e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010.
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-28288
CARDIOGENESIS CORPORATION
(Exact name of registrant as specified in its charter)
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California
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77-0223740 |
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(State of incorporation or organization)
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(I.R.S. Employer
Identification Number) |
11 Musick
Irvine, California 92618
(Address of principal executive offices)
(949) 420-1800
(Issuers telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act:
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of October 31, 2010, there were 46,691,249 shares of the registrants common stock, no par
value, outstanding.
CARDIOGENESIS CORPORATION
TABLE OF CONTENTS
2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
CARDIOGENESIS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
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September 30, |
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December 31, |
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2010 |
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2009 |
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(unaudited) |
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(audited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
2,139 |
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$ |
2,568 |
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Accounts receivable, net of allowance for doubtful accounts of $10
and $6, respectively |
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1,137 |
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933 |
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Inventories |
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768 |
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914 |
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Prepaids and other current assets |
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462 |
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253 |
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Total current assets |
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4,506 |
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4,668 |
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Property and equipment, net |
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248 |
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341 |
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Other assets, net |
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9 |
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9 |
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Total assets |
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$ |
4,763 |
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$ |
5,018 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
382 |
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$ |
127 |
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Accrued salaries and related |
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559 |
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604 |
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Accrued liabilities |
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362 |
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299 |
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Deferred revenue |
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704 |
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744 |
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Note payable |
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177 |
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88 |
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Current portion of capital lease obligations |
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10 |
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9 |
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Total current liabilities |
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2,194 |
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1,871 |
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Capital lease obligations, less current portion |
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5 |
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14 |
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Total liabilities |
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2,199 |
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1,885 |
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Commitments and contingencies |
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Shareholders equity: |
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Preferred stock: |
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no par value; 5,000 shares authorized; none issued and outstanding |
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Common stock: |
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no par value; 75,000 shares authorized; 45,888 and 45,549 shares
issued and outstanding, respectively |
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174,387 |
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174,217 |
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Accumulated deficit |
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(171,823 |
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(171,084 |
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Total shareholders equity |
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2,564 |
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3,133 |
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Total liabilities and shareholders equity |
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$ |
4,763 |
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$ |
5,018 |
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See accompanying notes.
3
CARDIOGENESIS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(in thousands, except per share amounts)
(unaudited)
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Three months ended |
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Nine months ended |
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September 30, |
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September 30, |
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2010 |
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2009 |
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2010 |
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2009 |
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Net revenues |
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$ |
2,764 |
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$ |
2,134 |
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$ |
8,426 |
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$ |
7,222 |
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Cost of revenues |
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454 |
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380 |
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1,363 |
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1,307 |
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Gross profit |
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2,310 |
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1,754 |
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7,063 |
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5,915 |
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Operating expenses: |
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Research and development |
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272 |
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379 |
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830 |
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1,013 |
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Sales and marketing |
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1,443 |
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1,363 |
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4,728 |
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4,104 |
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General and administrative |
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740 |
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730 |
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2,211 |
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2,375 |
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Total operating expenses |
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2,455 |
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2,472 |
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7,769 |
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7,492 |
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Operating loss |
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(145 |
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(718 |
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(706 |
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(1,577 |
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Other income (expense): |
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Interest expense |
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(4 |
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(3 |
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(35 |
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Interest income |
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1 |
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1 |
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3 |
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Other non-operating expense |
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(2 |
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(20 |
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(2 |
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(20 |
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Total other expense, net |
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(2 |
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(23 |
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(4 |
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(52 |
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Loss before provision for income taxes |
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(147 |
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(741 |
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(710 |
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(1,629 |
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Provision for income taxes |
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7 |
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(2 |
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14 |
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14 |
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Net loss |
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$ |
(154 |
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$ |
(739 |
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$ |
(724 |
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$ |
(1,643 |
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Net loss per share: |
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Basic |
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$ |
(0.00 |
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$ |
(0.02 |
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$ |
(0.02 |
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$ |
(0.04 |
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Diluted |
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$ |
(0.00 |
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$ |
(0.02 |
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$ |
(0.02 |
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$ |
(0.04 |
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Weighted average shares outstanding: |
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Basic |
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45,928 |
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45,549 |
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45,727 |
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45,519 |
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Diluted |
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45,928 |
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45,549 |
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45,727 |
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45,519 |
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See accompanying notes.
4
CARDIOGENESIS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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Nine months ended |
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September 30, |
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2010 |
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2009 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(724 |
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$ |
(1,643 |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation |
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193 |
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233 |
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Provision for doubtful accounts |
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4 |
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10 |
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Stock-based compensation expense |
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203 |
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156 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(208 |
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379 |
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Inventories |
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81 |
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15 |
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Prepaids and other current assets |
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(10 |
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197 |
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Accounts payable |
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255 |
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138 |
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Accrued liabilities |
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18 |
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(83 |
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Deferred revenue |
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(40 |
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171 |
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Net cash used in operating activities |
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(228 |
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(427 |
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Cash flows from investing activities: |
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Acquisition of property and equipment |
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(35 |
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(24 |
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Proceeds from the sale of marketable securities |
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75 |
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Net cash (used in) provided by investing activities |
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(35 |
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51 |
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Cash flows from financing activities: |
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Shares withheld to satisfy income tax withholding obligations |
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(48 |
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Payments on note payable |
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(110 |
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(18 |
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Net proceeds from issuance of common stock from exercise of options and from stock
purchased under the Employee Stock Purchase Plan |
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10 |
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Payments on capital lease obligations |
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(8 |
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(6 |
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Net cash (used in) provided by in financing activities |
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(166 |
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(14 |
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Net decrease in cash and cash equivalents |
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(429 |
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(390 |
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Cash and cash equivalents at beginning of period |
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2,568 |
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2,907 |
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Cash and cash equivalents at end of period |
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$ |
2,139 |
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$ |
2,517 |
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Supplemental schedule of cash flow information: |
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Interest paid |
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$ |
2 |
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$ |
2 |
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Taxes paid |
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$ |
12 |
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$ |
6 |
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Supplemental schedule of non-cash investing and financing activities: |
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Financing of insurance premiums under note payable |
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$ |
199 |
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$ |
158 |
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Financing of property and equipment |
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$ |
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$ |
12 |
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Reclassification of inventories to property and equipment |
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$ |
65 |
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$ |
165 |
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See accompanying notes.
