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| CRDC > SEC Filings for CRDC > Form 10-K on 18-Sep-2009 | All Recent SEC Filings |
18-Sep-2009
Annual Report
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes to those statements included elsewhere in this report. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under "Risk Factors" and elsewhere in this Report.
Overview
Historically, our business focused on the design, manufacture and marketing of proprietary automated anastomotic systems used by cardiac surgeons to perform coronary bypass surgery. Recently, we have expanded our business to include the development of an endoscopic microcutter intended for use by general, thoracic, gynecologic, bariatric and urologic surgeons. Unless and until this product is developed and cleared for marketing in the United States or elsewhere, or we enter into an arrangement with a development and commercialization partner that provides us with development revenue, we will have ongoing costs related thereto without related revenue. We are also developing a PFO device in collaboration with Cook Incorporated, or Cook, as described below. Our agreement with Cook related to the development of this device, described below, provides us with opportunities for potential milestone and royalty revenue.
We currently sell our C-PortŪ Distal Anastomosis Systems, or C-Port systems, in the United States and Europe. We also currently sell our PAS-PortŪ Proximal Anastomosis System, or PAS-Port system, in the United States and in Europe and Japan through distributors. The PAS-Port system is used to perform a proximal anastomosis, which is the connection of a bypass graft vessel to the aorta or other source of blood. We received 510(k) clearance to market our PAS-Port system in the United States in September 2008. As of June 30, 2009, more than 14,000 PAS-Port systems had been sold in the United States, Europe and Japan. In addition to our commercialized cardiac surgery products, we have commenced development of the Cardica Microcutter, a multi-fire endolinear microcutter device based on our proprietary "staple-on-a-strip" technology, which would expand our commercial opportunity into additional surgical markets. We are in discussions with multiple potential development and commercialization partners to advance further development of the Cardica Microcutter and other potential products in this product line, and we may enter into an arrangement to pursue further development of this product with a partner.
We are in the process of adding independent distributors and manufacturers' representatives to support a core direct sales team for our C-Port systems and PAS-Port system in the United States to contain sales costs while continuing to serve our customers and potential customers for our automated anastomosis product line. We are shifting our development efforts to focus on our endoscopic microcutter.
We manufacture our cardiac products, our C-Port systems and PAS-Port systems with parts we manufacture and components supplied by vendors, which we then assemble, test and package. For fiscal year 2009, we generated net revenue of $9.9 million, including $3.0 million of development revenue, and incurred a net loss of $17.2 million.
Since our inception, we have incurred significant net losses, and we expect to continue to incur net losses for the foreseeable future. To date, our C-Port and PAS-Port systems have had limited commercial adoption, and sales have not met the levels that we had anticipated. Revenues from product sales and milestone payments were not sufficient to support the operation of our business as we had planned. As a result, in order to reduce our operating expenses, in January, April and May 2009, we reduced our costs by eliminating 13, 22 and 15 positions, respectively, which impacted all functional areas, including research and development, sales and marketing, clinical, regulatory and quality, operations and general and administrative. We expect these reductions in force to impair our ability to continue sales at current or increased levels. We are continuing to evaluate potential additional steps to reduce our operating expenses. We are also seeking to raise additional funds. If adequate funds are not available or revenues from product sales do not increase, we may be required to delay, further reduce the scope of or eliminate our commercialization efforts with respect to one or more of our products or one or more of our research and development programs.
As of June 30, 2009, we had cash and cash equivalents of $5.3 million and total short-term debt of $2.0 million. We believe that our existing cash and cash equivalents, along with the cash that we expect to generate from operations, will be sufficient to meet our anticipated cash needs to enable us to conduct our business substantially as currently conducted through December 31, 2009. Accordingly, our financial statements for the fiscal year ended June 30, 2009, included in this Annual Report on Form 10-K contain a going concern qualification from our independent registered public accounting firm. Our estimates and our future capital requirements depend upon numerous factors. In addition, we have based our estimates on assumptions that may prove to be wrong, including assumptions with respect to the level of revenues from product sales, and we could exhaust our available financial resources sooner than we currently expect. While our cash resources would permit us to continue through December 31, 2009, we would need to further reduce expenses in advance of that date in the event that we are unable to complete a financing, strategic or commercial transaction in the near term to ensure that we have sufficient capital to meet our obligations and continue on a path designed to create and preserve stockholder value. The sufficiency of our current cash resources and our need for additional capital, and the timing thereof, will depend on many factors, including primarily the extent of our sales and marketing efforts related to our commercialized products and the amount of revenues that we receive from product sales, as well as other factors described in the "Liquidity and Capital Resources" section below.
