UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2007
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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Commission file number
000-51998
Restore Medical,
Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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41-1955715
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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2800 Patton Road
St. Paul, Minnesota 55113
(651) 634-3111
(Address and zip code of
principal executive offices and registrants telephone
number, including area code)
Securities Registered pursuant to Section 12(b) of the
Act:
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Common Stock, $0.01 par value
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Nasdaq Global Market
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(Title of each class)
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(Name of each exchange on which
registered)
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Securities Registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
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No
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
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No
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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
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No
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statement incorporated by reference in Part III
of this
Form 10-K
or any amendment to this
Form 10-K.
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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. (Check one):
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Large accelerated
filer
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Accelerated
filer
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Non-accelerated
filer
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(Do not check if a smaller reporting company)
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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
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No
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The aggregate market value of the registrants common stock
held by non-affiliates of the registrant (based on the closing
sales price of the common stock as reported on the Nasdaq Global
Market) on June 30, 2007 was approximately $29,554,000.
As of March 24, 2008, 15,731,094 shares of common
stock, $0.01 par value, were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrants Proxy Statement for its 2008
Annual Meeting of Stockholders are incorporated by reference in
Part III of this
Form 10-K.
Restore
Medical, Inc.
Form 10-K
Table of Contents
1
This Annual Report on
Form 10-K
contains certain 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. All statements, other than statements of
historical facts, are forward-looking statements for
purposes of these provisions, including any projections of
earnings, revenue or other financial items, any statement of the
plans and objectives of management for future operations, any
statements concerning proposed new product development, any
statements regarding future economic conditions or performance,
and any statement of assumptions underlying any of the
foregoing. In some cases, forward-looking statements can be
identified by the use of terminology such as may,
will, expects, plans,
anticipates, estimates,
potential, or continue or the negative
thereof or other comparable terminology. Although we believe
that the expectations reflected in the forward-looking
statements contained herein are reasonable, there can be no
assurance that such expectations or any of the forward-looking
statements will prove to be correct. Our actual results may
differ significantly from the results discussed in the
forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to,
those discussed below in Item IA Risk Factors
and in other documents we file from time to time with the
Securities and Exchange Commission, including our Quarterly
Reports on
Form 10-Q.
Restore Medical, Inc. disclaims any intention or obligation to
update or revise any forward-looking statements. Unless the
context requires otherwise, references to we,
us, our and Restore refer to
Restore Medical, Inc.
PART I
Overview
We develop, manufacture and market our proprietary and patented
Pillar
®
palatal implant system (Pillar System). The Pillar
System is a simple, innovative, minimally invasive, implantable
medical device used to treat the soft palate component of sleep
disordered breathing, which includes mild to moderate
obstructive sleep apnea, or OSA, and habitual or socially
disruptive snoring. During the Pillar Procedure, a physician
implants three small, braided, proprietary polyester inserts
into the muscle of the soft palate. These Pillar inserts,
together with the bodys natural fibrotic response to the
implanted Pillar inserts, add structural support and stiffen the
soft palate, thereby minimizing or eliminating the palatal
tissue vibration that can cause snoring and the collapse that
can obstruct the upper airway and cause OSA. We believe the
Pillar Procedure is a safe, clinically effective, long-lasting
and low-risk procedure with minimal pain or complications that
provides patients and physicians with significant benefits over
other available options to treat the soft palate component of
snoring and OSA.
As reported in the April 2004 Journal of the American Medical
Association, it is estimated that one in five adults, or
approximately 44 million people, in the United States
suffers from mild OSA, and that one in 15 adults, or
approximately 15 million people, in the United States
suffers from moderate or more severe OSA. A significant number
of these estimated 59 million people who suffer from OSA
remain undiagnosed and many of those diagnosed with mild to
moderate OSA may be reluctant to seek treatment given the less
severe nature of their condition, the potentially negative
lifestyle effects of traditional treatments, and the lack of
awareness of new treatment options. Internationally, the
aggregate number of people with OSA is estimated to exceed that
in the United States, including approximately 20 million
people in Western Europe, 57 million people in China, and
47 million people in India. OSA is a potentially harmful
breathing condition caused by one or more anatomical
obstructions of the upper airway during sleep. Individuals
suffering from OSA experience frequent interruptions during
sleep, resulting in excessive daytime sleepiness that can lead
to memory loss, lack of concentration, depression and
irritability. OSA also has been linked to more severe health
consequences, including increased risks of cardiovascular
morbidity, high blood pressure, stroke, heart attack and
Type II diabetes.
In a separate report, the American Academy of Otolaryngology, or
AAO, estimates that one in four adults, or approximately
55 million people, in the United States suffer from
habitual snoring. Because most people who have OSA also snore,
the number of people with OSA overlaps significantly with the
number of
2
people who snore. Snoring is a lifestyle issue that often
negatively affects the quality of life for the individual who
snores and his or her bed partner, often resulting in daytime
sleepiness and irritability for both.
We currently market and sell our Pillar System primarily to
otolaryngologists (ear, nose and throat physicians, or ENTs) and
to a limited number of other healthcare professionals that treat
sleep disordered breathing, as a minimally invasive, clinically
effective treatment for mild to moderate OSA and snoring. Our
Pillar System has been both cleared by the U.S. Food and
Drug Administration, or FDA, and received CE Mark certification
from the European Commission for treatment of mild to moderate
OSA and snoring. To date, more than 30,000 Pillar Procedures
have been performed world-wide. Our goal is to have the Pillar
Procedure recognized as the preferred minimally invasive
treatment for the soft palate component of snoring and mild to
moderate OSA. We also intend to establish the Pillar Procedure
as the preferred alternative palatal treatment for individuals
suffering from OSA who are unable or unwilling to comply with
traditional treatments, including continuous positive airway
pressure, or CPAP, or for those who are seeking a safe and
clinically effective alternative to CPAP therapy or more
invasive palatal surgical procedures for reasons of quality of
life, lifestyle, flexibility or convenience.
We were incorporated in Minnesota in November 1999 and
reincorporated in Delaware in May 2004. Our principal executive
offices are located at 2800 Patton Road, St. Paul, Minnesota
55113 and our telephone number is
(651) 634-3111.
Our website address is
www.restoremedical.com
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Industry
Background
Obstructive
Sleep Apnea
OSA is a serious, potentially life-threatening condition that is
far more common than generally understood. OSA occurs in all age
groups and both genders. According to a report published in the
April 2004 Journal of the American Medical Association,
approximately 44 million people in the United States suffer
from mild OSA and approximately 15 million people suffer
from moderate or more severe OSA. Recent studies have linked OSA
with increased risks of cardiovascular morbidity, high blood
pressure, stroke, heart attack, Type II diabetes and
depression. OSA typically causes excessive daytime sleepiness,
resulting in memory loss, lack of concentration, slower reaction
time that can cause difficulty driving or operating equipment
and sexual dysfunction, such as impotence and reduced libido.
OSA occurs when air flow into or out of the nose or mouth is
obstructed during sleep due to excess or relaxed tissue that
collapses and blocks the upper airway during inhalation. When
the upper airway becomes blocked, the brain detects a drop in
blood oxygen concentration that causes a physiological
awakening in order to tighten the muscles and tissues of
the upper airway to overcome the obstruction and allow normal
breathing to resume. People with OSA may experience sleep
disruptions several hundred times in one night, in many cases
without being aware that they are physiologically waking up,
thereby losing the ability to achieve the deep, restful sleep
that is critical to good health. For most people, the soft
palate and base of the tongue are the primary contributors to
upper airway obstruction, although blockages in the nasal airway
and walls of the throat, including the tonsils, also affect
significant numbers of people. Ingestion of alcohol or sleeping
pills can increase the frequency and duration of breathing
pauses in people with OSA. Obesity also can be a contributing
factor to OSA when excessive amounts of tissue narrow or
obstruct the upper airway, as can the loss of muscle and tissue
tone and elasticity as a result of aging.
Symptoms of OSA include loud, frequent snoring, periodically
gasping for breath or ceasing to breathe during sleep, resulting
in excessive daytime sleepiness and fatigue. Not everyone who
snores has OSA, and not everyone with OSA necessarily snores,
although most do. Primary care physicians often fail to
recognize OSA because signs of this sleep disorder can be missed
or ascribed to other conditions, such as depression, thyroid
problems, anemia or insomnia.
In addition to primary care physicians, ENTs, pulmonologists,
neurologists, or other physicians who have specialized training
in sleep disordered breathing may diagnose and treat, or
prescribe treatment for OSA. There also is a group of oral
maxillo facial surgeons and dentists who have been certified by
the American Academy of Dental Sleep Medicine who provide
patients suffering from snoring and OSA with oral appliance
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therapy. Diagnosing the cause of OSA is complicated because
there can be many different reasons for disturbed sleep, as well
as multiple areas of upper airway obstruction that can
contribute to OSA. While there are several tests available to
accurately diagnose the presence of OSA, an attended sleep
study, or polysomnography, or an ambulatory diagnostic sleep
study is required to determine the severity of an
individuals OSA. Attended sleep studies are most commonly
administered in sleep labs or dedicated sleep centers and
require an overnight stay. Ambulatory home sleep studies
increasingly are offered by physicians as an alternative to an
attended sleep study. Ambulatory home sleep studies are
self-administered by patients, and the output or reports
typically are read or interpreted by a board-certified sleep
physician. Although ambulatory home sleep studies historically
have not been covered by health insurance, in March of 2008, the
Center for Medicare and Medicaid Services implemented a national
coverage determination to reimburse for several categories of
home sleep study devices.
The specific therapy recommended to treat OSA is tailored to
individual patients based on the patients medical history,
physical examination and the results of sleep studies. In
addition to recommended lifestyle changes, treatment options for
OSA traditionally have been limited to mechanical therapies or
the surgical removal or scarring of tissue.
Mechanical
Therapies
The most frequently prescribed and common treatment for OSA is
CPAP. CPAP therapy requires the patient to wear a nasal or
facial mask during sleep that is connected by a tube to a
portable airflow generator which delivers air at a predetermined
or self-adjusting continuous positive pressure. The continuous
positive pressure forces air through the nasal passages and down
the upper airway, keeping tissues in the nose and at the back of
the throat open and unobstructed, essentially acting as a
pneumatic stent of the upper airway during sleep. CPAP prevents
upper airway closure while in use, but apnea or hypopnea
episodes return when CPAP is stopped or used improperly. CPAP is
not a cure for OSA, but a life-long therapy for managing OSA
that must be used on a nightly basis. Non-compliance rates for
CPAP are estimated to exceed 50% due to factors such as physical
discomfort and claustrophobia resulting from use of the nasal or
facial mask, nasal and facial irritation, uncomfortable sleeping
positions, lifestyle changes, social factors and inconvenience.
CPAP typically is prescribed by a physician who has been board
certified in sleep medicine by the American Academy of Sleep
Medicine (AASM). The reimbursed costs of the portable airflow
generator and accessories required for CPAP therapy in the first
year of use range from $1,200 to $2,500. The accessories,
including hoses, masks and filters, must be periodically
replaced at an annual reimbursed cost of approximately $350 to
$500.
Another mechanical therapy prescribed to treat OSA is a
custom-fitted or prefabricated orthodontic-like device, or oral
appliance, that is worn while sleeping. An oral appliance
attempts to reposition the jaw
and/or
the
base of the tongue to prevent the tongue from collapsing and
obstructing the upper airway during sleep. Oral appliances
typically are prescribed and fitted by a sleep dentist, a
general dentist or an orthodontist. The American Board of Dental
Sleep Medicine (ABDSM), an independent board of examiners that
was established in 2004, educates, trains, tests and certifies
duly licensed dentists to treat sleep breathing disorders as
Diplomates of the ABDSM. The AASM recognizes the Diplomate
status granted by the ABDSM. While oral appliances can be
helpful to those patients whose OSA is primarily the result of a
collapse of the base of the tongue, oral appliances have not
proven to be effective for treating the palatal collapse or
flutter addressed by the Pillar System. Oral appliances can be
uncomfortable and inconvenient, and many patients are unable to
comply with the requirement of nightly life-long use. Periodic
visits to adjust the oral appliance and dental rehabilitation
often are required. Coverage of oral appliances by third-party
healthcare insurers varies from plan-to-plan, and ranges from no
coverage, to partial coverage, to full coverage. The price of
oral appliances to patients typically ranges between $1,500 and
$3,500.
Surgical
Procedures
Prior to introduction of the Pillar Procedure, the only options
for palatal-based OSA patients who were not able to tolerate or
comply with CPAP therapy were aggressive interventional palatal
surgical procedures that permanently remove or scar tissue.
These surgical procedures are most often performed by ENTs.
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Although there are several interventional procedures used to
remove or destroy soft palate tissue that can cause upper airway
obstructions, none of these surgical procedures is completely
successful or without risks. The more invasive of these palatal
surgical procedures are very painful, usually require
post-procedure prescription narcotics to manage the pain, often
result in potentially serious post-surgical complications which
can involve hospital re-admission, usually result in lengthy
recovery periods of up to two weeks or more, and are expensive
to administer. Interventional procedures to scar or stiffen soft
palate tissue often involve more than one treatment, and the
scarring or stiffening that results from these procedures
diminishes over time as scar tissue tends to remodel and lose
stiffness. Other extremely aggressive surgical procedures to
treat OSA include a variety of procedures intended to improve
air flow through the back of the throat, such as procedures that
remove tissue, or that detach and reattach soft tissues in the
back of the throat, advance or suspend muscle tissue in the
tongue, or advance and realign the upper and lower jaws.
Uvulopalatopharyngoplasty,
or UPPP, which historically
has been the most common palatal surgical treatment for both OSA
and snoring, uses a scalpel, electrocautery, coblation or other
cutting technology to remove excess tissue at the back of the
throat (tonsils, uvula, and part of the soft palate) under
general anesthesia. The UPPP procedure is very painful, often
requires an overnight hospital stay, sometimes requires hospital
readmission to resolve complications, and typically involves a
lengthy recovery period of up to two weeks. An analysis of 18
clinical studies published in February 1996 with the approval of
the American Sleep Disorders Association, which included
497 patients who underwent a UPPP procedure to treat their
OSA, reported a 38.2% improvement in the patients
respiratory disturbance index. In a separate analysis published
in January 2005 by the American Laryngological, Rhinological and
Otological Society of the early complications experienced by
1,004 patients who underwent a UPPP, the post-surgical
complication rate ranged from 3.4% to 19.4%, including severe
complications such as post-operative pulmonary embolism,
respiratory complications, hemorrhaging and cardiovascular
events. Although the incidence of long-term complications of the
UPPP procedure is unclear, the most commonly reported long-term
side effects include velopharyngeal insufficiency (a poor seal
between the pharynx and soft palate causing a regurgitation of
food and fluids when swallowing and adversely affecting speech),
nasopharyngeal stenosis (a narrowing of the upper airway above
the soft palate) and voice change. It is difficult to predict
which patients will experience good clinical results following
this procedure. The UPPP procedure often is covered by
third-party healthcare insurers after a patient has been unable
to comply with CPAP therapy. The average reimbursed cost of a
UPPP procedure ranges from $3,100 to $6,800, depending upon the
geographic region in which the procedure takes place. If paid
for out-of-pocket, the average cost of a UPPP procedure to the
patient ranges from $9,600 to $16,400, depending upon the
geographic region in which the procedure takes place and length
of stay. Complications could result in additional costs.
Laser-assisted uvulopalatoplasty,
or LAUP, is similar to
UPPP but uses heat from a laser to destroy tissue of the soft
palate. The LAUP procedure requires the use of expensive laser
capital equipment and often involves multiple treatments. The
clinical and economic benefits of using LAUP over UPPP have not
been well established and, as a result, LAUP procedures now are
performed relatively infrequently. LAUP procedures typically are
performed as an outpatient procedure or in a physicians
office, and generally are not reimbursed by third-party
healthcare insurers. The total out-of-pocket cost to the patient
ranges between $1,500 and $3,000, and multiple procedures may be
required.
Radiofrequency ablation,
or RF ablation, is a procedure
that uses high frequency radio waves to stiffen the soft palate
tissue through scarring,
and/or
reduce the volume of excess nasal turbinate
and/or
base
of tongue tissue. In order to achieve acceptable near-term
results, RF ablation typically requires more than one treatment
in separate visits to the physician. RF ablation can be painful
and uncomfortable, and the clinical effect of scarring the soft
palate through ablation often is not permanent because the scar
tissue tends to remodel over time and lose stiffness. RF
ablation is most often performed in the physicians office
and is generally not reimbursed by third-party healthcare
insurers. FDA clearance for use of RF ablation to treat OSA is
currently limited to base of tongue procedures. The total
out-of-pocket cost to the patient typically ranges between
$1,500 and $3,000, and patients often require two or three
treatments per site of obstruction.
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Snoring
Habitual and socially disruptive snoring affects both the
individual who snores and his or her bed partner, often causing
daytime sleepiness and irritability for both. The average
non-snoring bed partner loses approximately an hour of sleep
each night as a result of his or her partners snoring.
Additionally, a survey of 1,008 adults whose partner experienced
sleep-related problems, including heavy snoring, determined that
31% of the couples surveyed adjust their sleeping habits by
sleeping apart, altering their sleep schedules or wearing ear
plugs while sleeping.
The noisy sounds of snoring occur when air flows across the
upper airway tissues of the nose or back of the mouth or throat
(soft palate), causing relaxed or unstable tissue to vibrate.
Although vibration of other parts of the upper airway may
contribute to snoring, the soft palate is estimated to
contribute to snoring in 90% or more of patients.
The diagnosis of snoring typically involves a consultation
between the patient, his or her bed partner and the
patients primary physician, along with a physical
examination of the patients upper airway. Snoring alone
often is treated by an ENT who specializes in sleep disordered
breathing, although increasingly, patients also are being
referred to sleep dentists. These physicians or sleep dentists
often discuss treatment alternatives with both the patient and
his or her bed partner, because in many cases the bed partner is
most affected by the patients snoring.
Historically, the treatment options for snoring have been
limited. Often times, the only options presented to patients
have been lifestyle changes, such as weight loss or sleeping
position adjustment; unproven and clinically ineffective
over-the-counter remedies, such as nasal strips; oral
appliances, which frequently are ineffective; expensive,
invasive and painful surgical procedures, such as UPPP or LAUP;
or less-invasive procedures, such as RF ablation or
sclerotherapy, which have not demonstrated sustained or
long-term clinical efficacy.
Sclerotherapy
(sometimes referred to as injection
snoreplasty) is a procedure where a small amount of a sclerosing
agent is injected into the soft palate and uvula. The sclerosing
agent causes scarring via an inflammatory tissue response, which
results in the shrinking and stiffening of tissue. Patients
frequently must undergo multiple injections to achieve the
desired stiffening of the tissue. As with RF ablation, the
results of sclerotherapy often are temporary as scar tissue
tends to remodel over time and lose stiffness. Sclerotherapy
injections are performed in the physicians office and
generally are not reimbursed by third-party healthcare insurers.
The out-of-pocket price range of a single sclerotherapy
procedure to the patient is approximately $350 to $500, and
periodic additional injections typically are required over time.
All procedures or devices to treat snoring are viewed by
third-party healthcare insurers as elective or cosmetic
procedures, and are not reimbursed in the absence of a
definitive OSA diagnosis. The patients out-of-pocket costs
for these procedures can range from several hundred dollars for
each sclerotherapy injection to multiple thousands of dollars
for a UPPP procedure. Although CPAP also may be offered as a
therapy for habitual snoring, the costs are not reimbursable,
and CPAP is not commonly prescribed for snoring alone.
Our
Solution The Pillar Procedure
Our Pillar System treats the soft palate, which is the most
common anatomical contributor to the upper airway obstruction
and tissue vibration that causes OSA and snoring. We designed
our Pillar System to address several essential clinical and
physiological requirements. We wanted to preserve the normal
function of the soft palate while producing a long-lasting
physiological effect. Additionally, we wanted the Pillar inserts
to provide a long-term clinical benefit using only well-known,
well-understood biocompatible materials in a procedure that
preserved tissue and future treatment options, and finally, was
reversible. We designed our Pillar System to stiffen and
increase the structural integrity of the soft palate and to
improve its response to dynamic airflow, without interfering
with normal soft palate functions, such as swallowing or speech.
Because the Pillar System is so minimally invasive, it can be
used as a stand-alone treatment or in combination with other
therapies or treatments.
6
During the Pillar Procedure, the physician uses topical and
local anesthetics to numb the soft palate tissue, and then
individually implants three Pillar inserts into the muscle of
the soft palate at the junction of the hard and soft palate
using a specially-designed, single-use delivery tool. Each
precisely braided Pillar insert is approximately 18 mm
(0.7 inches) in length and has an outer diameter of 2 mm
(0.08 inches). We braid our Pillar inserts to precise
specifications from a polyethylene terephthalate fiber that has
been used for many years in implantable medical products such as
surgical sutures and heart valve cuffs. Each patient receives
three Pillar inserts as part of the Pillar Procedure. The Pillar
inserts are placed as closely as possible to each other without
touching (approximately 2 mm apart) to achieve maximum
stiffening.
The implantation of the Pillar inserts into the soft palate
tissue triggers the bodys natural fibrotic response to
injury and the introduction of foreign bodies, which stimulates
tissue growth into and around the inserts, resulting in a
fibrotic tissue encapsulation of the implant. The proprietary
surface texture of the Pillar inserts promotes this tissue
in-growth, serving to anchor the Pillar inserts in the soft
palate. In addition to the structural support provided by the
inserts themselves, this natural fibrotic response into and
around the Pillar inserts further stiffens the soft palate
tissue, effectively acting to extend the hard
palate, and thereby reducing or eliminating the soft
palate tissue flutter that causes snoring and the retropalatal
collapse that can obstruct the airway and cause OSA.
The reported commercial complication rate for the Pillar
Procedure, with more than 30,000 procedures performed to date,
is less than 1%. The most commonly reported complication is the
partial extrusion of a Pillar insert, which typically occurs as
the result of an implant technique issue the inserts
are implanted too shallow or too deep into the soft palate
tissue, resulting in a protrusion of the insert. In the event of
a partial extrusion, the physician simply removes the partially
extruded insert and replaces it with a new Pillar insert.
We believe the Pillar Procedure offers the following significant
advantages over other current treatment options:
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Clinically effective, long-lasting
treatment.
In multiple clinical studies, the
Pillar Procedure has demonstrated comparable or superior
clinical outcomes compared to more invasive palatal surgical
procedures that involve the permanent removal or destruction of
tissue. Our procedure has demonstrated sustained clinical
benefits over time, as compared to the clinical benefits of
surgical procedures that ablate and destroy palatal tissue,
which often diminish over time as scar tissue tends to remodel,
reabsorb and lose its stiffness.
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Low-risk procedure with minimal pain, complications and
inconvenience.
The Pillar Procedure involves
minimal pain and has a reported commercial complication rate of
less than 1% with few post-procedure side effects. Invasive
surgical procedures, such as UPPP, that permanently remove soft
palate tissue are painful, involve recovery periods of up to two
weeks and have reported substantially higher complication rates
of 3.4% to 19.4%. For CPAP users with mild to moderate OSA who
are unable or unwilling to comply with their CPAP therapy, the
Pillar Procedure offers a minimally invasive procedural
alternative to treat the soft palate component of OSA, and one
that can be done in combination with interventional procedures
or devices designed to treat other areas of anatomical upper
airway obstruction that can cause or contribute to OSA.
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Uses local anesthetic, not general
anesthesia.
Physicians use only topical and local
anesthetics to perform the Pillar Procedure, rather than the
general anesthesia that usually is required for more invasive
surgical procedures, resulting in fewer complications and a
significantly shorter recovery period for the patient.
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In-office procedure that takes approximately 20
minutes.
The Pillar Procedure is a one-time
procedure that typically is performed in the physicians
office. Patients typically resume their normal diet and
activities the same day without the need for an overnight
hospital stay or prescription pain relievers. Invasive surgical
procedures often entail a recovery period of up to two weeks and
prescription narcotics to manage the pain. Other surgical
procedures that scar or ablate palatal tissue usually require
multiple treatments involving repeat visits to the physician.
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Economic benefits to patients, physicians and third party
healthcare insurers.
For patients, the Pillar
Procedure is a relatively low-cost, one-time treatment solution
with no recurring expenses. For physicians, the Pillar Procedure
is a simple, easy-to-learn, minimally invasive, in-office
procedure with clinical proven and sustained benefits for
patients suffering from mild to moderate OSA and chronic
snoring. The Pillar Procedure can be a profitable in-office
procedure for physicians, and can offer a cost-effective
alternative to more invasive and risky procedures with higher
complication rates or procedures which have not demonstrated
long-term clinical benefits. For patients and health care
insurers, the Pillar Procedure offers clinically effective and
sustained outcomes with minimal complications, and a
cost-effective approach to treat the soft palate component of
snoring and OSA.
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The Pillar System was cleared by the FDA for snoring in December
2002 and for mild to moderate OSA in July 2004. Our Pillar
System also received CE Mark certification from the European
Commission for snoring in May 2003 and for mild to moderate OSA
in December 2004.
Our
Strategy
Our objective is to have the Pillar Procedure adopted by an
increasing number of health care providers who focus on treating
obstructive sleep disorders as the preferred minimally invasive,
in-office treatment of the soft palate for patients suffering
from mild to moderate OSA and snoring. We are striving to
establish the Pillar Procedure as the preferred soft palate
treatment option for individuals who suffer from chronic snoring
as well as those individuals who are unable or unwilling to
comply with CPAP therapy, or who seek a safe and clinically
effective alternative to CPAP therapy for reasons of lifestyle
flexibility and convenience. To achieve these goals, we must
successfully develop the market for the Pillar Procedure in the
United States and internationally. We are undertaking the
following key growth strategies and related tactics:
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Work closely with our key customers who are committed to growing
their sleep practices and help them to implement sleep practice
support programs and initiatives that help increase the number
of patients they treat for obstructive sleep breathing disorders;
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Work with our key physician customers to establish effective
referral relationships with a variety of primary care providers,
sleep centers, and sleep dentists to effectively diagnose and
treat patients who are suffering from chronic snoring or who are
unable or unwilling to comply with CPAP therapy, and are seeking
safe and clinically effective alternatives to CPAP therapy for
reasons of lifestyle, quality of life, and convenience;
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Continue to collaborate with health care providers and insurers
around the country to establish adequate and appropriate
third-party healthcare insurance coverage and reimbursement for
use of the Pillar Procedure to treat mild to moderate OSA;
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Sponsor and participate in additional clinical studies to
(i) further validate the clinical effectiveness of the
Pillar Procedure for the treatment of snoring and mild to
moderate OSA, either stand-alone or in combination with other
therapies or procedures to treat the multi-level upper airway
obstruction that cause OSA and snoring, and (ii) to
evaluate the clinical effectiveness of Pillar inserts for other
indications, including the treatment of nasal
obstruction; and
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Proactively explore the development of new technologies, devices
and products to effectively diagnose
and/or
treat
areas of upper airway obstruction beyond the soft palate.
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Sales and
Marketing
U.S.
Sales and Marketing Strategies
In the fourth quarter of 2006, we initiated a restructuring of
our sales organization and the implementation of sales and
marketing programs designed to support an integrated
consultative sales approach that helps our key customers
establish and grow their sleep disordered breathing practices.