5
CARDIOGENESIS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Cardiogenesis Corporation (Cardiogenesis or the Company) was founded in 1989 to design,
develop, and distribute surgical lasers and single-use fiber optic laser delivery systems
(handpieces) for the treatment of cardiovascular disease.
Cardiogenesis markets its products for sale primarily in the United States and operates in a
single segment.
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Summary of Significant Accounting Policies: |
Interim Financial Information:
The accompanying unaudited condensed consolidated financial statements have been prepared by
the Company in accordance with accounting principles generally accepted in the United States of
America (GAAP) for interim financial information, and pursuant to the instructions to Form 10-Q
and Article 8 of Regulation S-X promulgated by the Securities and Exchange Commission (SEC).
Accordingly, they do not include all of the information and footnotes required by GAAP for complete
financial statement presentation. In the opinion of management, all adjustments (consisting
primarily of normal recurring accruals) considered necessary for a fair presentation have been
included. The Company has evaluated subsequent events through the filing date of this Form 10-Q,
and determined that no subsequent events have occurred that would require recognition in the
condensed consolidated financial statements or disclosure in the notes thereto other than as
disclosed in the accompanying notes. These unaudited condensed consolidated financial statements
should be read in conjunction with the Companys audited consolidated financial statements and
notes thereto for the year ended December 31, 2009, contained in the Companys Annual Report on
Form 10-K, as filed with the SEC.
These unaudited condensed consolidated financial statements contemplate the realization of
assets and the satisfaction of liabilities in the normal course of business. Cardiogenesis has
incurred significant losses and as of September 30, 2010 it had an accumulated deficit of $171.8
million. Management believes its cash balance as of September 30, 2010 and expected results of
operations are sufficient to meet the Companys capital and operating requirements for the next 12
months.
However, the Company may require additional financing in the future if revenues are not as
expected or the Companys costs exceed its estimates. In particular, the Company expects to incur
significant costs in connection with its planned clinical trials for the PHOENIX handpiece and if
the Company is not able to significantly increase its revenues, it will have to obtain additional
financing to fund the clinical trials or abandon the clinical trials. There can be no assurance
that the Company will be able to obtain additional debt or equity financing if and when needed or
on terms acceptable to the Company. Any additional debt or equity financing may involve
substantial dilution to the Companys shareholders, restrictive covenants or high interest costs.
The failure to raise needed funds on sufficiently favorable terms could have a material adverse
effect on the Companys business, operating results and financial condition. The Companys long
term liquidity also depends upon its ability to increase revenues from the sale of its products and
achieve consistent profitability. The failure to achieve these goals could have a material adverse
effect on the business, operating results and financial condition.
Net Earnings (Loss) Per Share:
Basic earnings (loss) per share (BEPS) is computed by dividing the net income (loss) by the
weighted average number of common shares outstanding for the period. Diluted earnings (loss) per
share (DEPS) is computed giving effect to all dilutive potential common shares that were
outstanding during the period. Dilutive potential common shares consist of incremental shares
issuable upon the exercise of stock options and warrants using the treasury stock method. The
computation of DEPS does not assume conversion, exercise or contingent exercise of securities that
would have an anti-dilutive effect on earnings.
6
For the three and nine months ended September 30, 2010, there were approximately 673,000 and
704,000 potentially dilutive shares, respectively, that were excluded from diluted loss per share
as their effect would have been anti-dilutive for the periods then ended. For the three and nine
months ended September 30, 2009, there were approximately 716,000 and 418,000 potentially dilutive
shares, respectively.
Use of Estimates:
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual results could differ from
those estimates. Significant estimates made in preparing the consolidated financial statements
include (but are not limited to) the determination of the allowance for bad debt, inventory
reserves, valuation allowance relating to deferred tax assets, warranty reserve, the assessment of
future cash flows in evaluating long-lived assets for impairment and assumptions used in fair value
determination of stock-based compensation.
Risks and Concentrations:
Cardiogenesis sells its products to hospitals and other healthcare providers primarily in the
United States. Cardiogenesis performs ongoing credit evaluations of its customers and generally
does not require collateral. Although Cardiogenesis maintains allowances for potential credit
losses that it believes to be adequate, a payment default on a significant sale could materially
and adversely affect its operating results and financial condition. At September 30, 2010 and
December 31, 2009, no customer individually accounted for more than 10% of gross accounts
receivable. For the three and nine month periods ended September 30, 2010 and September 30, 2009,
no customer individually accounted for more than 10% of net revenues.
As of September 30, 2010, approximately $969,000 of the Companys cash and cash equivalents
were maintained in money market mutual funds, and approximately $1,170,000 of the Companys cash
and cash equivalents were maintained at a major financial institution in the United States. At
times, deposits held with the financial institution may exceed the amount of insurance provided by
the Federal Deposit Insurance Corporation (the FDIC), which provides deposit coverage with limits
up to $250,000 per owner through December 31, 2013. Generally, these deposits may be redeemed upon
demand and, therefore, are believed to bear low risk.
After giving effect to the increased FDIC insurance, at September 30, 2010, the Companys
uninsured cash totaled approximately $1,985,000.
The Company outsources the manufacturing and assembly of its handpieces to a single contract
manufacturer. The Company also outsources the manufacturing of its laser consoles to a different
single contract manufacturer.
Certain components of laser consoles and fiber-optic handpieces are generally acquired from
multiple sources. Other laser and fiber-optic components and subassemblies are purchased from
single sources. Although the Company has identified alternative vendors, the qualification of
additional or replacement vendors for certain components or services is a lengthy process. Any
significant supply interruption would have a material adverse effect on the Companys ability to
manufacture its products and, therefore, would harm its business. The Company intends to continue
to qualify multiple sources for components that are presently single sourced.
Revenue Recognition:
Cardiogenesis recognizes revenue on product sales upon shipment of the products when the price
is fixed or determinable and when collection of sales proceeds is reasonably assured. Where
purchase orders allow customers an acceptance period or other contingencies, revenue is recognized
upon the earlier of acceptance or removal of the contingency.
Revenues from sales to distributors and agents are recognized upon shipment when there is
evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable and
collection of the sales proceeds is
reasonably assured. The contracts regarding these sales do not include any rights of return
or price protection clauses.
