Our primary products are categorized into five product lines. The following table sets forth, for the periods indicated, net revenue by product line along with the change from the previous year:
Net revenue increased 12% to $68,427,000 for the year ended December 31, 2009 from $61,221,000 for the year ended December 31, 2008. The increase in net revenue was primarily the result of an increased market penetration in all five of our product categories as well as the introduction of new products. Approximately 87% of our net revenue was earned in the United States and 13% of our net revenue was earned in international markets for both years ended December 31, 2009 and December 31, 2008. Net revenue increased 16% to $61,221,000 for the year ended December 31, 2008 from $52,864,000 for the year ended December 31, 2007.
We recognized $850,000 of licensing revenue during the year ended December 31, 2009 as the result of our License Agreement and Device Supply Agreement with King and our distribution agreement with Nicolai in Germany. We also recognized $851,000 of collaboration revenue during the year ended December 31, 2009 as a result of performing clinical and development work for King under the Device Supply Agreement. We expect to recognize approximately $850,000 of license revenue in 2010. We expect collaboration revenue will continue in 2010 but at a lower level due to us completing the enrollment of one of the clinical projects for King.
Gross margin across all product lines increased to 66% for the year ended December 31, 2009 compared to 65% for the year ended December 31, 2008. We expect product gross margins to be in the range of 65% to 67% in 2010, subject to changes in our selling mix between our lower margin products such as the Vari-Lase products and our higher margin products such as the D-Stat Dry. Gross margin across all product lines declined to 65% for the year ended December 31, 2008 compared to 67% for the year ended December 31, 2007.
Cost of sales related to thrombin inventory expenses were $-0- for the year ended December 31, 2009, compared to $670,000 for the year ended December 31, 2008. Cost of sales related to thrombin inventory expenses relate to a reserve we have recorded for the amount of thrombin we anticipate expiring prior to being used in the manufacturing of our international hemostat products. We do not anticipate incurring additional charges related to thrombin inventory during 2010.
Collaboration expenses were $850,000 for the year ended December 31, 2009, compared to $632,000 for the year ended December 31, 2008 and $685,000 for the year ended December 31, 2007. Collaboration expenses primarily are the result of our collaboration revenue related to the pre-clinical and clinical projects we are performing for King. We expect collaboration expenses to be approximately 2% of revenue during 2010, dependent upon the timing of the collaboration revenue.
Research and development expense for the year ended December 31, 2009 totaled $7,847,000, or 11% of revenue, compared to $6,333,000, or 10% of revenue for the year ended December 31, 2008 and $5,481,000, or 11% of revenue for the year ended December 31, 2007. The increase in research and development expenses resulted from additional new products moving through our development system in 2009. We expect our continuing research and development expenses to be approximately 10% to 12% of revenue in 2010 as we continue to pursue additional new products and to move our longer term development projects forward.
Clinical and regulatory expense for the year ended December 31, 2009 totaled $2,886,000, or 4% of revenue, compared to $3,220,000, or 5% of revenue for the year ended December 31, 2008 and $3,168,000, or 6% of revenue for the year ended December 31, 2007. Clinical and regulatory expenses fluctuate due to the timing of clinical studies and the number of new products coming through the regulatory system. We expect clinical and regulatory expenses to be approximately 4% to 5% of revenue in 2010.
Sales and marketing expense for the year ended December 31, 2009 totaled $21,206,000, or 31% of revenue, compared to $20,482,000, or 34% of revenue for the year ended December 31, 2008 and $19,603,000, or 37% of revenue for the year ended December 31, 2007. The primary reason for the increase in sales and marketing expenses was a $467,000, or 13% increase in our commissions paid to our direct sales force due to increased sales in 2009 over 2008. We expect to maintain the same relative size of our direct sales force during 2010 at between 85 and 90 full-time sales employees. As a result, we expect our sales and marketing expenses to continue to decrease as a percent of revenue from approximately 31% to 32% of revenue at the beginning of 2010 to between 27% and 29% of revenue by the end of 2010.
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General and administrative expense for the year ended December 31, 2009 totaled $4,555,000, or 7% of revenue, compared to $4,695,000, or 8% of revenue for the year ended December 31, 2008 and $5,304,000, or 10% of revenue for the year ended December 31, 2007. The decrease was primarily the result of lower legal fees of approximately $380,000 as we settled the Diomed and Covidien litigation matters in the second half of 2008 (see Note 14 to the Consolidated Financial Statements included in Item 8 of Part II of this Form 10-K). We expect general and administrative expenses to be approximately 6% to 7% of revenue during 2010.
Litigation expenses were $-0- for the year ended December 31, 2009, compared to $1,484,000 for the year ended December 31, 2008 and $5,800,000 for the year ended December 31, 2007. For the year ended December 31, 2009 we did not recognize any gain resulting from the Marine Polymer jury verdict. We received $3.56 million from Marine Polymer on January 22, 2010 and the gain will be recognized in the first quarter of 2010 (see Note 16 to the Consolidated Financial Statements included in Item 8 of Part II of this Form 10-K). In the second quarter of 2008 we recorded a gain of $1,659,000 due to the settlement of our litigation with Diomed (reflecting a reduction from the $5,245,000 litigation expense incurred in 2007 due to the Diomed jury verdict) and a litigation expense of $3,116,000 upon the settlement of the litigation with Covidien (see Note 14 to the Consolidated Financial Statements included in Item 8 of Part II of this Form 10-K).
Interest income decreased to $48,000 for the year ended December 31, 2009, compared to $203,000 for the year ended December 31, 2008 and $444,000 for the year ended December 31, 2007. The decrease in interest income was primarily the result of lower interest rates being paid on our deposit funds held at the bank.
Interest expense decreased to $38,000 for the year ended December 31, 2009, compared to $62,000 for the year ended December 31, 2008 and $148,000 for the year ended December 31, 2007. The decrease in interest expense was as a result of repaying our equipment line of credit during the year ended December 31, 2008.
Foreign exchange loss decreased to $10,000 for the year ended December 31, 2009, compared to $28,000 for the year ended December 31, 2008 and $-0- for the year ended December 31, 2007.
Income tax expense increased to $2,788,000 on income before taxes of $8,166,000 resulting in an income tax rate of 34% for the year ended December 31, 2009, compared to an income tax benefit of $13,045,000 for the year ended December 31, 2008 and income tax expense of $276,000 for the year ended December 31, 2007.
We assess the likelihood that our deferred tax assets will be recovered from future taxable income during the fourth quarter of each year. We consider projected future taxable income and ongoing tax planning strategies in assessing the amount of the valuation allowance necessary to offset our deferred tax assets that will not be recoverable. Based upon management’s assessment of all available evidence, including our cumulative pretax net income for fiscal years 2009 and 2008, estimates of future profitability and the overall prospects of our business, we determined that our current deferred tax assets are adequate at December 31, 2009. In the fourth quarter of 2008 we determined it was more likely than not that we would be able to realize a portion of our deferred tax assets in the future, and as a result recorded a $13.2 million income tax benefit. To determine the amount of the reduction in the valuation allowance, we projected our income over the next five years, which approximates the ten-year life of our three most significant products at this time. The amount of the valuation allowance reduction was based on our discounted projected taxable income. We will continue to assess the potential realization of our deferred tax assets on an annual basis or on an interim basis if circumstances warrant. If our actual results and updated projections vary significantly from our prior estimates, we expect to increase or decrease our valuation allowance against our gross deferred tax assets. Any adjustment to our earnings for the deferred tax would occur in the period we make the determination. With the exception of 2009 and 2008, we have not generated any significant pre-tax income in any year and therefore have not paid any federal income taxes since our inception in December 1996.
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As of December 31, 2009, we had approximately $40.3 million and $4.5 million of federal and state net operating loss carryforwards available to offset future taxable income which begin to expire in the year 2020. As of December 31, 2009, we also had federal and state research and development tax credit carryforwards of approximately $4.0 million which begin to expire in the year 2012. As of December 31, 2009, we also had a foreign tax loss carryforward of approximately $357,000, which does not expire. Under the United States Tax Reform Act of 1986, the amounts of and benefits from net operating loss carryforwards may be impaired or limited in certain circumstances, including significant changes in ownership interests. Future use of our existing net operating loss carryforwards may be restricted due to changes in ownership or from future tax legislation.
Liquidity and Capital Resources
Our cash and cash equivalents totaled $17,794,000 at December 31, 2009 compared to $7,209,000 in cash and cash equivalents at December 31, 2008, an increase of $10,585,000. Our cash equivalents are invested in a money market fund invested in all types of high quality, short-term money market instruments denominated in U.S. dollars such as debt instruments guaranteed by the governments of the United States, Western Europe, Australia, Japan and Canada, high quality corporate issuers and bank obligations. The money market fund’s assets are rated in the highest short-term category by nationally recognized rating agencies, such as Moody’s or Standard & Poor’s.
Cash provided by operations. We generated $10,374,000 of cash from operations during the year ended December 31, 2009. The cash generated during 2009 primarily resulted from our income before taxes of $8,166,000 since essentially all of our income taxes are offset by our deferred tax assets.
Cash used for investing activities.We used $1,325,000 of cash in investing activities during the year ended December 31, 2009. We incurred capital expenditures of $1,325,000 relating primarily to additional manufacturing equipment, leasehold improvements as part of our facility expansion and additional research and development equipment.
Cash provided by financing activities.We generated $1,536,000 of cash in financing activities during the year ended December 31, 2009. We used $354,000 of cash to repurchase shares that vested under outstanding restricted stock awards for income tax withholding purposes. This was offset by our receipt of $1,890,000 of cash we received under our Employee Stock Purchase Plan and upon the exercise of outstanding stock options.
We have a $10 million revolving line of credit with US Bank, which has a 12-month term, bears interest at the rate of LIBOR plus 1.60% and is secured by a first security interest on all of our assets. The credit facility includes one covenant that we cannot have a maximum cash flow leverage ratio greater than 2.5 to 1. The calculation of this covenant is determined by multiplying our annual lease expenses times six and adding any loans, then dividing this amount by the sum of our earnings before interest, taxes, depreciation, amortization and our annual operating lease payments. We were in compliance with this covenant on December 31, 2009. As of December 31, 2009, we had no outstanding balance on the $10 million revolving line of credit with an availability of $10 million.
The following table summarizes our contractual cash commitments as of December 31, 2009:
| | | | | | | | | | | | | | | | |
| | Payments Due by Period | |
| | | | | Less than
1 year | | | | | | | | More than
5 years | |
Contractual Obligation | | Total | | | 1 - 3 years | | 3 - 5 years | | |
Facility operating leases | | $ | 4,679,000 | | $ | 761,000 | | $ | 1,605,000 | | $ | 1,682,000 | | $ | 631,000 | |
We do not have any other significant cash commitments related to supply agreements, nor do we have any significant commitments for capital expenditures.
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We currently anticipate that we will experience positive cash flow from our normal operating activities for the foreseeable future. We currently believe that our working capital of $35.1 million at December 31, 2009 will be sufficient to meet all of our operating and capital requirements for the foreseeable future. However, our actual liquidity and capital requirements will depend upon numerous unpredictable factors, including the amount of revenues from sales of our existing and new products; the cost of maintaining, enforcing and defending patents and other intellectual property rights; competing technological and market developments; developments related to regulatory and third party reimbursement matters; and other factors.
Critical Accounting Policies
Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our consolidated financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate these estimates and judgments. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Our accounting policies are described in Note 2 to the consolidated financial statements. We set forth below those material accounting policies that we believe are the most critical to an investor’s understanding of our financial results and condition and that require complex management judgment.
Inventory
We state our inventory at the lower of cost (first-in, first-out method) or market. The estimated value of excess, obsolete and slow-moving inventory as well as inventory with a carrying value in excess of its net realizable value is established by us on a quarterly basis through review of inventory on hand and assessment of future demand, anticipated release of new products into the market, historical experience and product expiration. Our stated value of inventory could be materially different if demand for our products decreased because of competitive conditions or market acceptance, or if products become obsolete because of advancements in the industry. We have approximately $1.3 million of Sigma thrombin in inventory at December 31, 2009, which we expect to use in our hemostat products sold in international markets. We received regulatory approval in February 2008 allowing us to use the Sigma thrombin in our international hemostat products. In the fourth quarter of 2008 we wrote off $670,000 of our Sigma thrombin which we expect will expire before we are able to use it. We will continue to review our Sigma thrombin needs and we will write off any amounts we anticipate will not be used.
Revenue Recognition
We recognize revenue in accordance with generally accepted accounting principles as outlined in the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104Revenue Recognition, [ASC 605-10-S99], which requires that four basic criteria be met before revenue can be recognized: (i) persuasive evidence of an arrangement exists; (ii) the price is fixed or determinable; (iii) collectability is reasonably assured; and (iv) product delivery has occurred or services have been rendered. We recognize revenue as products are shipped based on FOB shipping point terms when title passes to customers. We negotiate credit terms on a customer-by-customer basis and products are shipped at an agreed upon price. All product returns must be pre-approved and, if approved, customers are subject to a 20% restocking charge.
