 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 consolidated
financial position of NuVasive, Inc. at December 31, 2005
and 2004, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
December 31, 2005, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set
forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of NuVasive, Inc.s internal control over
financial reporting as of December 31, 2005, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated March 4, 2006
expressed an unqualified opinion thereon.
San Diego, California
March 4, 2006
51
NUVASIVE, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per
|
|
|
|
share amounts)
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
12,545
|
|
|
$
|
8,560
|
|
|
Short-term investments
|
|
|
6,945
|
|
|
|
50,593
|
|
|
Accounts receivable, net of allowance of $613 and $255,
respectively
|
|
|
11,662
|
|
|
|
6,770
|
|
|
Inventory, net
|
|
|
11,870
|
|
|
|
5,249
|
|
|
Prepaid expenses and other current assets
|
|
|
1,496
|
|
|
|
826
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
44,518
|
|
|
|
71,998
|
|
Property and equipment, net of accumulated depreciation
|
|
|
17,974
|
|
|
|
8,725
|
|
Intangible assets, net of accumulated amortization
|
|
|
8,894
|
|
|
|
|
|
Other assets
|
|
|
104
|
|
|
|
29
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
71,490
|
|
|
$
|
80,752
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
6,102
|
|
|
$
|
6,207
|
|
|
Accrued payroll and related expenses
|
|
|
5,587
|
|
|
|
3,135
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
11,689
|
|
|
|
9,342
|
|
Long-term liabilities
|
|
|
1,665
|
|
|
|
13
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
Preferred Stock, $.001 par value; 5,000 shares
authorized, no shares issued and outstanding at
December 31, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
Common Stock, $.001 par value; 70,000 shares
authorized, 25,106 and 23,951 issued and outstanding at
December 31, 2005 and 2004, respectively
|
|
|
25
|
|
|
|
24
|
|
Additional paid-in capital
|
|
|
168,143
|
|
|
|
153,323
|
|
Deferred compensation
|
|
|
(1,195
|
)
|
|
|
(3,441
|
)
|
Accumulated other comprehensive loss
|
|
|
(32
|
)
|
|
|
(43
|
)
|
Accumulated deficit
|
|
|
(108,805
|
)
|
|
|
(78,466
|
)
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
58,136
|
|
|
|
71,397
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
71,490
|
|
|
$
|
80,752
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
52
NUVASIVE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per
|
|
|
|
share amounts)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MAS
|
|
$
|
48,983
|
|
|
$
|
28,135
|
|
|
$
|
12,069
|
|
|
|
Classic fusion
|
|
|
12,806
|
|
|
|
10,268
|
|
|
|
10,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
61,789
|
|
|
|
38,403
|
|
|
|
22,655
|
|
Cost of goods sold
|
|
|
12,392
|
|
|
|
10,228
|
|
|
|
6,791
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
49,397
|
|
|
|
28,175
|
|
|
|
15,864
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
37,701
|
|
|
|
19,740
|
|
|
|
12,609
|
|
|
|
Research and development
|
|
|
10,386
|
|
|
|
7,144
|
|
|
|
5,511
|
|
|
|
General and administrative
|
|
|
16,867
|
|
|
|
9,788
|
|
|
|
6,984
|
|
|
|
Stock-based compensation
|
|
|
3,040
|
|
|
|
6,143
|
|
|
|
743
|
|
|
|
In-process research and development
|
|
|
12,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
80,891
|
|
|
|
42,815
|
|
|
|
25,847
|
|
Interest and other income (expense), net
|
|
|
1,155
|
|
|
|
430
|
|
|
|
(144
|
)
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(30,339
|
)
|
|
$
|
(14,210
|
)
|
|
$
|
(10,127
|
)
|
|
|
|
|
|
|
|
|
|
|
Net loss per share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(1.24
|
)
|
|
$
|
(0.91
|
)
|
|
$
|
(6.30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares basic and diluted
|
|
|
24,473
|
|
|
|
15,605
|
|
|
|
1,607
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation is allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
1,405
|
|
|
$
|
2,216
|
|
|
$
|
479
|
|
|
|
Sales and marketing
|
|
|
787
|
|
|
|
1,909
|
|
|
|
148
|
|
|
|
General and administrative
|
|
|
848
|
|
|
|
2,018
|
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
3,040
|
|
|
$
|
6,143
|
|
|
$
|
743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As a result of the conversion of our preferred stock into
12,724,000 shares of our common stock upon completion of
our initial public offering on May 13, 2004, there is a
lack of comparability in the basic and diluted net loss per
share amounts for the periods presented above. Please reference
Note 1 for an unaudited pro forma basic and diluted net
loss per share calculation for the periods presented.
|
See accompanying notes to consolidated financial statements.
53
NUVASIVE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
Common stock
|
|
|
Additional
|
|
|
Receivable
|
|
|
|
|
Other
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Paid-in
|
|
|
from
|
|
|
Deferred
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stockholders
|
|
|
Compensation
|
|
|
Loss
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Balance at December 31, 2002
|
|
|
27,637
|
|
|
$
|
28
|
|
|
|
1,790
|
|
|
$
|
2
|
|
|
$
|
63,998
|
|
|
$
|
(435
|
)
|
|
$
|
(80
|
)
|
|
$
|
|
|
|
$
|
(54,129
|
)
|
|
$
|
9,384
|
|
|
Issuance of Series D-1 convertible preferred stock
|
|
|
3,949
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
9,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,915
|
|
|
Redemption of common stock for intellectual property
|
|
|
|
|
|
|
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
(125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(125
|
)
|
|
Issuance of common stock for cash
|
|
|
|
|
|
|
|
|
|
|
113
|
|
|
|
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
|
|
|
Issuance of stock options and warrants to non-employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
Compensation expense related to issuance of stock options to
non- employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
458
|
|
|
Interest on notes from stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
Forgiveness of notes and interest due from stockholders
|
|
|
|
|
|
|
|
|
|
|
(86
|
)
|
|
|
|
|
|
|
(57
|
)
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169
|
|
|
Payment received on note receivable from stockholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
Deferred stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
771
|
|
|
|
|
|
|
|
(771
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
|
285
|
|
|
Net loss and comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,127
|
)
|
|
|
(10,127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
31,586
|
|
|
|
32
|
|
|
|
1,717
|
|
|
|
2
|
|
|
|
75,046
|
|
|
|
(188
|
)
|
|
|
(566
|
)
|
|
|
|
|
|
|
(64,256
|
)
|
|
|
10,070
|
|
|
IPO proceeds net of offering costs of $7,627
|
|
|
|
|
|
|
|
|
|
|
6,883
|
|
|
|
7
|
|
|
|
68,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,092
|
|
|
Issuance of common stock under employee stock option and
purchase plans
|
|
|
|
|
|
|
|
|
|
|
2,600
|
|
|
|
2
|
|
|
|
1,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,095
|
|
|
Issuance of restricted stock
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
292
|
|
|
Interest on notes from stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
|
|
|
Forgiveness of notes and interest due from stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
188
|
|
|
Compensation expense related to issuance of stock options to
non- employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
925
|
|
|
Deferred stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,791
|
|
|
|
|
|
|
|
(7,791
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,916
|
|
|
|
|
|
|
|
|
|
|
|
4,916
|
|
|
Conversion of preferred to common stock
|
|
|
(31,586
|
)
|
|
|
(32
|
)
|
|
|
12,724
|
|
|
|
13
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43
|
)
|
|
|
|
|
|
|
(43
|
)
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,210
|
)
|
|
|
(14,210
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
23,951
|
|
|
|
24
|
|
|
|
153,323
|
|
|
$
|
|
|
|
|
(3,441
|
)
|
|
|
(43
|
)
|
|
|
(78,466
|
)
|
|
|
71,397
|
|
|
Issuance of common stock under employee stock option and
purchase plans
|
|
|
|
|
|
|
|
|
|
|
485
|
|
|
|
|
|
|
|
1,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,757
|
|
|
Issuance of common stock for acquisitions
|
|
|
|
|
|
|
|
|
|
|
670
|
|
|
|
1
|
|
|
|
12,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,270
|
|
|
Compensation expense related to issuance of stock options to
non- employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
988
|
|
|
Amortization of stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(194
|
)
|
|
|
|
|
|
|
2,246
|
|
|
|
|
|
|
|
|
|
|
|
2,052
|
|
|
Unrealized loss on marketable securities and foreign currency
translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
11
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,339
|
)
|
|
|
(30,339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
|
|
|
$
|
|
|
|
|
25,106
|
|
|
$
|
25
|
|
|
$
|
168,143
|
|
|
$
|
|
|
|
$
|
(1,195
|
)
|
|
$
|
(32
|
)
|
|
$
|
(108,805
|
)
|
|
$
|
58,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
54
NUVASIVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(30,339
|
)
|
|
$
|
(14,210
|
)
|
|
$
|
(10,127
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,359
|
|
|
|
2,298
|
|
|
|
1,775
|
|
|
In-process research and development
|
|
|
12,897
|
|
|
|
|
|
|
|
|
|
|
Amortization of loan fees
|
|
|
|
|
|
|
9
|
|
|
|
21
|
|
|
Stock-based compensation
|
|
|
3,040
|
|
|
|
6,143
|
|
|
|
743
|
|
|
Write-off of NuVasive assets in conjunction with acquisition of
RSB Spine LLC
|
|
|
497
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
