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| ALUS > SEC Filings for ALUS > Form 10-Q on 8-Aug-2008 | All Recent SEC Filings |
8-Aug-2008
Quarterly Report
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995, which provides certain "safe harbor" provisions for forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those expressed or implied by such forward-looking statements. For a detailed discussion of these risks and uncertainties, see the "Risk Factors" section in Item 1A of Part II of this Form 10-Q and in our other SEC filings. We caution the reader not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date of this Form 10-Q. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-Q.
Overview
We are a medical device company that develops, manufactures and sells proprietary, innovative products to precisely control patient temperature in hospital critical care settings. Our products consist of our CoolGard and Thermogard temperature regulation systems, which are computer-controlled cooling and warming units, as well as four families of single-use catheters used exclusively with the systems-Cool Line, Icy, Fortius and Quattro. We market our products to acute care hospitals and critical care physicians through a direct sales force in the United States and independent distributors in international markets. Our revenue consists primarily of sales of the CoolGard system, single-use catheters and single use start-up kits which connect the catheter to the system. In the first quarter of 2007, we introduced our new Thermogard system, a computer controlled cooling and warming unit used with our catheters that is similar to the CoolGard, but which contains additional features for use in surgical applications. In June 2007, we introduced our "Hospital Monitoring Interface Accessory" (HMIA). The HMIA enables the caregiver to display the patient's temperature on both the Alsius system and the patient monitor. The HMIA is compatible with the majority of patient monitoring systems. In the first quarter of 2008, we introduced the Thermogard XP system, which is similar to the Thermogard, but with additional power and features.
We began selling our products in the United States in April 2004 and, as of June 30, 2008, had established a U.S. installed base of over 272 systems in 138 hospitals, of which 232 had been sold and 40 were under evaluation. Our U.S. installed base includes 10 systems that we sold in the second quarter of 2008 to a third party who intends to rent them to hospitals. We began building a current network of independent distributors in Europe in February 2004, and as of June 30, 2008, had established a European installed base of over 367 systems in over 197 hospitals, of which 338 had been sold and 29 were under evaluation. In other parts of the world as of June 30, 2008, we had an installed base of 42 systems, of which 39 had been sold and 3 were under evaluation. We generated revenues of $5.5 million in the six months ended June 30, 2008, which represents revenue growth of 22% from the six months ended June 30, 2007. We had a net loss of $10.2 million in the six months ended June 30, 2008. International sales accounted for 50% of our revenue in the six months ended June 30, 2008. We expect U.S. sales to represent a greater percentage of our revenue as we continue to increase direct sales efforts in the United States.
We have FDA clearance to market our products in the United States for fever control in certain neuro-intensive care patients and temperature management in cardiac and neuro surgery patients, and are exploring ways to obtain clearance for cardiac arrest in the United States. We have broader clearance to market our products in Europe, Canada, China and Australia, including clearance for cardiac arrest, and are in the process of obtaining clearances to sell our products in Japan and other Asian countries. We only market our products for treatments in the specific cleared indications; however, this does not prevent physicians from using our products for non-cleared, or off-label, uses. As of June 30, 2008, we employed 15 direct sales people, a director of sales, a vice president of worldwide sales and marketing, two regional sales managers, a corporate accounts manager, a government-military accounts manager, six clinical application specialists and a director of clinical education in the United States and over 31 independent international distributors covering over 39 countries. We intend to continue to expand the size of our direct U.S. sales force and clinical application specialists, as well as increase our network of distributors in Europe and other countries.
We continue to face challenges in the U.S., Europe and the rest of the world, particularly due to competition, a long sales cycle, and the fact that we are not FDA-approved to market in the United States for cardiac arrest and certain other indications for which our products may be used. We believe awareness of the importance of patient temperature regulation is growing and that more critical care givers are implementing aggressive temperature management protocols, and looking for products to use in this effort. This increased awareness, however, has also increased our competition with companies that market more traditional and newer surface heating and cooling devices, which are less invasive and often less expensive that our catheter-based approach. We continue to believe that our products offer the most effective approach to temperature regulation, and offer superior benefits to patients and caregivers over competing surface products, and that our sales will grow as this awareness increases. However, the increase in competition has lengthened our sales cycle and made sales in the near term difficult to predict.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses, and disclosures of contingent assets and liabilities as of the date of the financial statements. On a periodic basis, we evaluate our estimates, including those related to revenue recognition, accounts receivable, inventories, warranty, stock-based compensation, warrants and embedded derivatives. We use historical experience and other assumptions as the basis for making estimates. Actual results could differ from those estimates under different assumptions or conditions.
