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CRDC > SEC Filings for CRDC > Form 10-Q on 7-May-2014All Recent SEC Filings

Show all filings for CARDICA INC

Form 10-Q for CARDICA INC


7-May-2014

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, 2013, which was filed with the Securities and Exchange Commission on September 25, 2013.

Overview

We are commercializing and developing a microcutter product line based on our proprietary "staple-on-a-strip" technology intended for use by thoracic, bariatric, colorectal, urological, gynecological and general surgeons. Our microcutter product line is designed to cut and staple human tissue during video-assisted (laparoscopic or thoracoscopic) and open surgical procedures. The product line includes the currently commercially-available MicroCutter XCHANGE® 30, a cartridge based microcutter device with a five millimeter shaft diameter and a 30 millimeter staple line, and the planned MicroCutter XCHANGE® 45, a cartridge based microcutter device with an eight millimeter shaft and a 45 millimeter staple line, FLEXCHANGE™ 30, a cartridge based microcutter device with a flexible shaft to facilitate endoscopic procedures requiring cutting and stapling, and MicroCutter XPRESS® 45, a multi-fire endolinear microcutter device with a 45 millimeter staple line specifically designed for the bariatric and thoracic surgery markets. Our MicroCutter XCHANGE 30 has the smallest shaft diameter (five millimeters) of a commercially-available articulating surgical stapler, and is used with cartridge-based staples that are first loaded in the device and then deployed by the microcutter, which also cuts the tissue in the center of the deployed staple rows, referred to as the staple lines. The small diameter and wide range of articulation allow the XCHANGE 30 to be used in areas that may be difficult to reach with conventional 12 millimeter surgical staplers. These features also increase visibility at the surgical site and reduce the trauma to the thoracic or abdominal wall typically inflicted by larger trocars, which are the tubes through which the surgical instruments are inserted. The use of cartridges enables the surgeon to only use one microcutter to deploy multiple staple lines by reloading a cartridge in the microcutter for subsequent deployments. According to a 2012 U.S. market survey, approximately 40% of sales for laparoscopic stapling procedures are performed on thin tissue and approximately 40% of sales for laparoscopic procedures are performed on medium thickness tissue. The remaining thicker tissues are typically stapled with cartridges color coded in green, which we expect to be available as part of the planned MicroCutter XCHANGE 45.

We received from the United States Food and Drug Administration, or FDA, 510(k) clearance for the MicroCutter XCHANGE 30 and blue staple cartridge in January 2014, and for the white staple cartridge in February 2014, for use in multiple open or minimally invasive surgical procedures for the transection, resection and/or creation of anastomoses in small and large intestine, as well as the transection of the appendix. The blue staple cartridge is for use in medium thickness tissue, and the white staple cartridge is for use in thin tissue. In addition, our exclusive distributor in Japan, Century Medical, Inc., or Century, has filed for regulatory approval of our MicroCutter XCHANGE 30 cartridges with the Pharmaceuticals and Medical Devices Agency in Japan and upon approval, anticipates launching the MicroCutter XCHANGE 30 in Japan.

In March 2012, we completed the design verification for and applied Conformité Européenne, or the CE Mark, to the MicroCutter XCHANGE 30 and, in December 2012, began a controlled commercial launch of the XCHANGE 30 in Europe. We believe that the MicroCutter XCHANGE 30 is differentiated in the market compared to currently marketed staplers due to its significantly reduced size and ability to articulate up to 80 degrees.

Historically, our business focused on the design, manufacture and marketing of proprietary automated anastomotic systems used by cardiac surgeons to perform coronary bypass surgery. 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, 2014, more than 14,200 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, 2014, more than 36,000 PAS-Port systems had been sold in the United States, Europe and Japan. To date, we have generated product revenues almost exclusively from the sale of automated anastomotic systems, and have generated minimal revenues from the commercial sales of the MicroCutter XCHANGE 30 since its December 2012 introduction.