443
|
|
|
|
(65
|
)
|
|
|
231
|
|
|
Allowance for excess and obsolete inventory
|
|
|
535
|
|
|
|
(343
|
)
|
|
|
351
|
|
|
Other
|
|
|
42
|
|
|
|
413
|
|
|
|
89
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(5,219
|
)
|
|
|
(2,977
|
)
|
|
|
(2,051
|
)
|
|
|
Inventory
|
|
|
(6,864
|
)
|
|
|
(1,494
|
)
|
|
|
(1,303
|
)
|
|
|
Prepaid expenses and other current assets
|
|
|
(370
|
)
|
|
|
(398
|
)
|
|
|
768
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
(1,303
|
)
|
|
|
1,166
|
|
|
|
3,122
|
|
|
|
Accrued payroll and related expenses
|
|
|
2,427
|
|
|
|
893
|
|
|
|
383
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(19,855
|
)
|
|
|
(8,565
|
)
|
|
|
(5,998
|
)
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisitions
|
|
|
(8,800
|
)
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(12,675
|
)
|
|
|
(6,139
|
)
|
|
|
(4,465
|
)
|
Purchases of short-term investments
|
|
|
(44,918
|
)
|
|
|
(108,342
|
)
|
|
|
(4,017
|
)
|
Sales of short-term investments
|
|
|
88,566
|
|
|
|
61,723
|
|
|
|
|
|
Other assets
|
|
|
(75
|
)
|
|
|
70
|
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
22,098
|
|
|
|
(52,688
|
)
|
|
|
(8,530
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
|
|
|
|
|
1,364
|
|
|
|
4,678
|
|
Payments of notes payable and capital leases
|
|
|
(18
|
)
|
|
|
(6,369
|
)
|
|
|
(1,431
|
)
|
Proceeds from employee note
|
|
|
|
|
|
|
|
|
|
|
34
|
|
Issuance of common stock, including net proceeds from initial
public offering
|
|
|
1,760
|
|
|
|
69,187
|
|
|
|
57
|
|
Net proceeds from issuance of convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
9,915
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
1,742
|
|
|
|
64,182
|
|
|
|
13,253
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
3,985
|
|
|
|
2,929
|
|
|
|
(1,275
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
8,560
|
|
|
|
5,631
|
|
|
|
6,906
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
12,545
|
|
|
$
|
8,560
|
|
|
$
|
5,631
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
55
NUVASIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Organization and Significant Accounting Policies
|
Description of Business.
NuVasive, Inc. (the Company or
NuVasive) was incorporated in Delaware on July 21, 1997.
The Company designs, develops and markets products for the
surgical treatment of spine disorders and operates in one
business segment. The Company began commercializing its products
in 2001. Its current product portfolio is focused on
applications for lumbar and cervical spine fusion. The principal
product offering includes a minimally disruptive surgical
platform called Maximum Access Surgery, or MAS, as well as
classic fusion implants. The Companys products are used
predominantly in spine fusion surgeries, both to enable access
to the spine and to perform restorative and fusion procedures.
MAS combines NeuroVision, a nerve avoidance system, MaXcess, a
minimally invasive surgical system, and specialized implants.
The Company loans its NeuroVision systems to surgeons and
hospitals who purchase disposables and implants for use in
individual procedures and places NeuroVision, MaXcess and
surgical instrument sets with hospitals for an extended period
at no up-front cost to them provided they commit to minimum
monthly purchases of disposables and implants. The Company also
sells a small quantity of MAS instrument sets, MaXcess, and
NeuroVision systems to hospitals for use in surgery. The classic
fusion portfolio includes a range of bone allografts in our
patented saline packaging and spine implants such as rods,
plates and screws. Implants and disposables are sold and shipped
from the Companys facility or from limited disposable
inventories stored at distributors sites.
The Company also focuses significant efforts on a research and
development pipeline emphasizing both MAS and motion
preservation products such as total disc replacement and
nucleus-like cervical disc replacement.
Basis of Presentation and Principles of Consolidation.
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries,
NuVasive Europe GmbH and NuVasive UK Limited. All significant
intercompany balances and transactions have been eliminated in
consolidation. There has been no material activity by the
Companys subsidiaries during the years presented.
Use of Estimates.
To prepare financial statements in
conformity with generally accepted accounting principles
accepted in the United States of America, management must make
estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results
could differ from those estimates.
Reclassification.
Certain amounts in the prior year
financial statements have been reclassified to conform to
current year presentation. Specifically, the costs related to
certain departments originally classified in research and
development in the consolidated statements of operations have
been reclassified to general and administrative expense in 2005.
The 2003 and 2004 presentation has been adjusted to reflect the
classification of these costs consistent with the 2005
presentation.
Cash, Cash Equivalents and Short-term Investments.
The
Company classifies investments with original maturities of three
months or less when acquired as cash equivalents. All of the
Companys short-term investments are classified as
available-for-sale and are reported at fair value, with
unrealized gains and losses included in stockholders
equity as a component of accumulated other comprehensive loss.
Any unrealized gains or losses deemed other than temporary will
be reflected in interest and other income, net. The cost of
securities sold is based on the specific identification method
and realized gains and losses are included in interest and other
income (expense), net. The Company has cash equivalents and
investments with various high quality institutions and, by
policy, limits the amount of credit exposure to any one
institution.
Accounts Receivable and Related Valuation Account.
Accounts receivable in the accompanying consolidated balance
sheets are presented net of allowance for doubtful accounts.
The Company makes judgments as to its ability to collect
outstanding receivables and provides an allowance for a portion
of receivables when collection becomes doubtful. Provisions are
made based upon a
56
NUVASIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
specific review of all significant outstanding invoices and the
overall quality and age of those invoices not specifically
reviewed. In determining the provision for invoices not
specifically reviewed, the Company analyzes historical
collection experience and current economic trends. If the
historical data used to calculate the allowance provided for
doubtful accounts does not reflect the Companys future
ability to collect outstanding receivables or if the financial
condition of customers were to deteriorate, resulting in
impairment of their ability to make payments, an increase in the
provision for doubtful accounts may be required.
Fair Value of Financial Instruments.
The carrying value
of cash and cash equivalents, short-term investments, accounts
receivable, and accounts payable and accrued expenses are
considered to be representative of their respective fair values
because of the short-term nature of those instruments.
Concentration of Credit Risk and Significant Customers.
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash and
cash equivalents, short-term investments and accounts
receivable. The Company limits its exposure to credit loss by
placing its cash and investments with high credit quality
financial institutions. Additionally, the Company has
established guidelines regarding diversification of its
investments and their maturities, which are designed to maintain
principal and maximize liquidity.
No single customer represented greater than 10 percent of
sales for any of the years presented.
Inventory.
Inventory is stated at the lower of cost or
market and is recorded in cost of goods sold on a method that
approximates specific identification. The Company reviews the
components of its inventory on a periodic basis for excess,
obsolete and impaired inventory, and records a reserve for the
identified items. At December 31, 2005 and 2004, the
balance of the allowance for excess and obsolete inventory is
$1.3 million and $844,000, respectively.
Long-Term Assets.
Property and equipment are stated at
cost less accumulated depreciation and amortization.
Depreciation is calculated using the straight-line method over
the estimated useful lives of the assets (ranging from two to
seven years). Leasehold improvements are amortized using the
straight-line method over the estimated useful life of the asset
or the lease term, whichever is shorter. Intangible assets
consist of purchased technology and are amortized on a
straight-line basis over their estimated useful lives of
17 years, the life of the related patents. The Company
evaluates its long-term assets for indications of impairment
whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. If this evaluation
indicates that the value of the long-term asset may be impaired,
the Company makes an assessment of the recoverability of the net
carrying value of the asset over its remaining useful life. If
this assessment indicates that the long-term asset is not
recoverable, the Company reduces the net carrying value of the
related asset to fair value and may adjust the remaining
depreciation or amortization period. The evaluation of
intangible assets is based on the estimated undiscounted future
cash flows of the technology over the remaining amortization
period. The Company has not recognized any impairment losses on
its long-term assets through December 31, 2005.
Revenue Recognition.
