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| ATSI > SEC Filings for ATSI > Form 10-Q on 13-May-2009 | All Recent SEC Filings |
13-May-2009
Quarterly Report
Also in 2006, we entered into an exclusive distribution agreement with Novare
Surgical Systems, Inc. ("Novare"). Novare is the owner of the Enclose II®
cardiac anastomosis assist device, which is a device used by cardiac surgeons to
attach a bypass vessel to the aorta during coronary artery bypass graft surgery.
Under the terms of the agreement, we hold the exclusive right to market, sell
and distribute the Enclose II product in the United States, Germany, France and
the United Kingdom. We agreed to pay to Novare a transfer price for each box of
Enclose II product we purchase.
In June 2007, we acquired the cryoablation surgical device business of CryoCath.
The acquisition included the SurgiFrost, FrostByte and SurgiFrost XL family of
products for which we served as CryoCath's exclusive agent in the United States
and distributor in certain international markets. Under the acquisition
agreements, we paid CryoCath $22.0 million upon closing of the transaction
(reduced by $0.9 million subsequent to closing) and $2.0 million during 2008
upon the achievement of certain manufacturing transition milestones. We must
also pay $2.0 million two years after closing and up to $4.0 million in
contingent payments based on future sales of Surgifrost XL, an FDA cleared and
CE Marked product designed to enable less-evasive ablations. This technology
enables us to leverage our current operating infrastructure and allows us to
better address the rapidly growing $130 million cardiac arrhythmia market within
cardiac surgery. The transaction was financed with a portion of the proceeds of
an $8.6 million senior secured Term Loan from Silicon Valley Bank and the
private placement of 9,800,000 shares of our common stock at a purchase price of
$1.65 per share to Alta Partners VIII, L.P., a life sciences venture capital
firm.
Critical Accounting Policies and Estimates
We base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances. Management's
discussion and analysis of financial condition and results of operations are
based upon the consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect (1) the reported amounts of assets, liabilities, revenues
and expenses; and (2) the related disclosure of contingent assets and
liabilities. At each balance sheet date, we evaluate our estimates and
judgments. The critical accounting policies that are most important to fully
understanding and evaluating our financial condition and results of operations
are discussed in our most recent Annual Report on Form 10-K on file with the
SEC.
See Note 10 of "Notes to Consolidated Financial Statements" in Item 1 of this
Form 10-Q for information on recently issued accounting pronouncements which
will or could affect our accounting policies and estimates.
Results of Operations
The following table provides the dollar and percentage change in the Statements
of Operations for the quarterly periods ended April 4, 2009 and March 29, 2008.
Quarter ended April 4 (March 29)
Increase (Decrease)
(in thousands) 2009 2008 $ %
Net sales $ 18,403 $ 14,845 $ 3,558 24.0 %
Cost of goods sold 6,130 5,897 233 4.0 %
Gross profit 12,273 8,948 3,325 37.2 %
Operating expenses:
Sales and marketing 7,501 6,487 1,014 15.6 %
Research and development 2,044 2,206 (162 ) (7.3 )%
General and administrative 2,476 3,004 (528 ) (17.6 )%
Amortization of intangibles 788 891 (103 ) (11.6 )%
Total operating expenses 12,809 12,588 221 1.8 %
Operating loss (536 ) (3,640 ) (3,104 ) (85.3 )%
Net interest expense (719 ) (619 ) 100 16.2 %
Other income (expense), net (353 ) 1,918 (2,271 ) (118.4 )%
Net loss before income taxes (1,608 ) (2,341 ) (733 ) (31.3 )%
Income tax expense (63 ) (70 ) (7 ) (10.0 )%
Net loss ($1,671 ) ($2,411 ) $ (740 ) (30.7 )%
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The following table presents the Statements of Operations as a percentage of net sales for the quarterly periods ended April 4, 2009 and March 29, 2008.
