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| VNUS > SEC Filings for VNUS > Form 10-Q on 10-Nov-2008 | All Recent SEC Filings |
10-Nov-2008
Quarterly Report
Business Overview
We are a leading provider of medical devices for the minimally invasive
treatment of venous reflux disease, a progressive condition caused by
incompetent vein valves in the legs. Venous reflux disease results in symptoms
such as leg pain, swelling, fatigue, skin ulcers and painful varicose veins. Our
primary product line, the Closure system, consists of a proprietary
radio-frequency or RF generator and proprietary disposable endovenous catheters
and devices to close diseased veins through the application of
temperature-controlled RF energy. As of December 31, 2007, we estimated that in
excess of 300,000 patients had been treated using our Closure system since 1999.
We market our Closure system through a direct sales organization in the
United States and France and subsidiaries in Germany and the United Kingdom. We
also market and sell our products through distributors throughout the world.
Most of our U.S. customers are reimbursed by governmental and third-party
payors, and that reimbursement is subject to periodic review and adjustment.
Currently, our Closure procedure is covered by the policies of approximately 140
health insurers, representing over 220 million covered lives in the United
States. We have a diverse customer base of hospitals, physicians and physician
groups.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires us
to make judgments, estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. On an ongoing basis, we re-evaluate our
judgments and estimates, including those related to doubtful accounts, income
taxes and loss contingencies. We base our estimates and judgments on our
historical experience, knowledge of current conditions and our belief of what
could occur in the future considering available information, including
assumptions that are believed to be reasonable under the circumstances. By their
nature, these estimates and judgments are subject to an inherent degree of
uncertainty and actual results could differ materially from the amounts reported
based on these policies.
We believe the following critical accounting policies reflect our most
significant estimates, judgments and assumptions used in the preparation of our
consolidated financial statements:
• Revenue recognition;
• Valuation of inventory;
• Warranty;
• Allowance for doubtful accounts;
• Income taxes; and
• Share-based compensation expense.
For more information, see "Critical Accounting Policies and Estimates"
included in our Annual Report on Form 10-K for the year ended December 31, 2007.
As of September 30, 2008, we have not identified any significant changes to
these critical accounting policies discussed in our "Critical Accounting
Policies and Estimates," except as described below.
Royalty Revenue Recognition. The Company recognizes royalty revenues in
accordance with SAB No. 104, Revenue Recognition. SAB 104 requires there to
exist persuasive evidence of an arrangement, transfer of title, fixed or
determinable price and reasonably assured collectability. We use negotiated
royalty licensing agreements to determine the existence of an arrangement and
transfer of title. Royalty licensing agreements typically cover products shipped
by the licensee after the date that the license agreement has been entered into
and until the patent has expired or when the agreement expires, whichever is
shorter. The Company's royalties are computed at a fixed price per unit shipped,
are paid quarterly in arrears and recognized as revenue at the time the amount
of the quarterly royalty payment becomes determinable and collection is
reasonably assured.
Financial Operations Overview
Net Revenues. We derive our net revenues from net product revenues and
royalty revenues. Net product revenues are derived from the sale of disposable
endovenous catheters and devices, RF generators and accessory products. Our
large installed base of RF generators facilitates a recurring revenue stream
from the sale of disposable catheters. Royalty revenues are derived from
licensing our patents which describe methods of vein ablation.
Cost of Revenues. Our cost of revenues represents the cost of materials,
overhead, direct labor and delivery charges associated with the manufacture of
disposable catheters, the purchase and delivery of RF generators, the purchase
and delivery of accessory products, warranty, inventory reserves and share-based
compensation.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily
of personnel expenses, sales force incentive compensation, travel, promotional
materials, advertising, patient education materials, other expenses incurred to
provide reimbursement services, clinical training and share-based compensation.
Research and Development Expenses. Research and development expenses consist
primarily of personnel expenses, supplies, materials and other expenses
associated with product development, expenses associated with preclinical and
clinical studies and share-based compensation.
General and Administrative Expenses. General and administrative expenses
consist primarily of personnel expenses for accounting, human resources,
information technology and corporate administration, professional fees and
share-based compensation.