We are currently seeking a range of financing and strategic alternatives and have engaged Allen & Company LLC to help us evaluate our strategic alternatives. A member of our Board of Directors, John Simon, is a Managing Director at Allen & Company LLC. We may seek to sell additional equity or debt securities, obtain a credit facility, enter into product development, license or distribution agreements with third parties or divest one or more of our commercialized products or products in development. The sale of additional equity or convertible debt securities could result in significant dilution to our stockholders, particularly in light of the prices at which our common stock has been recently trading. In addition, if we raise additional funds through the sale of equity securities, new investors could have rights superior to our existing stockholders. If additional funds are raised through the issuance of debt securities, these securities could have rights senior to those associated with our common stock and could contain covenants that would restrict our operations. Any product development, licensing, distribution or sale agreements that we enter into may require us to relinquish valuable rights, including with respect to commercialized products or products in development that we would otherwise seek to commercialize or develop ourselves. We believe that the general economic and credit market crisis have created a more difficult environment for obtaining equity and debt financing or strategic transactions, and we may not be able to obtain sufficient additional financing or enter into a strategic transaction in a timely manner. Our need to raise capital soon may require us to accept terms that may harm our business or be disadvantageous to our current stockholders, particularly in light of the current illiquidity and instability in the global financial markets.
Agreements with Cook Incorporated
In June 2007, we entered into, and in September 2007 and in June 2009 amended, a license, development and commercialization agreement with Cook Incorporated, or Cook, to develop and commercialize a specialized device, referred to as the PFO device, designed to close holes in the heart from genetic heart defects known as patent foramen ovales, or PFOs. Under the agreement, Cook funds certain development activities and we and Cook jointly develop the device. Once developed, Cook receives an exclusive, worldwide, royalty-bearing license, with the right to grant sublicenses, to make, have made, use, sell, offer for sale and import the PFO device. Under this agreement, we have received payments totaling $1.0 million, $1.7 million and $500,000 in fiscal years 2009, 2008 and 2007, respectively. We recorded as development revenue under the agreement a total of $1.4 million and $1.2 million in fiscal years 2009 and 2008, respectively, and none in fiscal year 2007. A total of $527,000 under this agreement has been recorded as deferred development revenue on the balance sheet as of June 30, 2009. We are also entitled to receive from Cook up to a total of an additional $275,000 in future payments if development milestones under the agreement are achieved. We are also entitled to receive a royalty based on Cook's annual worldwide sales of the PFO device, if any.
On December 9, 2005, we entered into, and in September 2007 amended and in July 2009 amended and partially terminated, an agreement with Cook to develop the Cook Vascular Closure Device. Under the agreement, Cook funded certain development activities, and we and Cook jointly developed the device, under the direction of a
Development Committee that included representatives from each party. Under the original agreement and the first amendment in September 2007, Cook received an exclusive, worldwide, royalty-bearing license, with the right to grant sublicenses, to make, have made, use, sell, offer for sale and import the Cook Vascular Closure Device for medical procedures in any part of the body. Under this agreement, we received payments totaling approximately $5.3 million, including $1.0 million, $1.5 million, $1.8 million and $1.0 million in fiscal years 2009, 2008, 2007 and 2006, respectively. We recorded as development revenue under the agreement a total of $1.6 million, $1.4 million and $1.4 million for fiscal years 2009, 2008 and 2007, respectively. In July 2009, we entered into a partial termination and second amendment of this agreement to terminate Cook's participation in the project and to provide to Cook a royalty on net sales of the Cook Vascular Closure Device if Cardica successfully commercializes the product. The remaining deferred revenue balance was recognized as revenue in the fourth quarter of fiscal 2009 as we had completed all of our activities under the agreement and no amounts are refundable to Cook under the partial termination agreement. In addition, during fiscal year 2009, we recognized a total of $251,000 of product sales to Cook of the Cook Vascular Closure Device.