For the nine months ended March 31, 2014, we generated net revenue of $2.6 million, including $2.3 million from the sale of automated anastomotic systems, $0.2 million from commercial sales of the MicroCutter XCHANGE 30 and $0.1 million from license and development and royalty revenues, and incurred a net loss of $12.3 million.

Since our inception, we have incurred cumulative net losses of $165.9 million through March 31, 2014, and we expect to continue to incur net losses for the next several years. We have not generated significant revenue from the MicroCutter XCHANGE 30. 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.


As of March 31, 2014, we have approximately $2.9 million of cash and cash equivalents, and $4.0 million of debt principal outstanding. On April 15, 2014, we entered into an underwriting agreement with Wedbush Securities Inc. ( "Wedbush") and Craig-Hallum Capital Group LLC ("Craig-Hallum") relating to the offering, issuance and sale of an aggregate of 32,500,000 shares of our common stock, $0.001 par value per share and 191,474 shares of Series A Convertible Preferred Stock, $0.001 par value per share. The Series A convertible preferred stock is non-voting and is convertible into shares of our common stock at a conversion rate of 100 shares of common stock for each share of Series A convertible preferred stock, provided that conversion will be prohibited if, as a result, the holder and its affiliates would own more than 9.98% of the total number of shares of the our common stock then outstanding unless the holder gives us at least 61 days prior notice of an intent to convert into shares of common stock that would cause the holder to own more than 9.98% of the total number of shares of common stock then issued and outstanding. We also granted to the underwriters an option to purchase up to an additional 4,875,000 shares of common stock to cover overallotments. On April 22, 2014, we completed the sale of 32,500,000 shares of our common stock at a price to the public of $0.85 per share and 191,474 shares of Series A Convertible Preferred Stock at a price to the public of $85 per share, and on April 29, 2014, we completed the sale of an additional 4,875,000 shares of common stock at $0.85 per share pursuant to the underwriters' exercise of their overallotment option. Net proceeds from the financing to us, including the exercise of the overallotment option, were approximately $44.5 million. We intend to use the net proceeds from this offering for general corporate purposes, including the costs of sales and marketing activities for the U.S. launch of the MicroCutter XCHANGE 30, research and development activities, and general and administrative and manufacturing expenses.

We believe that our existing cash and cash equivalents, together with the net proceeds from the April 2014 offering will be sufficient to meet our anticipated cash needs to enable us to conduct our business substantially as currently conducted for at least the next 24 months.

We would be able to extend this time period to the extent that we decrease our planned expenditures, or raise additional capital. 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 and additional 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 entered into at the time of the Distribution 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 is responsible for securing regulatory approval from the Ministry of Health in Japan for microcutter products. After approval for marketing in Japan, we would sell microcutter units to Century, which 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, $41,000 and $0.3 million had been recorded as license and development revenue for the nine months ended March 31, 2014 and 2013, respectively, and there was no deferred revenue as of March 31, 2014. 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 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. Through the termination date, 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. For the fiscal year ended June 30, 2013, and the nine months ended March 31, 2014, we did not issue any shares under the Purchase Agreement.

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, 2014, we have received net proceeds of $1.2 million, from the sale of an aggregate of 884,756 shares of common stock through MLV. During the nine months ended March 31, 2014 and 2013, we received net proceeds of $0.4 million and $0.7 million, respectively, from the sale of an aggregate of 439,163 and 414,099 shares of common stock through MLV, respectively.

We are no longer able to sell shares under our shelf registration statement, and therefore we will not be able to sell shares pursuant to the ATM Agreement until we file another shelf registration statement.


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, 2013, filed with the Securities and Exchange Commission on September 25, 2013.