There are no material changes from the critical accounting policies and estimates previously disclosed in Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2007, which sets forth the most recent Critical Accounting Policies and Estimates presentation in our filings under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Results of Operations
Revenue. Revenue was $5.5 million for the six months ended June 30, 2008, an increase of $1.0 million or 22%, from $4.5 million for the six months ended June 30, 2007. The increase was attributable to an approximate 18% increase in average selling prices for systems and an approximate 12% increase for disposable units. During the six months ended June 30, 2008, we sold 4,639 catheters and 4,497 start-up kits, an increase of 10% and 24%, respectively, from the 4,224 catheters and 3,637 start-up kits sold during the six months ended June 30, 2007. Sales of our CoolGard and Thermogard systems decreased from 109 during the six months ended June 30, 2007 to 102 during the six months ended June 30, 2008. Sales of our CoolGard and Thermogard systems accounted for 41% and 45% of revenue and sales of catheters and start-up kits accounted for 50% and 50% of our revenue for the six months ended June 30, 2008 and 2007, respectively. Sales in the United States accounted for 50% of our revenue for the six months ended June 30, 2008, compared to 41% for the six months ended June 30, 2007. We expect that U.S. sales will increase as a percentage of future revenue.
Cost of revenue. Cost of revenue consists of costs of materials, products purchased from third-parties, manufacturing personnel, freight, depreciation of property and equipment, royalties paid to technology licensors, manufacturing overhead, warranty expenses and inventory reserves. Royalties paid to third parties include two worldwide licenses related to our catheters. One license covers a coating used on our catheters and requires that we pay a royalty of between 2.0% and 3.5% on net revenue generated by all catheters. The other license covers technology used in our Cool Line catheter and requires that we pay a royalty of 2.5% on net revenue generated by the Cool Line catheter.
Cost of revenue was $4.0 million for the six months ended June 30, 2008, a decrease of $0.1 million or 2%, from $4.1 million for the six months ended June 30, 2007. As a percentage of revenue, cost of revenue decreased from 91% of sales for the six months ended June 30, 2007, to 72% of sales for the six months ended June 30, 2008. The percentage decrease was primarily due to the realization of cost reduction programs and higher average selling prices as a result of an increase in sales to domestic U.S. customers, to whom we sell directly, versus international sales which are made through distributors. Stock based compensation increased in the six months ended June 30, 2008 by $0.1 million as compared to the six months ended June 30, 2007 due to the grant of stock options under our 2006 Equity Incentive Plan.
Research and development expense. Research and development expense consists of costs related to our regulatory and product development activities. Research and development expense has been, and we anticipate in the future will be, highest when it is actively engaged in human clinical trials to support new regulatory clearances. Research and development expense was $2.2 million for the six months ended June 30, 2008, an increase of $0.6 million, or 37%, from $1.6 million for the six months ended June 30, 2007. This increase is primarily attributable to increased stock based compensation of $0.3 million associated with our 2006 Equity Incentive Plan , other compensation related costs of $0.2 million associated with increased headcount, and $0.1 million associated with material cost to test a new catheter. We expect research and development expenses to decline as a percentage of revenue due to a larger revenue base.
Sales and marketing expense. Sales and marketing expense consists of costs related to our direct sales force personnel, clinical application specialists, travel, trade shows, advertising, entertainment, and marketing materials provided to our international distributors. Sales and marketing expense was $6.5 million for the six months ended June 30, 2008, an increase of $1.5 million, or 30%, from $5.0 million for the six months ended June 30, 2007. This increase was primarily attributable to the growth of our direct sales force and marketing activities to support our worldwide market expansion, resulting in increased compensation and commission costs of $0.5 million, increased travel, trade show and meeting expenses of $0.2 million, increased advertising and promotion expenses of $0.1 million, and increased outside service costs related to installation and training of $0.1 million. Stock based compensation increased by $0.5 million associated with our 2006 Equity Incentive Plan. We expect that expenses associated with sales and marketing activities will increase as we incur additional costs to support our worldwide market expansion.