We also generate revenues from license agreements and research collaborations and recognizes these revenues when earned. In accordance with Emerging Issues Task Force (EITF) Issue No. 00-21,Revenue Arrangements with Multiple Deliverables, [ASC 605-25], for deliverables which contain multiple deliverables, the Company separates the deliverables into separate accounting units if they meet the following criteria: (i) the delivered items have a stand-alone value to the customer; (ii) the fair value of any undelivered items can be reliably determined; and (iii) if the arrangement includes a general right of return, delivery of the undelivered items is probable and substantially controlled by the seller. Deliverables that do not meet these criteria are combined with one or more other deliverables into one accounting unit. Revenue from each accounting unit is recognized based on the applicable accounting literature, primarily Staff Accounting Bulletin (SAB) 104,Revenue Recognition,[ASC 605-10-S99].
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Effective April 1, 2008 we entered into a five-year distribution agreement with Nicolai, GmbH. As a result of entering into this distribution agreement, we no longer maintain a direct sales force in Germany. In connection with this distribution agreement, we received 500,000 Euros from Nicolai, GmbH in 2008. The payment was deferred and is being recognized ratably over the five-year term of the distribution agreement. The distribution agreement also includes provisions requiring us to pay Nicolai, GmbH specific amounts if we terminate the distribution agreement prior to the end of the five-year term. We do not intend to terminate the distribution agreement and, as such, have not recorded a liability relating to these potential future payments to Nicolai, GmbH.
On January 9, 2007, we entered into three separate agreements with King, consisting of a License Agreement, a Device Supply Agreement and a Thrombin-JMI® Supply Agreement. We licensed the exclusive rights to our products Thrombi-Pad, Thrombi-Gel and Thrombi-Paste to King for a one-time payment of $6 million. We continue to manufacture the licensed products for sale to King under the Device Supply Agreement. The Device Supply Agreement requires King to pay us a $1 million milestone payment upon the first commercial sale of Thrombi-Gel and again upon the first commercial sale of Thrombi-Paste. On May 30, 2007 we received the first $1 million payment related to King’s first commercial sale of Thrombi-Pad. In 2009 King decided to suspend indefinitely the clinical development of the Thrombi-Paste product. We are amortizing the $6 million license fee received on January 9, 2007 and the $1 million milestone payment received on May 30, 2007 on a straight-line basis over the remaining 10 years. We will amortize the second $1 million milestone payment over the remaining 10-year license period from the date it is received.
As part of the Device Supply Agreement, we agreed to conduct clinical studies for Thrombi-Gel and Thrombi-Paste, with the expected costs related to the clinical studies to be paid by King. Additionally, on May 18, 2007, we entered into a Product Development & Supply Agreement with a third party company by which we agreed to develop, manufacture and sell to this company a specialty version of our Twin-Pass dual access catheter, with the costs related to the development paid by this company. We have recognized collaboration revenue on these development agreements as it was earned under the agreements with King and the third party company. No revenue was recognized under the Product Development & Supply Agreement with the third party company for the year ended December 31, 2009 and none is expected in 2010.
In addition, we have reviewed the provisions of EITF Issue No. 07-01,Accounting for Collaborative Arrangements,[ASC 808-10], and believe the adoption of this EITF will have no impact on the amounts recorded under these agreements.
We analyze the rate of historical returns when evaluating the adequacy of the allowance for sales returns, which is included with the allowance for doubtful accounts on our balance sheet. At December 31, 2009, this reserve was $45,000 compared to $25,000 at December 31, 2008. If the historical data we use to calculate these estimates does not properly reflect future returns, revenue could be overstated.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This allowance is regularly evaluated by us for adequacy by taking into consideration factors such as past experience, credit quality of the customer base, age of the receivable balances, both individually and in the aggregate, and current economic conditions that may affect a customer’s ability to pay. At December 31, 2009, this reserve was $105,000 compared to $95,000 at December 31, 2008. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
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Warranty Costs
We provide a warranty for certain products against defects in material and workmanship for periods of up to 24 months. We record a liability for warranty claims at the time of sale. The amount of the liability is based on the amount we are charged by our original equipment manufacturer to cover the warranty period. The original equipment manufacturer includes a one year warranty with each product sold to us. We record a liability for the uncovered warranty period offered to a customer, provided the warranty period offered exceeds the initial one year warranty period covered by the original equipment manufacturer. At December 31, 2009, this warranty provision was $73,000 compared to $49,000 at December 31, 2008. If the assumptions used in calculating the provision were to materially change, resulting in more defects than anticipated, an additional provision may be required.
Income Taxes
The carrying value of our net deferred tax assets assumes that we will be able to generate sufficient taxable income in the United States based on estimates and assumptions. We record a valuation allowance to reduce the carrying value of our net deferred tax asset to the amount that is more likely than not to be realized. For the year ended December 31, 2009, we recorded a $14.4 million valuation allowance and a $727,000 reserve related to our net deferred tax assets of $25.5 million as a result of our adoption of Financial Accounting Standards Board Interpretation 48 (FIN 48),Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109, [ASC 740-10]. At December 31, 2009, we have accrued $-0- for the payment of tax related interest and there was no tax interest or penalties recognized in the statements of operations. In the fourth quarter of 2008, based upon management’s assessment of all available evidence, including our cumulative adjusted pretax net income for fiscal years 2008 and 2007 adjusted for certain non-recurring items allowed by FAS 109, [ASC 740-10], estimates of future profitability and the overall prospects of our business, we determined that it is more likely than not that we will be able to realize a portion of our deferred tax assets in the future, and as a result recorded a $13.2 million income tax benefit. To determine the amount of the reduction in the valuation allowance, we projected our income over the next five years, which approximates the ten-year life of our three most significant products at this time. The amount of the valuation allowance reduction was based on our discounted projected taxable income. We continue to assess the potential realization of our deferred tax assets on an annual basis, or on an interim basis if circumstances warrant. If our actual results and updated projections vary significantly from our projections, we would need to increase or decrease our valuation allowance against our gross deferred tax assets. We would adjust our earnings for the deferred tax in the period we make the determination. No additional income tax benefits have been recorded for the year ended December 31, 2009.
New Accounting Pronouncement
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168,The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles a Replacement of FASB Statement No. 162(“FAS 168”), [ASC 105-10]. This Standard establishes the FASB Accounting Standards Codification™ (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. The Codification was effective for interim and annual periods ending after September 15, 2009, and as of the effective date, all existing accounting standard documents have been superseded. The Codification was effective for us in the third quarter of 2009, and accordingly, our Quarterly Report on Form 10-Q for the quarter ending September 30, 2009 and all subsequent public filings will reference the Codification as the sole source of authoritative literature.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivables. We maintain our accounts for cash and cash equivalents principally at one major bank and one investment firm in the United States. We have a formal written investment policy that restricts the placement of investments to issuers evaluated as creditworthy. We have not experienced any losses on our deposits of our cash and cash equivalents.
With respect to accounts receivable, we perform credit evaluations of our customers and do not require collateral. There have been no material losses on accounts receivables.
In the United States we sell our products directly to hospitals and clinics. In international markets, we sell our products to independent distributors who, in turn, sell to medical clinics. We sell our product in these countries through independent distributors denominated in United States dollars, with the exception of Germany, where sales are denominated in Euros.
We do not believe our operations are currently subject to significant market risks for interest rates, foreign currency exchange rates, commodity prices or other relevant market price risks of a material nature. A change of 0.1 in the Euro exchange would result in an increase or decrease of approximately $21,000 in the amount of United States dollars we receive in payment on accounts receivable from Nicolai, GmbH. Under our current policies, we do not use foreign currency derivative instruments to manage exposure to fluctuations in the Euro exchange rate.
We currently have no indebtedness, but if we were to borrow amounts from our revolving credit line, we would be exposed to changes in interest rates. Advances under our revolving credit line bear interest at an annual rate indexed to LIBOR. We will thus be exposed to interest rate risk with respect to amounts outstanding under the line of credit to the extent that interest rates rise. As we had no amounts outstanding on the line of credit at December 31, 2009, we have no exposure to interest rate changes on this credit facility. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. Additionally, we will be exposed to declines in the interest rates paid on deposited funds. A 1% decline in the current market interest rates paid on deposits would result in interest income being reduced by approximately $178,000 on an annual basis.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Notes thereto required pursuant to this Item begin on page 40 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.
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Changes in Internal Controls.
During the fiscal quarter ended December 31, 2009, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal Control - Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework inInternal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2009.
Baker Tilly Virchow Krause, LLP, an independent registered public accounting firm, has issued an attestation report on our internal control over financial reporting as of December 31, 2009.
Attestation Report of Independent Registered Public Accounting Firm.
Baker Tilly Virchow Krause, LLP, an independent registered public accounting firm, has issued an attestation report on our internal control over financial reporting as of December 31, 2009. The attestation report of Baker Tilly Virchow Krause, LLP, on our internal control over financial reporting as of December 31, 2009 is included on page 40 and incorporated by reference herein.
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPRATE GOVERNANCE
Incorporated herein by reference to the Sections under the headings “Proposal 1: Election of Directors,” “Committees of the Board of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” contained in the Proxy Statement for our Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days of the close of the year ended December 31, 2009.
See the section under the heading “Executive Officers of the Registrant” in Item 1 of Part I herein for information regarding our executive officers.
Code of Ethics
We have adopted a code of ethics that applies to all of our directors, officers (including our chief executive officer, chief financial officer, chief accounting officer, and any person performing similar functions) and employees. We have posted our Code of Ethics in the “Corporate Governance” section of our website, http://www.vascularsolutions.com.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to the Sections under the headings “Director Compensation” and “Executive Compensation” contained in the Proxy Statement for our Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days of the close of the year ended December 31, 2009.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Incorporated herein by reference to the Section under the heading “Security Ownership of Certain Beneficial Owners and Management” contained in the Proxy Statement for our Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days of the close of the year ended December 31, 2009.
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Equity Compensation Plans
The following table sets forth the securities authorized to be issued under our current equity compensation plans as of December 31, 2009:
| | | | | | | | | | |
Plan category | | Number of
securities to be
issued upon
exercise of
outstanding
options and
rights | | Weighted-average
exercise price of
outstanding options and
rights | | Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
outstanding options
and rights) | |
Equity compensation plans approved by security holders | | | 1,030,000 | | $ | 6.06 | | | 3,651,000 | (1)(2) |
| | | | | | | | | | |
Equity compensation plans not approved by security holders | | | None | | | None | | | None | |
| | | | | | | | | | |
Total | | | 1,030,000 | | $ | 6.06 | | | 3,651,000 | |
| | | |
(1) | Includes 2,800,000 shares reserved and available for issuance under our Stock Option and Stock Award Plan. The shares available for issuance under our Stock Option and Stock Award Plan automatically increases on an annual basis through 2016, by the lesser of: |
| |
| | • | 500,000 shares; |
| | | |
| | • | 5% of the common-equivalent shares outstanding at the end of our prior fiscal year; or |
| | | |
| | • | a smaller amount determined by our Board of Directors or the committee administering the plan. |
| | | |
(2) | Includes 851,000 shares reserved and available for issuance under our Employee Stock Purchase Plan. The shares available for issuance under our Employee Stock Purchase Plan automatically increases on an annual basis through 2010, by the lesser of: |
| |
| | • | 200,000 shares; |
| | | |
| | • | 2% of the common-equivalent shares outstanding at the end of our prior fiscal year; or |
| | | |
| | • | a smaller amount determined by our Board of Directors or the committee administering the plan. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Incorporated herein by reference to the Sections under the headings “Related Person Transaction Policy” and “Proposal 1: Election of Directors” contained in the Proxy Statement for our Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days of the close of the year ended December 31, 2009.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated herein by reference to the Section under the heading “Additional Information about our Independent Registered Public Accounting Firm” contained in the Proxy Statement for our Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days of the close of the year ended December 31, 2009.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this Report.
| | |
(1) | The following financial statements are filed herewith in Item 8 in Part II. |
| |
| (i) | Reports of Independent Registered Public Accounting Firm |
| | |
| (ii) | Consolidated Balance Sheets |
| | |
| (iii) | Consolidated Statements of Operations |
| | |
| (iv) | Consolidated Statements of Changes in Shareholders’ Equity |
| | |
| (v) | Consolidated Statements of Cash Flows |
| | |
| (vi) | Notes to Consolidated Financial Statements |
| | |
(2) | Financial Statement Schedules |
Schedule II – Valuation and Qualifying Accounts. Such schedule should be read in conjunction with the consolidated financial statements. All other supplemental schedules are omitted because of the absence of conditions under which they are required.