7
The Company, at times, will loan laser consoles to hospitals and charge an additional amount
(the Premium) over the stated list price on its handpieces in exchange for the use of the laser
console. In accordance with the accounting standards for leases, these arrangements are recorded
as leases as they convey the right to use the laser console over the period of time the customers
are purchasing handpieces. The loaned laser consoles are classified as operating leases and are
transferred from inventory to property and equipment upon commencement of the loan. In addition,
the Premium is considered contingent rent, and therefore, such amounts allocated to the lease of
the laser console are recognized as revenue when the contingency is resolved. In these instances,
the contingency is resolved upon the sale of the handpiece.
Cardiogenesis enters into contracts to sell its products and services and, while the majority
of its sales agreements contain standard terms and conditions, there are agreements that contain
multiple elements or non-standard terms and conditions. As a result, significant contract
interpretation is sometimes required to determine the appropriate accounting, including whether the
deliverables specified in a multiple element arrangement should be treated as separate units of
accounting for revenue recognition purposes and, if so, how the contract value should be allocated
among the deliverable elements and when to recognize revenue for each element. The Company
recognizes revenue for multiple element arrangements, such as sales of laser consoles and
handpieces, by allocating revenue for each respective element based on its selling price and when
revenue recognition criteria for each element have been met.
In addition to the standard product warranty, the Company periodically offers extended
warranties to its customers in the form of product maintenance services. Service agreements on its
equipment are typically sold separately from the sale of the equipment. In accordance with the
accounting standards for warranties, revenues on these service agreements are recognized ratably
over the life of the agreement, typically one to three years.
Segment Disclosures:
The Company operates in one segment. The principal market for the Companys products is in
the United States. International sales occur primarily in Europe, Mexico and Asia and amounted to
approximately $7,000 and $47,000 for the three and nine months ended September 30, 2010,
respectively. For the three and nine months ended September 30, 2009, the Companys international
sales were $4,000 and $96,000, respectively. International sales represented less than 1% of total
net revenues for both the three and nine months ended September 30, 2010 and less than 1% and
approximately 1% of total net revenues for the three and nine months ended September 30, 2009,
respectively. The majority of international sales are denominated in U.S. Dollars. All of the
Companys long-lived assets are located in the United States.
Recent Accounting Pronouncements:
In September 2009, the Financial Accounting Standards Board (FASB) issued an update to its
accounting guidance regarding multiple-deliverable revenue arrangements. The guidance addresses
how to measure and allocate consideration to one or more units of accounting. Specifically, the
guidance requires that consideration be allocated among multiple deliverables based on relative
selling prices. The guidance establishes a selling price hierarchy of (1) vendor-specific
objective evidence, (2) third-party evidence and (3) estimated selling price. This guidance is
effective for annual periods beginning on or after June 15, 2010 but may be early adopted as of the
beginning of an annual period. The Company adopted this guidance on January 1, 2010 and it did not
have a material impact on its consolidated financial statements.
In January 2010, the FASB issued an update to its accounting guidance regarding fair value
measurement and disclosure. The guidance affects the disclosures made about recurring and
non-recurring fair value measurements. This guidance is effective for annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and
settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures
are effective for fiscal years beginning after December 15, 2010. Early adoption is permitted.
The Company is currently evaluating the impact that this guidance will have on its consolidated
financial statements.
8
Other recent accounting pronouncements issued by the FASB (including the Emerging Issues Task
Force (EITF)) and the American Institute of Certified Public Accountants did not, or are not
believed by management to, have a material impact on the Companys present or future consolidated
financial statements.
Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(unaudited) |
|
|
(audited) |
|
Raw materials |
|
$ |
115 |
|
|
$ |
141 |
|
Work-in-process |
|
|
174 |
|
|
|
192 |
|
Finished goods |
|
|
479 |
|
|
|
581 |
|
|
|
|
|
|
|
|
Total |
|
$ |
768 |
|
|
$ |
914 |
|
|
|
|
|
|
|
|
4. |
|
Stock-Based Compensation: |
In accordance with the accounting standards for stock-based compensation, the Company
recognizes all share-based payments to employees, including grants of employee stock options and
restricted stock grants, based upon their fair values. The Company uses the Black-Scholes option
pricing model to estimate the grant-date fair value of share-based awards with the fair value
determined at the date of grant. The financial statement effect of forfeitures is estimated at the
time of grant and revised, if necessary, if the actual effect differs from those estimates.
Description of Plans
The Companys stock option plans provide for grants of options to employees and directors of
the Company to purchase the Companys shares at the fair value of such shares on the grant date
(based on the closing price of the Companys common stock). The options vest immediately or up to
four years beginning on the grant date and have a 10-year term. The terms of the option grants are
determined by the Companys Board of Directors. As of September 30, 2010, the Company is authorized
to issue up to an aggregate of 12,125,000 shares under these plans.
The Companys 1996 Employee Stock Purchase Plan (the ESPP) was adopted in April 1996 and
amended in July 2005. A total of 1,500,000 common shares are reserved for issuance under the ESPP,
as amended. The ESPP permits employees to purchase common shares at a price equal to the lower of
85% of the fair market value of the common stock at the beginning of each offering period or the
end of each offering period. The ESPP has two offering periods, the first one from May 16 through
November 15 and the second one from November 16 through May 15. Employee purchases are nonetheless
limited to 15% of eligible cash compensation, and other restrictions regarding the amount of annual
purchases also apply. The Company suspended the ESPP effective at the end of the November 16, 2008
offering period.
The Company has treated the ESPP as a compensatory plan.
Summary of Assumptions and Activity
The fair value of stock-based awards to employees and directors is calculated using the
Black-Scholes option pricing model, even though the model was developed to estimate the fair value
of freely tradable, fully transferable options without vesting restrictions, which differ
significantly from the Companys stock options. The Black-Scholes model also requires subjective
assumptions, including future stock price volatility and expected time to exercise, which greatly
affect the calculated values. The expected term of options granted is derived from historical data
on employee exercises and post-vesting employment termination behavior. The risk-free rate
selected to value any particular grant is based on the U.S. Treasury rate that corresponds to the
term of the grant effective as of the date of the grant. The expected volatility is based on the
historical volatility of the Companys stock price. These
factors could change in the future, affecting the determination of stock-based compensation
expense in future periods.
9
The weighted-average fair value of stock-based compensation is based on the single option
valuation approach. Forfeitures are estimated and it is assumed no dividends will be declared. The
estimated fair value of stock-based compensation awards to employees is amortized using the
straight-line method over the vesting period of the options.
