CSI MINNESOTA, INC. - S-1 - 20080122 - MORE_INFORMATION
LEGAL
MATTERS
The validity of the shares of common stock offered hereby and
certain other legal matters will be passed upon for us by
Fredrikson & Byron, P.A., Minneapolis, Minnesota.
Attorneys at Fredrikson & Byron hold an aggregate of
8,441 shares of our common stock. The underwriters have
been represented in connection with this offering by Davis
Polk & Wardwell, Menlo Park, California.
EXPERTS
The consolidated financial statements as of June 30, 2006
and 2007 and for each of the three years in the period ended
June 30, 2007 included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers
LLP, an independent registered public accounting firm, given on
the authority of said firm as experts in auditing and accounting.
WHERE
YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on
Form S-1
under the Securities Act with respect to the shares of common
stock offered by this prospectus. This prospectus, which
constitutes a part of the registration statement, does not
contain all of the information included in the registration
statement or the exhibits and schedules filed therewith. For
further information pertaining to us and the common stock to be
sold in this offering, you should refer to the registration
statement and its exhibits and schedules. Whenever we make
reference in this prospectus to any of our contracts, agreements
or other documents, the references are not necessarily complete,
and you should refer to the exhibits attached to the
registration statement for copies of the actual contract,
agreement or other document filed as an exhibit to the
registration statement or such other document, each such
statement being qualified in all respects by such reference. On
the closing of this offering, we will be subject to the
informational requirements of the Securities Exchange Act of
1934 and will be required to file annual, quarterly and current
reports, proxy statements and other information with the SEC. We
anticipate making these documents publicly available, free of
charge, on our website at www.csi360.com as soon as reasonably
practicable after filing such documents with the SEC. The
information contained in, or that can be accessed through, our
website is not part of this prospectus.
You can read the registration statement and our future filings
with the SEC over the Internet at the SEC’s website at
www.sec.gov. You may also read and copy any document we file
with the SEC at its public reference facility at
100 F Street, N.E., Room 1580,
Washington, D.C. 20549. You may also obtain copies of the
documents at prescribed rates by writing to the Public Reference
Section of the SEC at 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549. Please call the SEC
at
1-800-SEC-0330
for further information on the operation of the public reference
facilities.
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations, changes in
shareholders’ (deficiency) equity and comprehensive (loss)
income and cash flows present fairly, in all material respects,
the financial position of Cardiovascular Systems, Inc. (the
“Company”) at June 30, 2006 and 2007, and the
results of its operations and its cash flows for each of the
three years in the period ended June 30, 2007, in
conformity with accounting principles generally accepted in the
United States of America. 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 of these
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
As discussed in Note 1 to the consolidated financial
statements, the Company changed its method of accounting for
stock-based compensation effective July 1, 2006.
(Dollars
in thousands, except per share and share amounts)
Pro Forma
June 30,
September 30,
September 30,
2006
2007
2007
2007
(unaudited)
(unaudited —
see note 1)
ASSETS
Current assets
Cash and cash equivalents
$
1,554
$
7,908
$
3,265
$
3,265
Short-term investments
—
11,615
18,499
18,499
Accounts receivable, net
—
—
1,395
1,395
Inventories
728
1,050
2,572
2,572
Prepaid expenses
142
255
242
242
Total current assets
2,424
20,828
25,973
25,973
Property and equipment, net
273
585
745
745
Patents, net
599
612
598
598
Total assets
$
3,296
$
22,025
$
27,316
$
27,316
LIABILITIES AND SHAREHOLDERS’ (DEFICIENCY) EQUITY
Current liabilities
Accounts payable
$
200
$
1,909
$
1,479
$
1,479
Accrued expenses
357
748
1,371
1,371
Deferred revenue
—
—
1,428
1,428
Convertible promissory notes
3,107
—
—
—
Total current liabilities
3,664
2,657
4,278
4,278
Long-term liabilities
Redeemable convertible preferred stock warrants
—
3,094
3,394
—
Deferred rent
59
79
88
88
Total long-term liabilities
59
3,173
3,482
88
Total liabilities
3,723
5,830
7,760
4,366
Commitments and contingencies
Series A redeemable convertible preferred stock, no par
value; authorized 5,400,000 shares, issued and outstanding
4,728,547 at June 30, 2007 and September 30, 2007
(unaudited); aggregate liquidation value $29,034 and $29,586 at
June 30, 2007 and September 30, 2007 (unaudited),
respectively
—
40,193
43,503
—
Series A-1
redeemable convertible preferred stock, no par value; authorized
1,470,589 and 2,188,425 shares, issued and outstanding
977,046 and 2,188,425 at June 30, 2007 and
September 30, 2007 (unaudited), respectively; aggregate
liquidation value $8,305 and $18,730 at June 30, 2007 and
September 30, 2007 (unaudited), respectively
—
8,305
20,134
—
Shareholders’ (deficiency) equity
Common stock, no par value; authorized 25,000,000 shares;
issued and outstanding 6,199,204, 6,267,454 and 6,294,121 at
June 30, 2006 and 2007, and September 30, 2007
(unaudited), respectively
25,578
26,054
26,564
68,513
Common stock warrants
1,280
1,366
1,366
3,133
Accumulated other comprehensive loss
—
(7
)
(1
)
(1
)
Accumulated deficit
(27,285
)
(59,716
)
(72,010
)
(48,695
)
Total shareholders’ (deficiency) equity
(427
)
(32,303
)
(44,081
)
22,950
Total liabilities and shareholders’ (deficiency) equity
$
3,296
$
22,025
$
27,316
$
27,316
The accompanying notes are an integral part of these
consolidated financial statements.
(dollars in thousands, except per share and share
amounts)
1.
Summary
of Significant Accounting Policies
Company
Description
Cardiovascular Systems, Inc. (the “Company”) was
incorporated on February 28, 1989, to develop, manufacture
and market devices for the treatment of vascular diseases. The
Company has completed a pivotal clinical trial in the United
States to demonstrate the safety and efficacy of the
Company’s Diamondback 360 orbital atherectomy system in
treating peripheral arterial disease. On August 30, 2007,
the U.S. Food and Drug Administration, or FDA, granted the
Company 510(k) clearance to market the Diamondback 360 for the
treatment of peripheral arterial disease. The Company commenced
a limited commercial introduction of the Diamondback 360 in the
United States in September 2007.