Quarter ended
April 4 (March 29)
2009 2008
Net sales 100.0 % 100.0 %
Cost of goods sold 33.3 % 39.7 %
Gross profit 66.7 % 60.3 %
Operating expenses:
Sales and marketing 40.8 % 43.7 %
Research and development 11.1 % 14.9 %
General and administrative 13.5 % 20.2 %
Amortization of intangibles 4.3 % 6.0 %
Total operating expenses 69.6 % 84.8 %
Operating loss (2.9 )% (24.5 )%
Net interest income (expense) (3.9 )% (4.2 )%
Other income (expense), net (1.9 )% 12.9 %
Net loss before income taxes (8.7 )% (15.8 )%
Income tax expense (0.3 )% (0.5 )%
Net loss (9.1 )% (16.2 )%
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Net Sales. The following table provides the dollar and percentage change in net sales inside and outside the United States for the quarterly periods ended April 4, 2009 and March 29, 2008.
Quarter ended April 4 (March 29)
Increase
(in thousands) 2009 2008 $ %
United States $ 7,932 $ 5,830 $ 2,102 36.1 %
Outside United States 10,471 9,015 1,456 16.2 %
Total $ 18,403 $ 14,845 $ 3,558 24.0 %
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The following table provides net sales inside and outside the United States as a percentage of total net sales for the quarterly periods ended April 4, 2009 and March 29, 2008.
Quarter ended
April 4 (March 29)
2009 2008
United States 43.1 % 39.3 %
Outside United States 56.9 % 60.7 %
Total 100.0 % 100.0 %
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The following table provides net sales by product group for the quarterly periods ended April 4, 2009 and March 29, 2008.
Quarter ended April 4 (March 29)
Increase (Decrease)
(in thousands) 2009 2008 $ %
Heart valve therapy $ 13,245 $ 10,681 $ 2,564 24.0 %
Surgical arrhythmia 4,904 3,848 1,056 27.4 %
Surgical tools and accessories 254 316 (62 ) (19.6 )%
Total $ 18,403 $ 14,845 $ 3,558 24.0 %
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Total net sales in the first quarter of 2009 increased 24% over the same period
in 2008. Our net sales increase was negatively impacted by approximately 3.6% of
net sales due to lower foreign currency exchange rates against the U.S. dollar.
Approximately 20% of our total sales in the first quarter of 2009 were invoiced
in Euros or other local currencies in European markets where we sell our
products directly to hospitals.
Heart valve therapy sales, our largest product group, consists of mechanical and
tissue heart valves and heart valve repair products. Our mechanical heart valve
products continue to be our primary product line and comprised approximately 59%
of our total worldwide sales for the first quarter of 2009, compared to 66% for
the same period in 2008. Surgical arrhythmia therapy products consist of
cryotherapy products for the ablation of cardiac arrhythmias. We acquired this
business from CryoCath in 2007. Surgical tools and accessories consist primarily
of cardiac anastomosis assist devices and thoracic port systems.
Worldwide mechanical heart valve revenue in the first quarter of 2009 increased
12% from the same period in 2008. U.S. mechanical heart valve revenue in the
first quarter of 2009 also increased 12% from the same period in 2008, the
result of the introduction of a new mechanical valve offering in 2008, the AP
360 valve, which allowed us to take market share from competitors. International
mechanical heart valve revenue also increased approximately 12% in the first
quarter of 2009 compared to the same period a year ago, due primarily to
stronger mechanical heart valve sales in Asia and other developing markets.
Tissue heart valve revenue increased 378% in the first quarter of 2009 to
$1.1 million, driven primarily by the limited commercial launch of the Company's
first generation U.S. tissue valve product, the ATS 3f Aortic Bioprosthesis,
approved by the FDA in October 2008. U.S. tissue valve revenue comprised more
than 50% of total tissue valve revenue in the first quarter of 2009.
Heart valve repair revenue increased 76% in the first quarter of 2009 to
$1.2 million, due to the introduction of our semi-rigid line of repair rings in
the first quarter of 2008 as well as to continued sales growth of our existing
repair ring products.
Surgical arrhythmia therapy revenue in the first quarter of 2009 of $4.9 million
increased 27% compared to the same period in the prior year. Cryotherapy
products in general and CryoMaze procedural growth in particular has benefited
from the overall growth of the surgical ablation market and increased market
acceptance of cryo-energy (cold) as a preferred technology to perform Cox-Maze
lesion sets.
Cost of Goods Sold and Gross Profit. Our first quarter 2009 gross profit
percentages of net sales improved to 66.7% from 60.3% for the same period in the
prior year.