The Companys fair value calculations for stock-based compensation awards to employees under
its stock option plans for the nine months ended September 30, 2010 and 2009 were based on the
following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
Expected term |
|
5.36 5.56 years |
|
6.27 6.35 years |
Expected volatility |
|
|
96.05 97.59 |
% |
|
|
97.6 105.51 |
% |
Risk-free interest rate |
|
|
1.80 2.53 |
% |
|
|
1.63 2.84 |
% |
Expected dividend yield |
|
|
|
|
|
|
|
|
A summary of option activity as of September 30, 2010 and changes during the nine months then
ended, is presented below (in thousands except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Weighted |
|
Average |
|
|
|
|
|
|
|
|
Average |
|
Remaining |
|
Aggregate |
|
|
|
|
|
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
Shares |
|
Price |
|
Term (Years) |
|
Value |
Options outstanding at January 1, 2010 |
|
|
3,223 |
|
|
$ |
0.49 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
420 |
|
|
$ |
0.37 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Options forfeited/canceled |
|
|
(425 |
) |
|
$ |
0.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding and expected to vest at September 30, 2010 |
|
|
3,218 |
|
|
$ |
0.43 |
|
|
|
5.95 |
|
|
$ |
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at September 30, 2010 |
|
|
2,299 |
|
|
$ |
0.50 |
|
|
|
5.10 |
|
|
$ |
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value is calculated as the difference between the exercise price of
the stock options and the quoted price of the Companys common stock at period end. There were no
stock options exercised during the nine months ended September 30, 2010. There were 1,165,000
options outstanding and 742,846 exercisable options as of September 30, 2010, that were
in-the-money. At September 30, 2009, there were no exercisable stock options that were
in-the-money.
The weighted average grant date fair value of options was $0.26 and $0.28 for the three and
nine months ended September 30, 2010, respectively. The weighted average grant date fair value of
options granted during the three and nine months ended September 30, 2009 was $0.18 and 0.14 per
option, respectively.
As of September 30, 2010, there was approximately $132,000, net of forfeitures, of total
unrecognized compensation cost related to employee and director stock option compensation
arrangements. That cost is expected to be recognized over the weighted average remaining vesting
period of approximately 1.1 years. For the three and nine months ended September 30, 2010, the
amount of stock-based compensation expense related to stock options was approximately $41,000 and
$114,000, respectively as compared to $31,000 and $95,000, respectively recognized in the prior
year comparative periods. There was no stock-based compensation expense related to ESPP
contributions during the three and nine months ended September 30, 2010. For the three and nine
months ended September 30, 2009, the amount of stock-based compensation expense related to ESPP
contributions was approximately $0 and $12,000, respectively.
10
On March 31, 2009, the Company granted awards of restricted stock to each of its employees
totaling approximately 1,208,000 shares with a grant date fair value of approximately $302,000.
The shares vest as to 33% of the shares on the first anniversary of the grant date, 33% of the
shares on the second anniversary of the grant date and 34% of the shares on the third anniversary
of the grant date. In addition, in connection with Paul McCormicks appointment to Executive
Chairman on July 1, 2009, Mr. McCormick was granted 300,000 shares of restricted stock, with a
grant date fair value of $57,000, under the Companys Stock Option Plan. The restrictions on Mr.
McCormicks shares of restricted stock will lapse in equal installments upon the first and second
anniversaries of the date of grant. On May 17, 2010, in connection with his amended employment
agreement, Mr. McCormick was granted an additional 100,000 shares of restricted stock under the
Companys Stock Option Plan. The restrictions of these shares of restricted stock will lapse on the
one year anniversary of the grant date. The grant date fair value of these shares of restricted
stock was $38,000.
During the nine month period ended September 30, 2010, the Company withheld 125,983 shares of
its common stock upon the vesting of 315,324 shares of restricted stock to satisfy its income tax
withholding obligations. The value of the shares withheld was approximately $48,000, based on the
closing market price on the measurement date. Accordingly, the Company recorded the aggregate
original issue price of approximately $33,000 to equity and the difference of the fair value at
vesting and the original issue price of approximately $15,000 to accumulated deficit.
For the three and nine months ended September 30, 2010, the stock based compensation related
to the amortization of the related compensation cost of the restricted stock was approximately
$33,000 and $89,000, respectively. For the three and nine months ended September 30, 2009, the
stock compensation related to the amortization of the related compensation cost of the restricted
stock was approximately $25,000 and $49,000, respectively. Since shares of restricted stock are
subject to vesting, the unvested shares as of September 30, 2010 have been excluded from the issued
and outstanding shares and basic loss per share computations. As of September 30, 2010, there was
approximately $150,000 of total unrecognized compensation cost related to restricted stock that is
expected to be recognized over the weighted average remaining vesting period of approximately 1.2
years.
The following table summarizes the restricted stock activity for the nine months ended
September 30, 2010 (in thousands):
|
|
|
|
|
|
|
September 30, |
|
|
2010 |
Unvested Restricted Stock Outstanding at January 1, 2010 |
|
|
1,256 |
|
Granted |
|
|
100 |
|
Forfeited |
|
|
(88 |
) |
Vested |
|
|
(465 |
) |
|
|
|
|
|
Unvested Restricted Stock Outstanding at September 30, 2010 |
|
|
803 |
|
|
|
|
|
|
The following table summarizes stock-based compensation expense related to stock options,
restricted stock and ESPP purchases for the three and nine months ended September 30, 2010 and 2009
which was allocated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Stock-based compensation expense included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
$ |
6 |
|
|
$ |
4 |
|
|
$ |
14 |
|
|
$ |
10 |
|
Sales and marketing |
|
|
20 |
|
|
|
24 |
|
|
|
76 |
|
|
|
72 |
|
General and administrative |
|
|
48 |
|
|
|
28 |
|
|
|
113 |
|
|
|
74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
74 |
|
|
$ |
56 |
|
|
$ |
203 |
|
|
$ |
156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported, CardioFocus, Inc. (CardioFocus) filed a complaint in the United
States District Court for the District of Massachusetts (Case No. 1.08-cv-10285) against the
Company and a number of other companies.
11
In the complaint, CardioFocus alleges that Cardiogenesis and the other defendants had
previously violated patent rights allegedly held by CardioFocus. All of the asserted patents have
now expired.