For the fiscal year ended June 30, 2007, the Company was
considered a “development stage enterprise” as
prescribed in Statement of Financial Accounting Standards
(“SFAS”) No. 7,
Accounting and Reporting by
Development Stage Enterprises
. During that time, the
Company’s major emphasis was on planning, research and
development, recruitment and development of a management and
technical staff, and raising capital. These development stage
activities were completed during the first quarter of fiscal
2008. The Company’s management team, organizational
structure and distribution channel are in place. The
Company’s primary focus is on the sale and
commercialization of its current product and it has sold product
to end customers. As of September 30, 2007, the Company no
longer considers itself a development stage enterprise.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. The Company has incurred substantial losses since
inception and anticipates that it will continue to generate
losses for the foreseeable future. As of June 30, 2007, the
Company had cash, cash equivalents and short-term investments of
$19,523, working capital of $18,171 and an accumulated deficit
of $59,716. Subsequently, the Company raised additional cash
through the sale of 1,211,379 shares of Series A-1
redeemable convertible preferred stock for total proceeds of
$10,296 and 2,162,150 shares of Series B redeemable
convertible preferred stock for total proceeds of $20,000 as
further disclosed in Note 9. The Company’s continued
existence is dependent upon its ability to obtain sufficient
equity capital to finance the continued development of its
products. Management believes the Company has sufficient capital
to meet the Company’s working capital and capital
expenditure needs through at least June 30, 2008.
Thereafter, the Company may need to raise additional funds and
the Company cannot be certain that it would be able to obtain
additional financing on favorable terms, if at all.
Principles
of Consolidation
The consolidated balance sheets, statements of operations,
changes in shareholders’ (deficiency) equity and
comprehensive (loss) income, and cash flows include the accounts
of the Company and its wholly-owned inactive Netherlands
subsidiary, SCS B.V., after elimination of all significant
intercompany transactions and accounts. SCS B.V. was formed
for the purpose of conducting human trials and the development
of production facilities. Operations of the subsidiary ceased in
fiscal 2002; accordingly, there are no assets or liabilities
included in the consolidated financial statements related to SCS
B.V.
Interim
Financial Statements
The Company has prepared the unaudited interim consolidated
financial statements and related unaudited financial information
in the footnotes in accordance with accounting principles
generally accepted in the United States of America
(“GAAP”) and the rules and regulations of the
Securities and Exchange Commission (“SEC”) for interim
financial statements. These interim consolidated financial
statements reflect all adjustments consisting of normal
recurring accruals, which, in the opinion of management, are
necessary to present fairly the
Notes to Consolidated Financial
Statements — (Continued)
(Information presented as of and for the three months ended
September 30, 2006
and 2007, is unaudited)
(dollars in thousands, except per share and share
amounts)
Company’s consolidated financial position, the results of
its operations and its cash flows for the interim periods. These
interim consolidated financial statements should be read in
conjunction with the consolidated annual financial statements
and the notes thereto contained herein. The nature of the
Company’s business is such that the results of any interim
period may not be indicative of the results to be expected for
the entire year.
Pro
Forma Balance Sheet Data (Unaudited)
The Board of Directors has authorized the Company to file a
Registration Statement with the SEC permitting the Company to
sell shares of common stock in an initial public offering
(“IPO”). If the IPO is consummated as presently
anticipated, each share of Series A and
Series A-1
redeemable convertible preferred stock will automatically
convert into one share of common stock upon completion of the
IPO and preferred stock warrants will convert into warrants to
purchase common stock. The unaudited pro forma balance sheet
reflects the subsequent conversion of the redeemable convertible
preferred stock into common stock at a
1-for-1
conversion ratio and the conversion of the preferred stock
warrants into common stock warrants thereby eliminating the
preferred stock warrant liability as if such conversion occurred
at September 30, 2007.
Cash
and Cash Equivalents
The Company considers all money market funds and other
investments purchased with an original maturity of three months
or less to be cash and cash equivalents.
Short-Term
Investments
The Company classifies all short-term investments as
“available-for-sale.” The Company places its
investments primarily in commercial paper, U.S. government
securities and auction rate securities. These
investments,
a portion of which have original maturities beyond one year, are
classified as short-term based on their liquid nature. The
securities which have stated maturities beyond one year have
certain economic characteristics of short-term investments due
to a rate-setting mechanism and the ability to sell them through
a Dutch auction process that occurs at pre-determined intervals
of less than one year.
The amortized cost and fair value of available-for-sale
short-term investments are as follows:
Notes to Consolidated Financial
Statements — (Continued)
(Information presented as of and for the three months ended
September 30, 2006
and 2007, is unaudited)
(dollars in thousands, except per share and share
amounts)
Inventories
Inventories are stated at the lower of cost or market with cost
determined on a
first-in,
first-out (“FIFO”) method of valuation. The
establishment of inventory allowances for excess and obsolete
inventories is based on estimated exposure on specific inventory
items.
Property
and Equipment
Property and equipment is carried at cost, less accumulated
depreciation and amortization. Depreciation of equipment is
computed using the straight-line method over estimated useful
lives of three to seven years and amortization of leasehold
improvements over the shorter of their estimated useful lives or
the lease term. Expenditures for maintenance and repairs and
minor renewals and betterments which do not extend or improve
the life of the respective assets are expensed as incurred. All
other expenditures for renewals and betterments are capitalized.
The assets and related depreciation accounts are adjusted for
property retirements and disposals with the resulting gains or
losses included in operations.
Operating
Lease
The Company leases office space under an operating lease. The
lease arrangement contains a rent escalation clause for which
the lease expense is recognized on a straight-line basis over
the terms of the lease. Rent expense that is recognized but not
yet paid is included in deferred rent on the consolidated
balance sheets.
Patents
The capitalized costs incurred to obtain patents are amortized
using the straight-line method over their remaining estimated
lives, not exceeding 17 years. The recoverability of
capitalized patent costs is dependent upon the Company’s
ability to derive revenue-producing products from such patents
or the ultimate sale or licensing of such patent rights. Patents
that are abandoned are written off at the time of abandonment.
Long-Lived
Assets
The Company regularly evaluates the carrying value of long-lived
assets for events or changes in circumstances that indicate that
the carrying amount may not be recoverable or that the remaining
estimated useful life should be changed. An impairment loss is
recognized when the carrying amount of an asset exceeds the
anticipated future undiscounted cash flows expected to result
from the use of the asset and its eventual disposition. The
amount of the impairment loss to be recorded, if any, is
calculated by the excess of the asset’s carrying value over
its fair value.
Revenue
Recognition and Accounts Receivable
The Company derives its revenue through the sale of its
Diamondback 360 system, which includes disposable catheters,
control units and guide wires used in the atherectomy procedure.
The single use catheters rely upon the use of the control units,
thus the Company’s sales involve bundled transactions with
multiple elements.