Our first quarter 2009 gross profit has benefited significantly from lower
product manufacturing costs, particularly for mechanical heart valves. The cost
declines are attributable primarily to higher manufacturing volumes as a result
of increased demand. Lower product costs increased our first quarter 2009 gross
profit as a percentage of net sales by approximately 8.0 percentage points
compared to the first quarter of 2008. Also contributing to the higher first
quarter 2009 gross profit percentage was higher U.S. average selling prices,
attributable in large part to tissue valves, which increased our first quarter
2009 gross profit as a percentage of net sales by approximately 2.3 percentage
points compared to the first quarter of 2008.
Partially offsetting the improved first quarter 2009 gross profit percentage of
net sales were (1) shifts in the overall product mix to lower margin products,
which decreased our first quarter 2009 gross profit as a percentage of net sales
by approximately 1.5 percentage points compared to the first quarter of 2008 and
(2) lower international selling prices due to foreign currency exchange rate
changes and sales mix shifts to lower-margin countries, which had a net
unfavorable impact on our first quarter 2009 gross profit as a percentage of net
sales of approximately 2.7 percentage points compared to the same period in the
prior year.
Sales and Marketing. In the United States, our sales and marketing costs for the
first quarter of 2009 increased approximately 24% over the same period in the
prior year, to $4.9 million. The increase reflects costs for additional
marketing personnel and higher marketing program costs, particularly for our
tissue heart valve and repair ring businesses. Field selling costs in the United
States were 10% higher in the first quarter of 2009 compared to the same period
in the prior year, reflecting higher commissions and sales incentive accruals
for territory managers and independent sales representatives connected with
increased first quarter 2009 sales in the United States.
Internationally, our sales and marketing costs for the first quarter of 2009
increased approximately 2% over the same period in the prior year to
$2.6 million. The increase is attributable to our continuing investment in
international markets, evidenced by the establishment of a European support
office in Belgium during the second half of 2008 to continue the support and
expansion of our direct sales operations in Europe, offset by the impact of
declining Euro-to-U.S. dollar foreign exchange rates during 2009. Approximately
75% of our international sales and marketing costs for the first quarter of 2009
were denominated in Euros.
Research and Development. Research and development ("R & D") expenses for the
first quarter of 2009 decreased 7% compared to the same period in the prior year
to $2.0 million. The decrease reflects lower direct tissue valve R & D, lower
clinical program costs for tissue valves and prior year development and start-up
costs for surgical cryoablation manufacturing. These declines were partially
offset by higher R & D headcount and new product development costs.
General and Administrative. General and administrative ("G & A") expenses for
the first quarter of 2009 decreased $0.5 over the same period in 2008 to
$2.5 million. The primary driver behind this decline was significantly lower
legal fees ($0.8 million) after the fourth quarter 2008 settlement of the
litigation with CarboMedics. Cost increases in G & A expenses for the first
quarter of 2009 over the same period in 2008 were for compensation and benefits
($0.1 million) and other personnel-related expenditures ($0.1 million).
In the first quarters 2009 and 2008, we recognized total stock compensation
expense of $0.5 million and $0.3, respectively. Stock compensation expense has
been allocated to sales and marketing, R & D and G & A expenses as indicated
above in Note 2 of "Notes to Consolidated Financial Statements" in this Form
10-Q. The increase in stock compensation expense is attributable primarily to
new equity grants and awards, lower forfeitures and a higher number of days in
the first quarter of 2009 compared to the prior year first quarter.
Amortization of Intangibles. Amortization expense for the first quarter of 2009
decreased $0.1 million over the same period in the prior year to $0.8 million,
attributable primarily to the prior year accelerated amortization of the
trademark intangibles acquired in our 2007 purchase of the surgical cryoablation
business of CryoCath. Amortization expense for both 2009 and 2008 also includes
amortization of our pyrolytic carbon technology license with CarboMedics as well
as amortization of definite-lived intangible assets acquired in connection with
our 2006 acquisition of 3F. We estimate amortization expense for 2009 to total
approximately $3.3 million.
Net Interest Expense. Net interest expense for the first quarter of 2009
increased $0.1 million over the comparable period of the prior year, reflecting
primarily lower interest income on cash and investment balances.