General and administrative expense. General and administrative expense consists of costs related to personnel, legal, accounting and other general operating expenses. General and administrative expense was $2.9 million for the six months ended June 30, 2008, an increase of $1.2 million or 70%, from $1.7 million for the six months ended June 30, 2007. The increase was primarily attributable to increased stock based compensation of $0.7 million associated with our 2006 Equity Incentive Plan, increased compensation related expenses of $0.2 million associated with increased headcount, and increased public company expenses of $0.3 million. We expect that general and administrative expense will increase in absolute dollar amounts as we incur additional costs related to operating as a public company, such as legal and accounting fees, and higher costs for officers' and directors' insurance, investor relations programs and director and professional fees, including costs associated with compliance with Section 404 of the Sarbanes-Oxley Act.
Interest income. Interest income was $0.2 million for the six months ended June 30, 2008, an increase of $0.15 million, or 253%, from $0.05 million for the six months ended June 30, 2007. This increase was due to the investing of the cash and cash equivalents we obtained in the Ithaka merger in June 2007.
Interest expense. Interest expense was $0.4 million for the six months ended June 30, 2008, a decrease of $3.0 million, or 88%, from $3.4 million for the six months ended June 30, 2007. Interest expense in the six months ended June 30, 2008 resulted from our borrowings from Merrill Lynch Capital (now GE Capital). In the six months ended June 30, 2007, we incurred $0.6 million of interest on these borrowings, $0.2 million related to borrowings from other finance companies, and $2.6 million related to the bridge notes, all of which were repaid in the Ithaka merger in June 2007.
Other income (expense). Other income (expense) was zero for the six months ended June 30, 2008 as compared to $0.1 million of other expense for the six months ended June 30, 2007. This was primarily due to the decrease in the fair value adjustments of the warrant liabilities and embedded derivatives associated with the May 2005 secured promissory note and the 2006 bridge notes as these items were either repaid or converted in the Ithaka merger in June 2007.
Three Months Ended June 30, 2008 and 2007
Revenue. Revenue was $3.0 million for the quarter ended June 30, 2008, an increase of $0.5 million or 20%, from $2.5 million for the quarter ended June 30, 2007. The increase was attributable to an approximate 26% increase in average selling prices for systems and an approximate 19% increase for disposable units. During the quarter ended June 30, 2008, we sold 2,190 catheters, a decrease of 12% from the 2,489 catheters sold during the quarter ended June 30, 2007. During the quarter ended June 30, 2008, we sold 2,367 start-up kits, an increase of 25% from the 1,897 start-up kits sold during the quarter ended June 30, 2007. Sales of our CoolGard and Thermogard systems decreased from 60 during the quarter ended June 30, 2007 to 58 during the quarter ended June 30, 2008. The number of systems sold during the three months ended June 30, 2008 included 10 systems sold to a third party who intends to rent them to hospitals. We believe this rental program may provide a means to increase the installed base of systems and generate recurring disposable revenue. Sales of our CoolGard and Thermogard systems accounted for 45% and 45% of revenue and sales of catheters and start-up kits accounted for 48% and 50% of our revenue for the quarters ended June 30, 2008 and 2007, respectively. Sales in the United States accounted for 51% of our revenue for the quarter ended June 30, 2008, compared to 39% for the quarter ended June 30, 2007. We expect that U.S. sales will increase as a percentage of future revenue.
Cost of revenue. Cost of revenue consists of costs of materials, products purchased from third-parties, manufacturing personnel, freight, depreciation of property and equipment, royalties paid to technology licensors, manufacturing overhead, warranty expenses and inventory reserves. Royalties paid to third parties include two worldwide licenses related to our catheters. One license covers a coating used on our catheters and requires that we pay a royalty of between 2.0% and 3.5% on net revenue generated by all catheters. The other license covers technology used in our Cool Line catheter and requires that we pay a royalty of 2.5% on net revenue generated by the Cool Line catheter.
Cost of revenue was $2.1 million for the quarter ended June 30, 2008, a decrease of $0.1 million or 5%, from $2.2 million for the quarter ended June 30, 2007. As a percentage of revenue, cost of revenue decreased from 87% of sales for the quarter ended June 30, 2007, to 68% of sales for the quarter ended June 30, 2008. The percentage decrease was primarily due to the realization of cost reduction programs and higher average selling prices as a result of an increase in sales to domestic U.S. customers, to whom we sell directly, versus international sales which are made through distributors. Stock based compensation increased in the quarter ended June 30, 2008 by $0.06 million as compared to the quarter ended June 30, 2007 due to the grant of stock options under our 2006 Equity Incentive Plan.