The Company recognizes revenue in accordance with SEC Staff
Accounting Bulletin (“SAB”) No. 104,
Revenue
Recognition
and Emerging Issues Task Force
(“EITF”) Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables
. Revenue
is recognized when all of the following criteria are met:
(1) persuasive evidence of an arrangement exists;
(2) shipment has occurred or delivery has occurred if the
terms specify that title and risk of loss pass when products
reach their destination; (3) the sales price is fixed or
determinable; and (4) collectability is reasonably assured.
However, when the arrangement with the customer imposes
additional performance
Notes to Consolidated Financial
Statements — (Continued)
(Information presented as of and for the three months ended
September 30, 2006
and 2007, is unaudited)
(dollars in thousands, except per share and share
amounts)
requirements, and the Company is unable to treat the additional
performance requirements as a separate unit of accounting, then
revenue is recognized when all such requirements have been
satisfied. Payment terms are generally set at 30 days.
As of September 30, 2007, the Company has not recorded any
revenue from the shipment of the disposable catheters and
guidewires. The Company has treated the Diamondback 360° as
a single unit of accounting. Initial shipments to customers
included a loaner control unit which the Company committed to
replace when a new control unit was available. As a consequence
of unfulfilled performance requirements associated with these
shipments, the Company had deferred revenue of $1,428 as of
September 30, 2007.
Costs related to products delivered are recognized in the period
the products are shipped.
Income
Taxes
Deferred income taxes are recorded to reflect the tax
consequences in future years of differences between the tax
bases of assets and liabilities and their financial reporting
amounts based on enacted tax rates applicable to the periods in
which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Developing a provision for income taxes, including the effective
tax rate and the analysis of potential tax exposure items, if
any, requires significant judgment and expertise in federal and
state income tax laws, regulations and strategies, including the
determination of deferred tax assets. The Company’s
judgment and tax strategies are subject to audit by various
taxing authorities.
Research
and Development Expenses
Research and development expenses include costs associated with
the design, development, testing, enhancement and regulatory
approval of the Company’s products. Research and
development expenses include employee compensation, including
stock-based compensation, supplies and materials, consulting
expenses, travel and facilities overhead. The Company also
incurs significant expenses to operate clinical trails,
including trial design, third-party fees, clinical site
reimbursement, data management and travel expenses. Research and
development expenses are expensed as incurred.
Concentration
of Credit Risk
Financial statements that potentially expose the Company to
concentration of credit risk consist primarily of cash and cash
equivalents, short-term investments and accounts receivable. The
Company maintains its cash and short-term investments balances
primarily with two financial institutions. At times, these
balances exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not
exposed to any significant credit risk in cash and cash
equivalents.
Fair
Value of Financial Instruments
The carrying amounts of the Company’s financial
instruments, including cash and cash equivalents, short-term
investments, accounts receivable, accounts payable and accrued
liabilities, approximate fair value due to their short
maturities.
Notes to Consolidated Financial
Statements — (Continued)
(Information presented as of and for the three months ended
September 30, 2006
and 2007, is unaudited)
(dollars in thousands, except per share and share
amounts)
Use of
Estimates
The preparation of the Company’s consolidated financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Stock-Based
Compensation
Effective July 1, 2006, the Company adopted Financial
Accounting Standards Board (“FASB”)
SFAS No. 123(R),
Share-Based Payment
, as
interpreted by SAB No. 107, using the prospective
application method, to account for stock-based compensation
expense associated with the issuance of stock options to
employees and directors on or after July 1, 2006. The
unvested compensation costs at July 1, 2006, which relate
to grants of options that occurred prior to the date of adoption
of SFAS No. 123(R), will continue to be accounted for
under Accounting Principles Board (“APB”) No. 25,
Accounting for Stock Issued to Employees
.
SFAS No. 123(R) requires the Company to recognize
compensation expense in an amount equal to the fair value of
share-based payments computed at the date of grant. The fair
value of all employee and director stock option awards is
expensed in the consolidated statements of operations over the
related vesting period of the options. The Company calculated
the fair value on the date of grant using a Black-Scholes model.
For all options granted prior to July 1, 2006, in
accordance with the provisions of APB No. 25, compensation
costs for stock options granted to employees were measured at
the excess, if any, of the value of the Company’s stock at
the date of the grant over the amount an employee would have to
pay to acquire the stock.
As a result of adopting SFAS No. 123(R) on
July 1, 2006, net loss for the year ended June 30,
2007 and for the three months ended September 30, 2006 and
2007 (unaudited), was $390, $11 and $350, respectively, higher
than if the Company had continued to account for stock-based
compensation consistent with prior years. This expense is
included in general and administrative and research and
development expenses. Note 5 to the consolidated financial
statements contains the significant assumptions used in
determining the underlying fair value of options.
Preferred
Stock
In fiscal 2007, with the sale of the Series A and
A-1
redeemable convertible preferred stock, the Company began
recording the current estimated fair value of its redeemable
convertible preferred stock based on the fair market value of
that stock as determined by management and the Board of
Directors. In accordance with Accounting Series Release
No. 268,
Presentation in Financial Statements of
“Redeemable Preferred Stocks,”
and EITF Abstracts,
Topic D-98,
Classification and Measurement of Redeemable
Securities
, the Company records changes in the current fair
value of its redeemable convertible preferred stock in the
consolidated statements of changes in shareholders’
(deficiency) equity and comprehensive (loss) income and
consolidated statements of operations as accretion of redeemable
convertible preferred stock.
Preferred
Stock Warrants
Freestanding warrants and other similar instruments related to
shares that are redeemable are accounted for in accordance with
SFAS No. 150,
Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity
, and its related interpretations. Under SFAS No.
150, the freestanding warrant that is related to the
Company’s redeemable convertible preferred stock is
classified as a liability on the consolidated balance sheets as
of June 30, 2007 and September 30, 2007 (unaudited).
The warrant is subject to remeasurement at each
Notes to Consolidated Financial
Statements — (Continued)
(Information presented as of and for the three months ended
September 30, 2006
and 2007, is unaudited)
(dollars in thousands, except per share and share
amounts)
balance sheet date and any change in fair value is recognized as
a component of interest (expense) income. Fair value on the
grant date is measured using the Black-Scholes option pricing
model and similar underlying assumptions consistent with the
issuance of stock option awards. The Company will continue to
adjust the liability for changes in fair value until the earlier
of the exercise or expiration of the warrants or the completion
of a liquidity event, including the completion of an initial
public offering with gross cash proceeds to the Company of at
least $40,000 (“Qualified IPO”), at which time all
preferred stock warrants will be converted into warrants to
purchase common stock and, accordingly, the liability will be
reclassified to equity.
