Item 1.
Business
General
We were initially formed as a California general
partnership in July 1996, and incorporated in the State of Delaware in May
1997. We develop, manufacture and
market bioresorbable surgical implants to aid in the reconstruction, repair and
regeneration of bone and the healing of soft tissues throughout the body, as
well as related instruments and accessories used in connection with our
implants. Our bioresorbable implants
are used in craniomaxillofacial, neurological, orthopedic, spinal and
reconstructive surgery. We have also
developed a bioresorbable surgical film that we intend to begin marketing later
in 2002 for use in a wide variety of surgical applications. Since all of our current products and those
in development target the biosurgery market, we began doing business under the
name MacroPore Biosurgery in December 2001, to better reflect our company’s
technology and business as a whole. We
will ask our stockholders to approve the change of our name at our annual
meeting in May 2002.
Our bioresorbable
products are made from a copolymer composed of a lactic acid similar to that
which occurs naturally in the human body.
The lactic acid copolymer maintains its strength during the healing
process, while slowly breaking down in the body through hydrolysis into lactic
acid molecules and ultimately metabolizing into carbon dioxide and water, which
are then released from the body through the lungs and the kidneys. We believe that our products are easier to
use and more cost-effective than products made from alternative materials, such
as titanium or other metals. We believe
the benefits of using a bioresorbable material in bone healing and regenerating
applications include:
• no long-term growth restrictions
such as those related to the use of metallic plates and screws in pediatric
patients
• no distortion of diagnostic and
therapeutic imaging and no creation of imaging artifacts such as are commonly
encountered with metal systems
• no long-term patient palpation
• no interference with x-rays
• virtually eliminates thermal
sensitivity from temperature changes
• reduced risk of migration of plates
and screws during the bone healing process
• lowered risk of infection
• may eliminate additional surgery to
remove non-bioresorbable implants
• encouragement of normal bone growth
and increased strength of regenerated bone compared to non-bioresorbable
products, particularly metal, that may shield the bone from the stress that
facilitates bone growth and bone strength
In addition, because of their thermoplastic
properties, our bioresorbable products are easy to shape, size and apply to
varying anatomical structures, which we believe allows for a better anatomical
fit and saves valuable minutes in the operating room.
We have received regulatory clearance or approval to
market and sell some of our products in the United States, Europe and other
countries. We entered into an exclusive worldwide agreement with Medtronic,
Inc. in January 2000, for the global marketing and distribution of some of our
products for use in the craniofacial skeleton.
We also entered into an exclusive agreement with Medtronic to co-develop
and supply them with bioresorbable implants for spinal fixation, stabilization
and fusion.
During 2001, we received
regulatory clearance for:
• the use of our MacroPore OS Spine
bone graft containment system in spinal fusion procedures
• the use of our MacroPore ENT
Reconstruction Film film in ear, nose and throat applications for the prevention
of postsurgical adhesions, guided tissue regeneration, splinting and tympanic
membrane repair
• the use of our MacroPore TS
Surgi-Wrap™ film for wound support and soft tissue reinforcement throughout the
entire human body
• the use of our MacroPore LP system
in reconstructive surgery to correct pediatric skeletal birth defects and in
cranial reconstruction
• the use of our MacroPore IB system
as a cement restrictor in specified orthopedic applications
• the expanded use of some of our
product lines, including MacroPore FX, MacroPore PS and MacroPore NS, in
specified craniomaxillofacial procedures
We continue to seek patents on our technology and
recently received a U.S. patent for the design of our high torque, resorbable
StarBurst Screws which is used in many of our products.
We are also developing additional products for use in
spinal fusion procedures, neurosurgery plating, long-bone repair, healing of
non-union fractures and cyst or tumor removal site repair, among other
things. These future products may
require further development and regulatory clearance or approval, potentially
including clinical trials, prior to marketing and commercial use.
Products and Services
We manufacture our products solely in the United
States at our San Diego facility. We
currently market nine product lines in the United States and Europe for use in
the craniofacial skeleton, spine and for certain applications in the entire
skeleton, and we intend to release and begin marketing two additional products,
MacroPore Surgi-Wrap™ and MacroPore ENT Reconstruction Film, later in
2002. Our current product lines are:
For the year ended
December 31, 2001, revenue realized from the sale of our craniofacial products
accounted for more than 67.0% of our revenue.
Since all of our products are developed and sold for use in the medical
device industry and have similar purposes, production processes, markets and
regulatory requirements, we report them as a single industry segment.
We provide a range of support
services to our customers and to surgeons interested in using our products,
including:
• producing promotional, educational
and instructional materials and literature
• producing scientific publications
• demonstrating our products
• training at our San Diego
headquarters
• teaching regional and on-site
training seminars and symposia
• providing support personnel to
advise surgeons during surgery on the use of our products
Plan
of Operation
During 2002, we intend to focus our efforts on:
• enhancing production planning
systems and manufacturing processes to reduce costs and increase capacity of
our high volume spinal products
• developing product training
materials and publishing pre-clinical research reports to support 2002
Medtronic launches of MacroPore products
• establishing a world-wide
distribution network for sales of our bioresorbable surgical film products
• obtaining further clearances and
approvals for the use of our bioresorbable surgical film products for the
prevention of post-operative adhesion and scarring
• expanding the distribution of our
craniomaxillofacial and spinal products in overseas markets
• continuing our development and
testing of spinal implants with Medtronic
• continuing our development of new
bioresorbable polymers with differing resorbtion profiles and handling
characteristics for our use in future product development
• continuing our development of the
second generation of some of our existing products
• developing new uses for our existing
products and continuing our research and development of new products, including
additional products for orthopedic, spinal, craniomaxillofacial and neurologic
applications
• continuing our development of
implant systems and instrumentation to deliver biologics such as adult stem
cells, and biological molecules such as bone morphogenetic proteins that may
improve healing time and the quality of tissue regeneration
• continuing our collaboration with
StemSource to determine optimal applications and techniques for the
implantation of adult stem cells
• continuing to provide marketing
support to Medtronic by attending trade shows and providing product promotional
materials, through training of Medtronic’s sales force and the medical community
and by facilitating communications with our customers
Research
and Development
We are continuing our research efforts to develop new
applications for our bioresorbable products and to develop new bioresorbable
products. We are currently developing new
bioresorbable products and materials for use in cardiovascular surgery, tendon
and nerve repair, plastic surgery, ear, nose and throat applications,
obstetrics and gynecological applications, abdominal and general surgery,
craniomaxillofacial and neurosurgery applications, spinal and orthopedic
indications. We expect to continue to
develop new, technologically advanced products.
In 2001, our research and development efforts focused
on continued development with Medtronic of our spinal products, developing
bioresorbable surgical film, our MacroPore LP system, our MacroPore MX system,
our MacroPore NS system and our MacroPore DX system, and developing uses for
our bioresorbable sheets, plates, screws and tacks in other indications. Research and development expenses were
$5,487,000 for the year ended December 31, 2001, $2,584,000 for the year ended
December 31, 2000 and $1,172,000 for the year ended December 31, 1999.
Customers
Medtronic is our primary distributor and our principal
customer, directly accounting for $5,547,000, or 98.2%, of our revenues for the
year ended December 31, 2001, and $6,092,000, or 97.5%, of our revenues for the
year ended December 31, 2000.
Medtronic did not act as our distributor and we did not receive any
revenues from Medtronic in the year ended December 31, 1999.
We entered into a five-year distribution agreement and
a five-year development and supply agreement with Medtronic in
January 2000. Under the
distribution agreement, Medtronic agreed to purchase all of its bioresorbable
implant products for use in the reconstruction or fixation of the cranial or
facial skeleton exclusively from us. In
turn, we granted Medtronic exclusive rights in the United States and exclusive
rights worldwide, except for rights granted under our then-existing
distribution agreements with other distributors, to market, distribute and sell
all of our bioresorbable implant products, devices, systems and instruments
solely for use in the reconstruction or fixation of the cranial or facial
skeleton. Under our distribution
agreement with Medtronic, we may enter into a distribution agreement with
another distributor for distribution rights to any of our products other than
those used in the cranial or facial skeleton, as long as we first present
Medtronic with the right to distribute these other products. If we fail to come to terms with Medtronic,
or if Medtronic does not wish to distribute these other products, we may enter
into a distribution agreement with a third party distributor on the same or
more favorable terms than those we offered to Medtronic.
Under our development and supply agreement, we
co-develop bioresorbable implants with Medtronic for spinal fixation,
stabilization and fusion using proprietary information from both parties. Medtronic has exclusive worldwide rights to
market and sell all of the products that we co-develop. We and Medtronic will each own an undivided,
one-half interest in any inventions we jointly develop.
We are currently considering entering into
distribution agreements with other distributors in the United States, Europe,
Asia and the Pacific Region, primarily to market our products for use in
applications other than craniofacial, or spinal fixation, spinal stabilization
or spinal fusion applications.
Market
and Competition
We compete with many other companies in developing and
marketing our technology and products.
In the craniofacial fixation market, we compete primarily with titanium
products, although we believe that an increasing number of other companies are
developing, or are offering, bioresorbable bone fixation systems.
We believe our Surgi-Wrap™ film can be used to prevent
post-operative adhesions and scarring and we intend to obtain the clearances
and approvals necessary to market our bioresorbable surgical film for use in
cardiothoracic surgery, obstetrics and gynecology, tendon surgery and general
surgery applications. We are aware of
two other companies that have entered these markets with products designed to
prevent post-operative adhesions. We
believe that our bioresorbable surgical film is superior to competitive
products because it is non-inflammatory, there is no need to secure our film
when it is implanted into the patient, it maintains its strength and creates a
clear surgical dissection plane, and it is bioresorbable where some of our
competitor’s products are not.
Many of our competitors and potential competitors have
substantially greater financial, technological, research and development, marketing
and personnel resources than we do.
These competitors may also have greater experience in developing
products, conducting clinical trials, obtaining regulatory approvals, and
manufacturing and marketing such products.
Some of these competitors may obtain patent protection, approval or
clearance by the FDA or from foreign countries, or may achieve product
commercialization earlier than us, any of which could materially adversely
affect our business or results of operations.
We cannot assure you that our competitors will not succeed in developing
alternative technologies and products that are more effective, easier to use or
more economical than those which have been or are being developed by us or that
would render our technology and products obsolete and noncompetitive in these
fields. Furthermore, under the terms of
our marketing agreement with Medtronic, Medtronic may pursue parallel
development of other technologies or products, which may result in Medtronic
developing additional products that will compete with our products.
Sales
by Geographic Region
We sell our products in the United States and
internationally through independent distributors. International sales may be limited or disrupted by political
instability, price controls, trade restrictions and changes in tariffs. Our existing distribution agreement provides
for payment in U.S. dollars and we intend to include similar payment provisions
in future distribution agreements.
Fluctuations in currency exchange rates may adversely affect demand for
our products by increasing the price of our products in the currency of the
countries in which the products are sold.
We recorded our first sales in the year ended December
31, 1999, when we recorded $1,513,000 in revenues, including $1,472,000 of
product sales in the United States and $41,000 of product sales outside the
United States. For the year end ended
December 31, 2000, we recorded $6,251,000 in revenues, including $6,200,000 of
product sales in the United States and $51,000 of product sales outside the
United States. For the year ending
December 31, 2001, we recorded $5,648,000 in revenues, including $4,954,000 of
product sales in the United States and $694,000 of product sales outside the
United States.