On June 13, 2008, Cardiogenesis filed requests for reexamination of the patents being asserted
against Cardiogenesis with the United States Patent and Trademark Office (USPTO) and asserted
that prior art had been identified that raised substantial new issues of patentability with respect
to the inventions claimed by CardioFocus patents. In August 2008, the USPTO granted
Cardiogenesis reexamination requests. Reexamination requests filed by other named defendants were
also granted. The USPTO finally concluded and CardioFocus is not appealing the following
determinations made in reexamination: (a) all asserted claims of CardioFocus U.S. Patent No.
6,159,203 (the 203 Patent) are unpatentable; (b) 11 of 14 claims of U.S. Patent No. 6,547,780
(the 780 Patent) are unpatentable; and (c) 8 of 13 claims of U.S. Patent No. 5,843,073 (the
073 Patent) are unpatentable. Three claims being asserted by CardioFocus against the Company,
namely, Claim 2 of the 780 Patent and Claims 2 and 7 of the 073 Patent have been confirmed by the
USPTO.
In view of the reexamination having been completed, the Court, at a status conference held on
April 22, 2010, issued a scheduling order scheduling dates in connection with the litigation
regarding discovery, law and motion practice, a briefing schedule and hearing for patent claim
interpretation proceedings, and other key events. A settlement conference has been scheduled for
November 9, 2010 and trial is set to commence on November 7, 2011.
Since the Courts issuance of the scheduling order, the parties have engaged and continue to
engage in discovery. The parties are further exchanging infringement and non-infringement
contentions, as well as clam term constrictions. Cardiogenesis has further filed four further
reexamination requests seeking to invalidate the remaining claims of the 780 Patent and 073
Patent being asserted against Cardiogenesis. Two of the reexamination requests were filed on June
30, 2010, and two others were filed on October 15, 2010. These further reexamination requests are
based, in part, on newly identified prior art not previously considered by the USPTO.
The Company intends to defend itself vigorously in this action. At this time, the Company is
unable to predict the outcome of this matter. At this time, the Company believes that the outcome
of this matter will not have a material adverse effect on the Companys financial position, results
of operations, or cash flow. However, as this matter is ongoing, there is no assurance that this
matter will be resolved favorably by the Company or will not result in a material liability.
Except as described above, the Company is not a party to any material legal proceeding.
6. |
|
Related Party Transactions: |
The Company entered into a consulting agreement with Mr. McCormick, the Companys Chairman of
the Board, effective January 15, 2009. Pursuant to the consulting agreement, Mr. McCormick provided
consulting services relating to corporate strategy development and execution, financing and
investor relations up to 16 hours per week. In consideration for such services, the Company paid
Mr. McCormick $8,000 per month and reimbursed Mr. McCormick for healthcare insurance coverage up to
$15,600 per year. The consulting agreement had a term of 18 months, but was mutually terminated as
of June 30, 2009.
Effective July 1, 2009, the Company entered into an employment agreement with Mr. McCormick
whereby he agreed to serve as the Executive Chairman of the Board of Directors and principal
executive officer of the Company. Under the terms of the employment agreement, Mr. McCormick was
entitled to an annual base salary of $250,000, provided that he devotes at least 75% of his time to
his duties and responsibilities as Executive Chairman under the employment agreement. Mr.
McCormick is entitled to receive certain benefits which will include, at a minimum, medical
insurance for Mr. McCormick and his spouse, as well as no less than three weeks paid vacation per
year. In addition, Mr. McCormick is entitled to be reimbursed for all reasonable expenses incurred
by him in respect of his services to the Company under the employment agreement. The employment
agreement had an initial term of one year, which term is automatically renewed for successive
additional one year periods, unless terminated upon 30 days written notice by either Mr. McCormick
or the Company. In connection with Mr. McCormicks appointment to Executive Chairman, the Board of
Directors granted him 300,000 shares of restricted stock under the Companys Stock Option Plan.
The restrictions on Mr. McCormicks shares of restricted stock lapse in equal installments upon the
first and second anniversaries of the date of grant.
12
Effective July 1, 2010, the Company entered into an amendment to the employment agreement
dated as of July 1, 2009 by and between the Company and Mr. McCormick, pursuant to which the
Company and Mr. McCormick agreed to the following changes to his employment agreement: (i) Mr.
McCormick will receive an annual base salary of $200,000, which represents a decrease of $50,000
per year. In conjunction with the amended agreement, on May 17, 2010, the Board of Directors
approved a grant of 100,000 shares of restricted stock under the Companys Stock Option Plan, with
such restrictions lapsing after one year from the date of grant, and an option to purchase 100,000
shares of common stock, which would vest in full on the first anniversary of the date of grant.
Effective July 1, 2009, the Company entered into an amendment to the employment agreement
dated as of July 30, 2007 by and between the Company and Richard P. Lanigan, pursuant to which the
Company and Mr. Lanigan agreed to the following changes to his employment agreement: (i) Mr.
Lanigans title will be Executive Vice President, Marketing of the Company, (ii) Mr. Lanigan will
receive an annual base salary of $225,000, which represents a decrease of $22,500 per year, and
(iii) Mr. Lanigan will report directly to the Executive Chairman of the Company.
The Company entered into a consulting agreement with Dr. Marvin Slepian, a member of the
Companys Board of Directors, dated April 1, 2010 and effective March 24, 2010. Pursuant to the
agreement, Dr. Slepian will provide consulting services at the Companys direction relating to
basic and clinical scientific initiatives as well as development of certain scientific and
educational materials. In consideration for such services, the Company will pay Dr. Slepian $400
per hour up to a maximum of $2,500 per day. The agreement may be terminated by either party upon
thirty days written notice. For both the three and nine months ended September 30, 2010, the
Company paid Dr. Slepian a total of $0 and $2,500, respectively, for consulting services half of
which is included in research and development expenses and the other half is included in sales and
marketing expenses in the accompanying consolidated statements of operations.
Effective September 15, 2010, the Company entered into an agreement with the Texas Heart
Institute (THI), whereby the Company will sponsor biocompatibility and animal safety studies to
support the PHOENIX Investigational Device Exemption to the Food and Drug Administration. In
consideration for such services, the Company will pay THI total project funds not to exceed
$651,000. The agreement will terminate on June 30, 2011, but may be extended for an additional
term by the mutual written consent of both parties. The agreement may be terminated by either
party upon thirty days written notice.
On November 2, 2010, the Company was awarded a
research grant of approximately $244,500 from the Qualifying Therapeutic Discovery Project (QTDP) Program.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Managements Discussion and Analysis of Financial Condition and Results of Operations contains
certain statements relating to future results, which are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements are identified by words such as
believes, anticipates, expects, intends, plans, will, may and similar expressions.