At December 31, 2007, we employed a direct sales force in
the United States consisting of 15 field representatives, three
regional sales directors and one Vice President of
U.S. Sales. The direct sales force is primarily focused on
marketing and
8
selling our Pillar System to ENTs, and to a lesser extent, to
other healthcare professionals who treat patients suffering from
sleep disordered breathing, including oral maxillo facial
surgeons and sleep dentists. We have worked closely with our key
customers to implement practice development and support programs
that are designed to help increase the number of patients
suffering from sleep disordered breathing who are referred to,
or self-refer to, their practices. These practice development
programs include the creation and implementation of local
physician and prospective patient sleep disordered breathing
education programs, as well as customized local advertising,
public relations and sleep disordered breathing information
initiatives to promote physician practices to potential sleep
patients.
In addition to programs focused on our current and potential
physician customers, we have developed a number of marketing
programs targeted to potential consumers and their bed partners
which can be adapted and implemented by local physicians. We
will continue to execute marketing programs to increase
awareness of our Pillar System as a clinically effective,
minimally invasive treatment of the soft palate for individuals
suffering from mild to moderate OSA and snoring. These programs
will include local and regional marketing programs to increase
patient self-referrals as well as working closely with
physicians to generate referrals from primary care physicians,
sleep centers and other healthcare professionals who see,
diagnose, and in some cases, treat patients suffering from
obstructive sleep disorders.
International
Sales Strategy
We currently market our products in more than 20 countries
outside the United States through independent distributors in
North and South America, Asia Pacific, Europe, and the Middle
East. As part of the sales strategy we initiated in the fourth
quarter of 2006, in 2007 we focused our resources on our higher
margin U.S. business and significantly decreased the
near-term investment in our international business. We have
entered into multi-year distribution agreements with each of our
international distributors, and under the terms of these
international distribution agreements, we ship products to these
distributors upon receipt of purchase orders from the
distributor. Each of our independent distributors has the
exclusive right to sell our Pillar System within a defined
geographic territory. Many of these distributors also market and
sell other medical products, although contractually they are not
permitted to sell products directly competitive with our Pillar
System. Our independent distributors purchase Pillar Systems
from us at a discount to our United States list price and resell
our Pillar System to physicians, hospitals or clinics in their
respective geographic territories. The end-user price of Pillar
Systems in each country is determined by the distributor
and/or
local
physicians, and varies from country to country.
Clinical
Studies
To date, 24 clinical studies have been completed in which the
clinical safety and efficacy of the Pillar Procedure has been
evaluated and assessed on more than 1,000 patients.
Thirteen clinical studies have been completed with more than
600 patients to evaluate the Pillar Procedure for the
treatment of mild to moderate OSA. Eleven clinical studies have
been completed on over 400 patients to evaluate the Pillar
Procedure to treat snoring. The results from these clinical
studies have been consistent, and we believe the results,
individually and collectively, demonstrate that the Pillar
Procedure is a safe and effective treatment for the palatal
component of mild to moderate OSA and snoring.
Obstructive
Sleep Apnea
All of our OSA clinical studies have evaluated the effectiveness
of the Pillar Procedure to treat the palatal component of OSA by
measuring the decrease in the severity of patients OSA, as
measured by a reduction in the apnea-hypopnea index (AHI)
utilizing a clinical-based polysomnography (PSG) during an
overnight sleep study to assess the severity of patients
clinical sleep disturbances both prior to and subsequent to
receiving Pillar palatal implants. Twelve of the thirteen OSA
clinical studies have been either published in peer-reviewed
medical journals, accepted for publication in peer-reviewed
medical journals, or have been submitted for publication and are
undergoing the peer-review process. These studies include the
results of the first evidence-based-medicine Level 1
prospective, randomized, blinded, placebo-controlled clinical
study of the Pillar Procedure, which was first reported at the
American Academy of Otolaryngology (AAO) annual meeting in
9
September 2006, and subsequently published in the peer-reviewed
journal of the AAO, Head & Neck Surgery in February
2008.
Collectively, the results of these various OSA clinical studies
report that between 66% and 81% of patients demonstrated a
decrease in their AHI between their baseline PSG and the PSG
administered
90-days
following the Pillar Procedure. Between 21% and 45% of the
patients achieved the classical ENT surgical definition of
objective success (a reduction in AHI
³
50% and an absolute AHI
£
20). In two of these studies, clinical investigators followed
patients out to twelve and fifteen months, respectively, and 77%
to 81% of the patients maintained a decrease in their AHI, along
with a comparable level of classical ENT objective clinical
success.
With over 30,000 patients treated worldwide, the reported
commercial complication rate for the Pillar Procedure is less
than 1%, with the primary complication being the relatively
insignificant partial extrusion of a Pillar insert. In contrast
to the more severe and sometimes permanent nature of
complications resulting from more invasive palatal surgical
procedures, a physician remedies a partially extruded Pillar
insert by simply removing the insert and replacing it with
another Pillar insert.
Snoring
Manuscripts from eleven clinical studies reporting the safety
and efficacy of the Pillar Procedure to treat snoring have been
published in peer-reviewed medical journals. The most recent
clinical studies reporting on the use of Pillar implants to
treat snoring were presented in September 2006 at the AAO annual
meeting, and included
follow-up
results at three years post-treatment, as well as a reduction in
snoring intensity as part of a Level 1 prospective,
randomized, blinded, placebo-controlled clinical study of the
Pillar Procedure in patients suffering from OSA. Collectively,
the reported clinical results at 90 days, one year, and
three years post-treatment demonstrate a decrease in snoring
intensity of between 32% and 66%. Bed partner satisfaction in
these studies was reported between 67% and 100% at ninety days,
and maintained at between 70% and 80% at one and three years.
Additional
Clinical Studies
Two additional post-market evidence-based-medicine Level 1
prospective, randomized studies to further validate the efficacy
of the Pillar Procedure in the treatment of mild to moderate OSA
were recently completed. The manuscripts from these studies are
drafted
and/or
undergoing the peer review process. We recently initiated
another Level 1 prospective, randomized, placebo controlled
clinical study to potentially expand the approved indications
for the Pillar Procedure. This study is designed to evaluate the
effectiveness of the Pillar Procedure in patients who are not
satisfied with their CPAP therapy, and will assess whether the
combination of a soft palate stiffened with Pillar implants will
reduce CPAP pressures or make CPAP therapy more tolerable and
potentially improve patients CPAP compliance. Another
clinical study evaluating the use of a fourth or fifth Pillar
implant for patients who have not been able to achieve a
satisfactory outcome for snoring with just three Pillar inserts
was presented at the AAO annual meeting in September 2006, and
the investigator reported that 26 of the 31 patients
involved achieved a satisfactory reduction in snoring intensity
and bed partner satisfaction after receiving a fourth or fifth
Pillar insert. We are evaluating initiating additional clinical
studies that will evaluate the use of the Pillar Procedure to
treat the soft palate in combination with devices to treat other
areas of upper airway obstruction that can cause OSA. We
recently initiated a clinical study to evaluate the use of
braided inserts to treat nasal valve collapse pursuant to an
Investigational Device Exemption filed with the FDA.
This clinical study will involve the evaluation of more than
60 patients at six clinical sites in the U.S. We
will continue to work with leading, independent physician
investigators to conduct these clinical studies, and will
continue our efforts to facilitate the publication of the data
derived from these clinical studies in peer-reviewed medical
journals, as well as having the investigators present the data
from these studies at key scientific and medical meetings.
10
Third-Party
Reimbursement
Generally, patients who undergo the Pillar Procedure pay for the
procedure out-of-pocket without
third-party
reimbursement. Treatments for snoring typically are deemed to be
elective cosmetic procedures and are not reimbursed by
third-party healthcare insurers. We expect the Pillar Procedure
as a treatment for snoring will remain a self-pay procedure for
the foreseeable future. We believe, however, that the number of
Pillar Procedures performed to treat snoring will continue to
increase as patients are increasingly willing to pay for the
Pillar Procedure out-of-pocket to address the lifestyle and
quality of life issues that snoring presents to patients and
their bed partners. In turn, the Pillar Procedure will continue
to be an effective and profitable office-based treatment option
for our physicians and other health care providers who treat
patients suffering from snoring.
Certain therapies for the treatment of OSA, including CPAP and
UPPP, generally are covered by
third-party
healthcare insurers. We are seeking to obtain third-party
reimbursement for individuals who elect to undergo the Pillar
Procedure in order to treat their mild to moderate OSA.
Obtaining insurance coverage will depend, in large part, on
publication of additional, peer-reviewed clinical literature
demonstrating the effectiveness of the Pillar Procedure in
treating patients suffering from mild to moderate OSA. As
discussed above, there are several manuscripts reporting on the
results of recently completed Level 1 clinical studies
which are undergoing the peer review process, and well as
additional clinical studies underway, that we anticipate will
further demonstrate the clinical effectiveness of the Pillar
Procedure to treat the soft palate component of mild to moderate
OSA.
An important step in obtaining reimbursement is securing an
appropriate Current Procedural Terminology, or CPT code, which
are administered by the American Medical Association, or AMA.
CPT codes are used by all third-party healthcare insurers,
including Medicare, to adjudicate claims and to reimburse for
certain healthcare services, particularly physician fees. The
AMA has an annual process to create new CPT codes, whereby
physician societies are responsible for applying to the AMA for
new CPT codes. We are working in collaboration with the American
Academy of Otolaryngology Head and Neck Surgery, or
AAO-HNS, to provide the AMA with the information necessary to
obtain their support for the creation of a distinct CPT code for
the Pillar Procedure. We intend to use the data from three
Level 1 prospective, randomized, placebo-controlled
clinical studies of our Pillar System referred to above, to
support a future application for a Pillar Procedure CPT code. We
believe the data from these clinical studies not only support
the creation of a distinct CPT code for the Pillar Procedure,
but supplement the peer-reviewed published data from our
previous clinical studies validating the clinical efficacy of
the Pillar Procedure in treating the palatal component of mild
to moderate OSA.
Effective October 1, 2006, the Centers for Medicare and
Medicaid Services, or CMS, granted a New Technology Ambulatory
Payment Classification Designation, or New Technology APC, for
the Pillar System. The New Technology APC provides a billing and
payment mechanism for the Pillar Procedure when performed in the
hospital outpatient setting. CMS created a distinct HCPCS
Level II code for the Pillar System for billing and payment
purposes. The New Technology APC provides a national average
payment amount of $850 to the hospital to cover the cost of the
Pillar inserts and the facility fees. Physicians are required to
separately bill for their professional fees associated with the
Pillar Procedure.
Also effective October 1, 2006, Wisconsin Physician
Services (WPS) began to cover the Pillar Procedure as an
in-office treatment for Medicare patients with OSA who meet
certain conditions. WPS establishes medical policies for
Medicare physician services in Minnesota, Illinois, Michigan and
Wisconsin, and is the first regional Medicare carrier to grant
coverage for the Pillar Procedure. The WPS coverage policy
applies a payment of $1,139 for each Pillar Procedure performed
on Medicare patients in a physicians office.
Reimbursement systems in international markets vary
significantly by country, and by region within some countries,
and reimbursement approvals must be obtained on a
country-by-country
basis. In most markets, there are private health insurance
systems as well as government-managed health insurance systems.
As with regulatory approval to sell the Pillar Procedure in
international markets, it is the responsibility of each
distributor to obtain any applicable government
and/or
third-party healthcare reimbursement for the Pillar Procedure in
their respective country. Many international markets have
government managed healthcare
11
systems that control reimbursement for new products and
procedures. Market acceptance of our Pillar System will depend,
in part, on the availability and level of reimbursement in those
international markets in which we participate.
Research
and Development
We are continuing our efforts to develop and introduce
clinically relevant improvements and enhancements to our Pillar
System and further improve the ease-of-use of our Pillar System.
We also are evaluating a variety of device designs that would
allow us to leverage our technology and patent portfolio to
treat base of tongue obstructions that can cause OSA, as well as
develop an effective treatment for nasal valve collapse.
We incurred research and development expenses of approximately
$3.3 million, $3.0 million, and $1.9 million for
the years ended December 31, 2007, 2006 and 2005,
respectively. We anticipate that we will continue to make
significant investments in research and development as we
explore opportunities to leverage our Pillar implant and other
technologies.
Intellectual
Property
Our success will depend, in part, on our ability to obtain and
defend patent protection for our products and processes, to
preserve our trade secrets and to operate without infringing or
violating the proprietary rights of third parties. To date, we
have been granted 45 United States patents that we believe
provide us with broad intellectual property protection for our
Pillar System, related concepts and applications, and a wide
variety of other implants, devices, and tools. Our patent
coverage includes a wide array of devices, designs and materials
implanted in the soft palate and other areas of the upper airway
to induce tissue fibrosis and stiffening. We have 14 additional
pending U.S. patent applications. In addition to our
U.S. patents and applications, our technology is covered by
22 issued international patents, with 14 additional
international patents pending.
We also register the trademarks and trade names through which we
conduct our business. To date, we have registered the trademarks
Pillar, Pillar Procedure and
Restore Medical. In addition to the
United States, we have trademark registrations or pending
applications for our name and mark in China, the European Union,
Indonesia and Singapore.
In addition to our patents, we rely on confidentiality and
proprietary information agreements to protect our trade secrets
and proprietary knowledge. These confidentiality and proprietary
information agreements generally provide that all confidential
information developed or made known to individuals by us during
the course of their relationship with us is to be kept
confidential and not disclosed to third parties, except in
specific circumstances. The agreements also specifically provide
that all inventions conceived by the individual relating to our
technology, in the course of rendering services to us, shall be
our exclusive property.
Manufacturing
We currently manufacture our Pillar System in a leased facility
in St. Paul, Minnesota. We perform all final assembly, including
manufacturing our Pillar inserts, assembling the parts for our
Pillar delivery tool and inserting our Pillar inserts into the
delivery tool in our facility. We outsource the plastic
injection molding of our delivery tool. We make our Pillar
inserts in our facility using our proprietary material braiding
process. In addition, we perform all packaging, labeling and
inspection in-house. We use our FDA and EU compliant production
and quality systems and processes in performing all of our
operations. We use our own proprietary production floor control
system software to electronically generate manufacturing work
instructions, track product-build status, establish lot control
records and maintain operator training records. We follow lean
manufacturing principles to provide high-quality, low-cost
production of our Pillar System.
Competition
We believe that our competitive success will depend primarily on
our ability to effectively create market awareness and demand
for the Pillar Procedure by patients, as well as influence
increased clinical acceptance and adoption of the Pillar
Procedure to treat the palatal component of snoring and OSA by
physicians. The
12
market for the treatment of sleep disordered breathing has
attracted a high level of interest from various companies in the
medical device industry. Our primary competitors include
companies that offer CPAP and other therapeutic devices designed
to treat OSA and snoring. Respironics (a subsidiary of Philips
Healthcare) and ResMed, Inc. are the leading competitors in the
CPAP market, collectively accounting for an approximately 80%
market share. Fisher & Paykel Healthcare Corp.,
Nellcor Puritan Bennett (a subsidiary of Tyco) and Vital Signs,
Inc. also are competitors in the CPAP market. We also compete
against companies offering radiofrequency-based ablation devices
such as Gyrus ACMI (a subsidiary of Olympus Corporation of
Japan) and ArthroCare, Inc., as well as traditional surgical
procedures often recommended and performed by ENTs and other
surgeons who treat OSA and snoring. Additionally, we are aware
of several
development-stage
companies that are developing new products or technologies
designed to treat other areas of airway obstruction that can
cause OSA.
Many of our competitors and potential competitors have
substantially greater capital resources than we do, including
larger and more experienced sales and marketing organizations,
as well as research and development staffs and facilities. In
addition, most of our competitors and potential competitors have
substantially greater experience than we do in researching and
developing new products, testing products in clinical trials,
obtaining regulatory approvals and manufacturing, marketing and
selling medical devices. These competitors may be in a stronger
position to respond quickly to new technologies and may be able
to undertake more extensive sales and marketing campaigns. Our
failure to demonstrate the clinical efficacy and cost-effective
advantages of our products over those of our competitors could
adversely affect our business and results of operations.
Government
Regulations
United
States
Our Pillar System received FDA 510(k) clearance in December 2002
for the treatment of socially disruptive snoring and was
commercially introduced for snoring in April 2003. During the
next 15 months we undertook clinical trials to assess the
use of our Pillar System to treat patients suffering from mild
to moderate OSA, and received a 510(k) clearance from the FDA in
July 2004 for this indication.
Our Pillar System is regulated in the United States as a medical
device by the FDA under the federal Food, Drug and Cosmetic Act,
or FDC Act. Pursuant to the FDC Act, the FDA regulates the
research, testing, manufacture, safety, labeling, storage,
record keeping, advertising, distribution and production of
medical devices in the United States. Noncompliance with
applicable requirements can result in warning letters, fines,
injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, failure of the
government to grant pre-market approval for devices and criminal
prosecution.
The FDAs Premarket Clearance and Approval
Requirements.
Unless an exemption applies, each
medical device we wish to distribute commercially in the United
States will require either prior clearance under
Section 510(k) of the FDC Act from the FDA or acceptance of
a premarket approval, or PMA, application, by the FDA. Medical
devices are classified into one of three classes
Class I, Class II, or Class III
depending on the degree of risk associated with each medical
device and the extent of control needed to ensure safety and
effectiveness. Devices deemed to pose lower risks are placed in
either Class I or II, which requires the manufacturer to
submit to the FDA a premarket notification requesting permission
to commercially distribute the device. This process is generally
known as 510(k) clearance. Some low risk devices are exempted
from this requirement. Devices deemed by the FDA to pose the
greatest risk, such as life-sustaining, life-supporting or
implantable devices, or devices deemed not substantially
equivalent to a previously cleared 510(k) device, are placed in
Class III, requiring premarket approval. The Pillar
Procedure is a Class II device.
510(k) Clearance Pathway.
When a 510(k)
clearance is required, we must submit a premarket notification
to the FDA demonstrating that our proposed device is
substantially equivalent to a previously cleared and legally
marketed 510(k) device or a device that was in commercial
distribution before May 28, 1976 for which the FDA has not
yet called for the submission of a PMA application. By
regulation, the FDA is required to respond to a 510(k) premarket
notification within 90 days of submission of the
application. As a practical matter, clearance often takes
significantly longer. The FDA may require further information,
including clinical
13
data, to make a determination regarding substantial equivalence.
If the FDA determines that the device, or its intended use, is
not substantially equivalent to a previously-cleared device or
use, the FDA will place the device, or the particular use, into
Class III, which requires premarket approval.
Premarket Approval (PMA) Pathway.
A PMA
application must be submitted to the FDA if the device cannot be
cleared through the 510(k) process. The PMA application process
is much more demanding than the 510(k) premarket notification
process. A PMA application must be supported by extensive data,
including but not limited to technical, preclinical, clinical
trials, manufacturing and labeling to demonstrate to the
FDAs satisfaction the safety and effectiveness of the
device.
After a PMA application is submitted and the FDA determines that
the application is sufficiently complete to permit a substantive
review, the FDA will accept the application for review. The FDA
has 180 days to review an accepted PMA
application, although the review of an application generally
occurs over a significantly longer period of time and can take
up to several years. During this review period, the FDA may
request additional information or clarification of the
information already provided. Also, an advisory panel of experts
from outside the FDA may be convened to review and evaluate the
application and provide recommendations to the FDA as to the
approvability of the device. In addition, the FDA will conduct a
preapproval inspection of the manufacturing facility to ensure
compliance with quality system regulations. New PMA applications
or PMA application supplements are required for significant
modification to the manufacturing process, labeling and design
of a device that is approved through the PMA process. Premarket
approval supplements often require submission of the same type
of information as a PMA application, except that the supplement
is limited to information needed to support any changes from the
device covered by the original PMA application and may not
require as extensive clinical data or the convening of an
advisory panel.
Clinical trials are almost always required to support a PMA
application and are sometimes required for 510(k) clearance. In
the United States, these trials generally require submission of
an application for an Investigational Device Exemption, or IDE,
to the FDA. The IDE application must be supported by appropriate
data, such as animal and laboratory testing results, showing
that it is safe to test the device in humans and that the
testing protocol is scientifically sound. The IDE must be
approved in advance by the FDA for a specific number of patients
unless the product is deemed a non-significant risk device
eligible for more abbreviated IDE requirements. Clinical trials
for significant risk devices may not begin until the IDE
application is approved by the FDA and the appropriate
institutional review boards, or IRBs, are present at the
clinical trial sites. Clinical trials must be conducted under
the oversight of an IRB at the relevant clinical trial sites and
in accordance with the FDA regulations, including but not
limited to those relating to good clinical practices.
Patients informed consent that complies with both the FDA
requirements and state and federal privacy regulations is also
required. The FDA or the IRB at each site at which a clinical
trial is being performed may suspend a clinical trial at any
time for various reasons, including a belief that the risks to
study subjects outweigh the benefits. Even if a trial is
completed, the results of clinical testing may not demonstrate
the safety and efficacy of the device, or the results may not be
equivocal or may otherwise not be sufficient to obtain approval
of the product. Similarly, in Europe the clinical study must be
approved by the local ethics committee and in some cases,
including studies with high-risk devices, by the Ministry of
Health in the applicable country.
We are required to provide information to the FDA on death or
serious injuries alleged to have been associated with the use of
our medical devices, as well as product malfunctions that would
likely cause or contribute to death or serious injury if the
malfunction were to recur. In addition, the FDA prohibits an
approved device from being marketed for unapproved applications.
If the FDA believes that a company is not in compliance, it can
institute proceedings to detain or seize products, issue a
recall, enjoin future violations, and assess civil and criminal
penalties against the company, its officers and its employees.
Failure to comply with applicable FDA regulatory requirements
could have a material adverse effect on our business, financial
condition and results of operations.
Regulations regarding the manufacture and sale of our products
are subject to change. We cannot predict what impact, if any,
such changes might have on our business, financial condition or
results of operations.
14
International
We received CE Mark certification for our Pillar System from the
European Commission for the snoring indication and the OSA
indication in May 2003 and December 2004, respectively.
International sales of our Pillar System are subject to
regulatory requirements that vary widely from country to
country. The European Union has adopted rules which require that
medical products receive the right to affix the CE Mark, an
international symbol of adherence to quality assurance standards
and compliance with applicable European medical device
directives. As part of the CE compliance, manufacturers are
required to comply with the ISO series of quality systems
standards.
We plan to continue to leverage the FDA clearance and CE Mark
certification for OSA and snoring indications in support of
other regulatory filings outside the United States, and provide
regulatory dossiers to international regulatory agencies, as
required. Our Pillar System is currently approved for sale in
Canada and the following countries in the Asia Pacific region:
China, Singapore, Australia, South Korea, Hong Kong, the
Philippines, Malaysia, Brunei, Thailand, Indonesia, Vietnam and
Cambodia, Myanmar, Taiwan and applications have been filed or
are in process in several other countries in the region. Our
Pillar System is also approved for sale in the following
countries in the Middle East: Israel, Turkey, Bahrain, Qatar and
the United Arab Emirates and as well as Costa Rica,
Colombia and Chile. Additional countries will be added to the
registration process as distributors are selected. The
regulatory review process varies from country to country, and we
cannot provide assurance that such approvals will be obtained on
a timely basis or at all.
Product
Liability and Insurance
The development, manufacture and sale of medical products
involves significant risk of product liability claims and
product failure claims. We have conducted relatively limited
clinical trials and clinical studies to date, and we do not yet
have, and will not have for a number of years, sufficient
clinical data to allow us to measure the long-term risk of such
claims with respect to our products. We face an inherent
business risk of financial exposure to product liability claims
in the event the use of our products results in personal injury
or death. We also face the possibility that defects in the
design or manufacture of our products might necessitate a
product recall. We currently maintain product liability
insurance with coverage limits of $5.0 million
per occurrence and $5.0 million annually in the
aggregate, although we do not have sufficient experience to
confirm whether the coverage limits of our insurance policies
will be adequate. Product liability insurance is expensive, may
be difficult to obtain and may not be available in the future on
acceptable terms, or at all. Any claims against us, regardless
of their merit or eventual outcome, could have a material
adverse effect upon our business, financial condition and
results of operations.
Employees
As of December 31, 2007, we had a total of
57 employees, consisting of 27 employees in sales and
marketing, 9 employees in research and development
(including regulatory and clinical affairs), 10 employees
in operations and quality assurance, and 11 employees in
general and administrative functions. All of these employees are
located in the United States.
From time to time we also engage independent contractors,
consultants and temporary employees to support our operations.
None of our employees are subject to collective bargaining
agreements. We have never experienced a work stoppage and
believe that our relations with our employees are good.
Seasonality
Because the Pillar Procedure is an elective procedure, we
believe that holidays, major medical conventions and seasonal
vacations taken by physicians, patients and patient families may
have a seasonal impact on the sale of our Pillar Systems. We
continue to monitor and assess the impact seasonality has on the
demand for our Pillar System.
15
Executive
Officers of Restore
Our executive officers are as follows:
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Name
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Age
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Position
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J. Robert Paulson, Jr.
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51
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President, Chief Executive Officer and Director
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Christopher R. Geyen
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37
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Senior Vice President and Chief Financial Officer
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Craig G. Palmer
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58
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Senior Vice President of U.S. Sales
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David L. Bremseth, Pharm. D.
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48
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Vice President of Clinical Affairs
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Paul J. Buscemi, Ph.D.
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Vice President of Research and Development
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Michael R. Kujak
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Vice President of Marketing
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Philip E. Radichel
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Vice President of Information Systems
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John P. Sopp
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Vice President of Operations
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J. Robert Paulson, Jr.
was appointed President,
Chief Executive Officer and a director of our company in April
2005. Prior to joining us, Mr. Paulson served as Chief
Financial Officer and Vice President of Marketing for
Endocardial Solutions, Inc. from August 2002 until January 2005
when it was acquired by St. Jude Medical, Inc. From 2001 to June
2002, Mr. Paulson was the Senior Vice President and General
Manager of the Auditory Division of Advanced Bionics
Corporation, and between 1995 and 2001, Mr. Paulson served
in various capacities at Medtronic, Inc., including Vice
President and General Manager of the Surgical Navigation
Technologies business unit; Vice President of Corporate Strategy
and Planning; and Director of Corporate Development.
Mr. Paulson currently serves on the board of directors of
two publicly held medical device companies, MedicalCV, Inc. and
Vascular Solutions, Inc. Mr. Paulson received a Bachelor of
Arts in Accounting, Economics and Political Science from Luther
College; a Master of Business Administration from the University
of St. Thomas and a Juris Doctorate from Vanderbilt University
School of Law.
Christopher R. Geyen
was appointed Chief Financial
Officer of our company in March 2006 and was appointed Senior
Vice President and Chief Financial Officer in February 2007.
Prior to joining us, Mr. Geyen served as Chief Financial
Officer and Vice President for Acorn Cardiovascular, Inc. since
2003. From 1999 to 2003, Mr. Geyen was the Chief Financial
Officer, Vice President, Secretary and Treasurer of Urologix,
Inc., where he also served as the Controller from 1998 to 1999.
Previously, Mr. Geyen held positions as Controller at
SurVivaLink Corporation and as a Senior Auditor for
Ernst & Young, LLP. Mr. Geyen received a Bachelor
of Arts in Business Administration and Accounting from the
University of St. Thomas and is a Certified Public Accountant.
Craig G. Palmer
has served as Vice President of
U.S. Sales for our company since September 2006 and was
appointed Senior Vice President of U.S. Sales in February
2007. Prior to joining us, Mr. Palmer was Vice President of
Sales at ev3 from July 2003 until March 2006. From April 2002
until July 2003, Mr. Palmer held the position of Vice
President of Sales at Urologix. From January 2000 until December
2000, Mr. Palmer was Vice President of Sales at Image
Guided Neurologics. From 1997 through January 2000,
Mr. Palmer performed sales and marketing consulting with
SurVivaLink Corporation and MaxMed. Mr. Palmer also held
sales and sales management positions at Scimed/Boston Scientific
from August 1989 through July 1997, including five years as Vice
President of Sales. Prior to joining Scimed/Boston Scientific,
Mr. Palmer held various sales, sales management and
marketing positions at American/Baxter Edwards Laboratories and
Jelco/Critikon divisions of Johnson & Johnson.
