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CRDC > SEC Filings for CRDC > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for CARDICA INC


10-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. All statements other than statements of historical facts are "forward-looking statements" for purposes of these provisions, including any projections of earnings, revenue, sufficiency of cash resources or other financial items, any statement of the plans and objectives of management for future operations, any statements concerning proposed new products or licensing or collaborative arrangements, any statements regarding future economic conditions or performance, and any statement of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as "may," "will," "expects," "plans," "anticipates," "estimate,""believe," "potential," or "continue" or variations or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, including but not limited to the risk factors set forth in Item 1A below, and for the reasons described elsewhere in this report. All forward-looking statements and reasons why results may differ included in this report are made as of the date hereof, and we assume no obligation to update these forward-looking statements or reasons why actual results might differ.

The following discussion of our financial condition and results of operations should be read together with our financial statements and related notes included in Part I, Item 1 of this report, and with our financial statements and related notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the year ended June 30, 2012, which was filed with the Securities and Exchange Commission on September 28, 2012.

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. We have expanded our business on the development of an endoscopic microcutter product line intended for use by thoracic, bariatric, colorectal, pediatric and general surgeons.

We are developing our microcutter product line based on our proprietary "staple-on-a-strip" technology, which expands our commercial opportunity into additional surgical markets. Our planned microcutter product line consists of the MicroCutter XCHANGE™ 30, a cartridge based microcutter device with a 5 millimeter shaft diameter and a 30 millimeter staple line, the MicroCutter XCHANGE™ 45, a planned cartridge based microcutter device with a 8 millimeter shaft and a 45 millimeter staple line, the MicroCutter XPRESS™ 30, a true multi-fire endolinear stapling device, the MicroCutter FLEXCHANGE™ 30 a planned cartridge based microcutter device with a flexible shaft to facilitate endoscopic procedures requiring cutting and stapling, the MicroCutter XPRESS™ 45, a planned multi-fire endolinear microcutter device with a 45 millimeter staple line, and the MicroCutter XPRESS™ 60, a planned cutting and stapling device specifically designed for the bariatric and thoracic surgery markets. We estimate these planned devices expand our commercial opportunity to approximately 1.4 million additional procedures annually in the United States, involving, we estimate, over 4 million staple cartridge deployments, 3 million of which we believe are deployed in laparoscopic procedures.

In March 2012, we completed the design verification for and applied Conformité Européenne, or the CE Mark, to the MicroCutter XCHANGE 30. As we have gained more experience with our microcutter products, we believe that the cartridge-based design of the MicroCutter XCHANGE 30 permitted us to commercially launch this product more quickly than our planned initial multi-fire product, the MicroCutter XPRESS 30. We believe that the MicroCutter XCHANGE 30 is differentiated in the market in which it is currently commercially available compared to currently marketed staplers due to its significantly reduced size and ability to articulate up to 80 degrees. We intend to expand our microcutter product line with the development of the MicroCutter XCHANGE 45 and only then consider continuation of development of the MicroCutter XPRESS 30, but, in light of our limited financial resources, we have limited development of other potential products in our planned microcutter product line.

We initiated first-in-man use of the MicroCutter XPRESS 30, with the CE Mark, in Europe in July 2011, and in November 2011, began enrolling patients in a European clinical trial. We suspended our clinical trial of the MicroCutter XPRESS 30 in Europe in December 2011, and recommenced enrollment of the clinical trial with our MicroCutter XCHANGE 30 in July 2012. Prior to recommencing the clinical trial of the MicroCutter XCHANGE 30, we introduced this product to surgeons in Europe to validate the adequate function of the MicroCutter XCHANGE
30. As part of our controlled launch, on December 26, 2012, we commercially launched our first shipment to our distributor in Europe. We will continue to make enhancements and improvements to the MicroCutter XCHANGE 30 based on feedback from surgeons.