In addition, any statements that refer to our plans, expectations, strategies or other
characterizations of future events or circumstances are forward-looking statements. These
forward-looking statements are based on the beliefs of management, as well as assumptions and
estimates based on information available to us as of the dates such assumptions and estimates are
made, and are subject to certain risks and uncertainties that could cause actual results to differ
materially from historical results or those anticipated, depending on a variety of factors,
including those factors discussed in the section titled Risk Factors contained in Part I, Item 1A
of our Annual Report on Form 10-K for the year ended December 31, 2009. Should one or more of
those risks or uncertainties materialize adversely, or should underlying assumptions or estimates
prove incorrect, actual results may vary materially from those described. Those events and
uncertainties are difficult or impossible to predict accurately and many are beyond our control.
Except as may be required by applicable law, we assume no obligation to publicly release the result
of any revisions that may be made to any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of anticipated or
unanticipated events. Our business may have changed since the date hereof and we undertake no
obligation to update these forward looking statements. The following discussion should be read in
conjunction with the unaudited condensed consolidated financial statements and notes thereto
included in this Quarterly Report on Form 10-Q.
13
Overview
We design, develop and distribute laser-based surgical products and disposable fiber-optic
delivery systems (handpieces) for the treatment of diffuse coronary artery disease.
Transmyocardial revascularization, or TMR, is a surgical procedure, in which transmural channels
are made in heart muscle that cannot be treated by conventional methods and has been proven to
reduce angina in selected patients.
We have received both FDA approval and a CE mark for our products. Hospitals and physicians
are eligible to receive Medicare reimbursement for TMR equipment and procedures on indicated
Medicare patients.
We generate the majority of our revenue from sales of our laser consoles and our disposable
handpiece units. In 2009, we refocused our sales strategy in 2009 to emphasize sales of our
handpieces, particularly to focus on increasing penetration of accounts with previously installed
laser consoles. In combination with the emphasis on sales of handpieces, we have also become more
active in conducting and sponsoring professional seminars to educate cardiac surgeons, as well as
cardiologists that refer patients to the cardiac surgeon for treatment. Cardiologists are the
gatekeepers for patients with cardiac disease and must be updated on the data and clinical benefits
of TMR. We believe this refocused strategy will be effective in growing our revenue over the long
term.
In addition, we continue our research and development activities in an effort to develop new
technologies for the treatment of cardiac ischemia. We submitted an IDE application in December
2009, to begin a U.S. clinical trial for the PHOENIX handpiece; a product that combines TMR as
tissue stimulation with the intramyocardial delivery of biologics or stem cells. We are currently
investing resources to support our domestic strategy. We believe that if the PHOENIX handpiece can
ultimately obtain FDA marketing approval it will be the core product to enable us to achieve our
desired future growth.
As of September 30, 2010, we had an accumulated deficit of $171.8 million. We may continue to
incur operating losses. The timing and amounts of our expenditures will depend upon a number of
factors, including the efforts required to develop our sales and marketing organization, the timing
of market acceptance of our products and the status and timing of regulatory approvals.
Results of Operations
Net Revenues
We generate our revenues primarily through the sale of our laser consoles and handpieces,
which are the components of our TMR System, and related services. In addition, we loan our laser
consoles to hospitals in accordance with our loaned laser programs. Under certain loaned laser
programs we charge the customer an additional amount over the stated list price on our handpieces
in exchange for the use of the laser console or we collect an upfront deposit that can be applied
towards the purchase of a laser console.
Net revenues of $2,764,000 for the three months ended September 30, 2010 increased $630,000,
or 30%, when compared to net revenues of $2,134,000 for the three months ended September 30, 2009.
The increase in sales was attributed to both an increase in handpiece revenue for the three month
period ended September 30, 2010, as compared to the prior year as well as absence of laser sales in
the prior year period. We refocused our sales strategy in 2009 to emphasize sales of our
handpieces, particularly to focus on increasing penetration of accounts with previously installed
laser consoles. Going forward we anticipate continued growth in handpiece sales, however we expect
net revenue to fluctuate quarter to quarter depending on quarterly capital equipment sales.
For the three months ended September 30, 2010, domestic handpiece revenue increased by
$319,000, or 17%, compared to the prior year period. In the third quarter of 2010, domestic
handpiece revenue was $2,147,000, inclusive of $271,000 in sales of product to customers operating
under our loaned laser program. In the third quarter of 2009, domestic handpiece revenue was
$1,828,000, inclusive of $126,000 in sales of product to customers operating under our loaned laser
program. For the three months ended September 30, 2010 sales of our laser consoles were $295,000
as compared to no sales of laser consoles in the three months ended September 30, 2009.
14
International sales, which accounted for less than 1% of net revenues for the three months
ended September 30, 2010, were consistent with the prior year period. In addition, service and
other revenue of $315,000 increased $12,000 for the three months ended September 30, 2010, when
compared to $303,000 for the quarter ended September 30, 2009.
Net revenues of $8,426,000 for the nine months ended September 30, 2010 increased $1,204,000,
or 17%, when compared to net revenues of $7,222,000 for the nine months ended September 30, 2009.
This increase can be attributed to an increases in both domestic handpiece and sales of our laser
consoles.
For the nine months ended September 30, 2010, domestic handpiece revenue increased by $989,000
or 18% and domestic laser revenue increased by $302,000 compared to the nine months ended September
30, 2009. In the first nine months of 2010, domestic handpiece revenue was $6,417,000, inclusive
of $644,000 in sales of product to customers operating under our loaned laser program. In the
first nine months of 2009, domestic handpiece revenue was $5,428,000, inclusive of $361,000 in
sales of product to customers operating under our loaned laser program.
International sales, which accounted for less than 1% of net revenues for the nine months
ended September 30, 2010, decreased $48,000, or 51%, as compared to the prior year period. In
addition, service and other revenue of $893,000 decreased $40,000 for the nine months ended
September 30, 2010 when compared to $933,000 for the nine months ended September 30, 2009.