Research and development expense. Research and development expense consists of costs related to our regulatory and product development activities. Research and development expense has been, and we anticipate in the future will be, highest when we are actively engaged in human clinical trials to support new regulatory clearances. Research and development expense was $1.0 million for the quarter ended June 30, 2008, an increase of $0.3 million, or 43%, from $0.7 million for the quarter ended June 30, 2007. This increase is primarily attributable to increased stock based compensation of $0.15 million associated with our 2006 Equity Incentive Plan and other compensation related costs of $0.15 million associated with increased headcount. We expect research and development expenses to decline as a percentage of revenue due to a larger revenue base.
Sales and marketing expense. Sales and marketing expense consists of costs related to our direct sales force personnel, clinical application specialists, travel, trade shows, advertising, entertainment, and marketing materials provided to our international distributors. Sales and marketing expense was $3.3 million for the quarter ended June 30, 2008, an increase of $0.7 million, or 27%, from $2.6 million for the quarter ended June 30, 2007. This increase was primarily attributable to the growth of our direct sales force and marketing activities to support our worldwide market expansion, resulting in increased compensation and commission costs of $0.2 million, increased outside service costs related to installation and training of $0.1 million, and increased promotion, tradeshow and public relations expense of $0.1 million. Stock based compensation increased by $0.3 million associated with our 2006 Equity Incentive Plan. We expect that expenses associated with sales and marketing activities will increase as we incur additional costs to support our worldwide market expansion.
General and administrative expense. General and administrative expense consists of costs related to personnel, legal, accounting and other general operating expenses. General and administrative expense was $1.3 million for the quarter ended June 30, 2008, an increase of $0.7 million or 117%, from $0.6 million for the quarter ended June 30, 2007. The increase was primarily attributable to increased stock based compensation of $0.3 million associated with our 2006 Equity Incentive Plan, increased compensation related expenses of $0.1 million associated with increased headcount, increased public company expenses of $0.2 million, and increased legal costs of $0.1 million associated with our June 2008 tender offer to exchange common stock optionsfor restricted stock units. We expect that general and administrative expense will increase in absolute dollar amounts as we incur additional costs related to operating as a public company, such as legal and accounting fees, and higher costs for officers' and directors' insurance, investor relations programs and director and professional fees, including costs associated with compliance with Section 404 of the Sarbanes-Oxley Act.
Interest income. Interest income was $0.05 million for the quarter ended June 30, 2008, an increase of $0.01 million, or 25%, from $0.04 million for the quarter ended June 30, 2007. This increase was due to the investing the cash and cash equivalents we obtained in the Ithaka merger.
Interest expense. Interest expense was $0.2 million for the quarter ended June 30, 2008, a decrease of $1.3 million, or 87%, from $1.5 million for the quarter ended June 30, 2007. Interest expense in the three months ended June 30, 2008 resulted from our borrowings from Merrill Lynch Capital (now GE Capital). In the three months ended June 30, 2007, we incurred $0.4 million of interest on these borrowings, and $1.0 million related to bridge notes, all of which were repaid in the Ithaka merger in June 2007.
Other income (expense). Other income (expense) was zero for the quarter ended June 30, 2008 as compared to $0.2 million of other expense for the quarter ended June 30, 2007. This was primarily due to the decrease in the fair value adjustments of the warrant liabilities and embedded derivatives associated with the May 2005 secured promissory note and the 2006 bridge notes as these items were either repaid or converted in the Ithaka merger in June 2007.
Liquidity and Capital Resources
From our inception, and prior to the Ithaka merger in June 2007, we financed our operations primarily through private sales of preferred stock, with aggregate net proceeds of $76.5 million in cash. From April 2006 through February 2007, we borrowed an aggregate amount of $10.6 million from existing shareholders (the 2006 bridge notes). We issued to each lending party unsecured convertible promissory notes bearing interest at 8% per annum. In February 2007, we borrowed $8.0 million from Merrill Lynch Capital (subsequently acquired by GE Capital) of which $3.0 million was used to pay existing debt. We issued a secured promissory note to Merrill Lynch Capital bearing interest at 6.5% over the LIBOR rate with interest only payments for the first six months and interest and principal payments for 30 months thereafter. In connection with this term loan, we issued a warrant having a contractual life of ten years. We estimated the fair value of the warrant using the Black-Scholes option pricing model. The estimated fair value of $0.2 million resulted in a discount to the term loan. The discount will be amortized to interest expense using the effective interest method over the life of the term loan.