Mr. Palmer received a Bachelor of Arts in Mathematics from
St. John Fisher College in Rochester, NY.
David L. Bremseth, Pharm.D.,
joined us as Vice President
of Clinical Affairs in December 2006 and took over
responsibility for Quality and Regulatory in February 2007.
Prior to joining us, Dr. Bremseth served as the Vice
President of Clinical, Regulatory and Quality Affairs for
Celleration, Inc. since February 2001. From 1998 to 2001,
Dr. Bremseth was the Senior Director of Clinical Affairs
for Antares Pharma (formerly Medi-Ject Corporation), from 1996
until 1997 he was Director of New Medicine Development with
Orphan Medical, Inc. and from 1995 to 1996 he was Associate
Director of Clinical Affairs for LecTec Corporation.
Dr. Bremseth was Director of Clinical Affairs for
Pharmaceutical Research Associates, a contract research
organization, from 1992 to 1995 and a Clinical Scientist at
Parke-Davis Pharmaceuticals from 1989 to 1992. From 1987 to
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1988, Dr. Bremseth was an assistant professor at the North
Dakota State University College of Pharmacy. Dr. Bremseth
received a Bachelor of Science in Pharmacy from North Dakota
State University in 1983, a Doctor of Pharmacy from The Ohio
State University in 1985, and completed research fellowships in
Pharmacokinetics and Drug Development in 1987 and 1989,
respectively.
Paul J. Buscemi, Ph.D.,
has served as our Vice
President of Research and Development since joining us in
October 2005. From 1998 to October 2005, Dr. Buscemi was
Director of New Technology at Advanced BioSurfaces, Inc., where
he designed and tested a novel minimally invasive implant to
treat osteoarthritis of the knee. Dr. Buscemi also has
served as a consultant to international biomedical firms
including Medtronic, Upsher-Smith, Becton Dickenson and UpJohn
Pharmaceuticals, as well as several entrepreneurial companies in
the Twin Cities area involved in device design, coatings and
drug delivery. Dr. Buscemi received a Bachelor of Arts in
Physics and Applied Mathematics, a Master of Science in Material
Science, and a Ph.D. in Bioengineering and Biomedical Science
from the University of Florida, Gainesville.
Michael R. Kujak
has served as our Vice President of
Marketing since January 2007. Prior to joining us,
Mr. Kujak was Group Manager, Marketing at American Medical
Systems from April 2004 until January 2007. From January 2000
until March 2004, Mr. Kujak held the position of Vice
President of Sales and Marketing at AmericasDoctor. Prior to
joining AmericasDoctor, Mr. Kujak held various sales, sales
management and marketing positions at Connetics, Interneuron
Pharmaceuticals, Vencor and Hoffmann-LaRoche. Mr. Kujak
received a Bachelor of Sciences in Chemistry and Physics from
the University of South Dakota and is currently enrolled in the
Executive Master of Business Administration program at the
University of St. Thomas in Minneapolis, MN.
Philip E. Radichel
served as our Vice President of
Quality and Information Systems from October 2005 through
December 2006 and continues to serve as our Vice President of
Information Systems. From November 2002 to October 2005,
Mr. Radichel was our Director of Quality Assurance and
Information Systems. From February 2002 to November 2002 he was
a Vice President at Venturi Development Inc. Mr. Radichel
was Systems Manager at Integ Incorporated from December 1996 to
February 2002. Mr. Radichel received a Bachelor of Science
in Electrical Engineering from the University of Minnesota.
John P. Sopp
has served as our Vice President of
Operations since April 2004 and was our Director of Operations
from December 2002 to March 2004. From February 2002 to November
2002, Mr. Sopp served as a Vice President of Venturi
Development, Inc. From 1995 to 2001, Mr. Sopp served as
Production Manager and Senior Molding Engineer with Integ
Incorporated, and prior to that, he held a variety of
engineering positions with SIMS Deltec. Mr. Sopp also held
engineering positions at UFE Incorporated, a custom injection
molding company, and General Dynamics. Mr. Sopp received a
Bachelor of Science in Mechanical Engineering from the
University of Minnesota and a Masters Degree in Manufacturing
Systems from the University of St. Thomas.
Our
Corporate Information
Our principal executive offices are located at 2800 Patton Road,
St. Paul, Minnesota 55113, and our telephone number is
(651) 634-3111.
We make our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K
available free of charge through the investor relations page of
our website at
www.restoremedical.com
, as soon as
reasonably practicable after we electronically file such
material with (or furnish such material to) the Securities and
Exchange Commission. Our reports filed with the SEC also are
available at the SECs website at
www.sec.gov
. Our
Code of Conduct is also available on our website. The
information on, or that may be accessed through, our website is
not incorporated by reference into this report and should not be
considered a part of this report on
Form 10-K.
Pillar
®
and the Restore Medical logo are registered trademarks of
Restore Medical, Inc. This report on
Form 10-K
contains other trade names and service marks of Restore and of
other companies.
17
Our business, financial condition or results of operations
could be materially adversely affected by any of the risks and
uncertainties described below. Additional risks not presently
known to us, or that we currently deem immaterial, may also
impair our business, financial condition or results of
operations. You should consider carefully the risks and
uncertainties described below and all the other information
contained in this Annual Report on
Form 10-K,
including our financial statements and related notes. The market
price of our common stock could decline due to any of these
risks and uncertainties.
Risks
Relating to Our Business and Industry
We
will require additional capital to operate our business, and our
short-term investments in auction rate securities may prove to
be illiquid.
We believe that our current cash, cash equivalents, short-term
investments and cash generated from operations will be
sufficient to fund our working capital and capital resource
needs into mid 2008.
Our short-term investments include $4.2 million of
investments in auction rate securities. Auction rate securities
are variable-rate debt securities and have a long-term maturity
with the interest rate reset through Dutch auctions that are
typically held every 7, 28 or 35 days. The securities trade
at par and are callable at par on any interest payment date at
the option of the issuer. Interest is paid at the end of each
auction period. Our auction rate securities are all AAA/Aaa
rated and collateralized by student loans guaranteed by the
U.S. government under the Federal Family Education Loan
Program. Until February 2008, the auction rate securities market
was highly liquid. Starting the week of February 11, 2008,
a substantial number of auctions failed as a result
of negative overall capital market conditions, meaning that
there was not enough demand to sell the securities at auction.
The result of a failed auction, which does not signify a default
by the issuer, is that these securities continue to pay interest
in accordance with their terms until there is a successful
auction or until such time as other markets for these
investments develop. We will not be able to liquidate any of
these auction rate securities until a future auction is
successful, or until we decide to sell the securities in a
secondary market. A secondary market sale of any of these
securities could take a significant amount of time to complete
and would potentially result in a significant loss.
Typically, the fair value of auction rate securities
approximates par value due to the frequent resets through the
auction-rate process. Given the current market conditions, we
will continue to monitor our auction rate securities for
substantive changes in relevant market conditions, changes in
financial condition or other changes in these investments. We
may be required to record unrealized losses for impairment if we
determine that a decline in fair value of our auction rate
securities has occurred that is temporary or
other-than-temporary and these impairment charges could be
substantial.
It is possible that the potential lack of liquidity in our
auction rate security investments could adversely affect our
ability to fund operations beginning in May of 2008. We cannot
predict whether future auctions related to our auction rate
securities will be successful. We are currently seeking
alternatives for reducing our exposure to the auction rate
market, but may not be able to identify any such alternative. If
we are not able to monetize some or all of our auction rate
securities during the second quarter of 2008, it will have a
material adverse effect on our ability to finance our future
ongoing operations.
Even with the successful sale of our auction rate securities,
the funding of our operations beyond mid 2008 will require
additional investments in our company in the form of equity or
debt financing or through licensing our intellectual property to
generate capital. We have been actively exploring various equity
and debt financing alternatives as well as other strategic
alternatives. Any sale of additional equity or issuance of debt
will result in dilution to our current stockholders, and we
cannot be certain that additional public or private financing
will be available in amounts or on terms acceptable to us, or at
all. If we are unable to obtain additional financing, we will
need to significantly reduce the scope of our operations
including a reduction in the size of our sales and marketing,
research and development, administrative and manufacturing staff
18
combined with the elimination of the significant programs and
initiatives planned by each of those functional groups. These
changes would have a material adverse effect on our business.
Any inability to satisfy our liabilities as they come due could
result in the need to file for bankruptcy.
Our
Independent Registered Public Accounting Firms report on
our financials statements includes an emphasis paragraph stating
that there is substantial doubt regarding our ability to
continue as a going concern.
Since we commenced operations in 1999, we have incurred net
losses primarily from costs relating to the development and
commercialization of our Pillar System. As of December 31,
2007, we had an accumulated deficit of $85.5 million, which
includes the non-cash deemed dividend of $20.8 million from
the revision of preferred stock conversion prices in conjunction
with our IPO. Without additional capital, we may run out of cash
in the second quarter of 2008. We have prepared our financial
statements for the year ended December 31, 2007 on a going
concern basis, which contemplates the realization of assets and
satisfaction of liabilities and other commitments in the normal
course of business. The report of our independent registered
public accounting firm included herein contains an explanatory
paragraph expressing substantial doubt about our ability to
continue as a going concern as a result of recurring losses from
operations and insufficient capital resources to fund future
operations. The funding of our operations beyond mid 2008 will
require additional investments in our company in the form of
equity or debt financing or through licensing our intellectual
property to generate capital. We are actively exploring various
equity and debt financing alternatives as well as various
strategic alternatives. We expect to continue to invest in sales
and marketing and research and development activities and,
therefore, we expect to incur net losses through at least 2009.
Our current or future business strategy may not be successful,
and we may not become profitable in any future period. If we do
become profitable, we cannot be certain that we will be able to
sustain or increase profitability on a quarterly or annual basis.
A low
stock price or our inability to comply with other applicable
requirements could result in our common stock being delisted
from the NASDAQ Global Market, which could affect its market
price and liquidity and reduce our ability to raise
capital.
We are required to meet certain qualitative and financial tests
(including a minimum closing bid price for our common stock of
$1.00 per share) to maintain the listing of our common stock on
the NASDAQ Global Market. We have not received notification from
NASDAQ of a potential delisting. If we do not maintain
compliance with the continued listing requirements for the
NASDAQ Global Market within specified periods and subject to
permitted extensions, our common stock may be recommended for
delisting (subject to any appeal we would file or application to
transfer our common stock to the NASDAQ Capital Market, if
approved). If our common stock were delisted, it could be more
difficult to buy or sell our common stock and to obtain accurate
quotations, and the price of our stock could suffer a material
decline. Delisting would also impair our ability to raise
capital.
We
will not be successful if our Pillar System is not adopted for
the treatment of snoring or mild to moderate obstructive sleep
apnea.
The first commercially available product based on our
proprietary palatal implant technology is our patented Pillar
System. Our success depends both on the acceptance and adoption
of our Pillar System as a minimally invasive treatment for
individuals suffering from mild to moderate OSA and socially
disruptive and habitual snoring, by both patients and by
physicians or other healthcare providers who treat sleep
breathing disorders. Currently, a relatively limited number of
physicians regularly perform the Pillar Procedure. We cannot
predict how quickly, if at all, the medical community or other
healthcare providers will accept our Pillar System, or, if
accepted, the extent of its use. For us to be successful, our
customers must be committed to treating sleep disordered
breathing patients and also:
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believe that the Pillar Procedure offers meaningful clinical and
economic benefits as compared to the other therapies, procedures
or devices, surgical and non-surgical, currently being used to
treat patients suffering from mild to moderate OSA or snoring;
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use our Pillar System to treat individuals suffering from mild
to moderate OSA or snoring either as a stand-alone treatment or
in combination with procedures to treat other areas of upper
airway obstruction, and achieve acceptable clinical outcomes in
the patients they treat;
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believe patients will pay for the Pillar Procedure
out-of-pocket; and,
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commit the time and resources required to modify the way in
which they currently treat, or have historically treated,
patients suffering from mild to moderate OSA and snoring.
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Studies have shown that a significant percentage of people who
suffer from OSA remain undiagnosed and therefore do not seek
treatment for OSA. Many of those diagnosed with mild to moderate
OSA may be reluctant to seek treatment given the less severe
nature of their condition, the potentially negative lifestyle
effects of traditional treatments and the lack of awareness of
new treatment options. If we are unable to increase public
awareness of the prevalence of OSA or if the healthcare
community treating sleep breathing disorders is slow to adopt,
or fails to adopt, the Pillar Procedure as a treatment for
individuals suffering from mild to moderate OSA and snoring, we
would suffer a material adverse effect on our business,
financial condition and results of operations.
Our
future operating results are difficult to predict and may vary
significantly from quarter to quarter, which may adversely
affect the price of our common stock.
The limited sales history of our Pillar System, together with
our inability to predict how quickly, if at all, the sleep
medicine community will accept our Pillar System, or, if
accepted, the extent of its use, makes it difficult to predict
future operating results. You should not rely on our past
revenue trends as any indication of future trends or operating
results. The price of our common stock likely will fall in the
event our operating results do not meet the expectations of
analysts and investors. Comparisons of our quarterly operating
results are an unreliable indication of our future performance
because they are likely to vary significantly based on many
factors, including:
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the demand for and acceptance of our Pillar System to treat mild
to moderate OSA and snoring by patients, and by physicians or
other healthcare providers who treat sleep breathing disorders;
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the success of alternative therapies and surgical procedures to
treat individuals suffering from sleep disordered breathing, and
the possible future introduction of new products and treatments
for sleep disordered breathing;
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our ability to maintain current pricing for our Pillar System;
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the success of our direct sales force in the United States and
our independent distributors internationally;
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the successful completion of current and future clinical
studies, the presentation and publication of positive outcomes
data from these clinical studies and the increased adoption of
the Pillar Procedure by physicians as a result of this clinical
study data;
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actions relating to ongoing FDA and European Union, or EU,
compliance;
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the size and timing of Pillar System orders from physicians and
independent distributors;
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our ability in the future to obtain reimbursement for the Pillar
Procedure to treat mild to moderate OSA from third-party
healthcare insurers;
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the willingness of patients to pay out-of-pocket for the Pillar
Procedure for the treatment of snoring and, in the absence of
reimbursement from third-party healthcare insurers, for the
treatment of mild to moderate OSA;
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unanticipated delays in the development and introduction of our
future products
and/or
an
inability to control costs;
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seasonal fluctuations in revenue due to the elective nature of
all elective sleep disordered breathing treatments, including
the Pillar Procedure; and
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general economic conditions as well as those specific to our
customers and markets.
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We
expect to derive substantially all of our future sales from a
single product.
Currently, our only product is our Pillar System. We expect that
our Pillar System will account for substantially all of our
sales during 2008. Because the Pillar Procedure is different
from current surgical and non-surgical treatments for mild to
moderate OSA and snoring, we cannot assure you that physicians
or other healthcare providers will perform the Pillar Procedure
and demand for our Pillar System may decline or may not increase
as quickly as we expect. Also, we cannot assure you that the
Pillar Procedure will compete effectively as a treatment
alternative to other more well-known and well-established
therapies, such as CPAP, or other more frequently performed
palatal surgical procedures. Since our Pillar System currently
is our only product, decreased or lower than expected sales
would cause us to lose all or substantially all of our revenue.
Further
clinical studies of our Pillar System may adversely impact our
ability to generate revenue if the data from these studies do
not demonstrate that our Pillar System is clinically effective
for currently specified or expanded indications or if they are
not completed in a timely manner.
We have conducted, and continue to conduct, a number of clinical
studies of the use of our Pillar System to treat patients
suffering from mild to moderate OSA and snoring, including
prospective, randomized, placebo-controlled studies, as well as
clinical studies that are structured to obtain clearance from
the FDA and the EU for expanded clinical indications of use for
our Pillar System.
We cannot assure you that these clinical studies will
demonstrate that our Pillar System provides long-term clinical
effectiveness for individuals suffering from mild to moderate
OSA or snoring, nor can we assure you that the use of our Pillar
System will prove to be safe and effective in clinical studies
under United States or international regulatory guidelines for
any expanded indications. Additional clinical studies of our
Pillar System may identify significant clinical, technical or
other obstacles that will have to be overcome prior to obtaining
clearance from the applicable regulatory bodies to market our
Pillar System for such expanded indications. If further studies
of our Pillar System indicate that the Pillar Procedure is not a
safe and effective treatment of mild to moderate OSA or snoring,
our ability to market our Pillar System, and to generate
substantial revenue from additional sales of our Pillar System,
may be materially limited.
Individuals selected to participate in these further clinical
studies must meet certain anatomical, physiological and other
criteria in order to participate in these studies. We cannot
assure you that an adequate number of individuals can be
enrolled in clinical studies on a timely basis. Further, we
cannot assure you that the clinical studies will be completed as
planned. A delay in the analysis and publication of the positive
outcomes data from these clinical studies, or the presentation
or publication of negative outcomes data from these clinical
studies, including data related to approval of our Pillar System
for expanded indications, may materially impact our ability to
increase revenues through sales and negatively impact our stock
price.
Our
business and results of operations may depend upon the ability
of healthcare providers to achieve adequate levels of
third-party reimbursement.
Generally, patients pay for the Pillar Procedure entirely
out-of-pocket, whether the patient is being treated for OSA or
snoring. Third-party healthcare insurers typically consider any
snoring treatment to be an elective cosmetic procedure, and do
not reimburse the costs for such procedures. We believe that all
treatments for snoring, including the Pillar Procedure, will
continue to be considered elective procedures, and therefore,
procedures for which patients will pay out-of-pocket. Our
ability to generate revenue from additional sales of our Pillar
System for the treatment of snoring may be materially limited by
the fact that it is unlikely that it will ever be covered by a
third-party healthcare insurer.
The cost of treatments for OSA, such as CPAP, and most surgical
procedures generally are reimbursed by third-party healthcare
insurers. The Pillar Procedure is currently reimbursed for the
treatment of OSA on a
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very limited basis, and may in the future lose the reimbursement
coverage that currently is available
and/or
fail
to qualify for any additional reimbursement for the treatment of
OSA. Our ability to generate revenue from additional sales of
our Pillar System for the treatment of OSA may be materially
limited by the extent to which reimbursement of the Pillar
Procedure for the treatment of mild to moderate OSA is available
in the future. In addition, third-party healthcare insurers are
increasingly challenging the prices charged for medical products
and procedures. In the event that we are successful in our
efforts to obtain reimbursement for the Pillar Procedure, any
changes in this reimbursement system could materially affect our
ability to continue to grow our business.
Reimbursement and healthcare payment systems in international
markets vary significantly by country and reimbursement for the
Pillar Procedure may not be available at all under either
government or private reimbursement systems. If we are unable to
achieve reimbursement approvals in international markets, it
could have a negative impact on market acceptance of our Pillar
System and potential revenue growth in the markets in which
these approvals are sought.
Our
products and manufacturing activities are subject to extensive
governmental regulation that could prevent us from selling our
Pillar System or introducing new and/or improved products in the
United States or internationally.
Our products and manufacturing activities are subject to
extensive regulation by a number of governmental agencies,
including the FDA, the European Union, or the EU, and comparable
international regulatory bodies. We are required to:
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obtain clearance from the FDA, the EU and certain international
regulatory bodies before we can market and sell our products;
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satisfy all content requirements for the labeling, sales and
promotional materials associated with our Pillar System and the
Pillar Procedure; and
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undergo rigorous inspections of our facilities, manufacturing
and quality control processes, records and documentation.
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Compliance with the rules and regulations of these various
regulatory bodies may delay or prevent us from introducing any
new models of our Pillar System or other new products. In
addition, government regulations may be adopted that could
prevent, delay, modify or rescind regulatory clearance or
approval of our products.
We are required to demonstrate compliance with the FDAs
and EUs quality system regulations. The FDA and the EU
enforce their quality system regulations through pre-approval
and periodic post-approval inspections by representatives from
the FDA and the designated notified body for the EU,
respectively. These regulations relate to product testing,
vendor qualification, design control and quality assurance, as
well as the maintenance of records and documentation. If we fail
to conform to these regulations, the FDA or the EU may take
actions that could seriously harm our business. These actions
include sanctions, including temporary or permanent suspension
of our operations, product recalls and marketing restrictions. A
recall or other regulatory action could substantially increase
our costs, damage our reputation and materially affect our
operating results.
Our
products are currently not recommended by most pulmonologists,
who currently are integral to the diagnosis and treatment of
sleep breathing disorders.
The majority of patients being treated today for OSA,
domestically and internationally, are initially referred for
sleep studies by their primary care physicians. In the U.S.,
most sleep studies are performed at sleep centers, which
primarily are staffed by pulmonologists, neurologists and
psychologists (collectively, sleep medicine
physicians), who typically administer a polysomnography,
or overnight sleep study, to diagnose the presence and severity
of OSA. If an individual is diagnosed with OSA, the sleep
medicine physicians typically prescribe CPAP as the therapy of
choice. Sleep medicine physicians who staff sleep centers,
generally, do not endorse palatal surgical procedures to their
patients for the treatment of OSA or snoring, often citing
uncertainty in clinical outcomes, among other factors. Our
domestic sales organization
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has recently begun to call on a limited number of sleep centers
to begin establishing a referral pathway for use of our Pillar
System as a treatment option for the palatal component of
snoring and OSA for those patients who are unable or unwilling
to comply with their CPAP therapy. We cannot predict the extent
to which sleep medicine physicians will, in the future, endorse
or recommend the Pillar Procedure to their patients who suffer
from chronic snoring or mild to moderate OSA even for those
patients who are unwilling or unable to comply with CPAP
therapy. In addition, in March of 2008, CMS issued a national
coverage determination for the reimbursement of certain
ambulatory or home-based sleep studies which will not require
patients to undergo an attended overnight sleep study at a sleep
center. We cannot predict how the use of home sleep studies will
affect the historical referral and treatment patterns involving
referring physicians or sleep physicians, or how it will affect,
in the future, the endorsement or recommendation of the Pillar
Procedure to patients who suffer from chronic snoring or mild to
moderate OSA.
We
face significant competition in the market for treating sleep
breathing disorders.
The market for treating sleep disordered breathing is highly
competitive and the Pillar Procedure must compete with more
established products, treatments and surgical procedures, which
may limit our growth and negatively affect our business. Many of
our competitors have an established presence in the field of
treating sleep disordered breathing and have established
relationships with sleep medicine physicians, sleep clinics,
ENTs and sleep dentists, which play a significant role in
determining which product, treatment or procedure is recommended
to the patient. We believe certain of our competitors are
attempting to develop innovative approaches and new products for
diagnosing and treating OSA and other sleep disordered breathing
conditions. We cannot predict the extent to which ENTs, oral
maxillofacial surgeons, primary care physicians, sleep medicine
physicians or sleep dentists would or will recommend our Pillar
System over new or other established devices, treatments or
procedures.
In addition, we have limited resources with which to market,
develop and sell our Pillar System. Many of our competitors have
substantially greater financial and other resources than we do,
including larger research and development staffs who have more
experience and capability in conducting research and development
activities, testing products in clinical trials, obtaining
regulatory approvals and manufacturing, marketing, selling and
distributing products. Some of our competitors may achieve
patent protection, regulatory approval or product
commercialization more quickly than we do, which may decrease
our ability to compete. If we are unable to be competitive in
the market for sleep disordered breathing, our revenues will
decline, negatively affecting our business.
Our
Pillar System may become obsolete if we are unable to anticipate
and adapt to rapidly changing technology.
The medical device industry is subject to rapid technological
innovation and, consequently, the life cycle of any particular
product can be short. Alternative products, procedures or other
discoveries and developments to treat OSA and snoring may render
our Pillar System obsolete. Furthermore, the greater financial
and other resources of many of our competitors may permit them
to respond more rapidly than we can to technological advances.
If we fail to develop new technologies, products or procedures
to upgrade or improve our existing Pillar System to respond to a
changing market before our competitors are able to do so our
ability to market our products and generate substantial revenues
may be limited.
Our
international sales are subject to a number of risks that could
seriously harm our ability to successfully commercialize our
Pillar System in international markets.
Our international sales are subject to several risks, including:
|
|
|
|
|
the ability of our independent distributors to market and sell
our Pillar System and train physicians or other healthcare
providers to perform the Pillar Procedure;
|
|
|
|
the ability of our independent distributors to sell the quantity
of Pillar Systems they have committed to purchase from us in
their respective distribution agreements;
|
23
|
|
|
|
|
our ability to identify new reputable and qualified independent
third-party distributors in international markets where we do
not currently have distributors;
|
|
|
|
the impact of recessions in economies outside the United States;
|
|
|
|
greater difficulty in collecting accounts receivable and longer
collection periods;
|
|
|
|
unexpected changes in regulatory requirements, tariffs or other
trade barriers;
|
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|
|
weaker intellectual property rights protection in some countries;
|
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|
|
potentially adverse tax consequences; and
|
|
|
|
political and economic instability.
|
The occurrence of any of these events could seriously harm our
future international sales and our ability to successfully
commercialize our products in international markets, thereby
limiting our growth and revenues.
The
failure of our largest U.S. customer or international
third-party distributors to pay for their purchases of Pillar
Systems on a timely basis could reduce our future net sales and
negatively impact our liquidity.
Our largest customer accounted for 23%, or $863,000, and 12%, or
$563,000, of our domestic net sales in 2007 and 2006,
respectively. If the customer discontinues selling our Pillar
System or reduces its future purchases of Pillar Systems, our
future revenues could be materially reduced. We have negotiated
a monthly payment plan for $198,000 of past due accounts
receivable with our largest domestic customer and require
payment be mailed to us at the time of shipment for all future
shipments until the past due balance is paid. We have not
established a specific reserve for any estimated losses related
to this customer. Similarly, our international distributors must
continue to increase the number of physicians performing the
Pillar Procedure in their respective territories, as well as
expanding the number of Pillar Procedures performed by these
physicians. To the extent one or more of our large
U.S. physician customers or international distributors
fails to pay us for Pillar Systems on a timely basis or at all,
we may be required to discontinue selling to these organizations
and find new customers
and/or
replacement distributors, which could reduce our future revenues
and negatively impact our liquidity.
We
depend on our patents and proprietary technology, which we may
not be able to protect.
Our success depends, in part, on our ability to obtain and
maintain patent protection for the Pillar Procedure and our
Pillar System and its various components and processes. Our
success further depends on our ability to obtain and maintain
trademark protection for our name and mark, to preserve our
trade secrets and know-how and to operate without infringing the
intellectual property rights of others. We currently have issued
or pending patents in several countries, including in the United
States, Germany, Great Britain, Norway, Hong Kong, Singapore,
Canada, China, the EU, Japan, South Korea, Australia, Indonesia,
Malaysia and Taiwan, as well as pending Patent Cooperation
Treaty applications. We cannot assure you that any of our
pending or future patent applications will result in issued
patents, that any current or future patents will not be
challenged, invalidated or circumvented, that the scope of any
of our patents will exclude competitors or that the patent
rights granted to us will provide us any competitive advantage.
We may discover that our technology infringes patents or other
rights owned by others, and we cannot be certain that we were
the first to make the inventions covered by each of our issued
patents and our pending patent applications, or that we were the
first to file patent applications for such inventions. In
addition, we cannot assure you that our competitors will not
seek to apply for and obtain patents that will prevent, limit or
interfere with our ability to make, use or sell our products
either in the United States or in international markets.