The Company follows the provisions
of the Securities and Exchange Commissions Staff
Accounting Bulletin (SAB) No. 104,
Revenue
Recognition,
which sets forth guidelines for the timing of
revenue recognition based upon factors such as passage of title,
installation, payment and customer acceptance. The Company
recognizes revenue when all four of the following criteria are
met: (i) persuasive evidence that an arrangement exists;
(ii) delivery of the products and/or services has occurred;
(iii) the selling price is fixed or determinable; and
(iv) collectibility is reasonably assured. Specifically,
revenue from the sale of implants and disposables is recognized
upon receipt of written acknowledgement that the product has
been used in a surgical procedure or upon shipment to
third-party customers who immediately accept title. Revenue from
the sale of NeuroVision units and instrument sets is recognized
upon receipt of a purchase order and the subsequent shipment to
customers who immediately accept title.
Research and Development.
Research and development costs
are expensed as incurred.
57
NUVASIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Product Shipment Costs.
Product shipment costs are
included in sales and marketing expense in the accompanying
consolidated statements of operations.
Income Taxes.
In accordance with SFAS No. 109,
Accounting for Income Taxes,
a deferred tax asset or
liability is determined based on the difference between the
financial statement and tax basis of assets and liabilities as
measured by the enacted tax rates which will be in effect when
these differences reverse. The Company provides a valuation
allowance against net deferred tax assets unless, based upon the
available evidence, it is more likely than not that the deferred
tax assets will be realized.
Net Loss Per Share.
The Company computes net loss per
share using the weighted-average number of common shares
outstanding during the period and excluding the weighted-average
common shares subject to repurchase of 37,000, 185,000 and
141,000 shares at December 31, 2005, 2004 and 2003,
respectively. Diluted net loss per share is computed by dividing
the net loss for the period by the weighted-average number of
common shares outstanding during the period. Due to the net loss
reported in all periods, the effect of stock options and
warrants is anti-dilutive and is therefore excluded. Although
these options and warrants are currently not included in the net
loss per share calculation, they could be dilutive when, and if,
the Company reports future earnings.
The actual net loss per share amounts for the periods presented
were computed based on the shares of common stock outstanding
during the respective periods. The actual net loss per share for
the year ended December 31, 2004 reflects the
6,883,000 shares of our common stock issued in our initial
public offering on May 13, 2004 and the
12,724,000 shares of our common stock issued upon
conversion of our preferred stock in conjunction with the
initial public offering. As a result of the issuance of these
common shares on May 13, 2004, there is a lack of
comparability in the basic and diluted net loss per share
amounts for the periods presented below. In order to provide a
more relevant measure of our operating results, the following
unaudited pro forma net loss per share calculation for 2004 and
2003 has been provided. The shares used to compute unaudited pro
forma basic and diluted net loss per share represent the
weighted-average common shares used to calculate actual basic
and diluted net loss per share increased to include the assumed
conversion of all
58
NUVASIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
outstanding shares of preferred stock into shares of common
stock using the as-if converted method as of the beginning of
each year presented or the date of issuance, if later.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
Actual:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported net loss
|
|
$
|
(30,339
|
)
|
|
$
|
(14,210
|
)
|
|
$
|
(10,127
|
)
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares
|
|
|
24,510
|
|
|
|
15,790
|
|
|
|
1,831
|
|
|
Weighted-average unvested common shares subject to repurchase
|
|
|
(37
|
)
|
|
|
(185
|
)
|
|
|
(224
|
)
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted net loss per share
|
|
|
24,473
|
|
|
|
15,605
|
|
|
|
1,607
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(1.24
|
)
|
|
$
|
(0.91
|
)
|
|
$
|
(6.30
|
)
|
|
|
|
|
|
|
|
|
|
|
Pro forma:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported net loss used above
|
|
|
|
|
|
$
|
(14,210
|
)
|
|
$
|
(10,127
|
)
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used above
|
|
|
|
|
|
|
15,605
|
|
|
|
1,607
|
|
|
Pro forma adjustments to reflect assumed weighted-average effect
of conversion of preferred stock
|
|
|
|
|
|
|
4,659
|
|
|
|
12,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,264
|
|
|
|
14,332
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted net loss per share
|
|
|
|
|
|
$
|
(0.70
|
)
|
|
$
|
(0.71
|
)
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes potential common stock
equivalents that were excluded from historical basic and diluted
earnings per share because of their anti-dilutive effect
(in
thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
Common Stock Equivalents
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock
|
|
|
3,270
|
|
|
|
2,970
|
|
|
|
1,710
|
|
Warrants to purchase common stock
|
|
|
9
|
|
|
|
9
|
|
|
|
1,752
|
|
Warrants to purchase preferred stock
|
|
|
|
|
|
|
|
|
|
|
221
|
|
Common stock subject to repurchase
|
|
|
37
|
|
|
|
185
|
|
|
|
224
|
|
Convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
12,725
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,316
|
|
|
|
3,164
|
|
|
|
16,632
|
|
|
|
|
|
|
|
|
|
|
|
Stock-Based Compensation.
Through December 31, 2005,
and as permitted by Statement of Financial Accounting Standards
No. 123 (SFAS 123),
Accounting for Stock-Based
Compensation,
the Company has elected to use the intrinsic
value method prescribed by Accounting Principles Board Opinion
No. 25 (APB 25),
Accounting for Stock Issued to
Employees,
to measure compensation expense for stock-based
awards to employees. Accordingly, the Company generally
recognizes no compensation expense with respect to stock-based
awards to employees and directors as awards are generally issued
with exercise prices equal to the fair value of the common stock
on the grant date. Under APB 25, if the exercise price of
the Companys employee and director stock options is less
than the estimated fair value of the underlying stock on the
date of
59
NUVASIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
grant, the Company records deferred compensation for the
difference. The Company reports the pro forma information below
regarding net loss and net loss per share as if the Company had
accounted for employee stock awards under the fair value method
as required by SFAS No. 123, as amended by Statement
of Financial Accounting Standards No. 148 (SFAS 148),
Accounting for Stock-Based Compensation
Transition and Disclosure.
Prior to the initial public offering completed on May 13,
2004, the Company established the exercise price based on the
fair value of the Companys stock at the date of grant as
determined by the Companys board of directors. In
determining the fair value of the common stock, the board of
directors considered (i) the advancement of the
Companys technology, (ii) the Companys
financial position and (iii) the fair value of the
Companys preferred stock as determined in
arms-length transactions. With respect to certain options
granted during 2003 and 2004, the Company has recorded deferred
stock-based compensation of $771,000 and $7,791,000,
respectively, for the incremental difference at the grant date
between the fair value per share determined by the board of
directors and the deemed fair value per share determined solely
for financial reporting purposes in conjunction with the
Companys initial public offering. Deferred stock-based
compensation is recognized and amortized on an accelerated basis
in accordance with Financial Accounting Standards Board
Interpretation No. 28,
Accounting for Stock Appreciation
Rights and Other Variable Stock Option Award Plans
(FIN 28), over the vesting period of the related options,
generally four years.
Option or stock awards issued to non-employees are recorded at
their fair value as determined in accordance with SFAS 123,
Accounting for Stock-Based Compensation,
and Emerging
Issues Task Force (EITF) 96-18,
Accounting for Equity
Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling Goods or Services,
and are periodically revalued as the options vest and are
recognized as expense over the related service period.
As required under SFAS No. 123, the pro forma effects
of stock-based compensation on net loss are estimated at the
date of grant using the Black-Scholes option-pricing model. The
fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following
weighted-average
assumptions for the years ended December 31, 2005, 2004 and
2003, respectively: risk-free interest rate of 4.1%, 3.2% and
3.2%; dividend yield of 0%; volatility of 60%; and an expected
option life of five years. For purposes of pro forma
disclosures, the estimated fair value of the options is
amortized to expense over the vesting period of the related
options (generally four years) on an accelerated basis in
accordance with FIN 28.
The following table illustrates the effect on net losses as if
the Company had applied the fair value recognition provisions of
SFAS No. 123 to stock-based compensation
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except share and per
|
|
|
|
share amounts)
|
|
Net loss
|
|
$
|
(30,339
|
)
|
|
$
|
(14,210
|
)
|
|
$
|
(10,127
|
)
|
Add: Stock-based employee compensation expense included in net
loss
|
|
|
2,052
|
|
|
|
4,916
|
|
|
|
285
|
|
Deduct: Stock-based employee compensation expense determined
under fair value method for all awards
|
|
|
(5,209
|
)
|
|
|
(7,170
|
)
|
|
|
(334
|
)
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(33,496
|
)
|
|
$
|
(16,464
|
)
|
|
$
|
(10,176
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share as reported
|
|
$
|
(1.24
|
)
|
|
$
|
(0.91
|
)
|
|
$
|
(6.30
|
)
|
Basic and diluted pro forma net loss per share
|
|
$
|
(1.37
|
)
|
|
$
|
(1.06
|
)
|
|
$
|
(6.33
|
)
|
60
NUVASIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The pro forma effect on net loss for the years presented may not
be representative of the pro forma effect on reported net income
or loss in future years due to the uncertainty of stock option
grant volume and potential change in assumptions driven by
market factors.