Known Trends and Uncertainties Impacting Future Results of Operations: Global
Market and Economic Conditions. In the United States, recent market and economic
conditions have been unprecedented and challenging, with tighter credit
conditions and slower growth through the third quarter of 2008. For the
three-month period ended September 30, 2008, continued concerns about the
systemic impact of inflation, energy costs, geopolitical issues, the
availability and cost of credit, the United States mortgage market and a
declining real estate market in the United States have contributed to increased
market volatility and diminished expectations for the United States economy. In
the third quarter of 2008, added concerns fueled by the federal government
conservatorship of the Federal Home Loan Mortgage Corporation and the Federal
National Mortgage Association, the declared bankruptcy of Lehman Brothers
Holdings Inc., the United States government-provided loan to American
International Group Inc. and other federal government interventions in the
United States credit markets led to increased market uncertainty and instability
in both United States and international capital and credit markets. These
conditions, combined with volatile oil prices, declining business and consumer
confidence and increased unemployment have in recent weeks subsequent to the end
of the quarter contributed to volatility of unprecedented levels.
As a result of these market conditions, the cost and availability of credit
has been and may continue to be adversely affected by illiquid credit markets
and wider credit spreads. Concern about the stability of the markets generally
and the strength of counterparties specifically has led many lenders and
institutional investors to reduce, and in some cases, cease to provide funding
to borrowers. Continued turbulence in the United States and international
markets and economies may adversely affect our liquidity and financial
condition, and the liquidity and financial condition of our customers. If these
market conditions continue, they may limit our ability, and the ability of our
customers, to access the capital markets to meet liquidity needs and timely
replace maturing liabilities, resulting in an adverse effect on our financial
condition and results of operations.
Results of Operations
Net Revenues by Period
The following table sets forth our net revenues for the three and nine months
ended September 30, 2008 and 2007, and the percentage change in net revenues
between periods:
Three months ended Nine months ended
September 30, September 30,
2008 2007 % Change 2008 2007 % Change
(in thousands) (in thousands)
Net product revenues $ 21,910 $ 17,495 25 % $ 62,302 $ 50,333 24 %
Royalty revenues 1,226 - NA 11,628 - NA
Net revenues $ 23,136 $ 17,495 32 % $ 73,930 $ 50,333 47 %
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Net revenues increased in the three months ended September 30, 2008 as
compared to the same period in 2007 primarily due to:
• increased catheter sales in both units (increase of 29%) and dollars
(increase of $3.6 million) due to increased demand for the ClosureFAST
catheter and ClosureRFS device;
• increased accessory product sales in both dollars and units directly related to products used in the performance of our Closure procedure; and
• royalty revenues of $1.2 million relating to the current period.
Net revenues increased in the nine months ended September 30, 2008 as
compared to the same period in 2007 primarily due to:
• increased catheter sales in both units (increase of 38%) and dollars
(increase of $11.7 million) due to increased demand for the ClosureFAST
catheter and ClosureRFS device; and
• increased accessory product sales in both dollars and units directly related to products used in the performance of our Closure procedure; and
• royalty revenues of $11.6 million relating to the current period; partially offset by,
• decreased RF generator revenue due to net recognition of $2.0 million of RF generator revenue deferred in 2006 related to a promised software upgrade and recognized in 2007.
We expect net product revenues to increase in the fourth quarter ending
December 31, 2008 as a result of continued market acceptance of our ClosureFAST
catheter in both domestic and international markets. We expect royalty revenues
to be 4.0 to 4.5% of total net revenues for the fourth quarter of 2008.
Net Product Revenues by Product
The following table sets forth the percentage of net product revenues derived
from the sale of disposable endovenous catheters and devices, RF generators and
accessories for the three and nine months ended September 30, 2008 and 2007:
Three months ended Nine months ended
September 30, September 30,
2008 2007 2008 2007
Catheters and devices 77 % 76 % 77 % 72 %
RF generators 9 10 10 15
Accessories 14 14 13 13
100 % 100 % 100 % 100 %
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We derive our net product revenues from the sale of disposable endovenous
catheters and devices, RF generators and accessory products. Our large installed
base of RF generators facilitates a recurring revenue stream from the sale of
disposable catheters. The change in product mix as a percentage of net product
revenue in the nine months ended September 30, 2008 as compared to the same
period in 2007 resulted from the recognition of $2.0 million of RF generator
revenue in the first two quarters of 2007 which had been deferred in 2006. The
Company anticipates catheters and devices and accessories will continue to
account for a greater percentage of net revenues as our large installed base of
RF generators facilitates a recurring revenue stream from the sale of disposable
catheters and accessories.