Further, the laws of certain foreign countries may not protect
our intellectual property rights to the same extent as do the
laws of the United States.
In addition to patents, we rely on trademarks to protect the
recognition of our company and product in the marketplace. We
have trademark registrations for our name and mark principally
in the United States, as well as registrations or pending
applications in China, the EU, Indonesia and Singapore, and
accordingly may
24
not have protection for our name and mark in other
jurisdictions. We also rely on trade secrets, know-how and
proprietary knowledge that we seek to protect, in part, through
confidentiality agreements with employees, consultants and
others. We cannot assure you that our proprietary information
will not be shared, that our confidentiality agreements will not
be breached, that we will have adequate remedies for any breach
or that our trade secrets will not otherwise become known to or
independently developed by competitors.
We may
face intellectual property infringement claims that would be
costly to resolve.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry and
our competitors and others may initiate intellectual property
litigation as a means of competition. Intellectual property
litigation is complex and expensive and outcomes are difficult
to predict. We cannot assure you that we will not become subject
to patent infringement claims, litigation or interference
proceedings, to determine the priority of inventions. Litigation
or regulatory proceedings also may be necessary to enforce our
patent or other intellectual property rights. We may not always
have the financial resources to assert patent infringement suits
or to defend ourselves from claims. An adverse result in any
litigation could subject us to liabilities or require us to seek
licenses from or pay royalties to others that may be
substantial. Furthermore, we cannot predict the extent to which
the necessary licenses would be available to us on satisfactory
terms, if at all.
We may
face product liability claims that could result in costly
litigation and significant liabilities.
The manufacture and sale of medical products entail significant
risk of product liability claims. The medical device industry,
in general, has been subject to significant medical malpractice
litigation. Any product liability claims, with or without merit,
could result in costly litigation, reduced sales, cause us to
incur significant liabilities and divert our managements
time, attention and resources. Because of our limited operating
history and lack of experience with these claims, we cannot be
sure that our product liability insurance coverage is adequate
or that it will continue to be available to us on acceptable
terms, if at all.
We
depend on a few suppliers for key components, making us
vulnerable to supply shortages and price
fluctuation.
We purchase components for our Pillar System from a variety of
vendors on a purchase order basis; we have no long-term supply
contracts with any of our vendors. While it is our goal to have
multiple sources to procure certain key components, in some
cases it is not economically practical or feasible to do so. To
mitigate this risk, we maintain an awareness of alternate supply
sources that could provide our currently single-sourced
components with minimal or no modification to the current
version of our Pillar System, practice supply chain management,
maintain safety stocks of critical components and have
arrangements with our key vendors to manage the availability of
critical components. Despite these efforts, if our vendors are
unable to provide us with an adequate supply of components in a
timely manner or if we are unable to locate qualified alternate
vendors for components at a reasonable cost, the cost of our
products would increase, the availability of our products to our
customers would decrease and our ability to generate revenues
could be materially limited.
Our
sales and marketing efforts may not be successful.
We currently market and sell our Pillar System to ENTs and to a
limited number of other healthcare professionals. The commercial
success of our Pillar System ultimately depends upon a number of
factors, including the number of physicians and healthcare
professionals (collectively implanting physicians)
who perform the Pillar Procedure, the number of Pillar
Procedures performed by these physicians, the number of patients
who become aware of the Pillar Procedure through self-referral
or referrals by their primary care physicians, healthcare
providers or sleep center physicians, the number of patients who
elect to undergo the Pillar Procedure and the number of patients
who, having successfully undergone the Pillar Procedure, endorse
and refer the Pillar Procedure to other potential patients. The
Pillar Procedure may not gain significant increased market
acceptance among implanting physicians, healthcare providers,
patients, third-party healthcare insurers and managed care
providers. Primary care physicians may elect to refer
individuals suffering
25
from sleep disordered breathing to sleep medicine physicians or
sleep dentists who treat sleep disordered breathing rather than
to implanting physicians and these physicians may not recommend
the Pillar Procedure to patients for any number of reasons,
including knowledge of the safety and clinical efficacy of the
Pillar Procedure, the availability of alternative procedures and
treatment options or inadequate levels of reimbursement. In
addition, while positive patient experiences can be a
significant driver of future sales, it is impossible to
influence the manner in which this information is transmitted
and received, the choices potential patients may make and the
recommendations that treating physicians make to their patients.
We have limited experience in marketing and selling our Pillar
System through a direct sales organization in the United States
and through third-party distributors internationally. In the
fourth quarter of 2006, we initiated a restructuring of our
sales organization and the implementation of sales and marketing
programs designed to support a new integrated consultative sales
approach that continued throughout 2007. Additionally, we
decided to focus on our higher margin U.S. business and to
significantly decrease the near-term investment in our
international business. As a result of implementing these new
sales and marketing strategies, we experienced substantial
turnover in our United States sales organization during 2007 and
we may not be able to maintain a suitable sales force in the
United States or suitable number of third-party distributors
outside the United States, or enter into or maintain
satisfactory marketing and distribution arrangements with
others. Our marketing and sales efforts may not be successful in
increasing awareness and sales of our Pillar System.
All of
our operations are conducted at a single location; therefore,
any disruption at our existing facility could substantially
affect our business.
We manufacture our Pillar System at one facility using certain
specialized equipment. Although we have contingency plans in
effect for certain natural disasters, as well as other
unforeseen events that could damage our facility or equipment,
any such events could materially interrupt our manufacturing
operations. In the event of such an occurrence, we have business
interruption insurance to cover lost revenues and profits.
However, such insurance would not compensate us for the loss of
opportunity and potential adverse impact on relations with
existing customers created by an inability to produce our
products.
We
depend on certain key personnel.
If we are unable to attract, train and retain highly-skilled
technical, managerial, product development, sales and marketing
personnel, we may be at a competitive disadvantage and unable to
develop new products or increase revenue. The failure to
attract, train, retain and effectively manage employees could
negatively impact our research and development, sales and
marketing and reimbursement efforts. In particular, the loss of
sales personnel could lead to lost sales opportunities as it
takes several months to hire and train replacement sales
personnel. Uncertainty created by turnover of key employees
could adversely affect our business.
We
incur significant increased costs as a result of operating as a
public company, and our management devotes substantial time to
new public company compliance requirements.
We incur significant legal, accounting and other expenses that
we did not incur as a private company prior to our IPO in May
2006. In addition, the Sarbanes-Oxley Act, together with new
rules subsequently implemented by the Securities and Exchange
Commission, or SEC, and NASDAQ, has imposed various additional
requirements on public companies, including requiring certain
corporate governance practices. Our management and other
personnel have to devote a substantial amount of time to meet
these additional compliance requirements. Moreover, these rules
and regulations have increased our legal and financial
compliance costs and made some activities more time-consuming
and costly.
In addition, the Sarbanes-Oxley Act requires, among other
things, that we maintain effective internal controls for
financial reporting and disclosure controls and procedures. In
particular, commencing in 2007, we were required to perform
system and process evaluation and testing of our internal
controls over financial reporting to allow management to report
on the effectiveness of our internal controls over financial
reporting, as required by Section 404 of the Sarbanes-Oxley
Act. Commencing in 2008, we will be required to perform the same
assessment to allow management and our independent registered
public accounting firm to report on
26
the effectiveness of our internal controls over financial
reporting, as required by Section 404 of the Sarbanes-Oxley
Act. Our testing, or the subsequent testing by our independent
registered public accounting firm, may reveal deficiencies in
our internal controls over financial reporting that are deemed
to be material weaknesses. Our compliance with Section 404
requires that we incur substantial accounting expense and expend
significant management efforts. If we are not able to comply
with the requirements of Section 404 on a consistent basis,
the market price of our stock could decline and we could be
subject to sanctions or investigations by NASDAQ, the SEC or
other regulatory authorities.
Our
stock price may be volatile and a stockholders investment
may decline in value.
We cannot predict the extent to which investors interests
will lead to an active trading market for our common stock or
whether the market price of our common stock will be volatile
from period to period. The market for medical device stocks has
been extremely volatile. The following factors, most of which
are outside of our control, could cause such volatility in the
market price of our common stock:
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|
|
variations in our quarterly operating results;
|
|
|
|
cash balances and available cash resources and the potential
reduction in the scope of our operations to preserve our cash
balances
|
|
|
|
departure of key personnel;
|
|
|
|
changes in governmental regulations and standards affecting the
medical device industry and our products;
|
|
|
|
decreases in financial estimates, or negative commentary about
us or the medical device industry by equity research analysts;
|
|
|
|
sales of common stock or other securities by us in the future;
|
|
|
|
licensing of certain of our intellectual property;
|
|
|
|
decreases in market valuations of medical device
companies; and
|
|
|
|
fluctuations in stock market prices and volumes.
|
In the past, securities class action litigation often has been
initiated against a company following a period of volatility in
the market price of the companys securities. If class
action litigation is initiated against us, we will incur
substantial costs and our managements attention will be
diverted from our operations. All of these factors could cause
the market price of our stock to decline, and you may lose some
or all of your investment.
Future
sales of our common stock by existing stockholders could cause
our stock price to decline.
If our existing stockholders sell substantial amounts of our
common stock, the market price of our common stock could
decrease significantly. The perception in the public market that
our stockholders might sell shares of common stock could also
depress the market price of our common stock. A decline in the
price of shares of our common stock might impede our ability to
raise capital through the issuance of additional shares of our
common stock or other equity securities, and may cause you to
lose part or all of your investment.
Our
organizational documents and Delaware law make a takeover of our
company more difficult, which may prevent certain changes in
control and limit the market price of our common
stock.
Our charter and bylaws and Section 203 of the Delaware
General Corporation Law contain provisions that might enable our
management to resist a takeover of our company. These provisions
might discourage, delay or prevent a change in the control of
our company or a change in our management. These provisions also
could discourage proxy contests and make it more difficult for
you and other stockholders to elect directors and take other
corporate actions. The existence of these provisions could limit
the price that investors
27
might be willing to pay in the future for shares of our common
stock. Some provisions in our charter and bylaws may deter third
parties from acquiring us, which may limit the market price of
our common stock
|
|
Item 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
Our headquarters and manufacturing facilities in St. Paul,
Minnesota comprise approximately 24,000 square feet of
leased space. We lease a total of approximately
38,000 square feet, and sublease 14,346 square feet to
a third-party tenant. The lease space includes furnished office
space, a 4,000 square foot Class 8 clean room housing
manufacturing, an integrated client-server computer network, an
ISO 13485 compliant intranet-based quality and product
development system, a fully equipped 1,000 square foot
research and development wet laboratory, a fully equipped
prototype machine shop and warehouse space. The lease agreement
for our St. Paul facility expires in October 2010.
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Item 3.
|
LEGAL
PROCEEDINGS
|
We are not currently a party to any litigation and we are not
aware of any pending or threatened litigation against us that we
believe could have a material adverse effect on our business,
operating results or financial condition. The medical device
industry in which we operate is characterized by frequent claims
and litigation, including claims regarding patent and other
intellectual property rights as well as improper hiring
practices. As a result, we are involved in various legal
proceedings from time to time.
|
|
Item 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
No matters were submitted to a vote of security holders during
the fourth quarter ended December 31, 2007.
PART II
|
|
Item 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY
|
Stock
Listing
Our common stock has been listed on the Nasdaq Global Market
tier of the Nasdaq Stock
Market
tm
under the symbol REST since May 17, 2006,
following the pricing of our initial public offering. Prior to
that time, there was no public market for our common stock. As
of March 24, 2008, we had approximately 50 holders of
record of our common stock. Such number of record holders does
not reflect stockholders who beneficially own common stock in
nominee or street name.
28
Stock
Prices
High and low sale prices for each quarter during the years ended
December 31, 2006 and 2007, as reported on the NASDAQ Stock
Market, were as follows:
Price
Range of Common Stock
|
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|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
2nd Quarter (commencing May 17, 2006)
|
|
$
|
8.40
|
|
|
$
|
6.80
|
|
3rd Quarter
|
|
|
7.90
|
|
|
|
5.80
|
|
4th Quarter
|
|
|
7.05
|
|
|
|
3.09
|
|
Year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
$
|
4.90
|
|
|
$
|
2.60
|
|
2nd Quarter
|
|
|
3.74
|
|
|
|
1.62
|
|
3rd Quarter
|
|
|
1.97
|
|
|
|
0.90
|
|
4th Quarter
|
|
|
1.63
|
|
|
|
1.02
|
|
Dividend
Policy
We have never paid cash dividends on our common stock and do not
anticipate paying cash dividends in the foreseeable future. We
do not have a dividend reinvestment plan or a direct stock
purchase plan.
Repurchases
of Equity Securities
We did not repurchase any of our equity securities in the year
ended December 31, 2007.
Pursuant to our employee stock plans relating to the grant of
employee stock options and restricted stock awards, we have
granted and may in the future grant employee stock options to
purchase shares of our common stock for which the purchase price
may be paid by means of delivery to us by the optionee of shares
of our common stock that are already owned by the optionee (at a
value equal to market value on the date of the option exercise).
During the period covered by this report, no options to purchase
shares of our common stock were exercised for which the purchase
price was so paid.
Recent
Sales of Unregistered Securities
In February 2007, we issued 6,917 shares of our common
stock in connection with a cashless warrant exercise at an
exercise price of $3.48 per share, with 29,002 warrants to
purchase common stock being forfeited in the net exercise. All
shares were issued pursuant to Section 4(2) of the
Securities Act of 1933, as amended. The ability to exercise the
warrants for common stock on a net share basis was included in
the original warrant agreements.
Use of
Proceeds
On May 22, 2006, we completed our IPO of
4,000,000 shares of common stock (the IPO Shares). We sold
the IPO Shares to the public at a price of $8.00 per share. Our
sale of IPO Shares was registered under the Securities Act of
1933, as amended, pursuant to a registration statement on
Form S-1
(Registration Stmt.
No. 333-132368),
which was declared effective by the Securities and Exchange
Commission on May 16, 2006. We received net proceeds from
the sale of the IPO Shares, after deducting the underwriting
discount and offering expenses, of approximately
$27.7 million. The net proceeds have been invested in money
market funds, investment grade commercial paper and debt
instruments of the U.S. government and its agencies. During
the year ended December 31, 2007, we used approximately
$13.6 million of the net proceeds from the IPO for general
corporate purposes, including funding our domestic marketing and
sales organizations and programs, product development efforts
and clinical study initiatives.
29
Stock
Performance Graph
The graph depicted below shows a comparison of cumulative total
stockholder returns for an investment in Restore Medical, Inc.
common stock, the NASDAQ Stock Market (U.S.) Index and the
NASDAQ Medical Equipment Index. The graph assumes an investment
of $100 on May 17, 2006 (the first trading day of our
common stock) and reinvestment of dividends. We did not pay any
dividends during any period presented. Stockholder returns over
the indicated period should not be considered indicative of
future stockholder returns.
COMPARISON
OF 19 MONTH CUMULATIVE TOTAL RETURN*
Among
Restore Medical, Inc, The NASDAQ Composite Index
And The NASDAQ Medical Equipment Index
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|
*
|
$100 invested on 5/17/06 in stock or 4/30/06 in index-including
reinvestment of dividends. Fiscal year ending December 31.
|
30
|
|
Item 6.
|
SELECTED
FINANCIAL DATA
|
The selected financial data set forth below should be read in
conjunction with the financial statements and related notes,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and other financial
information appearing elsewhere in this Annual Report on
Form 10-K.
The statement of operations data for the years ended
December 31, 2007, 2006 and 2005 and the balance sheet data
as of December 31, 2007 and 2006 are derived from our
audited financial statements included elsewhere in this Annual
Report on
Form 10-K.
The statement of operations data for the year ended
December 31, 2003, and the balance sheet data as of
December 31, 2004, are derived from our audited financial
statements not included in this Annual Report on
Form 10-K.
The balance sheet data as of December 31, 2003 is derived
from our unaudited financial statements not included in this
Annual Report on
Form 10-K.
Our unaudited financial statements include, in the opinion of
our management, all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of
those statements. The historical results are not necessarily
indicative of the results to be expected for any future periods.
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Statement of operations data for the fiscal years ended December
31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
4,101
|
|
|
$
|
5,886
|
|
|
$
|
4,854
|
|
|
$
|
945
|
|
|
$
|
368
|
|
Cost of sales(1)
|
|
|
1,035
|
|
|
|
1,695
|
|
|
|
1,641
|
|
|
|
791
|
|
|
|
412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin (loss)
|
|
|
3,066
|
|
|
|
4,191
|
|
|
|
3,213
|
|
|
|
154
|
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development(1)
|
|
|
3,277
|
|
|
|
3,007
|
|
|
|
1,869
|
|
|
|
2,282
|
|
|
|
3,301
|
|
General and administrative(1)
|
|
|
4,598
|
|
|
|
4,960
|
|
|
|
2,938
|
|
|
|
2,148
|
|
|
|
2,003
|
|
Sales and marketing(1)
|
|
|
8,867
|
|
|
|
10,022
|
|
|
|
4,981
|
|
|
|
4,039
|
|
|
|
2,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
16,742
|
|
|
|
17,989
|
|
|
|
9,788
|
|
|
|
8,469
|
|
|
|
7,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(13,676
|
)
|
|
|
(13,798
|
)
|
|
|
(6,575
|
)
|
|
|
(8,315
|
)
|
|
|
(7,681
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
852
|
|
|
|
952
|
|
|
|
132
|
|
|
|
169
|
|
|
|
32
|
|
Interest expense
|
|
|
(689
|
)
|
|
|
(734
|
)
|
|
|
(25
|
)
|
|
|
(426
|
)
|
|
|
(2,660
|
)
|
Put option gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
871
|
|
|
|
639
|
|
Preferred stock warrant gain (loss)
|
|
|
|
|
|
|
500
|
|
|
|
(572
|
)
|
|
|
128
|
|
|
|
9
|
|
Other, net
|
|
|
|
|
|
|
50
|
|
|
|
18
|
|
|
|
19
|
|
|
|
(18
|
)
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(13,513
|
)
|
|
|
(13,030
|
)
|
|
|
(7,022
|
)
|
|
|
(7,554
|
)
|
|
|
(9,412
|
)
|
Deemed dividend from revision of preferred stock conversion price
|
|
|
|
|
|
|
(20,799
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of beneficial conversion feature of Series A
and Series B preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(252
|
)
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(13,513
|
)
|
|
$
|
(33,829
|
)
|
|
$
|
(7,022
|
)
|
|
$
|
(7,806
|
)
|
|
$
|
(9,457
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Basic and diluted net loss per common share before deemed
dividend from revision of preferred stock conversion price and
amortization of beneficial coversion feature of Series A
and Series B preferred stock
|
|
$
|
(0.84
|
)
|
|
$
|
(1.26
|
)
|
|
$
|
(5.77
|
)
|
|
$
|
(6.31
|
)
|
|
$
|
(11.37
|
)
|
Effect of deemed dividend from revision of preferred stock
conversion price
|
|
|
|
|
|
|
(2.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of amortization of beneficial coversion feature of
Series A and Series B preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.21
|
)
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.84
|
)
|
|
$
|
(3.26
|
)
|
|
$
|
(5.77
|
)
|
|
$
|
(6.52
|
)
|
|
$
|
(11.42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average common shares outstanding
|
|
|
16,066,649
|
|
|
|
10,377,793
|
|
|
|
1,217,640
|
|
|
|
1,196,366
|
|
|
|
827,819
|
|
(1) Includes stock-based compensation of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
103
|
|
|
$
|
79
|
|
|
$
|
19
|
|
|
$
|
2
|
|
|
$
|
|
|
Research and development
|
|
|
206
|
|
|
|
148
|
|
|
|
15
|
|
|
|
2
|
|
|
|
|
|
General and administrative
|
|
|
1,363
|
|
|
|
1,415
|
|
|
|
463
|
|
|
|
30
|
|
|
|
|
|
Sales and marketing
|
|
|
282
|
|
|
|
211
|
|
|
|
62
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,954
|
|
|
$
|
1,853
|
|
|
$
|
559
|
|
|
$
|
40
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Balance sheet data as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,964
|
|
|
$
|
11,377
|
|
|
$
|
3,397
|
|
|
$
|
2,258
|
|
|
$
|
853
|
|
Working capital (deficit)
|
|
|
7,767
|
|
|
|
21,660
|
|
|
|
4,058
|
|
|
|
8,323
|
|
|
|
(9,486
|
)
|
Total assets
|
|
|
12,418
|
|
|
|
26,765
|
|
|
|
6,395
|
|
|
|
9,659
|
|
|
|
2,260
|
|
Total current liabilities
|
|
|
4,041
|
|
|
|
4,320
|
|
|
|
1,769
|
|
|
|
974
|
|
|
|
10,891
|
|
Total liabilities
|
|
|
4,200
|
|
|
|
7,197
|
|
|
|
4,230
|
|
|
|
1,069
|
|
|
|
11,115
|
|
Convertible participating preferred stock
|
|
|
|
|
|
|
|
|
|
|
39,208
|
|
|
|
39,208
|
|
|
|
14,003
|
|
Convertible participating preferred stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
$
|
8,218
|
|
|
$
|
19,568
|
|
|
$
|
(37,043
|
)
|
|
$
|
(30,618
|
)
|
|
$
|
(22,858
|
)
|
32
|
|
Item 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following discussion and analysis should be read in
conjunction with the financial statements and related notes and
the other financial information appearing elsewhere in this
Annual Report on
Form 10-K.
Some of the information contained in this discussion and
analysis or set forth elsewhere in this Annual Report on
Form 10-K,
including information with respect to our plans and strategy,
contains forward-looking statements that involve risk,
uncertainties and assumptions. You should review the Risk
Factors in Item 1A of Part I of this report for
a discussion of important factors that could cause actual
results to differ materially from those described in or implied
by the forward-looking statements contained in the following
discussion and analysis and elsewhere in this report.
Overview
We develop, manufacture and market our proprietary Pillar
System, a simple, innovative, minimally invasive, implantable
medical device to treat the soft palate component of sleep
disordered breathing, which includes OSA and snoring. During the
Pillar Procedure, a physician implants three small, braided,
proprietary polyester inserts into the muscle of the soft
palate. These Pillar inserts, together with the bodys
natural fibrotic response to the implanted Pillar inserts, add
structural support and stiffen the soft palate, thereby
minimizing or eliminating the palatal tissue vibration that can
cause snoring and the retropalatal collapse that can obstruct
the upper airway and cause OSA. We currently market and sell our
Pillar System primarily to otolaryngologists (ear, nose and
throat physicians, or ENTs) and to a limited number of other
healthcare professionals. We believe the Pillar Procedure is a
safe, clinically effective, low-risk procedure with minimal pain
or complications that offers significant benefits and sustained
results to patients and physicians over other available
treatment options for chronic snoring and mild to moderate OSA.
Our Pillar System was cleared by the FDA for snoring in December
2002 and for mild to moderate OSA in July 2004. Our Pillar
System received CE Mark certification for both snoring and mild
to moderate OSA from the European Commission in May 2003 and
December 2004, respectively.
Generally, patients pay the entire cost for the Pillar Procedure
out-of-pocket, whether the patient is being treated for OSA or
snoring. The cost of treatments for OSA, such as CPAP, and most
surgical procedures generally are reimbursed by third-party
healthcare insurers, including Medicare. We have begun the
process of seeking third-party reimbursement approval for the
use of the Pillar Procedure to treat mild to moderate OSA, and
we intend to continue pursuing third-party reimbursement.
Third-party healthcare insurers typically consider any snoring
treatment to be an elective cosmetic procedure, and do not cover
payment for such procedures. We believe that all treatments for
snoring, including the Pillar Procedure, will continue to be
considered elective procedures, and therefore, procedures for
which patients will pay out-of-pocket.
In the fourth quarter of 2006 we implemented a new integrated
consultative sales and marketing approach for the Pillar
Procedure, as well as a restructuring of our U.S. sales
organization. This restructuring of our sales organization
resulted in the turnover of nearly our entire sales force during
2007. Currently, our direct sales force in the
U.S. consists of 15 sales representatives, three regional
sales directors and one Vice President of Sales who are
primarily focused on ENTs and a limited number of other
healthcare providers who treat sleep disordered breathing. We
work closely with our physician customers to implement
consultative practice support, education and development
programs that are designed to help increase the number of sleep
disordered breathing patients who are referred to, or self-refer
to, their practices for diagnosis
and/or
treatment. These practice development programs include the
creation and implementation of local physician and prospective
patient sleep disordered breathing education programs, as well
as customized local advertising, public relations and sleep
disordered breathing information initiatives to promote
physician practices to potential patients.
As part of the new sales strategy we initiated in the fourth
quarter of 2006, we decided to focus on our higher margin
U.S. business and to significantly decrease the investment
in our international business. We currently market our products
in more than 20 countries outside the United States through
independent distributors in North and South America, Asia
Pacific, Europe, and the Middle East. We have entered into
33
multi-year distribution agreements with each of these
international distributors. Each of our independent distributors
has the exclusive right to sell our Pillar System within a
defined geographic territory. Many of these distributors also
market and sell other medical products, although contractually
they are not permitted to sell products directly competitive
with our Pillar System. Our independent distributors purchase
our Pillar System from us at a discount to our U.S. list
price and resell our Pillar System to physicians, hospitals or
clinics in their respective geographic territories. The end-user
price of our Pillar System in each country is determined by the
distributor and varies from country to country.
Since we commenced operations in 1999, we have incurred net
losses primarily from costs relating to the development and
commercialization of our Pillar System. We incurred net losses
attributable to common stockholders of $7.0 million in
2005, $33.8 million in 2006, which includes the deemed
dividend of $20.8 million from the revision of preferred
stock conversion prices in conjunction with our initial public
offering, and $13.5 million in 2007. At December 31,
2007, we had an accumulated deficit of $85.5 million. We
expect to continue to invest in marketing and sales and research
and development activities, which will be primarily funded with
our current available cash. With our plans to continue our
commercialization activities, we expect to continue to incur net
losses through at least 2009. We believe that our current cash,
cash equivalents, short-term investments and cash generated from
operations will be sufficient to fund our working capital and
capital resource needs through mid 2008. The funding of our
operations beyond mid 2008 will require additional investments
in our company in the form of equity or debt financing or
through licensing our intellectual property to generate capital.
We have been actively exploring various equity and debt
financing alternatives to raise sufficient capital to fund our
operations as well as various strategic alternatives.
Application
of Critical Accounting Policies and Use of Estimates
Our discussion and analysis of the financial condition and
results of operations is based upon our financial statements,
which have been prepared in accordance with accounting
principles generally accepted in the United States. The
preparation of financial statements requires management to make
estimates and judgments that affect the reported amounts of
assets and liabilities, revenue and expenses, and disclosures of
contingent assets and liabilities at the date of the financial
statements. On a periodic basis, we evaluate our estimates,
including those related to accounts receivable, inventories,
warranty reserve, income taxes and deferred stock-based
compensation. We use authoritative pronouncements, historical
experience and other assumptions that we believe to be
reasonable under the circumstances as the basis for making
estimates. Actual results could differ from those estimates
under different assumptions or conditions.
We believe the following critical accounting policies represent
more significant judgments and estimates used in the preparation
of our financial statements.
Revenue
Recognition
We generate revenue from sales of our Pillar System to physician
customers in the U.S. and third-party distributors
internationally. We generally have not sold our Pillar System to
hospitals or healthcare institutions, although such sales may
occur more frequently in the future.
Revenue is recognized when evidence of an arrangement exists,
delivery to the customer has occurred, the selling price is
fixed or determinable and collectability is reasonably assured.