In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
No. 123R,
Share-Based Payment
(SFAS 123R),
which supersedes Accounting Principles Board (APB) Opinion
No. 25,
Accounting for Stock Issued to Employees,
and its related implementation guidance. SFAS 123R focuses
primarily on accounting for transactions in which an entity
obtains employee services through share-based payment
transactions. SFAS 123R requires a public entity to measure
the cost of employee services received in exchange for the award
of equity instruments based on the fair value of the award at
the date of grant. The cost will be recognized over the period
during which an employee is required to provide services in
exchange for the award. The Company will adopt SFAS 123R in
the first quarter of 2006, as required. The adoption of
SFAS 123R will have a significant adverse impact on the
Companys earnings; however, the adoption will not impact
the Companys cash flows. The table above provides the pro
forma net loss and net loss per share as if NuVasive had used a
fair-value-based method similar to one of the methods permitted
under SFAS 123R to measure the compensation expense for
employee stock awards during the years presented.
Comprehensive Income (Loss).
SFAS No. 130,
Reporting Comprehensive Income,
requires that all
components of comprehensive income, including net income, be
reported in the financial statements in the period in which they
are recognized. Comprehensive income (loss) is defined as the
change in equity during a period from transactions and other
events and circumstances from non-owner sources. Comprehensive
loss which includes the unrealized gain (loss) on short-term
investments and foreign currency translation adjustments for the
years ended December 31, 2005, 2004 and 2003, did not
differ significantly from the reported net loss.
On June 3, 2005, the Company acquired the intellectual
property and related assets for cervical plate technology from
RSB Spine LLC (RSB), a privately owned company focused on spine
technology (the RSB Acquisition), in a purchase business
combination transaction. The Company has included the results of
the acquired RSB operations in its statement of operations from
the date of the acquisition. The Company does not consider the
RSB Acquisition material to its results of operations or
financial position, and therefore is not presenting pro forma
information.
Reasons for the RSB Acquisition.
The transaction provides
NuVasive with commercialized cervical plate technology that has
received FDA 510(K) clearance and that the Company believes is
superior to others on the market and to those that were under
development at NuVasive.
Purchase Price.
The total purchase consideration
consisted of (
in thousands, except share and per share
data
):
|
|
|
|
|
Cash paid on the closing date
|
|
$
|
3,800
|
|
NuVasive common stock issued on the closing date
(222,929 shares at $15.64 per share)
|
|
|
3,486
|
|
Present value of non-contingent deferred purchase consideration
|
|
|
1,064
|
|
Acquisition-related costs, consisting primarily of professional
fees
|
|
|
193
|
|
|
|
|
|
Total purchase price
|
|
$
|
8,543
|
|
|
|
|
|
The Company has allocated the total purchase consideration to
the assets and liabilities acquired based on their respective
fair values at the acquisition date. This allocation resulted in
an excess of the fair value of
61
NUVASIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
net tangible and intangible assets acquired over the total
purchase price of approximately $874,000 which has been recorded
as a long-term liability in accordance with Statement of
Financial Accounting Standards No. 141,
Business
Combinations.
The following table summarizes the allocation
of the purchase price (
in thousands
):
|
|
|
|
|
Cervical plate intangible assets consisting primarily of patents
|
|
$
|
8,200
|
|
Inventory
|
|
|
776
|
|
Fixed assets
|
|
|
503
|
|
Accounts receivable
|
|
|
116
|
|
Accounts payable and other current liabilities
|
|
|
(178
|
)
|
Long-term liability
|
|
|
(874
|
)
|
|
|
|
|
Total purchase price
|
|
$
|
8,543
|
|
|
|
|
|
The cervical plate intangible asset will be amortized on a
straight-line basis over a period of 17 years, the life of
the related patent.
Under the acquisition agreement, RSB will receive four annual
non-contingent deferred purchase consideration payments of
$300,000 through June 2009. In addition, RSB will receive annual
payments over a period of 12 years based upon sales of the
products derived from the cervical plate technology. Any amounts
paid under this arrangement will first be applied to reduce the
long-term liability and then will be recorded as goodwill when
incurred. The acquisition agreement provides for adjustment to
the first of these annual payments if shares of NuVasive common
stock issued in the transaction are sold by RSB within a period
defined by the acquisition agreement at a price more than 110%
of the value of NuVasive common stock at the closing date of the
transaction. As of December 31, 2005, and based on the sale
by RSB of all of the shares of NuVasive common stock issued in
the transaction, the first annual payment will be reduced by
approximately $48,000. The recorded values of the long-term
liability and the shares issued have been reduced to reflect
this adjustment.
In exchange for cash payments totaling $500,000 through June
2009, the purchase agreement grants NuVasive the right of first
refusal on all additional existing technologies and any future
technology that may be developed by RSB in the five years
following the closing date. On the closing date, the first
installment of $100,000 under this agreement was made.
In connection with the transaction, NuVasive has written off
assets, consisting primarily of inventory, totaling
approximately $497,000 for the initial alpha/beta testing of the
Companys own cervical plate under development. The charge
is recorded in cost of goods sold in the accompanying
consolidated statement of operations for the year ended
December 31, 2005.
On August 4, 2005, NuVasive acquired technology and assets
from Pearsalls Limited, a privately-owned company based in the
United Kingdom (Pearsalls). The acquired assets include an
investigational nucleus-like cervical disc replacement device
called NeoDisc. Also acquired was all of Pearsalls
intellectual property related to embroidery technology for use
in surgical implants. NuVasive made a closing payment of
$12.0 million, consisting of $5.0 million in cash and
$7.0 million in unregistered common stock which has
subsequently been registered. In addition, the transaction
provides for NuVasive to make additional payments totaling up to
$31.5 million as progress is made towards FDA approval for
marketing of the NeoDisc product. Finally, Pearsalls will
receive a royalty of 5% on NeoDisc product sales. No royalties
will be due on other products based on the acquired technology,
except for a limited royalty on products for non-spine
applications.
62
NUVASIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Additional payments made on attainment of milestones will be
charged to research and development expense as incurred. Royalty
payments will be charged to sales and marketing expense as
incurred.
The total purchase consideration consisted of (
in thousands,
except share and per share data
):
|
|
|
|
|
Cash paid on the closing date
|
|
$
|
5,000
|
|
NuVasive common stock issued on the closing date
(395,972 shares at $19.54 per share)
|
|
|
7,736
|
|
Acquisition-related costs, consisting primarily of professional
fees
|
|
|
274
|
|
|
|
|
|
Total purchase price
|
|
$
|
13,010
|
|
|
|
|
|
The purchase price has been allocated to the fair value of the
assets
acquired at the date of the acquisition consisting of fixed
assets of $113,500. The remaining purchase price of
$12.9 million has been allocated to in-process research and
development (IPRD) because the projects associated with the
IPRD efforts had not yet reached technological feasibility and
the research and development in process had no alternative
future uses. Accordingly, the $12.9 million was charged to
expense on the acquisition date.
On August 12, 2005, NuVasive acquired assets and
intellectual property from RiverBend Design LLC (RiverBend),
pursuant to the terms of an Intellectual Property Purchase
Agreement. The acquired intellectual property includes a patent
application and related technology and know-how for use in
developing dynamic stabilization products. NuVasive made a
closing payment to RiverBend of 51,308 unregistered shares of
common stock which has subsequently been registered. In
addition, NuVasive will make royalty payments to RiverBend based
on sales of products based on the acquired technology. The
purchase price of $1.0 million has been allocated to
purchased technology and is being amortized on a straight-line
basis over the estimated useful life of 17 years.
At the same time as the transaction with RiverBend, NuVasive
executed an Intellectual Property Purchase Agreement Addendum
(the Addendum) with Spine Partners LLC (Spine Partners), a
company affiliated with RiverBend. The Addendum amended the
terms of the Intellectual Property Purchase Agreement dated
October 10, 2002, between NuVasive and Spine Partners. The
Addendum adjusts the royalty payments due to Spine Partners for
the NuVasive SpheRx multi-axial pedicle screws. The Addendum
also effects the transfer to NuVasive of multiple patent
applications and related technology and know-how relating to
pedicle-based dynamic stabilization systems.
Short-term Investments.
Short-term investments include
auction rate securities, commercial paper, government securities
and corporate bonds that are classified as available-for-sale
(
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
Cost
|
|
$
|
6,975
|
|
|
$
|
50,636
|
|
Gross unrealized loss
|
|
|
(30
|
)
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
Estimated fair value
|
|
$
|
6,945
|
|
|
$
|
50,593
|
|
|
|
|
|
|
|
|
63
NUVASIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The estimated fair value of available-for-sale securities, by
contractual maturity is as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Market
|
|
|
Amortized
|
|
|
Market
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
2,978
|
|
|
$
|
2,976
|
|
|
$
|
44,749
|
|
|
$
|
44,721
|
|
Due between one and two years
|
|
|
3,997
|
|
|
|
3,969
|
|
|
|
5,887
|
|
|
|
5,872
|
|
Property and Equipment.
