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| NMTI > SEC Filings for NMTI > Form 10-Q on 5-Nov-2009 | All Recent SEC Filings |
5-Nov-2009
Quarterly Report
The following discussion of the financial condition and results of operations of our Company should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2008. Matters discussed in this Quarterly Report on Form 10-Q and in our public disclosures, whether written or oral, relating to future events or our future performance, including any discussion, express or implied, of our anticipated growth, operating results, future earnings per share, plans and objectives, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are often identified by the words "believe", "plans", "estimate", "project", "target", "continue", "intend", "expect", "future", "anticipates", and similar expressions that are not statements of historical fact. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Our actual results and timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q and in our other public filings with the Securities and Exchange Commission, or the SEC. It is routine for internal projections and expectations to change as the year or each quarter in the year progresses, and therefore it should be clearly understood that all forward-looking statements and the internal projections and beliefs upon which we base our expectations included in this Quarterly Report on Form 10-Q are made only as of the date of this Quarterly Report on Form 10-Q and may change. While we may elect to update forward-looking statements at some point in the future, we do not undertake any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.
CRITICAL ACCOUNTING POLICIES
Certain of our accounting policies are particularly important to the portrayal and understanding of our financial position and results of operations and require the application of significant judgment by our management. As a result, these policies are subject to an inherent degree of uncertainty. In applying these policies, we use our judgment in making certain assumptions and estimates. Our critical accounting policies, which consist of revenue recognition, accounts receivable reserves, inventories, expenses associated with clinical trials, share-based compensation and fair value measurements of marketable securities are described in our Annual Report on Form 10-K for the year ended December 31, 2008, or are described below. There have been no material changes to our critical accounting policies in the quarter ended September 30, 2009.
Fair Value Measurements of Marketable Securities
In determining the fair value of our marketable securities, we consider the level of market activity and the availability of prices for the specific security that we hold. If a security is traded in an active market and prices are regularly and readily available ("Level 1 inputs"), valuation of these securities does not entail a significant degree of judgment. When using Level 1 inputs, we do not adjust the market price for such instruments, even in situations where we hold a large position and a sale could reasonably impact the market price. If we conclude that the market is not active for the identical security we hold, we evaluate various observable data points ("Level 2 inputs") for the identical security or similar securities in developing the fair value estimates. The identification of similar securities requires some level of judgment. We use quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency to develop our initial value. We also access publicly available market activity from third party databases and credit ratings of the issuers of the securities we hold to corroborate the data used in the fair value calculations obtained from our primary source. We then apply judgment to ensure the fair value is reflective of any credit rating degradation of the issuer or recent marketplace activity. Adjustments to the Level 2 inputs, which are primarily to reflect the volume and level of activity in the markets for the similar securities compared to the security we hold, are evaluated for significance to the overall fair value measurement. We do not have any securities for which the fair value is determined using Level 3 inputs.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 2008
The following table presents consolidated statements of operations information as a reference for management's discussion and analysis which follows thereafter. This table presents dollar and percentage changes for each listed line item for the three months ended September 30, 2009 compared to the three months ended September 30, 2008, as well as consolidated statements of operations information as a percentage of product sales for such periods.
Three Months Ended Increase
September 30, (Decrease) % Change
2009 % 2008 % 2008 to 2009 2008 to 2009
(In thousands, except percentages)
Product sales $ 3,003 100.0% $ 4,154 100.0% $ (1,151) (27.7)%
Costs and expenses:
Cost of product sales 1,195 39.8% 1,546 37.2% (351) (22.7)%
Research and development 2,010 66.9% 2,877 69.3% (867) (30.1)%
General and administrative 1,391 46.3% 2,106 50.7% (715) (34.0)%
Selling and marketing 1,275 42.5% 1,977 47.6% (702) (35.5)%
Total costs and expenses 5,871 195.5% 8,506 204.8% (2,635) (31.0)%
Loss from operations (2,868) (95.5)% (4,352) (104.8)% 1,484 (34.1)%
Other income (expense):
Currency transaction gain (loss) 11 0.4% (142) (3.4)% 153 (107.7)%
Interest income 7 0.2% 159 3.8% (152) (95.6)%
Total other income, net 18 0.6% 17 0.4% 1 5.9%
Loss before income taxes (2,850) (94.9)% (4,335) (104.4)% 1,485 (34.3)%
Income tax expense 9 0.3% 16 0.4% (7) (43.8)%
0.0%
Net loss $ (2,859) (95.2)% $ (4,351) (104.7)% $ 1,492 (34.3)%
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REVENUES
THREE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 2008
Increase
Three Months Ended September 30, (Decrease) % Change
2009 2008 2008 to 2009 2008 to 2009
(In thousands, except percentages)
Product sales:
CardioSEAL®, STARFlex® and
BioSTAR ®:
North America $ 2,308 $ 3,021 $ (713) (23.6)%
Rest of world 695 1,133 (438) (38.7)%
Total product sales $ 3,003 $ 4,154 $ (1,151) (27.7)%
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Product sales for the three months ended September 30, 2009 compared to the three months ended September 30, 2008 decreased by 27.7%. The challenging global economy combined with the tightly managed hospital inventories, have continued to impact our sales performance. In an effort to more tightly manage their cash flow, we believe that hospitals are reducing their inventories. As a result, while our implants continue to be used in procedures, hospitals are taking longer to re-order product in the near-term, thus slowing our sales cycle. Outside of North America, we are continuing to transition from direct sales to distribution
partnerships in several key markets while expanding into new territories. However, several of our recently established international territories are not yet contributing revenue due to the time necessary to complete product registrations in those markets. We currently expect this sales strategy to show incremental revenue beginning in the fourth quarter of 2009. Sales outside of North America represented approximately 23.1% and 27.3% of total product sales for the three months ended September 30, 2009 and 2008, respectively. In addition, in Europe we continue to be faced with competitive pricing and ongoing clinical trials that are competing for procedure market share.