For physician customers in the U.S., the evidence of an
arrangement generally consists of a signed order confirmation,
email order or verbal phone order as their normal business
practices do not require a purchase order. Our international
distributors place orders pursuant to a distribution agreement.
The price for each sale is fixed and agreed with the customer
prior to shipment and is based on established list prices. Sales
to our international distributors are made according to the
contractual terms of each individual distribution agreement.
Revenue for all domestic and international sales is recognized
upon shipment of product from our facility when title and risk
of loss passes to the customer.
A provision for estimated sales returns on domestic product
sales is recorded in the same period as the related revenue is
recorded. The provision for estimated sales returns, if any, is
based on an analysis of
34
historical sales returns, as adjusted for specifically
identified estimated changes in historical return activity.
Sales terms to our international distributors do not contain a
right to return product purchased from us.
In the U.S. during 2005, as part of introducing our Pillar
System to potential new physician customers, we offered
physicians the opportunity to participate in a practice
introduction program, or PI program, in which they could
treat up to three patients using Pillar Systems that we provided
at no charge to the physician. This program was eliminated in
2006 and was not utilized during 2007. The costs associated with
providing these Pillar Systems to U.S. physicians under the
PI program were accounted for as a sales and marketing expense
at the time of each practice introduction. During 2005, our
international distributors were offered the opportunity to
participate in an international PI program whereby we would
provide marketing support payments for practice introductions
conducted by the distributor. The support payments made to each
distributor who participated in our 2005 international PI
program were accounted for as a reduction of revenue to that
distributor. During the first quarter of 2006, we amended
substantially all of our international distribution agreements
to change the structure of our international PI program. Under
the modified program, we provide our international distributors
with free product to undertake a PI program with physician
customers in their respective territories rather than provide
our international distributors with a marketing support payment
for practice introductions performed. The free product that we
provide is recorded as a cost of sales.
Our standard payment terms for customers are
net 30 days in the United States and net 30 to
90 days internationally. We have, on a
customer-by-customer
basis, granted special payment terms in excess of standard
terms. Collectability is evaluated prior to shipment. If we
determine the facts and circumstances surrounding a
customers order justify alternative payment terms, we may
grant extended payment terms on a
customer-by-customer
basis. We have negotiated a monthly payment plan for $198,000 of
past due accounts receivable with our largest domestic customer
and require payment be mailed to us at the time of shipment for
all future shipments until the past due balance is paid. We have
not established a specific reserve for any estimated losses
related to this customer. Our customers typically are
physicians, clinics and distributors, and are generally deemed
creditworthy; however, if we have collection concerns, we
require prepayment of the order.
Allowance
for Doubtful Accounts
In estimating the collectability of our accounts receivable, we
analyze historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in
customer payment terms. In the normal course of our business,
many of our international distributors pay us after their
scheduled payment due date. In addition, on a
case-by-case
basis, we have allowed certain of our international distributors
to extend the time of payment beyond their scheduled payment due
date or to make periodic partial payments of past-due amounts
owing to us. We make adjustments to our allowance for doubtful
accounts in the period when the net revenues are recognized
based on anticipated future events. If there are unanticipated
future events, this allowance may need to be adjusted. On a
monthly basis, we determine the amount of this reserve based on
a review of slow-paying accounts, as well as accounts with
changed circumstances indicating that the balances due and owing
to us are unlikely to be collectible.
Warranties
We replace any defective Pillar System that is returned to us at
no charge to the customer provided the returned unit is not past
its product expiration date. We also will provide a replacement
Pillar System at no charge to a physician customer in the event
a patient treated by the physician with a Pillar Procedure
experiences a partial extrusion of the Pillar insert, either at
or subsequent to the time of implant. We adjust our estimated
warranty expense accrual each month based on historical warranty
claims experience, and record adjustments in an amount equal to
the standard cost of the replacement Pillar Systems provided to
physician customers.
35
Accounting
for Income Taxes
Significant management judgment is required in determining our
provision for income taxes, our deferred tax assets and
liabilities and any valuation allowance recorded against our net
deferred tax assets. We have recorded a full valuation allowance
on our net deferred tax assets as of December 31, 2007 and,
2006, respectively, due to uncertainties related to our ability
to utilize our deferred tax assets in the foreseeable future.
These deferred tax assets primarily consist of certain net
operating loss carry forwards and research and development tax
credits.
Stock-Based
Compensation
Prior to the adoption of Statement of Financial Accounting
Standards No. 123(R),
Share-Based Payment
(SFAS No. 123(R)) on January 1, 2006, we measured
compensation costs for options issued or modified under our
stock-based compensation plans using the intrinsic-value method
of accounting. Under the intrinsic-value method, we recorded
deferred compensation expense within stockholders equity
(deficit) for stock options awarded to employees and directors
to the extent that the option exercise price was less than the
fair market value of common stock on the date of grant. Recorded
deferred compensation is amortized to compensation expense on a
straight-line basis over the vesting period of the underlying
stock option grants.
On January 1, 2006, we adopted the fair value recognition
provisions of SFAS 123(R). We apply the provisions of
SFAS 123(R) to new stock option grants and to stock option
grants that are modified, repurchased or cancelled after
December 31, 2005 using the prospective method of
transition. Compensation cost calculated under SFAS 123(R)
is amortized to compensation expense on a straight-line basis
over the vesting period of the underlying stock option grants.
We will continue to apply the intrinsic-value method to
determine compensation expense for stock options granted prior
to the adoption of SFAS 123(R).
Determining the appropriate fair value model and calculating the
fair value of share-based payment awards requires the input of
highly subjective assumptions, including the expected life of
the share-based payment awards and stock price volatility. We
use the Black-Scholes model to value our stock option awards.
The assumptions used in calculating the fair value of
share-based payment awards represent managements best
estimates, but these estimates involve inherent uncertainties
and the application of management judgment. As a result, if
factors change and management uses different assumptions,
share-based compensation expense could be materially different
in the future. As we have been a public company since May 2006,
we do not have sufficient historical volatility for the expected
term of our options. Therefore, we use comparable companies as a
basis for our expected volatility. As we become a more mature
public company, we will rely more on our historical volatility
to calculate the fair value of option grants. This volatility
may materially impact the fair value of employee stock option
grants. In addition, we are required to estimate the expected
term and forfeiture rate and only recognize expense for those
shares expected to vest. If the actual forfeiture rate is
materially different from the estimate, share-based compensation
expense could be significantly different from what has been
recorded in the current period.
As of December 31, 2007, we had outstanding stock options
to acquire an aggregate of 2,540,789 shares of common
stock. Of those outstanding common stock options,
924,790 shares had vested as of December 31, 2007, and
1,615,999 shares were unvested.
Results
of Operations
Comparison
of the years ended December 31, 2007 and 2006
Net Sales.
Net sales decreased by
$1.8 million, or 30%, to $4.1 million in 2007 from
$5.9 million in 2006. Net sales in the United States
decreased by $898,000, or 20%, to $3.7 million in 2007
compared to $4.6 million in 2006. The decrease in
U.S. net sales was due to the disruption caused by the
implementation of the sales and marketing strategies required to
support our new integrated consultative sales approach that we
initiated in the fourth quarter of 2006 and the corresponding
restructuring of our sales organization that resulted in the
turnover of nearly all of our sales representatives during 2007.
The sales force restructuring created a significant short-term
disruption leaving sales territories temporarily uncovered while
we hired and
36
trained new sales representatives in our consultative sales
approach, resulting in a decrease in new customer orders and
lower reorder demand from existing customers. The United States
average selling price for the three Pillar inserts used in each
Pillar Procedure was approximately $680 in fiscal years 2007 and
2006.
Net sales internationally decreased by $887,000, or 68%, to
$419,000 in 2007 compared to $1.3 million in 2006. We
commercially introduced our Pillar System into international
markets beginning in January 2005 through independent
third-party distributors. The decrease in international sales
was primarily due to lower sales to two distributors covering
the majority of the Asia Pacific market. Due to inventory levels
at these two distributors resulting from delays in planned
market launches, execution of certain market development
activities and obtaining a required government pricing approval
for the Pillar System in a key market, we did not receive orders
from either of these two distributors in 2007. The agreement
with one of these two distributors that covered China expired
pursuant to the original term during the second quarter of 2007.
Due to a change in the distributors organizational
structure and business focus, the distribution agreement will
not be renewed. We are currently evaluating alternatives for
distributing our product in China. Additionally, we made a
decision in the fourth quarter of 2006 to focus on our higher
margin U.S. business and to significantly decrease the
near-term investment in our international business. The
combination of these factors contributed to decreased net sales
internationally in 2007 compared to 2006.
Our independent international distributors purchase Pillar
Systems from us at a discount to our U.S. list price for
resale; the end-user price of our Pillar System in each country
is determined by the distributor and varies from country to
country. Due to the market development investment and
distribution costs incurred by our international third-party
distributors, our international average selling price is
typically approximately 50% of domestic average selling price.
As of December 31, 2007, our Pillar System was marketed and
sold in more than 20 international markets in Asia Pacific,
Europe, the Middle East and South America.
Cost of sales and gross margin.
Our cost of
sales consists primarily of material, labor and manufacturing
overhead expenses. Cost of sales also includes warranty
expenses, as well as salaries and personnel-related expenses,
including stock-based compensation, for our operations
management team and quality control. Cost of sales decreased by
$660,000, or 39%, to $1.0 million in 2007 from
$1.7 million in 2006. This decrease primarily was due to
the decrease in the number of our Pillar Systems sold in 2007.
As a percentage of net sales, gross margin improved to 75% in
2007 from 71% in 2006. The improvement in the gross margin
percent in 2007 was the result of cost reductions and increased
efficiencies in the manufacturing of our Pillar System.
Research and development expenses.
Our
research and development expenses consist of salaries and other
personnel-related expenses, including stock-based compensation,
for employees engaged in research, development and engineering
activities and materials used and other overhead expenses
incurred in connection with the design and development of our
products. Research and development expenses increased by
$270,000, or 9%, to $3.3 million in 2007 from
$3.0 million in 2006. This increase was mainly attributable
to increased compensation expense of $422,000, which included an
increase in stock-based compensation of $58,000. We increased
the number of employees in our research and development and
clinical groups to accelerate several key clinical studies and
the development of a product to treat base of tongue
obstruction. The increase in compensation expense was partially
offset by a decrease to our consulting expense of $127,000, as
compared to the prior year.
General and administrative expenses.
Our
general and administrative expenses consist primarily of
salaries and other personnel-related expenses, including
stock-based compensation, for executive, accounting and
administrative personnel, professional fees, and other general
corporate expenses. General and administrative expenses
decreased by $362,000, or 7%, to $4.6 million in 2007 from
$5.0 million in 2006. The decrease is primarily due to a
decrease of $501,000 in audit and consulting fees in 2007, which
had increased in the first five months of 2006 in preparation of
our IPO. Offsetting increases were incurred for insurance of
$96,000 and various other expenses that increased as a result of
operating as a public company for a full year in 2007.
Sales and marketing expenses.
Our sales and
marketing expenses consist primarily of salaries, commissions
and other personnel-related expenses, including stock-based
compensation, for employees engaged in
37
sales, marketing and support of our products, trade show,
marketing, promotional and public relations expenses and
management and administration expenses in support of sales and
marketing. Sales and marketing expenses decreased by
$1.2 million, or 12%, to $8.9 million for 2007 from
$10.0 million in 2006. This decrease was primarily
attributable to a decrease in overall advertising and promotion
expenses of $1.2 million for the year ended
December 31, 2007, partially offset by an increase in
compensation expense with the hiring of additional sales
employees in 2007. We reduced our direct-to-consumer advertising
in 2007 and discontinued several co-marketing programs as we
focused more on the development of our key physicians and the
consultative sales approach.
Interest income.
Interest income decreased to
$852,000 in 2007 from $952,000 in 2006. The decrease is
attributable to a decrease in amounts invested in cash
equivalents and short-term investments and interest earned from
those investments.
Interest expense.
Interest expense decreased
to $689,000 in 2007 from $734,000 in 2006. This decrease was due
to lower interest expense as a result of principal payments made
during 2007 on our loan facility with Lighthouse Capital
Partners and the decrease in the outstanding balance.
Preferred stock warrant gain/loss.
In 2006, we
recognized a gain of $500,000 related to the change in fair
value of our preferred stock warrants subject to redemption.
These warrants were converted to common stock warrants as a
result of our IPO.
Deemed dividend from revision of preferred stock conversion
price.
In 2006, we recognized a non-cash dividend
of $20.8 million due to a change in the conversion price of
our Series C and C-1 preferred stock prior to our IPO. All
outstanding Series A, B, C and C-1 preferred stock
automatically converted into shares of common stock at the then
current conversion prices.
Comparison
of Years Ended December 31, 2006 and 2005
Net Sales.
Net sales increased by
$1.0 million, or 21%, to $5.9 million in 2006 from
$4.9 million in 2005. The increase in net sales during 2006
was attributable to the increased unit sales of our Pillar
Systems in the U.S., partially offset by a decrease in sales in
international markets.
Net sales in the U.S. increased by $1.2 million, or
34%, to $4.6 million in 2006 compared to $3.4 million
in 2005. The growth in U.S. net sales was due primarily to
a larger number of physicians performing the Pillar Procedure,
which resulted in increased shipments of our Pillar System. The
U.S. average selling price for the three Pillar inserts
used in each Pillar Procedure increased from approximately $645
in 2005 to approximately $680 in 2006 due to a price increase
initiated in October 2004 that provided for a gradual increase
to the new price level for existing customers.
Net sales internationally decreased by $132,000 to
$1.3 million in 2006 compared to $1.4 million in 2005.
We commercially introduced our Pillar System into international
markets beginning in January 2005 through independent
third-party distributors. Our two largest distributors accounted
for 39%, or $505,000, of our international net sales in 2006 and
74%, or $1.1 million, in 2005. Due to their inventory
levels as a result of delays in planned market launches,
execution of certain market development activities and obtaining
a required government pricing approval for the Pillar System in
a key market, we did not receive orders from either of these two
distributors in the second half of 2006. Decreased sales to
these two distributors in 2006 were partially offset by sales to
new distributors and reorders from existing distributors. As a
result, international sales decreased in 2006 as compared to
2005.
Cost of sales and gross margin.
Our cost of
sales consists primarily of material, labor and manufacturing
overhead expenses. Cost of sales also includes warranty
expenses, as well as salaries and personnel-related expenses,
including stock-based compensation, for our operations
management team and quality control. Cost of sales increased by
$54,000, or 3%, to $1.7 million in 2006 from
$1.6 million in 2005. This increase was due to the increase
in the number of our Pillar Systems sold in 2006. As a
percentage of net sales, gross margin improved to 71% in 2006
from 66% in 2005. The improvement in the gross margin percent in
2006 was the result of reductions in the cost of our Pillar
System following our launch of a redesigned second-generation
delivery system in May 2005, as well as volume-related
production efficiencies.
38
Research and development expenses.
Our
research and development expenses consist of salaries and other
personnel-related expenses, including stock-based compensation,
for employees engaged in research, development and engineering
activities and materials used and other overhead expenses
incurred in connection with the design and development of our
products. Research and development expenses increased by
$1.1 million, or 61%, to $3.0 million in 2006 from
$1.9 million in 2005. This increase was attributable to
increased compensation expense of $352,000, stock-based
compensation of $133,000 and development expenses of $289,000
over the prior year. We increased the number of personnel in our
research and development and clinical groups during 2006 to
accelerate several key clinical studies and the development of a
product to treat base of tongue obstruction.
General and administrative expenses.
Our
general and administrative expenses consist primarily of
salaries and other personnel-related expenses, including
stock-based compensation, for executive, accounting and
administrative personnel, professional fees, and other general
corporate expenses. General and administrative expenses
increased by $2.1 million, or 69%, to $5.0 million in
2006 from $2.9 million in 2005. The increase is due to an
increase of $601,000 in audit and consulting fees incurred
during the first five months of 2006 in preparation for our IPO.
In addition, stock-based compensation expense increased by
$952,000 for the year ended December 31, 2006 to
$1.4 million from $463,000 in 2005. The increase in
stock-based compensation included $191,000 of expense related to
the severance agreement with our former Vice President of
Finance.
Sales and marketing expenses.
Our sales and
marketing expenses consist primarily of salaries, commissions
and other personnel-related expenses, including stock-based
compensation, for employees engaged in sales, marketing and
support of our products, trade show, marketing, promotional and
public relations expenses and management and administration
expenses in support of sales and marketing. Sales and marketing
expenses increased by $5.0 million, or 101%, to
$10.0 million for 2006 from $5.0 million in 2005. This
increase was attributable to an increase in compensation expense
of $2.0 million related to the hiring of additional sales
and marketing personnel, including an increase in stock-based
compensation of $149,000 for the year ended December 31,
2006. In addition, advertising and promotional expenses
increased by $2.0 million as we developed and implemented
new marketing programs designed to raise awareness of the Pillar
Procedure with potential patient consumers.
Interest income.
Interest income increased to
$952,000 in 2006 from $132,000 in 2005. The increase was
attributable to an increase in amounts invested in cash
equivalents and short-term investments from the proceeds of our
IPO.
Interest expense.
Interest expense increased
to $734,000 in 2006 from $25,000 in 2005. This increase was due
to interest expense resulting from draws on our loan facility
with Lighthouse Capital Partners and an additional capital lease.
Preferred stock warrant gain/loss.
In 2006, we
recognized a gain of $500,000 related to the change in fair
value of our preferred stock warrants subject to redemption
compared to a loss of $572,000 in 2005 for the change in fair
value during the same period in 2005.
Deemed dividend from revision of preferred stock conversion
price.
In 2006, we recognized a non-cash dividend
of $20.8 million due to a change in the conversion price of
our Series C and C-1 preferred stock prior to our IPO. All
outstanding Series A, B, C and C-1 preferred stock
automatically converted into shares of common stock at the then
current conversion prices.
Liquidity
and Capital Resources
Since our inception and prior to May 2006, we funded our
operations primarily through issuances of convertible preferred
stock and related warrants, which provided us with aggregate
gross proceeds of $39.9 million. On May 22, 2006, we
sold 4,000,000 shares of common stock in an IPO for
aggregate gross proceeds of $32.0 million to finance
current operations and provide for general corporate purposes,
including expanding domestic and international marketing and
sales organizations and programs, increasing product development
efforts and increasing our clinical study initiatives. After
deducting the underwriters
39
commissions and discounts, we received net proceeds of
approximately $27.7 million. As of December 31, 2007,
we had total cash, cash equivalents and marketable securities of
$10.2 million.
Net cash used in operating activities was $11.5 million,
$10.6 million and $6.6 million during 2007, 2006 and
2005, respectively. Cash used in operating activities has
historically resulted from operating losses and net increases or
decreases in accounts receivable, inventories and accounts
payable resulting from the changes within our business.
Net cash provided by investing activities was $6.1 million
during 2007, primarily related to proceeds from the sales of
marketable securities. During 2006, cash used in investing
activities was $12.4 million, primarily related to the
purchase of marketable securities. During 2005, cash provided by
investing activities was $5.7 million and primarily related
to the proceeds from the sales of marketable securities.
Additionally, we purchased capital equipment of $92,000 in the
year ended December 31, 2007 and $190,000 and $208,000
during 2006 and 2005, respectively.
Net cash used in financing activities was $2.0 million
during 2007, primarily related to repayments of long-term debt.
Net cash provided by financing activities was $31.0 million
during 2006, primarily related to the issuance of common stock
in our IPO. Net cash provided by financing activities during
2005 was $2.0 million, primarily consisting of proceeds
from the issuance of long-term debt.
In March 2005, we entered into a term debt agreement with
Lighthouse Capital Partners with a maximum principal draw-down
of $5.0 million, which was amended on March 3, 2006 to
provide for a maximum principal draw-down of $8.0 million.
We received $2.0 million in December 2005,
$1.0 million in February 2006 and an additional
$3.0 million in March 2006 under the term debt agreement.
We elected not to draw the remaining $2.0 million on or
before June 30, 2006 when the option to draw additional
funds expired. Interest on the loan accrues at a variable rate
of prime plus 3% and is payable monthly, with principal due at
the maturity date of December 31, 2008 and an additional
final payment in an amount equal to 5% of the original loan
principal. The term debt loan is collateralized by substantially
all of our assets excluding our intellectual property. As of
December 31, 2007, we were in compliance with all of the
financial and other covenants contained in the term debt loan
agreement.
We believe that our current cash, cash equivalents, short-term
investments and cash generated from operations will be
sufficient to fund our working capital and capital resource
needs into mid 2008.
Our short-term investments include $4.2 million of
investments in auction rate securities. Auction rate securities
are variable-rate debt securities and have a long-term maturity
with the interest rate reset through Dutch auctions that are
typically held every 7, 28 or 35 days. The securities trade
at par and are callable at par on any interest payment date at
the option of the issuer. Interest is paid at the end of each
auction period. Our auction rate securities are all AAA/Aaa
rated and collateralized by student loans guaranteed by the
U.S. government under the Federal Family Education Loan
Program. Until February 2008, the auction rate securities market
was highly liquid. Beginning the week of February 11, 2008,
a substantial number of auctions failed as a result
of negative overall capital market conditions, meaning that
there was not enough demand to sell the securities at auction.
The result of a failed auction, which does not signify a default
by the issuer, is that these securities continue to pay interest
in accordance with their terms until there is a successful
auction or until such time as other markets for these
investments develop. We will not be able to liquidate any of
these auction rate securities until a future auction is
successful, or until we decide to sell the securities in a
secondary market. A secondary market sale of any of these
securities could take a significant amount of time to complete
and would potentially result in a significant loss.
Typically, the fair value of auction rate securities
approximates par value due to the frequent resets through the
auction-rate process. Given the current market conditions, we
will continue to monitor our auction rate securities for
substantive changes in relevant market conditions, changes in
financial condition or other changes in these investments. We
may be required to record unrealized losses for impairment if we
determine that a decline in fair value of our auction rate
securities has occurred that is temporary or
other-than-temporary and these impairment charges could be
substantial.
40
It is possible that the potential lack of liquidity in our
auction rate security investments could adversely affect our
ability to fund operations beginning in May of 2008. We cannot
predict whether future auctions related to our auction rate
securities will be successful. We currently are seeking
alternatives for reducing our exposure to the auction rate
market, but may not be able to identify any such alternative. If
we are not able to monetize some or all of our auction rate
securities during the second quarter of 2008, it will have a
material adverse effect on our ability to finance our future
ongoing operations.
Even with the successful sale of our auction rate securities,
the funding of our operations beyond mid 2008 will require
additional investments in our company in the form of equity or
debt financing or through licensing our intellectual property to
generate capital. We have been actively exploring various equity
and debt financing alternatives to raise sufficient capital to
fund our operations, as well as various strategic alternatives.
Any sale of additional equity or issuance of debt will result in
dilution to our stockholders, and we cannot be certain that
additional public or private financing will be available in
amounts or on terms acceptable to us, or at all. If we are
unable to obtain additional financing, we will need to
significantly reduce the scope of our operations including a
reduction in the size of our sales and marketing, research and
development, administrative and manufacturing staff combined
with the elimination of the significant programs and initiatives
planned by each of those functional groups. These changes would
have a material adverse effect on our business. Any inability to
satisfy our liabilities as they come due could result in the
need to file for bankruptcy.
Disclosures
about Contractual Obligations and Commercial
Commitments
The following table aggregates all contractual commitments and
commercial obligations that affect our financial condition and
liquidity position at December 31, 2007.
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Payments Due by Period
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Less Than
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|
|
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After
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Contractual Obligations
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Total
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1 Year
|
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2-3 Years
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4-5 Years
|
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5 Years
|
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|
(In thousands)
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|
Term debt facility
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$
|
2,802
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|
|
$
|
2,802
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|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Capital lease obligations
|
|
|
184
|
|
|
|
41
|
|
|
|
89
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|
|
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54
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|
|
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|
Operating leases
|
|
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949
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|
|
|
276
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|
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673
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Deposit payable
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|
5
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|
5
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Total contractual cash obligations
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$
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3,940
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$
|
3,124
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|
|
$
|
762
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|
$
|
54
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|
|
$
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|
|
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|
|
|
|
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Term debt obligations of $2.8 million in 2008 include the
required 5% repayment premium. Term debt facility and capital
lease obligations are stated net of interest expense.
Off-Balance-Sheet
Arrangements
As of December 31, 2007 or 2006, we did not have any
significant off-balance sheet arrangements, as defined in
Item 303(a)(4)(ii) of
Regulation S-K.
Recent
Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 48,
Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109
(FIN 48). FIN 48 clarifies the
accounting for uncertainties in income taxes recognized in a
companys financial statements in accordance with Statement
109 and prescribes a recognition threshold and measurement
attributable for financial disclosure of tax positions taken or
expected to be taken on a tax return. Additionally, FIN 48
provides guidance on de-recognition, classification, interest
and penalties, accounting in interim periods, disclosure and
transition. We adopted the provisions of FIN 48 as of
January 1, 2007. The adoption of FIN 48 did not impact
our financial position, results of operations or cash flows for
the year ended December 31, 2007.
41
In September 2006, the FASB issued SFAS 157,
Fair
Value Measurements
(SFAS 157), which provides
enhanced guidance for using fair value to measure assets and
liabilities. The standard applies whenever other standards
require (or permit) assets or liabilities to be measured at fair
value. The standard does not expand the use of fair value in any
new circumstances. SFAS 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. We are required to adopt the provisions of SFAS 157
in our fiscal year beginning January 1, 2009. We currently
are evaluating the effects, if any, that this pronouncement may
have on our consolidated financial statements.
Managements
Report on Internal Control over Financial Reporting
Management of the company is responsible for establishing and
maintaining adequate internal control over financial reporting
as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934. Our internal control
over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Our
internal control over financial reporting includes those
policies and procedures that:
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pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company;
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provide reasonable assurance that transactions are recorded as
necessary to permit preparation of 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
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provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
companys assets that could have a material effect on the
financial statements.
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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.
Management assessed the effectiveness of the companys
internal control over financial reporting as of
December 31, 2007. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework.
Based on our assessment and those criteria, management believes
that the company maintained effective internal control over
financial reporting as of December 31, 2007.
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Item 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Interest
Rate Risk
Our cash is invested in bank deposits and money market funds
denominated in U.S. dollars. The carrying amount of these
cash equivalents approximates fair market value. Our investments
in marketable securities are subject to interest rate risk and
our financial condition and results of operations could be
adversely affected due to movements in interest rates. Due to
the short-term nature of these investments, a 1% change in
market interest rates would have an impact of approximately
$83,000 on an annual basis. We do not utilize derivative
financial instruments, derivative commodity instruments or other
market risk-sensitive instruments, positions or transactions to
any material extent.
Foreign
Currency Exchange Risk
Historically, our only foreign denominated payments were for
clinical expenditures. Foreign currency gains and losses
associated with these expenditures have not been significant.
Although substantially all of our sales and purchases are
denominated in U.S. dollars, in future periods, we believe
a greater portion of our net sales could be denominated in
currencies other than the U.S. dollar, thereby increasing
our exposure to
42
exchange rate gains and losses on
non-United
States currency transactions. We do not currently enter into
forward exchange contracts to hedge exposure denominated in
foreign currencies or any other derivative financial instruments
for trading or speculative purposes. In the future, if we
believe an increase in our currency exposure merits further
review, we may consider entering into transactions to help
mitigate that risk.