Working
Capital
We generally maintain an inventory of approximately
six to twelve months of products.
Although capital expenditures may vary depending on a variety of
factors, including sales, we presently intend to spend approximately $1,300,000
on capital equipment purchases in 2002.
We believe our inventory
practices and capital expenditures are consistent with
other similar companies at similar levels of development.
Raw
Materials
We presently purchase all of our supply of lactic acid
copolymer, the primary raw material used in manufacturing our medical devices,
from one source. We have entered into
an agreement with B.I. Chemicals, Inc. to provide us with our required supply
of lactic acid copolymer. This
agreement terminates in August 2003, but automatically renews for
successive one-year terms unless we give B.I. Chemicals written notice, or B.I.
Chemicals gives us written notice, that the agreement will not be renewed six
months prior to the end of that term.
In the event that B.I. Chemicals is unable to supply the lactic acid
copolymer, B.I. Chemicals has agreed to provide us with the manufacturing
protocol to enable us to produce the lactic acid copolymer in-house. We believe we would be able to obtain the
lactic acid copolymer we use in our products from at least one other supplier
if B.I. Chemicals fails to provide us with a sufficient supply.
Intellectual
Property
Our success depends in large part on our ability to
protect our proprietary technology and information, and operate without
infringing on the proprietary rights of third parties. We rely on a combination of patent, trade
secret, copyright and trademark laws, as well as confidentiality agreements,
licensing agreements and other agreements, to establish and protect our
proprietary rights. Our success also
depends on our ability to obtain patents on our technology. We have four U.S. patents for two of our
products. Our two U.S. patents for the
design of our bioresorbable sheets were issued in July 1999 and
August 2001. Our two U.S. patents
for the design of our high torque bioresorbable screws were issued in August
2001 and February 2002. Each of our
patents will expire 20 years from the date of the patent application.
We have filed applications for sixteen additional U.S.
patents, as well as twelve corresponding patent applications outside the United
States, relating to our technology. We
cannot assure you that any of the pending patent applications will be approved,
that we will develop additional proprietary products that are patentable, that
any patents issued to us will provide us with competitive advantages or will
not be challenged by any third parties or that the patents of others will not
prevent the commercialization of products incorporating our technology. Furthermore, we cannot assure you that
others will not independently develop similar products, duplicate any of our
products or design around our patents.
Litigation may also be necessary to enforce any
patents issued or licensed to us or to determine the scope and validity of
third party proprietary rights. If our
competitors claim technology also claimed by us and prepare and file patent
applications in the United States, we may have to participate in interference
proceedings declared by the U.S. Patent and Trademark Office to determine
priority of invention. Any such
litigation or interference proceedings, could result in substantial costs to us
and divert our management’s attention from our business operations, even if the
eventual outcome is favorable to us.
Litigation could subject us to significant liabilities to third parties
and require disputed rights to be licensed from third parties or require us to
cease using certain technology.
We currently have pending five patent applications in
the European Patent Office, four in Japan and Canada, and three in
Australia. We have published five other
international patent applications with all countries designated. In addition, we have one patent issued in
Australia for the design of our bioresorbable sheets that expires on
August 5, 2017. Patent law outside
the United States is uncertain and in many countries is currently undergoing
review and revisions. The laws of some
countries may not protect our proprietary rights to the same extent as United States
laws. Third parties may attempt to
oppose the issuance of patents to us in foreign
countries by initiating opposition proceedings. Opposition proceedings against any of our patent filings in a foreign
country could have an adverse effect on our corresponding patents that are
issued or pending in the United States.
It may be necessary or useful for us to participate in proceedings to
determine the validity of our, or our competitors’ patents that have been
issued in countries other than the United States. This could result in substantial costs, divert our efforts and
attention from other aspects of our business, and could have a material adverse
effect on our results of operations and financial condition.
In addition to patent protection, we rely on
unpatented trade secrets and proprietary technological expertise. We cannot assure you that others will not
independently develop or otherwise acquire substantially equivalent techniques,
or otherwise gain access to our trade secrets and proprietary technological
expertise or disclose such trade secrets, or that we can ultimately protect our
rights to such unpatented trade secrets and proprietary technological
expertise. We rely, in part, on
confidentiality agreements with our marketing partners, employees, advisors,
vendors and consultants to protect our trade secrets and proprietary
technological expertise. We cannot
assure you that these agreements will not be breached, that we will have
adequate remedies for any breach or that our unpatented trade secrets and
proprietary technological expertise will not otherwise become known or be
independently discovered by competitors.
Our failure to obtain or maintain patent and trade secret protection,
for any reason, could have a material adverse effect on our results of
operations and financial condition.
Government
Regulation
Most medical devices for use in humans, including our
bioresorbable protective sheets, plates, screws and tacks, are subject to
stringent government regulation in the United States by the Food and Drug
Administration, or FDA, under the federal Food, Drug and Cosmetic Act, or FDC
Act. The FDA regulates the clinical
testing, manufacture, safety, labeling, sale, distribution and promotion of
medical devices. Included among these
regulations are premarket clearance, premarket approval, and Quality System
Regulation, or QSR, requirements. Other
statutory and regulatory requirements govern, among other things, registration
and inspection, medical device listing, prohibitions against misbranding and
adulteration, labeling and postmarket reporting. The regulatory process may be lengthy, expensive and
uncertain. Securing FDA approvals and
clearances may require us to submit extensive clinical data and supporting
information to the FDA. Failure to
comply with applicable requirements can result in application integrity
proceedings, fines, recalls or seizures of products, injunctions, civil
penalties, total or partial suspensions of production, withdrawals of existing
product approvals or clearances, refusal to approve or clear new applications
or notifications, and criminal prosecution.
Under the FDC Act, medical devices are classified into
Class I, Class II or Class III devices, based on their risks and the control
necessary to reasonably ensure their safety and effectiveness. Class I devices are subject to general
controls such as labeling, premarket notification and adherence to QSR
requirements. Class II devices are
subject to general controls, and to specific controls such as performance
standards, postmarket surveillance and patient registries. Generally, Class III devices, which include
certain life-sustaining, life-supporting and implantable devices or new devices
which have been found not to be substantially equivalent to certain legally
marketed devices, must receive premarket approval from the FDA. All of our implant products to date are
Class II medical devices.
Before any new medical device may be introduced to the
market, the manufacturer generally must obtain either premarket clearance
through the 510(k) premarket notification process or premarket approval through
the lengthier Premarket Approval Application, or PMA, process. The FDA will grant a 510(k) premarket
notification if the submitted data establishes that the proposed device is
“substantially equivalent” to a legally marketed Class I or Class II medical
device, or to a Class III medical device for which the FDA has not called for
PMAs. The FDA may request data,
including clinical studies, before it
can make a determination of substantial
equivalence. It generally takes from
three to 12 months from submission to obtain 510(k) premarket clearance,
although it may take longer. There is
no assurance that clearance will be granted.
We must file a PMA if one of our products is found not to be
substantially equivalent to a legally marketed Class I or II device or if it is
a Class III device for which the FDA requires PMAs. A PMA must be supported by extensive data to demonstrate the
safety and effectiveness of the device, including laboratory, preclinical and
clinical trial data, as well as extensive manufacturing information. Before initiating human clinical trials on
devices that present a significant risk, we must first obtain an
Investigational Device Exemption, or IDE, for the proposed medical device. Toward the end of the PMA review process,
the FDA will generally conduct an inspection of our manufacturing facilities to
ensure compliance with QSRs. Approval
of a PMA could take up to one or more years from the date of submission of the
application or petition. The PMA
process can be expensive, uncertain and lengthy, and there is no guarantee of
ultimate approval.
Modifications or enhancements of products that could
affect the safety or effectiveness or effect a major change in the intended use
of a device that was either cleared through the 510(k) process or approved
through the PMA process may require further FDA review through new 510(k) or
PMA submissions.
As a medical device manufacturer, we are subject to
periodic inspections by the FDA to ensure that devices continue to be
manufactured in accordance with QSR requirements. We are also subject to postmarket reporting requirements for
deaths or serious injuries when a device may have caused or contributed to
death or serious injury, and for certain device malfunctions that would be
likely to cause or contribute to a death or serious injury if the malfunction
were to recur. Postmarket reporting
also may be required for certain corrective actions undertaken for distributed
devices. If safety or effectiveness
problems occur after the product reaches the market, the FDA may take steps to
prevent or limit further marketing of the product. Additionally, the FDA actively enforces regulations prohibiting
marketing of devices for indications or uses that have not been cleared or
approved by the FDA.
Under the terms of our development and supply
agreement with Medtronic, Medtronic is responsible for preparing and filing
applications for, and obtaining regulatory approval of the products we
co-develop for use in spinal fixation, stabilization or fusion
applications. We or our marketing partners
may not be able to obtain necessary 510(k) clearances or PMA approvals to
market the products we are developing in the United States for their intended
use on a timely basis, if at all.
Our current human medical devices are at different
stages of FDA review. We have received
510(k) clearance for the following:
In addition, we must obtain marketing authorization
for our products that we market in Europe, Canada and certain other non-U.S.
jurisdictions. We have received
marketing authorization for the sale of our products in the following
countries:
In addition, we have
submitted applications for authorizations to market our products in fifteen
other countries.
We must comply with extensive regulations from foreign
jurisdictions regarding safety, manufacturing processes and quality. These regulations, including the
requirements for marketing authorization, may differ from the FDA regulatory
scheme. Under the terms of our
distribution agreements, our distributors are generally responsible for
obtaining the necessary approvals.
We may not be able to obtain marketing authorization
in all of the countries where we intend to market our products, may incur
significant costs in obtaining or maintaining our foreign marketing
authorizations, or may not be able to successfully commercialize our current or
future products in any foreign markets.
Delays in receipt of marketing authorizations for our products in
foreign countries, failure to receive such marketing authorizations or the
future loss of previously received marketing authorizations could have a
material adverse effect on our results of operations and financial condition.
Environmental
Regulation
Companies in the United States are subject to federal,
state and local laws and regulations governing the use, manufacture, storage,
handling and disposal of hazardous materials and chemicals and certain
wastes. We do not currently use any
significant amounts of hazardous materials or chemicals in our manufacturing
processes.
Staff
As of December 31, 2001, we had 72 full-time
employees, comprised of 31 employees in research and development, 17 employees
in manufacturing, 16 employees in management and finance and administration,
and 8 employees in marketing. As of
December 31, 2000, we had 58 full-time employees, comprised of 15 employees in
research and development, 20 employees in manufacturing, 13 employees in
management and finance and administration and 10 employees in marketing. From time to time, we also employ
independent contractors to support our administrative organizations. Our employees are not represented by any
collective bargaining unit and we have never experienced a work stoppage. We believe our relations with our employees
are good.
Item 2.
Item 2.
Properties
Our main facility which we use for our corporate
headquarters and for manufacturing is located at 6740 Top Gun Street, San
Diego, California. We currently lease
approximately 27,000 square feet of space at this location of which
approximately 13,000 square feet is laboratory space, 6,000 square feet is
office space and 8,000 square feet is manufacturing space. Our lease has a five-year term, expiring in
2003.