| | | |
Exhibit
Number | | Description | |
3.1 | | Amended and Restated Articles of Incorporation of Vascular Solutions, Inc. (incorporated by reference to Exhibit 3.1 to Vascular Solutions’ Form 10-Q for the quarter ended September 30, 2000). |
3.2 | | Amended and Restated Bylaws of Vascular Solutions, Inc. (incorporated by reference to Exhibit 3.1 of Vascular Solutions’ Form 8-K dated October 19, 2007). |
4.1 | | Specimen of Common Stock certificate (incorporated by reference to Exhibit 4.1 of Vascular Solutions’ Registration Statement on Form S-1 (File No. 333-84089)). |
10.1 | | Lease Agreement dated December 28, 2006 by and between IRET - Plymouth, LLC as Landlord and Vascular Solutions, Inc. as Tenant (incorporated by reference to Exhibit 10.4 of Vascular Solutions’ Form 10-K for the year ended December 31, 2006). |
10.2 | | Amendment to Lease Agreement, dated November 12, 2007, by and between IRET - Plymouth, LLC as Landlord and Vascular Solutions, Inc. as Tenant (incorporated by reference to Exhibit 99.1 of Vascular Solutions’ Form 8-K dated November 14, 2007). |
10.3 | | Amendment to Lease Agreement, dated November 12, 2007, by and between IRET – Plymouth, LLC as Landlord and Vascular Solutions, Inc. as Tenant (incorporated by reference to Exhibit 99.2 of Vascular Solutions’ Form 8-K dated November 14, 2007). |
10.4 | | Mutual and General Release dated November 9, 1998 by and between Vascular Solutions, Inc., Dr. Gary Gershony and B. Braun Medical, Inc. (incorporated by reference to Exhibit 10.5 of Vascular Solutions’ Registration Statement on Form S-1 (File No. 333-84089)). |
10.5 | | Purchase and Sale Agreement dated September 17, 1998 by and between Vascular Solutions, Inc. and Davol Inc. (incorporated by reference to Exhibit 10.8 of Vascular Solutions’ Registration Statement on Form S-1 (File No. 333-84089)). |
36
| | | |
Exhibit
Number | | Description | |
10.7** | | Form of Employment Agreement by and between Vascular Solutions, Inc. and each of its executive officers (incorporated by reference to Exhibit 10.5 of Vascular Solutions’ Form 10-Q for the quarter ended March 31, 2004). |
10.8 | | Form of Distribution Agreement (incorporated by reference to Exhibit 10.12 of Vascular Solutions’ Registration Statement on Form S-1 (File No. 333-84089)). |
10.9** | | Vascular Solutions, Inc. Employee Stock Purchase Plan, as amended (incorporated by reference to Exhibit 10.14 to Vascular Solutions’ Form 10-K for the year ended December 31, 2000). |
10.10*** | | Supply Agreement dated October 18, 2004 by and between Vascular Solutions and Sigma-Aldrich Fine Chemicals, an operating division of Sigma-Aldrich, Inc. (incorporated by reference to Exhibit 10.12 to Vascular Solutions’ Form 10-K for the year ended December 31, 2004). |
10.11*** | | Amendment to Supply Agreement dated December 15, 2006 by and between Vascular Solutions and Sigma-Aldrich Fine Chemicals, an operating division of Sigma-Aldrich, Inc. (incorporated by reference to Exhibit 10.12 of Vascular Solutions’ Form 10-K for the year ended December 31, 2006). |
10.12* | | Credit Agreement, dated December 21, 2009, between U.S. Bank Association and Vascular Solutions, Inc. |
10.13* | | Security Agreement, dated December 21, 2009, between U.S. Bank Association and Vascular Solutions, Inc. |
10.14* | | Promissory Note, dated December 21, 2009, between U. S. Bank Association and Vascular Solutions, Inc. |
10.15** | | Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.1 of Vascular Solutions’ Form 8-K dated September 22, 2004). |
10.17** | | Form of Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.2 of Vascular Solutions’ Form 8-K dated September 22, 2004). |
10.18** | | Form of Board of Directors Stock Option Agreement, as amended December 9, 2005 (incorporated by reference to Exhibit 10.2 of Vascular Solutions’ Form 8-K dated December 9, 2005). |
10.19** | | Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.3 of Vascular Solutions’ Form 8-K dated December 9, 2005). |
10.20 | | License agreement dated January 9, 2007 by and between Vascular Solutions and King Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.22 of Vascular Solutions’ Form 10-K for the year ended December 31, 2006). |
10.21*** | | Device Supply agreement dated January 9, 2007 by and between Vascular Solutions and King Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.23 of Vascular Solutions’ Form 10-K for the year ended December 31, 2006). |
10.22*** | | Thrombin-JMI® Supply Agreement dated January 9, 2007 by and between Vascular Solutions and King Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.24 of Vascular Solutions’ Form 10-K for the year ended December 31, 2006). |
10.23** | | Vascular Solutions, Inc. Stock Option and Stock Award Plan, as amended January 25, 2006, effective April 18, 2006 (incorporated by reference to Exhibit 10.1 of Vascular Solutions’ Form 10-Q for the quarter ended March 31, 2006). |
10.24 | | Settlement Agreement dated April 8, 2008 between Vascular Solutions, Inc. and Diomed, Inc. (incorporated by reference to Exhibit 10.1 of Vascular Solutions’ Form 8-K dated April 10, 2008). |
10.25*** | | Settlement Agreement dated June 2, 2008 among VNUS Medical Technologies, Inc. (acquired by Covidien), AngioDynamics, Inc. and Vascular Solutions, Inc. (incorporated by reference to Exhibit 10.2 of Vascular Solutions’ Form 10-Q for the quarter ended June 30, 2008). |
10.26** | | Separation Agreement and General Release dated December 31, 2009 between Vascular Solutions, Inc. and James H. Quackenbush (incorporated by reference to Exhibit 10.1 of Vascular Solutions’ Form 8-K dated December 31, 2009). |
23.1* | | Consent of Baker Tilly Virchow Krause, LLP. |
24.1 | | Power of Attorney (included on signature page). |
37
| | | |
Exhibit
Number | | Description | |
31.1* | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2* | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1* | | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2* | | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
* Filed herewith. |
**Management contract or compensatory plan or arrangement required to be filed as an Exhibit to this Form 10-K. |
*** Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of these exhibits have been deleted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. |
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 2nd day of February 2010.
| | |
| VASCULAR SOLUTIONS, INC. |
|
| By: | /s/ Howard Root |
| | Howard Root |
| | Chief Executive Officer and Director |
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Howard Root and James Hennen (with full power to act alone), as his true and lawful attorneys-in-fact and agents, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to the Annual Report on Form 10-K of Vascular Solutions, Inc. for the year ended December 31, 2009, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on the 2nd day of February 2010, by the following persons in the capacities indicated.
| | | | | | |
| Signature | | | | Title | |
| | |
/s/ Howard Root | | Chief Executive Officer and Director |
Howard Root | | (principal executive officer) |
| | |
/s/ James Hennen | | Vice President, Finance and Chief Financial Officer and Secretary |
James Hennen | | (principal financial officer) |
| | |
/s/ Timothy Slayton | | Controller |
Timothy Slayton | | (principal accounting officer) |
| | |
/s/ Richard Nigon | | Director |
Richard Nigon | | |
| | |
| | Director |
Michael Kopp | | |
| | |
/s/ Paul O’Connell | | Director |
Paul O’Connell | | |
| | |
/s/ John Erb | | Director |
John Erb | | |
| | |
/s/ Jorge Saucedo | | Director |
Jorge Saucedo | | |
| | |
/s/ Charmaine Sutton | | Director |
Charmaine Sutton | | |
39
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Vascular Solutions, Inc.
Under date of February 2, 2010, we reported on the consolidated balance sheets of Vascular Solutions, Inc. as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009 as contained in the annual report on Form 10-K for the year ended December 31, 2009. In connection with our audits of the aforementioned consolidated financial statements, we have also audited the related financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
| |
| /s/ Baker Tilly Virchow Krause, LLP |
| |
Minneapolis, Minnesota | |
February 2, 2010 | |
40
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
| | | | | | | | | | | | | |
Description | | Balance at
Beginning
of Year | | Additions
Charged
to Costs
and
Expenses | | Less
Deductions | | Balance at
End of
Year | |
| | | | | | | | | | | | | |
YEAR ENDED DECEMBER 31, 2009: | | | | | | | | | | | | | |
Sales return allowance | | $ | 25,000 | | $ | 20,000 | | $ | — | | $ | 45,000 | |
Allowance for doubtful accounts | | | 95,000 | | | 62,000 | | | (52,000 | ) | | 105,000 | |
Total | | $ | 120,000 | | $ | 82,000 | | $ | (52,000 | ) | $ | 150,000 | |
| | | | | | | | | | | | | |
YEAR ENDED DECEMBER 31, 2008: | | | | | | | | | | | | | |
Sales return allowance | | $ | 40,000 | | $ | — | | $ | (15,000 | ) | $ | 25,000 | |
Allowance for doubtful accounts | | | 90,000 | | | 58,000 | | | (53,000 | ) | | 95,000 | |
Total | | $ | 130,000 | | $ | 58,000 | | $ | (68,000 | ) | $ | 120,000 | |
| | | | | | | | | | | | | |
YEAR ENDED DECEMBER 31, 2007: | | | | | | | | | | | | | |
Sales return allowance | | $ | 45,000 | | $ | — | | $ | (5,000 | ) | $ | 40,000 | |
Allowance for doubtful accounts | | | 65,000 | | | 37,000 | | | (12,000 | ) | | 90,000 | |
Total | | $ | 110,000 | | $ | 37,000 | | $ | (17,000 | ) | $ | 130,000 | |
41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders, Audit Committee and Board of Directors
Vascular Solutions, Inc.
Minneapolis, MN
We have audited the accompanying consolidated balance sheets of Vascular Solutions, Inc. as of December 31, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2009. We also have audited Vascular Solutions, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established inInternal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Vascular Solutions, Inc.’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting included in Item 9A Controls and Procedures. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vascular Solutions, Inc. as of December 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Vascular Solutions, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established inInternal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
|
/s/ Baker Tilly Virchow Krause, LLP |
|
Minneapolis, Minnesota |
February 2, 2010 |
42
Vascular Solutions, Inc.
Consolidated Balance Sheets
| | | | | | | |
| | December 31 | |
| | 2009 | | 2008 | |
Assets | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | | $ | 17,794,000 | | $ | 7,209,000 | |
Accounts receivable, net of reserves of $150,000 and $120,000 at December 31, 2009 and 2008, respectively | | | 9,143,000 | | | 8,706,000 | |
Inventories | | | 8,977,000 | | | 9,974,000 | |
Prepaid expenses | | | 1,520,000 | | | 1,045,000 | |
Current portion of deferred tax assets | | | 4,500,000 | | | 2,680,000 | |
Total current assets | | | 41,934,000 | | | 29,614,000 | |
| | | | | | | |
Property and equipment, net | | | 3,793,000 | | | 3,887,000 | |
Intangible assets, net | | | 193,000 | | | 193,000 | |
Deferred tax assets, net of current portion and liabilities | | | 5,835,000 | | | 10,486,000 | |
Total assets | | $ | 51,755,000 | | $ | 44,180,000 | |
| | | | | | | |
Liabilities and shareholders’ equity | | | | | | | |
Current liabilities: | | | | | | | |
Accounts payable | | $ | 1,396,000 | | $ | 2,022,000 | |
Accrued compensation | | | 2,978,000 | | | 2,584,000 | |
Accrued expenses | | | 865,000 | | | 848,000 | |
Accrued royalties | | | 621,000 | | | 576,000 | |
Current portion of deferred revenue | | | 929,000 | | | 907,000 | |
Total current liabilities | | | 6,789,000 | | | 6,937,000 | |
| | | | | | | |
Long-term deferred revenue, net of current portion | | | 4,567,000 | | | 5,417,000 | |
| | | | | | | |
Commitments and contingencies | | | | | | | |
| | | | | | | |
Shareholders’ equity: | | | | | | | |
Common stock, $0.01 par value: | | | | | | | |
Authorized shares – 40,000,000 | | | | | | | |
Issued and outstanding shares – 16,557,669 – 2009; 16,027,519 – 2008 | | | 166,000 | | | 160,000 | |
Additional paid-in capital | | | 88,481,000 | | | 85,292,000 | |
Other | | | 84,000 | | | 84,000 | |
Accumulated deficit | | | (48,332,000 | ) | | (53,710,000 | ) |
Total shareholders’ equity | | | 40,399,000 | | | 31,826,000 | |
Total liabilities and shareholders’ equity | | $ | 51,755,000 | | $ | 44,180,000 | |
See accompanying notes.
43
Vascular Solutions, Inc.
Consolidated Statements of Operations
| | | | | | | | | | |
| | Year Ended December 31 | |
| | 2009 | | 2008 | | 2007 | |
| | | | | | | | | | |
Revenue: | | | | | | | | | | |
Product revenue | | $ | 66,726,000 | | $ | 59,757,000 | | $ | 51,414,000 | |
License and collaboration revenue | | | 1,701,000 | | | 1,464,000 | | | 1,450,000 | |
Total revenue | | | 68,427,000 | | | 61,221,000 | | | 52,864,000 | |
| | | | | | | | | | |
Product costs and operating expenses: | | | | | | | | | | |
Cost of goods sold | | | 22,917,000 | | | 20,690,000 | | | 17,002,000 | |
Cost of goods sold related to thrombin inventory | | | — | | | 670,000 | | | — | |
Collaboration expenses | | | 850,000 | | | 632,000 | | | 685,000 | |
Research and development | | | 7,847,000 | | | 6,333,000 | | | 5,481,000 | |
Clinical and regulatory | | | 2,886,000 | | | 3,220,000 | | | 3,168,000 | |
Sales and marketing | | | 21,206,000 | | | 20,482,000 | | | 19,603,000 | |
General and administrative | | | 4,555,000 | | | 4,695,000 | | | 5,304,000 | |
Litigation | | | — | | | 1,484,000 | | | 5,800,000 | |
Thrombin qualification | | | — | | | — | | | 147,000 | |
Total product costs and operating expenses | | | 60,261,000 | | | 58,206,000 | | | 57,190,000 | |
| | | | | | | | | | |
Operating income (loss) | | | 8,166,000 | | | 3,015,000 | | | (4,326,000 | ) |
| | | | | | | | | | |
Other income (expenses): | | | | | | | | | | |
Interest income | | | 48,000 | | | 203,000 | | | 444,000 | |
Interest expense | | | (38,000 | ) | | (62,000 | ) | | (148,000 | ) |
Foreign exchange loss | | | (10,000 | ) | | (28,000 | ) | | — | |
| | | | | | | | | | |
Income (loss) before income taxes | | | 8,166,000 | | | 3,128,000 | | | (4,030,000 | ) |
| | | | | | | | | | |
Income tax benefit (expense) | | | (2,788,000 | ) | | 13,045,000 | | | (276,000 | ) |
Net income (loss) | | $ | 5,378,000 | | $ | 16,173,000 | | $ | (4,306,000 | ) |
| | | | | | | | | | |
Basic net income (loss) per common share | | $ | 0.34 | | $ | 1.04 | | $ | (0.28 | ) |
Diluted net income (loss) per common share | | $ | 0.33 | | $ | 1.01 | | $ | (0.28 | ) |
Shares used in computing basic net income (loss) per common share | | | 16,046,534 | | | 15,588,135 | | | 15,237,836 | |
Shares used in computing diluted net income (loss) per common share | | | 16,474,708 | | | 15,954,631 | | | 15,237,836 | |
See accompanying notes.