We have been advised by the U.S. Food and Drug Administration, or FDA, that the FDA will require clinical data related to the staple design used in the planned microcutter product line as part of a 510(k) submission for clearance of the products in our planned microcutter product line for marketing and sale in the United States. We recommenced the clinical trial with the MicroCutter XCHANGE 30 in Europe in July 2012, and we intend to enroll patients who are undergoing certain types of gastrointestinal surgical procedures. The number of gastrointestinal procedures and specific applications that can be performed with the MicroCutter XCHANGE 30, is limited to certain tissue thicknesses. We plan to complete enrollment in the clinical trial and required patient followup according to the protocol in the second quarter of calendar year 2013. If the results of the trial are favorable, we anticipate that we would submit a 510(k) to the FDA in the third quarter of calendar 2013. While we cannot predict when or if the FDA will clear our 510(k) submission or what such clearance will cover, we anticipate that the earliest that any such clearance could be obtained would be in the fourth quarter of calendar 2013.

Our C-Port® Distal Anastomosis Systems, or C-Port systems, are sold in the United States and Europe. The C-Port systems are used to perform a distal anastomosis, which is the connection between a bypass graft vessel and the target coronary artery. As of March 31, 2013, more than 13,700 C-Port systems had been sold in the United States and Europe. We also currently sell our PAS-Port® Proximal Anastomosis System, or PAS-Port system, in the United States, Europe and Japan. 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. As of March 31, 2013, more than 31,500 PAS-Port systems had been sold in the United States, Europe and Japan.

We use independent distributors and manufacturers' representatives to augment a small core direct sales team for our C-Port 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.

For the nine months ended March 31, 2013, we generated net revenue of $2.3 million, including $99,000 from commercial sales of the MicroCutter XCHANGE 30 and $252,000 of license and development revenue, and incurred a net loss of $12.3 million.

Since our inception, we have incurred significant net losses, and we expect to continue to incur net losses for the foreseeable future. We have not generated significant revenue from sales of any of the microcutter products that we are developing. 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. Revenue from product sales and license and development payments were not sufficient to support the operation of our business as we had planned. If we fail to obtain broader commercial adoption of our products or to achieve commercial adoption of our microcutter products, 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.

On March 20, 2013, we completed the sale of 14,251,368 shares of our common stock at a price to the public of $1.05 per share. Net proceeds from the financing to us were $14.1 million. As of March 31, 2013, we had approximately $17.0 million of cash, cash equivalents and short-term investments and $4.0 million of debt principal outstanding. We believe that our existing cash, cash equivalents and short-term investments will be sufficient to meet our anticipated cash needs to enable us to conduct our business substantially as currently conducted through December 31, 2013, excluding the repayment of $4.0 million debt principal outstanding. We would be able to extend this time period to the extent that we decrease our planned expenditures, or raise capital. The audit report on our financial statements for the year ended June 30, 2012, included an explanatory paragraph highlighting the substantial doubt about our ability to continue as a going concern. We have based our estimate as to the sufficiency of our cash resources on assumptions that may prove to be wrong, including assumptions with respect to the level of revenue from product sales and the cost of product development, and we could exhaust our available financial resources sooner than we currently expect. The sufficiency of our current cash resources and our need for additional capital, and the timing thereof, will depend on many factors, including the extent of our ongoing research and development programs and related costs, including costs related to the continued development of the MicroCutter XCHANGE 30, the MicroCutter XCHANGE 45, the MicroCutter XPRESS 30 and additional potential products in our anticipated microcutter product line, our ability to enter into additional license, development and/or collaboration agreements with respect to our technology, and the terms thereof, market acceptance and adoption of our current products or future products that we may commercialize, our level of revenues, costs associated with our sales and marketing initiatives and manufacturing activities, costs and timing of obtaining and maintaining FDA, and other regulatory clearances or approvals for our products and potential additional products, securing, maintaining and enforcing intellectual property rights and the costs thereof, and the effects of competing technological and market developments.

We may seek to sell 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 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 may not be able to obtain sufficient additional financing or enter into a strategic transaction in a timely manner, or at all. Our need to raise capital may require us to accept terms that may harm our business or be disadvantageous to our current stockholders.