In May 2007, we and Merrill Lynch Capital amended our promissory note to provide for an additional $2.0 million of borrowing for an aggregate total of $10.0 million. The second tranche of $2.0 million was funded on May 11, 2007 with interest at the same rate as the original note and it was repaid upon the close of the Ithaka merger in June 2007. In connection with the second tranche, we did not issue any additional warrants but we did incur a fee of $0.2 million, which was paid out of proceeds. In June 2007, we borrowed $1.5 million in an unsecured promissory note from a financing company, Cheyne Capital, a shareholder of Ithaka. The interest rate on this note was 15% and we incurred a fee of 7.5% which was paid out of proceeds. We repaid this unsecured promissory note in July 2007. We consummated the Ithaka merger in June 2007, and in that transaction we acquired approximately $40.0 million of net assets (see Note 3 of the accompanying Notes to Condensed Consolidated Financial Statements).
We have incurred significant net losses since inception and have relied on our ability to obtain financing. As of June 30, 2008, we had $13.3 million in cash and cash equivalents to finance operations. We expect operating losses and negative cash flows to continue for the foreseeable future as we incur additional costs and expenses related to expanding sales and marketing, continuing product development, and obtaining FDA and foreign regulatory approvals for new indications. These factors raise substantial doubt about our ability to continue as a going concern. Our ability to meet our obligations in the ordinary course of business is dependent upon our ability to establish profitable operations, and to secure other sources of financing to fund operations. Before we can achieve cash flow positive operations through increased sales, it will be necessary to raise working capital through debt or additional equity financing in 2008 or early 2009. However, there can be no assurance that such financing can be successfully completed on terms acceptable to us.
Six Months Ended June 30, 2008 and 2007
As of June 30, 2008, we had cash and cash equivalents of $13.3 million, working capital of $15.8 million and an accumulated deficit of $108.5 million.
Cash flows used in operating activities. Net cash used in operations was $9.2 million for the six months ended June 30, 2008 and $10.5 million for the six months ended June 30, 2007. The net cash used in each of these periods primarily reflects the net loss for those periods, offset by non-cash charges such as depreciation and amortization, stock-based compensation, amortization of debt discounts and the change in fair value of warrant liabilities associated with the May 2005 and February 2007 secured promissory notes and Merrill Lynch Capital Term Loan and the change in the fair value of the warrant liabilities and embedded derivatives associated with our 2006 bridge notes. Non-cash charges for depreciation and amortization, stock-based compensation, amortization of debt discounts and the change in fair value of warrant liabilities and embedded derivatives totaled $2.4 million and $3.0 million for the six months ended June 30, 2008 and 2007, respectively, representing a $0.6 million decrease. This decrease was primarily comprised of a $1.7 million increase in stock-based compensation offset by a decrease of $2.5 million of amortization of discounts on promissory notes since we converted or repaid our debt instruments in June 2007.
For the six months ended June 30, 2008, operating assets and liabilities aggregated to a net decrease of cash of $1.3 million, representing an increased level of all operating assets and liabilities, primarily related to decreased accounts payable and accrued liabilities of $1.8 million as cash levels increased following the Ithaka merger in June 2007.
Cash flows used in investing activities. Net cash used by investing activities was $0.8 million for the six months ended June 30, 2008 and consisted of capital expenditures. Net cash provided by investing activities was $45.3 million for the six months ended June 30, 2007 and consisted of $45.6 million in net cash acquired in the Ithaka merger offset by $0.3 million in capital expenditures. The increase in capital expenditures is primarily attributable to the January 2008 release of our Thermogard XP system and the subsequent placement of these systems into our evaluation equipment pool. We expect our capital expenditures to increase in future periods to support the growth of our infrastructure. We anticipate that our current operating facility will be appropriate to support our manufacturing demands for the foreseeable future.
Cash flows from financing activities. Net cash flows used by financing activities were $1.1 million for the six months ended June 30, 2008 compared to $7.6 million provided by financing activities for the six months ended June 30, . . .
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