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| ELGX > SEC Filings for ELGX > Form 10-Q on 2-Nov-2009 | All Recent SEC Filings |
2-Nov-2009
Quarterly Report
In addition to the historical financial information included herein, this
Quarterly Report on Form 10-Q includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, that are based
on management's beliefs, as well as on assumptions made by and information
currently available to management. All statements other than statements of
historical fact included in this Quarterly Report on Form 10-Q, including
without limitation, statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and statements located elsewhere
herein regarding our financial position and business strategy, may constitute
forward-looking statements. You generally can identify forward-looking
statements by the use of forward-looking terminology such as "believes," "may,"
"will," "expects," "intends," "estimates," "anticipates," "plans," "seeks," or
"continues," or the negative thereof or variations thereon or similar
terminology although not all forward-looking statements contain these words.
Such forward-looking statements involve known and unknown risks, including, but
not limited to, market acceptance of our Powerlink® System and related products,
economic and market conditions, estimates regarding patient populations, number
of procedures performed and market statistics, the regulatory environment in
which we operate, the impact of litigation, the availability of third party
payor medical reimbursements, competitive activities or other business
conditions. Our actual results, performance or achievements may differ
materially from any future results, performance or achievements expressed or
implied from such forward-looking statements. Important factors that could cause
actual results to differ materially from our expectations are disclosed in our
Annual Report on Form 10-K for the year ended December 31, 2008, including but
not limited to those factors discussed in "Management's Discussion and Analysis
of Financial Condition and Results of Operations," "Risk Factors," "Consolidated
Financial Statements" and "Notes to Consolidated Financial Statements." All
subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by these
cautionary statements. We expressly disclaim any intent or obligation to update
information contained in any forward-looking statement after the date hereof to
conform such information to actual results or to changes in our opinions or
expectations.
Overview
Our Business
We develop, manufacture, market and sell innovative treatments for aortic disorders. Our principal product, the Powerlink® System, is a minimally invasive device for the treatment of abdominal aortic aneurysm, or AAA. AAA is a weakening of the wall of the aorta, the largest artery of the body. Once AAA develops, it continues to enlarge and if left untreated becomes increasingly susceptible to rupture. The overall patient mortality rate for ruptured AAAs is between 50% and 80%, making it a leading cause of death in the United States today.
The Powerlink System is a catheter and endoluminal stent graft, or ELG, system. The device consists of a self-expanding cobalt chromium alloy stent cage covered by ePTFE, a common surgical graft material. The Powerlink ELG is implanted in the abdominal aorta, which is accessed through the femoral artery. Once the Powerlink ELG is deployed into its proper position, blood flow is shunted away from the weakened or "aneurismal" section of the aorta, reducing pressure and the potential for the aorta to rupture. Our clinical trials demonstrated that implantation of our products reduces the mortality and morbidity rates associated with conventional AAA surgery, as well as provides a clinical alternative for many patients who could not undergo conventional surgery. Sales of our Powerlink System in the United States, Europe, Asia, and South America are the primary source of our reported revenues.
In February 2008, Cosmotec Co., Ltd., or Cosmotec, our distributor in Japan, obtained Shonin approval to market the Powerlink System from the Japanese Ministry of Health. Shonin is equivalent to the U.S. Food & Drug Administration, or FDA, approval of a premarket approval, or PMA, application in the United States. We commenced commercial sales to Japan in February 2008 through Cosmotec.
We continue to conduct clinical trials for other products related to the Powerlink System. All the required 63 patients have been enrolled in a clinical trial for a 34mm infrarenal bifurcated device designed to treat patients with large aortic necks.
Results of Operations
Comparison of the Three Months Ended September 30, 2009 and 2008
Revenue. Revenue increased 47% to $13.8 million in the three months ended September 30, 2009 from $9.4 million in the three months ended September 30, 2008. Domestic sales increased 40% to $11.3 million in the three months ended September 30, 2009 from $8.1 million in the three months ended September 30, 2008. The increase in domestic sales was primarily due to increased productivity of our sales representatives, as well as the introduction of two new Powerlink System products in the fourth quarter of 2008 and the marketing of IntuiTrak, our new system to deliver and deploy the Powerlink System, in the first quarter of 2009.
International sales increased 91% to $2.5 million in the three months ended September 30, 2009 from $1.3 million for the comparable period in the prior year. This increase was driven primarily by the introduction of IntuiTrak through limited release to some of our international distributors, higher sales to Cosmotec in Japan and various distributors in South America due to greater market acceptance, and an initial stocking order from our distributor in China.
We anticipate that revenue for the full year ending December 31, 2009, will be between $51.0 and $53.0 million.
Cost of Revenue. The cost of revenue increased 49% to $3.7 million in the three months ended September 30, 2009 from $2.5 million in the three months ended September 30, 2008, due to an increase in the volume of Powerlink System sales. As a percentage of product revenue, cost of product revenue increased to 27% in the third quarter of 2009 as compared to 26% in the same period of 2008. The percentage increase in the cost of product revenue was due to a higher international to domestic sales mix in the products sold during the period, offset by favorable product mix due to new product introductions, and certain product cost efficiencies due to higher volume.