We also lease:
• a 14,000 square foot research and
development facility located at 6749 Top Gun Street, San Diego, California for
a five-year term. expiring in 2006
• 5,800 square feet of office space in
Frankfurt, Germany for use in marketing and administration for a five-year
term, expiring in 2006
• approximately 400 total square feet
of office space in Malvern, Pennsylvania and Atlanta, Georgia for six month
terms that renew automatically, unless terminated
We pay an aggregate of approximately $47,000 in rent
per month for our properties located in the United States and approximately
10,000 for our property in Germany.
Item 3.
Item 3. Legal
Matters
None.
Item 4.
Item 4. Submission of Matters to a Vote of Security
Holders
None.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity and
Related Stockholder Matters
Market Prices
Our common stock has been quoted on the Neuer Markt of
the Frankfurt Stock Exchange under the symbol “XMP” since our initial public
offering on August 8, 2000. Prior
to this time, there was no public market for our stock. Our common stock is not currently traded on
any United States exchange. The
following table shows the high and low sales prices for our common stock for
the periods indicated, as reported on Xetra, the Frankfurt Stock Exchange’s
Exchange Electronic Trading System.
These prices do not include retail markups, markdowns or commissions.
All of our shares are
represented by global stock certificates issued in the name of Concord Effekten
AG and deposited with Clearstream Banking AG, Frankfurt, Germany, the German
securities depository. As of January
28, 2002, based on information provided by Clearstream, we believe that the
number of beneficial owners of our common stock held through the global stock
certificates is approximately 14,000.
Dividends
We have never declared or paid any dividends and
currently intend to retain all available earnings generated by our operations
for the development and growth of our business. We do not currently anticipate paying any cash dividends on our
outstanding shares of common stock in the foreseeable future.
German Securities Laws
As a United States company offering securities on a
German stock exchange, we are subject to various laws and regulations in both
jurisdictions. Some of these laws and
regulations, in turn, can affect the ability of holders of our securities to
transfer or sell those securities.
At present, Germany does not restrict the export or
import of capital, except for investments in Iraq and Libya in accordance with
applicable resolutions adopted by the United Nations and the European
Union. However, for statistical
purposes only, every individual or corporation residing in Germany must report
to the German Central Bank, subject only to immaterial exceptions, any payment
received from or made to an individual or a corporation not a resident of
Germany if such payment exceeds Euro 2,550 or the equivalent in a foreign
currency. In addition, residents of
Germany must report any claims against or
any liabilities payable to non-residents if such
claims or liabilities, in the aggregate, exceed Euro 1.53 million or the
equivalent in a foreign currency, during any one month. Residents must also report any direct
investment outside Germany if such investment exceeds Euro 51,000 or the
equivalent in a foreign currency.
There are no limitations imposed by German law or our
certificate of incorporation or bylaws on the right of non-resident owners to
hold or vote the shares.
Recent Sales of
Unregistered Securities
During the year ended December 31, 2001, we sold
unregistered securities pursuant to our 1997 Amended and Restated Stock Option
Plan and an exemption from the registration requirements under the Securities
Act provided by Rule 701. During the
period from January 1, 2001 through December 31, 2001, we granted
options to some of our employees, directors, officers and advisors to purchase
a total of 1,578,500 shares of our common stock, at a weighted average exercise
price of $6.18.
Item 6.
Item 6. Selected Financial Data
The following selected historical financial data are
derived from our financial statements and the related notes thereto. We were founded as a partnership in
July 1996, commenced operations in January 1997 and incorporated in
May 1997. Results of the
partnership through the date of incorporation have been included with our 1997
results. Our financial statements as of
December 31, 1997, 1998 and 1999, and for the years then ended, have been
audited by PricewaterhouseCoopers LLP, independent accountants. Our financial statements as of December 31,
2000 and 2001, and for the years then ended, have been audited by Arthur
Andersen LLP, independent public accountants.
Some of our financial statements are included elsewhere in this report.
The information contained in this table should be read
in conjunction with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the financial statements and related
notes thereto included elsewhere in this report.
Item 7.
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Overview
We have a limited operating history. Our prospects are subject to the risk and
uncertainties frequently encountered by companies in the early stages of
development, and particularly by companies in rapidly evolving and technologically
advanced fields such as the medical device industry.
We incurred net losses of $11,207,000 for the year
ended December 31, 2001, $8,645,000 for the year ended December 31, 2000
and $4,571,000 for the year ended December 31, 1999. As of December 31, 2001, we had an accumulated deficit of
$27,099,000. These net losses resulted
to a large extent from expenses associated with developing bioresorbable
implant designs, performing preclinical studies, preparing submissions to the FDA and foreign regulatory
agencies, expanding marketing and distribution channels, further developing our
manufacturing capabilities, securing intellectual property rights and
trademarks and supporting our status as a public company traded on the Neuer Markt. We expect to expend substantial financial
resources to expand marketing, training and customer support needed to generate
and support higher sales, expand our manufacturing capabilities, obtain
additional regulatory clearances and to develop new products. This investment is likely to result in lower
income from operations until operational efficiencies are reached.
In January 1999, we recognized revenue for the
first time from the sale of our products.
For the years ended December 31, 2001, 2000 and 1999, the majority
of our revenues came from sales of our craniomaxillofacial bioresorbable
implant products, including our MacroPore FX and MacroPore PS systems. A smaller percentage of our revenues for the
years ended December 31, 2001 and 2000 came from sales of instruments and
accessories used by surgeons to form, mold and manipulate our bioresorbable
products during surgical procedures. We
expect to realize the majority of our revenues in 2002 from the sale of our
bioresorbable implant products for use in orthopedic, spinal and
craniomaxillofacial applications.
Results of Operations
Year ended
December 31, 2001 compared to year ended December 31, 2000
Revenues. For the year ended December 31, 2001,
revenues were $5,648,000 compared to $6,251,000 for the year ended December 31,
2000, a decrease of $603,000, or 9.6%.
The decrease in revenues was primarily attributable to Medtronic’s
initial inventory purchase of $1,162,000 in the three months ended June 30,
2000. Excluding the initial inventory
purchase, our revenues in the year ended December 31, 2001 increased by
$559,000 compared to the year ended December 31, 2000, which increase was
attributable to revenues generated from new product introductions during the
three months ended September 30, 2000.
Revenues attributable to Medtronic, which owns approximately 6.6% of our
outstanding common stock, represented 98.2% of our revenues for the year ended
December 31, 2001, compared to 97.5% for the year ended December 31, 2000.
Cost of
revenues. For the
year ended December 31, 2001, cost of revenues, excluding the inventory
provision discussed below, was $2,401,000 or 42.5% of revenues, compared to
$2,394,000 or 38.3% of revenues for the year ended December 31, 2000. Cost of revenues includes material,
manufacturing labor and overhead costs.
The increase in cost as a percentage of revenues was primarily
attributable to an inability to absorb some of our fixed manufacturing overhead
costs due to lower sales volumes and excess capacity.
Inventory
provision. For the
year ended December 31, 2001, we recorded an inventory provision of $1,750,000,
representing 31.0% of revenues, for which there was no comparable charge in the
year ended December 31, 2000. The
inventory provision resulted from potential excess and obsolete inventory due
to an anticipated reduction in future revenues of our craniofacial implant and
instrument products.
Gross
profit. For the year
ended December 31, 2001, gross profit was $1,497,000 or 26.5% of revenues,
compared to $3,857,000 or 61.7% of revenues for the year ended
December 31, 2000. Excluding the
inventory provision, the gross profit would have been $3,247,000 or 57.5% of
revenues in the year ended December 31, 2001.
The decrease in gross profit as a percentage of revenues was primarily
attributable to an inability to absorb some of our fixed manufacturing overhead
costs due to lower sales volume and excess capacity.
Research
and development expenses.
For the year ended December 31, 2001, research and development
expenses excluding related stock based compensation expenses were $5,487,000,
compared to $2,584,000 for the year ended December 31, 2000. Research and development expenses include
costs associated with the design, development, testing and enhancement of our
products, regulatory fees, the purchase of laboratory supplies and clinical
trials. The increase in research and
development expenses in the year ended December 31, 2001 was primarily
attributable to a $1,465,000 increase in additional personnel costs related to
the hiring of employees, and other costs of $1,438,000 associated with the
research into the development of new product lines. In addition, stock based compensation related to research and
development was $111,000 for the year ended December 31, 2001 and
$2,239,000 for the year ended December 31, 2000. For further information regarding fluctuations in research and
development inclusive of stock based compensation, you should read the
discussion under the section entitled “Stock based compensation expenses.” We expect research and development spending
to continue to increase for the next twelve months as we continue to expand our
product development efforts and seek further regulatory approvals.
Sales
and marketing expenses.
For the year ended December 31, 2001, sales and marketing expenses
excluding related stock based compensation expenses were $4,493,000, compared
to $2,629,000 for the year ended December 31, 2000. Sales and marketing expenses include costs
for marketing personnel, tradeshow expenses, and promotional activities and
materials. The increase in sales and
marketing expenses in the year ended December 31, 2001 was primarily
attributable to a $1,507,000 increase in additional personnel costs related to
the hiring of employees, and other costs of $357,000 for tradeshow expenses,
promotional activities and materials expenses related to the promotion of
product lines. In addition, stock based
compensation related to sales and marketing was $176,000 for the year ended
December 31, 2001 and $1,852,000 for the year ended December 31,
2000. For further information regarding
fluctuations in sales and marketing inclusive of stock based compensation, you
should read the discussion under the section entitled “Stock based compensation
expenses.” We expect sales and
marketing expenses to remain at current levels for the next twelve months.
General
and administrative expenses.
For the year ended December 31, 2001, general and administrative
expenses excluding related stock based compensation expenses were $3,578,000,
compared to $2,555,000 for the year ended December 31, 2000. General and administrative expenses include
costs for administrative personnel, legal and other professional expenses and
general corporate expenses. The
increase in general and administrative expenses in the year ended
December 31, 2001 was primarily attributable to increased personnel costs
of $554,000, increased administrative costs of $469,000 for professional
services, increased other general corporate expenditures related to all areas
of our operations and costs to support our status as a public company traded on
the Neuer
Markt. In addition, stock
based compensation related to general and administrative expenses was $836,000 for
the year ended December 31, 2001, compared to $1,607,000 for the year
ended December 31, 2000. For
further information regarding fluctuations in general and administrative
expenses inclusive of stock based
compensation, you should read the discussion under the
section entitled “Stock based compensation expenses.” We expect general and administrative expenses to remain at
current levels for the next twelve months.
Stock
based compensation expenses.
For the year ended December 31, 2001, total non-cash stock based
compensation expenses were $1,123,000, compared to $5,698,000 for the year
ended December 31, 2000. Stock
based compensation results from options issued to employees and
non-employees. Stock based compensation
expenses are amortized over the remaining vesting periods of the options, which
generally vest over a four year period from the date of grant. The overall decrease in stock based
compensation was related to the acceleration of vesting and other modifications
to compensatory stock options granted to employees and consultants in the year
ended December 31, 2000. The decrease
of $2,128,000 in research and development stock based compensation was
primarily due to our decision on August 9, 2000 to accelerate options
granted to doctors who performed consulting services, as the services for which
these options were granted were deemed complete, and the recognition of the
compensation expense related to all of the accelerated options. The decrease of $1,676,000 in sales and
marketing stock based compensation was due primarily to $1,775,000 in
additional expense recorded in the three months ended March 31, 2000 as a
result of the extension of the expiration date of some stock options granted to
members of our sales force upon the termination of their employment. The decrease of $771,000 in general and
administrative stock based compensation was primarily due to $636,000 in
additional expense recorded in the year ended December 31, 2000 as a result of
significant options granted to senior management with immediate vesting and at
exercise prices below fair market value.