Comprehensive
(Loss) Income
Comprehensive (loss) income for the Company includes net (loss)
income and unrealized (loss) gain on short-term investments that
are charged or credited to comprehensive (loss) income. These
amounts are presented in the consolidated statements of changes
in shareholders’ (deficiency) equity and comprehensive
(loss) income.
Recent
Accounting Pronouncements
In July 2006, the FASB issued interpretation No. 48,
Accounting for Uncertainty in Income Taxes — An
Interpretation of FASB Statement No. 109
(“FIN 48”). FIN 48 clarifies the accounting
treatment (recognition and measurement) for an income tax
position taken in a tax return and recognized in a
company’s financial statement. The new standard also
contains guidance on “de-recognition, classification,
interest and penalties, accounting in interim periods,
disclosure and transition.” The provisions of FIN 48
are effective for fiscal years beginning after December 15,
2006.
The Company adopted the provisions of FIN 48 on
July 1, 2007. Previously, the Company had accounted for tax
contingencies in accordance with SFAS No. 5,
Accounting
for Contingencies
. As required by FIN 48, which
clarifies SFAS No. 109,
Accounting for Income
Taxes
, the Company recognizes the financial statement
benefit of a tax position only after determining that the
relevant tax authority would more likely than not sustain the
position following an audit. For tax positions meeting the
more-likely-than-not threshold, the amount recognized in the
financial statements is the largest benefit that has a greater
than 50% likelihood of being realized upon ultimate settlement
with the relevant tax authority. At the adoption date, the
Company applied FIN 48 to all tax positions for which the
statute of limitations remained open. The Company did not record
any adjustment to the liability for unrecognized income tax
benefits or accumulated deficit for the cumulative effect of the
adoption of FIN 48.
In addition, the amount of unrecognized tax benefits as of
July 1, 2007 was zero. There have been no material changes
in unrecognized tax benefits since July 1, 2007, and the
Company does not anticipate a significant change to the total
amount of unrecognized tax benefits within the next
12 months. The Company did not have an accrual for the
payment of interest and penalties related to unrecognized tax
benefits as of July 1, 2007.
The Company is subject to income taxes in the U.S. federal
jurisdiction and various state jurisdictions. Tax regulations
within each jurisdiction are subject to the interpretation of
the related tax laws and regulations and require significant
judgment to apply.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
. This standard clarifies the
principle that fair value should be based on the assumptions
that market participants would use when pricing an asset or
liability. Additionally, it establishes a fair value hierarchy
that prioritizes the information used to develop these
assumptions. This standard is effective for financial statements
issued for fiscal years beginning after November 15, 2007,
with the exception of the implementation of
SFAS No. 157 for nonfinanical assets and liabilities
which was deferred to fiscal years beginning after
November 15, 2008. The Company is currently
Notes to Consolidated Financial
Statements — (Continued)
(Information presented as of and for the three months ended
September 30, 2006
and 2007, is unaudited)
(dollars in thousands, except per share and share
amounts)
evaluating the impact of this statement, but believes the
adoption of SFAS No. 157 will not have a material
impact on its financial position or consolidated results of
operations.
In February 2007, the FASB issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial
Liabilities
. This standard provides companies with an option
to report selected financial assets and liabilities at fair
value and establishes presentation and disclosure requirements
designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 is effective as of the
beginning of an entity’s first fiscal year beginning after
November 15, 2007, with early adoption permitted for an
entity that has also elected to apply the provisions of
SFAS No. 157. The Company is currently evaluating the
impact of this statement, but believes the adoption of
SFAS No. 159 will not have a material impact on its
financial position or consolidated results of operations.
In December 2007, the FASB issued SFAS No. 141
(revised 2007),
Business Combinations
, and
SFAS No. 160,
Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB
No. 51
. The revised standards continue the movement
toward the greater use of fair values in financial reporting.
SFAS 141(R) will significantly change how business
acquisitions are accounted for and will impact financial
statements both on the acquisition date and in subsequent
periods including the accounting for contingent consideration.
SFAS 160 will change the accounting and reporting for
minority interests, which will be recharacterized as
noncontrolling interests and classified as a component of
equity. SFAS 141(R) and SFAS 160 are effective for fiscal
years beginning on or after December 15, 2008 with
SFAS 141(R) to be applied prospectively while SFAS 160
requires retroactive adoption of the presentation and disclosure
requirements for existing minority interests. All other
requirements of SFAS 160 shall be applied prospectively.
Early adoption is prohibited for both standards. The Company is
currently evaluating the impact of these statements, but
believes the adoption of SFAS No. 141(R) and
SFAS No. 160 will not have a material impact on its
financial position or consolidated results of operations.
2.
Selected
Consolidated Financial Statement Information
Notes to Consolidated Financial
Statements — (Continued)
(Information presented as of and for the three months ended
September 30, 2006
and 2007, is unaudited)
(dollars in thousands, except per share and share
amounts)
June 30,
September 30,
2006
2007
2007
(unaudited)
Property and equipment
Equipment
$
379
$
804
$
974
Furniture
53
85
97
Leasehold improvements
6
14
39
438
903
1,110
Less: Accumulated depreciation and amortization
(165
)
(318
)
(365
)
$
273
$
585
$
745
Patents
Patents
$
932
$
990
$
990
Less: Accumulated amortization
(333
)
(378
)
(392
)
$
599
$
612
$
598
As of September 30, 2007, future estimated amortization of
patents and patent licenses will be (unaudited):
Nine months ending June 30, 2008
$
31
2009
45
2010
45
2011
45
2012
45
Thereafter
387
$
598
This future amortization expense is an estimate. Actual amounts
may change these estimated amounts due to additional intangible
asset acquisitions, potential impairment, accelerated
amortization or other events.
June 30,
September 30,
2006
2007
2007
(unaudited)
Accrued expenses
Salaries and related expenses
$
309
$
748
$
703
Commissions
—
—
668
Accrued interest
48
—
—
$
357
$
748
$
1,371
3.
Convertible
Promissory Notes
At various dates in fiscal 2006 and 2007, the Company obtained
$3,084 in financing from the issuance of convertible promissory
notes (the “Notes”) that accrued interest at a rate of
8% per annum. Under the terms of the
Notes to Consolidated Financial
Statements — (Continued)
(Information presented as of and for the three months ended
September 30, 2006
and 2007, is unaudited)
(dollars in thousands, except per share and share
amounts)
Notes, interest and principal were due on February 28,
2009, unless earlier prepaid or converted into Series A
redeemable convertible preferred stock. The interest and
principal of the notes convert at the per share price of any
future offerings. On July 19, 2006, all Notes and accrued
interest were converted into the Series A redeemable
convertible preferred stock (Note 9).