We believe that gross profit will increase in the last quarter of 2009 due to the expected higher commercial sales of the Powerlink System both in and outside of the United States. We also expect gross profit as a percentage of product revenue to increase modestly relative to the first nine months of 2009 due to expected continued effect of the positive factors mentioned above.
Research, Development and Clinical. Research, development and clinical expense increased 15% to $1.6 million in the three months ended September 30, 2009 from $1.4 million for the three months ended September 30, 2008. This increase was due to additional headcount added during the period as we increased our efforts in the development of product improvements and new products.
We expect that research, development, and clinical expense will increase sequentially in the remaining quarter of 2009 as we pursue opportunities to develop additional new products for the treatment of aortic disorders.
Marketing and Sales. Marketing and sales expense increased 9% to $6.6 million in the three months ended September 30, 2009 from $6.1 million in the three months ended September 30, 2008. The increase in the third quarter of 2009 resulted primarily from higher commission expense on the 40% increase in domestic sales between those periods.
We anticipate that marketing and sales expense will increase sequentially at a moderate rate for the remaining quarter of 2009 due to the expected addition of four additional sales territories, the higher compensation associated with the anticipated sales growth, and the addition of management staff in the fourth quarter.
General and Administrative. General and administrative expense decreased 16% to $2.0 million in the three months ended September 30, 2009 from $2.4 million in the three months ended September 30, 2008. The decrease is primarily due to the resolution in the second half of 2008 of certain legal matters which were ongoing during the third quarter of 2008.
We expect general and administrative expenses to be in the $2.1 million to $2.3 million range for the remaining quarter of 2009, exclusive of legal fees likely to be incurred due to the patent infringement suit initiated by Cook in October 2009.
Other Expense. Other expense increased to $34,000 in the three months ended September 30, 2009 from $1,000 in the same period of 2008 due to interest expense on the greater time weighted average bank debt outstanding in the 2009 period. We do not expect to incur any significant interest expense in the remaining quarter of 2009.
Comparison of the Nine Months Ended September 30, 2009 and 2008
Revenue. Revenue increased 44% to $38.8 million in the nine months ended September 30, 2009 from $27.0 million in the nine months ended September 30, 2008. Domestic sales increased 44% to $32.9 million in the nine months ended September 30, 2009 from $22.8 million in the nine months ended September 30, 2008. The increase in domestic sales was due to the increased productivity of our sales force, the introduction of new products including Powerlink XL, Powerlink XL Express, and the IntuiTrak delivery system, and increased physician acceptance of the Powerlink System.
International sales increased 42% to $5.9 million in the nine months ended September 30, 2009 from $4.1 million for the comparable period in the prior year. This increase was driven primarily by the introduction of IntuiTrak through limited release to some of our international distributors. Additionally, we had higher sales to our distributors in South America and Japan and an initial stocking order to our distributor in China.
License Revenue. License revenue was $33,000 for the nine months ended September 30, 2008. The minimum royalty provision of our licensing agreement with Abbott Laboratories expired at December 31, 2007 and the license was fully paid up at June 30, 2008.
Cost of Revenue. The cost of revenue increased 30% to $9.8 million in the nine months ended September 30, 2009 from $7.5 million in the nine months ended September 30, 2008, due to an increase in the volume of Powerlink System sales. As a percentage of product revenue, cost of product revenue decreased to 25% in the nine months ended September 30, 2009 from 28% in the same period of 2008. The percentage decline in the cost of product revenue was due to a favorable product mix due to new product introductions and certain product cost efficiencies due to higher volume.
Research, Development and Clinical. Research, development and clinical expense decreased 5% to $4.5 million in the nine months ended September 30, 2009 as compared to $4.7 million for the nine months ended September 30, 2008. This decline was due to a reduction of costs associated with our clinical trials.
Marketing and Sales. Marketing and sales expense increased 10% to $19.8 million in the nine months ended September 30, 2009 from $18.0 million in the nine months ended September 30, 2008. The increase in the first three quarters of 2009 resulted primarily from variable commission payments on the 44% increase in domestic sales between those periods.
General and Administrative. General and administrative expense decreased 13% to $6.3 million in the nine months ended September 30, 2009, from $7.3 million in the nine months ended September 30, 2008. The decrease was primarily due to $700,000 in costs associated with our chief executive officer succession, which occurred in May 2008, and significant legal fees, as previously discussed, in the nine months ended September 30, 2008, offset by higher stock based compensation charges and incentive compensation accruals based on performance metrics for the nine months ended September 30, 2009.
Other Income/(Expense), Net. Other income/(expense) decreased 196% to ($133,000) in the nine months ended September 30, 2009, from $139,000 in the same period of 2008. The decrease in other income/(expense) is primarily due to interest expense on the term loan and revolving line of credit with SVB in the 2009 period, and the loss in value of our investment in Cianna Medical, partially offset by a gain in foreign currency exchange.