Interest
income. For the year
ended December 31, 2001, interest income was $2,249,000, compared to
$1,315,000 for the year ended December 31, 2000, an increase of $934,000,
or 71.0%. The increase in interest
income resulted from cash equivalents and short-term investments being invested
for twelve months in the year ended December 31, 2001, compared to an
investment period of four and one-half months in the year ended
December 31, 2000.
Interest
and other expenses.
For the year ended December 31, 2001, interest and other expenses
were $168,000, compared to $351,000 for the year ended December 31,
2000. The decrease in interest and
other expenses was primarily related to the conversion loss of the Euro to the
U.S. dollar in connection with the net proceeds we realized from the sale of
equity in our initial public offering in August 2000.
Equity
loss in investment.
For the year ended December 31, 2001, our equity loss in investment
was $104,000, for which there was no comparable charge in the year ended
December 31, 2000 since the investment related to the equity loss was made
in May 2001.
Year ended
December 31, 2000 compared to year ended December 31, 1999
Revenues. For the year ended December 31, 2000,
revenues were $6,251,000 compared to $1,513,000 for the year ended December 31,
1999, an increase of $4,738,000. The
increase in revenues was primarily the result of sales to Medtronic, our principal
distributor, which totaled $6,092,000, including an initial inventory purchase
of $1,162,000 that occurred in the three months ended June 30, 2000. Revenues attributable to Medtronic, which
owned approximately 6.7% of our outstanding common stock on December 31, 2000,
represented 97.5% of our revenues for the year ended December 31, 2000.
Cost of
revenues. For the
year ended December 31, 2000, cost of revenues was $2,394,000, or 38.3% of
revenues, compared to $486,000, or 32.1% of revenues for the year ended
December 31, 1999. Cost of revenues
includes material, manufacturing labor and overhead costs. The increase in cost directly related to
revenue for the year ended December 31, 2000 was primarily attributable to
increased costs to support the increased revenue base. The percentage of revenues increase of 6.2%
was due to a decrease in
revenues per unit resulting from our use of third
party distributors rather than an internal sales force. Our savings related to the use of third
party distributors are reflected below the gross profit line in sales and
marketing expenses for the commissions and other selling expenses that were
outsourced.
Gross
profit. For the year
ended December 31, 2000, gross profit was $3,857,000 or 61.7% of revenues,
compared to $1,027,000 or 67.9% of revenues for the year ended December 31,
1999. The decrease in gross profit as a
percentage of revenues was primarily attributable to a decrease in revenues per
unit resulting from our use of third party distributors rather than an internal
sales force.
Research
and development expenses.
For the year ended December 31, 2000, research and development expenses
excluding related stock based compensation expenses were $2,584,000, compared
to $1,172,000 for the year ended December 31, 1999. Research and development expenses include costs associated with
the design, development, testing, enhancement of our products, regulatory fees,
the purchases of laboratory supplies and clinical trials. The increase in research and development
expenses in the year ended December 31, 2000 was primarily attributable to
research into the development of new product lines. In addition, stock based compensation related to research and
development was $2,239,000 for the year ended December 31, 2000 and $70,000 for
the year ended December 31, 1999. For
further information regarding fluctuations in research and development
inclusive of stock based compensation, you should read the discussion under the
section entitled “Stock based compensation expenses.”
Sales
and marketing expenses.
For the year ended December 31, 2000, sales and marketing expenses
excluding related stock based compensation were $2,629,000, compared to
$2,356,000 of expenses for the year ended December 31, 1999. Sales and marketing expenses include costs
for marketing personnel, tradeshow expenses, and promotional activities and
materials. Despite the elimination of
our internal sales force in January 2000, we re-deployed sales costs to
marketing personnel and other internal marketing expenses related to the
promotion of our product lines. After
our initial public offering in August 2000, we allocated some of our available
funds to marketing activities.
Accordingly, the increase in sales and marketing expenses in the year
ended December 31, 2000 was primarily attributable to our increased efforts to
provide regional and on-site seminars and symposia and to provide support
personnel to demonstrate the use of our new products to surgeons. In addition, stock based compensation
related to sales and marketing was $1,852,000 for the year ended December 31,
2000, compared to $231,000 for the year ended December 31, 1999. For further information regarding
fluctuations in sales and marketing inclusive of stock based compensation, you
should read the discussion under the section entitled “Stock based compensation
expenses.”
General
and administrative expenses.
For the year ended December 31, 2000, general and administrative
expenses excluding related stock based compensation expenses were $2,555,000,
compared to $1,313,000 for the year ended December 31, 1999. General and administrative expenses include
costs for administrative personnel, legal and other professional expenses and
general corporate expenses. The
increase in general and administrative expenses in the year ended December 31,
2000 was primarily attributable to increased personnel costs of $605,000 due to
the addition of eight full-time employees, increased administrative costs for
professional services and insurance, increased other general corporate expenses
related to the expansion of all areas of our operations and costs to support
our status as a public company traded on the Neuer Markt. In addition, stock based compensation related
to general and administrative expense was $1,607,000 for the year ended
December 31, 2000, compared to $360,000 for the year ended December 31,
1999. For further information regarding
fluctuations in general and administrative expense inclusive of stock based
compensation, you should read the discussion under the section entitled “Stock
based compensation expenses.”
Stock
based compensation expenses.
For the year ended December 31, 2000, total non-cash stock based
compensation expenses were $5,698,000, compared to $661,000 for the year ended
December 31,
1999. Stock
based compensation results from options issued to employees and
non-employees. Stock based compensation
expenses are amortized over the remaining vesting periods of the options, which
generally vest over a four year period from the date of grant. The overall increase in stock based
compensation was related to compensatory stock options granted to employees and
consultants, and an increase in the fair market value of our common stock. The increase of $2,169,000 in research and
development stock based compensation was primarily due to a large grant of
options to doctors and other professionals who performed consulting services
related to our development and start-up activities through August 8,
2000. Approximately $1,257,000 of this
increase was due to our decision to accelerate those options on August 9,
2000, as the services for which those options were granted were deemed
complete, and the recognition of the compensation expense related to all of the
accelerated options. The increase of
$1,621,000 in sales and marketing stock based compensation was due primarily to
$1,775,000 in additional expense recorded in the three months ended March 31,
2000 as a result of the extension of the expiration date of some stock options
granted to former members of our sales force upon the termination of their
employment. The increase of $1,247,000
in general and administrative stock based compensation was primarily due to the
grant of significant options to senior management and other employees at
exercise prices below fair market value.
Interest
income. For the year
ended December 31, 2000, interest income was $1,315,000, compared to
$68,000 for the year ended December 31, 1999, an increase of
$1,247,000. The increase in interest
income resulted from an increase in cash, cash equivalents and short-term
investments upon the completion of our initial public offering in August 2000.
Interest
and other expenses.
For the year ended December 31, 2000, interest and other expenses
was $351,000, compared to $164,000 for the year ended December 31,
1999. The increase in interest and
other expenses was primarily related to a loss on the conversion of the Euro to
the U.S. dollar in connection with the net proceeds we realized from the sale
of equity in our initial public offering in August 2000.
Unearned Compensation
We record unearned compensation for options granted to
employees as the difference between the exercise price of options granted and
the fair market value of our common stock on the date of grant. Unearned compensation is amortized to stock
based compensation expense and reflected as such in the Statement of Operations
and Comprehensive Income. Unearned
compensation recorded through December 31, 2001 was $6,669,000 with an
accumulated amortization, net of charges reversed during the period for the
forfeiture of unvested awards, of $4,564,000.
The remaining $2,105,000 as of December 31, 2001 will be amortized
using the straight-line method over the remaining vesting periods of the
options, which generally vest over a four year period from the date of
grant. We expect to record amortization
expense for unearned compensation of $1,040,000 in 2002, $851,000 in 2003 and
$214,000 in 2004. The amount of
unearned compensation expense recorded in future periods may decrease if
unvested options for which unearned compensation has been recorded are
subsequently forfeited.
Net Operating Loss and
Tax Credit Carryforwards
As of December 31,
2001, we had federal net operating loss carryforwards of $17,916,000 and state
net operating loss carryforwards of $3,011,000, which may be available to
offset future taxable income for tax purposes.
The federal net operating loss carryforwards will begin to expire in
2012, if unused. The state net
operating loss carryforwards will begin to expire in 2005, if unused. A portion of the net operating losses are
limited in their annual utilization. As
of December 31, 2001, we also had research tax credit carryforwards of
$345,000 for federal tax purposes and $339,000 for state tax purposes. The federal and state research tax credit
carryforwards will begin to expire in 2012, if unused. In addition, as
of December 31 2001,
we had state manufacturer’s credit carryforwards of $252,000, which will begin
to expire in 2007, if unused. For
financial reporting purposes, we have provided a valuation against our deferred
tax assets due to uncertainties regarding their realization.
Liquidity and Capital
Resources
As of December 31, 2001, we had cash and cash
equivalents, and short-term investments, available-for-sale, of $33,951,000 and
working capital of $35,119,000. Since
inception, we have financed our operations primarily through sales of
stock. Our sales of preferred stock in
1997, 1998 and 1999 yielded net proceeds of $14,679,000. On August 8, 2000, we completed our
public offering in Germany and listed our common stock for trading on the Neuer Markt segment
of the Frankfurt Stock Exchange in Frankfurt, Germany, at which time the
outstanding shares of our preferred stock was converted into 6,831,398 shares
of common stock. We received net
proceeds of $43,244,000 from the sale of 3,500,000 shares of our common stock
in our initial public offering. A
portion of those net proceeds have been used for research and development, to
expand our manufacturing operations, to promote our brand and to pursue
regulatory approvals for our products.
In addition, some of the proceeds have been used for working capital and
general corporate purposes. We have
invested some of the proceeds from the offering in short-term investments,
pending other uses of the proceeds in our business.
Net cash used in operating activities was $8,322,000
for the year ended December 31, 2001, $2,982,000 for the year ended December
31, 2000 and $5,107,000 for the year ended December 31, 1999. For each period, net cash used in operating
activities resulted primarily from net losses and working capital
requirements. Net losses for each
period resulted to a large extent from expenses associated with the development
of our bioresorbable designs, preclinical studies, preparation of submissions
to the FDA and foreign regulatory agencies, the establishment of marketing and
distribution channels, and the improvement of our manufacturing
capabilities. In the year ended
December 31, 2001, net cash used in operating activities primarily related to
our net loss of $11,207,000 and an increase in inventory of $1,157,000, offset
by non-cash charges for inventory provision, stock based compensation, and
depreciation and amortization. In the
year ended December 31, 2000, net cash used in operating activities resulted
primarily from our net loss of $8,645,000 and an increase in inventory of
$1,143,000, offset by stock based compensation of $5,716,000 and deferred
revenue related to an up-front license fee of $1,200,000 paid to us by
Medtronic. In the year ended December
31, 1999, net cash used in operating activities primarily related to our net
loss of $4,571,000 and an increase in inventory of $1,097,000 in anticipation of increased sales in the three months
ended March 31, 2000, offset by non-cash charges for stock based compensation,
and depreciation and amortization. Our
working capital requirements fluctuate with changes in our operating activities
that include such items as sales and manufacturing costs, which affect the
levels of accounts receivable, inventories and current liabilities.