4.
Common
Stock Warrants
In fiscal 2007, the Company issued warrants to purchase
131,349 shares of common stock at $5.71 per share to agents
in connection with the Series A redeemable convertible
preferred stock offering. The warrants expire seven years after
issuance and are exercisable immediately. The warrants were
assigned a value of $99 for accounting purposes.
In fiscal 2005, 2006 and 2007, the Company issued warrants to
purchase 3,500, 6,400 and 6,000, shares of common stock,
respectively, to consultants resulting in expense for services
of $13, $31 and $4, for each period. The warrants granted to
consultants in 2006 and 2007 were 50% immediately exercisable
and 50% exercisable one year from the date of issuance. In
addition, during fiscal 2005, the Company issued warrants to
purchase 40,000 shares of common stock at $6.00 per share
to two directors for services provided. The following summarizes
common stock warrant activity:
Price
Warrants
Range
Outstanding
per Share
Warrants outstanding at June 30, 2004
219,675
$
1.00-$5.00
Warrants issued
43,500
$
6.00
Warrants exercised
(3,250
)
$
1.00
Warrants outstanding at June 30, 2005
259,925
$
1.00-$6.00
Warrants issued
6,400
$
8.00
Warrants expired
(3,600
)
$
5.00
Warrants outstanding at June 30, 2006
262,725
$
1.00-$8.00
Warrants issued
137,349
$
5.71
Warrants exercised
(3,250
)
$
1.00
Warrants outstanding at June 30, 2007
396,824
$
1.00-$8.00
Warrants outstanding at September 30, 2007 (unaudited)
396,824
$
1.00-$8.00
Warrants have exercise prices ranging from $1.00 to $8.00 and
are immediately exercisable, unless noted above. There were no
warrants issued or exercised for the three months ended
September 30, 2007 (unaudited). The
Notes to Consolidated Financial
Statements — (Continued)
(Information presented as of and for the three months ended
September 30, 2006
and 2007, is unaudited)
(dollars in thousands, except per share and share
amounts)
following assumptions were utilized in determining the fair
value of warrants issued under the Black-Scholes model:
Year Ended June 30,
2005
2006
2007
Weighted average fair value of warrants granted
$
3.62
$
4.90
$
0.69-$0.76
Risk-free interest rates
3.56
%
4.34
%
4.70%-5.02
%
Expected life
5 years
5 years
5-7 years
Expected volatility
70.0
%
70.0
%
44.9%-45.1
%
Expected dividends
None
None
None
5.
Stock
Options
The Company has a 1991 Stock Option Plan (the “1991
Plan”) and a 2003 Stock Option Plan (the “2003
Plan”) (collectively the “Plans”) under which
options to purchase common stock of the Company have been
awarded to employees, directors and consultants at exercise
prices determined by the Board of Directors. The Plans permit
the granting of incentive stock options and nonqualified
options. A total of 750,000 shares were originally reserved
for issuance under the 1991 Plan, but with the execution of the
2003 Plan no additional options were granted under it. A total
of 3,800,000 shares of the Company’s common stock have
been reserved for issuance under the 2003 Plan. All options
granted under the Plans become exercisable over periods
established at the date of grant. The option exercise price is
generally not less than the estimated fair market values of the
Company’s common stock at the date of grant, as determined
by the Company’s management and Board of Directors. In
addition, the Company has granted nonqualified stock options to
employees, directors and consultants outside of the Plans.
Notes to Consolidated Financial
Statements — (Continued)
(Information presented as of and for the three months ended
September 30, 2006
and 2007, is unaudited)
(dollars in thousands, except per share and share
amounts)
Stock option activity is as follows:
Weighted
Shares
Number
Average
Available
of
Exercise
for
Grant
(a)
Options
(b)
Price
Options outstanding at June 30, 2004
127,751
1,470,360
$
3.06
Shares reserved
1,000,000
—
Options granted
(181,500
)
181,500
$
6.00
Options forfeited or expired
51,499
(100,999
)
$
7.28
Options outstanding at June 30, 2005
997,750
1,550,861
$
3.12
Options granted
(484,500
)
484,500
$
7.53
Options forfeited or expired
113,500
(213,500
)
$
2.96
Options outstanding at June 30, 2006
626,750
1,821,861
$
3.91
Shares reserved
2,500,000
—
Options granted
(2,624,850
)
2,624,850
$
5.64
Options exercised
—
(65,000
)
$
1.00
Options forfeited or expired
79,850
(94,850
)
$
1.04
Options outstanding at June 30, 2007
581,750
4,286,861
$
4.96
Options granted
(402,500
)
402,500
$
5.11
Options exercised
—
(26,667
)
$
6.00
Options forfeited or expired
63,333
(63,333
)
$
5.68
Options outstanding at September 30, 2007 (unaudited)
242,583
4,599,361
$
4.95
(a)
Excludes the effect of options
granted, exercised, forfeited or expired related to activity
from the 1991 Plan and options granted outside the stock option
plans described above.
(b)
Includes the effect of options
granted, exercised, forfeited or expired from the 1991 Plan,
2003 Plan and options granted outside the stock option plans
described above.