Auction
Rate Securities
Our short-term investments include $4.2 million of
investments in auction rate securities. Auction rate securities
are variable-rate debt securities and have a long-term maturity
with the interest rate being reset through Dutch auctions that
are typically held every 7, 28 or 35 days. The securities
trade at par and are callable at par on any interest payment
date at the option of the issuer. Interest is paid at the end of
each auction period. Our auction rate securities are all AAA/Aaa
rated and collateralized by student loans guaranteed by the
U.S. government under the Federal Family Education Loan
Program. Until February 2008, the auction rate securities market
was highly liquid. Starting the week of February 11, 2008,
a substantial number of auctions failed as a result
of negative overall capital market conditions, meaning that
there was not enough demand to sell the securities at auction.
The result of a failed auction, which does not signify a default
by the issuer, is that these securities continue to pay interest
in accordance with their terms until there is a successful
auction or until such time as other markets for these
investments develop. We will not be able to liquidate any of
these auction rate securities until a future auction is
successful, or until we decide to sell the securities in a
secondary market. A secondary market sale of any of these
securities could take a significant amount of time to complete
and would potentially result in a significant loss.
43
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Item 8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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Page
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Report of Independent Registered Public Accounting Firm
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45
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Balance Sheets as of December 31, 2007 and 2006
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46
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Statements of Operations for the years ended December 31,
2007, 2006 and 2005
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47
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Statements of Stockholders Equity (Deficit) for the years
ended December 31, 2007, 2006 and 2005
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48
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Statements of Cash Flows for the years ended December 31,
2007, 2006 and 2005
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49
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Notes to Financial Statements
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50
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44
Report of
Independent Registered Public Accounting Firm
The Board of Directors
Restore Medical, Inc.:
We have audited the accompanying balance sheets of Restore
Medical, Inc. as of December 31, 2007 and 2006 and the
related statements of operations, stockholders equity
(deficit), and cash flows for each of the years in the
three-year period ended December 31, 2007. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements 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 audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Restore Medical, Inc. as of December 31, 2007 and 2006,
and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 2007
in conformity with U.S. generally accepted accounting
principles.
The accompanying financial statements have been prepared
assuming that Restore Medical, Inc. will continue as a going
concern. As discussed in Note 2 to the financial
statements, the Company has suffered recurring losses from
operations and has insufficient capital resources to fund future
operations that raise substantial doubt about the entitys
ability to continue as a going concern. Managements plans
in regard to these matters are also described in Note 2.
The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
As discussed in Note 1 to the financial statements, the
Company adopted Statement of Financial Accounting Standards
No. 123R, Share-Based Payment, on
January 1, 2006.
Minneapolis, Minnesota
March 26, 2008
45
RESTORE
MEDICAL, INC.
(In thousands, except share amounts)
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December 31,
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|
December 31,
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2007
|
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|
2006
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
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|
|
Cash and cash equivalents
|
|
$
|
3,964
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|
|
$
|
11,377
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|
Short-term investments
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|
|
6,285
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|
|
|
12,463
|
|
Accounts receivable, net of allowance for doubtful accounts of
$21 and $86, respectively
|
|
|
604
|
|
|
|
1,262
|
|
Related-party receivables
|
|
|
16
|
|
|
|
33
|
|
Inventories
|
|
|
785
|
|
|
|
598
|
|
Prepaid expenses
|
|
|
141
|
|
|
|
237
|
|
Other current assets
|
|
|
13
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
11,808
|
|
|
|
25,980
|
|
Machinery and equipment, net
|
|
|
487
|
|
|
|
539
|
|
Deferred debt issuance costs, net of accumulated amortization of
$251 and $128, respectively
|
|
|
123
|
|
|
|
246
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
12,418
|
|
|
$
|
26,765
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
275
|
|
|
$
|
670
|
|
Accrued expenses
|
|
|
344
|
|
|
|
939
|
|
Accrued payroll and related expense
|
|
|
616
|
|
|
|
519
|
|
Current portion of long-term debt, net of debt discount of $37
and $37, respectively
|
|
|
2,806
|
|
|
|
2,192
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
4,041
|
|
|
|
4,320
|
|
Long-term debt, net of debt discount of $0 and $37, respectively
|
|
|
143
|
|
|
|
2,863
|
|
Other long-term liabilities
|
|
|
16
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
4,200
|
|
|
|
7,197
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (note 12)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock $0.01 par value: 50,000,000 shares
authorized; issued and outstanding 15,731,094 and
15,534,244 shares, respectively
|
|
|
157
|
|
|
|
155
|
|
Additional paid-in capital
|
|
|
94,228
|
|
|
|
92,772
|
|
Deferred stock-based compensation
|
|
|
(690
|
)
|
|
|
(1,395
|
)
|
Accumulated deficit
|
|
|
(85,477
|
)
|
|
|
(71,964
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
8,218
|
|
|
|
19,568
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
12,418
|
|
|
$
|
26,765
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
46
RESTORE
MEDICAL, INC.
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net sales
|
|
$
|
4,101
|
|
|
$
|
5,886
|
|
|
$
|
4,854
|
|
Cost of sales(1)
|
|
|
1,035
|
|
|
|
1,695
|
|
|
|
1,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
3,066
|
|
|
|
4,191
|
|
|
|
3,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development(1)
|
|
|
3,277
|
|
|
|
3,007
|
|
|
|
1,869
|
|
General and administrative(1)
|
|
|
4,598
|
|
|
|
4,960
|
|
|
|
2,938
|
|
Sales and marketing(1)
|
|
|
8,867
|
|
|
|
10,022
|
|
|
|
4,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
16,742
|
|
|
|
17,989
|
|
|
|
9,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(13,676
|
)
|
|
|
(13,798
|
)
|
|
|
(6,575
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
852
|
|
|
|
952
|
|
|
|
132
|
|
Interest expense
|
|
|
(689
|
)
|
|
|
(734
|
)
|
|
|
(25
|
)
|
Preferred stock warrant gain (loss)
|
|
|
|
|
|
|
500
|
|
|
|
(572
|
)
|
Other, net
|
|
|
|
|
|
|
50
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
163
|
|
|
|
768
|
|
|
|
(447
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(13,513
|
)
|
|
|
(13,030
|
)
|
|
|
(7,022
|
)
|
Deemed dividend from revision of preferred stock conversion
price (note 8)
|
|
|
|
|
|
|
(20,799
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(13,513
|
)
|
|
$
|
(33,829
|
)
|
|
$
|
(7,022
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share before deemed
dividend from revision of preferred stock conversion price
|
|
$
|
(0.84
|
)
|
|
$
|
(1.26
|
)
|
|
$
|
(5.77
|
)
|
Effect of deemed dividend from revision of preferred stock
conversion price
|
|
|
|
|
|
|
(2.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.84
|
)
|
|
$
|
(3.26
|
)
|
|
$
|
(5.77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average common shares outstanding
|
|
|
16,066,649
|
|
|
|
10,377,793
|
|
|
|
1,217,640
|
|
(1) Includes stock-based compensation of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
103
|
|
|
$
|
79
|
|
|
$
|
19
|
|
Research and development
|
|
|
206
|
|
|
|
148
|
|
|
|
15
|
|
General and administrative
|
|
|
1,363
|
|
|
|
1,415
|
|
|
|
463
|
|
Sales and marketing
|
|
|
282
|
|
|
|
211
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,954
|
|
|
$
|
1,853
|
|
|
$
|
559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
47
RESTORE
MEDICAL, INC.
(In thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Deferred
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Stock-Based
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Deficit
|
|
|
Equity (Deficit)
|
|
|
Balance, December 31, 2004
|
|
|
821,712
|
|
|
$
|
8
|
|
|
$
|
653
|
|
|
$
|
(166
|
)
|
|
$
|
(31,113
|
)
|
|
$
|
(30,618
|
)
|
Stock options exercised
|
|
|
33,964
|
|
|
|
1
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
Changes to deferred compensation
|
|
|
|
|
|
|
|
|
|
|
2,498
|
|
|
|
(1,939
|
)
|
|
|
|
|
|
|
559
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,022
|
)
|
|
|
(7,022
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
855,676
|
|
|
|
9
|
|
|
|
3,188
|
|
|
|
(2,105
|
)
|
|
|
(38,135
|
)
|
|
|
(37,043
|
)
|
Issuance of shares in initial public offering, net of offering
costs
|
|
|
4,000,000
|
|
|
|
40
|
|
|
|
27,641
|
|
|
|
|
|
|
|
|
|
|
|
27,681
|
|
Conversion of participating convertible preferred stock to
common stock
|
|
|
10,395,288
|
|
|
|
104
|
|
|
|
39,104
|
|
|
|
|
|
|
|
|
|
|
|
39,208
|
|
Conversion of preferred warrants to common stock warrants
|
|
|
|
|
|
|
|
|
|
|
648
|
|
|
|
|
|
|
|
|
|
|
|
648
|
|
Stock options exercised
|
|
|
231,607
|
|
|
|
2
|
|
|
|
249
|
|
|
|
|
|
|
|
|
|
|
|
251
|
|
Stock warrants exercised
|
|
|
51,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes to deferred compensation
|
|
|
|
|
|
|
|
|
|
|
(98
|
)
|
|
|
710
|
|
|
|
|
|
|
|
612
|
|
Stock-based compensation under 123(R)
|
|
|
|
|
|
|
|
|
|
|
1,241
|
|
|
|
|
|
|
|
|
|
|
|
1,241
|
|
Deemed dividend from revision of preferred stock conversion price
|
|
|
|
|
|
|
|
|
|
|
20,799
|
|
|
|
|
|
|
|
(20,799
|
)
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,030
|
)
|
|
|
(13,030
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
15,534,244
|
|
|
|
155
|
|
|
|
92,772
|
|
|
|
(1,395
|
)
|
|
|
(71,964
|
)
|
|
|
19,568
|
|
Stock options exercised
|
|
|
189,933
|
|
|
|
2
|
|
|
|
207
|
|
|
|
|
|
|
|
|
|
|
|
209
|
|
Stock warrants exercised
|
|
|
6,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes to deferred compensation
|
|
|
|
|
|
|
|
|
|
|
(188
|
)
|
|
|
705
|
|
|
|
|
|
|
|
517
|
|
Stock-based compensation under 123(R)
|
|
|
|
|
|
|
|
|
|
|
1,437
|
|
|
|
|
|
|
|
|
|
|
|
1,437
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,513
|
)
|
|
|
(13,513
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
15,731,094
|
|
|
$
|
157
|
|
|
$
|
94,228
|
|
|
$
|
(690
|
)
|
|
$
|
(85,477
|
)
|
|
$
|
8,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
48
RESTORE
MEDICAL, INC.
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(13,513
|
)
|
|
$
|
(13,030
|
)
|
|
$
|
(7,022
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
232
|
|
|
|
193
|
|
|
|
169
|
|
Stock-based compensation
|
|
|
1,954
|
|
|
|
1,853
|
|
|
|
559
|
|
Preferred stock warrant (gain) loss
|
|
|
|
|
|
|
(500
|
)
|
|
|
572
|
|
Bad debt expense
|
|
|
92
|
|
|
|
97
|
|
|
|
62
|
|
Non-cash interest expense
|
|
|
160
|
|
|
|
141
|
|
|
|
22
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
|
566
|
|
|
|
(119
|
)
|
|
|
(1,028
|
)
|
Related-party receivables
|
|
|
17
|
|
|
|
(5
|
)
|
|
|
46
|
|
Inventories
|
|
|
(187
|
)
|
|
|
146
|
|
|
|
(328
|
)
|
Prepaid expenses
|
|
|
96
|
|
|
|
(121
|
)
|
|
|
(20
|
)
|
Other current assets
|
|
|
(3
|
)
|
|
|
44
|
|
|
|
(50
|
)
|
Accounts payable
|
|
|
(395
|
)
|
|
|
557
|
|
|
|
5
|
|
Accrued expenses
|
|
|
(595
|
)
|
|
|
294
|
|
|
|
175
|
|
Accrued payroll and related expenses
|
|
|
97
|
|
|
|
(154
|
)
|
|
|
276
|
|
Other long-term liabilities
|
|
|
2
|
|
|
|
7
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(11,477
|
)
|
|
|
(10,597
|
)
|
|
|
(6,555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities of short-term investments
|
|
|
36,037
|
|
|
|
36,979
|
|
|
|
13,212
|
|
Purchase of short-term investments
|
|
|
(29,859
|
)
|
|
|
(49,194
|
)
|
|
|
(7,286
|
)
|
Purchases of machinery and equipment
|
|
|
(92
|
)
|
|
|
(190
|
)
|
|
|
(208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
6,086
|
|
|
|
(12,405
|
)
|
|
|
5,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
|
|
|
|
4,000
|
|
|
|
2,000
|
|
Increase in deferred offering costs
|
|
|
|
|
|
|
|
|
|
|
(61
|
)
|
Repayments on long-term debt
|
|
|
(2,202
|
)
|
|
|
(997
|
)
|
|
|
|
|
Capital lease payments
|
|
|
(29
|
)
|
|
|
(14
|
)
|
|
|
(1
|
)
|
Proceeds from stock options exercised
|
|
|
209
|
|
|
|
251
|
|
|
|
38
|
|
Net proceeds from initial public offering
|
|
|
|
|
|
|
27,681
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(2,022
|
)
|
|
|
30,982
|
|
|
|
1,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(7,413
|
)
|
|
|
7,980
|
|
|
|
1,139
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
11,377
|
|
|
|
3,397
|
|
|
|
2,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
3,964
|
|
|
$
|
11,377
|
|
|
$
|
3,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
529
|
|
|
$
|
593
|
|
|
$
|
4
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of preferred stock warrants issued with long-term debt
|
|
$
|
|
|
|
$
|
273
|
|
|
$
|
169
|
|
Capital lease financing
|
|
|
88
|
|
|
|
116
|
|
|
|
25
|
|
Deemed dividend on revision of preferred stock conversion price
|
|
|
|
|
|
|
20,799
|
|
|
|
|
|
Conversion of Series A through C-1 preferred stock to
common stock
|
|
|
|
|
|
|
39,208
|
|
|
|
|
|
Conversion of preferred stock warrants to common stock warrants
|
|
|
|
|
|
|
648
|
|
|
|
|
|
See accompanying notes to financial statements.
49
RESTORE
MEDICAL, INC.
(In
thousands, except share and per share amounts)
|
|
(1)
|
Organization
and Summary of Significant Accounting Policies
|
Nature of Business
Restore Medical, Inc.
(hereinafter we, us or the
Company) develops and markets medical devices
designed to treat sleep disordered breathing. In December 2002,
we received Food and Drug Administration (FDA) 510(k) clearance
to market and sell the
Pillar
®
palatal implant system (Pillar System) in the United States for
the treatment of snoring. We received 510(k) clearance from the
FDA in July 2004 to market and sell our Pillar System in the
United States for mild to moderate obstructive sleep apnea
(OSA). We received CE Mark certification to market and sell our
Pillar System in Europe for snoring in May 2003 and for mild to
moderate OSA in December 2004. We market and sell our products
domestically through a direct sales force and internationally
through independent distributors.
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
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of expenses during the reporting period.
Ultimate results could differ from those estimates.
Cash and Cash Equivalents
The Company
considers highly liquid investments with original maturities of
90 days or less to be cash equivalents. Cash equivalents
are stated at cost, which approximates market value. The
Companys cash equivalents are primarily invested in
commercial paper, money market funds and
U.S. government-backed securities. The Company performs
periodic evaluations of the relative credit standing of the
financial institutions and issuers of its cash equivalents and
limits the amount of credit exposure with any one issuer.
Short-term investments
Investments with
original maturities in excess of three months are classified as
short-term investments. Marketable securities consist of
high-grade commercial paper and corporate bonds. Marketable
securities that are classified as held-to-maturity are due to
the Companys intent and ability to hold such securities to
maturity. The carrying amount of these instruments approximates
fair market value. Declines in value of marketable securities
classified as held-to-maturity are considered to be temporary.
Unrealized losses are charged against net earnings when a
decline in fair value is determined to be other-than-temporary.
In accordance with
EITF 03-1
and FSP
FAS 115-1
and
124-1,
The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments,
several factors
are reviewed to determine whether a loss is
other-than-temporary. These factors include but are not limited
to: (i) the length of time a security is in an unrealized
loss position, (ii) the extent to which fair value is less
than cost, (iii) the financial condition and near term
prospects of the issuer, and (iv) our ability to hold the
security for a period of time sufficient to allow for any
anticipated recovery in fair value. Realized gains and losses
are accounted for on the specific identification method.
Marketable securities that are classified as available-for-sale
are due to certain provisions within the marketable security and
the Companys intention not to hold such securities to
maturity. Unrealized gains and losses in marketable securities
classified as available-for-sale are a component of other
comprehensive income until realized and are nominal as of
December 31, 2007 and 2006. Short-term investments were as
follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Held-to-maturity: Corporate debt securities
|
|
$
|
2,085
|
|
|
$
|
12,463
|
|
Available-for-sale: Auction rate securities
|
|
|
4,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,285
|
|
|
$
|
12,463
|
|
|
|
|
|
|
|
|
|
|
50
RESTORE
MEDICAL, INC.
Notes to
Financial Statements (Continued)
(In
thousands, except share and per share amounts)
Fair Value of Financial Instruments
The
following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Short-term investments
The carrying amount
approximates fair value due to the short maturity of the
instruments.
Long-Term Debt
Due to the recent nature of
the debt agreement, the borrowing rates, loan terms and maturity
date reflect the current market value of debt issued to the
Company. Accordingly, the carrying amount approximates fair
value of this instrument as of December 31, 2007 and 2006.
Warrants Subject to Redemption
As further
described in Note 10, the Company adjusted the carrying
amount of warrants subject to redemption to fair value until
their conversion to common stock warrants in 2006 upon the
completion of the Companys initial public offering (IPO).
Inventories
The Company states its
inventories at the lower of cost or market, using the
first-in,
first-out method. Market is determined as the lower of
replacement cost or net realizable value. Inventory write-downs
are established when conditions indicate that the selling price
could be less than cost due to physical deterioration, usage,
obsolescence, reductions in estimated future demand and
reductions in selling prices. Costs associated with excess
capacity are charged to cost of sales as incurred. Inventory
write-downs are measured as the difference between the cost of
inventory and estimated realizable value. Inventories were as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Raw materials
|
|
$
|
39
|
|
|
$
|
57
|
|
Work in process
|
|
|
437
|
|
|
|
320
|
|
Finished goods
|
|
|
309
|
|
|
|
221
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
785
|
|
|
$
|
598
|
|
|
|
|
|
|
|
|
|
|
Machinery and Equipment
Machinery and
equipment is recorded at cost and depreciated utilizing the
straight-line method over the estimated useful lives of the
respective assets. Leasehold improvements are amortized over the
shorter of the useful life of the assets or term of the lease.
Repairs and maintenance are expensed as incurred.
Impairment of Long-Lived Assets
Long-lived
assets, such as machinery and equipment, are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated
undiscounted future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the
asset exceeds the fair value of the asset. We conducted a review
of our long-lived assets and determined that there was no
material impairment as of December 31, 2007.
Deferred Debt Issuance Costs
The Company
issued preferred stock warrants in relation to the issuance of
the long-term debt with Lighthouse Capital Partners. Debt
issuance costs are recognized as interest expense using the
effective-interest method over the period from issuance until
the debt is extinguished in December 2008. All warrants for
preferred stock were converted into warrants for common stock
upon the completion of our IPO.
Revenue Recognition
Revenue is recognized
when evidence of an arrangement exists, delivery to the customer
has occurred, the selling price is fixed or determinable and
collectability is reasonably assured. For physician customers in
the U.S., the evidence of an arrangement generally consists of a
signed order
51
RESTORE
MEDICAL, INC.
Notes to
Financial Statements (Continued)
(In
thousands, except share and per share amounts)
confirmation, email order or verbal phone order as their normal
business practices do not require a purchase order. The
Companys international distributors place orders pursuant
to a distribution agreement. The price for each sale is fixed
and agreed with the customer prior to shipment and is based on
established list prices. Sales to the Companys
international distributors are made according to the contractual
terms of each individual distribution agreement. Revenue for all
domestic and international sales is recognized upon shipment of
product from our facility when title and risk of loss passes to
the customer.
A provision for estimated sales returns on domestic product
sales is recorded in the same period as the related revenue is
recorded. The provision for estimated sales returns, if any, is
based on an analysis of historical sales returns, as adjusted
for specifically identified estimated changes in historical
return activity. Sales terms to the Companys international
distributors do not contain a right to return product purchased
from us.
The following table summarizes the number of customers who
individually comprise greater than 10% of total net sales and
their aggregate percentage of the Companys total net sales:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Percent of Total
|
|
|
|
Customers
|
|
|
Net Sales
|
|
|
December 31, 2007
|
|
|
1
|
|
|
|
21
|
%
|
December 31, 2006
|
|
|
|
|
|
|
0
|
%
|
December 31, 2005
|
|
|
1
|
|
|
|
11
|
%
|
The Company has negotiated a monthly payment plan for $198 of
past due accounts receivable with its largest domestic customer
and requires payment be mailed to the Company at the time of
shipment for all future shipments until the past due balance is
paid. The Company has not established a specific reserve for any
estimated losses related to this customer.
The following table summarizes the number of customers who
individually comprise greater than 10% of total net accounts
receivables and their aggregate percentage of the Companys
total net accounts receivables:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Percent of Total
|
|
|
|
Customers
|
|
|
Net Receivables
|
|
|
December 31, 2007
|
|
|
1
|
|
|
|
33
|
%
|
December 31, 2006
|
|
|
2
|
|
|
|
26
|
%
|
The following table summarizes the geographic dispersion of the
Companys net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
United States
|
|
$
|
3,682
|
|
|
$
|
4,580
|
|
|
$
|
3,416
|
|
Asia Pacific
|
|
|
70
|
|
|
|
570
|
|
|
|
1,111
|
|
Europe
|
|
|
236
|
|
|
|
487
|
|
|
|
153
|
|
All other markets
|
|
|
113
|
|
|
|
249
|
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,101
|
|
|
$
|
5,886
|
|
|
$
|
4,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 an estimate and 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 customers ability to pay.
Provisions for the allowance for doubtful accounts are recorded
in general and administrative expenses. If the financial
condition of the Companys customers were to deteriorate,
resulting in an impairment of their ability to make payments,
52
RESTORE
MEDICAL, INC.
Notes to
Financial Statements (Continued)
(In
thousands, except share and per share amounts)
additional allowances may be required. A roll-forward of the
allowance for doubtful accounts for the years ending December 31
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Beginning balance
|
|
$
|
86
|
|
|
$
|
60
|
|
|
$
|
12
|
|
Provision
|
|
|
92
|
|
|
|
97
|
|
|
|
62
|
|
Write-offs
|
|
|
(157
|
)
|
|
|
(71
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
21
|
|
|
$
|
86
|
|
|
$
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty Costs
The Company provides its
customers with the right to receive a replacement Pillar System
in the event a device malfunctions or the physician needs to
remove and replace a Pillar implant in a patient for any reason.
The Company has based its warranty provision on an analysis of
historical warranty claims. Actual results could differ from
those estimates. Warranty reserve provisions and claims for the
years ending December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Beginning balance
|
|
$
|
3
|
|
|
$
|
5
|
|
|
$
|
|
|
Warranty provision
|
|
|
35
|
|
|
|
15
|
|
|
|
17
|
|
Warranty claims
|
|
|
(26
|
)
|
|
|
(17
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
12
|
|
|
$
|
3
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company is exposed to potential product liability claims
that are inherent in the testing, production, marketing and sale
of medical devices. Management believes any losses that may
occur from these matters are adequately covered by insurance.
Stock-Based Compensation
On January 1,
2006, the Company adopted the provisions of Financial Accounting
Standards Board Statement No. 123R,
Share-Based Payment
(SFAS 123(R)). SFAS 123(R) requires companies to
measure and recognize compensation expense for all employee
stock-based payments at fair value over the service period
underlying the arrangement. As a result, the Company records the
grant-date fair value of its employee stock-based payments
(i.e., stock options and other equity-based compensation) in the
statement of operations. The Company adopted SFAS 123R
prospectively to new awards and to awards modified, repurchased
or cancelled after December 31, 2005.
Prior to the adoption of SFAS No. 123(R) on
January 1, 2006, the Company measured compensation costs
for options issued or modified under its stock-based
compensation plans using the intrinsic-value method of
accounting. Under the intrinsic-value method, the Company
recorded deferred compensation expense within stockholders
equity for stock options awarded to employees and directors to
the extent that the option exercise price was less than the fair
market value of common stock on the date of grant. Recorded
deferred compensation is amortized to compensation expense on a
straight-line basis over the vesting period of the underlying
stock option grants. The Company will continue to apply the
intrinsic-value method to determine compensation expense for
stock options granted prior to the adoption of SFAS 123(R).
Net amortization of deferred stock-based compensation for awards
granted prior to January 1, 2006 totaled $517, $612 and
$559 for the years ended December 31, 2007, 2006 and 2005,
respectively.
53
RESTORE
MEDICAL, INC.
Notes to
Financial Statements (Continued)
(In
thousands, except share and per share amounts)
Severance
The Company does not have an
established severance payment policy for terminated employees.
The Company recognizes severance costs when costs are probable
and estimable. The severance accrual at December 31, 2007
is expected to be paid during 2008. Severance activity is
illustrated in the following table for the years ending December
31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Beginning balance
|
|
$
|
168
|
|
|
$
|
173
|
|
|
$
|
191
|
|
Expense
|
|
|
365
|
|
|
|
481
|
|
|
|
192
|
|
Payments
|
|
|
(531
|
)
|
|
|
(486
|
)
|
|
|
(210
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
2
|
|
|
$
|
168
|
|
|
$
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development Costs
Research and
development costs are charged to expense as incurred.
Advertising Expense
Advertising costs are
expensed as incurred and totaled $1,141, $1,984 and $100 for the
years ended December 31, 2007, 2006 and 2005, respectively.
Foreign Currency Transactions
The Company
incurs some of its clinical study expenditures in foreign
currencies. Foreign currency transaction gains and losses, which
are not significant, are included in other, net in the
accompanying statements of operations.
Income Taxes
Income taxes are accounted for
under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carry
forwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. A valuation
allowance for deferred income tax assets is recorded when it is
more likely than not that some portion or all of the deferred
income tax assets will not be realized.
Net Loss per Share
Basic net loss per common
share (Basic EPS) is computed by dividing net loss by the
weighted average number of common shares outstanding. Diluted
net loss per common share (Diluted EPS) is computed by dividing
net loss by the weighted average number of common shares and
dilutive potential common shares outstanding. Potential common
shares consist of shares issuable upon the exercise of stock
options and warrants. Diluted EPS is identical to Basic EPS
since potential common shares are excluded from the calculation,
as their effect is anti-dilutive. The weighted average shares
outstanding for basic and diluted loss per share includes
378,122 shares of common stock underlying warrants to
purchase common stock as such warrants are immediately
exercisable and have an exercise price of $0.02 per share. The
common stock underlying the warrants is considered outstanding
in substance for EPS purposes. Historical outstanding potential
common shares not included in diluted net loss per share at year
end attributable to common stockholders calculations were
2,868,363, 2,762,799 and 9,487,031 for the years ended
December 31, 2007, 2006 and 2005, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(13,513
|
)
|
|
$
|
(33,829
|
)
|
|
$
|
(7,022
|
)
|
Weighted average common shares and equivalents outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding
|
|
|
15,688,527
|
|
|
|
9,999,671
|
|
|
|
839,518
|
|
Warrants issued at a nominal exercise price
|
|
|
378,122
|
|
|
|
378,122
|
|
|
|
378,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic and diluted
|
|
|
16,066,649
|
|
|
|
10,377,793
|
|
|
|
1,217,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted
|
|
$
|
(0.84
|
)
|
|
$
|
(3.26
|
)
|
|
$
|
(5.77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
RESTORE
MEDICAL, INC.