44
Vascular Solutions, Inc.
Consolidated Statements of Changes in Shareholders’ Equity
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | Additional
Paid-In
Capital | | | | | | | | | | |
| | Common Stock | | | | | | Accumulated
Deficit | | | | |
| | Shares | | Amount | | | Other | | | Total | |
Balance at December 31, 2006 | | | 15,141,181 | | | 151,000 | | | 79,841,000 | | | 52,000 | | | (65,577,000 | ) | | 14,467,000 | |
Exercise of stock options | | | 208,781 | | | 2,000 | | | 473,000 | | | — | | | — | | | 475,000 | |
Issuance of common stock under the Employee Stock Purchase Plan | | | 102,194 | | | 1,000 | | | 666,000 | | | — | | | — | | | 667,000 | |
Stock option compensation | | | 154,500 | | | 2,000 | | | 1,455,000 | | | — | | | — | | | 1,457,000 | |
Deferred compensation related to option grants | | | — | | | — | | | 21,000 | | | (21,000 | ) | | — | | | — | |
Amortization of deferred compensation | | | — | | | — | | | — | | | 26,000 | | | — | | | 26,000 | |
Comprehensive loss: | | | | | | | | | | | | | | | | | | | |
Net loss | | | — | | | — | | | — | | | — | | | (4,306,000 | ) | | (4,306,000 | ) |
Translation adjustment | | | — | | | — | | | — | | | 39,000 | | | — | | | 39,000 | |
Total comprehensive loss | | | | | | | | | | | | | | | | | | (4,267,000 | ) |
Balance at December 31, 2007 | | | 15,606,656 | | | 156,000 | | | 82,456,000 | | | 96,000 | | | (69,883,000 | ) | | 12,825,000 | |
| | | | | | | | | | | | | | | | | | | |
Exercise of stock options | | | 184,860 | | | 2,000 | | | 617,000 | | | — | | | — | | | 619,000 | |
Issuance of common stock under the Employee Stock Purchase Plan | | | 133,274 | | | 1,000 | | | 701,000 | | | — | | | — | | | 702,000 | |
Stock option compensation | | | 130,000 | | | 1,000 | | | 1,676,000 | | | — | | | — | | | 1,677,000 | |
Cancellation of common stock upon the vesting of restricted shares | | | (27,271 | ) | | — | | | (158,000 | ) | | — | | | — | | | (158,000 | ) |
Amortization of deferred compensation | | | — | | | — | | | — | | | 9,000 | | | — | | | 9,000 | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | |
Net income | | | — | | | — | | | — | | | — | | | 16,173,000 | | | 16,173,000 | |
Translation adjustment | | | — | | | — | | | — | | | (21,000 | ) | | — | | | (21,000 | ) |
Total comprehensive income | | | | | | | | | | | | | | | | | | 16,152,000 | |
Balance at December 31, 2008 | | | 16,027,519 | | $ | 160,000 | | $ | 85,292,000 | | $ | 84,000 | | $ | (53,710,000 | ) | $ | 31,826,000 | |
| | | | | | | | | | | | | | | | | | | |
Exercise of stock options | | | 247,990 | | | 3,000 | | | 1,140,000 | | | — | | | — | | | 1,143,000 | |
Issuance of common stock under the Employee Stock Purchase Plan | | | 140,790 | | | 1,000 | | | 746,000 | | | — | | | — | | | 747,000 | |
Stock option compensation | | | 180,500 | | | 2,000 | | | 1,657,000 | | | — | | | — | | | 1,659,000 | |
Repurchase and cancellation of common stock upon the vesting of restricted shares | | | (39,130 | ) | | — | | | (354,000 | ) | | — | | | — | | | (354,000 | ) |
Amortization of deferred compensation | | | — | | | — | | | — | | | — | | | — | | | — | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | |
Net income | | | — | | | — | | | — | | | — | | | 5,378,000 | | | 5,378,000 | |
Translation adjustment | | | — | | | — | | | — | | | — | | | — | | | — | |
Total comprehensive income | | | | | | | | | | | | | | | | | | 5,378,000 | |
Balance at December 31, 2009 | | | 16,557,669 | | $ | 166,000 | | $ | 88,481,000 | | $ | 84,000 | | $ | (48,332,000 | ) | $ | 40,399,000 | |
See accompanying notes.
45
Vascular Solutions, Inc.
Consolidated Statements of Cash Flows
| | | | | | | | | | |
| | Year Ended December 31 | |
| | 2009 | | 2008 | | 2007 | |
Operating activities | | | | | | | | | | |
Net income (loss) | | $ | 5,378,000 | | $ | 16,173,000 | | $ | (4,306,000 | ) |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | | | | |
Depreciation | | | 1,418,000 | | | 1,469,000 | | | 1,376,000 | |
Stock-based compensation | | | 1,659,000 | | | 1,677,000 | | | 1,457,000 | |
Deferred compensation expense | | | — | | | 9,000 | | | 26,000 | |
Deferred taxes, net | | | 2,832,000 | | | (13,194,000 | ) | | 28,000 | |
Loss on disposal of fixed assets | | | — | | | 26,000 | | | — | |
Change in accounts receivable allowance | | | 30,000 | | | (10,000 | ) | | 20,000 | |
Changes in operating assets and liabilities: | | | | | | | | | | |
Accounts receivable | | | (467,000 | ) | | (1,330,000 | ) | | (848,000 | ) |
Inventories | | | 996,000 | | | (1,667,000 | ) | | (1,080,000 | ) |
Prepaid expenses | | | (474,000 | ) | | (235,000 | ) | | (14,000 | ) |
Accounts payable | | | (626,000 | ) | | 1,000 | | | 758,000 | |
Accrued compensation and expenses | | | 456,000 | | | (5,091,000 | ) | | 5,524,000 | |
Deferred license fees received | | | — | | | 731,000 | | | 7,000,000 | |
Amortization of deferred license fees and other deferred revenue | | | (828,000 | ) | | (845,000 | ) | | (562,000 | ) |
Net cash provided by (used in) operating activities | | | 10,374,000 | | | (2,286,000 | ) | | 9,379,000 | |
| | | | | | | | | | |
Investing activities | | | | | | | | | | |
Purchase of property and equipment, net | | | (1,325,000 | ) | | (1,536,000 | ) | | (1,545,000 | ) |
Cash deposits transferred from (to) restricted cash | | | — | | | 5,473,000 | | | (5,473,000 | ) |
Net cash provided by (used in) investing activities | | | (1,325,000 | ) | | 3,937,000 | | | (7,018,000 | ) |
| | | | | | | | | | |
Financing activities | | | | | | | | | | |
Net proceeds from the exercise of stock options and stock warrants | | | 1,143,000 | | | 619,000 | | | 475,000 | |
Net proceeds from the sale of common stock, employee stock purchase plan | | | 747,000 | | | 702,000 | | | 667,000 | |
Payments on long-term debt borrowings | | | — | | | (867,000 | ) | | (800,000 | ) |
Repurchase and cancellation of common shares | | | (354,000 | ) | | (158,000 | ) | | — | |
Net cash provided by financing activities | | | 1,536,000 | | | 296,000 | | | 342,000 | |
Effect of exchange rate changes on cash and cash equivalents | | | — | | | (24,000 | ) | | 26,000 | |
Increase in cash and cash equivalents | | | 10,585,000 | | | 1,923,000 | | | 2,729,000 | |
Cash and cash equivalents at beginning of year | | | 7,209,000 | | | 5,286,000 | | | 2,557,000 | |
Cash and cash equivalents at end of year | | $ | 17,794,000 | | $ | 7,209,000 | | $ | 5,286,000 | |
|
Supplemental disclosure of cash flow | | | | | | | | | | |
Cash paid for interest | | $ | 39,000 | | $ | 68,000 | | $ | 155,000 | |
Cash paid for taxes | | $ | 191,000 | | $ | 252,000 | | $ | 149,000 | |
See accompanying notes.
46
1. Description of Business
Vascular Solutions, Inc. (the Company) is a medical device company focused on bringing clinically advanced solutions to interventional cardiologists and interventional radiologists. The Company’s main product lines consist of the following:
| | |
| • | Hemostat (blood clotting) products, principally consisting of the D-Stat® Dry hemostat, a topical thrombin-based pad with a bandage used to control surface bleeding, and the D-Stat Flowable, a thick yet flowable thrombin-based mixture for preventing bleeding in subcutaneous pockets, |
| | |
| • | Extraction catheters, principally consisting of the Pronto® V3 and Pronto LP extraction catheters, mechanical systems for the removal of soft thrombus from arteries, |
| | |
| • | Vein products, principally consisting of the Vari-Lase® endovenous laser, a laser and procedure kit used for the treatment of varicose veins, |
| | |
| • | Access products, principally consisting of micro-introducer kits, MICROElite™ and EXPROElite™ snares, the Guardian® hemostasis valve, and guidewires used in connection with percutaneous access to the vasculature, and |
| | |
| • | Specialty catheters, consisting of a variety of catheters for clinical niches including the Langston® dual lumen catheters, Twin-Pass® dual access catheters, GuideLiner™ catheter, Minnie™ support catheter, and Gopher™ catheter. |
As a vertically-integrated medical device company, the Company generates ideas and creates new interventional medical devices and then delivers the products directly to the physician through a direct domestic sales force and an international distribution network. The Company was incorporated in the state of Minnesota in December 1996 and began operations in February 1997.
2. Summary of Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements include the accounts of Vascular Solutions, Inc. and its wholly owned subsidiary, Vascular Solutions GmbH, after elimination of intercompany accounts and transactions.
Segment Reporting
A business segment is a distinguishable component of an enterprise that is engaged in providing an individual product or service or a group of related products or services and that is subject to risks and returns that are different from those of other business segments. The Company’s segments have similar economic characteristics and are similar in the nature of the products sold, type of customers, methods used to distribute the Company’s products and regulatory environment. Management believes that the Company meets the criteria for aggregating its operating segments into a single reporting segment.
47
2. Summary of Significant Accounting Policies (Continued)
Our primary products are categorized into five product lines. The following table sets forth, for the periods indicated, net revenue by product line along with the percent change from the previous year:
| | | | | | | | | | | | | | | | | | | |
| | For Years Ended December 31, | |
| | 2009 | | 2008 | | 2007 | |
| | Net Revenue | | Percent
Change | | Net Revenue | | Percent
Change | | Net Revenue | | Percent
Change | |
| | | | | | | | | | | | | | | | | | | |
Hemostat products | | $ | 24,428,000 | | | 4 | % | $ | 23,475,000 | | | (5 | %) | $ | 24,712,000 | | | 14 | % |
Extraction catheters | | | 16,897,000 | | | 13 | % | | 14,992,000 | | | 36 | % | | 11,016,000 | | | 22 | % |
Vein products | | | 11,225,000 | | | 12 | % | | 10,035,000 | | | 16 | % | | 8,629,000 | | | 22 | % |
Access products | | | 7,298,000 | | | 31 | % | | 5,561,000 | | | 99 | % | | 2,790,000 | | | 74 | % |
Specialty catheters | | | 5,905,000 | | | 29 | % | | 4,563,000 | | | 36 | % | | 3,363,000 | | | 8 | % |
Other products | | | 973,000 | | | (14 | %) | | 1,131,000 | | | 25 | % | | 904,000 | | | 18 | % |
License & Collaboration | | | 1,701,000 | | | 16 | % | | 1,464,000 | | | 1 | % | | 1,450,000 | | | N/A | |
| | | | | | | | | | | | | | | | | | | |
Total Net Revenue | | $ | 68,427,000 | | | 12 | % | $ | 61,221,000 | | | 16 | % | $ | 52,864,000 | | | 22 | % |
Foreign Currency Translation and Transactions
The Company’s German subsidiary Vascular Solutions, GmbH accounted for its transactions in its functional currency, the Euro. Foreign assets and liabilities are translated into United States dollars using the year-end exchange rates. Equity is translated at average historical exchange rates. Results of operations are translated using the average exchange rates throughout the year. Translation gains or losses are accumulated as a separate component of shareholders’ equity.
Effective April 1, 2008 the Company began to sell products to a new international distributor in Germany at prices denominated in Euros. The Company also purchases a small number of inventory items at prices denominated in Euros. As a result, the Company is exposed to foreign exchange movements during the time between the shipment of the product and payment. The Company currently has terms of net 60 days with this distributor and net 30 days with vendors under the agreements providing for payments in Euros.