Notes to Consolidated Financial
Statements — (Continued)
(Information presented as of and for the three months ended
September 30, 2006
and 2007, is unaudited)
(dollars in thousands, except per share and share
amounts)
The following table summarizes information about stock options
granted during the year ended June 30, 2007 and for the
three months ended September 30, 2007 (unaudited):
Number
Estimated
of Shares
Fair Value
Subject to
Exercise
of Common
Grant Date
Options
Price
Stock
July 1, 2006
132,000
$
5.71
$
2.43
July 17, 2006
230,000
$
5.71
$
2.43
August 15, 2006
239,500
$
5.71
$
2.43
October 3, 2006
375,000
$
5.71
$
2.58
December 19, 2006
446,100
$
5.71
$
2.79
February 14, 2007
48,000
$
5.71
$
3.58
February 15, 2007
540,000
$
5.71
$
3.58
April 18, 2007
299,250
$
5.71
$
4.63
June 12, 2007
315,000
$
5.11
$
5.95
August 7, 2007
402,500
$
5.11
$
5.95
Options outstanding and exercisable at June 30, 2007, were
as follows:
Options Outstanding
Options Exercisable
Remaining
Weighted
Weighted
Weighted
Number of
Average
Average
Number of
Average
Range of
Outstanding
Contractual
Exercise
Exercisable
Exercise
Exercise Prices
Shares
Life (Years)
Price
Shares
Price
$ 1.00
845,000
0.48
$
1.00
845,000
$
1.00
$ 5.00
174,000
1.05
$
5.00
174,000
$
5.00
$ 5.11
315,000
9.96
$
5.11
—
$
5.11
$ 5.71
2,366,750
6.03
$
5.71
286,222
$
5.71
$ 6.00
230,500
2.17
$
6.00
209,168
$
6.00
$ 8.00
307,000
3.33
$
8.00
157,666
$
8.00
$12.00
48,611
8.76
$
12.00
48,611
$
12.00
4,286,861
4.65
$
4.96
1,720,667
$
3.75
Options issued to employees and directors that are vested or
expected to vest at June 30, 2007, were as follows:
Notes to Consolidated Financial
Statements — (Continued)
(Information presented as of and for the three months ended
September 30, 2006
and 2007, is unaudited)
(dollars in thousands, except per share and share
amounts)
Options outstanding and exercisable at September 30, 2007
(unaudited), were as follows:
Options Outstanding
Options Exercisable
Remaining
Weighted
Weighted
Weighted
Number of
Average
Average
Number of
Average
Range of
Outstanding
Contractual
Exercise
Exercisable
Exercise
Exercise Prices
Shares
Life (Years)
Price
Shares
Price
$ 1.00
845,000
0.23
$
1.00
845,000
$
1.00
$ 5.00
174,000
0.80
$
5.00
174,000
$
5.00
$ 5.11
712,500
9.79
$
5.11
10,000
$
5.11
$ 5.71
2,311,750
5.82
$
5.71
490,554
$
5.71
$ 6.00
200,500
1.96
$
6.00
185,334
$
6.00
$ 8.00
307,000
3.08
$
8.00
161,999
$
8.00
$12.00
48,611
8.51
$
12.00
48,611
$
12.00
4,599,361
4.90
$
4.95
1,915,498
$
3.95
Options issued to employees and directors that are vested or
expected to vest at September 30, 2007, were as follows:
Remaining
Weighted
Weighted
Average
Average
Aggregate
Number of
Contractual
Exercise
Intrinsic
Shares
Life (Years)
Price
Value
Options vested or expected to vest
4,369,393
4.90
$
4.95
$
10,901
Effective July 1, 2006, the Company adopted
SFAS No. 123(R) using the prospective application
method. Under this method, as of July 1, 2006, the Company
has applied the provisions of this statement to new and modified
awards. The adoption of this pronouncement had no effect on net
loss in fiscal 2005 or 2006.
An additional requirement of SFAS No. 123(R) is that
estimated pre-vesting forfeitures be considered in determining
compensation expense. As previously permitted, the Company
recorded forfeitures when they occurred for pro forma
presentation purposes. As of July 1, 2006, the Company
estimated its forfeiture rate at 5.0% per annum. As of
June 30, 2007 and for the three months ended
September 30, 2007 (unaudited), the total compensation cost
for nonvested awards not yet recognized in the consolidated
statements of operations was $2,367 and $3,149, respectively,
net of the effect of estimated forfeitures. These amounts are
expected to be recognized over a weighted-average period of 2.72
and 2.62 years, respectively.
Options typically vest over three years. An employee’s
unvested options are forfeited when employment is terminated;
vested options must be exercised at termination to avoid
forfeiture. The Company determines the fair value of options
using the Black-Scholes option pricing model. The estimated fair
value of options, including the effect of estimated forfeitures,
is recognized as expense on a straight-line basis over the
options’ vesting periods.
Notes to Consolidated Financial
Statements — (Continued)
(Information presented as of and for the three months ended
September 30, 2006
and 2007, is unaudited)
(dollars in thousands, except per share and share
amounts)
The following assumptions were used in determining the fair
value of stock options granted under the
Black-Scholes
model:
Three Months Ended
Year Ended June 30,
September 30,
2005
2006
2007
2006
2007
(unaudited)
(unaudited)
Weighted average fair value of options granted
$
0.79
$
1.16
$
1.07
$
0.32
$
3.16
Risk-free interest rates
3.56%-3.64
%
3.71%-4.77
%
4.56%-5.18
%
5.02
%
4.63
%
Expected life
4-6 years
4 years
3.5-6 years
3.5 years
6 years
Expected volatility
None
None
43.8%-45.1
%
44.9
%
43.2
%
Expected dividends
None
None
None
None
None
The risk-free interest rate for periods within the five and ten
year contractual life of the options is based on the
U.S. Treasury yield curve in effect at the grant date and
the expected option life of 3.5 to 6 years. Expected
volatility is based on the historical volatility of the stock of
companies within our peer group. Generally, the 3.5 to
6 year expected life of stock options granted to employees
represents the weighted average of the result of the
“simplified” method applied to “plain
vanilla” options granted during the period, as provided
within SAB No. 107.
The aggregate intrinsic value of a stock award is the amount by
which the market value of the underlying stock exceeds the
exercise price of the award. The aggregate intrinsic value for
outstanding options at June 30, 2005, 2006, and 2007 and
September 30, 2007 (unaudited), was $4,869, $1,301, $5,181
and $11,475, respectively. The aggregate intrinsic value for
exercisable options at June 30, 2005, 2006, and 2007 and
September 30, 2007 (unaudited), was $3,351, $1,301, $4,417
and $6,869, respectively. The total aggregate intrinsic value of
options exercised during the years ended June 30, 2005,
2006 and 2007 and the three months ended September 30, 2007
(unaudited), was negligible. Shares supporting option exercises
are sourced from new share issuances.
2007
Equity Incentive Plan
On December 6, 2007, the shareholders of the Company
approved the 2007 Equity Incentive Plan (the “2007
Plan”). The 2007 Plan allows for the granting of up to
3,000,000 shares of common stock as approved by the Board
of Directors in the form of nonqualified or incentive stock
options, restricted stock awards, restricted stock unit awards,
performance share awards, performance unit awards or stock
appreciation right to officers, directors, consultants and
employees of the Company. The 2007 Plan also includes a renewal
provision whereby the number of shares shall automatically be
increased on the first day of each fiscal year beginning
July 1, 2008, and ending July 1, 2017, by the lesser
of (i) 1,500,000 shares, (ii) 5% of the
outstanding common shares on such date, or (iii) a lesser
amount determined by the Board of Directors. The Company has
granted stock options and restricted stock awards in the amount
of 2,190,489 shares of common stock under the 2007 Plan.