Cost of Product Sales. For the three months ended September 30, 2009, cost of product sales, as a percentage of total product sales, was approximately 39.8% compared with approximately 37.2% in 2008. The increase in cost of product sales as a percentage of product sales was primarily the result of the impact of fixed manufacturing overhead expenses on lower than budgeted production volumes. In addition, royalty expenses also increased as a percentage of sales due to lower sales volumes. For the full year 2009, we currently expect cost of product sales to be approximately 41.0% of total product sales, compared with approximately 33.4% for fiscal 2008. Included in cost of product sales are royalty expenses of approximately $465,000 and $520,000 for the three months ended September 30, 2009 and 2008, respectively.
Research and Development. Research and development expense decreased approximately $867,000, or 30.1%, for the three months ended September 30, 2009 compared with the three months ended September 30, 2008. The decrease in research and development expenses was primarily due to reduced costs associated with our clinical trials and reduced resources allocated to our development programs.
We currently expect full year 2009 research and development expense to decrease to approximately $10.0 million compared to approximately $13.2 million in 2008. This anticipated decrease is primarily related to the completion of our clinical trial enrollment work. As programs develop or mature, we also have the ability to further adjust our investment in research and development activities.
General and Administrative. General and administrative expense decreased approximately $715,000, or 34.0%, for the three months ended September 30, 2009 compared with the three months ended September 30, 2008. Included as a reduction to general and administrative expense for the three months ended September 30, 2009, is a payment received of $250,000 pursuant to a settlement agreement with Cardia, Inc. The decrease in general and administrative expenses was also due to reduced costs for personnel related expenses of approximately $350,000.
General and administrative expense is currently expected to decrease to approximately $7.6 million in 2009 compared to approximately $8.6 million in 2008.
Selling and Marketing. Selling and marketing expense decreased approximately $700,000, or 35.5%, for the three months ended September 30, 2009 compared to the same period in 2008. This decrease was primarily the result of decreased expenses related to lower headcount, as well as lower commissions and sales bonuses due to lower sales. We currently expect worldwide selling and marketing expense in 2009 to decrease approximately $3.5 million compared to 2008, the result of a restructured and refocused sales infrastructure which includes increased use of distributors.
Interest Income. The decrease in interest income for the three months ended September 30, 2009 compared to the same period in 2008 was primarily related to lower cash balances and lower interest rates during 2009. We currently expect interest income to approximate $100,000 in 2009 compared to $768,000 in 2008, primarily due to reduced cash balances resulting from the use of approximately $11 million of cash, cash equivalents and marketable securities to fund 2009 operations.
Income Tax Provision. We provide for taxes on income from continuing operations based upon our anticipated effective income tax rate. We anticipate incurring a loss from continuing operations in 2009 and therefore have not made a provision for taxes on continuing operations in the three months ended September 30, 2009. For the three months ended September 30, 2009 and 2008, we recorded income tax expense of $9,571 and $16,302, respectively, for the establishment of a liability for uncertain tax positions.
NINE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2008
The following table presents consolidated statements of operations information as a reference for management's discussion and analysis which follows thereafter. This table presents dollar and percentage changes for each listed line item for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008, as well as consolidated statements of operations information as a percentage of total revenues (except for cost of product sales, which is stated as a percentage of product sales) for such periods.