Liquidity and Capital Resources
For the nine months ended September 30, 2009, we incurred net losses of $1.8 million. As of September 30, 2009, we had an accumulated deficit of approximately $145.5 million. Historically, we have relied on the sale and issuance of equity securities to provide a significant portion of funding for our operations. In August 2009, we completed a sale of our common stock that resulted in net proceeds of approximately $14.7 million.
In February 2007, we entered into a credit facility with Silicon Valley Bank, or SVB, whereby we may borrow up to $5.0 million under a revolving line of credit. All outstanding amounts under the revolving line of credit bear interest at a variable rate equal to the lender's prime rate plus 0.5%, which is payable on a monthly basis. The unused portion is subject to an unused revolving line facility fee, payable quarterly, in arrears, on a calendar year basis, in an amount equal to one quarter of one percent per annum of the average unused portion of the revolving line of credit, as determined by SVB. The credit facility is collateralized by all of our assets with the exception of our intellectual property. All amounts owing under the revolving line of credit become due and payable in July 2010. In September 2008, we drew down $2.0 million. As of September 30, 2009, we re-paid the principal balance of $2.0 million and all accrued interest, leaving $0 in outstanding borrowings under the revolving line of credit.
In July 2008, we entered into an amendment to the credit facility which added a term loan whereby we may borrow up to $3.0 million. In September 2008, we drew the entire $3.0 million available under the term loan. Interest on the term loan is calculated at a variable rate equal to the lender's prime rate plus 1.0%, which is payable on a monthly basis. The term loan principal is due in 36 monthly installments which began in April 2009. We made principal payments of $2.8 million and $3.0 million during the three and nine months ended September 30, 2009, respectively. As of September 30, 2009, we re-paid all outstanding principal and interest, leaving $0 in outstanding borrowings under the term loan.
The credit facility contains negative covenants regarding the operation of our business and financial covenants, including a covenant requiring us to maintain a tangible net worth of $21.0 million. As of September 30, 2009, our tangible net worth was $31.1 million. If we are not able to maintain compliance with our financial covenants, certain terms of the revolving line of credit and term loan will change, including an increase in the applicable interest rate and a limitation on the amounts available for borrowing under the credit facility based on eligible accounts receivable. Further, if we do not maintain a tangible net worth of at least $20.5 million, we will be in default under the credit facility which could allow SVB to accelerate the repayment of the indebtedness under the credit facility. As of September 30, 2009, we were in complete compliance with all of our covenants under the credit facility.
In October 2009, we terminated our existing credit facility with SVB and entered into a revolving credit facility with Wells Fargo Bank, National Association, or Wells, whereby we may borrow up to $10.0 million. All outstanding amounts under the credit facility bear interest at a variable rate equal to the greater of 90 day LIBOR, the federal funds rate, or the lender's prime rate, plus 1.25%, which is payable on a monthly basis. The unused portion is subject to an unused revolving line facility fee, payable quarterly, in arrears, on a calendar year basis, in an amount equal to 0.2% per annum of the average unused portion of the revolving line, as determined by Wells. The credit facility also contains customary covenants regarding operations of our business and financial covenants relating to ratios of current assets to current liabilities and tangible net worth during any calendar quarter and is collateralized by all of our assets with the exception of our intellectual property. All amounts owing under the credit facility will become due and payable on April 30, 2012. As of October 30, 2009, we did not have any outstanding borrowings under this credit facility.
At September 30, 2009, we had cash and cash equivalents of $21.1 million. In the nine months ended September 30, 2009, we generated $3.0 million of positive cash flow from operations. We believe that our current cash balance, in combination with cash flows from operations and borrowings available under our credit facility, will be sufficient to meet anticipated cash needs for operating and capital expenditures for the foreseeable future. If we do not realize expected revenue and gross profit margin levels, or if we are unable to manage our operating expenses in line with our revenues, or if we cannot maintain our days sales outstanding accounts receivable level, we may not continue to achieve positive cash flow from operations, in which case we may need to obtain additional financing.
We believe that the future growth of our business will depend upon our ability to successfully develop new technologies for the treatment of aortic disorders and bring these technologies to market, and to increase the size and productivity of our direct sales force. In order to achieve these objectives, we may need to seek additional sources of financing. In the event that we require additional funding, we will attempt to raise the required capital through either debt or equity arrangements.
The timing and amount of our future capital requirements will depend on many factors, including:
• the need for additional capital to fund future development programs or sales force expansion;
• our requirements for additional facility space or manufacturing capacity;
• our requirements for additional information technology infrastructure and systems; and
• adverse outcome(s) from current or future litigation and the cost to defend such litigation.
If we are required to obtain additional financing, we may not be able to do so on acceptable terms, if at all. Even if we are able to obtain such financing it may cause substantial dilution for our stockholders, in the case of an equity financing, or may contain burdensome restrictions on the operations of our business, in the case of debt financing.
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