Gross Margin
Gross margin, which was of 84% of net revenues for the three months ended September 30, 2010,
was higher than our gross margin of 82% of net revenues for the three months ended September 30,
2009. Gross profit in absolute dollars increased by $556,000 to $2,310,000 for the current year
third quarter as compared with $1,754,000 for the 2009 third quarter. For the nine months ended
September 30, 2010, the gross margin percentage increased to 84% of net revenues as compared to 82%
of net revenues for the nine months ended September 30, 2009. Gross profit in absolute dollars
increased by $1,148,000 to $7,063,000 for the nine months ended September 30, 2010, as compared to
$5,915,000 for the nine months ended September 30, 2009. The increase in the gross margin
percentage for the third quarter was primarily attributed to a higher average selling price on
handpieces. We anticipate gross margins to remain constant going forward.
Research and Development
Research and development expense consists of expenses incurred in connection with the
development of technologies and products including the costs of third party studies, salaries and
stock-based compensation associated with research and development personnel.
For the three months ended September 30, 2010, research and development expenses of $272,000
decreased $107,000, or 28%, when compared to $379,000 for the three months ended September 30,
2009. As a percentage of revenues, research and development expenses were 10% during the three
months ended September 30, 2010 as compared to 18% for the prior year period. For the nine months
ended September 30, 2010, research and development expenses of $830,000 decreased $183,000 or 18%
when compared to $1,013,000 for the nine months ended September 30, 2009. As a percentage of
revenues, research and development expenses were 10% for the nine months ended September 30, 2010
as compared to 14% for the prior year period. The dollar decrease for the three and nine months
ended September 30, 2010 was primarily attributed to prior year submissions to the Food and Drug
Administration related to the Premarket Approval Application for the PEARL 8.0 handpiece and the
pre-Investigational Device Exemption to initiate a feasibility trial for the PHOENIX handpiece. As
we start the PHOENIX feasibility trial in Europe and the biocompatibility and animal safety studies
at the Texas Heart Institute, we anticipate an increase in research and development expense over
the next several quarters.
Sales and Marketing
Sales and marketing expense consists of salaries, stock-based compensation, commissions, taxes
and benefits for sales, marketing, and service employees and other sales, general and
administrative expenses directly associated with the sales, marketing, and service departments.
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For the three months ended September 30, 2010, sales and marketing expenses of $1,443,000
increased $80,000, or 6%, when compared to $1,363,000 for the three months ended September 30,
2009. As a percentage of revenues, sales and marketing expenses were 52% during the three months
ended September 30, 2010 as compared to 64% for the prior year period. The increase in sales and
marketing expenses for the three months ended September 30, 2010 as compared to the prior year
period was primarily due to a $142,000 increase in salary and other employee related expenses as a
result of increased headcount as well as higher commissions expense related to the increase in net
revenues and partially offset by a $59,000 decrease in advertising and marketing expenses.
For the nine months ended September 30, 2010, sales and marketing expenses of $4,728,000
increased $624,000, or 15%, when compared to $4,104,000 for the nine months ended September 30,
2009. As a percentage of revenues, sales and marketing expenses were 56% as compared to 57% for
the prior year period. The dollar and percentage increase in sales and marketing expenses for the
nine month periods was also a result of increased headcount which led to higher salaries and wage
expense as well as higher travel and entertainment expense. Salaries and wage expense was also
higher for the nine months ended September 30, 2010, due to higher commission expense as a result
of the increase in net revenues. As a large portion of sales and marketing expenses are directly
related to revenue, we anticipate expenses to fluctuate with revenues but trend downward as a
percent of net revenues as sales increase.
General and Administrative
General and administrative expenses represent all other operating expenses not included in
research and development or sales and marketing expenses. For the three months ended September 30,
2010, general and administrative expenses totaled $740,000, or 27% of net revenues, as compared to
$730,000, or 34% of net revenues, during the three months ended September 30, 2009. This
represents an increase of $10,000, or 1%. For the nine months ended September 30, 2010, general
and administrative expenses totaled $2,211,000 or 26% of net revenues as compared to $2,375,000, or
33% of net revenues, for the nine months ended September. 30, 2009. The decrease for the nine
month period was primarily a result of a reduced headcount which led to lower salaries and wages
expense. We anticipate general and administrative expenses in absolute dollars to remain
relatively constant going forward.
Liquidity and Capital Resources
At September 30, 2010, we had cash and cash equivalents of $2,139,000 compared to $2,568,000
at December 31, 2009, a decrease of $429,000. During the nine months ended September 30, 2010,
cash used in operating activities totaled $228,000, which primarily resulted from a net loss of
$724,000 and an increase in accounts receivable, partially offset by an increase in accounts
payable and a reduction in inventory levels. During the nine months ended September 30, 2009 cash
used in operating activities totaled $427,000, which primarily resulted from a net loss of
$1,643,000 partially offset by decreases in accounts receivable, inventory, and prepaids and other
current assets and increases in accounts payable and deferred revenue.
Cash used in investing activities during the nine months ended September 30, 2010 was $35,000
due to property and equipment purchases. Cash provided by investing activities during the nine
months ended September 30, 2009 was $51,000 primarily due to the redemption of investments in
marketable securities.
Cash used in financing activities during the nine months ended September 30, 2010 was
$166,000, which primarily consisted of repayment of $110,000 related to the short term note payable
and $48,000 related to the withholding of 125,983 shares of our common stock for the payment of
income tax withholdings due upon the vesting of restricted stock issued to employees. Cash used by
financing activities during the nine months ended September 30, 2009 was $14,000 which consisted of
payments on the short term note payable and capital lease obligations partially offset by proceeds
from purchases of common stock under the Employee Stock Purchase Plan.
We have incurred significant operating losses and as of September 30, 2010 we had an
accumulated deficit of $171.8 million. Our ability to maintain current operations is dependent
upon increasing our sales from current levels. Our focus is executing upon our core and critical
activities, thus operating expenses that are nonessential to our core operations have been reduced
or eliminated.
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We believe our cash balance as of September 30, 2010, cash receipts from sales of our
products, and actions we have taken to manage sales and marketing and general and administrative
expenses will be sufficient to meet our capital, debt and operating requirements through the next
twelve months. However, our actual future capital requirements will depend on many factors,
including the following:
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the success of the commercialization of our products and our refocused sales
strategy; |
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sales and marketing activities, and expansion of our commercial infrastructure,
related to our approved products and product candidates; |
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the results of our clinical trials and requirements to conduct additional clinical
trials; |
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the rate of progress of our research and development programs; |
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the time and expense necessary to obtain regulatory approvals; |
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activities and payments in connection with potential acquisitions of companies,
products or technology; and |
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competitive, technological, market and other developments. |
In particular, we anticipate that we will have to incur significant expenses to complete the
clinical trials required to obtain FDA approval of our PHOENIX handpiece. If revenues from sales
of our products are not sufficient to continue our current operations and fund these clinical
trials, we will need to obtain debt or equity financing, significantly reduce our operations, or
abandon clinical trials for the PHOENIX handpiece.