Notes to
Financial Statements (Continued)
(In
thousands, except share and per share amounts)
Recently Issued Accounting Statements
In June
2006, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 48,
Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement
No. 109
(FIN 48). FIN 48 clarifies the
accounting for uncertainties in income taxes recognized in a
companys financial statements in accordance with Statement
109 and prescribes a recognition threshold and measurement
attributable for financial disclosure of tax positions taken or
expected to be taken on a tax return. Additionally, FIN 48
provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. We adopted the provisions of FIN 48 as of
January 1, 2007. The adoption of FIN 48 did not impact
our financial position, results of operations or cash flows for
the year ended December 31, 2007.
In September 2006, the FASB issued SFAS 157,
Fair
Value Measurements
(SFAS 157), which provides
enhanced guidance for using fair value to measure assets and
liabilities. The standard applies whenever other standards
require (or permit) assets or liabilities to be measured at fair
value. The standard does not expand the use of fair value in any
new circumstances. SFAS 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. We are required to adopt the provisions of SFAS 157
in our fiscal year beginning January 1, 2009. We currently
are evaluating the effects, if any, that this pronouncement may
have on our consolidated financial statements.
The accompanying financial statements have been prepared on a
going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities and commitments in
the normal course of business. The Company has incurred net
losses of $13.5 million and $13.0 million, and
negative cash flows from operating activities of
$11.5 million and $10.6 million in 2007, and 2006,
respectively. The Company has $2.8 million of long-term
debt that is due in 2008. At December 31, 2007 the Company
has $4.0 million of cash and cash equivalents and
$6.3 million of short-term investments. The Company
believes that current cash, cash equivalents, short-term
investments and cash generated from operations will be
sufficient to fund its working capital and capital resource
needs into mid 2008. As noted in the following paragraphs, the
Company will require additional capital to continue funding its
operations in 2008. The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
Short-term investments include $4.2 million of investments
in auction rate securities. Auction rate securities are
variable-rate debt securities and have a long-term maturity with
the interest rate reset through Dutch auctions that are
typically held every 7, 28 or 35 days. The securities trade
at par and are callable at par on any interest payment date at
the option of the issuer. Interest is paid at the end of each
auction period. The Companys auction rate securities are
all AAA/Aaa rated and collateralized by student loans guaranteed
by the U.S. government under the Federal Family Education
Loan Program. Until February 2008, the auction rate securities
market was highly liquid. Starting the week of February 11,
2008, a substantial number of auctions failed as a
result of negative overall capital market conditions, meaning
that there was not enough demand to sell the securities at
auction. The result of a failed auction, which does not signify
a default by the issuer, is that these securities continue to
pay interest in accordance with their terms until there is a
successful auction or until such time as other markets for these
investments develop. The Company will not be able to liquidate
any of these auction rate securities until a future auction is
successful, or until the Company decides to sell the securities
in a secondary market. A secondary market sale of any of these
securities could take a significant amount of time to complete
and would potentially result in a significant loss.
It is possible that the potential lack of liquidity in the
Companys auction rate security investments could adversely
affect the Companys ability to fund operations beginning
in May of 2008. The Company cannot predict whether future
auctions related to its auction rate securities will be
successful and is currently seeking
55
RESTORE
MEDICAL, INC.
Notes to
Financial Statements (Continued)
(In
thousands, except share and per share amounts)
alternatives for reducing its exposure to the auction rate
market, but may not be able to identify any such alternative. If
the Company is not able to monetize some or all of its auction
rate securities during the second quarter of 2008, it will have
a material adverse effect on its ability to finance ongoing
operations.
Even with the successful sale of its auction rate securities,
the funding of the Companys operations beyond mid 2008
will require additional investments in the Company in the form
of equity or debt financing or through licensing its
intellectual property to generate capital. The Company has been
exploring various equity and debt financing alternatives as well
as other various strategic alternatives. Any sale of additional
equity or issuance of debt will result in dilution to the
Companys stockholders, and the Company cannot be certain
that additional public or private financing will be available in
amounts or on terms acceptable to the Company, or at all. If the
Company is unable to obtain additional financing, the Company
will need to significantly reduce the scope of its operations
including a reduction in the size of its sales and marketing,
research and development, administrative and manufacturing staff
combined with the elimination of the significant programs and
initiatives planned by each of those functional groups. These
changes would have a material adverse effect on the
Companys business. Any inability to satisfy the
Companys liabilities as they come due could result in the
need to file for bankruptcy.
|
|
(3)
|
Machinery
and Equipment, net
|
Machinery and equipment consists of the following as of December
31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
2007
|
|
|
2006
|
|
|
Useful Lives
|
|
|
Furniture and office equipment
|
|
$
|
159
|
|
|
$
|
95
|
|
|
|
5 years
|
|
Computer hardware and software
|
|
|
409
|
|
|
|
390
|
|
|
|
3 years
|
|
Production and production support equipment
|
|
|
608
|
|
|
|
534
|
|
|
|
5 years
|
|
Leasehold improvements
|
|
|
95
|
|
|
|
88
|
|
|
|
4 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,271
|
|
|
|
1,107
|
|
|
|
|
|
Less accumulated depreciation and amortization
|
|
|
(784
|
)
|
|
|
(568
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
487
|
|
|
$
|
539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense was $232, $193 and $169
for the years ended December 31, 2007, 2006 and 2005,
respectively. At December 31, 2007, the cost and
accumulated amortization of assets under capital leases was $217
and $45, respectively, and was $140 and $16, respectively, at
December 31, 2006.
Accrued expenses consist of the following as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Clinical trials
|
|
$
|
50
|
|
|
$
|
168
|
|
Legal and accounting
|
|
|
12
|
|
|
|
188
|
|
Other
|
|
|
282
|
|
|
|
583
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
344
|
|
|
$
|
939
|
|
|
|
|
|
|
|
|
|
|
56
RESTORE
MEDICAL, INC.
Notes to
Financial Statements (Continued)
(In
thousands, except share and per share amounts)
Long-term debt consists of the following as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Term loan (interest at prime plus 3% maturing December 2008),
net of $37 debt discount at December 31, 2007 and $74 debt
discount at December 31, 2006
|
|
$
|
2,765
|
|
|
$
|
4,930
|
|
Capital lease for equipment (interest at 9.14%, paid balance off
in September 2007)
|
|
|
|
|
|
|
18
|
|
Capital lease for leasehold improvements (interest at 14.33%,
monthly payments maturing March 2010)
|
|
|
20
|
|
|
|
27
|
|
Capital lease for equipment (interest at 12.14%, monthly
payments maturing July 2011)
|
|
|
66
|
|
|
|
80
|
|
Capital lease for equipment (interest at 8.77%, monthly payments
maturing August 2012)
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,949
|
|
|
|
5,055
|
|
Less current portion, net of debt discount of $37 at
December 31, 2007 and $37 at December 31, 2006
|
|
|
(2,806
|
)
|
|
|
(2,192
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
143
|
|
|
$
|
2,863
|
|
|
|
|
|
|
|
|
|
|
Future long-term debt payments as of December 31, 2007 are:
|
|
|
|
|
2008
|
|
$
|
2,843
|
|
2009
|
|
|
46
|
|
2010
|
|
|
43
|
|
2011
|
|
|
38
|
|
2012 and after
|
|
|
16
|
|
|
|
|
|
|
|
|
$
|
2,986
|
|
|
|
|
|
|
In March 2005, the Company entered into a term debt facility
with Lighthouse Capital Partners (Lighthouse) with maximum
principal drawdown of $5,000. The Company drew down $2,000 and
$1,000 on December 30, 2005 and February 28, 2006,
respectively. On March 3, 2006, the agreement was amended
to increase the term debt facility from $5,000 to $8,000. The
Company drew $3,000 against the amended Lighthouse loan facility
on March 30, 2006. The Company elected not to draw the
additional $2,000 on the loan facility and the ability to make
additional draws expired on June 30, 2006.
Borrowings under the agreement bear interest at the
lenders prime rate plus 3.0%, with monthly interest-only
payments from the time of funding until June 30, 2006.
Beginning on July 1, 2006, each draw began to be amortized
over 30 consecutive monthly payments of principal and interest,
with an additional final payment in an amount equal to 5% of the
original loan principal due by December 31, 2008. The 5%
final payment is recognized ratably as interest expense from the
date of the draw down over the remaining term of the loan.
Lighthouse has a perfected first position lien on all of the
Companys assets with the exception of intellectual
property. As of December 31, 2007, the Company was in
compliance with all of the covenants in the credit agreement,
which include maintaining all collateral in good condition,
filing quarterly and annual financial information with the
Securities and Exchange Commission.
An initial warrant to purchase 95,420 shares of
Series C-1
preferred stock was issued on March 23, 2005, which
represented 5.0% of the $5,000 facility divided by the exercise
price of $2.62 per share. As additional
57
RESTORE
MEDICAL, INC.
Notes to
Financial Statements (Continued)
(In
thousands, except share and per share amounts)
consideration for the expanded loan commitment in March 2006,
Lighthouse received 103,053
Series C-1
preferred stock warrants. These warrants were physically
delivered on June 30, 2006.
As further discussed in Note 10, the
Series C-1
preferred stock warrants were classified as liabilities under
preferred stock warrants subject to redemption prior to our IPO.
The
Series C-1
warrants issued in March 2005 upon entering into the term debt
facility and in March 2006 when the facility agreement was
amended resulted in non-cash debt issuance costs of $102 and
$273, respectively, which are being amortized over the term of
the debt on a straight-line basis. As a result of the $2,000
funding on December 30, 2005 and $1,000 funding on
February 28, 2006, we issued 30,534 and 15,267
Series C-1
preferred stock warrants, respectively, which resulted in a debt
discount of $67 and $40, respectively, which is recognized using
the effective-interest method.
As further described in Note 8, the
Series C-1
preferred stock warrants were converted to common stock warrants
upon completion of the Companys IPO in 2006.
The Company has incurred net operating losses since inception.
The Company has not reflected any benefit of such net operating
loss carry forwards in the accompanying financial statements.
The income tax expense (benefit) differed from the amount
computed by applying the U.S. federal income tax rate of
34% to income before income taxes as a result of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Computed expected tax benefit
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
State income taxes
|
|
|
(3.2
|
)
|
|
|
(3.1
|
)
|
|
|
(1.7
|
)
|
Change in state tax rate
|
|
|
(0.4
|
)
|
|
|
(2.0
|
)
|
|
|
|
|
Permanent differences
|
|
|
2.5
|
|
|
|
|
|
|
|
3.1
|
|
Research and development tax credit
|
|
|
(1.0
|
)
|
|
|
(0.9
|
)
|
|
|
(0.8
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
Change in valuation allowance
|
|
|
36.1
|
|
|
|
40.0
|
|
|
|
33.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
RESTORE
MEDICAL, INC.
Notes to
Financial Statements (Continued)
(In
thousands, except share and per share amounts)
The tax effect of temporary differences that give rise to
significant portions of the deferred tax assets is presented
below:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Reserves and accruals
|
|
$
|
98
|
|
|
$
|
188
|
|
Start-up
costs
|
|
|
|
|
|
|
384
|
|
|
|
|
|
|
|
|
|
|
Total Current
|
|
|
98
|
|
|
|
572
|
|
Non-current:
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
|
(1
|
)
|
|
|
(12
|
)
|
Stock-based compensation
|
|
|
698
|
|
|
|
326
|
|
Net operating loss carryforwards
|
|
|
22,327
|
|
|
|
17,479
|
|
Research tax credit carryforwards
|
|
|
619
|
|
|
|
488
|
|
|
|
|
|
|
|
|
|
|
Total Non-current
|
|
|
23,643
|
|
|
|
18,281
|
|
|
|
|
|
|
|
|
|
|
Net gross deferred tax assets
|
|
|
23,741
|
|
|
|
18,853
|
|
Valuation allowance
|
|
|
(23,741
|
)
|
|
|
(18,853
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The valuation allowance for deferred tax assets as of
December 31, 2007, 2006, and 2005 was $23,741, $18,853 and
$13,554, respectively. The net change in the total valuation
allowance for the years ended December 31, 2007 and 2006
was an increase of $4,888 and $5,299, respectively.
In assessing the realization of deferred tax assets, management
considers whether it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during periods in which
those temporary differences become deductible.
Based on the level of historical taxable income and projections
of future taxable income over the periods in which the deferred
tax assets are deductible, management believes that it is more
likely than not that the Company will not realize the benefits
of these deductible differences. Accordingly, the Company has
provided a valuation allowance against the gross deferred tax
assets as of December 31, 2007 and 2006.
As of December 31, 2007, the Company has federal and state
net operating loss and tax credit carry forwards of
approximately $58,500 and $619, respectively. The net operating
loss and tax credit carry forwards if unutilized, will expire in
the years 2019 through 2027. The Company has net operating loss
carry forwards of $1,186, which when utilized, the benefit of
$444 will be recorded to additional paid-in capital instead of
the income statement.
The Company adopted the provisions of FASB Interpretation
No. 48 (FIN 48),
Accounting for Uncertainty in
Income Taxes
, on January 1, 2007. Implementation of
FIN 48 resulted in no adjustment to the Companys
liability for unrecognized tax benefits. As of both the date of
adoption, and as of December 31, 2007, the total amount of
unrecognized tax benefits was zero. Accordingly, a tabular
reconciliation from beginning to ending periods is not provided.
The Company will classify any future income tax related interest
and penalties as a component of income tax expense. To date,
there have been no interest or penalties charged or accrued in
relation to unrecognized tax benefits.
59
RESTORE
MEDICAL, INC.
Notes to
Financial Statements (Continued)
(In
thousands, except share and per share amounts)
Utilization of net operating loss and tax credit carry forwards
may be subject to a substantial annual limitation due to
ownership change limitations that have occurred previously or
that could occur in the future as provided by Section 382
of the Internal Revenue Code of 1986, as well as similar state
provisions. These ownership changes may limit the amount of net
operating loss and tax credit carry forwards that can be
utilized annually to offset future taxable income and tax,
respectively. In general, an ownership change, as defined by
Section 382, results from transactions increasing the
ownership of certain shareholders or public groups in the stock
of a corporation by more than 50 percentage points over a
three year period. Since the Companys formation, the
Company has raised capital through the issuance of capital stock
which, combined with the purchasing shareholders
subsequent disposition of those shares, may have resulted in a
change of control, as defined by Section 382, or could
result in a change of control in the future upon subsequent
disposition. The Company has not currently completed a study to
assess whether there have been multiple changes of control since
the Companys formation due to the significant complexity
and cost associated with such study. If the Company has
experienced a change in control at any time since the
Companys formation, utilization of the Companys net
operating loss and tax credit carry forwards would be subject to
an annual limitation under Section 382. Any limitation may
result in expiration of a portion of the net operating loss and
tax credit carry forwards before utilization. Until a study is
completed and any limitation known, no amounts are being
presented as uncertain tax positions under FIN 48.
|
|
(7)
|
Stockholders
Equity (Deficit)
|
On May 12, 2006, the Companys Board of Directors and
stockholders approved a
1-for-2
reverse stock split of its preferred and common shares. This
reverse stock split was effective on May 17, 2006. All
preferred and common stock data presented herein have been
restated to retroactively reflect the stock split.
On May 22, 2006, we sold 4,000,000 shares of common
stock in an IPO for aggregate gross proceeds of $32,000. After
deducting the underwriters commissions and discounts and
offering costs, we received net proceeds of $27,681.
|
|
(8)
|
Participating
Convertible Preferred Stock
|
Prior to the completion of the IPO, we amended our Certificate
of Incorporation to change the conversion price to common stock
of the Series C and
Series C-1
preferred stock from $5.24 per share to $3.48 per share. This
change in conversion price to common stock was effective
immediately prior to the conversion of all outstanding shares of
our preferred stock upon the completion of our IPO, and was in
consideration for a modification of the definition of a
qualified offering such that our IPO trigged the
mandatory conversion of our preferred stock into common stock.
As a result of this change in the conversion price of
Series C and
Series C-1
preferred stock, the common stock outstanding upon completion of
our IPO increased by 2,679,783 shares, including 122,091
common shares issuable pursuant to the
Series C-1
preferred stock warrants. For purposes of calculating net loss
per share in the period in which the IPO was completed, net loss
attributable to common stockholders has been increased by
$20,799 for the fair value of the additional common shares
issued upon conversion as a result of the change in the
Series C and
Series C-1
preferred stock conversion price. Upon completion of the IPO,
all outstanding Series A, B, C and C-1 preferred stock
automatically converted into 10,395,288 shares of common
stock at the then current conversion prices.
60
RESTORE
MEDICAL, INC.
Notes to
Financial Statements (Continued)
(In
thousands, except share and per share amounts)
Preferred stock consisted of the following prior to the
conversion of preferred stock to common stock:
|
|
|
|
|
|
|
Amount
|
|
|
Series A, $0.01 par value: 775,000 shares
authorized and 750,000 shares issued and outstanding
|
|
$
|
747
|
|
Series B, $0.01 par value: 4,500,000 shares
authorized and 4,185,411 shares issued and outstanding
|
|
|
13,507
|
|
Series C, $0.01 par value: 9,500,000 shares
authorized and 7,615,675 shares issued and outstanding
|
|
|
18,723
|
|
Series C-1,
$0.01 par value: 2,940,000 shares authorized and
2,498,833 shares issued and outstanding
|
|
|
6,231
|
|
|
|
|
|
|
Total convertible participating preferred stock
|
|
$
|
39,208
|
|
|
|
|
|
|
Preferred stock activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
Series B
|
|
|
Series C
|
|
|
Series C-1
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Balance, December 31, 2004
|
|
|
750,000
|
|
|
$
|
747
|
|
|
|
4,185,411
|
|
|
$
|
13,507
|
|
|
|
7,615,675
|
|
|
$
|
18,723
|
|
|
|
2,498,833
|
|
|
$
|
6,231
|
|
|
|
15,049,919
|
|
|
$
|
39,208
|
|
Balance, December 31, 2005
|
|
|
750,000
|
|
|
|
747
|
|
|
|
4,185,411
|
|
|
|
13,507
|
|
|
|
7,615,675
|
|
|
|
18,723
|
|
|
|
2,498,833
|
|
|
|
6,231
|
|
|
|
15,049,919
|
|
|
|
39,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion to common stock upon initial public offering
|
|
|
(750,000
|
)
|
|
|
(747
|
)
|
|
|
(4,185,411
|
)
|
|
|
(13,507
|
)
|
|
|
(7,615,675
|
)
|
|
|
(18,723
|
)
|
|
|
(2,498,833
|
)
|
|
|
(6,231
|
)
|
|
|
(15,049,919
|
)
|
|
|
(39,208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006 and 2007
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9)
|
Debt
Financing Arrangement and Warrant Issuances
|
The Company issued common and preferred stock warrants in
connection with various debt financings prior to our IPO in May
2006. In connection with the 2006 and 2005 Lighthouse debt
financings, as amended on March 3, 2006, the Company issued
warrants to acquire a total of 244,274 shares of
Series C-1
preferred stock. See Note 5 for further details.
Stock warrant activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Preferred
|
|
|
Weighted
|
|
|
Preferred
|
|
|
Weighted
|
|
|
Preferred
|
|
|
Weighted
|
|
|
|
Common
|
|
|
Average
|
|
|
Series A
|
|
|
Average
|
|
|
Series B
|
|
|
Average
|
|
|
Series C-1
|
|
|
Average
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Warrants
|
|
|
Price
|
|
|
Warrants
|
|
|
Price
|
|
|
Warrants
|
|
|
Price
|
|
|
Balance as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
433,522
|
|
|
$
|
0.16
|
|
|
|
9,191
|
|
|
$
|
1.00
|
|
|
|
1,827
|
|
|
$
|
3.00
|
|
|
|
238,545
|
|
|
$
|
2.62
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,420
|
|
|
|
2.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
433,522
|
|
|
|
0.16
|
|
|
|
9,191
|
|
|
|
1.00
|
|
|
|
1,827
|
|
|
|
3.00
|
|
|
|
333,965
|
|
|
|
2.62
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148,854
|
|
|
|
2.62
|
|
Converted to common
|
|
|
369,640
|
|
|
|
3.44
|
|
|
|
(9,191
|
)
|
|
|
1.00
|
|
|
|
(1,827
|
)
|
|
|
3.00
|
|
|
|
(482,819
|
)
|
|
|
2.62
|
|
Exercised
|
|
|
(61,547
|
)
|
|
|
0.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
741,615
|
|
|
|
1.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(35,919
|
)
|
|
|
0.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
705,696
|
|
|
$
|
1.77
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
RESTORE
MEDICAL, INC.
Notes to
Financial Statements (Continued)
(In
thousands, except share and per share amounts)
All warrants issued by the Company are fully vested. Pursuant to
the original terms, all classes of preferred stock warrants were
converted into 369,640 common warrants upon the completion of
our IPO in May 2006.
|
|
(10)
|
Preferred
Stock Warrants Subject to Redemption
|
The Company classified preferred stock warrants as liabilities
prior to the completion of our IPO as the preferred stock had
liquidation rights upon the sale or merger of the Company. The
warrants were required to be marked to market with adjustments
recorded in the statements of operations. These adjustments were
a gain (loss) of $0, $500 and ($572) for the years ended
December 31, 2007, 2006 and 2005, respectively. Preferred
stock warrants were converted to common stock warrants upon the
completion of our IPO in May 2006.
The Company has adopted the Restore Medical, Inc. 1999 Omnibus
Stock Plan (the Plan) that includes both incentive
stock options and nonqualified stock options to be granted to
employees, officers, consultants, independent contractors,
directors and affiliates of the Company. At December 31,
2007, 3,325,000 shares have been authorized for issuance
under this plan.
Incentive stock options must be granted at an exercise price not
less than the fair market value of the common stock on the grant
date. The options granted to participants owning more than 10%
of the Companys outstanding voting stock must be granted
at an exercise price not less than 110% of fair market value of
the common stock on the grant date. The options expire on the
date determined by the Companys board of directors, but
may not extend more than 10 years from the grant date,
while incentive stock options granted to participants owning
more than 10% of the Companys outstanding voting stock
expire five years from the grant date. Options typically vest
25% after the first year of service with the remaining vesting
1/36th each month thereafter. Options that are forfeited
without exercise go back into the total amount of options
available for grant.
On January 1, 2006, the Company adopted the fair value
recognition provisions of SFAS 123(R) prospectively to new
awards and to awards modified, repurchased, or cancelled after
December 31, 2005. Prior to the adoption of
SFAS 123(R) we used the minimum value method of measuring
equity share options for the pro forma disclosure under
SFAS 123. We will continue to apply the intrinsic-value
method for awards granted prior to the adoption of
SFAS 123(R).
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model. Since the
Company does not have sufficient historical data on volatility
of its stock, the expected volatility is based on the volatility
of similar entities (referred to as guideline companies). In
evaluating similarity, the Company considered factors such as
industry, stage of life cycle, size and financial leverage. The
expected term of options granted is determined using the
shortcut method allowed by SAB 107 and
SAB 110. Under this approach, the expected term is presumed
to be the mid-point between the vesting date and the end of the
contractual term. The risk-free rate is based on the
U.S. Treasury yield curve in effect at the time of grant
for the estimated life of the option. The Company has never
declared or paid any cash dividends and do not presently plan to
pay cash dividends in the foreseeable future. The Company uses
historical termination behavior to support an estimated annual
forfeiture rate of 8% for employees and 2% for directors. In
addition, SFAS 123(R) requires us to reflect the benefits
of tax deductions in excess of recognized compensation cost to
be reported as both a financing cash inflow and an operating
cash outflow upon adoption. The Company has recognized no such
tax benefits to date.
62
RESTORE
MEDICAL, INC.
Notes to
Financial Statements (Continued)
(In
thousands, except share and per share amounts)
The following assumptions were used to estimate the fair value
of each stock option grant:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted to Employees
|
|
Granted to Directors
|
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
|
Volatility
|
|
65%
|
|
65%
|
|
N/A
|
|
65%
|
|
65%
|
|
N/A
|
Risk-free interest rates
|
|
4-5%
|
|
5.0%
|
|
4.0%
|
|
5.0%
|
|
5.0%
|
|
4.0%
|
Expected option life
|
|
6.40 years
|
|
6.40 years
|
|
5 years
|
|
5.5 years
|
|
5.5 years
|
|
5 years
|
Stock dividend yield
|
|
0%
|
|
0%
|
|
0%
|
|
0%
|
|
0%
|
|
0%
|
Stock option activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Average
|
|
|
Weighted
|
|
|
Options
|
|
|
|
Available for
|
|
|
Under
|
|
|
Exercise Price
|
|
|
Average Fair
|
|
|
Exercisable at
|
|
|
|
Grant
|
|
|
Options
|
|
|
per Share
|
|
|
Value
|
|
|
Period End
|
|
|
Balance, December 31, 2004
|
|
|
(20,577
|
)
|
|
|
886,364
|
|
|
$
|
1.08
|
|
|
|
|
|
|
|
300,878
|
|
Authorized
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(584,700
|
)
|
|
|
584,700
|
|
|
|
1.10
|
|
|
$
|
5.18
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
(33,967
|
)
|
|
|
1.10
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
31,483
|
|
|
|
(31,483
|
)
|
|
|
1.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
426,206
|
|
|
|
1,405,614
|
|
|
|
1.09
|
|
|
|
|
|
|
|
615,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized
|
|
|
1,387,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(1,380,200
|
)
|
|
|
1,380,200
|
|
|
|
6.89
|
|
|
$
|
3.95
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
(231,607
|
)
|
|
|
1.08
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
154,901
|
|
|
|
(154,901
|
)
|
|
|
5.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
588,407
|
|
|
|
2,399,306
|
|
|
|
4.17
|
|
|
|
|
|
|
|
709,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(2,191,820
|
)
|
|
|
2,191,820
|
|
|
|
2.37
|
|
|
$
|
3.59
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
(189,933
|
)
|
|
|
1.10
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
395,604
|
|
|
|
(395,604
|
)
|
|
|
4.83
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
1,464,800
|
|
|
|
(1,464,800
|
)
|
|
|
5.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
256,991
|
|
|
|
2,540,789
|
|
|
$
|
2.02
|
|
|
|
|
|
|
|
924,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information concerning options
outstanding and exercisable at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Outstanding
|
|
|
Vested and Exercisable
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
Aggregate
|
|
|
Average
|
|
|
|
|
|
Aggregate
|
|
|
Average
|
|
|
Contractual
|
|
Exercise Price
|
|
Shares
|
|
|
Intrinsic Value
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Intrinsic Value
|
|
|
Exercise Price
|
|
|
Life in Years
|
|
|
$0.40 - $1.10
|
|
|
826,769
|
|
|
|
|
|
|
$
|
1.08
|
|
|
|
654,352
|
|
|
|
|
|
|
$
|
1.08
|
|
|
|
6.5
|
|
$1.33 - $2.08
|
|
|
1,432,050
|
|
|
|
|
|
|
|
1.64
|
|
|
|
25,000
|
|
|
|
|
|
|
|
1.45
|
|
|
|
9.6
|
|
$3.37 - $3.89
|
|
|
88,170
|
|
|
|
|
|
|
|
3.72
|
|
|
|
53,669
|
|
|
|
|
|
|
|
3.61
|
|
|
|
8.9
|
|
$7.28 - $8.00
|
|
|
193,800
|
|
|
|
|
|
|
|
8.00
|
|
|
|
191,769
|
|
|
|
|
|
|
|
8.00
|
|
|
|
8.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,540,789
|
|
|
$
|
359
|
|
|
$
|
2.02
|
|
|
|
924,790
|
|
|
$
|
276
|
|
|
$
|
2.67
|
|
|
|
8.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The aggregate intrinsic value represents the total pre-tax
intrinsic value, based on the Companys closing stock price
of $1.50 as of December 31, 2007, which would have been
received by the option holders had all option holders exercised
their options as of that date.
|
63
RESTORE
MEDICAL, INC.