Nine Months Ended Increase
September 30, (Decrease) % Change
2009 % 2008 % 2008 to 2009 2008 to 2009
(In thousands, except percentages)
Revenues:
Product sales $ 9,662 100.0% $ 13,419 99.9% $ (3,757) (28.0)%
Net royalty income - 0.0% 18 0.1% (18) (100.0)%
Total revenues 9,662 100.0% 13,437 100.0% (3,775) (28.1)%
Costs and expenses:
Cost of product sales 4,021 41.6% 4,362 32.5% (341) (7.8)%
Research and development 6,636 68.7% 9,621 71.6% (2,985) (31.0)%
General and administrative 5,495 56.9% 6,989 52.0% (1,494) (21.4)%
Selling and marketing 4,092 42.4% 6,866 51.1% (2,774) (40.4)%
Total costs and expenses 20,244 209.5% 27,838 207.2% (7,594) (27.3)%
Loss from operations (10,582) (109.5)% (14,401) (107.2)% 3,819 (26.5)%
Other income (expense):
Currency transaction gain (loss) 14 0.1% (72) (0.5)% 86 (119.4)%
Interest income 88 0.9% 662 4.9% (574) (86.7)%
Total other income, net 102 1.1% 590 4.4% (488) (82.7)%
Loss before income taxes (10,480) (108.5)% (13,811) (102.8)% 3,331 (24.1)%
Income tax expense 30 0.3% 58 0.4% (28) (48.3)%
Net loss $ (10,510) (108.8)% $ (13,869) (103.2)% $ 3,359 (24.2)%
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REVENUES
NINE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2008
Increase
Nine Months Ended September 30, (Decrease) % Change
2009 2008 2008 to 2009 2008 to 2009
(In thousands, except percentages)
Product sales:
CardioSEAL®, STARFlex® and
BioSTAR ®:
North America $ 7,003 $ 8,720 $ (1,717 ) (19.7 )%
Rest of world 2,659 4,699 (2,040 ) (43.4 )%
Total product sales 9,662 13,419 (3,757 ) (28.0 )%
Net royalty income:
Boston Scientific Corporation - 18 (18 ) (100.0 )%
Total net royalty income - 18 (18 ) (100.0 )%
Total revenues $ 9,662 $ 13,437 $ (3,775 ) (28.1 )%
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The decrease in product sales for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 was primarily a result of the challenging global economy. In an effort to more tightly manage their cash flow, we believe that hospitals are reducing their inventories. As a result, while our implants continue to be used in procedures, hospitals are taking longer to re-order product in the near-term, thus slowing our sales cycle. Outside of North America, we are continuing to transition from direct sales to distribution partnerships in several key markets while expanding into new territories. However, several of our recently established international territories are not yet contributing revenue due to the time necessary to complete product registrations in those markets. Sales outside of North America represented approximately 27.5% and 35.0% of total product sales for the nine months ended September 30, 2009 and 2008, respectively. In Europe, we continue to be faced with competitive pricing and ongoing clinical trials that are competing for procedure market share.
Cost of Product Sales. For the nine months ended September 30, 2009, cost of product sales, as a percentage of total product sales, was approximately 41.6% compared with approximately 32.5% in the comparable period of 2008. The increase in cost of product sales as a percentage of product sales was primarily the result of the impact of fixed manufacturing overhead expenses on lower than budgeted production volumes. In addition, royalty expenses also increased as a percentage of sales due to lower sales volumes. Included in cost of product sales were royalty expenses of approximately $1.5 million and $1.6 million for the nine months ended September 30, 2009 and 2008, respectively.
Research and Development. Research and development expense decreased approximately $3.0 million, or 31.0%, for the nine months ended September 30, 2009 compared with the nine months ended September 30, 2008. The decrease in research and development expenses was primarily due to reduced costs associated with our clinical trials and reduced resources allocated to our development programs.
General and Administrative. General and administrative expense decreased approximately $1.5 million, or 21.4%, for the nine months ended September 30, 2009 compared with the nine months ended September 30, 2008. Included as a reduction to expense are payments received totaling $1.0 million pursuant to a settlement agreement with Cardia, Inc. for the nine months ended September 30, 2009, compared with a payment of $500,000 for the nine months ended September 30, 2008. The decrease in general and administrative expenses was also due to lower legal costs relating to patent work as well as additional savings spread across numerous account classifications. The favorable variances were offset by the impact on expenses of our former CEO's retirement. Our former CEO retired as of February 9, 2009 and we entered into a Settlement Agreement and Release at that time. The charges in connection with this agreement, including severance in the form of continued payment of his salary for twelve months in the amount of $460,000, accrued and unused vacation pay in the amount of approximately $35,000, health benefits for a period of 18 months, and the acceleration of the vesting of the former CEO's unvested stock options in the amount of approximately $50,000 were included in general and administrative expenses for the nine months ended September 30, 2009.