We will have a continuing need for new infusions of cash if we incur losses or are otherwise
unable to generate positive cash flow from operations in the future. We plan to increase our sales
through successful execution of our refocused sales strategy and achieving regulatory approval for
the PHOENIX handpiece. If these efforts are unsuccessful, we will be unable to significantly
increase our revenues and may have to obtain additional financing to continue our operations or
scale back our operations. Due to the current economic conditions, it has become very difficult
for companies to obtain debt financing on reasonable terms, if at all. In addition, it may be
difficult for us to obtain significant equity financing as a result of our low trading price and
trading volume combined with our stock not being listed on a national securities exchange, such as
NYSE, Amex, or NASDAQ. As a result, we may not be able to obtain additional financing if required,
or even if we were to obtain any financing, it may contain burdensome restrictions on our business,
in the case of debt financing, or result in significant dilution, in the case of equity financing.
Critical Accounting Policies and Estimates
The preparation of our financial statements requires that we make estimates and assumptions
that affect the reported amounts of assets and liabilities and related disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. On an ongoing basis, we evaluate these estimates and
assumptions, which are based on historical experience and on other assumptions that we believe to
be reasonable. In the event that any of our estimates and assumptions are inaccurate in any
material respect, it could have a material adverse effect on our reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. A summary of our critical accounting policies is included in
Item 7 (Managements Discussion and Analysis of Financial Condition and Results of Operations) of
Part II, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. There have
been no material changes to the critical accounting policies disclosed in our Annual Report on Form
10-K for the fiscal year ended December 31, 2009.
Item 4(T). Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of our
management, including our principal executive officer and our principal financial officer, of the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of September 30, 2010.
Based upon that evaluation, our principal executive officer and our principal financial officer
concluded that the design and operation of these disclosure controls and procedures at September
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30, 2010 were effective in timely alerting them to the material information relating to us
required to be included in our periodic filings with the SEC, such that the information relating to
us, required to be disclosed in SEC reports (i) is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated
to our management, including our principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
All internal control systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective may not prevent or detect all
misstatements and can provide only reasonable assurance with respect to financial statement
preparation and presentation. 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.
Changes in internal control over financial reporting
There were no changes in our internal control over financial reporting that occurred during
the quarter ended September 30, 2010 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported, CardioFocus, Inc. (CardioFocus) filed a complaint in the United
States District Court for the District of Massachusetts (Case No. 1.08-cv-10285) against us and a
number of other companies. In the complaint, CardioFocus alleges that we and the other defendants
had previously violated patent rights allegedly held by CardioFocus. All of the asserted patents
have now expired.
On June 13, 2008, we filed requests for re-examination of the patents being asserted against
us with the United States Patent and Trademark Office, or USPTO, and asserted that prior art had
been identified that raised substantial new issues of patentability with respect to the inventions
claimed by CardioFocus patents. In August 2008, the USPTO granted our reexamination requests.
Reexamination requests filed by other named defendants were also granted. The USPTO has now
finally concluded, and CardioFocus is not appealing, the following determinations made in
reexamination: (a) all asserted claims of CardioFocus U.S. Patent No. 6,159,203 are unpatentable;
(b) 11 of 14 claims of U.S. Patent No. 6,547,780 are unpatentable; and (c) 8 of 13 claims of U.S.
Patent No. 5,843,073 are unpatentable. However, three claims being asserted by CardioFocus against
us, namely, Claim 2 of the 780 patent and Claims 2 and 7 of the 073 patent have been confirmed by
the USPTO.
In view of the re-examination having been completed, the Court, at a status conference held on
April 22, 2010, issued a scheduling order scheduling dates in connection with the litigation
regarding discovery, law and motion practice, a briefing schedule and hearing for patent claim
interpretation proceedings, and other key events. A settlement conference has been scheduled for
November 9, 2010 and trial is set to commence on November 7, 2011.
Since the Courts issuance of the scheduling order, the parties have engaged and continue to
engage in discovery. The parties are further exchanging infringement and non-infringement
contentions, as well as clam term constructions. We have further filed four further reexamination
requests seeking to invalidate the remaining claims of the 780 Patent and 073 Patent being
asserted against us. Two of the reexamination requests were filed on June 30, 2010, and two others
were filed on October 15, 2010. These further reexamination requests are based, in part, on newly
identified prior art not previously considered by the USPTO.
We intend to defend ourselves vigorously in this action. At this time, we are unable to
predict the outcome of this matter. At this time, we believe that the outcome of this matter will
not have a material adverse effect on our financial position, results of operations, or cash flow.
However, as this matter is ongoing, there is no assurance that this matter will be resolved
favorably by us or will not result in a material liability.
Item 6. Exhibits
The exhibits below are filed or incorporated herein by reference.
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Exhibit No. |
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Description |
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31.1 |
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Certification of the Principal Executive Officer pursuant to
Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of
1934. |
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31.2 |
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Certification of the Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. |
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32.1 |
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Certification of the Principal Executive Officer pursuant to
Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of
1934 and 18 U.S.C. Section 1350. |
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32.2 |
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Certification of the Chief Financial Officer pursuant to Rule
13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and
18 U.S.C. Section 1350. |
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SIGNATURES
Pursuant to the requirements 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.
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CARDIOGENESIS CORPORATION
Registrant
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Date: November 5, 2010 |
/s/ Paul J. McCormick
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Paul J. McCormick |
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Executive Chairman
(Principal Executive Officer) |
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Date: November 5, 2010 |
/s/ William R. Abbott
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William R. Abbott |
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Senior Vice President, Chief Financial Officer,
Secretary and Treasurer
(Principal Financial and Accounting Officer) |
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Exhibit Index
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Exhibit No. |
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Description |
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31.1 |
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Certification of the Principal Executive Officer pursuant to
Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of
1934. |
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31.2 |
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Certification of the Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. |
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32.1 |
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Certification of the Principal Executive Officer pursuant to
Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of
1934 and 18 U.S.C. Section 1350. |
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32.2 |
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Certification of the Chief Financial Officer pursuant to Rule
13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and
18 U.S.C. Section 1350. |