Notes to Consolidated Financial
Statements — (Continued)
(Information presented as of and for the three months ended
September 30, 2006
and 2007, is unaudited)
(dollars in thousands, except per share and share
amounts)
6.
Income
Taxes
The components of the Company’s overall deferred tax assets
and liabilities are as follows:
June 30,
2006
2007
Deferred tax assets
Stock-based compensation
$
—
$
76
Accrued expenses
68
54
Inventories
50
226
Net operating loss carryforwards
10,473
16,524
Total deferred tax assets
10,591
16,880
Deferred tax liabilities
Accrued rent
(32
)
(24
)
Accelerated depreciation and amortization
(1
)
(15
)
Total deferred tax liabilities
(33
)
(39
)
Valuation allowance
(10,558
)
(16,841
)
Net deferred tax assets
$
—
$
—
The Company has established valuation allowances to fully offset
its deferred tax assets due to the uncertainty about the
Company’s ability to generate the future taxable income
necessary to realize these deferred assets, particularly in
light of the Company’s historical losses. The future use of
net operating loss carryforwards is dependent on the Company
attaining profitable operations, and will be limited in any one
year under Internal Revenue Code Section 382 (“IRC
Section 382”) due to significant ownership changes, as
defined under the Code Section, as a result of the
Company’s equity financings.
At June 30, 2007, the Company had net operating loss
carryforwards for federal and state income tax reporting
purposes of approximately $40,820 which will expire at various
dates through fiscal 2027.
7.
Commitment
and Contingencies
Operating
Lease
The Company leases manufacturing and office space under a lease
agreement which expires on November 30, 2012. Rental
expenses were $78, $201 and $341 for the years ended
June 30, 2005, 2006 and 2007, respectively, and
Notes to Consolidated Financial
Statements — (Continued)
(Information presented as of and for the three months ended
September 30, 2006
and 2007, is unaudited)
(dollars in thousands, except per share and share
amounts)
$80 and $132 for the three months ended September 30, 2006
and 2007 (unaudited), respectively. Future minimum lease
payments under the agreement are as follows:
Nine months ended June 30, 2008
$
297
2009
451
2010
460
2011
470
2012
476
Thereafter
202
$
2,356
8.
Employee
Benefits
The Company offers a 401(k) plan to its employees. Eligible
employees may authorize up to $16 of their annual compensation
as a contribution to the plan, subject to Internal Revenue
Service limitations. The plan also allows eligible employees
over 50 years old to contribute an additional $5 subject to
Internal Revenue Service limitations. All employees must be at
least 21 years of age to participate in the plan. The
Company did not provide any employer matching contributions for
the periods ended June 30, 2005, 2006 and 2007 or for the
three months ended September 30, 2007 (unaudited).
9.
Redeemable
Convertible Preferred Stock and Convertible Preferred Stock
Warrants
During the period from July 2006 to October 2006, the Company
completed the sale of 4,728,547 shares of Series A
redeemable convertible preferred stock, no par value, at a
purchase price of $5.71 per share for a total of $27,000. In
addition, Series A convertible preferred stock warrants
were issued to purchase 671,453 shares of Series A
redeemable convertible preferred stock in connection with the
sale of the Series A redeemable convertible preferred
stock. The Series A convertible preferred stock warrants
have a purchase price of $5.71 per share with a five-year term
and were assigned an initial value of $1,767 for accounting
purposes using the Black-Scholes model. The change in value of
the Series A convertible preferred stock warrants due to
accretion as a result of remeasurement was $1,327, $(59) and
$300 as of June 30, 2007 and September 30, 2006 and
2007 (unaudited), respectively, and is included in interest
(expense) income on the consolidated statements of operations.
The Series A redeemable convertible preferred stock
offering included the conversion of $3,145 of convertible
promissory notes and accrued interest previously sold by the
Company at various dates in fiscal 2006 and 2007 (Note 3).
In connection with the Series A redeemable convertible
preferred stock offering, the Company incurred offering costs of
$1,742 and issued warrants to purchase 131,349 shares of
common stock at a purchase price of $5.71 with a term of seven
years. The warrants were assigned a value of $99 for accounting
purposes (Note 4).
As of June 30, 2007, the Company had sold
977,046 shares of
Series A-1
redeemable convertible preferred stock, no par value, at a
purchase price of $8.50 per share for total proceeds of $8,271,
net of offering costs of $34. During the period from July 2007
to September 2007, the Company sold an additional
1,211,379 shares of
Series A-1
redeemable convertible preferred stock for total proceeds of
$10,286, net of offering costs of $10.
In connection with the preparation of the Company’s
financial statements as of June 30, 2007 and
September 30, 2006 and 2007 (unaudited), the Company’s
management and Board of Directors established what it believes
to be a fair market value of the Company’s Series A
and
Series A-1
redeemable convertible preferred stock. This determination was
based on concurrent significant stock transactions with third
parties and a variety of factors,
Notes to Consolidated Financial
Statements — (Continued)
(Information presented as of and for the three months ended
September 30, 2006
and 2007, is unaudited)
(dollars in thousands, except per share and share
amounts)
including the Company’s business milestones achieved and
future financial projections, the Company’s position in the
industry relative to its competitors, external factors impacting
the value of the Company in its marketplace, the stock
volatility of comparable companies in its industry, general
economic trends and the application of various valuation
methodologies.
Changes in the current market value of the Series A and
A-1
redeemable convertible preferred stock are recorded as accretion
of redeemable convertible preferred stock and as accumulated
deficit in the consolidated statements of changes in
shareholders’ (deficiency) equity and in the consolidated
statements of operations as accretion of redeemable convertible
preferred stock.
The rights, privileges and preferences of the Series A
redeemable convertible preferred stock and the
Series A-1
redeemable convertible preferred stock (collectively, the
“Preferred Stock”) are as follows:
Dividends
The holders of Preferred Stock are entitled to receive cash
dividends at the rate of 8% of the original purchase price. All
dividends shall accrue, whether or not earned or declared, and
whether or not the Company has legally available funds. All such
dividends shall be cumulative and shall be payable only
(i) when and as declared by the Board of Directors,
(ii) upon liquidation or dissolution of the Company and
(iii) upon redemption of the Preferred Stock by the
Company. As of June 30, 2007 and September 30, 2006
and 2007 (unaudited), $2,034, $398 and $2,714, respectively, of
dividends had accumulated but had not yet been declared by the
Company’s Board of Directors, or paid by the Company as of
such respective dates. The holders of the Preferred Stock have
the right to participate in dividends with the common
shareholders on an as converted basis.