Deficiency letter from The NASDAQ Global Market
On May 22, 2009, we announced that we received a letter, dated May 19, 2009, from the Listing Qualifications Department of The NASDAQ Stock Market notifying us that we did not comply with the $10.0 million minimum stockholders' equity requirement for continued listing on The NASDAQ Global Market set forth in NASDAQ Marketplace Rule 5450(b)(1)(A). NASDAQ's determination was based on a review of our Quarterly Report on Form 10-Q for the period ended March 31, 2009. As provided in the NASDAQ rules, we timely submitted to the NASDAQ Staff a plan to continue listing on The NASDAQ Global Market. NASDAQ granted us an extension until September 1, 2009, to regain compliance with the listing standards.
On September 2, 2009, we received a second letter from the Listing Qualifications Department of The NASDAQ Stock Market notifying us of its determination that we had failed to meet the terms of the extension because we failed to publicly disclose a compliant stockholders' equity balance by September 1, 2009. Pursuant to the NASDAQ rules we appealed the decision to a NASDAQ Listing Qualifications Panel and requested a hearing. The hearing is scheduled for October 15, 2009. Our common stock will remain listed on The NASDAQ Global Market pending a decision by the Panel following the hearing.
In the event we are unable to otherwise satisfy the continued listing criteria of The NASDAQ Global Market and our appeal is denied we may apply for listing on The NASDAQ Capital Market. We believe that we currently meet the listing requirements of that market, including the requirement to have a minimum of $1.0 million in stockholders' equity. Even if we are able to regain compliance with the listing requirements of The NASDAQ Global Market, there is no assurance that in the future we will continue to satisfy such listing requirements, with the result that our common stock may be delisted from that market and we may not meet the listing requirements of The NASDAQ Capital Market at such time.
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of our financial condition and results of operations are based on our financial statements which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of our financial statements requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results could differ materially from those estimates.
We believe that the following critical accounting policies to be the most critical to an understanding of our financial statements because they require us to make significant judgments and estimates that are used in the preparation of our financial statements.
Revenue Recognition. We recognize revenue in accordance with SEC Staff
Accounting Bulletin, or SAB, No. 104, "Revenue Recognition." SAB No. 104
requires that four basic criteria must be met before revenue can be recognized:
(1) persuasive evidence of an arrangement exists; (2) title has transferred;
(3) the fee is fixed or determinable; and (4) collectibility is reasonably
assured. We generally use contracts and customer purchase orders to determine
the existence of an arrangement. We use shipping documents and third-party proof
of delivery to verify
that title has transferred. We assess whether the fee is fixed or determinable based upon the terms of the agreement associated with the transaction. To determine whether collection is probable, we assess a number of factors, including past transaction history with the customer and the creditworthiness of the customer. If we determine that collection is not reasonably assured, then the recognition of revenue is deferred until collection becomes reasonably assured, which is generally upon receipt of payment.
We record product sales net of estimated product returns and discounts from the list prices for our products. The amounts of product returns and the discount amounts have not been material to date. We include shipping and handling costs in cost of product sales.
Revenue generated from development contracts is recognized when it is earned and non-refundable upon receipt of milestone payments or upon incurrence of the related development expenses in accordance with contractual terms, based on the actual costs incurred to date plus overhead costs for certain project activities. Amounts paid but not yet earned on the project are refundable and are recorded as deferred revenue until such time as the related development expenses are incurred.
Inventory. We state our inventories at the lower of cost (computed on a standard cost basis, which approximates actual cost on a first-in, first-out basis) or market. Standard costs are monitored on a quarterly basis and updated as necessary to reflect changes in raw material costs and labor and overhead rates. Inventory write-downs are established when conditions indicate that the selling price could be less than cost due to physical deterioration, usage, obsolescence, reductions in estimated future demand or reductions in selling prices. Inventory write-downs are measured as the difference between the cost of inventory and estimated market value. Inventory write-downs are charged to cost of product sales and establish a lower cost basis for the inventory. We balance the need to maintain strategic inventory levels with the risk of obsolescence due to changing technology and the risk of lower customer demand levels. While we believe the current value of inventories represents all known and estimated changes in demand, we have recently experienced reduced demand for our C-Port systems and further unfavorable changes in market conditions may result in a need for additional inventory write-downs that could adversely impact our financial results.