Net cash provided by investing activities was
$2,263,000 for the year ended December 31, 2001. Net cash used in investing activities was $39,450,000 for the
year ended December 31, 2000 and $381,000 for the year ended December 31,
1999. Net cash provided by investing
activities for the year ended December 31, 2001 consisted of net proceeds from
the purchase and sale of short-term investments, capital expenditures and our
investment in StemSource, Inc. Net
cash used in investing activities for the year ended December 31, 2000 included
net purchases of short-term investments related to the use of proceeds from our
initial public offering in August 2000, as well as capital expenditures. Net cash used in investing activities for
the year ended December 31, 1999 was primarily related to the purchase of
property and equipment.
Net cash provided by financing activities was
$1,283,000 for the year ended December 31, 2001, $47,437,000 for the year ended
December 31, 2000 and $7,924,000 for the year ended December 31, 1999. Net cash provided by financing activities
for the year ended December 31, 2001 was primarily
related to proceeds from long-term debt financing,
partially offset by our repurchase of shares of our common stock. Net cash provided by financing activities
for the year ended December 31, 2000 was primarily attributable to our sale of
shares of Series D preferred stock and our sale of common stock in our initial
public offering. Net cash provided by
financing activities for the year ended December 31, 1999 was primarily related
to our sale of shares of Series C and Series D preferred stock.
Our revenues, operating results and cash flow are
affected by product pricing, fixed costs of sales and fluctuations in variable
cost of sales and sales volumes. In
January 2000, we entered into an exclusive distribution agreement with
Medtronic for the marketing, distribution and sale of our bioresorbable
products for use in the craniofacial skeleton.
Under the terms of the distribution agreement, we sell our products to
Medtronic at fixed prices that are subject to adjustment upon biannual
reviews. Although the distribution
agreement provides that direct selling costs are borne by the distributor, our
cash flow may be adversely affected if our fixed costs increase and we are
unable to negotiate an increase in product pricing with Medtronic.
We have equipment lease obligations that mature at
various dates through 2004 with interest rates ranging from 12.4% to
23.7%. The total monthly payments under
our equipment lease obligations are $13,000.
In October 2001, we obtained $2,433,000 of equipment financing that
matures in October 2005 at an interest rate of 9.3%. Our total monthly payments under the
equipment financing arrangement are $62,000.
We have an additional $1,400,000 of credit, at an interest rate of 9.3%,
available to us through September 2002 under an equipment financing master
security agreement.
As of December 31, 2001, we had property and
equipment of $7,108,000, less accumulated depreciation of $1,937,000 to support
our clinical, research, development, manufacturing and administrative
activities. Our capital expenditures
were $2,664,000 for the year ended December 31, 2001, $2,732,000 for the year
ended December 31, 2000 and $376,000 for the year ended December 31, 1999. We expect capital expenditures for the next
twelve months to be approximately $1,300,000 as we acquire additional equipment
and expand our facilities. We intend to
pay for future capital expenditures with available working capital and by using
credit available under our equipment financing master security agreement.
In May 2001, we invested $1,000,000 in cash in
exchange for shares of Series A preferred stock of StemSource, representing a
13.4% ownership interest. StemSource
was formed in January 2001 to engage in biomedical research. Under our investor rights agreement with
StemSource, we have the right to appoint a representative as a member of
StemSource’s board of directors. We are
not obligated to provide StemSource with any additional funding. From time to time, we may enter into
collaborative arrangements with, and acquire ownership interest in, other
companies for the purpose of engaging in joint research and development
activities.
Our capital requirements depend on numerous factors,
including market acceptance of our products and regulatory approvals, the
resources we devote to developing and supporting our products and other
factors. We expect to devote
substantial capital resources to continue our research and development efforts,
to expand our support and product development activities and for other general
corporate activities. We believe that
our current cash and investment balances and revenue to be derived from the
sale of our products will be sufficient to fund our operations at least through
December 31, 2002. However, unless
we begin to generate sufficient revenues from our operations to cover our
operating costs, we may need to seek additional sources of financing in the
future. We cannot assure you that we
will generate sufficient revenues to cover our operating costs or that we will
be able to obtain additional financing on terms satisfactory to us, if at all.
Recent Accounting
Pronouncements
In June 2001, the Financial Accounting Standards
Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS,
No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other
Intangible Assets.” SFAS No. 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 and no longer permits the use of the
pooling-of-interests method. SFAS No.
142 requires that amortization of goodwill cease and the carrying value of
goodwill be evaluated for impairment at least annually using a fair value
test. Identifiable intangible assets
will continue to be amortized over their useful lives and reviewed at least
annually for impairment using a method appropriate to the nature of the
intangible asset. We adopted SFAS No.
141 on July 1, 2001 and SFAS No. 142 on January 1, 2002. We do not expect our adoption of SFAS No.
141 or SFAS No. 142 to have a material impact on our financial position or
results of operations.
In August 2001, the FASB issued SFAS No. 143,
“Accounting for Asset Retirement Obligations.”
SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs.
It applies to all entities and to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development and/or normal operation of long-lived assets, except for some
lessee obligations. SFAS No. 143 is
effective for financial statements issued for fiscal years beginning after June
15, 2002. We do not expect our adoption
of SFAS No. 143 to have a material impact on our financial position or results
of operations.
Also in August 2001, the FASB issued SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. The provisions of SFAS No. 144 are effective
for financial statements issued for fiscal years beginning after December 15,
2001. We do not expect our adoption of
SFAS No. 144 to have a material impact on our financial position or results of
operations.
Critical Accounting
Policies
The preparation of financial statements in conformity
with accounting principals generally accepted in the United States requires us
to make estimates and assumptions that affect the reported amounts of our
assets, liabilities, revenues and expenses, and that affect our disclosure of
contingent assets and liabilities.
While our estimates are based on assumptions we considered reasonable at
the time they were made, our actual results may differ from our estimates,
perhaps significantly. If results
differ from our estimates, we will make adjustments to our financial statements
as we become aware of the necessity for an adjustment. Specifically, we make estimates in the
following areas:
Allowance
for doubtful accounts.
We provide a reserve against our receivables for estimated losses that
may result from our customers’ inability to pay. These reserves are based on known uncollectible accounts, aged
receivables, historical losses and our estimate of our customers’
credit-worthiness. Should a customer’s
account become past due, we generally place a hold on the account and
discontinue further shipments to that customer, minimizing further risk of
loss. The likelihood of our recognition
of a material loss on an uncollectible account mainly depends on a
deterioration in the economic financial strength of the customer and the
general business environment. Medtronic
is our single largest customer, directly accounting for 98.2% of our revenues
in the year ended December 31, 2001. We
believe that the allowance for doubtful accounts as of December 31, 2001
with respect to Medtronic’s account is sufficient, given Medtronic’s financial
strength.
Inventory
adjustments. We state
inventories at the lower of average cost, determined on the first-in first-out
method, or fair market value. We review
the components of our inventory on a regular basis for
potential excess, obsolete and impaired inventory,
based on estimated future usage. The
likelihood of any material adjustment of our stated inventory depends on
significant changes in the competitive conditions in which we operate, new
product introductions by us or our competitors, or fluctuations in customer
demand.
Litigation
reserves. We record
as liabilities on our balance sheets estimated amounts for claims that we
consider probable and that can be reasonably estimated. The likelihood of a material change in our
estimated reserves depends on new claims that arise and our estimations of the
favorable or unfavorable outcome of the particular litigation. We adjust our litigation reserves as new
facts relevant to the claim or litigation become known.
Warranty
reserves. We estimate
our potential warranty reserve based on historical claims by our customers. The likelihood of a material change in our
estimated warranty reserve depends on a significant change in actual product
failures and increased customer claims.
Valuation
of deferred income taxes.
We establish valuation allowances, when necessary, to reduce deferred
tax assets to the amount we expect to realize.
The likelihood of a material change in our expected realization of these
assets depends on our generation of future taxable income, our ability to deduct
tax loss carryforwards against future taxable income, and the effectiveness of
our tax planning strategies in the various tax jurisdictions that we operate
in.
Principles
of consolidation. We
determine whether the equity method of consolidation is appropriate to account
for our investments based on our ability to exercise control through
decision-making, our ability to exercise significant influence over management
of the company in which we have invested, and our equity ownership interest in
that company. If our ability to
exercise significant influence or our decision-making abilities change
materially from our evaluation, or our ownership interest in an investment
increases or decreases, our operating results could be impacted, either
positively or negatively.
Item 7a.
Item 7a. Quantitative and Qualitative Disclosures
About Market Risk
We are exposed to market risk related to fluctuations
in interest rates and in foreign currency exchange rates.
Interest Rate Exposure
Our exposure to market risk due to fluctuations in
interest rates relates primarily to short-term investments. These short-term investments, reported at an
aggregate fair market value of $31,251,000 as of December 31, 2001,
consist primarily of investments in debt instruments of financial institutions,
corporations with strong credit ratings and United States government
obligations. These securities are
subject to interest rate risk inasmuch as their fair value will fall if market
interest rates increase. If market
interest rates were to increase immediately and uniformly by 100 basis points
from the levels prevailing at December 31, 2001, for example, and assuming
an average investment duration of ten months, the fair value of the portfolio
would not decline by a material amount.
We do not use derivative financial instruments to mitigate the risk
inherent in these securities. However,
we do attempt to reduce such risks by generally limiting the maturity date of
such securities, diversifying our investments and limiting the amount of credit
exposure with any one issuer. We
believe that we currently have the ability to hold these investments until
maturity and, therefore, believe that reductions in the value of such
securities attributable to short-term fluctuations in interest rates would not
materially affect our financial position, results of operations or cash flows.
Foreign
Currency Exchange Rate Exposure
Our exposure to market risk due to fluctuations in
foreign currency exchange rates relates primarily to sales of our products in
Europe and other foreign markets.
Although we transact business in various foreign countries, settlement
amounts are usually based on the U.S. dollar or the Euro. Transaction gains or losses resulting from
sales revenues have not been significant in the past and we are not engaged in
any hedging activity on the Euro or other currencies. Based on our revenues derived from markets other than the United
States for the year ended December 31, 2001, a hypothetical 10% adverse
change in the Euro against the U.S. dollar would not result in a material
foreign exchange loss. Consequently, we
do not expect that reductions in the value of such sales denominated in foreign
currencies resulting from even a sudden or significant fluctuation in foreign
exchange rates would have a direct material impact on our financial position,
results in operations or cash flows.
Notwithstanding the foregoing, the indirect effect of
fluctuations in interest rates and foreign currency exchange rates could have a
material adverse effect on our business, financial condition and results of
operations. For example, foreign
currency exchange rate fluctuations may affect international demand for our
products. In addition, interest rate
fluctuations may affect our customers’ buying patterns. Furthermore, interest rate and currency
exchange rate fluctuations may broadly influence the United States and foreign
economies resulting in a material adverse effect on our business, financial
condition and results of operations.
Item 8.
Item 8. Financial Statements and Supplementary Data
Report of
Arthur Andersen LLP, Independent Public Accountants
Report of
Pricewaterhouse Coopers LLP, Independent Accountants
Balance Sheets as of December 31,
2001 and 2000
Statements
of Operations and Comprehensive Income for the years ended December 31,
2001, 2000 and 1999
Statements of
Stockholders’ Equity for the years ended December 31, 2001, 2000 and
Statements of Cash Flows for
the years ended December 31,
2001, 2000 and 1999
Notes to Financial
Statements
Report of Independent Public Accountants
To the Board of Directors and Stockholders of
MacroPore, Inc.