Property and equipment consisted
of the following (
in thousands
)
:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
Loaner equipment
|
|
$
|
17,972
|
|
|
$
|
9,057
|
|
Machinery and equipment
|
|
|
4,696
|
|
|
|
1,243
|
|
Computer equipment
|
|
|
1,195
|
|
|
|
1,416
|
|
Leasehold improvements
|
|
|
2,555
|
|
|
|
654
|
|
Construction in progress
|
|
|
|
|
|
|
1,427
|
|
Furniture and fixtures
|
|
|
1,093
|
|
|
|
386
|
|
|
|
|
|
|
|
|
|
|
|
27,511
|
|
|
|
14,183
|
|
Less: accumulated depreciation and amortization
|
|
|
(9,537
|
)
|
|
|
(5,458
|
)
|
|
|
|
|
|
|
|
|
|
$
|
17,974
|
|
|
$
|
8,725
|
|
|
|
|
|
|
|
|
Intangible assets.
Intangible assets were acquired in
2005 in connection with the business combination and asset
acquisitions discussed in Note Nos. 2 and 3 and consisted
of purchased technology with a cost of $9.2 million and
accumulated amortization of $306,000 at December 31, 2005.
Estimated annual amortization of the balance of intangible asset
balance as of December 31, 2005 is $541,000 through the
second quarter of 2022.
Accounts Payable and Accrued Liabilities.
Accounts
payable and accrued liabilities consisted of the following
(
in thousands
)
:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,007
|
|
|
$
|
1,598
|
|
Accrued expense
|
|
|
3,457
|
|
|
|
4,054
|
|
Other
|
|
|
1,638
|
|
|
|
555
|
|
|
|
|
|
|
|
|
|
|
$
|
6,102
|
|
|
$
|
6,207
|
|
|
|
|
|
|
|
|
|
|
5.
|
Commitments and Contingencies
|
The Company leases its facility under an operating lease, which
expires on August 31, 2012. The minimum annual rent on the
Companys facility is subject to increases based on stated
rental adjustment terms of certain leases, taxes, insurance and
operating costs. For financial reporting purposes, rent expense
is recognized on a straight-line basis over the term of the
lease. Accordingly, rent expense recognized in excess of rent
paid is reflected as deferred rent and is included in accounts
payable and accrued liabilities in the accompanying consolidated
balance sheets.
64
NUVASIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys future minimum annual lease payments and
long-term contractual obligations for years ending after
December 31, 2005 are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Operating
|
|
|
Contractual
|
|
|
|
Lease
|
|
|
Obligations
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
1,236
|
|
|
$
|
810
|
|
2007
|
|
|
1,267
|
|
|
|
756
|
|
2008
|
|
|
1,301
|
|
|
|
718
|
|
2009
|
|
|
1,338
|
|
|
|
653
|
|
2010
|
|
|
1,311
|
|
|
|
319
|
|
Thereafter
|
|
|
2,264
|
|
|
|
1,013
|
|
|
|
|
|
|
|
|
Total minimum payments
|
|
$
|
8,717
|
|
|
$
|
4,269
|
|
|
|
|
|
|
|
|
Other contractual obligations consist of certain intellectual
property purchase and consulting agreements for which the
Company is required to make annual payments.
In connection with the acquisition of RSB described in
Note 2, we are contingently obligated to make additional
annual payments as follows: (i) over a period of
12 years based upon sales of the products derived from the
cervical plate technology; and (ii) up to $400,000 payable
in equal annual installments through June 2009 for the right of
first refusal on all additional existing technologies and any
future technology that may be developed by RSB in the five years
following the closing date the acquisition.
In connection with the acquisition of technology and assets from
Pearsalls Limited described in Note 3, we are contingently
obligated to make additional payments to Pearsalls totaling up
to $31.5 million as progress is made towards FDA approval
for marketing of the NeoDisc product.
The expected timing of payments of the obligations discussed
above is estimated based on current information. Timing of
payment and actual amounts paid may be different depending on
the time of receipt of goods or services or changes to
agreed-upon amounts for some obligations. Amounts disclosed as
contingent or milestone-based obligations depend on the
achievement of the milestones or the occurrence of the
contingent events and can vary significantly.
Rent expense was approximately $1.3 million, $432,000 and
$300,000 for each of the years ended December 31, 2005,
2004 and 2003, respectively.
The Company is party to certain claims and legal actions arising
in the normal course of business. The Company does not expect
any such claims and legal actions to have a material adverse
effect on its business, results of operations or financial
condition.
Common Stock.
In May 2004, the Company completed an
initial public offering whereby 6,882,991 shares of the
Companys common stock were sold at an offering price of
$11 per share. All 6,882,991 shares were sold by the
Company and there were no selling shareholders. The Company
received net proceeds of approximately $68.1 million in
connection with the offering.
Convertible Preferred Stock.
All outstanding shares of
convertible preferred stock consisting of 12.7 million
shares prior to the initial public offering, converted to common
in connection with the initial public offering on May 13,
2004.
There are 5,000,000 shares of preferred stock authorized
and none issued or outstanding at December 31, 2005 and
2004.
65
NUVASIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Warrants.
From 1999 to January of 2003, the Company
issued warrants in connection with debt, sale-leaseback and
private placement transactions. The Company recorded the fair
value of the warrants as interest or consulting expense based on
the terms of the transaction in accordance with Emerging Issues
Task Force (EITF) 96-18,
Accounting for Equity
Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling Goods or Services
and SFAS 123.
All of the warrants were exercisable in connection with the
initial underwriting of the Companys stock. As of
December 31, 2005, warrants have been exercised on a net or
cash basis resulting in the issuance of 1,763,145 shares of
common stock. A total of 9,486 warrants with an exercise price
of $6.33 per share issued in 2001 in conjunction with a
sale-leaseback agreement were outstanding at December 31,
2005.
Stock Options.
In October 1998, the Company adopted the
1998 Stock Incentive Plan (the 1998 Plan) to grant options to
purchase common stock to eligible employees, non-employee
members of the board of directors, consultants and other
independent advisors who provide services to the Company. Under
the 1998 Plan, 3,922,800 shares of common stock, as
amended, were reserved for issuance upon exercise of options
granted by the Company. The board of directors determines the
terms of the stock option agreements, including vesting
requirements. Options under the 1998 Plan have a
10-year
term and
generally vest over a period not to exceed four years from the
date of grant. All options granted under the 1998 Plan allow for
early exercise prior to the option becoming fully vested.
Unvested common shares obtained upon early exercise of options
are subject to repurchase by the Company at the original issue
price.
In April 2004, the board of directors replaced the 1998 Plan
with the 2004 Equity Incentive Plan (the 2004 Plan) under which
2,000,000 shares (plus the remaining shares available for
grant under the 1998 Plan) of the Companys common stock
are authorized for future issuance, and reserved for purchase
upon exercise of options granted. In addition, the 2004 Plan
provides for automatic annual increases in the number of shares
reserved for issuance thereunder equal to the lesser of
(i) 4% of the Companys outstanding shares on the last
business day in December of the calendar year immediately
preceding; (ii) 10,000,000 shares; or (iii) a
number of shares determined by the board of directors.
The 2004 Plan provides for the grant of options to the
Companys directors, officers, employees and consultants.
The 2004 Plan provides for the grant of incentive and
nonstatutory stock options and rights to purchase stock to
employees, directors or consultants of the Company. The 2004
Plan provides that incentive stock options will be granted only
to employees and are subject to certain limitations as to fair
value during a calendar year. Under the 2004 Plan, the exercise
price of incentive stock options must equal at least the fair
value on the date of grant and the exercise price of
non-statutory stock options and the issuance price of common
stock under the stock issuance program may be no less than 85%
of the fair value on the date of grant or issuance. The options
are exercisable for a period of up to ten years after the date
of grant and generally vest 25% one year from date of grant and
ratably each month thereafter for a period of 36 months.
Also in April 2004, the board of directors approved the Employee
Stock Purchase Plan (ESPP). The ESPP initially allowed for the
issuance of up to 250,000 shares of NuVasive common stock,
increasing annually on December 31 by the lesser of
(i) 1,500,000 shares; (ii) 1% of the outstanding
shares of NuVasive common stock; or (iii) a lesser amount
determined by the board of directors. Under the terms of the
ESPP, employees can elect to have up to 15% of their annual
compensation withheld to purchase shares of NuVasive common
stock. The purchase price of the common stock is equal to 85% of
the lower of the fair market value per share of the common stock
on the commencement date of the two-year offering period or the
end of each semi-annual purchase period. In 2005 and 2004,
57,276 and 25,799 shares, respectively, were purchased
under the ESPP and 406,449 remain available for issuance under
the ESPP as of December 31, 2005.