Clinical Trial Accounting. Clinical trial costs are a component of research and development expenses and include fees paid to participating hospitals and other service providers that conduct clinical trial activities with patients on our behalf and the cost of clinical trial insurance. The various costs of the trial are contractually based on the nature of the services, and we accrue the costs as the services are provided. Accrued costs are based on estimates of the work completed under the service agreements, patient enrollment and past experience with similar contracts. Our estimate of the work completed and associated costs to be accrued, includes our assessment of information received from our third-party service providers and the overall status of our clinical trial activities. If we have incomplete or inaccurate information, we may underestimate costs associated with various trials at a given point in time. Although our experience in estimating these costs is limited, the difference between accrued expenses based on our estimates and actual expenses have not been material to date.
Stock-Based Compensation. During fiscal year 2006, we adopted Statement of Financial Accounting Standards, or SFAS, No. 123R, "Share-Based Payment", which revises SFAS No. 123. Under SFAS No. 123R stock-based compensation cost is measured on the grant date, based on the fair value of the award, and is recognized as an expense over the employee requisite service period. Prior to the adoption of SFAS No. 123R, we accounted for stock-based employee compensation arrangements using the intrinsic value method in accordance with the provisions of Accounting Principles Board, or APB, Opinion No. 25,"Accounting for Stock Issued to Employees" and its interpretations. We adopted SFAS No. 123R applying the "prospective method" under which we will continue to account for nonvested equity awards outstanding at the date of adoption of SFAS No. 123R in the same manner as they had been accounted for prior to adoption, that is, we will continue to apply APB No. 25 in future periods to equity awards outstanding at the date we adopted SFAS No. 123R.
The expected term of options granted under SFAS No. 123R is determined using the "simplified" method allowed by SAB No. 107, as extended by SAB No. 110. Under this approach, the expected term is presumed to be the mid-point between the vesting date and the end of the contractual term. Since the Company has limited historical data on volatility of its stock, the expected volatility is based on volatility of similar entities (referred to as "guideline" companies). In evaluating similarity, the Company considered factors such as industry, stage of life
cycle, size, and financial leverage. The risk-free interest rate for periods within the contractual life of the option is based on a risk-free zero-coupon spot interest rate at the time of grant. We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. SFAS No. 123R requires us to estimate forfeitures in calculating the expense related to stock-based compensation. We recognize stock-based compensation expense for options and restricted stock awards using the accelerated method over the requisite service period of the award, which generally equals the vesting period of each grant. We recorded stock-based compensation expense under SFAS 123R of $1.6 million, or $0.10 per share, $1.4 million, or $0.09 per share, and $561,000, or $0.05 per share for fiscal years 2009, 2008 and 2007, respectively. Total compensation expense related to unvested awards not yet recognized is approximately $1.4 million at June 30, 2009 and is expected to be recognized over a weighted average period of 2.5 years.
Prior to the adoption of SFAS No. 123R, certain stock options were granted with exercise prices that were below the estimated fair value of the common stock at the date of grant. We recorded deferred stock-based compensation, net of cancellations due to terminated employees, of $1.0 million in fiscal year 2006, in accordance with APB No. 25, and will amortize this amount on a straight-line basis over the related vesting period of the options. We recorded employee stock-based compensation expense associated with the amortization of deferred stock compensation of $254,000, $307,000 and $353,000 for fiscal years 2009, 2008 and 2007, respectively. The total unamortized deferred stock compensation recorded for all option grants as of June 30, 2009 of $22,000 is expected to be fully amortized in fiscal year 2010.
Results of Operations
Comparison of Fiscal Years ended June 30, 2009 and 2008
Net revenue. Net revenue increased $2.3 million, or 31%, to $9.9 million in fiscal year 2009 compared to $7.6 million in fiscal year 2008.