Net Revenues by Geographic Region as a Percentage of Net Revenues
The following table sets forth the percentage of net revenues from domestic
and international sales for the three and nine months ended September 30, 2008
and 2007:
Three months ended Nine months ended
September 30, September 30,
2008 2007 2008 2007
United States 91 % 93 % 91 % 94 %
Europe and other 9 7 9 6
100 % 100 % 100 % 100 %
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We market our Closure system through a direct sales organization in the United States and France and subsidiaries in Germany and the United Kingdom. We also market and sell our products through distributors throughout the world. In 2007, we experienced an increase in net revenues as a percentage of total net revenues from sources outside the U.S., primarily due to the addition of a direct sales presence in the United Kingdom in 2007. We expect our net revenues derived from sales outside the United States to continue to increase in 2008 compared to 2007 primarily related to increasing customer demand and international expansion.
Gross Profit by Period
The following table sets forth our gross profit for the three and nine months
ended September 30, 2008 and 2007, and the percentage change between periods:
Three months ended Nine months ended September 30, September 30, 2008 2007 % Change 2008 2007 % Change
Gross profit margin for the three months ended September 30, 2008 was
approximately 69.6% compared with approximately 61.5% for the same period in
2007. Gross profit margin for the nine months ended September 30, 2008 was
approximately 71.8% compared with approximately 62.9% for the same period in
2007. The overall increase in gross profit margin for both periods was primarily
due to:
• The recognition of royalty revenues with no associated cost of revenue; and
• Higher margin of ClosureFAST catheters in 2008 as compared to 2007. This is the result of reductions in the initial manufacturing inefficiencies in 2007 associated with launching a new product.
Assuming we do not experience reductions in average sales price or experience
unusual manufacturing inefficiencies, we expect gross margins for 2008 to range
from 70% to 72%.
Operating Expenses by Period
Three months ended Nine months ended
September 30, September 30,
2008 2007 % Change 2008 2007 % Change
(in thousands) (in thousands)
Sales and marketing $ 6,779 $ 5,460 24 % $ 21,195 $ 18,435 15 %
Research and development 2,554 2,258 13 % 7,596 7,168 6 %
General and administrative 4,860 6,128 -21 % 14,654 15,029 -2 %
$ 14,193 $ 13,846 3 % $ 43,445 $ 40,632 7 %
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Operating Expenses as a Percent of Net Revenues
Three months ended Nine months ended
September 30, September 30,
2008 2007 2008 2007
Sales and marketing 29 % 31 % 29 % 37 %
Research and development 11 % 13 % 10 % 14 %
General and administrative 21 % 35 % 20 % 30 %
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Operating Expense Summary
Overall operating expenses increased $347,000 in the three months ended
September 30, 2008, as compared to the same period in 2007, primarily due to:
• an increase of $2,050,000 due to increased payroll and related expense
(including share-based compensation) over the prior year;
• an increase of $495,000 in travel and professional fee expenditures; and
• an increase of $97,000 in general business expenses; partially offset by
• a decrease of $2,433,000 in patent litigation expense; and
• a decrease of $57,000 in certain clinical research and marketing expenses.
Overall operating expenses increased $2,813,000 in the nine months ended
September 30, 2008, as compared to the same period in 2007, primarily due to:
• an increase of $5,280,000 due to increased payroll and related expense
(including share-based compensation) over the prior year;
• an increase of $476,000 in travel and professional fee expenditures;
• an increase of $206,000 due to increases in general and international expenditures; and
• an increase of $77,000 in consulting fees; partially offset by
• a decrease of $2,643,000 in patent litigation expense;
• a decrease of $361,000 in certain clinical research and marketing expenses; and
• a decrease of $81,000 in bad debt expense.
Overall operating expenses as a percentage of net revenues decreased as the
Company continued to leverage its cost structure to support growth in net
revenues.
Sales and Marketing Expenses
Sales and marketing expenses increased $1,319,000 in the three months ended
September 30, 2008, as compared to the same period in 2007, primarily due to:
• an increase of $1,067,000 due to increased payroll and related expense
(including share-based compensation); and
• an increase of $206,000 in travel expenses.
Sales and marketing expenses increased $2,760,000 in the nine months ended
September 30, 2008, as compared to the same period in 2007, primarily due to:
• an increase of $2,460,000 due to increased payroll and related expense
(including share-based compensation);
• an increase of $476,000 in travel expenses; and
• an increase of $207,000 in expenses associated with international operations and expansion, partially offset by
• a decrease of $315,000 in marketing programs, primarily advertising.