In July 2002, certain executives exercised a total of 910,446
options, the consideration for which included cash of
approximately $2,000 and promissory notes of approximately
$523,000 payable to the Company. In March 2004, these notes were
forgiven by the Company or settled by payment.
66
NUVASIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In November 2003, the Company amended the 1998 Plan to provide
for the acceleration of 50% of the unvested options of all
employees upon a change in control and the vesting of the
remaining unvested options for those employees that are
involuntarily terminated within a year of the change in control.
Under FIN 44, the modification to the Plan requires the
Company to measure, based on the difference between the fair
value of the common stock as of the date of the modification and
the exercise price of each unvested option, the potential charge
that would be recorded as additional compensation expense should
the change in control provision be triggered prior to when the
employees would have vested in the options under the original
terms of the option grants. Based on the unvested employee
options as of December 31, 2005, and the market value of
the Companys common stock on that date, the exposure to
the Company related to the modification to the Plan is
$8.7 million. The potential charge is reduced as employees
continue to vest in their options over the normal four-year
vesting period, thereby decreasing the unvested portion of the
options on which the potential charge is based. Assuming the
acceleration is not triggered, the potential exposure is reduced
to zero by September 2007.
The Company recorded expense of $988,000, $925,000 and $458,000
and in 2005, 2004, and 2003, respectively, related to the
vesting of stock options granted to non-employees under
consulting agreements, in accordance with EITF 96-18.
Following is a summary of stock option activity
(in
thousands, except per share data)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Underlying
|
|
|
Avg. Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2002
|
|
|
1,332
|
|
|
$
|
0.60
|
|
|
Granted
|
|
|
684
|
|
|
$
|
0.80
|
|
|
Exercised
|
|
|
(113
|
)
|
|
$
|
0.50
|
|
|
Cancelled
|
|
|
(192
|
)
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2003
|
|
|
1,711
|
|
|
$
|
0.68
|
|
|
Granted
|
|
|
2,168
|
|
|
$
|
6.85
|
|
|
Exercised
|
|
|
(811
|
)
|
|
$
|
0.84
|
|
|
Cancelled
|
|
|
(98
|
)
|
|
$
|
4.01
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2004
|
|
|
2,970
|
|
|
$
|
5.02
|
|
|
Granted
|
|
|
1,043
|
|
|
$
|
15.70
|
|
|
Exercised
|
|
|
(427
|
)
|
|
$
|
3.02
|
|
|
Cancelled
|
|
|
(316
|
)
|
|
$
|
9.37
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005
|
|
|
3,270
|
|
|
$
|
8.27
|
|
|
|
|
|
|
|
|
The weighted-average fair value of options granted during the
years ended December 31, 2005, 2004 and 2003, was $8.64,
$6.85 and $0.46 per share, respectively.
67
NUVASIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information about stock options
outstanding and exercisable at December 31, 2005
(shares
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Weighted-
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Contractual Life
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
Range of Exercise Prices
|
|
Shares
|
|
|
(Years)
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 0.25 to $ 1.88
|
|
|
620
|
|
|
|
6.78
|
|
|
$
|
0.69
|
|
|
|
620
|
|
|
$
|
0.69
|
|
$ 3.75 to $ 3.75
|
|
|
856
|
|
|
|
8.01
|
|
|
$
|
3.75
|
|
|
|
856
|
|
|
$
|
3.75
|
|
$ 9.41 to $10.08
|
|
|
703
|
|
|
|
8.83
|
|
|
$
|
9.59
|
|
|
|
396
|
|
|
$
|
9.59
|
|
$10.13 to $17.27
|
|
|
662
|
|
|
|
8.41
|
|
|
$
|
13.27
|
|
|
|
184
|
|
|
$
|
10.92
|
|
$17.36 to $19.94
|
|
|
429
|
|
|
|
9.45
|
|
|
$
|
18.38
|
|
|
|
31
|
|
|
$
|
18.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 0.25 to $19.94
|
|
|
3,270
|
|
|
|
8.22
|
|
|
$
|
8.27
|
|
|
|
2,087
|
|
|
$
|
4.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Reserved for Future Issuance.
The following
table summarizes common shares reserved for issuance at
December 31, 2005 on exercise or conversion of
(in
thousands)
:
|
|
|
|
|
|
Convertible preferred stock warrants
|
|
|
9
|
|
Common stock options:
|
|
|
|
|
|
Issued and outstanding
|
|
|
3,270
|
|
|
Available for future grant
|
|
|
415
|
|
|
|
|
|
Total shares reserved for future issuance
|
|
|
3,694
|
|
|
|
|
|
|
|
7.
|
Related Party Transactions
|
In February 2000, the Company loaned $500,000 to the chief
executive officer in exchange for a promissory note. The Company
also agreed to pay all withholding obligations arising from the
forgiveness of the loan. For the years ended December 31,
2004 and 2003, respectively, the Company has recognized
compensation expense of $56,000 and $619,000, and a liability of
$26,000 and $626,000 for the payroll withholding obligations. In
May 2004, this loan was forgiven in full in conjunction with the
initial public offering.
In July 2002, certain executives exercised stock options using
non-recourse promissory notes payable to the Company totaling
approximately $523,000. The notes bore interest at 6% per
annum. The Company has recorded compensation expense related to
the forgiveness of the notes and related interest for the years
ended December 31, 2004 and 2003, respectively, of
approximately $188,000 and $310,000. In July 2003, upon the
resignation of two employees, the Company repurchased $54,000 of
stock by adjusting the related notes receivable. Subsequently,
the Company received full payment of $34,000 from one employee
and forgave the remaining balance of $28,000 for the other
employee. In May 2004, the remaining notes were forgiven in full
in conjunction with the initial public offering.
As a result of the modification of the original option grants to
these executives, in order to provide for the forgiveness of the
notes, there was deemed to be a new measurement date for the
option grants. The resulting aggregate value of the options,
based on the intrinsic value at the date of the modification of
approximately $121,000, was recorded as deferred compensation in
stockholders equity and was amortized to compensation
expense over the term of the promissory notes. Total
compensation expense recorded in 2003 related to these options
was approximately $76,000.
68
NUVASIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Due to the Companys net loss position for the years ended
December 31, 2005, 2004 and 2003, and the Companys
determination that realization of the deferred tax assets is not
more likely than not, the Company has recorded a full valuation
allowance against deferred tax assets. Accordingly, there was no
provision or benefit for income taxes recorded. There were no
components of current or deferred federal, state or foreign tax
provisions for the years ended December 31, 2005, 2004 and
2003.
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Companys deferred tax assets and liabilities at
December 31, 2005 and 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
|
30,733
|
|
|
|
25,122
|
|
|
Income tax credit carryforwards
|
|
|
4,375
|
|
|
|
3,427
|
|
|
Capitalized assets and other
|
|
|
5,749
|
|
|
|
1,218
|
|
|
Other
|
|
|
2,559
|
|
|
|
1,081
|
|
|
|
|
|
|
|
|
|
|
|
43,416
|
|
|
|
30,848
|
|
|
Valuation allowance
|
|
|
(43,416
|
)
|
|
|
(30,848
|
)
|
|
|
|
|
|
|
|
|
Total deferred tax assets, net of valuation allowance
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
There are no deferred tax liabilities at December 31, 2005
and 2004. The Company has established a valuation allowance
against its deferred tax asset due to the uncertainty
surrounding the realization of such assets. Management
periodically evaluates the recoverability of the deferred tax
asset. At such time as it is determined that it is more likely
than not that the deferred tax assets are realizable, the
valuation allowance will be reduced. The Company has recorded a
valuation allowance of approximately $43.4 million as of
December 31, 2005 to reflect the estimated amount of
deferred tax assets that may not be realized. The Company
increased its valuation allowance by approximately
$12.6 million for the year ended December 31, 2005.
The valuation allowance includes approximately $1.3 million
related to stock option deductions, the benefit of which will
eventually be credited to equity.
At December 31, 2005, the Company had federal and state tax
loss carryforwards of approximately $81.3 million and
$49.6 million, respectively. The federal and state net
operating loss carryforwards begin to expire in 2018 and 2007,
if unused. The Company also has losses attributable to its
foreign subsidiary of approximately $519,000 at
December 31, 2005. At December 31, 2005, the Company
had federal and state tax credit carryforwards of approximately
$2.9 million and $2.2 million, respectively. The
federal credits will begin to expire in 2019.
The utilization of net operating loss carryforwards and tax
credit carryforwards is dependent on the future profitability of
the Company. Furthermore, the Internal Revenue Code (IRC)
imposes substantial restriction on the utilization of net
operating loss and tax credit carryforwards in the event of an
ownership change of more than 50 percentage
points during any three year period. Due to prior ownership
changes as defined by IRC Section 382, a portion of the
Companys net operating loss and tax credit carryforwards
are limited in their annual utilization.