Comprehensive Loss
The components of comprehensive income (loss) are net income (loss) and the effects of foreign currency translation adjustments. The accumulated other comprehensive income (loss) for the foreign currency translation adjustment at December 31, 2009 and 2008 was $84,000 and $84,000, respectively.
Fair Value of Financial Instruments
The carrying amount for cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximates fair value due to the immediate or short-term maturity of these financial instruments. The fair value of long-term debt approximated their carrying value because the terms are equivalent to borrowing rates currently available to the Company for debt with similar terms and maturities.
48
2. Summary of Significant Accounting Policies (Continued)
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of deferred tax assets and liabilities, as well as other amounts in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company classifies all highly liquid investments with initial maturities of three months at the date of purchase or less as cash equivalents. Cash equivalents consist of cash and money market funds and are stated at cost, which approximates market value. The Company deposits its cash in high quality financial institutions. The balances, at times, may exceed federally insured limits.
Credit Risk and Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. This allowance is regularly evaluated by the Company for adequacy by taking into consideration factors such as past experience, credit quality of the customer base, age of the receivable balances, both individually and in the aggregate, and current economic conditions that may affect a customer’s ability to pay. Accounts receivable over 60 days past due are considered past due. The Company does not accrue interest on past due accounts receivable. Receivables are written off only after all collection attempts have failed and are based on individual credit evaluation and the specific circumstances of the customer. At December 31, 2009 and 2008, the allowance for doubtful accounts was $105,000 and $95,000, respectively.
All product returns must be pre-approved and, if approved, customers are subject to a 20% restocking charge. The Company analyzes the rate of historical returns when evaluating the adequacy of the allowance for sales returns, which is included with the allowance for doubtful accounts on its balance sheet. At December 31, 2009 and 2008, the sales and return allowance was $45,000 and $25,000, respectively.
Accounts receivable are shown net of the combined total of the allowance for doubtful accounts and allowance for sales returns of $150,000 and $120,000 at December 31, 2009 and 2008, respectively.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or market. Appropriate consideration is given to deterioration, obsolescence and other factors in evaluating net realizable value. Inventories are comprised of the following at December 31:
| | | | | | | |
| | 2009 | | 2008 | |
Raw materials | | $ | 4,382,000 | | $ | 4,943,000 | |
Work-in-process | | | 858,000 | | | 871,000 | |
Finished goods | | | 3,737,000 | | | 4,160,000 | |
| | $ | 8,977,000 | | $ | 9,974,000 | |
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2. Summary of Significant Accounting Policies (Continued)
Cost of sales related to thrombin inventory expenses were $670,000 for the year ended December 31, 2008. Cost of sales related to thrombin inventory expenses relate to a reserve the Company has recorded for the amount of thrombin the Company anticipates will expire prior to being used in the manufacturing of international hemostat products. The Company has not incurred additional charges related to thrombin inventory during 2009 and does not anticipate incurring additional charges related to thrombin inventory during 2010.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets as follows:
| |
Manufacturing equipment | 1 to 8 years |
Office and computer equipment | 1 to 5 years |
Furniture and fixtures | 3 to 8 years |
Leasehold improvements | Shorter of useful life or
remaining term of the lease |
Research and development equipment | 3 to 7 years |
Impairment of Long-Lived Assets
The Company will record impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. The amount of impairment loss recorded will be measured as the amount by which the carrying value of the assets exceeds the fair value of the assets. To date, the Company has determined that no impairment of long-lived assets exists.
Revenue Recognition
In the United States the Company sells its products directly to hospitals and clinics. Revenue is recognized in accordance with generally accepted accounting principles as outlined in the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104,Revenue Recognition(SAB 104), [Accounting Standards Codification (“ASC”) 605-10-S99], which requires that four basic criteria be met before revenue can be recognized: (i) persuasive evidence of an arrangement exists; (ii) the price is fixed or determinable; (iii) collectibility is reasonably assured; and (iv) product delivery has occurred or services have been rendered. The Company recognizes revenue as products are shipped based on FOB shipping point terms when title passes to customers. The Company negotiates credit terms on a customer-by-customer basis and products are shipped at an agreed-upon price. All product returns must be pre-approved and, if approved, customers are subject to a 20% restocking charge.
In all international markets, the Company sells its products to international distributors which subsequently resell the products to hospitals and clinics. The Company has agreements with each of its distributors which provide that title and risk of loss pass to the distributor upon shipment of the products to the distributor. The Company warrants that its products are free from manufacturing defects at the time of shipment to the distributor. Revenue is recognized upon shipment of products to distributors following the receipt and acceptance of a distributor’s purchase order. Allowances are provided for estimated returns and warranty costs at the time of shipment. Sales and use taxes are reported on a net basis, excluding them from revenue.
50
2. Summary of Significant Accounting Policies (Continued)
The Company’s revenues from license agreements and research collaborations are recognized when earned (see Note 14). In accordance with Emerging Issues Task Force (EITF) Issue No. 00-21,Revenue Arrangements with Multiple Deliverables, [ASC 605-25], for deliverables which contain multiple deliverables, the Company separates the deliverables into separate accounting units if they meet the following criteria: (i) the delivered items have a stand-alone value to the customer; (ii) the fair value of any undelivered items can be reliably determined; and (iii) if the arrangement includes a general right of return, delivery of the undelivered items is probable and substantially controlled by the seller. Deliverables that do not meet these criteria are combined with one or more other deliverables into one accounting unit. Revenue from each accounting unit is recognized based on the applicable accounting literature, primarily Staff Accounting Bulletin (SAB) 104,Revenue Recognition, [ASC 605-10-S99].
The Company currently has a license agreement with King Pharmaceuticals, Inc. (King) under which the Company licensed the exclusive rights of Thrombi-PadTM, Thrombi-Gel® and Thrombi-PasteTM products to King in exchange for a license fee. The Company is amortizing the license fees on a straight-line basis over the projected 10 year economic life of the products. The Company determines the economic life of the products under its license agreements by evaluating similar products the Company has launched or other similar products in the medical industry. In addition, the Company has a five-year license agreement with Nicolai, GmbH in which the Company is amortizing the license fee on a straight-line basis over the five-year life of the agreement.
As part of the agreements with King, the Company agreed to conduct clinical studies for the Thrombi-Gel and Thrombi-Paste products, with the costs related to the clinical studies paid by King. Additionally, on May 18, 2007, the Company entered into a Product Development & Supply Agreement with a third party company pursuant to which the Company agreed to develop, manufacture and sell to this company a specialty version of its Twin-Pass dual access catheter, with the costs related to the development paid by this company. The Company is recognizing the collaboration revenue on these development agreements as it is earned in accordance with Emerging Issues Task Force 01-14,Income Statement Characterizations of Reimbursements Received for “Out-of-Pocket” Expenses Incurred, [ASC 605-45-45], and SAB104, [ASC 605-10-S99]. In 2009 King decided to suspend indefinitely further development of the Thrombi-Paste products.
In addition, the Company has reviewed the provisions of EITF Issue No. 07-01,Accounting for Collaborative Arrangements,[ASC 808-10], and believes the adoption of this EITF will have no impact on the amounts recorded under these agreements.
Shipping and Handling Costs
In accordance with the Emerging Issues Task Force (EITF) issue 00-10,Accounting for Shipping and Handling Fees and Costs, [ASC 605-45-45], the Company includes shipping and handling revenues in net sales and shipping and handling costs in cost of goods sold.
Research and Development Costs
All research and development costs are charged to operations as incurred.
Warranty Costs
Certain of the Company’s products are covered by warranties against defects in material and workmanship for periods of up to 24 months. The Company records a liability for warranty claims at the time of sale. The amount of the liability is based on the amount the Company is charged from its original equipment manufacturer to cover the warranty period. The original equipment manufacturer includes a one year warranty with each product sold to the Company. The Company records a liability for the uncovered warranty period offered to a customer, provided the warranty period offered exceeds the initial one year warranty period covered by the original equipment manufacturer.
51
2. Summary of Significant Accounting Policies (Continued)
Warranty provisions and claims for the years ended December 31, 2009, 2008 and 2007, were as follows:
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
Beginning balance | | $ | 49,000 | | $ | 34,000 | | $ | 46,000 | |
Warranty provisions | | | 80,000 | | | 66,000 | | | 28,000 | |
Warranty claims | | | (56,000 | ) | | (51,000 | ) | | (40,000 | ) |
Ending balance | | $ | 73,000 | | $ | 49,000 | | $ | 34,000 | |
Advertising Costs
The Company follows the policy of charging production costs of advertising to expense as incurred. Advertising expense was $116,000, $110,000, and $77,000 for the years ended December 31, 2009, 2008 and 2007, respectively.
Stock-Based Compensation
The Company has various types of stock-based compensation plans. These plans are administered by the compensation committee of the Board of Directors, which selects persons to receive awards and determines the number of shares subject to each award and the terms, conditions, performance measures and other provisions of the award. Refer to Notes 8, 9 and 10 for additional information related to these stock-based compensation plans.
Effective January 1, 2006, the Company adopted Statement No. 123R,Share-Based Payment (SFAS 123R), [ASC 718], which requires companies to measure and recognize compensation expense for all stock-based payments at fair value. SFAS 123R, [ASC 718], is being applied on the modified prospective basis. Prior to the adoption of SFAS 123R, [ASC 718], the Company accounted for its stock-based compensation plans under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations, and accordingly, recognized no compensation expense related to the stock-based plans.
Under the modified prospective approach, SFAS 123R, [ASC 718], applies to new awards and to awards that were outstanding on January 1, 2006 that are subsequently modified, repurchased, cancelled or vest. Under the modified prospective approach, compensation cost recognized in 2006 includes compensation cost for all share-based payments granted prior to, but not yet vested on, January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R, [ASC 718], and compensation cost for all shared-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R, [ASC 718]. Prior periods were not restated to reflect the impact of adopting the new standard.
52
2. Summary of Significant Accounting Policies (Continued)
The following amounts have been recognized as stock-based compensation expense in the Consolidated Statements of Operations:
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
Stock-based compensation included in: | | | | | | | | | | |
Cost of goods sold | | $ | 199,000 | | $ | 207,000 | | $ | 154,000 | |
Research and development | | | 234,000 | | | 170,000 | | | 164,000 | |
Clinical and regulatory | | | 38,000 | | | 132,000 | | | 102,000 | |
Sales and marketing | | | 608,000 | | | 601,000 | | | 422,000 | |
General and administrative | | | 580,000 | | | 567,000 | | | 615,000 | |
| | $ | 1,659,000 | | $ | 1,677,000 | | $ | 1,457,000 | |
The Company uses the Black-Scholes option-pricing model to estimate fair value of stock-based awards with the following weighted average assumptions:
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
Stock Options and Awards: | | | | | | | | | | |
Expected life (years) | | | 5.50 | | | 5.50 | | | 5.50 | |
Expected volatility | | | 52% | | | 50% | | | 51% | |
Dividend yield | | | 0% | | | 0% | | | 0% | |
Risk-free interest rate | | | 1.8% | | | 2.75% | | | 4.64% | |
| | | | | | | | | | |
Employee Stock Purchase Plan: | | | | | | | | | | |
Expected life (years) | | | 2.0 | | | 2.0 | | | 2.0 | |
Expected volatility | | | 52% | | | 42% | | | 36% | |
Dividend yield | | | 0% | | | 0% | | | 0% | |
Risk-free interest rate | | | 1.03% | | | 2.04% | | | 3.48% | |
Restricted stock awards fair value is calculated as the market price on the date of grant for the years ended December 31, 2009 and 2008 and the fair value is amortized on a straight line basis over the requisite service period of four years for the award. The weighted average fair value of restricted stock awards granted during 2009, 2008 and 2007 was $9.14, $6.09 and $10.37, respectively.
The weighted average fair value of stock options granted with an exercise price equal to the deemed stock price on the date of grant during 2009, 2008 and 2007 was $2.65, $2.82 and $4.51, respectively.
The Company calculates expected volatility for stock options and awards using historical volatility. The starting point for the historical period used is based on a material change in the Company’s operations that occurred in the third quarter of 2003. The Company uses a 10% forfeiture rate for key employees and a 15% forfeiture rate for non-key employees for stock options and awards. The Company calculates expected volatility for employee stock purchase plan shares using historical volatility over a two-year period. A two-year period is used to coincide with the maximum two-year offering period under the employee stock purchase plan. The risk-free rates for the expected terms of the stock options and awards and the employee stock purchase plan is based on the U.S. Treasury yield curve in effect at the time of grant.
53
2. Summary of Significant Accounting Policies (Continued)
Income Taxes
Income taxes are accounted for under the liability method. Deferred income taxes are provided for temporary differences between the financial reporting and the tax bases of assets and liabilities. Deferred tax assets are reduced by a valuation allowance to the extent that realization of the related deferred tax asset is not assured. If the Company determines in the future that it is more likely than not that the Company will realize all or a portion of the deferred tax assets, the Company will adjust the valuation allowance in the period the determination is made (Note 7).
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation 48 (FIN 48),Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109, [ASC 740-10], which clarifies the accounting for uncertain income tax positions. This interpretation prescribes a financial statement recognition threshold and measurement attribute for any tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Effective January 1, 2007, the Company adopted FIN 48, [ASC 740-10]. Upon adoption, the Company had $425,000 of unrecognized income tax benefits and the adoption of FIN 48, [ASC 740-10], had no effect on shareholders’ equity. The Company has recorded FIN 48, [ASC 740-10], reserves of $727,000 and $597,000 at December 31, 2009 and 2008. The impact of tax related interest and penalties is recorded as a component of income tax expense. At December 31, 2009, the Company has recorded $-0- for the payment of tax related interest and there were no tax penalties or interest recognized in the statements of operations
Net Income (Loss) Per Common Share
In accordance with SFAS No. 128,Earnings Per Share, [ASC 260-10], basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average common shares outstanding during the periods presented. Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average common and potential dilutive common shares outstanding computed in accordance with the treasury stock method.