We have audited the accompanying balance sheets of MacroPore, Inc. as
of December 31, 2001 and 2000 and the related statements of operations and
comprehensive income, stockholders’ equity and cash flows for the years then
ended. These financial statements are
the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the 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 MacroPore, Inc. as
of December 31, 2001 and 2000, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States.
Our audits were made for the purpose of forming an opinion of the basic
financial statements taken as a whole.
The schedule presented in Item 14(a)(2) of the Company’s Report on Form 10-K for the period ended December 31,
2001 is presented for purposes of complying with the Securities and Exchange
Commission’s rules and is not part of the basic financial statements. This schedule, for the years ended December
31, 2001 and 2002, has been subjected to the auditing procedures applied in our
audit of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Report
of Independent Accountants
To the Board of Directors of
MacroPore, Inc.
In our opinion, the statements of operations and
comprehensive income, of stockholders’ equity and of cash flows listed in the
index appearing under Item 14(a)(1) on page 46 present fairly, in all
material respects, the results of operations and cash flows of MacroPore, Inc.
for the year ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 14(a)(2) on page 47 presents fairly,
in all material respects, the information set forth therein for the year ended
December 31, 1999 when read in conjunction with the related financial
statements. These financial statements
and financial statement schedule are the responsibility of the Company’s
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audit. We conducted our audit of these statements
in accordance with auditing standards generally accepted in the United States
of America, which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
San Diego, California
June 30, 2000
MACROPORE, INC.
BALANCE
SHEETS
THE
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
MACROPORE, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
THE
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
MACROPORE, INC.
STATEMENTS
OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
THE ACCOMPANYING NOTES
ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
MACROPORE, INC.
STATEMENTS
OF CASH FLOWS
THE
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
MACROPORE, INC.
NOTES
TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER
31, 2001, 2000, AND 1999
1. Organization and
Operations
The
Company
MacroPore, Inc. (the “Company”) was
founded as MacroPore (the “Partnership”), a California general partnership with
three equal partners, on July 1, 1996.
On May 16, 1997, the Company was incorporated in the State of
Delaware. The Company received assets
from and liabilities of the Partnership and a cash contribution from a
shareholder solely in exchange for common stock on May 20, 1997 (the
“Transfer”).
The Transfer was undertaken to
reconstitute the Company as a corporation for tax purposes, at which time the
Company transferred the amount of the Partnership’s accumulated deficit to the
additional paid-in-capital balance until it was zero, with the remainder
transferred to the deficit accumulated during the development stage.
The Company develops, commercializes
and manufactures bioresorbable surgical implants to aid in the reconstruction,
repair and regeneration of bone. The
Company’s bioresorbable products are made from a lactic acid copolymer which is
composed of a lactic acid similar to that which occurs naturally in the human
body.
Certain
Risks and Uncertainties
The Company has a limited operating
history and its prospects are subject to the risks and uncertainties frequently
encountered by companies in the early stages of development, and particularly
by such companies in rapidly evolving and technologically advanced fields such
as the medical device field. The future
viability of the Company largely depends on the Company completing development
of new products and receiving regulatory approvals for those products. No assurance can be given that the Company’s
new products will be successfully developed, regulatory approvals will be
granted, or acceptance of these products will be achieved.
Capital
Availability
The Company has a limited operating
history and recorded the first sale of its products in 1999. The Company incurred losses of $11,207,000,
$8,645,000 and $4,571,000 for the years ended December 31, 2001, 2000 and 1999,
respectively, and has an accumulated deficit of $27,099,000 as of
December 31, 2001. Additionally,
the Company has experienced cash flow losses from operations of $8,322,000,
$2,982,000 and $5,107,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.
Management recognizes the need to
generate positive cash flows in future periods and/or to acquire additional
capital from various sources. The
Company currently has adequate cash and cash equivalent and investment balances
to fund operations at least through December 31, 2002. However, in the continued absence of
positive cash flows from operations, no assurance can be given that the Company
can generate sufficient revenue to cover operating costs or that additional
financing will be available to the Company and, if available, on terms acceptable
to the Company in the future.
2. Summary of
Significant Accounting Policies
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 affecting
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 revenue and expenses during the reporting
period. Actual results could differ
from these estimates.
Cash
and Cash Equivalents
The Company considers all highly
liquid investments with maturities of three months or less at the time of
purchase to be cash equivalents.
Investments with original maturities of three months or less that were
classified as cash equivalents totaled $754,000 and $4,522,000 as of December
31, 2001 and 2000, respectively, and consisted primarily of cash and highly
liquid investments.
Short-Term
Investments
The Company invests its excess cash
in debt instruments of financial institutions, corporations with strong credit
ratings, and in United States government obligations. The Company has established guidelines relative to
diversification and maturities that maintain safety and liquidity. These guidelines are periodically reviewed
and modified to take advantage of trends in yields and interest rates.
Investments are accounted for in
accordance with Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain
Investments in Debt and Equity Securities,” which requires that the Company
determine the appropriate classification of investments at the time of purchase
based on management’s intent. Held to
maturity investments are recorded at amortized cost as management has the
positive intention and ability to hold such investments to maturity. Any premiums or discounts are amortized to
income over the term of the investment using a method, which approximates the
interest method. Available-for-sale
investments are stated at fair value, with net unrealized gains or losses, if
any, net of tax, reported as a separate component of stockholders’ equity. Realized gains or losses from the sale of
investments, interest income and dividends are included in interest income in
the accompanying statements of operations and comprehensive income.
Management reviews the carrying
values of its investments and writes down such investments to estimated fair
value by a charge to operations when such review results in management’s
determination that an investment’s impairment is considered to be other than
temporary. The cost of securities sold
is based on the specific identification method.
Fair
Value of Financial Instruments
The carrying amounts of the Company’s
cash and cash equivalents, accounts receivable and accounts payable and accrued
expenses approximate their fair value due to the short-term nature of these
balances. The carrying amounts of the
Company’s short-term debt, capital lease obligations, and long-term obligations
approximate fair value as the rates of interest for these instruments
approximate market rates of interest currently available to the Company for
similar instruments.
Inventories
Inventories include the cost of
material, labor and overhead, and are stated at the lower of average cost,
determined on the first-in, first-out (FIFO) method, or market. The Company periodically evaluates its on-hand
stock and makes appropriate provision for any stock deemed excess or obsolete.
During the year ended December 2001,
the Company recorded an inventory provision of $1,750,000 for excess and
obsolete inventory related to the Company’s craniofacial skeleton implant and
instrument products. The provision for
potential excess and obsolete inventory was
determined based on an anticipated
reduction in expected future revenues of these products. The provision includes inventory held
on-hand as of December 31, 2001.
Long-Lived
Assets
The Company assesses potential
impairments to its long-lived assets when there is a change in circumstances
that indicate carrying values of assets may not be recovered. An impairment loss is recognized when the
undiscounted cash flows expected to be generated by an asset is less than its
carrying amount. Any required
impairment loss would be measured as the amount by which the asset’s carrying
value exceeds its fair value, and would be recorded as a reduction in the
carrying value of the related asset and a charge to operating expense. The Company has not incurred any such
losses.
Property
and Equipment
Property and equipment is stated at
cost. Depreciation expense, which
includes the amortization of assets recorded under capital leases, is provided
on a straight-line basis over the useful lives of the assets, which range from
three to seven years. When assets are
sold or otherwise disposed of, the cost and related accumulated depreciation
are removed from the accounts and the resulting gain or loss is included in
operations. Leasehold improvements are
amortized over the shorter of the estimated useful life of the asset or the
lease term. Maintenance and repairs are
charged to operations as incurred.
Revenue
Recognition
The Company generally sells its
products to hospitals and distributors.
Revenue from sales to hospitals is recognized upon delivery of the
product. The Company has agreements
with its distributors that title and risk of loss pass to the distributor upon
shipment of the products. The Company
warrants that its products are free from manufacturing defects at the time of
shipment to the distributor. Revenue is
recognized upon shipment of products to distributors following receipt and
acceptance of a distributor’s purchase order.
Revenue from license agreements is
recognized ratably over the term of the agreement, provided no significant
obligations remain. For the years ended
December 31, 2001 and 2000, the Company recognized $300,000 in revenue in each
period from license agreements. There
was no revenue from the license agreements for the year ended December 31,
1999. See note 12.
Research
and Development
Research and development expenditures
are charged to operations in the period incurred.
Income
Taxes
The Company accounts for income taxes
utilizing the liability method in accordance with SFAS No. 109, “Accounting for
Income Taxes.” Under this method,
deferred income taxes are recorded to reflect the tax consequences on future
years of temporary differences between the tax bases of assets and liabilities
and their financial reporting amounts at each year end. If it is more likely than not that some
portion or all of the net deferred tax asset will not be realized, a valuation
allowance is recognized.
Stock
Based Compensation
The Company has adopted the
disclosure-only provisions of SFAS No. 123, “Accounting for Stock Based
Compensation.” Accordingly, the Company
accounts for its stock based compensation plan under the provisions of Accounting
Principle Board (APB) No. 25, “Accounting for Stock Issued to Employees” under
which compensation cost is measured by the
excess, if any, of the fair market
value of the Company’s common stock at the date of grant over the exercise
price of the option. Compensation cost
is amortized using the straight-line method over the related vesting
periods. Accrued compensation costs for
awards that are forfeited are reversed against compensation expense in the
period of forfeiture. Stock based
awards issued to non-employees are accounted for using a fair value method and
are remeasured to estimated fair value at each period end until the earlier of
the date that performance by the counterparty is complete or the awards are
fully vested.
Other
Comprehensive Income (Loss)
The Company has adopted SFAS No. 130,
“Reporting Comprehensive Income.” This
statement establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial
statements. The objective of the
statement is to report a measure of all changes in equity of an enterprise that
result from transactions and other economic events of the period other than
transactions with owners. Comprehensive
income is the total of net income and all other non-owner changes in equity.
During the years ended
December 31, 2000, 2000 and 1999 the Company’s only element of other
comprehensive income resulted from unrealized gains on investments, which are
reflected in the statements of changes in stockholders’ equity as other
accumulated comprehensive income.
Segment
Information
The Company follows the provisions of
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related
Information.” The Company believes that
all of its material operations are managed under the medical device industry,
with similar purpose, production processes, markets, and regulatory
requirements, and it currently reports as a single industry segment.
The Company recorded its first sales
in 1999. For the year ended December
31, 1999, the Company recorded $1,513,000 in sales. The Company sold $1,472,000 of product in the United States and
$41,000 of product outside the United States.
For the year end ended December 31, 2000, the Company recorded
$6,251,000 in sales. The Company sold
$6,200,000 of product in the United States and $51,000 of product outside the
United States. For the year ending December
31, 2001, the Company recorded $5,648,000 in sales. The Company sold $4,954,000 of product in the United States and
$694,000 of product outside the United States.
Earnings (Loss) Per Share
The Company computes earnings (loss)
per share based on the provision of SFAS No. 128 “Earnings Per Share.” Basic per share data is computed by dividing
income (loss) available to common stockholders by the weighted average number
of common shares outstanding during the period. Weighted average shares exclude shares of unvested common stock
subject to repurchase by the Company.