69
NUVASIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On February 7, 2006, the Company completed the sale of
7,829,120 shares of the Companys common stock at the
price of $19.25 per share, less underwriting discounts and
commissions. The number of shares sold by the Company includes
1,125,000 shares sold pursuant to the underwriters
exercise of an option to purchase additional shares. The
Companys total net proceeds from the offering, after
deducting underwriter discounts and commissions and estimated
offering expenses, was approximately $142.3 million.
|
|
10.
|
Effect of New Accounting Pronouncements
|
In November 2005, the Financial Accounting Standards Board
(FASB) issued FASB Staff Position (FSP) Nos.
FAS 115-1 and FAS 124-1,
The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments.
This FSP addresses the determination as to when
an investment is considered impaired, whether that impairment is
other than temporary, and the measurement of an impairment loss.
This FSP also includes accounting considerations subsequent to
the recognition of other-than-temporary impairments. The
adoption of this FSP is not expected to have a material effect
on the Companys consolidated financial position, results
of operations or cash flows. The guidance in this FSP will be
applied to reporting periods beginning after December 15,
2005.
In June 2005, the FASB issued Statement of Financial Accounting
Standards No. 154,
Accounting Changes and Error
Corrections
(SFAS 154), which changes the requirements
for the accounting for and reporting of a change in accounting
principle. Previously, most voluntary changes in accounting
principles required recognition via a cumulative effect
adjustment within net income of the period of the change.
SFAS 154 requires retrospective application to prior
periods financial statements, unless it is impracticable
to determine either the period-specific effects or the
cumulative effect of the change. SFAS 154 is effective for
accounting changes made in fiscal years beginning after
December 15, 2005; however, SFAS 154 does not change
the transition provisions of any existing accounting
pronouncements.
In March 2005, the FASB published FASB Interpretation
No. 47,
Accounting for Conditional Asset Retirement
Obligations
, which clarifies that the term,
conditional asset retirement obligation, as used in
Statement of Financial Accounting Standards No. 143,
Accounting for Asset Retirement Obligations
refers to a
legal obligation to perform an asset retirement activity in
which the timing and (or) method of settlement are
conditional on a future event that may or may not be within the
control of the entity. The uncertainty about the timing and
(or) method of settlement of a conditional asset retirement
obligation should be factored into the measurement of the
liability when sufficient information exists. The interpretation
also clarifies when an entity would have sufficient information
to reasonably estimate the fair value of an asset retirement
obligation. This interpretation is effective no later than the
end of 2006. The adoption of this Interpretation is not expected
to have a material effect on the Companys consolidated
financial position, results of operations or cash flows.
In December 2004, the FASB issued Statement of Financial
Accounting Standards No. 123 (revised 2004),
Share-Based
Payment
(SFAS 123R), which NuVasive will be required to
follow beginning in its first quarter of 2006. SFAS 123R
will result in the recognition of substantial compensation
expense relating to the Companys employee stock options
and employee stock purchase plans. As noted in Note 1,
currently the Company generally does not recognize any
compensation expense related to stock option grants the Company
issues under its stock option plans or related to the discounts
the Company provides under its employee stock purchase plans.
Under the new rules, the Company will be required to adopt a
fair-value-based method for measuring the compensation expense
related to employee stock awards. The resulting additional
compensation expense will have a material adverse effect on the
Companys reported results of operations. SFAS 123R
eliminates the ability to account for share-based compensation
transactions using the intrinsic value method under APB 25
and generally would require instead that such transactions be
accounted for using a fair-value-based method. The Company will
recognize stock-based compensation expense on all awards on an
70
NUVASIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
accelerated basis over the requisite service period using the
modified prospective method. In January 2005, the SEC issued
SAB No. 107, which provides supplemental
implementation guidance for SFAS 123R. SFAS 123R will
be effective for the Company beginning in the first quarter of
2006.
|
|
12.
|
Quarterly Data
(unaudited)
|
The following quarterly financial data, in the opinion of
management, reflects all adjustments, consisting of normal
recurring adjustments necessary, for a fair presentation of
results for the periods presented
(in thousands except per
share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
13,064
|
|
|
$
|
15,036
|
|
|
$
|
15,134
|
|
|
$
|
18,555
|
|
Gross profit
|
|
|
10,437
|
|
|
|
11,858
|
|
|
|
11,832
|
|
|
|
15,270
|
|
Total operating expenses
|
|
|
14,332
|
|
|
|
16,313
|
|
|
|
30,572
|
|
|
|
19,674
|
|
Net loss
|
|
$
|
(3,555
|
)
|
|
$
|
(4,110
|
)
|
|
$
|
(18,476
|
)
|
|
$
|
(4,198
|
)
|
Basic and diluted net loss per common share
|
|
$
|
(0.15
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.74
|
)
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
7,588
|
|
|
$
|
8,809
|
|
|
$
|
10,184
|
|
|
$
|
11,822
|
|
Gross profit
|
|
|
5,384
|
|
|
|
6,328
|
|
|
|
7,560
|
|
|
|
8,903
|
|
Total operating expenses
|
|
|
9,531
|
|
|
|
10,783
|
|
|
|
10,565
|
|
|
|
11,936
|
|
Net loss
|
|
$
|
(4,227
|
)
|
|
$
|
(4,466
|
)
|
|
$
|
(2,756
|
)
|
|
$
|
(2,761
|
)
|
Basic and diluted net loss per common share(1)
|
|
$
|
(2.33
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.12
|
)
|
|
|
(1)
|
Net loss per share is computed independently for each of the
quarters presented on an historical basis. The Company completed
its initial public offering (IPO) of 6,882,991 shares in
May 2004. These shares are included in the computation of loss
per share from the date of the IPO forward. Therefore, the sum
of the quarterly loss per share is not comparable from quarter
to quarter and will not equal the total loss per share for the
year.
|
71
NuVasive, Inc.
Schedule II: Valuation Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
Balance at the
|
|
|
|
Beginning of Period
|
|
|
Additions(1)
|
|
|
Deductions(2)
|
|
|
End of Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Year ended December 31, 2005 Accounts Receivable Reserve
|
|
$
|
255
|
|
|
$
|
443
|
|
|
$
|
85
|
|
|
$
|
613
|
|
Year ended December 31, 2004 Accounts Receivable Reserve
|
|
$
|
320
|
|
|
$
|
287
|
|
|
$
|
352
|
|
|
$
|
255
|
|
Year ended December 31, 2003 Accounts Receivable Reserve
|
|
$
|
105
|
|
|
$
|
231
|
|
|
$
|
16
|
|
|
$
|
320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
Balance at the
|
|
|
|
Beginning of Period
|
|
|
Additions(3)
|
|
|
Deductions(4)
|
|
|
End of Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005 Inventory Reserve
|
|
$
|
844
|
|
|
$
|
1,019
|
|
|
$
|
531
|
|
|
$
|
1,332
|
|
Year ended December 31, 2004 Inventory Reserve
|
|
$
|
1,187
|
|
|
$
|
98
|
|
|
$
|
441
|
|
|
$
|
844
|
|
Year ended December 31, 2003 Inventory Reserve
|
|
$
|
800
|
|
|
$
|
588
|
|
|
$
|
201
|
|
|
$
|
1,187
|
|
|
|
(1)
|
Amount represents customer balances deemed uncollectible.
|
|
(2)
|
Uncollectible accounts written-off, net of recoveries.
|
|
(3)
|
Amount represents excess and obsolete reserve recorded to cost
of sales. In 2005, this amount includes an approximately
$484,000 write-off of cervical plate inventory in connection
with the acquisition of RSB Spine LLC.
|
|
(4)
|
Excess and obsolete inventory written-off against reserve.
|
72
Index to Exhibits
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
|
|
2
|
.1(1)
|
|
Asset Purchase Agreement, dated as of June 3, 2005, by and
between NuVasive, Inc. and RSB Spine LLC
|
|
|
2
|
.2(2)
|
|
Asset Purchase Agreement, dated as of August 4, 2005, by
and among NuVasive, Inc., Pearsalls Limited and American Medical
Instruments Holdings, Inc.