Results of Operations

Comparison of the three and nine months ended March 31, 2014 and 2013

Net Revenue. Total net revenue was $0.9 million and $2.6 million for the three and nine months ended March 31, 2014, respectively, compared to $0.9 million and $2.6 million for the same period in 2013, respectively. Product sales increased by $0.1 million, or 19%, to $0.9 for the three months ended March 31, 2014, compared to $0.8 million for the same period in 2013. Product sales increased by $0.2 million, or 8%, to $2.5 million for the nine months ended March 31, 2014, compared to $2.3 million for the same period in 2013. The increases in product sales for both periods were primarily attributable to higher PAS-Port and MicroCutter XCHANGE 30 sales, offset in part by lower C-Port systems sales.

License and development revenue from our agreement with Intuitive Surgical and royalty revenue were $18,000 and $0.1 million for the three months ended March 31, 2014 and 2013, respectively, and $0.1 million and $0.3 million for the nine months ended March 31, 2014 and 2013, respectively. The decreases for both periods were primarily attributable to the end of the three years amortization of the license and development agreement with Intuitive Surgical.

For the three months ended March 31, 2014 and 2013, sales of automated anastomosis systems to Century accounted for approximately 28% and 36%, respectively, and for the nine months ended March 31, 2014 and 2013, approximately 33% and 34%, 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 $0.3 million, or 26%, to $1.4 million for the three months ended March 31, 2014, compared to $1.1 million for the same period in 2013. Cost of product sales increased by $0.7 million, or 27%, to $3.4 million for the nine months ended March 31, 2014, compared to $2.7 million for the same period in 2013. The increases in cost of product sales for both periods resulted primarily from higher product costs related to increased microcutter products sales since the XCHANGE 30's December 2012 introduction.

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 decreased by $0.3 million, or 15%, to $1.7 million for the three months ended March 31, 2014, compared to $2.0 million for the same period in 2013. The decrease was primarily attributable to a decrease of $0.2 million due to the completion of the microcutter clinical trial and FDA submission efforts and a decrease of $0.1 million of depreciation expenses. There were also decreases in salaries and benefits expenses of $45,000 due primarily to fewer numbers of personnel, partially offset by an increase of $0.1 million in material purchases used in research and development activities.

Research and development expense decreased by $1.8 million, or 26%, to $5.1 million for the nine months ended March 31, 2014, compared to $6.8 million for the same period in 2013. The decrease was primarily attributable to a decrease of $0.7 million of material purchases due to the completion of the development of our MicroCutter XCHANGE 30 and a decrease of $0.5 million due to the completion of our microcutter clinical trial in Europe. There were also decreases in salaries and benefits expenses of $0.2 million due primarily to fewer numbers of personnel, partially offset by an increase of $0.1 million in professional outside services expense related to the completion of the microcutter clinical trial and FDA submission effort.

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

Selling, General and Administrative Expense. Selling, general and administrative expense increased by $0.5 million, or 32%, to $2.1 million for the three months ended March 31, 2014, compared to $1.6 million for the same period in 2013. The increase in selling, general and administrative expense was primarily attributable to an increase in microcutter demonstration and sample expenses of $0.2 million for units used in the field for training, an increase in salaries and benefits expenses of $0.2 million due to the hiring of the VP of sales and marketing as well as add two more sales representatives to our sales force, and an increase in travel expenses of $0.1 million, offset in part by a decrease in professional outside service expenses of $0.1 million due mainly to the conversion of our VP of sales and marketing to permanent hire.

Selling, general and administrative expense increased by $1.0 million, or 20%, to $6.1 million for the nine months ended March 31, 2014, compared to $5.0 million for the same period in 2013. The increase in selling, general and administrative expense was primarily attributable to an increase in microcutter demonstration and sample expenses of $0.7 million for units used in the field for training, an increase in salaries and benefits expenses of $0.1 million due to three additions in our sales force, and an increase in travel expenses of $0.2 million, offset in part by a decrease of $0.1 million professional outside services expense.


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

Interest Expense. Interest expense was $0.1 million for the three months ended March 31, 2014, compared to $0.1 million for the same period in 2013. Interest expense was $0.4 million for the nine months ended March 31, 2014, compared to $0.3 million for the same period in 2013. The increase in interest expenses 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 . . .

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