Net product sales increased $1.9 million, or 38%, to $6.8 million in fiscal year 2009 from $4.9 million in fiscal year 2008. The increase in product sales for the fiscal year ended June 30, 2009 was primarily the result of the introduction of our PAS-Port system in the United States. Product sales for the fiscal year ended June 30, 2008 did not include any PAS-Port system sales in the United States as the system was not cleared by the FDA until September 2008. In the fourth quarter of fiscal year 2009, total revenue was $2.0 million compared to $2.8 million in the fourth quarter of fiscal year 2008. The lower sales for the fourth quarter of fiscal year 2009 were due primarily to lower product sales caused by the reductions in force in April and May which included a significant number of our direct sales force as well as our Vice President of Sales and Marketing. In addition, in the third quarter of fiscal year 2009 we received low orders from our distributor in Japan and did not receive a significant order in the fourth quarter for Japan. We are transitioning to a sales force made up primarily of independent manufacturers' representatives and distributors. The new sales representatives need to be recruited and trained and future quarterly product sales may be lower than comparable quarters until we complete this transition period.
For fiscal years 2009 and 2008, sales to Century Medical, Inc., our distributor in Japan, accounted for approximately 15% and 20%, respectively, of our total product sales.
Development revenue was $3.0 million and $2.6 million in fiscal years 2009 and 2008, respectively. The 2009 total was comprised of $1.4 million for development activities for the PFO device under a development agreement with Cook that we entered into in June 2007, and $1.6 million for development activities for the Cook Vascular Closure Device under a separate development agreement with Cook.
Cost of product sales. Cost of product sales consists primarily of material, labor and overhead costs. Cost of product sales increased $533,000, or 11%, to $5.3 million in fiscal year 2009 from $4.8 million in fiscal year 2008.
The increase in cost of product sales in fiscal year 2009 compared to fiscal year 2008 was primarily attributable to increased unit sales of all of our products worldwide, due primarily to increased adoption of PAS-Port systems in the United States, of $513,000, an excess reserve on C-Port raw materials of $248,000, and higher production scrap expense of $112,000 for the PAS-Port system; offset in part by lower warranty charges of $144,000, and decreased lower of cost or market reserves of $162,000.
Our cost of product sales was 79% and 97% of our net product sales in fiscal years 2009 and 2008, respectively due to lower overhead and higher volumes mix. We expect high cost of product sales to continue for the foreseeable future.
Research and development expense. Research and development expense consists primarily of personnel costs within our product development, regulatory and clinical groups and the costs of clinical trials. Research and development expense decreased $392,000, or 5%, to $8.2 million in fiscal year 2009 from $8.6 million in fiscal year 2008.
The net decrease in research and development expense in fiscal year 2009 compared to fiscal year 2008 was attributable to a decrease in salaries and benefits of $232,000 due primarily to a net decrease in the number of personnel, decreased prototype project materials for the C-Port xV and Cook projects of $414,000, lower non-cash stock-based compensation expenses of $84,000 and lower clinical trial expense of $223,000 as a result of completing the PAS-Port trials, offset by higher molds and tooling expenses of $475,000 related to retirement of certain assets for the C-Port xV System, which is no longer under development since the C-Port X-CHANGE II System performs a comparable function while offering additional features and has nearly caught up to the C-Port xV System in development, and higher facilities costs of $71,000 .
We anticipate that research and development expenses will decrease in absolute terms in fiscal year 2010 due to the restructuring and reductions in headcount completed in January to May 2009.
Selling, general and administrative expense. Selling, general and administrative expense consists primarily of costs for administrative and sales and marketing personnel, intellectual property and marketing expenses. Selling, general and administrative expense increased $457,000, or 3%, to $13.6 million in fiscal year 2009 from $13.2 million in fiscal year 2008.
The net increase in selling, general and administrative expense in fiscal year 2009 compared to fiscal year 2008 was attributable to higher sales and marketing expenses to support field sales activities in the United States to sell C-Port systems and PAS-Port systems, including increased salaries and benefits of $861,000, higher non-cash stock-based compensation expenses of $156,000, higher recruiting fees of $111,000 due to the expansion of the sales force and higher product demonstration and trade show expense of $129,000, offset in part by lower accounting and auditing fees of $119,000 primarily related to our change in filing status to be a non-accelerated filer, and lower legal expense of $658,000 due to lower litigation expense in fiscal 2009 based on the settlement reached in fiscal year 2008.
We expect selling, general and administrative expense to decrease in absolute terms in fiscal year 2010 due to the restructuring and reductions in headcount completed in January to May 2009.
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