Agreements with Century

On September 2, 2011, we signed a distribution agreement, or the Distribution Agreement, with Century Medical, Inc., or Century with respect to distribution of our planned microcutter products in Japan. Under the terms of a secured note purchase agreement, Century agreed to loan us an aggregate of up to $4.0 million, with principal due on September 30, 2016, under the agreement, subject to certain conditions. Under this facility, we received $2.0 million on September 30, 2011, and the remaining $2.0 million on December 27, 2011. The note bears 5% annual interest which is payable quarterly in arrears on the last business day of March, June, September and December of each year through September 30, 2016, the maturity date when the total $4.0 million of principal becomes due. In return for the loan commitment, we granted Century distribution rights to our planned microcutter product line in Japan, and a right of first negotiation for distribution rights in Japan to future products. Century will be responsible for securing regulatory approval from the Ministry of Health in Japan for the microcutter product line. After approval for marketing in Japan, we would sell microcutter units to Century, who would then sell the microcutter devices to their customers in Japan.

Proceeds from the note and granting the distribution rights were allocated to the note based on their aggregate fair value of $2.4 million at the dates of receipt. This fair value was determined by discounting cash flows using a discount rate of 18%, which we estimated was a market rate of borrowing that could be obtained by companies with credit risk similar to ours. The remainder of the proceeds of $1.6 million was recognized as debt issuance discount and was allocated to the value of the distribution rights granted to Century under the Distribution Agreement and is included in deferred revenue. The deferred revenue will be recognized on a straight-line basis over the term of the Distribution Agreement, beginning upon the first sale by Century of microcutter products in Japan.

Agreements with Intuitive Surgical

On August 16, 2010, we entered into a license agreement, or License Agreement, with Intuitive Surgical Operations, Inc., or Intuitive Surgical, pursuant to which we granted to Intuitive Surgical a worldwide, sublicenseable, exclusive license to use our intellectual property in the robotics field in diagnostic or therapeutic medical procedures, but excluding vascular anastomosis applications, for an upfront license fee of $9.0 million. We are also eligible to receive a contingent payment if sales of any products incorporating our patent rights achieve a specified level of net sales within a specified period after the date of the License Agreement, as well as single-digit royalties on sales by Intuitive Surgical, its affiliates or its sublicensees of specified stapler and clip applier products covered by our patent rights as well as on sales of certain other products covered by our patent rights that may be developed in the future, if any. Each party has the right to terminate the License Agreement in the event of the other party's uncured material breach or bankruptcy. Following any termination of the License Agreement, the licenses granted to Intuitive Surgical will continue, and, except in the case of termination for our uncured material breach or insolvency, Intuitive Surgical's payment obligations will continue as well. Under the License Agreement, Intuitive Surgical has rights to improvements in our technology and intellectual property over a specified period of time.

In addition, on the same date, we entered into a stock purchase agreement with Intuitive Surgical pursuant to which Intuitive Surgical paid $3.0 million to purchase from us an aggregate of 1,249,541 shares of our common stock, or the Stock Issuance. The net proceeds recorded to stockholders' equity based upon the fair value of our common stock on August 16, 2010, were approximately $2.0 million after offering expenses. From the premium paid of $1.0 million and the upfront license fee payment of $9.0 million, $252,000 had been recorded as license and development revenue for each of the nine months ended March 31, 2013 and 2012, respectively, and $125,000 had been recorded as deferred revenue as of March 31, 2013. There were no underwriters or placement agents involved with the Stock Issuance, and no underwriting discounts or commissions or similar fees were payable in connection with the Stock Issuance.