Notes to
Financial Statements (Continued)
(In
thousands, except share and per share amounts)
The following table summarizes information concerning unvested
options for the period ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Grant Date Fair
|
|
|
|
Shares
|
|
|
Value
|
|
|
Non-vested at January 1, 2007
|
|
|
1,690,268
|
|
|
$
|
3.85
|
|
Granted
|
|
|
2,191,820
|
|
|
|
3.59
|
|
Vested
|
|
|
(580,503
|
)
|
|
|
2.59
|
|
Forfeited
|
|
|
(381,813
|
)
|
|
|
3.97
|
|
Cancelled
|
|
|
(1,303,773
|
)
|
|
|
3.84
|
|
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2007
|
|
|
1,615,999
|
|
|
$
|
3.68
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of share options
granted during the year ended December 31, 2007 and 2006
was approximately $3.59 and $3.95, respectively. The Company
recorded cash received from the exercise of stock options of
$209 and did not recognize any related tax benefits during 2007.
Upon exercise, the Company issues new shares of stock. The
aggregate intrinsic value of share options exercised during the
year ended December 31, 2007 and 2006 was approximately
$371 and $1,224, respectively. As of December 31, 2007,
there was $3,754 of total unrecognized compensation costs
related to outstanding options granted after the adoption of
SFAS 123(R), which is expected to be recognized over a
weighted average period of 3.4 years.
Prior to our IPO, certain stock options were granted with
exercise prices that were below the estimated fair value of the
common stock at the date of grant. We recorded deferred stock
compensation of $2,500 for the period through December 31,
2005 (until the adoption of SFAS 123(R)), in accordance
with Accounting Principles Board Opinion No. 25 (APB 25).
As of December 31, 2007, there was $690 of deferred
stock-based compensation related to options granted prior to the
adoption of SFAS 123(R) that will be amortized on a
straight-line basis over a weighted average period of
1.3 years.
64
RESTORE
MEDICAL, INC.
Notes to
Financial Statements (Continued)
(In
thousands, except share and per share amounts)
In-the-money options granted during the year ended
December 31, 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
Options
|
|
|
Exercise
|
|
|
Stock on
|
|
Grant Date
|
|
Granted
|
|
|
Price
|
|
|
Grant Date
|
|
|
January 1, 2005
|
|
|
49,250
|
|
|
$
|
1.10
|
|
|
$
|
1.88
|
|
January 18, 2005
|
|
|
5,000
|
|
|
|
1.10
|
|
|
|
2.36
|
|
January 25, 2005
|
|
|
5,450
|
|
|
|
1.10
|
|
|
|
2.56
|
|
February 14, 2005
|
|
|
500
|
|
|
|
1.10
|
|
|
|
3.10
|
|
March 21, 2005
|
|
|
2,500
|
|
|
|
1.10
|
|
|
|
4.06
|
|
March 29, 2005
|
|
|
5,000
|
|
|
|
1.10
|
|
|
|
4.28
|
|
April 1, 2005
|
|
|
1,000
|
|
|
|
1.10
|
|
|
|
4.38
|
|
April 11, 2005
|
|
|
408,500
|
|
|
|
1.10
|
|
|
|
4.72
|
|
April 18, 2005
|
|
|
250
|
|
|
|
1.10
|
|
|
|
4.98
|
|
May 2, 2005
|
|
|
500
|
|
|
|
1.10
|
|
|
|
5.48
|
|
May 23, 2005
|
|
|
15,000
|
|
|
|
1.10
|
|
|
|
6.22
|
|
June 6, 2005
|
|
|
500
|
|
|
|
1.10
|
|
|
|
6.70
|
|
June 30, 2005
|
|
|
2,500
|
|
|
|
1.10
|
|
|
|
7.56
|
|
July 11, 2005
|
|
|
5,250
|
|
|
|
1.10
|
|
|
|
7.74
|
|
July 18, 2005
|
|
|
500
|
|
|
|
1.10
|
|
|
|
7.86
|
|
July 21, 2005
|
|
|
10,000
|
|
|
|
1.10
|
|
|
|
7.92
|
|
August 1, 2005
|
|
|
10,500
|
|
|
|
1.10
|
|
|
|
8.10
|
|
September 1, 2005
|
|
|
15,000
|
|
|
|
1.10
|
|
|
|
8.64
|
|
September 6, 2005
|
|
|
10,000
|
|
|
|
1.10
|
|
|
|
8.74
|
|
November 15, 2005
|
|
|
37,500
|
|
|
|
1.10
|
|
|
|
10.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
584,700
|
|
|
$
|
1.10
|
|
|
$
|
5.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In March 2006, the Company modified certain stock options held
by one individual to accelerate the vesting period. The modified
stock options resulted in $191 of additional compensation
expense for the year ended December 31, 2006. The following
assumptions were used to estimate the fair value of the 27,180
common stock options modified during the year ended
December 31, 2006 using the Black-Scholes option-pricing
model:
|
|
|
Volatility
|
|
67.5%
|
Risk-free interest rates
|
|
4.6%
|
Expected option life
|
|
90 Days
|
Stock dividend yield
|
|
0%
|
On February 1, 2007, the Board of Directors of the Company
approved an amendment to 235,250 stock options that were granted
to nine Company employees between May 15, 2006 and
July 20, 2006 whereby the exercise price of such stock
options was reduced from a weighted average of $7.89 per share
to $3.89 per share, which was the closing price of the
Companys common stock on February 1, 2007. The
primary objective of this stock option re-pricing was to address
the discrepancy in equity value of the stock options granted to
two groups of new employees who were recruited to the Company
during a critical period in the Companys growth and
evolution. The stock options were amended and accounted for as a
cancellation and grant in the stock option roll-forward. All
other terms of the stock options, including vesting and
termination
65
RESTORE
MEDICAL, INC.
Notes to
Financial Statements (Continued)
(In
thousands, except share and per share amounts)
dates, remained the same. The incremental fair value created by
the amendment to the stock options was $122. The remaining
unrecognized incremental fair value of $100 will be recognized
as compensation expense over the weighted average remaining
vesting period of 3.6 years.
On March 6, 2007, the Company granted a total of 23,070
options to purchase common stock to two consultants. The terms
of the agreements were consistent with employee stock options,
except that the vesting provision provided for immediate vesting
of all options on the date of grant. The Black-Scholes
option-pricing model was utilized and the assumptions were the
same as stated in the table above for employees, except that an
option life of ten years was utilized, which is the contractual
term of the options. The total compensation expense of $64 for
these two grants was recognized in March 2007.
On August 10, 2007, the Board of Directors of the Company
approved the cancellation of options to purchase
326,950 shares of common stock that were granted to
employees with an exercise price ranging from $3.37 per share to
$8.00 and the concurrent grant of an equal number of replacement
stock options with an exercise price of $1.63 per share, which
was the historical
45-day
trailing average of the closing price of the Companys
common stock on August 10, 2007. The closing price of the
Companys common stock on August 10, 2007 was $1.18
per share. The Board of Directors also approved an amendment on
August 10, 2007 to the terms of stock options to purchase
an aggregate of 890,100 shares of common stock granted to
eight executive officers, with exercise prices ranging from
$3.37 to $8.00 per share, whereby the exercise price of such
stock options was reduced to $1.63 per share. The primary
objective of re-pricing and amending these employee and
executive stock options was to provide appropriate market-based
equity incentives to all Company employees during a critical
period in the Companys evolution and growth. These stock
options were accounted for as a cancellation and grant in the
stock option roll-forward. The terms of the replacement and
amended stock option agreements were consistent with the Plan.
The incremental fair value created by the modification to the
stock options was $386. The remaining unrecognized incremental
fair value of $335 as of December 31, 2007 will be
recognized as compensation expense over the remaining vesting
period of 3.6 years.
On October 23, 2007, the Company granted a total of 25,000
options to purchase common stock to one consultant. The terms of
the agreement were consistent with employee stock options,
except that the vesting provision provided for immediate vesting
of all options on the date of grant. The Black-Scholes
option-pricing model was utilized and the assumptions were the
same as stated in the table above for employees, except that an
option life of ten years was utilized, which is the contractual
term of the options. The total compensation expense of $28 for
this grant was recognized in October 2007.
For the year ended December 31, 2007 and 2006, results of
operations reflect compensation expense for new stock options
granted or modified under our stock incentive plans during the
year ended December 31, 2007 and 2006, and the continued
amortization of the deferred compensation for options granted
prior to January 1, 2006.
|
|
(12)
|
Commitments
and Contingencies
|
Leases
Assets held under capital leases are included in property and
equipment and are charged to depreciation and interest over the
life of the lease. Operating leases are not capitalized and
lease rentals are expensed on a straight-line basis over the
life of the lease.
On October 1, 2005, the Company entered into a
non-cancelable operating lease agreement for
office/warehouse
space. The lease expires on September 30, 2010, and the
Company has an option to renew for an additional five years. The
Company has sublet part of the office/warehouse space for a
three-year period beginning on October 1, 2005 to a related
party, EnteroMedics, Inc., whose president and CEO, Mark B.
66
RESTORE
MEDICAL, INC.
Notes to
Financial Statements (Continued)
(In
thousands, except share and per share amounts)
Knudson, Ph.D, is the chairman of the Companys board of
directors. Previously, the Company had entered into a
non-cancelable sublease agreement for office/warehouse space
that expired on September 30, 2005. Rent expense totaled
$373, $367 and $264 and for the years ended December 31,
2007, 2006 and 2005, respectively.
In August 2007, the Company entered into a new capital lease
agreement for the purchase of equipment with an annual interest
rate of 8.77% and monthly payments commencing in September 2007
maturing in August 2012. The total capital lease amount financed
was $102 and included the new equipment and the remaining
outstanding debt obligation of $14 from the capital lease
obligation originally maturing September 2009, for which we
retired the assets originally associated with that lease
commitment
The following is a schedule of total future minimum lease
payments due as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Capital
|
|
|
|
Leases
|
|
|
Leases
|
|
|
2008
|
|
$
|
276
|
|
|
$
|
58
|
|
2009
|
|
|
384
|
|
|
|
58
|
|
2010
|
|
|
289
|
|
|
|
50
|
|
2011
|
|
|
|
|
|
|
40
|
|
2012
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
|
949
|
|
|
|
225
|
|
Less amounts representing interest
|
|
|
|
|
|
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
Total capital lease obligations
|
|
|
|
|
|
$
|
184
|
|
|
|
|
|
|
|
|
|
|
Less noncancelable sublease payments:
|
|
|
|
|
|
|
|
|
2008
|
|
|
(104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum lease payments
|
|
$
|
845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has a 401(k) profit sharing plan that provides
retirement benefits to all full-time employees. Eligible
employees may contribute a percentage of their annual
compensation, subject to Internal Revenue Service limitations.
The Companys matching is at the discretion of the
Companys Board of Directors. For the years ended
December 31, 2007, 2006 and 2005, the Company did not
provide for matching of employees contributions.
|
|
(14)
|
Quarterly
Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
Total
|
|
|
Net sales
|
|
$
|
1,124
|
|
|
$
|
1,036
|
|
|
$
|
1,153
|
|
|
$
|
788
|
|
|
$
|
4,101
|
|
Gross margin
|
|
|
856
|
|
|
|
760
|
|
|
|
884
|
|
|
|
566
|
|
|
|
3,066
|
|
Loss from operations
|
|
|
(4,245
|
)
|
|
|
(3,544
|
)
|
|
|
(2,800
|
)
|
|
|
(3,087
|
)
|
|
|
(13,676
|
)
|
Net loss
|
|
|
(4,157
|
)
|
|
|
(3,492
|
)
|
|
|
(2,775
|
)
|
|
|
(3,089
|
)
|
|
|
(13,513
|
)
|
Net loss per share
|
|
$
|
(0.26
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.84
|
)
|
67
RESTORE
MEDICAL, INC.
Notes to
Financial Statements (Continued)
(In
thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
Total
|
|
|
Net sales
|
|
$
|
1,752
|
|
|
$
|
1,810
|
|
|
$
|
1,218
|
|
|
$
|
1,106
|
|
|
$
|
5,886
|
|
Gross margin
|
|
|
1,162
|
|
|
|
1,345
|
|
|
|
987
|
|
|
|
697
|
|
|
|
4,191
|
|
Loss from operations
|
|
|
(2,844
|
)
|
|
|
(2,822
|
)
|
|
|
(3,879
|
)
|
|
|
(4,253
|
)
|
|
|
(13,798
|
)
|
Net loss
|
|
|
(3,054
|
)
|
|
|
(22,956
|
)
|
|
|
(3,728
|
)
|
|
|
(4,091
|
)
|
|
|
(33,829
|
)
|
Net loss per share
|
|
$
|
(2.48
|
)
|
|
$
|
(2.74
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
(3.26
|
)
|
The summation of quarterly loss per share computations may not
equate to the year-end computation as the quarterly computations
are performed on a discrete basis.
On February 5, 2008, the Board of Directors of the Company
approved an amendment to the terms of stock options to purchase
an aggregate of 98,900 shares of common stock granted to
eight executive officers, with exercise prices ranging from
$3.37 to $8.00 per share, whereby the exercise price of such
stock options was reduced to $1.19 per share, which was the
closing price of the Companys stock on February 5,
2008. The primary objective of re-pricing and amending these
executive stock options was to provide appropriate market-based
equity incentives to the Companys executive officers in
lieu of granting new options from the option pool. The terms of
the replacement and amended stock option agreements were
consistent with the Plan. The incremental fair value created by
the modification to the stock options was $44 and will be
recognized as compensation expense over the vesting period. The
Black-Scholes option pricing model was utilized to value these
modified options with assumptions consistent with regular stock
options issued during 2007 and were valued consistent with the
option modification provisions of FAS 123(R).
68
|
|
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.
As of the end of the period covered
by this report (the Evaluation Date) we carried out an
evaluation, under the supervision and with the participation of
management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined
in
Rule 13a-15(e)
under the Securities Exchange Act of 1934 as amended (the
Exchange Act)). Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that, as of the
Evaluation Date, our disclosure controls and procedures were
effective to ensure that information required to be disclosed in
the reports that we file or submit under the Exchange Act is
(i) recorded, processed, summarized and reported within the
time periods specified in the Commissions rules and forms,
and (ii) accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial
Officer, to allow timely decisions regarding required disclosure.
Managements Annual Report on Internal Control Over
Financial Reporting.
Managements report on
our internal control over financial reporting is contained in
Item 7 above.
Changes in Internal Control Over Financial
Reporting.
During our fourth fiscal quarter,
there was no significant change made in our internal control
over financial reporting (as defined in
Rule 13(a) 15(f) under the Exchange Act) that
has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
|
|
Item 9B.
|
OTHER
INFORMATION
|
None.
PART III
Certain information required by Part III is omitted from
this report, and is incorporated by reference to our definitive
proxy statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A (the Proxy
Statement) in connection with our 2008 Annual Meeting of
Stockholders.
|
|
Item 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information relating to our directors is incorporated by
reference to the Proxy Statement as set forth under the caption
Election of Directors. Information relating to our
executive officers is set forth in Part I of this report
under the caption Executive Officers of Restore.
Information with respect to delinquent filings pursuant to
Item 405
Regulation S-K
is incorporated by reference to the Proxy Statement as set forth
under the caption Section 16(a) Beneficial Ownership
Reporting Compliance.
Information regarding our corporate governance practices,
including information regarding which members of the audit
committee are audit committee financial experts and the code of
conduct applicable to principal executive officers, principal
financial officers and principal accounting officers (a copy of
which is included as an exhibit to this Report on
Form 10-K),
is incorporated by reference to the Proxy Statement as set forth
under the caption Corporate Governance.
69
|
|
Item 11.
|
EXECUTIVE
COMPENSATION
|
The information relating to executive compensation is
incorporated by reference to the Proxy Statement under the
captions Executive Compensation (except for the
information set forth under the sub-caption Compensation
Committee Report) and Certain Relationships and
Related Transactions Compensation Committee
Interlocks and Insider Participation. The information
relating to director compensation is incorporated by reference
to the Proxy Statement under the caption Director
Compensation.
|
|
Item 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
|
(a) Equity Compensation Plans
The following table sets forth information as of
December 31, 2007, with respect to our equity compensation
plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
Number of
|
|
|
Weighted-
|
|
|
Remaining Available
|
|
|
|
Securities to be
|
|
|
Average
|
|
|
for Future Issuance
|
|
|
|
Issued Upon
|
|
|
Exercise Price
|
|
|
Under Equity
|
|
|
|
Exercise of
|
|
|
of Outstanding
|
|
|
Compensation Plans
|
|
|
|
Outstanding
|
|
|
Options,
|
|
|
(Excluding Securities
|
|
|
|
Options, Warrants
|
|
|
Warrants and
|
|
|
Reflected in Second
|
|
Plan Category
|
|
and Rights
|
|
|
Rights
|
|
|
Column)
|
|
|
Equity compensation plans approved by security holders
|
|
|
3,246,485
|
(1)
|
|
$
|
1.97
|
|
|
|
256,991
|
(2)
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,246,485
|
|
|
$
|
1.97
|
|
|
|
256,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Consists of options awarded under the 1999 Omnibus Stock Plan
and outstanding warrants to purchase common stock.
|
|
(2)
|
|
Represents the maximum number of shares of common stock
available to be awarded as of December 31, 2007.
|
(b) Security Ownership
The information relating to ownership of our equity securities
by certain beneficial owners and management is incorporated by
reference to the Proxy Statement as set forth under the caption
Stock Ownership of Certain Beneficial Owners and
Management.
|
|
Item 13.
|
CERTAIN
RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
|
The information relating to certain relationships, related
transactions and director independence is incorporated by
reference to the Proxy Statement under the captions
Certain Relationships and Related Transactions and
Corporate Governance Director
Independence.
|
|
Item 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The information relating to principal accountant fees and
services is incorporated by reference to the Proxy Statement
under the caption Audit Committee Report and Payment of
Fees to Auditor Payment of Fees to Auditor.
70
PART IV
|
|
Item 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULE
|
(a)
The following documents are filed as part of this
Annual Report on
Form 10-K:
1. Financial Statements (see Part II, Item 8).
2. All schedules have been omitted since the information
required by the schedule is not applicable, or is not present in
amounts sufficient to require submission of the schedule, or
because the information required is included in the financial
statements and notes thereto.
(b)
Exhibits:
See Exhibit Index.
71
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, in St. Paul, Minnesota on
March 27, 2008.
Restore Medical, Inc.
|
|
|
|
By:
|
/s/ J.
Robert Paulson, Jr.
|
J. Robert Paulson, Jr.
President and Chief Executive Officer
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints J. Robert
Paulson, Jr. and Christopher R. Geyen, as his true and
lawful attorneys-in-fact and agents, with full power 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 Restore Medical, Inc., and to file the same, with all
exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent 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 attorney-in-fact and agent, or his
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 below on March 27, 2008
by the following persons in the capacities indicated.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/ J.
Robert Paulson, Jr.
J.
Robert Paulson, Jr.
|
|
President, Chief Executive Officer and Director
(principal executive officer)
|
|
|
|
/s/ Christopher
R. Geyen
Christopher
R. Geyen
|
|
Chief Financial Officer (principal financial and
accounting officer)
|
|
|
|
/s/ Mark
B. Knudson, Ph.D.
Mark
B. Knudson
|
|
Chairman and Director
|
|
|
|
/s/ Richard
Nigon
Richard
Nigon
|
|
Director
|
|
|
|
/s/ Howard
Liszt
Howard
Liszt
|
|
Director
|
|
|
|
/s/ Luke
Evnin, Ph.D.
Luke
Evnin, Ph.D.
|
|
Director
|
|
|
|
/s/ Stephen
Kraus
Stephen
Kraus
|
|
Director
|
|
|
|
/s/ John
Schulte
John
Schulte
|
|
Director
|
72
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1
|
|
Second Amended and Restated Certificate of Incorporation of
Restore Medical, Inc. (Incorporated herein by reference to
Exhibit 3.2 to Amendment No. 4 to the
registrants Registration Statement on
Form S-1
filed on May 12, 2006 (File
No. 333-132368)).
|
|
3
|
.2
|
|
Amended and Restated Bylaws of Restore Medical, Inc.
(Incorporated herein by reference to Exhibit 3.4 to
Amendment No. 4 to the registrants Registration
Statement on
Form S-1
filed on May 12, 2006 (File
No. 333-132368)).
|
|
4
|
.1
|
|
Investors Rights Agreement, dated as of January 28,
2004, by and between Restore Medical, Inc. and the parties named
therein (Incorporated herein by reference to Exhibit 4.2 to
the registrants Registration Statement on
Form S-1
filed on March 13, 2006 (File
No. 333-132368)).
|
|
4
|
.2
|
|
First Amendment to Investors Rights Agreement, dated as of
March 17, 2005, by and between Restore Medical, Inc. and
the parties named therein (Incorporated herein by reference to
Exhibit 4.3 to the registrants Registration Statement
on
Form S-1
filed on March 13, 2006 (File
No. 333-132368)).
|
|
4
|
.3
|
|
Waiver to Investors Rights Agreement, dated as of
March 30, 2005, by and between Restore Medical, Inc. and
the parties named therein (Incorporated herein by reference to
Exhibit 4.4 to the registrants Registration Statement
on
Form S-1
filed on March 13, 2006 (File
No. 333-132368)).
|
|
10
|
.1
|
|
Commercial Lease, dated as of August 5, 2005, by and
between Roseville Properties Management Company, as agent for
Commers-Klodt III, and Restore Medical, Inc. (Incorporated
herein by reference to Exhibit 10.1 to the
registrants Registration Statement on
Form S-1
filed on March 13, 2006 (File
No. 333-132368)).
|
|
10
|
.2
|
|
Loan and Security Agreement No. 4541, dated as of
March 23, 2005, by and between Lighthouse Capital
Partners V, L.P. and Restore Medical, Inc. (Incorporated
herein by reference to Exhibit 10.2 to the
registrants Registration Statement on
Form S-1
filed on March 13, 2006 (File
No. 333-132368)).
|
|
10
|
.3
|
|
Amendment No. 1 to the Loan and Security Agreement
No. 4541, dated as of March 23, 2005, by and between
Lighthouse Capital Partners V, L.P. and Restore Medical,
Inc., dated March 3, 2006 (Incorporated herein by reference
to Exhibit 10.2A to the registrants Registration
Statement on
Form S-1
filed on March 13, 2006 (File
No. 333-132368)).
|
|
10
|
.4*
|
|
Employment and Change in Control Agreement, dated as of
April 11, 2005, by and between Restore Medical, Inc. and J.
Robert Paulson, Jr. (Incorporated herein by reference to
Exhibit 10.3 to the registrants Registration
Statement on
Form S-1
filed on March 13, 2006 (File
No. 333-132368)).
|
|
10
|
.5*
|
|
Employment and Change in Control Supplemental Agreement, dated
as of March 15, 2006, by and between Restore Medical, Inc.
and J. Robert Paulson, Jr. (Incorporated herein by reference to
Exhibit 10.3A to Amendment No. 1 to the
registrants Registration Statement on
Form S-1
filed on April 14, 2006 (File
No. 333-132368)).
|
|
10
|
.6*
|
|
Employment and Change in Control Agreement, dated as of
March 13, 2006, by and between Restore Medical, Inc. and
Christopher R. Geyen (Incorporated herein by reference to
Exhibit 10.16 to Amendment No. 1 to the
registrants Registration Statement on
Form S-1
filed on April 14, 2006 (File
No. 333-132368)).
|
|
10
|
.7*
|
|
1999 Omnibus Stock Plan, as amended March 2, 2006
(Incorporated herein by reference to Exhibit 10.7 to
Amendment No. 4 to the registrants Registration
Statement on
Form S-1
filed on May 12, 2006 (File
No. 333-132368)).
|
|
10
|
.8*
|
|
Standard form of Incentive Stock Option Agreement pursuant to
the 1999 Omnibus Stock Plan (Incorporated herein by reference to
Exhibit 10.8 to the registrants Registration
Statement on
Form S-1
filed on March 13, 2006 (File
No. 333-132368)).
|
|
10
|
.9*
|
|
Standard form of Non-Qualified Stock Option Agreement pursuant
to the 1999 Omnibus Stock Plan (Incorporated herein by reference
to Exhibit 10.9 to the registrants Registration
Statement on
Form S-1
filed on March 13, 2006 (File
No. 333-132368)).
|
|
10
|
.10*
|
|
Management Incentive Plan (Incorporated herein by reference to
Exhibit 10.10 to the registrants Registration
Statement on
Form S-1
filed on March 13, 2006 (File
No. 333-132368)).
|
73
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.11*
|
|
Executive Compensation Plan (Incorporated herein by reference to
Exhibit 10.11 to Amendment No. 4 to the
registrants Registration Statement on
Form S-1
filed on May 12, 2006 (File
No. 333-132368)).
|
|
10
|
.12
|
|
EU Authorized Representative Contract for Services, dated as of
June 16, 2003, by and between Quality First International
and Restore Medical, Inc. (Incorporated herein by reference to
Exhibit 10.12 to the registrants Registration
Statement on
Form S-1
filed on March 13, 2006 (File
No. 333-132368)).
|
|
10
|
.13
|
|
Research and Development Agreement, dated as of August 11,
2000, by and between Restore Medical, Inc. and Advanced
Composite Industries, Inc. (Incorporated herein by reference to
Exhibit 10.14 to the registrants Registration
Statement on
Form S-1
filed on March 13, 2006 (File
No. 333-132368)).
|
|
10
|
.14
|
|
Assignment and Grant Back of License Agreement, dated as of
November 28, 2001, by and between Restore Medical, Inc. and
Venturi Development Inc. (Incorporated herein by reference to
Exhibit 10.15 to the registrants Registration
Statement on
Form S-1
filed on March 13, 2006 (File
No. 333-132368)).
|
|
10
|
.15*
|
|
Form of Indemnification Agreement entered into by and between
Restore Medical, Inc. and each of its executive officers and
directors (Incorporated herein by reference to
Exhibit 10.23 to Amendment No. 4 to the
registrants Registration Statement on
Form S-1
filed on May 12, 2006 (File
No. 333-132368)).
|
|
10
|
.16*
|
|
Form of Principle Executive Officer Employment and Change in
Control Agreement (Incorporated by reference to
Exhibit 10.1 to the registrants Current Report on
Form 8-K
filed on March 30, 2007).
|
|
10
|
.17*
|
|
Form of Executive Officer Employment and Change in Control
Agreement (Incorporated by reference to Exhibit 10.2 to the
registrants Current Report on
Form 8-K
filed on March 30, 2007).
|
|
14
|
.1
|
|
Code of Conduct and Ethics (Incorporated herein by reference to
Exhibit 14.1 to the registrants Registration
Statement on
Form S-1
filed on March 13, 2006 (File
No. 333-132368))
|
|
23
|
.1
|
|
Consent of KPMG LLP, Independent Registered Public Accounting
Firm.
|
|
24
|
.1
|
|
Power of Attorney (included on signature page to this
Form 10-K).
|
|
31
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certificate 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.
|
|
|
|
*
|
|
Management contract or compensatory plan or arrangement.
|
74
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