Conversion
The holders of the Preferred Stock shall have the right to
convert, at their option, their shares into common stock on a
share for share basis (subject to adjustments for events of
dilution). Each preferred share shall be automatically converted
into unregistered shares of the Company’s common stock
without any Company action, thereby providing conversion of all
preferred shares, upon the approval of a majority of the
preferred shareholders or upon the completion of an underwritten
public offering of the Company’s shares, pursuant to a
registration statement on
Form S-1
under the Securities Act of 1933, as amended, of which the
aggregate proceeds to the Company exceed $40,000, or a Qualified
Public Offering. Upon conversion, each share of the preferred
stock shall be converted into one share of common stock (subject
to adjustment as defined in the preferred stock sale agreement),
dividends will no longer accumulate, and previously accumulated,
undeclared and unpaid dividends will not be payable by the
Company.
In the event the holders of the Preferred Stock elect to convert
their preferred shares into shares of common stock, and those
holders request that the Company register those shares of common
stock, the Company is obligated to use its best efforts to
effect a registration of the Company’s common shares. In
the event that the common shares are not registered, the Company
is not subject to financial penalties.
Redemption
The Company shall not have the right to call or redeem at any
time any shares of Preferred Stock. Holders of Preferred Stock
shall have the right to require the Company to redeem in cash,
30% of the original amount on the fifth year anniversary of the
Purchase Agreement, 30% after the sixth year and 40% after the
seventh year. The price the Company shall pay for the redeemed
shares shall be the greater of (i) the price per share paid
for the Preferred
Notes to Consolidated Financial
Statements — (Continued)
(Information presented as of and for the three months ended
September 30, 2006
and 2007, is unaudited)
(dollars in thousands, except per share and share
amounts)
Stock, plus all accrued and unpaid dividends; or (ii) the
fair market value of the Preferred Stock at the time of
redemption as determined by a professional appraiser.
Liquidation
In the event of any liquidation or winding up of the Company,
the holders of preferred stock are entitled to receive an amount
equal to (i) the price paid for the preferred shares, plus
(ii) all dividends accrued and unpaid before any payments
shall be made to holders of stock junior to the preferred stock.
The remaining net assets of the Company, if any, would be
distributed to the holders of preferred and common stock based
on their ownership amounts assuming the conversion of the
preferred stock. The amount is limited based on the overall
return on investment earned by the preferred stock holders. At
June 30, 2007 and September 30, 2007 (unaudited), the
liquidation value of the Series A redeemable convertible
preferred stock was $29,034 and $29,586, respectively, and
Series A-1
redeemable convertible preferred stock were $8,305 and $18,730,
respectively.
Voting
Rights
The holders of Preferred Stock have the right to vote on all
actions to be taken by the Company based on such number of votes
per share as shall equal the number of shares of common stock
into which each share of Series A redeemable convertible
preferred stock is then convertible. The holders of Preferred
Stock also have the right to designate, and have designated, two
individuals to the Company’s Board of Directors.
Registration
Rights
Pursuant to the terms of an investor rights agreement dated
July 19, 2006, entered into with certain holders of the
preferred stock and the holder of a warrant to purchase shares
of the Company’s common stock if, at any time after the
earlier of four years after the date of the agreement or six
months after the Company’s IPO, the Company receives a
written request from the holders of a majority of the
registrable securities then outstanding, the Company has agreed
to file up to three registration statements on Form
S-3.
Series B
Redeemable Convertible Preferred Stock
On December 17, 2007, the Company completed the sale of
2,162,150 shares of Series B redeemable convertible
preferred stock at a price of $9.25 per share for total proceeds
of $19,950, net of estimated offering costs of $50. The
Series B redeemable convertible preferred stock have the
same terms as the Series A and
A-1
redeemable convertible preferred stock, except to the extent of
differences in liquidation rights resulting from a different
purchase price per share. The Company believes that the
conversion price of the Series B redeemable convertible
preferred stock into common stock at $9.25 per share represents
or exceeds the fair value of the Company’s common stock at
issuance.
10.
Legal
Matters
The Company is, from time to time, subject to various legal
proceedings arising in the ordinary course of business. There
were no matters, as of June 30, 2007 or September 30,
2007, that, in the opinion of management, might have a material
adverse effect on the Company’s financial position, results
of operations or cash flows.
Notes to Consolidated Financial
Statements — (Continued)
(Information presented as of and for the three months ended
September 30, 2006
and 2007, is unaudited)
(dollars in thousands, except per share and share
amounts)
11.
Earnings
Per Share
The following table presents a reconciliation of the numerators
and denominators used in the basic and diluted earnings per
common share computations:
Three Months Ended
Year Ended June 30,
September 30,
2005
2006
2007
2006
2007
(unaudited)
(unaudited)
Numerator
Net loss available in basic calculation
$
3,511
$
4,895
$
15,596
$
1,329
$
7,441
Plus: Accretion of redeemable convertible preferred stock
—
—
16,835
3,878
4,853
(a)
Loss available to common stock- holders plus assumed conversions
$
3,511
$
4,895
$
32,431
$
5,207
$
12,294
Denominator
Weighted average common shares — basic
5,779,942
6,183,715
6,214,820
6,199,204
6,291,512
(b)
Effect of dilutive stock options and warrants
—
—
—
—
—
(c)
Weighted average common shares outstanding — diluted
5,779,942
6,183,715
6,214,820
6,199,204
6,291,512
Loss per common share — basic and diluted
$
(0.61
)
$
(0.79
)
$
(5.22
)
$
(0.84
)
$
(1.95
)
(a)
The calculation for accretion of
redeemable convertible preferred stock marks the redeemable
convertible preferred stock to fair value, which equals or
exceeds the amount of any undeclared dividends on the redeemable
convertible preferred stock.
(b)
At June 30, 2005, 2006 and
2007, 259,925, 262,725 and 1,068,277 warrants, respectively, and
at September 30, 2006 and 2007 (unaudited), 1,015,790 and
1,068,277 warrants, respectively, were outstanding. The effect
of the shares that would be issued upon exercise of these
options has been excluded from the calculation of diluted loss
per share because those shares are anti-dilutive.
(c)
At June 30, 2005, 2006, and
2007, 1,550,861, 1,821,861 and 4,286,861 stock options,
respectively, and at September 30, 2006 and 2007
(unaudited), 2,411,361 and 4,599,361 stock options,
respectively, were outstanding. The effect of the shares that
would be issued upon exercise of these options has been excluded
from the calculation of diluted loss per share because those
shares are anti-dilutive.
12.
Authorized
Shares
On December 6, 2007, the shareholders of the Company
approved the increase of authorized shares of common stock to
70,000,000 shares and undesignated shares of 5,000,000.
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