Net interest expense includes interest on the $8.6 million Term Loan with
Silicon Valley Bank obtained in connection with the 2007 CryoCath asset
acquisition. See "Liquidity and Capital Resources-Financing Activities" below
for a detailed discussion of the Term Loan. Net interest expense also includes
interest on $22.4 million aggregate principal amount of 6% Convertible Senior
Notes issued in 2005. Interest expense on these Notes includes amortization of
(1) financing costs, (2) the discount related to the implied value of common
stock warrants sold with the Notes, and (3) the discounts related to the
bifurcated Convertible Senior Notes derivatives. See Note 7 of "Notes to
Consolidated Financial Statements" in this Form 10-Q for more information
regarding the Notes.
Other Income (Expense). The following table summarizes our net other income
(expense) for the first quarters of 2009 and 2008:
Quarter ended April 4 (March 29):
(in thousands) 2009 2008
Alta warrant liability gain $ - $ 1,520
Convertible Senior Notes derivative liability gain 9 15
Net realized foreign currency transaction gain (loss) (229 ) 247
Unrealized foreign currency gain (loss) related to
short-term intercompany balances with foreign subsidiaries (133 ) 136
Net other income (expense) $ (353 ) $ 1,918
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In our June 2007 private equity placement in connection with the acquisition of
the surgical cryoablation business of CryoCath, we sold to Alta 9,800,000 shares
of our common stock and a seven-year warrant to purchase up to 1,960,000 shares
of our common stock at an exercise price of $1.65 per share. The Company was
required to treat the warrant as a liability pending approval of its
shareholders at the Company's 2008 annual meeting of shareholders to provide
shares of common stock issuable to Alta upon exercise of the warrant.
Accordingly, the fair value of the warrant was recorded as a liability on the
date of issuance and marked-to-market at each quarter-end. This resulted in a
$1.5 million credit to other income recorded in the first quarter of 2008. At
the annual meeting of shareholders in May 2008, we received shareholder approval
to issue shares of our common stock upon exercise of the warrant. Consequently,
the warrant liability was marked-to-market through the date of shareholder
approval and the remaining liability was credited to additional paid-in capital.
Since 2005 we have recorded non-operating other income for the change in fair
value of the Convertible Senior Notes derivative liability. See Note 7 of "Notes
to Consolidated Financial Statements" in this Form 10-Q for more information
regarding the Notes derivative liability.
Net other income also includes net foreign currency transaction gains and
losses, including unrealized foreign currency gains and losses related to
short-term intercompany balances with our foreign subsidiaries. These gains and
losses have increased in 2008 and 2009 due to larger fluctuations in foreign
currency exchange rates.
Income Taxes. In the first quarters of both 2009 and 2008, we recognized
$0.1 million of income tax expense related to (1) deferred income taxes
connected with the deductibility of goodwill from the CryoCath acquisition for
tax purposes, but not for book purposes, and the uncertainty of the timing of
its reversal for book purposes and (2) current income taxes for our Austrian
subsidiary. In future years, we will continue recognizing deferred income tax
expense related to this goodwill over its tax life as long as there is no
impairment of the goodwill's recorded value.
Through 2008 we have accumulated approximately $161 million of net operating
loss ("NOL") carryforwards for U.S. tax purposes ($57 million related to 3F). We
believe our ability to fully utilize the existing NOL carryforwards could be
restricted on a portion of the NOL by changes in control that may have occurred
or may occur in the future and by our ability to generate net income.
We are conducting a formal study of whether, or to what extent, past changes in
control of ATS impairs our NOL carryforwards. We have recorded no net deferred
tax asset related to our NOL carryforwards and other deferred items as we
currently cannot determine that it is more likely than not that this asset will
be realized and we, therefore, have provided a valuation allowance for the
entire asset.
Net Loss. Our changes in net losses in the first quarter of 2009 compared to the
same period in 2008 were due to higher sales and gross profit, partially offset
by slightly higher operating expenses and significantly lower non-operating
income, all of which are described in detail above.
Liquidity and Capital Resources
Cash, cash equivalents, and short-term investments totaled $17.4 million and
$20.9 million at April 4, 2009 and December 31, 2008, respectively.
Operating Activities. During the first quarter of 2009, we received cash
payments from customers of approximately $17.7 million and made payments to
employees and suppliers of approximately $19.2 million. During the first quarter
of 2008, we received cash payments from customers of approximately $14.6 million
and made payments to employees and suppliers of approximately $16.0 million.
Since 2002, we have incurred significant expenses to support the
. . .
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