Diluted per share data is computed by dividing net income (loss)
available to common stockholders by the weighted average number of common
shares outstanding during the period increased to include, if dilutive, the
number of additional common share equivalents that would have been outstanding
if potential common shares had been issued.
The dilutive effect of outstanding stock options and unvested common
stock subject to repurchase is reflected in diluted loss per share by application
of the treasury stock method.
The Company has excluded all
potentially dilutive securities from the calculation of diluted loss per share
attributable to common stockholders for the periods ended December 31, 2001,
2000 and 1999 as their inclusion would be antidilutive. The number of potential common shares
excluded from the calculations of
diluted loss per share for the years ended December 31, 2001, 2000 and 1999 was
3,367,000,2,797,000 and 5,907,420, respectively.
Reclassification
Certain amounts reported in the
Company’s Statements of Operations and Comprehensive Income have been
reclassified to conform to the presentation for the current year.
Recent
Accounting Pronouncements
In June 2001, the Financial
Accounting Standards Board (“FASB”) issued two new pronouncements: Statement of
Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” and
SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 and no longer permits the use of the
pooling-of-interests method. SFAS No. 142 requires that upon adoption,
amortization of goodwill will cease and instead, the carrying value of goodwill
will be evaluated for impairment at least annually using a fair value
test. Identifiable intangible assets
will continue to be amortized over their useful lives and reviewed at least
annually for impairment using a method appropriate to the nature of the
intangible asset. The Company was
required to implement SFAS No. 141 on July 1, 2001 and SFAS No. 142 at the
beginning of its next fiscal year, January 1, 2002. The Company has determined that the implementation of these
standards will not have a material impact on its financial position or results
of operations.
In August 2001, the FASB issued SFAS
No. 143, “Accounting for Asset Retirement Obligations.” This statement addresses financial
accounting and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. It applies to (a) all entities and (b) legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development and/or normal operation of
long-lived assets, except for certain obligations of lessees. This statement amends SFAS No. 19,
“Financial Accounting and Reporting by Oil and Gas Producing Companies,” and is
effective for financial statements issued for fiscal years beginning after June
15, 2002. Management does not believe
that the adoption of this statement will have a material impact on its
financial position or results of operations.
Also in August 2001, the FASB issued
SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets.” SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and supersedes SFAS No. 121, “Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and the
accounting and reporting provisions of APB Opinion No. 30, “Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions,” for the disposal of a segment of a business (as previously
defined in that Opinion). The
provisions of SFAS No. 144 are effective for financial statements issued for
fiscal years beginning after December 15, 2001. The Company does not expect the adoption of SFAS No. 144 to have
a material impact on its financial position or results of operations.
3. Short-Term
Investments
As of
December 31, 2001 and 2000, all investments were classified as available-for-sale,
which consisted of the following:
As of
December 31, 2001 and 2000, investments available for sale have the following
maturities:
Proceeds
from sales of investments for the year ended December 31, 2001 and 2000 were
$90,065,000 and $85,610,000, respectively.
Gross realized gains on such sales for the years ended December 31, 2001
and 2000 were approximately $217,000 and $6,000, respectively. There were no sales of investments for the
year ended December 31, 1999.
4. Composition of
Certain Financial Statement Captions
Inventories
Property
and Equipment, net
Accounts
Payable and Accrued Liabilities
5. Equity Investment in
StemSource
In 2001 the Company invested
$1,000,000 in cash in exchange for shares of Series A preferred stock, a 13.4%
ownership interest, in StemSource, Inc. (“StemSource”), a development stage
company primarily engaged in biomedical research. Under the Investors’ Rights Agreement, each StemSource investor
shall use their best efforts to maintain a Company representative on the Board
of Directors of StemSource so long as the Company continues to hold at least
50% of the investment shares.
StemSource has continued to rely on the Company’s cash investment for
the continuance of its operations. The
investment is accounted for under the equity method of accounting as the
Company may be able to exercise significant influence over the operations of
StemSource because of its board of director representation and its initial cash
investment. Realization of this
investment depends on the successful development of products and the future
operating results of StemSource. For
the year ended December 31, 2001, the Company recognized an equity loss in
investment of $104,000.
6. Commitments
The Company leases office space and
equipment under noncancelable leases as follows:
Equipment
acquired under capital leases included in property and equipment amount to
$543,000 ($331,000 net of accumulated depreciation and amortization) as of
December 31, 2001. The Company’s
capital lease obligations mature at various dates through 2004 with interest
rates ranging from 12.4% to 23.7%.
Rent expense for the years ended
December 31, 2001, 2000 and 1999 was $579,000, $369,000 and $210,000,
respectively.
The Company has entered into a
long-term supply agreement for copolymer. The Company has agreed to purchase at
least 50 kilograms of copolymer per year, at a cost of between $2,480 and
$2,655 per kilogram, depending on the volume purchased by the Company. If the Company purchases less than 50
kilograms of the product per year, the purchase price the Company pays for the
product will be subject to renegotiation.
7. Long-Term Debt
In 2001 the Company entered into a
Master Security Agreement to provide financing for equipment purchases. In connection with the agreement, the
Company issued two promissory notes to its lender under the agreement for a
total of approximately $2,433,000.
These notes bear interest at 9.3% per annum with principal and interest
due in monthly payments of approximately $55,000 and $7,000, respectively, and
mature over 48 and 36 month periods, respectively, and are secured by equipment
with a cost of $2,752,000. The Company
has $1,400,000 of remaining available credit under the Master Security
Agreement through September 2002.
8. Income Taxes
Due to the Company’s net loss
position for the years ended December 31, 2001, 2000 and 1999, and as the
Company recorded a full valuation allowance against deferred tax assets, there
was no provision or benefit for income taxes recorded. There were no components of current or
deferred federal or state income tax provisions for the years ended December
31, 2001, 2000 and 1999.
The following is a reconciliation of
the statutory federal income tax rate to the Company’s effective tax rate:
The
components of the deferred tax assets and liabilities are as follows:
The Company has established a
valuation allowance against its deferred tax asset due to the uncertainty
surrounding the realization of such assets.
Management periodically evaluates the recoverability of the deferred tax
asset. At such time as it is determined that it is more likely than not that
deferred tax assets are realizable, the valuation allowance will be reduced.
At December 31, 2001, the Company had
federal net operating loss carryforwards of approximately $17,916,000 and state
net operating loss carryforwards of approximately $3,011,000, which may be
available to offset future taxable income for tax purposes. The federal net operating loss carryforwards
begin to expire in 2012, if unused. The
state net operating loss carryforwards begin to expire in 2005.
At December 31, 2001, the Company had
a research tax credit carryforwards of approximately $345,000 and $339,000 for
federal and state tax purposes, respectively.
The federal carryforward will begin to expire in 2012, if unused. At December 31, 2001, the Company also had a
California manufacturer’s credit
carryforwards of approximately $252,000, which begin to expire in 2007, if
unused.
The Internal Revenue Code limits the
future availability of net operating loss and tax credit carryforwards that
arose prior to certain cumulative changes in a corporation’s ownership
resulting in a change of control of the Company. Due to prior ownership changes as defined in IRC Section 382, a
portion of the net operating loss and tax credit carryforwards are limited in
their annual utilization.
9. Employee Benefit
Plan
The Company implemented a 401(k)
retirement savings and profit sharing plan (the “Plan”) effective January 1,
1999. The Company may make
discretionary annual contributions to the Plan, which is allocated to the
profit sharing accounts based on the number of years of employee service and
compensation. At the sole discretion of
the Board of Directors, the Company may also match the participants’
contributions to the Plan. There were
no contributions made by the Company to the Plan in 2001, 2000 and 1999.
10. Stockholders’ Equity
Convertible
Preferred Stock
In August 1997, the Company issued
1,267,000 shares of Series A non-cumulative convertible preferred stock
(“Series A”) at $0.50 per share.
Proceeds, net of issuance costs, were $630,000. In July 1998, the Company issued 1,032,583
shares of Series B non-cumulative convertible preferred stock (“Series B”) at
$1.50 per share. Proceeds, net of
issuance costs, were $1,547,000. In
September 1999, the Company issued 2,574,989 shares of Series C non-cumulative
convertible preferred stock (“Series C”) at $2.25 per share. Proceeds, net of
issuance costs, were $5,657,000. In
December 1999, the Company issued 832,226 shares of Series D non-cumulative
convertible preferred stock (“Series D”) at $3.50 per share. Proceeds, net of
issuance costs, were $2,855,000. In May
2000, the Company issued an additional 2,777 shares of Series C at $2.25 per
share for $6,000 upon the exercise of warrants. In March 2000, the Company issued an additional 1,167,774 shares
of Series D at $3.50 per share for $4,087,000.
In February 2000, certain
stockholders converted 45,951 shares of Series C into 45,951 shares of Common
Stock. In August 2000, all outstanding
shares of Series A, B, C and D preferred stock were converted into shares of
common stock upon the consent of the majority of holders, in connection with
the Company’s initial public offering.
Preferred
Stock
The Company has authorized 5,000,000
shares of $.001 par value preferred stock, with no shares outstanding as of
December 31, 2001 and 2000. The Board
of Directors of the Company is authorized to designate the terms and conditions
of any preferred stock issued by the Company without further action by the
common stockholders.
Treasury
Stock
On April 3, 2001, the Board of
Directors authorized the repurchase of up to 1,000,000 shares of the Company’s
common stock in the open market, from time to time until March 31, 2002,
subject to the Company’s assessment of market conditions and buying
opportunities, and at a purchase price per share not to exceed 7.50, or $6.77,
based on the exchange rate in effect on
that date. During 2001 the Company spent $1,077,000 to repurchase 356,120
shares of its Common Stock at an average cost of $3.02 per share.
The Company’s purchases of its common
stock are recorded at cost and are included as a component in the accompanying
statement of stockholders’ equity for the year ended December 31, 2001.
11. Stock Based Compensation
During 1997, the Company adopted the
“1997 Stock Option and Stock Purchase Plan” (the “1997 Plan”) which provides
for the direct award or sale of shares and for the grant of incentive stock
options (“ISO”) and non-statutory options (“NSO”) to employees, directors or
consultants. The Plan, as amended,
provides for the issuance of up to 5,000,000 shares of the Company’s common
stock.
Under the provisions of the 1997
Plan, the exercise price of ISOs is not less than the fair market value of the
underlying shares on the date of grant.
Option vesting is determined by the Board of Directors and is generally
over a four-year period. Options expire
no later than ten years from date of grant.
The
following summarizes activity with respect to the options granted under the
1997 Plan:
The following table summarizes information about options outstanding
under the 1997 Plan as of December 31, 2001:
The
weighted-average fair value of options granted for the years ended 2001, 2000
and 1999 was $3.11, $6.40 and $1.42, respectively.
As required by SFAS 123, the Company
has determined the pro forma information as if the Company had accounted for
stock options under the minimum value method of SFAS 123. The following weighted average assumptions
were used; risk free interest rates ranging from 3.52% to 6.71%, dividend yield
of zero, expected market price volatility factor of 60% and a weighted average
expected life of the options of four years.
Had compensation cost for stock options granted during the years ended
December 31, 2001, 2000 and 1999 been determined consistent with SFAS 123, the
Company’s net loss and related per share amounts on a pro forma basis would be
as follows:
The pro forma compensation expense
may not be representative of such expense in future years.