|
|
|
2
|
.3(3)
|
|
Intellectual Property Purchase Agreement, dated as of
August 12, 2005, by and between NuVasive, Inc. and
RiverBend Design LLC
|
|
|
3
|
.1(4)
|
|
Restated Certificate of Incorporation
|
|
|
3
|
.2(4)
|
|
Restated Bylaws
|
|
|
4
|
.1(5)
|
|
Second Amended and Restated Investors Rights Agreement,
dated July 11, 2002, by and among NuVasive, Inc. and the
other parties named therein
|
|
|
4
|
.2(5)
|
|
Amendment No. 1 to Second Amended and Restated
Investors Rights Agreement, dated June 19, 2003, by
and among NuVasive, Inc. and the other parties named therein
|
|
|
4
|
.3(5)
|
|
Amendment No. 2 to Second Amended and Restated
Investors Rights Agreement, dated February 5, 2004,
by and among NuVasive, Inc. and the other parties named therein
|
|
|
4
|
.4(2)
|
|
Registration Rights Agreement, dated as of August 4, 2005,
between NuVasive, Inc. and Pearsalls Limited
|
|
|
4
|
.5
|
|
Specimen Common Stock Certificate
|
|
|
10
|
.1(5)#
|
|
1998 Stock Option/ Stock Issuance Plan
|
|
|
10
|
.2(5)#
|
|
Form of Notice of Grant of Stock Option under our 1998 Stock
Option/ Stock Issuance Plan
|
|
|
10
|
.3(5)#
|
|
Form of Stock Option Agreement under our 1998 Stock Option/
Stock Issuance Plan, and form of addendum thereto
|
|
|
10
|
.4(5)#
|
|
Form of Stock Purchase Agreement under our 1998 Stock Option/
Stock Issuance Plan
|
|
|
10
|
.5(6)#
|
|
Form of Stock Issuance Agreement under our 1998 Stock Option/
Stock Issuance Plan
|
|
|
10
|
.6(6)#
|
|
Form of Stock Issuance Agreement issued to consultants and
distributors, under our 1998 Stock Option/ Stock Issuance Plan,
on April 21, 2004, and May 4, 2004
|
|
|
10
|
.7(7)#
|
|
2004 Equity Incentive Plan
|
|
|
10
|
.8(7)#
|
|
Form of Stock Option Award Notice under our 2004 Equity
Incentive Plan
|
|
|
10
|
.9(7)#
|
|
Form of Option Exercise and Stock Purchase Agreement under our
2004 Equity Incentive Plan
|
|
|
10
|
.10(7)#
|
|
Forms of Restricted Stock Grant Notice and Restricted Stock
Agreement under our 2004 Equity Incentive Plan
|
|
|
10
|
.11(7)#
|
|
Form of Restricted Stock Unit Award Agreement under our 2004
Equity Incentive Plan
|
|
|
10
|
.12(7)#
|
|
2004 Employee Stock Purchase Plan
|
|
|
10
|
.13(5)#
|
|
Employment Letter Agreement, dated July 12, 1999, as
amended on January 20, 2004, between NuVasive, Inc. and
Alexis V. Lukianov
|
|
|
10
|
.14(5)#
|
|
Bonus Agreement, dated February 25, 2000, between NuVasive,
Inc. and Alexis V. Lukianov
|
|
|
10
|
.15(5)#
|
|
Employment Agreement, dated December 20, 2002, as amended
on January 20, 2004, between NuVasive, Inc. and Kevin C.
OBoyle
|
|
|
10
|
.16(5)#
|
|
Employment Agreement, dated January 20, 2004, between
NuVasive, Inc. and Keith Valentine
|
|
|
10
|
.17(5)#
|
|
Employment Agreement, dated January 20, 2004, between
NuVasive, Inc. and Patrick Miles
|
|
|
10
|
.18(5)#
|
|
Employment Agreement, dated January 20, 2004, between
NuVasive, Inc. and James J. Skinner
|
|
|
10
|
.19(5)#
|
|
Employment Agreement, dated January 20, 2004, between
NuVasive, Inc. and G. Bryan Cornwall
|
|
|
10
|
.20(5)#
|
|
Employment Agreement, dated January 20, 2004, between
NuVasive, Inc. and Jonathan D. Spangler
|
73
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
|
|
|
10
|
.21(8)#
|
|
Employment Agreement, dated December 5, 2005, between
NuVasive, Inc. and Jeffrey P. Rydin
|
|
|
10
|
.22(8)#
|
|
Employment Agreement, dated December 5, 2005, between
NuVasive, Inc. and Jason M. Hannon
|
|
|
10
|
.23(5)#
|
|
Form of Indemnification Agreement between NuVasive, Inc. and
each of our directors and officers
|
|
|
10
|
.24(5)
|
|
Patent Purchase Agreement, dated June 21, 2002, by and
among NuVasive, Inc. and Drs. Anthony Ross and Peter
Guagliano
|
|
|
10
|
.25(5)
|
|
Intellectual Property Purchase Agreement, dated October 10,
2002, between NuVasive, Inc. and Spine Partners, LLC
|
|
|
10
|
.26(3)
|
|
Intellectual Property Purchase Agreement Addendum, dated as of
August 12, 2005, by and between NuVasive, Inc. and Spine
Partners, LLC
|
|
|
10
|
.27(7)
|
|
Development, Production and Marketing Services Agreement, dated
December 30, 1999, as amended, by and between NuVasive,
Inc. and Tissue Banks International, Inc.
|
|
|
10
|
.28(7)
|
|
Supply Agreement, dated January 21, 2002, by and between
NuVasive, Inc. and Intermountain Tissue Center
|
|
|
10
|
.29(7)
|
|
Clinical Advisor, Patent Purchase and Development Agreement,
dated March 31, 2004, by and between NuVasive, Inc. and
James L. Chappuis
|
|
|
10
|
.30(9)
|
|
Sublease, dated October 12, 2004, by and between NuVasive,
Inc. and Gateway, Inc.
|
|
|
10
|
.31(10)
|
|
Supply Agreement, dated January 14, 2005, by and between
NuVasive, Inc. and Blood and Tissue Center of Central Texas
|
|
|
10
|
.32(2)
|
|
Exclusive Manufacturing Agreement, dated as of August 4,
2005, by and between NuVasive, Inc. and Pearsalls Limited
|
|
|
10
|
.33(11)
|
|
Master Technology and Services Agreement, dated
September 2, 2005, and Master Technology and Services
Agreement Amendment #1, dated December 16, 2005, each
by and between NuVasive, Inc. and Medidata Solutions, Inc.
|
|
|
10
|
.34(12)#
|
|
Description of 2005 performance bonus arrangements for our chief
executive officer and certain of our other officers
|
|
|
10
|
.35(13)#
|
|
Description of 2006 annual salaries for our chief executive
officer and certain of our other officers
|
|
|
10
|
.36(14)#
|
|
Summary of the 2005 bonus payments to and description of 2006
performance bonus arrangements for our chief executive officer
and certain of our other officers
|
|
|
21
|
.1
|
|
List of subsidiaries of NuVasive, Inc.
|
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm
|
|
|
31
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act
of 1934, as amended
|
|
|
31
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act
of 1934, as amended
|
|
|
32
|
.1
|
|
Certification of the Chief Executive Officer pursuant to
Rule 13a-14(b) of the Securities Exchange Act of 1934, as
amended, and 18 U.S.C. section 1350
|
|
|
32
|
.2
|
|
Certification of the Chief Financial Officer pursuant to
Rule 13a-14(b) of the Securities Exchange Act of 1934, as
amended, and 18 U.S.C. section 1350
|
|
|
|
|
(1)
|
Incorporated by reference to our Current Report on
Form
8-K
filed
with the Securities and Exchange Commission (the
Commission) on June 9, 2005.
|
|
|
(2)
|
Incorporated by reference to our Current Report on
Form
8-K
filed
with the Commission on August 10, 2005.
|
|
|
(3)
|
Incorporated by reference to our Current Report on
Form
8-K
filed
with the Commission on August 17, 2005.
|
74
|
|
|
|
(4)
|
Incorporated by reference to our Quarterly Report on
Form
10-Q
filed
with the Commission on August 13, 2004.
|
|
|
(5)
|
Incorporated by reference to our Registration Statement on
Form
S-1
(File
No.
333-113344)
filed with the Commission on March 5, 2004.
|
|
|
(6)
|
Incorporated by reference to Amendment No. 4 to our
Registration Statement on
Form
S-1
(File
No.
333-113344)
filed with the Commission on May 11, 2004.
|
|
|
(7)
|
Incorporated by reference to Amendment No. 1 to our
Registration Statement on
Form
S-1
(File
No.
333-113344)
filed with the Commission on April 8, 2004.
|
|
|
(8)
|
Incorporated by reference to our Current Report on
Form
8-K
filed
with the Commission on December 7, 2005.
|
|
|
(9)
|
Incorporated by reference to our Quarterly Report on
Form
10-Q
filed
with the Commission on November 15, 2004.
|
|
|
(10)
|
Incorporated by reference to our Current Report on
Form
8-K
filed
with the Commission on January 21, 2005.
|
|
(11)
|
Incorporated by reference to our Current Report on
Form
8-K
filed
with the Commission on December 22, 2005.
|
|
(12)
|
Incorporated by reference to our Current Report on
Form
8-K
filed
with the Commission on August 2, 2005.
|
|
(13)
|
Incorporated by reference to our Current Report on
Form
8-K
filed
with the Commission on January 9, 2006.
|
|
(14)
|
Incorporated by reference to our Current Report on
Form
8-K
filed
with the Commission on March 13, 2006.
|
|
|
|
|
|
The Commission has granted confidential treatment to us with
respect to certain omitted portions of this
exhibit (indicated by asterisks). We have filed separately
with the Commission an unredacted copy of the exhibit.
|
|
|
#
|
Indicates management contract or compensatory plan.
|
75