Selling and Marketing. Selling and marketing expense decreased approximately $2.8 million, or 40.4%, for the nine months ended September 30, 2009 compared to the same period in 2008. This decrease was primarily the result of decreased expenses related to
salary costs due to lower headcount, lower commissions and sales bonuses due to lower sales, and decreased travel and promotion expenses related to BioSTAR ®.
Interest Income. The decrease in interest income for the nine months ended September 30, 2009 compared to the same period in 2008 was primarily related to lower cash balances and lower interest rates during 2009.
Income Tax Provision. We provide for taxes on income from continuing operations based upon our anticipated effective income tax rate. We anticipate incurring a loss from continuing operations in 2009 and therefore have not made a provision for taxes on continuing operations in the nine months ended September 30, 2009. For the nine months ended September 30, 2009 and 2008, we recorded income tax expense of $29,966 and $57,972, respectively, for the establishment of a liability for uncertain tax positions.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2009, we had cash and cash equivalents of approximately $9.0 million. We have taken several actions over the last year to both reduce our expenditures and further enhance our ability to generate revenue. We continually evaluate our cost structure and, it may be necessary to further reduce expenses in the short term. We believe that our current cash position, combined with a reduction in expenses and expected increase in revenues outside of North America in addition to our two-year $4 million revolving credit facility with Silicon Valley Bank will be sufficient to bring our STARFlex® implant with an indication for PFO closure to the commercial market in the United States, subject to FDA approval. We will also continue to review financing alternatives to raise capital, if necessary. We expect the data from this trial to be reviewed in April of 2010 and anticipate that a submission will be made to the FDA for PMA approval during the third quarter of 2010. Based upon current projections, we expect that the aggregate of cash and cash equivalents will approximate $6 million at the end of 2009. This projection assumes a use of cash for 2009 of approximately $11 million compared to $13.4 million in 2008. We believe our cash use for 2009 will decrease compared to 2008, with clinical trial spending decreasing approximately $1.0 million, given that the data analysis for our CLOSURE I trial is currently expected to be in April of 2010. We have also implemented a series of cost reduction initiatives, including reducing headcount throughout the organization, reprioritizing our internal programs and restructuring various departments, that we believe will decrease expenses by greater than $5.0 million in 2009 compared to 2008. Based on current projections and plans, we believe that our current capital resources, including the $4 million revolving credit facility with Silicon Valley Bank, in addition to increased worldwide sales and reduced expenses, will be sufficient to complete the CLOSURE I trial and fund operations at least until we receive a decision with respect to a PMA with a PFO/stroke and TIA indication in the U.S. However, these forecasts are forward-looking statements that involve risks and uncertainties and actual results could vary materially.
We have incurred operating losses of $18.7 million and $11.1 million during each of the past two fiscal years, respectively, and have experienced decreasing sales over those time periods. We also incurred an operating loss of $10.6 million for the nine months ended September 30, 2009. Our cash used in operations significantly parallels the operating losses we have incurred and we have an accumulated deficit of $48.6 million as of September 30, 2009. In addition, we expect to incur significant additional research and development and other costs during the fourth quarter of fiscal 2009 and in fiscal 2010-including costs to complete our CLOSURE I trial and bring our STARFlex® implant with an indication for PFO closure to commercial market in the United States, subject to U.S. FDA approval. Our costs, including research and development for our product candidates and sales, marketing and promotion expenses for any of our existing or future products to be marketed by us or our distributors currently exceed and will likely continue to exceed revenues during this period. In addition, while we have recently secured a two-year credit facility with Silicon Valley Bank, we will also continue to review financing alternatives to raise additional capital, if necessary.
For the Nine Months Ended September 30,
2009 2008
(In thousands)
Cash, cash equivalents and marketable
securities $ 8,991 $ 21,146
Net cash used in operating activities (8,645 ) (9,819 )
Net cash provided by investing activities 12,730 11,673
Net cash provided by financing activities 6 312
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Net Cash Used in Operating Activities
Net cash used in operating activities for the nine months ended September 30, 2009 totaled approximately $8.6 million and consisted of a net loss of approximately $10.5 million partially offset by a net decrease in working capital requirements of approximately $1.3 million and non-cash charges of approximately $533,000.
The non-cash charges of approximately $533,000 during the nine months ended September 30, 2009 consisted of (i) share-based compensation, (ii) depreciation of property and equipment and (iii) amortization of bond premium.
The primary elements of the $1.3 million net decrease in working capital during . . .
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