Unearned
Stock Based Compensation
In connection with the grant of stock
options to employees and directors, the Company recorded unearned stock based
compensation within stockholders’ equity of $115,000, $4,980,000 and $1,480,000
during the years ended December 31, 2001, 2000 and 1999, respectively. This represents the difference between the
exercise price of these stock based awards and the deemed market value of the
underlying common stock on the date of grant.
Amortization of unearned stock based compensation, net of any charges
reversed during the period for the forfeiture of unvested awards, was
$1,104,000, $3,171,000 and $411,000 for the years ended December 31, 2001, 2000
and 1999, respectively.
The remaining unearned stock based
compensation of $2,105,000 at December 31, 2001 will be amortized as follows:
$1,040,000 in 2002, $851,000 in 2003 and $214,000 in 2004. The amount of stock based compensation expense
to be recorded in future periods could decrease if awards are forfeited for
which accrued but unamortized compensation expense has been recorded.
Non-Employee
Stock Based Compensation
The Company issued 298,000 and
226,000 stock options to non-employees for consulting services for the years
ended December 31, 2000 and 1999, respectively. The weighted-average fair value per share of stock options issued
and remeasured to non-employees for the years ended December 31, 2001, 2000 and
1999 was $4.21, $9.42 and $1.49, respectively.
As a result, the Company recorded stock based compensation expense of
$33,000, $2,545,000 and $255,000 for the years ended December 31, 2001, 2000
and 1999, respectively. The fair value
of the grants was estimated using the Black-Scholes option-pricing model with
the following weighted average assumptions for the years ended December 31,
2001, 2000 and 1999: expected dividend
yield of 0.0%, risk-free interest rate ranging from 4.47% to 6.52%, expected
volatility ranging from 60% to 100% and expected life of 2 to 4 years.
Warrants
The Company issued warrants to
purchase 25,000 shares of Series C convertible preferred stock with an exercise
price of $2.25 per share, in connection with its convertible bridge loan
financing in 1998 and 1999. All of the
warrants are currently exercisable and begin to expire in September 2008. As of December 31, 2001, 2,777 of these
warrants had been exercised. Upon conversion of the Company’s outstanding
preferred stock into common stock, which occurred in August 2000, the warrants
became immediately exercisable into shares of the Company’s common stock.
In connection with a termination of a
sales distribution agreement in 2000, the Company issued warrants to purchase
25,000 shares of common stock with an exercise price of $12.00 per share. All the warrants are exercisable and expire
in July 2004. As of December 31, 2001,
none of these warrants have been exercised.
12. Related Party Transactions
In the years ended December 31, 2000
and 1999, consulting fees, manufacturing and out-of-pocket expenses paid to
various stockholders and employees were included in research and development
expenses. These expenses amounted to
$19,000 and $151,000 for the years ended December 31, 2000 and 1999,
respectively. There were no similar
related party transactions in year ended December 31, 2001.
In January 2000, the Company entered
into a five-year distribution agreement with a distributor. Under the terms of the agreement, the
Company granted the distributor exclusive worldwide rights, except for certain
international rights previously granted, to market, distribute and sell all of
the Company’s products for use in the cranial and facial areas. In consideration for this exclusive right,
the distributor paid a $1,500,000 up-front license fee to the Company, which
will be recognized ratably over the same five-year period. Additionally, the distributor is required to
purchase a minimum amount of product at agreed-upon prices for the first fifteen
months of the agreement, as amended. The
Company and the distributor concurrently entered into a five-year development
and supply agreement, which provides the distributor exclusive worldwide rights
for products developed as a result of the agreement. The terms of the aforementioned distribution agreement and
development and supply agreement are consistent with the terms of MacroPore
distribution agreements with unaffiliated third parties. Additionally, in January 2000, the
distributor purchased 1,000,000
shares Series D convertible preferred stock for $3,500,000. The terms of the sale of the Series D
convertible preferred stock were equivalent to the terms and price paid by
unaffiliated third parties who also purchased shares of Series D convertible
preferred stock. For the years ended
December 31, 2001 and 2000, the Company had sales to the distributor of
$5,547,000 and $6,092,000, respectively, which represented 98.2% and 97.5% of
total revenues, respectively. At
December 31, 2001 and 2000, the Company had amounts due from the distributor of
$463,000 and $693,000, respectively.
There were no sales or receivables from the related party distributor in
the year ended December 31, 1999.
In April 2000, the Company entered
into two one year full-recourse notes receivable with one of its directors and
officers. At December 31, 2000, the
notes totaled approximately $47,000, with an annual interest rate of 10%. The notes were repaid in full on April 30,
2001.
13. Subsequent Event
On February 26, 2002, the Company
extended loans to two of its directors, who also serve as officers, in the
aggregate amount of $478,000, for the purchase of shares of the Company’s
common stock from another of the Company’s stockholders. The loans carry an annual interest rate of
5.75%, subject to adjustment once a year on the anniversary of the issuance
date of the loan based on prime plus one percent. The loans are secured by a pledge of all of the stock purchased
with the proceeds of the loan, are full recourse and mature in February 2005.
In addition, the Company is
authorized to loan the two directors up to an aggregate of an additional
$3,022,000 for the purchase of additional shares of the Company’s common stock
from another of its stockholders. As
authorized, any additional loans the Company makes to the directors will be
made on the same terms and conditions as the February 2002 loans, and must be
made prior to March 31, 2002, if at all.
MACROPORE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
14. Quarterly
Information (unaudited)
The following unaudited quarterly
financial information includes, in management’s opinion, all the normal and
recurring adjustments necessary to fairly state the results of operations and
related information for the periods presented.
Item 9.
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure.
Not applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of the
Registrant
The information called
for by Item 10 with respect to identification of our directors and executive
officers is incorporated herein by reference to the material under the captions
“Election of Directors” and “Compensation and Other Information Concerning
Directors and Executive Officers” in our proxy statement for our 2002 annual
stockholders meeting, which will be filed with the Commission before April 30,
2002.
Item 11.
Item 11. Executive Compensation
The information called
for by Item 11 with respect to executive compensation is incorporated
herein by reference to the material under the caption “Compensation and Other
Information Concerning Directors and Executive Officers” in our proxy statement
for our 2002 annual stockholders meeting, which will be filed with the
Commission before April 30, 2002.
Item 12.
Item 12. Security Ownership of Certain Beneficial
Owners and Management
The information called
for by Item 12 with respect to security ownership of beneficial owners of
more than 10% of our common stock and management is incorporated herein by
reference to the material under the caption “Security Ownership of Certain
Beneficial Owners and Management” in our proxy statement for our 2002 annual
stockholders meeting, which will be filed with the Commission before April 30,
2002.
Item 13.
Item 13. Certain Relationships and Related
Transactions
The information called
for by Item 13 with respect to certain relationships and related
transactions is incorporated herein by reference to the material under the
caption “Compensation and Other Information Concerning Directors and Executive
Officers - Certain Relationships and Related Transactions” in our proxy
statement for our 2002 annual stockholders meeting, which will be filed with
the Commission before April 30, 2002.
PART IV
Item 14.
Item 14. Exhibits,
Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements
Report of
Arthur Andersen LLP, Independent Public Accountants
Report of
PricewaterhouseCoopers LLP, Independent Accountants
Balance Sheets as
of December 31, 2001 and 2000
Statements
of Operations and Comprehensive Income for the years ended December 31,
2001, 2000 and 1999
Statements of
Stockholders’ Equity for the years ended December 31, 2001, 2000 and
Statements
of Cash Flows for the years ended December 31, 2001, 2000 and 1999
Notes to Financial
Statements
(a)
(2) Financial Statement Schedules
SCHEDULE II - VALUATION
AND QUALIFYING ACCOUNTS
For the years ended
December 31, 2001, 2000 and 1999
(in thousands of dollars)
(b) Reports on Form 8-K
On August 13, 2001, we
filed a Current Report on Form 8-K with the Commission pursuant to Item 5
of that Form in which we provided information on our results of operations for
the six months ended June 30, 2001.
On November 12,
2001, we filed a Current Report on Form 8-K with the Commission pursuant to
Item 5 of that Form in which we provided information on our results of
operations for the three months and nine months ended September 30, 2001.
(c) Exhibits
Exhibit Number
Description
3.1
Amended and
Restated Certificate of Incorporation of MacroPore, Inc. (filed as
Exhibit 3.1 to our Form 10 registration statement, as amended, as
filed on March 30, 2001 (file number 000-32501) and incorporated by
reference herein)
3.2
Bylaws of
MacroPore, Inc. (filed as Exhibit 3.2 to our Form 10 registration
statement, as amended, as filed on March 30, 2001 (file number
000-32501) and incorporated by reference herein)
10.1
Amended and
Restated Stock Option and Stock Repurchase Plan (filed as Exhibit 10.1
to our Form 10 registration statement, as amended, as filed on
March 30, 2001 (file number 000-32501) and incorporated by reference
herein)
10.2+
Distribution
Agreement, made and entered into as of January 5, 2000, between
MacroPore, Inc. and Medtronic, Inc. (filed as Exhibit 10.2 to our
Form 10 registration statement, as amended, as filed on June 1,
2001 (file number 000-32501) and incorporated by reference herein)
10.3+
Amendment
No. 1 to Distribution Agreement, effective as of December 22, 2000,
by and between the Company and Medtronic (filed as Exhibit 10.3 to our
Form 10 registration statement, as amended, as filed on June 1,
2001 (file number 000-32501) and incorporated by reference herein)
10.4+
Development and
Supply Agreement, made and entered into as of January 5, 2000, by and
between the Company and Medtronic (filed as Exhibit 10.4 to our
Form 10 registration statement, as amended, as filed on June 1,
2001 (file number 000-32501) and incorporated by reference herein)
10.5+
Amendment
No. 1 to Development and Supply Agreement, effective as of
December 22, 2000, by and between the Company and Medtronic (filed as
Exhibit 10.5 to our Form 10 registration statement, as amended, as
filed on June 1, 2001 (file number 000-32501) and incorporated by
reference herein)
23.1
Consent of Arthur Andersen LLP, independent public
accountants
23.2
Consent of PricewaterhouseCoopers LLP, independent
accountants
24.1
Power of Attorney (contained in the signature page).
99.1
Confirmation of Receipt of Assurances from Arthur
Andersen LLP
+ Portions
of these exhibits have been omitted pursuant to a request for confidential
treatment.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the registrant has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized.
Pursuant to the requirements of the Securities Act of 1934, this annual
report has been signed by the following persons in the capacities and on the
date indicated. Each person whose
signature appears below hereby constitutes and appoints Christopher J. Calhoun,
his true and lawful attorney-in-fact and agent, with full power of substitution
and re-substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this annual report, and to file
the same with all the 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 any and
all acts and things requisite and necessary to be done, as fully as to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agents of said attorney-in-fact,
or his substitute, may lawfully do or cause to be done by virtue hereof.
SIGNATURE
TITLE
DATE
/s/ Marshall G. Cox
Chairman
of the Board of Directors
March 21, 2002
Marshall G. Cox
/s/ Christopher J. Calhoun
Vice-Chairman,
Chief Executive Officer, Secretary
and Director
March 22, 2002
Christopher J. Calhoun
/s/ Michael Simpson
President
and Director
March 22, 2002
Michael Simpson
/s/ Ari Bisimis
Chief
Financial Officer and Director
March 22, 2002
Ari Bisimis
/s/ David Rickey
Director
March 21, 2002
David Rickey
/s/ Edmund Krix
Director
March 21, 2002
Edmund Krix