Agreement with Aspire Capital

Subject to the terms and conditions of our Purchase Agreement with Aspire Capital, we had a right to sell to Aspire Capital pursuant to the Purchase Agreement up to $10.0 million of our common stock at a maximum of 300,000 shares per day based on the trading price of our common stock. In consideration for entering into the Purchase Agreement, concurrently with the execution of the Purchase Agreement, we issued to Aspire Capital 295,567 shares of our common stock as a commitment fee, or the Commitment Shares. The Purchase Agreement terminated on February 10, 2013, and 166,759 shares of our common stock issued pursuant to the Purchase Agreement were returned to us during the three months ended March 31, 2013, as the maximum numbers of shares available under the Purchase Agreement were not sold to Aspire. Based on the quoted price, the shares were valued at $1.38 per share, or $230,000. We are no longer entitled to sell any further shares of our common stock to Aspire Capital under the Purchase Agreement. As of March 31, 2013, a total of 1,478,808 shares of common stock (including the 128,808 Commitment Shares) had been issued to Aspire Capital pursuant to the Purchase Agreement and $4.4 million of capital had been raised through the sale of 1,350,000 shares of common stock at an average price of $3.23 per share.


Agreement with MLV

Subject to the terms and conditions of the ATM Agreement, we may issue and sell up to $10.0 million of our common stock through MLV as our sales agent. The extent to which we rely on sales of common stock under the ATM Agreement as a source of funding will depend on a number of factors, including the prevailing market price of our common stock and the extent to which we are able to secure working capital from other sources. The ATM Agreement provides that the offering of shares of our common stock pursuant to the ATM Agreement will terminate upon the earlier of (1) the sale of all common stock subject to the ATM Agreement,
(2) August 2, 2014, and (3) termination of the ATM Agreement. As of March 31, 2013, we received net proceeds of $0.7 million from the sale of an aggregate of 445,593 shares of common stock through MLV.

We are subject to limitations on the amount that we may sell under our shelf registration statement, and therefore that we may sell pursuant to the ATM Agreement.

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. 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.

There were no significant changes to our critical accounting policies and significant judgments and estimates as set forth in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012, filed with the Securities and Exchange Commission on September 28, 2012.

Results of Operations

Comparison of the three month periods ended March 31, 2013 and 2012

Net Revenue. Total net revenue was $868,000 for the three months ended March 31, 2013, compared to $953,000 for the same period in 2012. Product sales decreased by $85,000, or 10%, to $767,000 for the three months ended March 31, 2013, compared to $852,000 for the same period in 2012. The decrease in product sales for the three months ended March 31, 2013, was primarily attributable to lower C-Port systems sales, offset in part by our MicroCutter XCHANGE 30 commercial sales of $75,000.

License and development revenue from our agreement with Intuitive Surgical and royalty revenue were unchanged compared to the prior period in 2012.

For the three months ended March 31, 2013 and 2012, sales to Century accounted for approximately 36% and 37%, respectively, of our total product sales.

Cost of Product Sales. Cost of product sales consists primarily of material, labor and overhead costs. Cost of product sales increased by $120,000, or 12%, to $1.1 million for the three months ended March 31, 2013, compared to $1.0 million for the same period in 2012. The increase in cost of product sales resulted primarily from a recorded inventory valuation adjustment to reduce the cost of inventory to its net realizable value by $673,000 in the three months ended March 31, 2013, compared to $34,000 for the same period in 2012, primarily due to our higher inventory costs for the MicroCutter XCHANGE 30, and we recorded capitalized labor and overhead to inventory by $292,000 for inventory produced during the quarter and not sold, compared to $123,000 for the same period in 2012. In addition, we released $1,800 of excess and obsolete inventory reserves as a result of units sold in the three months ended March 31, 2013.

Research and Development Expense. Research and development expense relates primarily to the development of our microcutter product line and largely consists of personnel costs within our product development, regulatory and clinical groups and the costs for tooling used to facilitate research and development. Research and development expense increased by $62,000, or 3%, to $2.0 million for the three months ended March 31, 2013. The increase was primarily attributable to an increase in clinical expenses of $168,000 due to our microcutter clinical trial in Europe, as well as an increase in depreciation expenses of $167,000 due to the amortization of the completed molds and tools for our microcutter development. These increases were partially offset by lower material purchases of $465,000 as costs are shifted to inventory. There were also increases in salaries and benefits of $100,000 due primarily to an increase in the number of personnel.