54
2. Summary of Significant Accounting Policies (Continued)
The number of shares used in earnings per share computations is as follows for the years ended December 31:
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
Weighted average common shares outstanding—basic | | | 16,046,534 | | | 15,588,135 | | | 15,237,836 | |
Dilutive effect of stock options and warrants | | | 428,174 | | | 366,496 | | | — | |
Weighted average common shares outstanding—diluted | | | 16,474,708 | | | 15,954,631 | | | 15,237,836 | |
The dilutive effect of stock options and warrants in the above table excludes 396,000, 448,500, and 441,500 of options and warrants for which the exercise price was higher than the average market price for the years ended December 31, 2009, 2008 and 2007, respectively. In addition, dilutive potential common shares of 1,017,400 were excluded from diluted weighted average common shares outstanding for the year ended December 31, 2007, as they would be anti-dilutive due to the Company’s net loss for that year.
Goodwill and Other Intangible Assets
In fiscal 2002, the Company adopted SFAS No. 142,Goodwill and Other Intangible Assets, [ASC 350-20 and 350-30]. Goodwill is tested for impairment annually in the fourth quarter or more frequently if changes in circumstances or the occurrence of events suggest impairment exists. The Company has concluded that no impairment of goodwill existed as of December 31, 2009.
Other intangible assets consist of purchased technology. Purchased technology was amortized using the straight-line method over its estimated useful life of four years. The Company reviewed intangible assets for impairment as changes in circumstances or the occurrence of events suggested the remaining value was not recoverable.
Leases and Deferred Rent
The Company leases all office space. Leases are accounted for under the provisions of SFAS No. 13,Accounting for Leases, as amended, [ASC 840-10 and 840-20], which requires that leases be evaluated and classified as operating or capital leases for financial reporting purposes. As of December 31, 2009, all of the Company’s leases were accounted for as operating leases. For leases that contain rent escalations, the Company records the total rent payable during the lease term on a straight-line basis over the term of the lease and records the difference between the rents paid and the straight-line rent as a deferred rent. For any lease incentives the Company receives for items such as leasehold improvements, the Company records a deferred credit for the amount of the lease incentive and amortizes it over the lease term, which may or may not equal the amortization period of the leasehold improvements in accordance with FASB Technical Bulletin 88-1 “Issues Relating to Accounting for Leases,” [ASC 840-20].
New Accounting Pronouncement
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168,The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles a Replacement of FASB Statement No. 162(“FAS 168”), [ASC 105-10]. This Standard establishes the FASB Accounting Standards Codification™ (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. The Codification was effective for interim and annual periods ending after September 15, 2009, and as of the effective date, all existing accounting standard documents will be superseded. The Codification was effective for the Company in the third quarter of 2009, and accordingly, the Quarterly Report on Form 10-Q for the quarter ending September 30, 2009 and all subsequent public filings will reference the Codification as the sole source of authoritative literature.
55
3. Goodwill and Other Intangible Assets
The Company has adopted SFAS No. 141,Business Combinations,[ASC 805-10 and 805-20]. The Company acquired developed technology from Angiosonics, Inc. in April 2002 and subsequently amortized the amount over its useful life of four years. The goodwill of $193,000 acquired as part of this transaction is not being amortized.
4. Property and Equipment
Property and equipment consists of the following at December 31:
| | | | | | | |
| | 2009 | | 2008 | |
Property and equipment: | | | | | | | |
Manufacturing equipment | | $ | 5,908,000 | | $ | 5,067,000 | |
Office and computer equipment | | | 1,888,000 | | | 1,815,000 | |
Furniture and fixtures | | | 424,000 | | | 463,000 | |
Leasehold improvements | | | 1,495,000 | | | 1,275,000 | |
Research and development equipment | | | 504,000 | | | 436,000 | |
Construction-in-process | | | 61,000 | | | 213,000 | |
| | | 10,280,000 | | | 9,269,000 | |
Less accumulated depreciation and amortization | | | (6,487,000 | ) | | (5,382,000 | ) |
Net property and equipment | | $ | 3,793,000 | | $ | 3,887,000 | |
5. Lines of Credit
On December 21, 2009, the Company entered into a secured asset-based revolving credit agreement with U.S. Bank National Association. The revolving credit agreement is a one-year, $10,000,000 facility with availability based primarily on eligible customer receivables, inventory and property and equipment. The revolving credit agreement bears interest equal to the one-month LIBOR rate plus 1.60% and is secured by a first security interest on all of the Company’s assets. The revolving credit agreement requires a quarterly payment based on an annual fee of 0.125% of the average unused portion of the committed revolving line as determined by the bank and reviewed by management.
The revolving credit agreement includes one covenant that the Company cannot have a maximum cash flow leverage ratio greater than 2.5 to 1. The calculation of this covenant is determined by multiplying annual lease expense times six and adding any loans, then dividing this amount by the sum of earnings before interest, taxes, depreciation, amortization and annual operating lease payments. The covenant is computed quarterly based on a rolling 12-month period. The Company was in compliance with all of the covenants as of December 31, 2009.
As of December 31, 2009, the Company had no outstanding balance against the revolving credit agreement. Based on the Company’s eligible customer receivables, inventory, property and equipment and cash balances, $10,000,000 was available for borrowing as of December 31, 2009.
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6. Leases
The Company leases two buildings totaling approximately 93,000 square-feet under separate operating leases. On November 12, 2007, both leases were amended to extend the terms until September 2015, with options to renew both leases. Rent expense related to the operating leases was approximately $1,133,000, $755,000 and $596,000 for the years ended December 31, 2009, 2008, and 2007, respectively.
Future minimum lease commitments under these operating leases as of December 31, 2009 were as follows:
| | | | |
2010 | | $ | 761,000 | |
2011 | | | 797,000 | |
2012 | | | 808,000 | |
2013 | | | 841,000 | |
2014 | | | 841,000 | |
Thereafter | | | 631,000 | |
| | $ | 4,679,000 | |
7. Income Taxes
At December 31, 2009, the Company had net operating loss carryforwards of approximately $40,276,000 and $4,521,000 for federal and state income tax purposes that are available to offset future taxable income and begin to expire in the year 2019. Included in the U.S. amount are approximately $4.1 million of deductions resulting from disqualifying dispositions of stock options. When these deductions from disqualifying dispositions are realized for financial statement purposes they will not result in a reduction in income tax expense, rather the benefit will be recorded as additional paid-in-capital. At December 31, 2009, the Company also had federal research and development tax credit carryforwards of approximately $3,272,000 and Minnesota research and development tax credit carryforwards of approximately $760,000, which begin to expire in the year 2012. At December 31, 2009, the Company has foreign tax loss carryforwards of approximately $357,000 that do not expire. The adoption of FIN 48,Accounting for Uncertainty in Income Taxes,[ASC 740-10], has had no impact on the reported carryforwards at December 31, 2009.
The Company adopted the provisions of FASB Interpretation No. 48 (FIN 48),Accounting for Uncertainty in Income Taxes - an Interpretation of SFAS No. 109,[ASC 740-10], on January 1, 2007. This interpretation prescribes a financial statement recognition threshold and measurement attribute for any tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Upon adoption, there was $425,000 of unrecognized income tax benefits and the adoption of FIN 48, [ASC 740-10], had no effect on shareholders’ equity. The impact of tax related interest and penalties will be recorded as a component of income tax expense. At December 31, 2009, the Company has accrued zero for the payment of tax related interest and there were no tax interest or penalties recognized in the statements of operations.
The Company is subject to income tax in numerous jurisdictions and at various rates and the use of estimates is required in determining the provision for income taxes. For the year ended December 31, 2009, the Company recorded a tax provision of $2,788,000 on income before tax of $8,166,000 resulting in an effective income tax rate of 34%.
The Company is subject to income tax examinations in the U.S. Federal jurisdiction, as well as in the Germany and various state jurisdictions. At December 31, 2009, the Company was not under examination by any of these taxing authorities and the open tax years are 2007 to 2009.
57
7. Income Taxes (Continued)
A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:
| | | | |
Balance at December 31, 2007 | | $ | 512,000 | |
Increases as a result of tax positions taken during a prior period | | | 5,000 | |
Increases as a result of tax positions taken during the current period | | | 80,000 | |
Reductions as a result of lapse of the applicable statute of limitations | | | — | |
Decreases relating to settlements with taxing authorities | | | — | |
Balance at December 31, 2008 | | | 597,000 | |
Increases as a result of tax positions taken during a prior period | | | 2,000 | |
Increases as a result of tax positions taken during the current period | | | 128,000 | |
Reductions as a result of lapse of the applicable statute of limitations | | | — | |
Decreases relating to settlements with taxing authorities | | | — | |
Balance at December 31, 2009 | | $ | 727,000 | |
The components of the Company’s deferred tax assets and liabilities as of December 31, 2009 and 2008 are as follows:
| | | | | | | |
| | 2009 | | 2008 | |
Deferred tax assets: | | | | | | | |
Net operating loss carryforwards | | $ | 16,942,000 | | $ | 19,538,000 | |
Tax credit carryforwards | | | 4,759,000 | | | 4,274,000 | |
Deferred revenue | | | 2,049,000 | | | 2,353,000 | |
Depreciation and amortization | | | 171,000 | | | 206,000 | |
Accrued compensation | | | 335,000 | | | 304,000 | |
Stock-based compensation | | | 609,000 | | | 530,000 | |
Federal and state AMT credits | | | 143,000 | | | 195,000 | |
Inventory reserve | | | 325,000 | | | 334,000 | |
Other | | | 155,000 | | | 138,000 | |
Gross deferred tax assets | | | 25,488,000 | | | 27,872,000 | |
Deferred tax liability | | | (38,000 | ) | | (34,000 | ) |
Net deferred taxes assets before FIN48 Reserve and valuation allowances | | | 25,450,000 | | | 27,838,000 | |
FIN48 Reserve | | | (727,000 | ) | | (597,000 | ) |
Less valuation allowances | | | (14,388,000 | ) | | (14,075,000 | ) |
Net deferred tax asset / (liability) | | $ | 10,335,000 | | $ | 13,166,000 | |
| | | | | | | |
Deferred taxes recorded on the balance sheet: | | | | | | | |
Net deferred tax assets / (liabilities) – current | | $ | 4,500,000 | | $ | 2,680,000 | |
Net deferred tax assets / (liabilities) – long-term | | | 5,835,000 | | | 10,486,000 | |
Net deferred tax assets | | $ | 10,335,000 | | $ | 13,166,000 | |
58
7. Income Taxes (Continued)
The Company regularly assesses the likelihood that the deferred tax assets will be recovered from future taxable income. The Company considers projected future taxable income and ongoing tax planning strategies, then records a valuation allowance to reduce the carrying value of the net deferred taxes to an amount that is more likely than not to be realized. For the year ended December 31, 2008, based upon the Company’s assessment of all available evidence, including the previous three year cumulative income before unusual and infrequent expenses (litigation and thrombin qualification expenses), estimates of future profitability, and the Company’s overall prospects of future business, the Company determined that it was more likely than not that the Company would be able to realize a portion of the deferred tax assets in the future, and as a result recorded a $13,200,000 income tax benefit. To determine the amount of the reduction in the valuation allowance, the Company used a discounted projection of its revenue and income for the years ending December 31, 2009 through 2013, which would approximate the ten-year life of the Company’s three most significant products at this time. The amount of the valuation allowance reduction at December 31, 2008, was based on the Company’s projected discounted taxable income. The Company continues to assess the potential realization of deferred tax assets on an annual basis, or an interim basis if circumstances warrant. If the Company’s actual results and updated projections vary significantly from the projections used as a basis for this determination, the Company may need to increase or decrease the valuation allowance against the gross deferred tax assets. The Company would adjust earnings for the deferred tax in the period the determination was made. At December 31, 2009 and 2008, the valuation allowance was $14,388,000 and $14,075,000, respectively. Of these amounts, $530,000 as of December 31, 2008 was attributable to increases in the net operating loss carry forwards resulting from the exercise of stock options. This amount will be recorded as an increase to additional paid-in-capital if it is determined in the future that this portion of the valuation allowance is no longer required. The increase (decrease) in the valuation allowance was $313,000, ($14,997,000) and $1,360,000 for the years ended December 31, 2009, 2008 and 2007, respectively. For the year ended December 31, 2009 the Company recorded a stock option tax deduction of $1,062,000, which will be recorded against “additional paid-in capital” at the time at which it reduces taxes payable.
Reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | �� |
| | | | | | | | | | |
Tax at statutory rate | | | 34.0 | % | | 34.0 | % | | (34.0 | )% |
Permanent differences | | | (1.4 | ) | | 9.6 | | | 13.5 | |
State income taxes, net of federal benefit | | | 4.5 | | | 3.7 | | | (3.7 | ) |
Change in valuation reserve | | | 6.2 | | | (476.4 | ) | | 33.6 | |
R&D credits generated | | | (6.1 | ) | | (18.1 | ) | | (24.8 | ) |
FIN48 reserve | | | 1.6 | | | 2.8 | | | 12.7 | |
Change in effective deferred tax rate | | | (2.1 | ) | | 25.4 | | | 4.0 | |
Other adjustments | | | (2.6 | ) | | 2.0 | | | 5.5 | |
Effective income tax rate | | | 34.1 | % | | (417.0 | )% | | 6.8 | % |
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
| | | | | | | | | | |
Current taxes | | | (0.1 | )% | | 3.7 | % | | (3.7 | )% |
Deferred taxes | | | 34.2 | | | 1.3 | | | 10.5 | |
Benefit from release of valuation reserve | | | — | | | (422.0 | ) | | — | |
Effective income tax rate | | | 34.1 | % | | (417.0 | )% | | 6.8 | % |
59
8. Stock Options and Restricted Shares
Stock Option and Stock Award Plan
The Company has a stock option and stock award plan (the Stock Option Plan) which provides for the granting of stock options, restricted shares and stock appreciation rights to employees, directors, and consultants. Incentive stock options may be granted only to employees of the Company. Options which do not qualify as incentive stock options and awards of restricted shares may be granted to both employees and to non-employee directors and consultants. As of December 31, 2009, the Company had reserved 5,900,000 shares of common stock under the Stock Option Plan. Under the Stock Option Plan, stock options must be granted at an exercise price not less than the fair market value of the Company’s common stock on the grant date. Vesting requirements of all awards under this plan are time based and vary by individual grant. The options expire on the date determined by the Board of Directors but may not extend more than 10 years from the grant date. The incentive stock options generally become exercisable over a four-year period and the nonqualified stock options generally become exercisable over a two-year period. Vested and unexercised options are canceled three-months after termination, and unvested awards are canceled on the date of termination of employment and become available under the Stock Option Plan for future grants.
During 2007 to 2009, the Company granted stock options to its directors under the Stock Option Plan. The ten-year options issued to the Company’s directors vest over a one-year period based on the continuation of service as a director of the Company. The Company uses a 0% forfeiture rate for all director options granted.
Option activity is summarized as follows:
| | | | | | | | | | | | | | | | |
| | Shares
Available
for Grant
(exclusive of
restricted
shares issued) | | Plan Options
Outstanding | | Exercise
Price | | Weighted
Average
Exercise
Price | | Aggregate
Intrinsic
Value | |
|
Balance at December 31, 2006 | | | 1,991,000 | | | 1,512,000 | | $ | 0.78–$12.00 | | $ | 5.24 | | | | |
Shares reserved | | | 500,000 | | | — | | | — | | | — | | | | |
Granted | | | (75,000 | ) | | 75,000 | | | 9.41– 9.58 | | | 9.44 | | | | |
Exercised | | | — | | | (116,000 | ) | | 0.78– 9.46 | | | 2.01 | | | | |
Forfeited | | | 3,000 | | | (3,000 | ) | | 0.84– 9.46 | | | 8.27 | | | | |
Expired | | | 9,000 | | | (9,000 | ) | | 0.78– 9.46 | | | 4.24 | | | | |
Balance at December 31, 2007 | | | 2,428,000 | | | 1,459,000 | | $ | 0.78–$12.00 | | $ | 5.74 | | | | |
Shares reserved | | | 500,000 | | | — | | | — | | | — | | | | |
Granted | | | (60,000 | ) | | 60,000 | | | 6.36 | | | 6.36 | | | | |
Exercised | | | — | | | (185,000 | ) | | 0.84– 6.74 | | | 3.35 | | | | |
Forfeited | | | 5,000 | | | (5,000 | ) | | 6.74– 9.46 | | | 9.45 | | | | |
Expired | | | 83,000 | | | (83,000 | ) | | 6.74– 12.00 | | | 9.52 | | | | |
Balance at December 31, 2008 | | | 2,956,000 | | | 1,246,000 | | $ | 0.78–$11.62 | | $ | 5.84 | | | | |
Shares reserved | | | 500,000 | | | — | | | — | | | — | | | | |
Granted | | | (60,000 | ) | | 60,000 | | | 6.39 | | | 6.39 | | | | |
Exercised | | | — | | | (248,000 | ) | | 0.81– 6.74 | | | 4.61 | | | | |
Forfeited | | | 2,000 | | | (2,000 | ) | | 6.00– 11.62 | | | 10.22 | | | | |
Expired | | | 26,000 | | | (26,000 | ) | | 9.46– 11.62 | | | 11.55 | | | | |
Balance at December 31, 2009 | | | 3,424,000 | | | 1,030,000 | | $ | 0.78–$10.89 | | $ | 6.06 | | $ | 2,849,000 | |
Exercisable at December 31, 2009 | | | | | | 1,010,000 | | | | | $ | 6.05 | | $ | 2,809,000 | |
The weighted average remaining contractual term of options exercisable at December 31, 2009, was 4.3 years. The total intrinsic value of options exercised during fiscal 2009, 2008 and 2007, was $879,000, $909,000 and $903,000, respectively.
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8. Stock Options and Restricted Shares (Continued)
The following table summarizes information about stock options outstanding at December 31, 2009:
| | | | | | | | | | | | | | | | |
| | Options Outstanding | | Options Exercisable | |
Range of
Exercise Prices | | Outstanding
as of
December 31,
2009 | | Weighted
Average
Remaining
Contractual
Life | | Weighted
Average
Exercise Price | | Exercisable
as of
December 31,
2009 | | Weighted
Average
Exercise Price | |
| | | | | | | | | | | | | | | | |
$0.78–$0.84 | | | | 243,000 | | 2.4 | | $ | 0.84 | | | 243,000 | | $ | 0.84 | |
0.85– 2.51 | | | | 76,000 | | 1.9 | | | 2.39 | | | 76,000 | | | 2.39 | |
2.52– 6.50 | | | | 128,000 | | 8.4 | | | 6.34 | | | 108,000 | | | 6.33 | |
6.51– 7.48 | | | | 187,000 | | 2.9 | | | 6.93 | | | 187,000 | | | 6.93 | |
7.49– 9.27 | | | | 73,000 | | 5.9 | | | 8.23 | | | 73,000 | | | 8.23 | |
9.28– 10.89 | | | | 323,000 | | 5.2 | | | 9.72 | | | 323,000 | | | 9.72 | |
| | | | 1,030,000 | | 4.3 | | $ | 6.06 | | | 1,010,000 | | $ | 6.05 | |
As of December 31, 2009, there was $12,000 of total unrecognized compensation costs related to the outstanding stock options, which is expected to be recognized over a weighted average period of 0.18 years.
The holder of a restricted share award is generally entitled at all times on and after the date of issuance of the restricted shares to exercise the rights of a shareholder of the Company, including the right to vote the shares and the right to receive dividends on the shares. These shareholders do not have the ability to sell, transfer or otherwise encumber the restricted share awards until they fully vest. During 2009, 2008 and 2007 the Company granted restricted shares to employees under the Stock Option Plan. The restricted shares vest over a four-year period based on the continuation of employment.
Restricted share activity is summarized as follows:
| | | | | | | |
| | Shares
Outstanding | | Weighted
Average Grant
Date Fair
Value | |
| | | | | | | |
Balance at December 31, 2006 | | | 159,000 | | $ | 5.42 | |
Granted | | | 174,000 | | | 10.37 | |
Vested | | | — | | | — | |
Forfeited | | | (20,000 | ) | | 8.03 | |
Expired | | | — | | | — | |
Balance at December 31, 2007 | | | 313,000 | | | 8.01 | |
Granted | | | 174,000 | | | 6.09 | |
Vested | | | (73,000 | ) | | 5.50 | |
Forfeited | | | (44,000 | ) | | 7.55 | |
Expired | | | — | | | — | |
Balance at December 31, 2008 | | | 370,000 | | | 7.68 | |
Granted | | | 211,000 | | | 9.14 | |
Vested | | | (106,000 | ) | | 8.86 | |
Forfeited | | | (30,000 | ) | | 8.15 | |
Expired | | | — | | | — | |
Balance at December 31, 2009 | | | 445,000 | | $ | 8.07 | |
61
8. Stock Options and Restricted Shares (Continued)
As of December 31, 2009, there was $1,112,000 of total unrecognized compensation costs related to the outstanding restricted shares, which is expected to be recognized over a weighted average period of 1.22 years. The Company estimates the forfeiture rate for restricted stock using 10% for key employees and 15% for non-key employees.
The net remaining shares available for grant under the Stock Option and Stock Award Plan is 2,800,000 shares.
Deferred Compensation
In 2009, 2008, and 2007, the Company recorded $-0-, $-0- and $21,000, respectively, of deferred compensation in connection with certain nonqualified stock options granted to medical advisory board members. The weighted average fair value of these options was $4.23. The deferred compensation recorded was amortized ratably over the period that the options vest and was adjusted for options which have been canceled. Vesting requirements for nonqualified stock options under this plan will vary by individual grant. Deferred compensation expense was $-0-, $9,000 and $26,000 for the years ended December 31, 2009, 2008, and 2007, respectively.
9. Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan (the Purchase Plan) under which 2,100,000 shares of common stock have been reserved for issuance. Eligible employees may contribute 1% to 10% of their compensation to purchase shares of the Company’s common stock at a discount of 15% of the market value at certain plan-defined dates up to a maximum of 2,000 shares per purchasing period. The Purchase Plan terminates in July 2010. In fiscal 2009, 2008 and 2007, 140,800 shares, 133,300 shares, and 102,200 shares, respectively, were issued under the Purchase Plan. At December 31, 2009, 851,000 shares were available for issuance under the Purchase Plan.
As of December 31, 2009, there was $98,000 of total unrecognized compensation costs related to the Purchase Plan, which is expected to be recognized over a weighted average period of 0.24 years.
10. Employee Retirement Savings Plan
The Company has an employee 401(k) retirement savings plan (the Plan). The Plan provides eligible employees with an opportunity to make tax-deferred contributions into a long-term investment and savings program. All employees over the age of 21 are eligible to participate in the Plan beginning with the first quarterly open enrollment date following start of employment. The Plan allows eligible employees to contribute up to 50% of their annual compensation, subject to a maximum limit determined by the Internal Revenue Service, with the Company contributing an amount equal to 25% of the first 5% contributed to the Plan. The Company recorded an expense of $157,000, $117,000 and $144,000 for contributions to the Plan for the years ended December 31, 2009, 2008, and 2007, respectively.
11. Concentrations of Credit and Other Risks
In the United States the Company sells its products directly to hospitals and clinics. In all international markets, the Company sells its products to distributors who, in turn, sell to medical clinics. Loss, termination, or ineffectiveness of distributors to effectively promote the Company’s product could have a material adverse effect on the Company’s financial condition and results of operations.
No customer represented more than 10% of total revenue for any year ended December 31, 2009, 2008 and 2007.
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11. Concentrations of Credit and Other Risks (Continued)
The Company performs credit evaluations of its customers and does not require collateral to establish an account receivable. No customer represented more than 10% of gross accounts receivable at December 31, 2009 and 2008. There have been no material losses on customer receivables.
Product revenue by geographic destination as a percentage of total product revenues were as follows for the years ended December 31:
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
| | | | | | | | | | |
Domestic | | 87 | % | | 87 | % | | 87 | % | |
Foreign | | 13 | | | 13 | | | 13 | | |
12. Related Party Activity
During the years ended December 31, 2009, 2008 and 2007, the Company sold $458,000, $495,000 and $489,000, respectively, of product to a company of which a board member of the Company is an officer. As of December 31, 2009 and 2008, the Company had an accounts receivable balance due of $103,000 and $47,000, respectively, from this related party. In addition, the Company purchases product from this related party and during the years ended December 31, 2009, 2008 and 2007 the Company purchased $15,000, $16,000 and $24,000, respectively, of product from this related party. As of December 31, 2009 and 2008, the Company had an accounts payable balance due of $-0- to this related party.
In July 2008 the Company began utilizing the consulting services from a company owned by a board member. During the years ended December 31, 2009 and 2008, the Company utilized services in the amount of $354,000 and $170,000, respectively, from this vendor. At December 31, 2009 and 2008, the Company had an accounts payable balance due of $25,000 and $68,000 to this related party.
In July 2009 the Company began utilizing development consulting services from a company owned by the spouse of a board member. During the year ended December 31, 2009 the Company utilized services in the amount of $55,000 from this vendor. At December 31, 2009 the Company had an accounts payable balance due of $4,000 to this related party.
13. Dependence on Key Suppliers
King Pharmaceuticals
The Company purchases certain key components from single-source suppliers. Any significant component delay or interruption could require the Company to qualify new sources of supply, if available, and could have a material adverse effect on the Company’s financial condition and results of operations. The Company purchases its requirements for thrombin (a component in the Hemostat products) under a Thrombin-JMI Supply Agreement entered into with King Pharmaceuticals, Inc. (King) on January 9, 2007. Under the terms of the Thrombin-JMI Supply Agreement, King agrees to manufacture and supply thrombin to the Company on a non-exclusive basis. The Thrombin-JMI Supply Agreement does not contain any minimum purchase requirements. King agrees to supply the Company with such quantity of thrombin as the Company may order at a fixed price throughout the term of the Thrombin-JMI Supply Agreement as adjusted for inflation, variations in potency and other factors. The Thrombin-JMI Supply Agreement has an initial term of 10 years, followed by successive automatic one-year extensions, subject to termination by the parties under certain circumstances, including: (i) termination by King without cause any time after the fifth anniversary of the date of the Thrombin-JMI Supply Agreement upon five years prior written notice to the Company, and (ii) termination by the Company without cause any time after the fifth anniversary of the date of the Thrombin-JMI Supply Agreement upon five years prior written notice to King provided that the Device Supply Agreement, which the Company also entered into with King on January 9, 2007, has expired on its terms or the parties have agreed to terminate it.