We expect sales and marketing related expenses to increase in absolute
dollars in 2008 but to decrease as a percentage of net revenues as compared to
2007.
Research and Development Expenses
Research and development expenses were comparable in the three months ended
September 30, 2008, as compared to the same period in 2007; however, the
components of research and development expenses varied by period as follows:
• an increase of $463,000 due to increased payroll and related expense
(including share-based compensation); partially offset by
• a decrease of $57,000 in clinical study expense; and
• a decrease of $180,000 in outside consulting fees.
Research and development expenses increased $428,000 in the nine months ended
September 30, 2008, as compared to the same period in 2007, primarily due to:
• an increase of $1,472,000 due to increased payroll and related expense
(including share-based compensation); partially offset by
• a decrease of $361,000 in clinical study expense; and
• a decrease of $442,000 in outside consulting fees.
We expect research and development expenses to increase in absolute dollars
in 2008 but to decrease as a percentage of net revenues as compared to 2007.
General and Administrative Expenses
General and administrative expenses decreased $1,268,000 in the three months
ended September 30, 2008, as compared to the same period in 2007, primarily due
to:
• an increase of $520,000 due to increased payroll and related expense
(including share-based compensation);
• an increase of $97,000 in general business expenses; and
• an increase of $469,000 due to increased professional fees; partially offset by
• a decrease of $2,443,000 in patent litigation expenses.
General and administrative expenses decreased $375,000 in the nine months
ended September 30, 2008, as compared to the same period in 2007, primarily due
to:
• an increase of $1,348,000 due to increased payroll and related expense
(including share-based compensation);
• an increase of $330,000 in general business expenses; and
• an increase of $519,000 in professional fees and travel; partially offset by
• a decrease of $2,643,000 in patent litigation and related Diomed due diligence legal expenses; and
• a decrease of $81,000 in bad debt expense.
We expect general and administrative expenses to decrease in absolute dollars
and as a percentage of net revenues in 2008 as compared to 2007.
Interest Income and Other, Net
Interest income and other, net, decreased to $24,000 in the three months
ended September 30, 2008 from $945,000 for the same period in 2007, primarily
due to:
• a decrease of $590,000 in foreign currency translation gains related to the
translation into U.S. dollars of foreign currency denominated cash and
receivable balances held by the Company; and
• a decrease of $331,000 in interest income related to decreases in short-term interest rates.
Interest income and other, net, decreased to $1,241,000 in the nine months ended September 30, 2008 from $2,569,000 for the same period in 2007, primarily due to:
• a decrease of $364,000 in foreign currency translation gains related to the translation into U.S. dollars of foreign currency denominated cash and receivable balances held by the Company; and
• a decrease of $964,000 in interest income related to decreases in short-term interest rates.
We expect interest income and other, net to decrease in absolute dollars and
as a percentage of net revenues in 2008 as compared to 2007. Additionally, we
anticipate certain foreign currency losses in the three months ending
December 31, 2008 to the extent the dollar continues to strengthen in comparison
to foreign currencies, primarily the British pound and the Euro.
Provision for Income Taxes
Provision for income tax was $349,000 in the three months ended September 30,
2008 for anticipated annual minimum tax payments for Federal and certain state
purposes in the United States, and foreign tax expense. Provision for income tax
was $19,000 for three months ended September 30, 2007, primarily related to
foreign taxes. The provision for income tax for the three months ended
September 30, 2008, included the retroactive effect to the beginning of the year
for the two year suspension of use of California net operating loss
carryforwards enacted in September 2008.
Provision for income tax was $842,000 in the nine months ended September 30,
2008 for anticipated annual minimum tax payments for Federal and certain state
purposes in the United States, and foreign tax expense. Provision for income tax
was $37,000 for nine months ended September 30, 2007, primarily related to
foreign taxes.
We expect the tax provision rate will be 8.0% for the full year 2008.
Liquidity and Capital Resources
As of
September 30, December 31,
2008 2007 $ Change
(in thousands)
Cash and cash equivalents $ 48,532 $ 39,269 $ 9,263
Short-term investments $ 29,637 $ 24,067 $ 5,570
Working capital $ 85,708 $ 71,001 $ 14,707
Nine Months Ended
September 30,
2008 2007
(in thousands)
Net cash provided by (used in) operating activities $ 14,600 $ (4,660 )
Net cash (used in) provided by investing activities $ (6,541 ) $ 4,725
Net cash provided by financing activities $ 1,201 $ 1,749
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We incurred net losses from inception through September 30, 2008 of . . .
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