We anticipate that research and development expenses will decrease in absolute terms in future periods as the clinical trial is completed.

Selling, General and Administrative Expense. Selling, general and administrative expense decreased by $51,000, or 3%, to $1.6 million for the three months ended March 31, 2013. The decrease in selling, general and administrative expense was primarily attributable to a decrease in salaries and benefits of $16,000 due to a decrease in the number of personnel, a decrease in stock-based compensation charges of $89,000 due primarily to the use of the accelerated method of expensing, and a decrease in travel expenses of $37,000 due to fewer travel expenses from our sales team, partially offset by an increase in consulting and professional service expenses of $108,000 due to the sales and marketing effort for our microcutter products in Europe.

We expect selling, general and administrative expense to increase slightly in absolute terms in future periods as we continue to expand our sales and marketing effort to commercialize our microcutter products in Europe.

Interest Expense. Interest expense was $114,000 for the three months ended March 31, 2013, compared to $105,000 for the same period in 2012. The increase in interest expense was due to the interest, including the amortization of debt discount, on our note payable to Century, which we issued in September and December 2011. We expect interest expense to increase in future periods as the notes payable to Century are scheduled to mature on September 30, 2016, and the debt discount is amortized using the effective interest method.

Comparison of the nine month periods ended March 31, 2013 and 2012

Net Revenue. Total net revenue of $2.6 million for the nine months ended March 31, 2013, compared to $2.7 million for the for the same period in 2012. Product sales decreased by $0.1 million, or 4% to $2.3 million for the nine months ended March 31, 2013, compared to $2.4 million for the same period in 2012. The decrease in product sales was primarily attributable to lower C-Port systems sales, offset in part by our MicroCutter XCHANGE 30 commercial sales of $99,000.

License and development revenue from our agreement with Intuitive Surgical and royalty revenue were unchanged compared to the prior period in 2012.

For the nine months ended March 31, 2013 and 2012, sales to Century accounted for approximately 34% and 31%, respectively, of our total product sales.

Cost of Product Sales. Cost of product sales decreased by $186,000, or 6%, to $2.7 million for the nine months ended March 31, 2013, compared to $2.9 million for the same period in 2012. The decrease in cost of product sales resulted primarily from an allocation of overhead to Research and Development for work performed on our microcutter product line (as the microcutter product line was commercialized in December 2012) which was previously absorbed solely by production of PAS-Port and C-Port systems, partially offset by increased overhead spending. We recorded an inventory valuation adjustment to reduce the cost of inventory to its net realizable value by $866,000 in the nine months ended March 31, 2013, compared to $162,000 for the same period in 2012, primarily due to our higher inventory costs for the MicroCutter XCHANGE 30, and we recorded capitalized labor and overhead to inventory by $526,000 for inventory produced and not sold, compared to $388,000 for the same period in 2012. In addition, we released $8,100 of excess and obsolete inventory reserves as a result of units sold in the nine months ended March 31, 2013.

Research and Development Expense. Research and development expense increased by $1.8 million, or 37%, to $6.8 million for the nine months ended March 31, 2013, compared to $5.0 million for the same period in 2012. The increase in research and development expenses was primarily attributable to an increase in clinical expenses of $421,000 due to our microcutter clinical trial in Europe, an increase in material purchases of $254,000 for our development of the microcutter product line and an increase in depreciation expenses of $440,000 due to the amortization of the completed molds and tools for our microcutter development. In addition, we had an increase in salaries and benefits of $308,000 due primarily to an increase in the number of personnel and increase facility related expenses of $186,000.

Selling, General and Administrative Expense. Selling, general and administrative expense increased $372,000, or 8%, to $5.0 million for the nine months ended March 31, 2013, compared to $4.7 million for the same period in 2012. The increase in selling, general and administrative expense was primarily attributable to an increase in salaries and benefits of $106,000 due to higher . . .

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