63
14. Commitments and Contingencies
All legal cost related to litigation are charged to operations as incurred, except settlements which are expensed when a claim is probable and estimatable.
Diomed Litigation
On March 4, 2004, the Company was named as the defendant in an intellectual property lawsuit brought by Diomed Inc. (Diomed) in the United States District Court for the District of Massachusetts (the “Court”). The complaint requested a judgment that sales of the Company’s Vari-Lase® procedure kit and Vari-Lase laser console infringe on a single method patent (No. 6,398,777) held by Diomed and asked for relief in the form of an injunction that would prevent the Company from selling the Company’s Vari-Lase products, compensatory and treble damages caused by the manufacture and sale of the Company’s products, and other costs, disbursements and attorneys’ fees. The trial commenced on March 12, 2007, and concluded on March 28, 2007, when the jury reached a verdict that the Company contributed to and induced infringement of Diomed’s patent and awarded monetary damages in the amount of $4,100,000, plus pre-judgment interest. The jury concluded there was no willful infringement by the Company and therefore the award was not subject to treble damages or attorneys’ fees. To settle Diomed’s claims for pre-judgment interest and for additional damages for sales not considered by the jury, the Company agreed to amend the judgment amount to $4,975,000 and accrued this amount together with additional costs and attorney’s fees as of June 30, 2007 in the aggregate amount of $5,690,000. On June 20, 2007 the Company posted a supersedeas bond and appealed the jury verdict to the U.S. Court of Appeals for the Federal Circuit in Washington, D.C. On April 8, 2008, the Company announced that it entered into a settlement agreement with Diomed. Pursuant to the settlement agreement, (i) on April 29, 2008, the Company made a one-time payment of $3,586,000 to Diomed, (ii) the Company and Diomed jointly dismissed the appeal with the United States Court of Appeals for the Federal Circuit, and (iii) Diomed provided to the Company a satisfaction of judgment, releasing the Company from the monetary obligations of the judgment imposed by the Court in its entirety.
Marine Polymer Technologies, Inc.
On May 11, 2005 the Company initiated a lawsuit for product disparagement and false advertising against Marine Polymer Technologies, Inc., a Delaware corporation (Marine Polymer). In the lawsuit, the Company alleged that Marine Polymer made defamatory and disparaging statements concerning the Company’s D-Stat® Dry hemostatic bandage. The Company sought relief in the form of an injunction to enjoin Marine Polymer from continuing to defame and disparage the Company’s products, damages as a result of such statements, and other costs, disbursements and attorneys’ fees. Marine Polymer brought a counter-claim against the Company including, among other claims, business defamation and product disparagement for statements allegedly made by the Company concerning Marine Polymer’s SyvekPatch®. Marine Polymer sought relief in the form of monetary damages, costs, disbursements and attorneys’ fees. The trial commenced on March 24, 2008 in the United States District Court for the District of Massachusetts. At the conclusion of the trial on April 7, 2008 the jury returned a verdict in favor of the Company and against Marine Polymer for product disparagement concerning statements made regarding the safety of the Company’s D-Stat Dry hemostat product. In its verdict, the jury found that Marine Polymer’s statements were false and disparaged the D-Stat Dry product and awarded the Company $4,500,000 in monetary damages. The jury rejected Marine Polymer’s counter-claims in their entirety. Following post trial motions, on June 30, 2008, the Court upheld the jury verdict, granted the Company’s request for a permanent injunction against Marine Polymer for the statements that the jury found were false, and added prejudgment interest on the jury verdict award in the amount of $592,124.
64
14. Commitments and Contingencies (Continued)
On July 14, 2008, Marine Polymer filed a Notice of Appeal with the U.S. First Circuit Court of Appeals seeking to overturn the monetary damages and injunction issued against them. Marine Polymer did not appeal the Court’s rejection of its counter-claims against the Company. On February 4, 2009, oral arguments by both parties on Marine Polymer’s appeal were heard by the U.S. First Circuit Court of Appeals. On December 23, 2009, the U.S. First Circuit Court of Appeals affirmed the judgment against Marine Polymer for product disparagement. As a result, the permanent injunction issued at the conclusion of the trial will remain in effect, prohibiting Marine Polymer and its representatives from making, publishing or disseminating certain disparaging statements concerning the safety of our D-Stat products. Addressing the jury’s award of $4.5 million in damages, the Court determined that, due to differences in opinion among the judges, the Company could either accept a $2.7 million award of damages (plus interest) or insist upon a new trial limited to the issue of determining the reasonable amount of damages. The Company has accepted the $2.7 million award of damages plus interest, received $3.56 million from Marine Polymer on January 22, 2010, and will record the amount as litigation gain during the first quarter of 2010 (See Note 16).
VNUS® Medical Technologies (acquired by Covidien) Litigation
On October 13, 2005, the Company was named as one of three defendants in an intellectual property lawsuit brought by VNUS® Medical Technologies, Inc. (VNUS) in the United States District Court for the Northern District of California. The complaint requested a judgment that the Company’s Vari-Lase® procedure kit and Vari-Lase® laser console infringe on four patents held by VNUS and asked for relief in the form of an injunction that would prevent the Company from selling the Company’s Vari-Lase® products, compensatory and treble damages caused by the manufacture and sale of these products, and other costs, disbursements and attorneys’ fees. VNUS subsequently indicated that it was not pursuing its allegation of infringement concerning one of the four patents. On June 2, 2008, the Company entered into a settlement agreement with VNUS for the purpose of resolving the lawsuit. Under the terms of the settlement agreement, (i) on June 4, 2008, the Company paid VNUS a royalty payment in the aggregate amount of $3,116,000 related to all Vari-Lase products shipped within the United States through the end of the first quarter of 2008, (ii) the Company agreed to pay a quarterly royalty on all on-going U.S. shipments of Vari-Lase laser and kit products payable quarterly during the remaining life of the applicable patents, (iii) VNUS granted the Company a non-exclusive and non-sublicensable license to the applicable patents for use in endovenous laser therapy, and (iv) all litigation between the parties was dismissed.
AngioDynamics, Inc. Litigation
On July 29, 2009 AngioDynamics, Inc. (AngioDynamics) filed a lawsuit against the Company in the U.S. District Court for the District of Delaware, alleging that the Company has infringed U.S. Patent No. 7,273,478 and U.S. Patent No. 7,559,329. Specifically, AngioDynamics alleges that doctors using the Company’s Bright Tip fibers and procedure kits are using the methods claimed in those patents, and accuses the Company of inducing and contributing to infringement. AngioDynamics has requested injunctive relief and compensatory damages. On December 1, 2009 the Company filed its answer, a counterclaim, and a motion to transfer the case to the U.S. District Court for the District of Minnesota.
The Company has also filed aninter partes request for reexamination of both the ‘478 and ‘329 patents with the United States Patent Office. The Patent Office granted theinter partes requests for reexamination for both the ‘478 and ‘329 patents. The Company expects the reexamination process for each patent will take at least three years to conclude. On January 27, 2010, the Company filed a motion with the U.S. District Court for the District of Delaware to stay all proceedings in the litigation pending the outcome of theinter partes reexaminations.
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14. Commitments and Contingencies (Continued)
From time to time, the Company is involved in additional legal proceedings arising in the normal course of business. As of the date of this report the Company is not a party to any legal proceeding not described in this section in which an adverse outcome would reasonably be expected to have a material adverse effect on the Company’s results of operations or financial condition.
King Agreements
On January 9, 2007, the Company entered into three separate agreements with King: a License Agreement, a Device Supply Agreement and a Thrombin-JMI® Supply Agreement. Under the License Agreement, the Company licensed the exclusive rights to the Company’s products Thrombi-Pad, Thrombi-Gel and Thrombi-Paste to King in exchange for a one-time license fee of $6,000,000. Under the Device Supply Agreement, the Company agreed to manufacture the licensed products for sale to King in exchange for two separate $1,000,000 milestone payments; one upon the first commercial sale of Thrombi-Gel (which was received on May 31, 2007), and one upon the first commercial sale of Thrombi-Paste. The Company is amortizing the $6,000,000 license fee on a straight-line basis over 10 years. The Company is amortizing the $1,000,000 milestone payment that was received on May 31, 2007 over the remaining 10-year license period and will amortize the additional $1,000,000 milestone payment over the remaining 10-year license period when it is received. In 2009 King suspended further development of all Thrombi-Paste products. The unamortized license fee was $4,945,000, $5,649,000 and $6,353,000 at December 31, 2009, 2008 and 2007, respectively. The amortization of license fee was $704,000, $704,000 and $647,000 for the years ended December 31, 2009, 2008 and 2007, respectively.
Under the Device Supply Agreement the Company agreed to pursue a surgical indication for the use of the Thrombi-Gel and Thrombi-Paste products from the FDA. The Device Supply Agreement requires the Company to make a one-time payment of $2,500,000 to King if the FDA does not approve the surgical indication of Thrombi-Gel and a one-time payment of $2,500,000 to King if the FDA does not approve the surgical indication of Thrombi-Paste after performing a clinical study and submitting the application. The Company believes the probability of paying these one-time payments to King is remote, and therefore has not recorded any provision for these payments.
Nicolai, GmbH Agreement
Effective April 1, 2008 the Company entered into a five-year distribution agreement with Nicolai, GmbH. As a result of entering into this distribution agreement, the Company no longer maintains a direct sales force in Germany. In connection with this distribution agreement, the Company received 500,000 Euros from Nicolai, GmbH. which was deferred and is being recognized ratably over the five-year term of the distribution agreement.
The agreement also includes provisions requiring the Company to pay Nicolai, GmbH specific amounts if the Company terminates the distribution agreement prior to the end of the five-year term. The Company does not intend to terminate the distribution agreement and, as such, has not recorded a liability relating to these potential future payments to Nicolai, GmbH. The unamortized license fee was $472,000 and $617,000 at December 31, 2009 and 2008, respectively. The amortization of license fee was $145,000 and $114,000 for the year ended December 31, 2009 and 2008, respectively.
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15. Quarterly Financial Data (Unaudited, in Thousands, Except per Share Data)
| | | | | | | | | | | | | |
2009 | | Fourth Quarter | | Third
Quarter | | Second Quarter | | First
Quarter | |
Revenue: | | | | | | | | | | | | | |
Product | | $ | 17,712 | | $ | 16,817 | | $ | 16,781 | | $ | 15,416 | |
License and collaboration | | | 510 | | | 411 | | | 385 | | | 395 | |
Total revenue | | | 18,222 | | | 17,228 | | | 17,166 | | | 15,811 | |
| | | | | | | | | | | | | |
Selected costs and expenses: | | | | | | | | | | | | | |
Product | | | 6,219 | | | 5,718 | | | 5,765 | | | 5,215 | |
Collaboration | | | 295 | | | 199 | | | 173 | | | 183 | |
Total selected costs and expenses: | | | 6,514 | | | 5,917 | | | 5,938 | | | 5,398 | |
| | | | | | | | | | | | | |
Operating income (loss) | | | 2,228 | | | 2,178 | | | 2,247 | | | 1,513 | |
| | | | | | | | | | | | | |
Net income (loss) | | | 1,623 | | | 1,431 | | | 1,386 | | | 938 | |
| | | | | | | | | | | | | |
Basic net income (loss) per share | | $ | 0.10 | | $ | 0.09 | | $ | 0.09 | | $ | 0.06 | |
Diluted net income (loss) per share | | $ | 0.10 | | $ | 0.09 | | $ | 0.09 | | $ | 0.06 | |
| | | | | | | | | | | | | |
2008 | | | | | | | | | | | | | |
Revenue: | | | | | | | | | | | | | |
Product | | $ | 16,059 | | $ | 15,089 | | $ | 14,872 | | $ | 13,737 | |
License and collaboration | | | 345 | | | 376 | | | 366 | | | 377 | |
Total revenue | | | 16,404 | | | 15,465 | | | 15,238 | | | 14,114 | |
| | | | | | | | | | | | | |
Selected costs and expenses: | | | | | | | | | | | | | |
Product | | | 5,619 | | | 5,130 | | | 5,360 | | | 4,581 | |
Collaboration | | | 126 | | | 138 | | | 187 | | | 181 | |
Total selected costs and expenses: | | | 5,745 | | | 5,268 | | | 5,547 | | | 4,762 | |
| | | | | | | | | | | | | |
Operating income (loss) | | | 1,457 | | | 1,748 | | | (444 | ) | | 254 | |
| | | | | | | | | | | | | |
Net income (loss) | | | 14,684 | | | 1,722 | | | (468 | ) | | 235 | |
| | | | | | | | | | | | | |
Basic net income (loss) per share | | $ | 0.93 | | $ | 0.11 | | $ | (0.03 | ) | $ | 0.02 | |
Diluted net income (loss) per share | | $ | 0.90 | | $ | 0.11 | | $ | (0.03 | ) | $ | 0.01 | |
16. Subsequent Event
On January 22, 2010 the Company received $3.56 million dollars as payment in full for the judgment against Marine Polymer in the lawsuit initiated by the Company for product disparagement and false advertising which was affirmed by the U.S. First Circuit Court of Appeals on December 23, 2009. The Company will record the $3.56 million as a litigation gain in the first quarter of 2010.
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